Banking Sector
Laws and Regulations
Definitions and Scope of Applicability
Licensing Provisions
Types of Licenses
- Domestic Bank.
- Digital Bank.
- Branch of a Foreign Bank
Licensing Guidelines
Licensing Guidelines and Minimum Criteria
Date(g): 1/12/2018 | Date(h): 23/3/1440 Status: In-Force 1. Objective of the Licensing Guidelines/Criteria and Overview of the Application Process
These Licensing Guidelines and minimum criteria set out the Saudi Central Bank's (SAMA's) Licensing process for banks. The guidelines and criteria apply to applicants seeking a license to carry on banking business in the Kingdom of Saudi Arabia (KSA) under the Banking Control Law “BCL”. They outline the general guidelines, the minimum criteria to be addressed by applicants and the application procedures and the necessary information and documents to be submitted with an application.
These guidelines and minimum licensing criteria are issued in accordance with the authority vested in SAMA under the Charter of Saudi Arabian Monetary Agency -issued via Royal Decree No. 23 dated 23/5/1377 H, and the Banking Control Law - issued via Royal Decree No. M/5 dated 22/2/1386 H.
The application process involves the following steps:
• Preliminary consultation between SAMA and the prospective applicant to discuss the applicant’s plans to carry on banking business in the Kingdom of Saudi Arabia.
• Submission of an application and relevant information, as detailed in the Licensing criteria and the application form; and
• SAMA’s review of the application.
• The form can be found under the link below:
sama.gov.sa/en-us/applylicense/pages/banksforms.aspx
All applications will be processed within reasonable time, having regard to the particular circumstances of each application, including the completeness of information and documents submitted to SAMA by the applicant. Some common factors that can delay the Licensing process include:
• An initial submission that contains incomplete or inadequate documentation;
• Situations where as per SAMA’s assessment, the applicant is unable or unwilling to comply with SAMA requirements;
• Delays in responding to SAMA’s requirements and requests and;
• Delays as a result of new developments since the application was first lodged by the applicant.
All prospective applicants are encouraged to contact SAMA as early as possible during their planning process to discuss their intent (or likely intent) to apply for a banking license.
2. General Licensing Guidelines for Banks
1. Overview
1. These guidelines are for the applicants seeking to conduct banking business in Kingdom of Saudi Arabia. The requirements set down the minimum criteria to be met by the applicants and the necessary information and documents to be submitted with the application.
2. Article 3 of the Banking control law allows Joint Stock Companies to carry on banking business in Kingdom of Saudi Arabia.
3. Applicants seeking a license to carry on banking business in Kingdom of Saudi Arabia should apply in writing to SAMA.
4. Foreign banks may apply to establish branches to carry on banking business in Kingdom of Saudi Arabia. For Foreign branches, references to ‘Applicant’ means the parent entity. If any of the founders of a locally incorporated bank is a foreign bank, the foreign partner would also be subject to the requirements for the licensing of a foreign bank branch.
5. Except as explicitly stated in SAMA’s Prudential Standards, foreign bank branches are subject to the same legislative and prudential requirements as locally incorporated Banks. Although the prime responsibility for oversight of the Kingdom of Saudi Arabian operations of a foreign bank branch rests with local management and its head office as well as with the foreign bank branch’s home supervisor(s), the foreign bank branch is nonetheless required to submit its local operations to SAMA’s prudential supervision and other statutory laws.
2. Use of Restricted Words and Expressions
6. Applicants should note that The Banking Control Law prohibits the use of the word “Bank, or its synonyms, or any similar term in any language on papers or printed matter, or in commercial address, or name or in advertisements”
3. Minimum Licensing Criteria for Banks
7. SAMA will only process a license for suitable applicants with the capacity and commitment to conduct banking business with integrity, prudence and competence on a continuing basis.
8. These licensing criteria are applicable to all applicants, including foreign bank applicants intending to establish a foreign bank branch. These requirements represent minimum criteria that an applicant will need to meet. These licensing criteria should not be taken as exhaustive as SAMA may consider processing an application on other prudential grounds.
9. SAMA expects all applicants to be aware and able to comply with the BCL, its prudential requirements, and other relevant laws and regulations from the commencement of their banking operations. It should be noted that more prudential requirements may be set on a case-by-case basis, for example, for newly licensed banks in their formative years.
A. Capital
10. SAMA will also assess the adequacy of capital for an applicant on a case-by-case basis depending on the scale, nature and complexity of the operations as proposed in the business plan. Foreign Bank branches are not required to maintain capital in Kingdom of Saudi Arabia although capital requirements may be set on a case-by-case basis, for example, those intending to conduct high risk businesses and/or wanting to specialize in particular business lines that require specific level of capacity or competence.
11. Applicants must satisfy SAMA that they are able to comply with SAMA’s capital adequacy requirements from the commencement of their banking operations. All locally incorporated banks are required to maintain, at all times, a minimum capital ratio (CAR) as set by SAMA. Newly established banks may be subject to a higher minimum capital ratio in their formative years, depending on the risk profile of their proposed operations.
B. Bank Ownership
12. As per to the BCL, the founders and members of the Board of Directors of an applicant are required to demonstrate to SAMA that they are ’fit and proper’, are persons of good reputation, are well established and are of financially sound standing and substance. In the case of foreign bank branch applicants, this requirement applies both to the foreign bank itself and to the significant shareholders of the foreign bank. SAMA requires all significant shareholders to be able to demonstrate that their involvement in the bank represents a long-term commitment and that they have the capacity to contribute additional capital, if required.
C. Corporate Governance
13. Applicants must satisfy the requirements set out in SAMA’s Principles of Corporate Governance for Banks Operating in Saudi Arabia with regard to the composition and functioning of the Board. Applicants must also satisfy SAMA that they have policies and related procedures in place to ensure that persons who hold the key positions within the proposed bank are fit and proper, in accordance with SAMA’s Requirements for Appointments to Senior Positions in Financial Institutions Supervised by the Saudi Central Bank (SAMA).
14. SAMA may consult other regulators (domestic and overseas) regarding the suitability of individuals who will manage the affairs of the proposed bank. Where necessary, applicants will be expected to provide SAMA with consent to seek details in this regard.
D. Risk Management and Controls
15. Applicants must satisfy SAMA that their proposed (or existing) risk management and control policies are adequate and appropriate for monitoring and limiting risk exposures in relation to domestic and, where relevant, international operations from the commencement of the bank’s operations. This includes, but is not limited to, the development, implementation and maintenance of adequate and appropriate policies and procedures for monitoring and managing Credit, Market, Liquidity, Compliance, AML/CTF risks and Operational Risks.
16. Applicants must demonstrate that their proposed arrangements for reporting to SAMA are adequate and are in line with SAMA prudential standards and Article 15 of the Banking Control Law. Foreign bank branch applicants must demonstrate that the arrangements for reporting to SAMA and the parent foreign bank or head office are adequate and in compliance with applicable laws and regulations.
17. In assessing whether the proposed policies and procedures for managing and controlling risks are adequate and appropriate for the applicant’s operations, SAMA will take into account the size, nature and complexity of the operations.
E. Compliance & Anti Money Laundering and Combating Terrorism Financing (AML/CTF)
18. Applicants must satisfy SAMA that their proposed compliance and AML & CTF processes, people and systems are adequate and appropriate for ensuring compliance with:
(a) Rules Governing Anti-Money Laundering & Combating Terrorist Financing and;
(b) SAMA’s Compliance Manuel for Banks Working in SAUDI ARABIA and;
(c) Other Kingdom of Saudi Arabia regulatory and legal requirements.
19. In assessing whether the proposed compliance and AML/CTF processes, people and systems are adequate and appropriate for the applicant’s operations, SAMA will have regard to the size, nature and complexity of those operations.
F. Information Technology (IT), Accounting Systems and Outsourcing
20. All Banks are required to submit prudential returns to SAMA. Required reporting forms and the frequency for Banks depend on the type of bank.
21. Applicants must satisfy SAMA that their proposed information technology and accounting systems will be adequate for maintaining up-to-date records of all transactions and commitments undertaken by an applicant, so as to keep management and SAMA continuously and accurately informed of the bank’s condition and the risks to which it is exposed.
22. Applicants are required to demonstrate to SAMA that their proposed IT and accounting systems will be capable of producing all required statutory and prudential information in an accurate and timely manner from the commencement of their banking operations.
23. In assessing the overall adequacy of the proposed information and accounting systems, SAMA will have regard to the integrity and security of the systems and arrangements for Business Continuity Management (BCM) and Disaster Recovery Planning (DRP) as per SAMA’s SAMA Cyber Security Framework and BCM framework.
24. Any planned outsourcing of material processes, people and systems must satisfy SAMA’s outsourcing requirements set out in SAMA’s Instructions for Outsourcing.
G. External and Internal Audit Arrangements
25. Applicants must demonstrate to SAMA that arrangements have been established with external auditors in accordance with the requirements of the BCL and other relevant laws and regulations.
26. Applicants are required to satisfy SAMA on the adequacy of proposed internal audit arrangements and requirements as set out in SAMA’s Principles of Corporate Governance for Banks Operating in Saudi Arabia.
H. Supervision by Home Supervisor (Foreign Bank Branch Application)
27. Foreign bank branch applicants must have received a written consent from their home supervisor for the establishment of a banking operation in Kingdom of Saudi Arabia. Only applicants that are licensed banks in their home country and are listed in their domestic stock exchange will have their applications processed for granting of a license to operate as a foreign bank branch.
28. Foreign bank branch applicants must satisfy SAMA that they are subject to adequate prudential supervision in their home country. In considering the standard of supervision exercised by the home supervisor, SAMA will have regard to the Core Principles of Banking Supervision (Core Principles) promulgated by the Basel Committee on Banking Supervision (BCBS). This includes whether the home supervisor supervises the foreign bank applicant on a consolidated basis in accordance with the principles contained in the Basel rules, and is prepared to co-operate with SAMA in the supervision of the bank branch in Kingdom of Saudi Arabia.
4. Application Process Guidelines
1. Pre-Application Consultations
29. Prospective applicants for a license to carry on banking business in Kingdom of Saudi Arabia are encouraged to contact SAMA to discuss their plans prior to submitting a formal application. Consultations with prospective applicants before they submit an application will help them to:
I. Understand SAMA’s licensing procedures.
II. Understand SAMA’s expectations of banks, and in particular any concerns that SAMA might have early on, and which will help the prospective applicant make an informed decision about whether to spend time and other resources on an application that may not progress further.
30. To start the pre-application process, prospective applicants should contact SAMA to arrange an initial meeting.
2. Information Required to Be Submitted with the Application
31. After the pre-application consultations, prospective applicants should be ready to submit their formal application for SAMA to assess. Prospective applicants can find the application form they need to complete on SAMA’s website. All the supporting information and other requirements to be submitted by an applicant to carry out banking business in the Kingdom of Saudi Arabia, either to operate as a locally incorporated bank or as a foreign bank branch, is set out in the Application Form.
32. SAMA may seek such additional information from an applicant, as is necessary, to assess the application.
3. Submission of Application
33. Two copies of the final application (one hard copy and one soft copy (via e-mail)), each to be signed by two authorized Directors of the applicant (preferably the Chairman of the Board of Directors and the Chief Executive Officer (CEO), including all the required information and supporting documents as set out in the Application Form, should be submitted to SAMA. These should be sent to the physical and e-mail addresses shown in the front page of the Application Form. If there are any changes to the information provided before a decision on the application has been made, the applicant should notify SAMA in writing as soon as possible.
4. Processing and Notification
34. All applications will be processed within reasonable time, having regard to the particular circumstances of each application, including the completeness of information and documents submitted to SAMA by the applicant. For applicant’s application to be assessed as complete, it would need to have provided SAMA with a fully and correctly completed Application Form with all its supporting requirements. The information provided must also be of sufficient quality and detail to allow SAMA to complete its assessment.
35. Applicants should expect to receive written acknowledgement (by e-mail) of receipt of their application from SAMA along with confirmation of their case officer/s name within fifteen (15) business days.
36. SAMA will endeavor to assess an application and reach a decision within a reasonable time. Throughout the processing and assessment of the application, SAMA may have queries or require further information from the applicants. Applicants can help to make the process as efficient as possible by responding promptly and comprehensively to any SAMA queries.
Additional Licensing Guidelines and Criteria for Digital-Only Banks in Saudi Arabia Feb 2020
Date(g): 24/2/2020 | Date(h): 1/7/1441 Status: In-Force Introduction
These Additional Licensing Guidelines and Criteria for Digital-Only Banks in Saudi Arabia are issued in accordance with the authority vested in SAMA under the Charter of Saudi Arabian Monetary Authority –issued via Royal Decree No. 23 dated 23/5/1377 H, and the Banking Control Law – issued via Royal Decree No. M/5 dated 22/2/1386 H.
Purpose and Scope
1. This document sets out the licensing criteria for Digital-only Banks. For purposes of implementing the provisions in this document, a Digital-only Bank is defined as a bank that conducts a banking business mainly through digital channels (e.g. the web and mobile applications).
2. These guidelines are applicable to Digital-only Bank license applications in Saudi Arabia. They must be considered as additional requirements to be met along with the Banking Licensing Guidelines and Minimum Criteria.
Licensing Conditions
To apply for a Digital-only Bank license in Saudi Arabia, the following conditions must be met:
1. The Digital-only Bank should be set up as a locally incorporated joint-stock company.
2. A promoter should have:
a. experience and knowledge in the financial industry;
b. appropriate technology-related experience and knowledge; and
c. financial capacity to support setting up the Digital-only Bank.
3. An applicant must possess a team with adequate expertise to discuss relevant aspects of the application.
Business Plan
An applicant is required to present a clearly articulated business plan, covering as a minimum:
1) the IT infrastructure plan and innovative technologies that will be rolled out;
2) the financial projections;
3) the targeted segment (with the underlying study and analysis); and
4) the proposed products and services in line with the targeted segments.
Capital and Liquidity Requirements
An applicant is required to submit an Internal Capital Adequacy Assessment Plan (ICAAP) and an Internal Liquidity Adequacy Assessment Plan (ILAAP) along with the application.
SAMA will assess the adequacy of capital of applicants on a case-by-case basis considering the scale, nature and complexity of the operations as proposed in the Business Plan, ICAAP and ILAAP of the applicants.
Physical Presence
An applicant must maintain a physical presence for its Digital-only Bank in Saudi Arabia to be its principal place of business (i.e. head office). A Digital-only Bank is not expected to establish physical branches; however, on exceptional basis, SAMA may require a Digital-only Bank to establish costumer service centers in order to facilitate customer interaction, enquiries or complaints.
Governance
Digital-only Banks are required to follow the same SAMA’s Principles of Corporate Governance for Banks Operating in Saudi Arabia as with conventional banks.
Risk Management and Control
Digital-only Banks are required to satisfy SAMA that their proposed risk management and control policies are adequate and appropriate for monitoring and limiting risk exposures as per section D of the SAMA Banking Licensing Guidelines and Minimum Criteria.
Compliance & Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)
In addition to demonstrating compliance with the requirements set out in Section E of the SAMA Banking Licensing Guidelines and Minimum Criteria, applicants should demonstrate the compliance of the AML/CTF regulations in the fully digitalized environment.
Technology and Cybersecurity Risks
1. Applicant should consider Information systems security, resilience and availability, being key components of a Digital-only Bank. The selection of appropriate technologies and security arrangements should be aligned to the proposed banking products and services.
2. SAMA requires compliance with all relevant requirements, such as (but not limited to) SAMA’s Cybersecurity Framework and BCM Framework. In addition, SAMA requires applicants to consider other relevant regulations, (e.g. from National Cybersecurity Authority) when designing and implementing the Technology and Cybersecurity framework of the proposed Digital-Only Bank.
Independent Assessment
SAMA may require the applicant to appoint a qualified and experienced third-party entity (“assessor”) to perform assessments on the specific technical areas such as the technology/cybersecurity and AML/CFT arrangements at the expense of the applicant. Such assessment will be performed over following phases:
a) The design phase – After submission of the application to SAMA, the assessor should perform an assessment of the adequacy of the governance, proposed processes and systems of the proposed design. SAMA requires the applicant to submit a report on the proposed design phase assessment along with a plan on the closure of observations/issues (if any). The applicant should remediate all key observations / issues to the satisfaction of SAMA.
b) The implementation phase – Prior to commencement of operations, the assessor should perform a detailed assessment of the implementation of paragraph (a) above. SAMA requires the applicant to submit a report on the implementation phase assessment in accordance with the approved design along with a plan on the closure of observations/issues (if any). The applicant must remediate all key observations / issues to the satisfaction of SAMA prior to obtaining SAMA's approval to go-live.
Outsourcing
Any planned outsourcing of material processes, people and systems must satisfy SAMA’s outsourcing requirements as set out in SAMA’s Rules of Outsourcing.
Exit Plan
An applicant is required to provide an exit plan in case of difficulties in achieving the targeted business objectives.
The exit plan should be clearly articulated to provide SAMA with the steps that will be taken to manage customer funds and ongoing businesses. This could include, for example, the migration of bank accounts and associated funds to another bank, ensuring continued services to the existing customers, and management of other assets and liabilities.
Prudential and Supervisory Requirements
1. Digital-only Banks will be subject to the same set of prudential requirements as with other banks.
2. In addition, due to the nature of business operations, all (or most) of the data are expected to be in an electronic format. The design of technology solutions in a Digital-only Bank should allow for easy and quick access to complete and accurate information needed for SAMA to perform its supervisory duties.
Consumer Protection
1. SAMA’s Banking Consumer Protection Principles are also applicable to Digital-only Banks.
2. An applicant should demonstrate that the necessary arrangements and channels are in place to adequately support customers during the banking life cycle.
Application Forms
All prospective applicants are encouraged to fulfill all requirements outlined in the Licensing guidelines and other Statutory Regulations and Prudential Standards before filling out the application forms, and to arrange an initial meeting with SAMA. The forms can be found under the links below:
Application Process
The applicant shall submit an application to SAMA using the License Request Form, complete all information including prerequisite documents and files in a hard-copy and soft-copy, then submit it via the following addresses:
- Saudi Central Bank (SAMA)- General Department of Banking Control - Banking Licensing Division P.O. Box 2992, Riyadh 11169, Saudi Arabia.
- Email: (BankingLicenseApp@SAMA.GOV.SA).
If any changes occur to the given information by license applicant prior to SAMA's decision on the application, the license applicant shall notify SAMA as soon as possible.
Prohibited Activities
Withdrawal of a License
Anti Money Laundering and Combating the Financing of Terrorism
Instructions under this section should be read in conjunction with the Anti-Money Laundering Law and its Implementing Regulations and the Law on Combating the Financing of Terrorism and its Implementing Regulations.- The Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Guide
- Guide to the Implementation of the Mechanisms for the of Security Council Resolutions Relating to the CTF and its Financing
- Guide to the Implementation of Security Council Resolutions Related to Prevention of Proliferation of Arms of Mass Destruction and their Financing
Cyber Risk Control
Cyber Resilience
Cyber Resilience Fundamental Requirements (CRFR)
To read the Cyber Resilience Fundamental Requirements (CRFR), click here.
Cyber Security Framework
This translation is provided for guidance. The governing text is the Arabic text.Motivated by the commitment of the Central Bank [SAMA] to enhancing cyber security standards at SAMA-supervised financial institutions through having in place a proven effective mechanism at the financial institutions based on the best solutions and practices that would help create a flexible and mature cyber security environment that is capable of combating the cyberattacks faced by the sector, and with reference to SAMA's cyber security-related strategic initiatives, including, among others, the development and issuance of a Cyber Security Framework at SAMA-supervised financial institutions;
This is to inform you that a Cyber Security Framework has been issued, so all banks operating in the Kingdom shall fully comply with its contents as follows:
First: Conduct an in-depth and accurate assessment of the current status of cyber security at the financial institution. This shall be compared against the requirements stated in the CSF [Gap Assessment] to identify weaknesses and assess the level of maturity as described within the CSF under the definition of "Maturity Level".
Second: Develop a Roadmap to meet all requirements of the Maturity Level 3 as a minimum for all requirements set out in the CSF, after conducting an in-depth assessment of the current status at the financial institution's environment
Third: The financial institution shall submit the Roadmap to the Board of Directors and provide the latter with explanatory details on it and obtain its approval on both the roadmap and support needed.
Fourth: The financial institution shall send its Roadmap to SAMA not later than the end of August 2017.
Fifth: Provide SAMA with quarterly reports starting from the end of Q3 2017 until full compliance by the financial institution with SAMA requirements.
Sixth: The financial institution shall fully comply with the requirements stated in the CSF by the end of October 2018.
Seventh: The financial institution's Cyber Security Committee must follow up on the implementation of the CSF and verify the level of compliance with the approved roadmap and full support and must provide full support for smoothing away all impediments faced by the financial institution's teams and to ensure timely escalation of obstacles and other related hindrances to the competent authority that may prevent complete implementation of the CSF.
By virtue of the Circular No. [51610/99] dated 17/08/1440 H, the competent officers of the financial institutions must provide necessary support to the Cyber Security Department and provide it with the national talents, technical means and appropriate training in order to optimally perform its role.
By virtue of the Circular No. [29814/67] dated 11/05/1440, Hand based on SAMA's powers to enhance cyber security in the financial sector and upgrade the maturity level to combat and manage the cyber challenges in a professional and advance manner, the banks are required to carry out the following:
1. Develop a Roadmap for fulfilling all [Maturity Level 4] requirements by the end of Q3 2022, for all components of the following subdomains mentioned in the CSF:
- 3.3.14 Cyber Security Event Management
- 3.3.15 Cyber Security Incident Management
- 3.3.16 Threat Management
- 3.3.17 Vulnerability Management
2. Provide necessary support to the Cyber Security Department and provide it with the national talents, technical means and appropriate training in order to optimally perform its role.
3. Submit the Roadmap as mentioned in Para. [1] and [2] above to the Board of Directors and obtain the latter's approval on both the Roadmap and support needed.
4. Provide SAMA [Financial Sector IT Risk Department] with the following:
A- The roadmap approved by the Board of Directors by the end of Q1 2019;
B- Quarterly reports as from the end of Q2 2019 showing the phases of fulfillment of SAMA's requirements until such requirements are fully satisfied; and
C- An in-depth annual report by the Bank's Internal Audit Department showing the level of compliance with the CSF's requirements compared to the maturity level required, as per the mechanism to be designated by SAMA.
Kindly be informed that SAMA will conduct periodic inspection visits to verify the accuracy of the assessment and level of compliance with the CSF's requirements. If you have any query, you can communicate with the Banking IT Risk Manager.
To read the Cyber Security Framework, Click Here.
Financial Sector Cyber Threat Intelligence Principles
To read the Financial Sector Cyber Threat Intelligence Principles, click here.
Minimum Verification Controls
To read the Minimum Verification Controls, click here.
Business Continuity Management Framework
To read the Business Continuity Management Framework, click here.
Financial Entities Ethical Red-Teaming
To read the Financial Entities Ethical Red-Teaming, click here.
Information Technology Governance
Counter Fraud
Counter-Fraud Framework
To read the Counter-Fraud Framework, click here.
Outsourcing and Third Party
Rules on Outsourcing
No: 41027017 Date(g): 15/12/2019 | Date(h): 18/4/1441 Status: In-Force I. Introduction
A. Background
1. Banks are increasingly using third party services to carry out activities, functions and processes such as outsourcing arrangements. While outsourcing can bring down cost and provide other benefits, it may increase the risk profile of an institution through such risks as strategic, reputation, compliance, financial and operational risks arising from failure of a third-party or a related party service provider in providing the service, breaches in security, or inability to comply with legal and regulatory requirements by the institution. Banks can also be exposed to country risk when a third-party or a related party service provider is located overseas and systemic risk when there is lack of control by a group of banks over a common third-party service provider. It is therefore important that banks adopt a sound and responsive risk management framework when outsourcing. These requirements aim to ensure that all outsourcing arrangements are subjected to appropriate due diligence, approval and ongoing monitoring. All risks arising from outsourcing must be appropriately managed to ensure that the bank is able to meet both its financial and service obligations to its depositors.
2. These rules shall supersede the existing SAMA Rules in Outsourcing issued vide SAMA circular no. 34720/ B.C.S dated 20 July 2008 and Outsourcing for Foreign Banks Branches vide SAMA circular no. 391000014241 dated 06/02/1439 H.
B. Definitions
3. Unless otherwise stated, the key terms used in this document are set out below.
Banking agent A legal entity authorized by SAMA to provide a financial services on behalf of the commercial bank based on the Regulation of Agent Banking (circular No. 37541/67 dated 1440/06/15 H).
Board or Board Directors a) In the case of an institution incorporated in Saudi Arabia, the of board of Directors.
b) In the case of an institution incorporated outside Saudi Arabia, a local board, a management committee or body beyond local management empowered with oversight and supervision responsibilities for the institution in Saudi Arabia.
Customer data Any information or document relating to the affairs or account of a customer (whether held physically or electronically and whether held by the Banks themselves or by Third Party Service Provider on their behalf).
Financial data All financial data including books of accounts, general and sub-ledger, financial statements and various financial data other than Customer Data.
Insourcing An arrangement where a Bank is utilizing personnel provided under a contract with a Third Party Service Provider to undertake certain functions within or outside the Bank's premises, under its direct supervision, control and management.
Material outsourcing Outsourcing of a function or activity that has the potential, if disrupted, to have a material impact on the bank's business operations or its ability to manage risks effectively. The materiality can be assessed by taking the following into consideration:
a) The financial and operational impact and impact on reputation of a failure of the third party service provider to perform over a given period.
b) The cost of the outsourcing arrangement as a share of total cost of operations.
c) The degree of difficulty, including the time taken, in finding an alternative third party service provider or bringing the business function or activity in-house.
d) The ability of the bank to meet regulatory requirements if there are problems with the third party service provider.
e) potential losses to the bank's customers and other affected parties in the event of a third party service provider failure.
f) Affiliation or other relationship between the bank and the third party service provider.
g) Sharing any customer data whether it is personal, financial or credit.
h) Sharing any non-published financial data with a third party service provider.
i) The complexity of the outsourced function or activity i.e., the number of the party that have been involving in the function or the activity include subcontracting.
Outsourcing Involves a bank entering into an arrangement with another party (both domestic and Foreign) to perform, on a continuing basis, a business function or activity which currently is, or could be, undertaken by the bank itself.
Overseas Entities located outside of Saudi Arabia and subject to laws and regulations of the jurisdiction in which they are located.
Third-party service provider An entity undertaking the outsourced activity on behalf of the Banks. (Head Offices and Related entities of Foreign Bank Branches operating in KSA are not considered as Third-Party Service Providers)
II. Applicability of the Rules
C. Level of Application
4. The rules are applicable to banks licensed under the Banking Control Law (Royal Decree No. M/5 dated 22/2/1386 H), including all branches of local and foreign banks and banking subsidiaries ("Banks") located in Saudi Arabia. The banks are required to ensure that their branches and subsidiaries located overseas are aware of these rules.
D. Scope
5. The rules set out in this document enumerate SAMA's requirements of banks that have entered or are planning to enter into outsourcing arrangements. These rules are applicable to all outsourcing arrangements with domestic as well as foreign third party and related party (in the case of foreign bank branches) service providers.
6. Insourcing contracts utilizing third party personnel under the direct supervision, control and management of Banks are exempt from the purview of these outsourcing Rules.
7. In addition to the above, the following are examples of activities that are not considered as part of outsourcing arrangements:
a) Contractual arrangement with market information data providers (e.g. provision of data by Bloomberg, Moody's, Standard & Poor's, Fitch).
b) Clearing and settlement arrangements between clearing houses, central counterparties and settlement institutions and their members.
c) Correspondent banking relationship arrangements.
d) Utilities services (e.g. electricity, gas, water, telephone line).
E. Related Regulations and "No Objections" Requirements
8. While deciding to outsource any function, banks should ensure that outsourcing does not reduce the protection available to depositors nor be used as a way of avoiding compliance with regulatory requirements. It is the responsibility of the bank to continue to satisfy all regulatory and legal requirements when entering into any outsourcing arrangements.
9. Banks are not allowed to outsource any services or activities mentioned in article 19 of the Regulation of Agent Banking that has been issued under circular No. 37541/67 dated 15/06/1440 H).
10. Banks are explicitly required to obtain a written "no objection" from SAMA for Material outsourcing to Third Party Service Providers.
III. Governance
F. Board of Directors
11. The Board of Directors of the bank retains the ultimate responsibility for the outsourcing policy and all outsourcing arrangements, including compliance with all relevant legal and regulatory requirements. The bank and the Board are responsible for complying with all prudential requirements relating to the outsourced business activity.
12. The Board of Directors should ensure that appropriate policies are developed and implemented within the proper risk management framework for outsourcing arrangements. The Board or its delegated authority must approve the bank's outsourcing policy, which must set out its approach to outsourcing of Material business activities, including a detailed framework for managing all outsourcing arrangements.
G. Reporting Requirements
13. Banks are required to notify SAMA of any breaches of legal or regulatory requirements in their outsourcing arrangements. In such event, SAMA may require the bank to modify or cancel the arrangement, or re-integrate an outsourced function into the organization.
14. All Banks are required to provide annual report of their outsourcing activities using the prudential return in Annex 1 as of the end of each year within 30 business days to be sent to BankingDataSection@SAMA.GOV.SA.
IV. Outsourcing Policy and Procedures
15. The policy and procedures should cover, at minimum, all requirements stated below.
H. Assessment of Outsourcing Options
16. Banks must be able to demonstrate to SAMA that, in assessing the options for outsourcing a Material business function or activity to a third party, it has:
a) Prepared and analyzed a business case for outsourcing the Material business function or activity;
b) Analyzed the impact of the outsourcing on the overall risk profile and its impact on systems and controls within the bank;
c) Undertaken a tender or other selection process for third-party service providers;
d) Undertaken a due diligence review of the chosen third-party service providers, and its financial, technical and ethical capabilities;
e) Considered the risk arising from outsourcing multiple activities to the same third-party service provider;
f) Involved the Board or its delegated authority or a Board committee, in approving the agreement;
g) Has put in place a comprehensive outsourcing agreement;
h) Established procedures for monitoring performance under the outsourcing agreement on a continuing basis;
i) Addressed the renewal process for outsourcing agreements and how the renewal will be conducted; and
j) Developed contingency plans that would enable the outsourced business function or activity to be provided by an alternative third-party service provider or brought in-house, if required.
17. Banks are required to ensure that the process of awarding outsourcing contracts is free from any conflict of interest. Banks must declare to SAMA any affiliation or relationship with the third-party service provider.
I. Contractual Arrangements
18. Banks should document all their outsourcing arrangements through a written and legally binding agreement. As a minimum, the contract should incorporate the following:
a) Scope of the Contract;
b) Regulatory status (legal entity & registered) of the third party service provider
c) Service levels and performance requirements;
d) Audit and monitoring procedures;
e) Business continuity plans;
f) Default arrangements, termination clause and minimum periods to execute a termination provisions. The clause should take into account insolvency or any material changes.
g) Pricing and fee structure;
h) Dispute resolution mechanisms;
i) Liability and indemnity;
j) Confidentiality, privacy and security of information;
k) Ensuring access to SAMA and the Bank's internal and external auditors;
l) Compliance with all applicable regulatory and legal requirements;
m) Contractual obligations of the third-party service provider in case of subcontracting all or part of the outsourcing;
n) Mechanisms for reporting and escalation;
o) Commitment of the third-party service provider to report to the bank any control weaknesses or adverse developments in its financial performance;
p) Commitment of foreign third-party service provider that there are no regulatory impediments to the data and record access as per Article 33 and 34 of these rules.
19. The contract should allow for renewal, renegotiation, default termination and early exit, to enable the bank to retain control over the outsourced function or activity and should include provisions that prohibit sub-contracting of the Material outsourcing under the contract without the prior approval of the Bank and no objection from SAMA.
20. The contract should also incorporate a clause for providing SAMA access to documentation and accounting records in relation to the outsourcing arrangements. The contract should require the third-party service provider to cooperate with SAMA.
21. The contract should preferably include Saudi Arabia as the legal jurisdiction of the contract.
22. Banks should institute a defined internal mechanism for receipt and resolution of any customer complaints regarding their outsourced services and the outsourcing contract should include appropriate clauses to ensure that the third party service provider will facilitate the resolution mechanism.
J. Material Outsourcing
23. Proposals for all Material outsourcing should be submitted in writing for SAMA no objection, at least 15 business days for domestic banks and 30 days for foreign, of the proposed commencement of the outsourcing arrangement.
K. Data Confidentiality and Security
24. Banks should ensure that, prior to providing customer and financial data to a third-party service provider, the proposed outsourcing arrangement complies with the relevant statutory requirements related to confidentiality of its customers. In particular, with the provision of Article #19 of the Banking Control Law dated 22/2/1386 H, regulations and instructions issued by SAMA and other relevant local laws.
25. Banks should establish appropriate safeguards to protect the integrity and confidentiality of customer and financial data.
26. Upon termination of the outsourcing arrangement and contract, banks should ensure that any sensitive/confidential data is either retrieved from the third-party service provider or destroyed in a controlled manner, with any exceptions to be reported immediately to SAMA.
L. Control and Monitoring of Outsourcing
27. Banks should setup an internal structure to effectively control, monitor and manage all of their outsourcing activities, and to provide timely reports to senior management, depending on the level and complexity of the outsourcing activities.
28. In case of poor performance by a third-party service provider, banks must account for potential additional costs, which may accrue if the bank decides to change the third party service provider, moving the activity in-house or even exiting the business. Banks should negotiate those probabilities and specify it in the contract.
M. Risk Assessment
29. The Board of Directors should ensure the existence of relevant policies and procedures that would require existing and proposed outsourcing arrangements to be subjected to a comprehensive risk review process. The risk review process should identify and evaluate the exposure relating to operational, legal, financial reputation and regulatory risks and assess the risk mitigation strategies. This should be undertaken by:
a) Conducting a comprehensive risk evaluation of the outsourcing at inception and for all subsequent renewals.
b) Evaluating risk of outsourcing at inception and then reviewed at renewal only in case of a change in scope or occurrence of operational errors etc.
30. In analyzing the business case, and the suitability of the third-party service provider, the level and extent of due diligence should depend on the nature of outsourcing arrangement i.e. Material outsourcing will entail a more comprehensive exercise. At a minimum:
a) Banks should ensure that the third-party service provider has the ability, capacity and authorization to perform the outsourced function reliably and professionally.
b) Banks must establish a method for periodically assessing the third-party service provider.
c) The Bank must retain the necessary expertise to supervise the outsourced functions effectively.
N. Business Continuity Management
31. Banks should ensure that their business continuity is not compromised by any outsourcing arrangements. For all Material outsourcing, banks should have a separate contingency plan for each outsourcing arrangement, which outlines the procedures to be followed in the event that the arrangement is suddenly terminated or the third-party service provider is unable to fulfill its obligations under the outsourcing agreement for any reason.
32. Banks should document within their business continuity plans, the availability of alternate third-party service providers, or the procedures and time for selecting an alternative third-party service providers. In addition, banks must set a procedure if they choose to bring the outsourced function in-house for each of their Material outsourcing contracts.
O. Access to Outsourced Data
33. Banks are required to ensure that for all outsourcing arrangements, SAMA has unrestricted and timely access to current and accurate records pertaining to the outsourcing as per Article # 17 and 18 of the Banking Control Law dated 22/2/1386 H (11/6/1966).
34. Banks are also required to ensure that for all outsourcing arrangements, SAMA has unrestricted access to data pertaining to the outsourcing, if located at the premises of the third-party service provider; and SAMA and the Banks' auditors must be able to exercise those rights of access.
P. Monitoring the Relationship
35. Banks must ensure they have sufficient and appropriate resources to manage and monitor the outsourcing relationship. The type and extent of resources required will depend on the materiality of the outsourced business function or activity. At a minimum, monitoring must include:
a) Maintaining appropriate levels of regular contact with the third-party service provider. This will range from daily operational contact to senior management involvement; and
b) A process for regular monitoring of performance under the agreement, including meeting criteria concerning service levels.
36. Banks should immediately report any breaches of legal and or regulatory requirements or any adverse developments and problems affecting the outsourcing arrangement to SAMA. The report should also include measures proposed and taken for continuity of the service.
37. Where a Material outsourcing agreement is terminated, banks must notify SAMA immediately and provide a statement about the transition arrangements and future strategies for carrying out the outsourced material business function or activity.
Q. Audit Arrangements
38. Banks' internal audit function must audit Material outsourced activities on a regular basis and report to the Board or Board Audit Committee on compliance with the outsourcing policy.
39. SAMA may request an appropriate external expert to provide an assessment of the risk management processes in place in regards to the outsourcing of a Material business function or activity. This could cover areas such as information technology systems, data security, internal control frameworks and business continuity plans.
R. Documentation Requirements
40. Banks are required to keep a register of all their outsourcing arrangements. The documentation for each outsourcing arrangement should include at least the following information:
With regard to the outsourcing arrangement
a) A reference number for each outsourcing arrangement;
b) A brief description of the function that is outsourced;
c) Whether it is considered Material or not, the reasons why it is considered as such and the date of the last respective assessment; and
d) Whether or not personal and confidential data is processed, transferred or held by the third party service provider.
With regard to the third party service provider
a) Their name and registered address; and
b) Location of third party service provider.
In addition, the outsourcing register should include at least the following information with regard to the outsourcing of Material functions:
a) The date of the last risk assessment and a brief summary of the main results;
b) The individual or decision-making body or committee in the bank that approved the outsourcing arrangement;
c) The commencement date and, as applicable, the expiry date and/or notice periods; and
d) The date of the last and next scheduled audit, where applicable.
V. Outsourcing to Third-Party Service Providers Located Overseas
41. The outsourcing of activities by banks to third-party service providers located overseas exposes them to a number of additional risks including the foreign country's economic, political, regulatory, legal and infrastructure conditions. Furthermore an outsourcing activity involving transmission to and retention of customer and financial data by a third-party service provider located overseas raises a number of risks. This includes potential breach of customer confidentiality (as stated in Article 19 of the Banking Control Law), and access to customer data by foreign regulatory and or judicial authorities, right of access by SAMA to the third-party service providers' overseas operations and any restrictions and or delays on timely provision of data to SAMA as required under Article 17 and 18 of the Banking Control Law.
42. For any proposed outsourcing arrangements to a third-party service provider located overseas, banks are required to seek a written SAMA no objection and provide the following information to SAMA with their request:
a) Details of the function to be outsourced;
b) Categorization of the function (Material and non-Material outsourcing);
c) Rationale for outsourcing (including why it cannot be done within KSA);
d) Details on the third-party service provider located overseas;
e) Details on the nature and disposal of the data to be transferred (if applicable);
f) Legal opinion confirming that the outsourcing arrangement is in compliance with Banking Control Law and other regulations; and
g) Confirmation in writing by the Bank supported by a legal opinion confirming SAMA's right of access to the outsourcing activity at the third-party service provider.
VI. Outsourcing for Foreign Bank Branches (Material and Non-Material)
43. Foreign bank branches are required to book KSA business in the Saudi branch, unless SAMA otherwise agrees to an alternative treatment for specific business activities where local booking is not practical.
44. Foreign bank branches are required to maintain appropriate and sufficient local staffing to demonstrate adequate local control over the KSA business and compliance with all of SAMA's prudential requirements applicable to foreign bank branches. However, during the initial stages of a foreign bank branch operations in the Kingdom, SAMA would take a reasonable and proportionate view of local staffing requirements keeping in view the nature, scale, size and complexity of their business.
45. Key management responsibilities, such as business decision-making, along with functions such as compliance and Anti-Money Laundering (AML)/Combatting the Financing of Terrorism (CFT) are not allowed to be outsourced. Foreign bank branches could decide on the outsourcing model of other functions (e.g. Internal Audit, Risk Management) based on the nature, scale and complexity of the branch). Outsourcing to Head Office or a related party does not diminish the obligations of the foreign bank branch, and those of its management to comply with relevant laws and regulations in Saudi Arabia.
46. The outsourced operation to the head office/other group member must be audited annually by the group internal audit team or by an independent third party and the audit findings shared with SAMA.
47. Any report to or by any other regulatory authority on the quality of controls of the outsourcing arrangement must be submitted immediately by the foreign bank branch to SAMA.
48. Foreign bank branches must ensure that head office/other group member outsourcing arrangements do not constrain SAMA's ability to provide effective prudential supervision of the local operations or they do not contravene the Banking Control Law and other applicable Laws and Regulations.
49. Foreign bank branches should adopt good risk management practices to mitigate any potential outsourcing risks. At a minimum and subject to the Rules, a foreign bank branch entering into an outsourcing arrangement with its head office or a member of its group should:
a) Establish policies and procedures relating to ownership and access, resolution of differences, sub-contracting confidentiality and security, separation of property, business continuity management, monitoring of the performance and circumstances of outsourcing arrangements and annual reviews to gauge compliance with agreed service levels.
b) Perform a due diligence process to address all aspects of the arrangement, particularly those pertaining to any unique operational requirements of the branch.
c) Develop an outsourcing agreement that details, among other things, the scope of the arrangement, the services to be supplied, the nature of the relationship between the branch and the head office/other group member (e.g., roles, responsibilities and expectations).
d) Develop procedures governing any subcontracting of services.
e) Develop an appropriate business continuity plan (BCP) that should be supported with IT disaster recovery plan. In addition, a branch's BCP plan should consider applicable controls from SAMA business continuity management framework.
f) Implement a process for monitoring and oversight.
g) Implement procedures for record keeping.
50. Given a foreign bank branch is a dependent unit of a bank and is integrated into the parent entity, whether by legal set-up and/or other organizational designs, outsourcing certain functions/services containing customer information to their head office or other members of the group may occasionally be needed. Subject to the Rules, the foreign bank branch, in outsourcing functions/services containing customer information to head office and other group members is required to put in place a policy that, at minimum, ensures that the following additional conditions are met:
a) A service level agreement that should clearly state that SAMA has the legal right to conduct examinations of the head office/member of the group having outsourcing arrangement with the branch if required.
b) A customer's consent for data sharing with the head office and to transmit the data through reliable secure channel supported by a strong encryption mechanism.
c) Access to such information at the head office/other group member is limited to key control functions such as compliance, risk management, operations, IT and internal audit. Any such customer information should only be for the sole use of the bank and should not be shared with any party outside of the bank without prior written approval of SAMA. The bank is also required to keep a log of who and when such information is accessed.
d) Any changes to customer data stored or in transit shall be completely logged and monitored.
51. For Foreign bank branches that would like to use the services of a third party already contracted by their Head Offices or other member of the group, SAMA will only consider such a third party outsourcing arrangement if the Head Office submits to SAMA a letter of comfort which specifies which operations are to be outsourced and must also include the following conditions:
a) The Head office declares its ultimate responsibility of ensuring that adequate controlling measures for the outsourcing arrangement are in place; and
b) The Head Office is responsible to take adequate rectification measures, including compensation to the affected customers, in cases where customers suffer any loss due to inadequate outsourcing controls applied by the third party service provider.
52. In line with SAMA's risk-based supervisory framework, SAMA may have additional expectations (for all or specific foreign bank branches) depending on the risks related to such outsourcing arrangements and following its supervisory review. Furthermore, SAMA has the right to revoke any outsourcing arrangements, if such an arrangement poses risk to the bank.
53. Foreign bank branches would still be required to comply with all other aspects of these outsourcing requirements in relation to outsourcing arrangements with unrelated third parties.
Annex 1 - Annual Return on Outsourcing Services Provided and Received
Annex 1 - Annual Return on Outsourcing Services Provided and Received
1- Outsourcing Services Provided
Please provide details of all Material services provided BY the bank to the group and / or third parties
No. Service Description Service provided to which Group Company and / or third party 2- Outsourcing Services Received
a) Please provide details of all Material services provided TO the bank by the group and / or third parties for which SAMA no-objection was obtained.
No. Service Description Service Provider b) Please provide details of all non-Material services provided TO the bank to the group and / or third parties for which SAMA no objection is not required.
No. Service Description Service Provider Data Privacy
To read the Data Privacy, click here.
Governance and Internal Control
Key Principles of Governance in Financial Institutions
To read the Key Principles of Governance in Financial Institutions, click here.
Requirements for Appointments to Senior Positions
To read the Requirements for Appointments to Senior Positions, click here.
Banks Remuneration Rules
No: 44049096 Date(g): 4/1/2023 | Date(h): 12/6/1444 Status: In-Force In reference to the Saudi Central Bank Law issued by Royal Decree No. M/36 dated 11/04/1442H, the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386H, and the Rules on Compensation Practices issued by the Saudi Central Bank under Circular No. 1258/BCS/26194 dated 19/05/1431H,
Attached are the new Banks Remuneration Rules, which replace the aforementioned Rules on Compensation Practices. These new rules are designed to ensure that banks implement an appropriate governance framework for awarding Remuneration and effectively managing risks.
For your information and action accordingly as of 01/06/2023G.
1. General Requirements
1.1 Background
These Banks Remuneration Rules shall supersede the existing Rules on Compensation Practices issued vide circular no. 26194/BCS/12580 dated 3 May 2010. Saudi Central Bank (SAMA) has updated these rules for the purpose of addressing the risk of misconduct that may be associated with improper reward practices.
1.2 Objective
The objective of these rules is to set the minimum requirements and provide supervisory guidance to banks in formulation of their policies, procedures and practices on remuneration to ensure financial soundness and promote effective risk management.
These rules are aimed at dealing with risks posed by the remuneration practices, and not at determining the absolute amount of remuneration, which will continue to be determined by banks in line with their remuneration policies. However, banks shall comply with the regulatory caps on remuneration, if any, as specified by SAMA or any other regulatory authority.
1.3 Scope of Application
These rules shall apply to banks as follows:
1. All locally incorporated banks licensed and operating in Saudi Arabia.
2. Where a locally incorporated bank has majority owned subsidiary(ies) operating in the financial sector, it will either formulate group level Remuneration Policy and practices consistent with these rules for application across the group or will ensure that the subsidiary’s Remuneration Policy and practices are in line with these rules.
3. Where a locally incorporated bank has majority owned subsidiary(ies) outside Saudi Arabia, it will ensure that the Remuneration Policy and practices of such subsidiary or branch are in accordance with these rules provided that there is no inconsistency with the legal and regulatory requirements of the host country.
4. Foreign Banks Branches (FBB) licensed and operating in Saudi Arabia shall also follow these rules in designing their Remuneration Policy and practices for Saudi operations, taking into consideration the following:
a. The responsibilities of the Board of Directors, relative committees and General Assembly stated in these rules should lie with the authority responsible for overseeing the business and operations of the FBB at the Head Office/Regional Office.
b. Minimum percentages required in clause number 40 of these Rules shall not be applicable.
1.4 Effective Date
These updated rules shall come into force starting from 1 June 2023, and all banks shall take necessary measures to ensure compliance thereof. Banks shall also ensure that all employment contracts including contracts already in force at time of issuance of these updated rules are consistent with the rules by 1 June 2023.
1.5 Definitions
SAMA: Saudi Central Bank.
Rules: Banks Remuneration Rules.
Senior Management: The functions, roles and responsibilities entrusted to those positions who take, propose and implement strategic decisions and manage the Financial Institution’s business processes including senior management positions that requires SAMA’s non-objection for appointment.
Control Functions: Those functions that have a responsibility independent from management to provide objective assessment, reporting and/or assurance including risk management function, compliance function, and internal audit function.
Misconduct: Conduct that falls short of expected standards, including legal, professional, internal conduct and ethical standards.
Remuneration System: Bank’s internal remuneration policies and procedures including structure, roles and controls of the remuneration and the actual implementation and application thereof by the bank.
In-year adjustment: Downward adjustment of an anticipated annual variable remuneration award to reflect the impact of a negative event or behavior.
Malus: Permits the bank to reduce the value of all or part of deferred remuneration based on ex post risk adjustment before it has vested.
Clawback: Under this process the individual has to return ownership of an amount of variable remuneration paid in the past or which has already vested to the bank under certain conditions.
2. Governance of Remuneration
1. Banks shall comply with all corporate governance requirements with regards to remuneration as specified by SAMA or any regulatory authority, as applicable.
2.1 Board of Directors Responsibilities
2. The Board of Directors (the Board) of a bank shall be responsible for the overall design and oversight of the remuneration system that promote prudent risk-taking behaviors and business practices and accordingly shall not delegate this responsibility to senior management.
3. The Board shall be ultimately responsible for promoting effective governance, sound remuneration practices, ethical behavior and compliance with laws, regulations, and internal conduct standards, and for ensuring accountability for misconduct; in addition to the following:
a. Overseeing and holding senior management accountable for implementing and participating in the design of the remuneration system that effectively delineates how remuneration tools address misconduct risk or other imprudent risk taking behavior.
b. Engaging actively with senior management, including challenging senior management’s remuneration assessments and recommendations if warranted when serious or recurring misconduct occurs and ensure that root cause analysis is performed, lessons learned are promulgated bank-wide and new policies are adopted, as necessary, to prevent it from happening again.
4. The Board shall ensure that senior management puts in place policies and procedures that ensure effective control and adherence to these rules, and any relevant Laws, Regulations, Principles and Standards.
5. The Board shall review and, if satisfied, approve the remunerations of the senior management based on the recommendations of the Nomination and Remuneration Committee.
6. The Board shall ensure that an annual review of the remuneration (internally through Internal Audit or externally commissioned by a recognized firm) is carried out independently without the intervention of senior management. The review must assess the compliance with these rules and any relevant Laws, Regulations, Principles and Standards, as well as the bank’s internal policies that are prepared according to these rules. The Board shall takes into account the results of such a review when making decisions related to remuneration, and could briefly disclose those results in the Board of Directors Annual Report.
2.2 Formation and Responsibilities of the Nomination and Remuneration Committee
7. Banks shall have a Nomination and Remuneration Committee comprising of at least three members. The composition and responsibilities of the committee shall be consistent with SAMA’s Key Principles of Governance in Financial Institutions and any other requirements set by any regulatory authority, as applicable.
8. The General Assembly, upon the proposal of the Board, shall lay down the terms of reference of the Nomination and Remuneration Committee, which should include its work controls, responsibilities, procedures for appointing committee members, their membership duration and remuneration. A copy of the terms of reference of the Nomination and Remuneration Committee shall be submitted to SAMA along-with the Compliance Report for every cycle.
9. The Nomination and Remuneration Committee should work closely with the bank’s Risk Management Committee and/or the Chief Risk Officer in the evaluation of the incentives created by the remuneration system.
10. The Nomination and Remuneration Committee shall review the implementation of the Remuneration Policy at-least on a half-yearly basis to ensure achievement of its stated objectives.
11. The Nomination and Remuneration Committee shall closely review and monitor the remuneration for highest paid staff to verify compliance with the Remuneration Policy, and to avoid misuse.
2.3 Senior Management Responsibilities
12. Senior management should implement the remuneration system that promotes effective governance, sound remuneration practices, ethical behavior and comply with laws, regulations, and internal conduct standards.
13. Senior Management shall be responsible for the following:
a. Promote, develop and communicate conduct expectations and clearly link remuneration and conduct standards, including as part of the performance assessment process and ensure that the potential consequences of misconduct on remuneration are clearly explained to all employees.
b. Follow-up on the publication of the desired aspirations of every department in the bank regarding ethical behavior and work practices that are in compliance with the laws, regulations and internal standards of behavior, and the application and achievement of these aspirations.
c. Identify, monitor and report on relevant indicators of misconduct risk in every department in the bank, as well as monitor the role of each department in the bank in escalating and remediating identified deficiencies or other important matters in an appropriate and timely fashion, in such a way as to allow inclusion of relevant feedback and changes in the performance assessment process if needed.
14. Senior management shall submit a report to the Nomination and Remuneration Committee on a semi-annual basis at least on measures taken and steps to be taken within the framework of applying the Banks Remuneration Rules issued by SAMA and any relevant Laws, Regulations, Principles and Standards.
2.4 Misconduct
15. Banks should have an internal definition of misconduct based on their characteristics, values and business, which promotes adherence to legal, professional, internal conduct and ethical standards.
16. The bank’s risk appetite statements should reflect clear and well-understood values and conduct standards that are tailored and cascaded to individual business units and taken into account when assessing performance and promotion potential. Individuals should be held accountable for ensuring that their own conduct is consistent with these standards.
2.5 Remuneration Policy
17. Banks shall have a written Remuneration Policy for Senior Management approved by General Assembly, and a Remuneration Policy for all other employees approved by the Board of Directors. The Remuneration Policy shall ensures the achievement of prudent management of the risks associated with remuneration.
18. The Remuneration Policy should be designed to attract and retain quality staff with sufficient knowledge, skills and expertise to effectively conduct the business of the bank.
19. The Remuneration Policy should, inter-alia, cover the following areas:
a. The objectives of the Remuneration system (with focus on promoting effective risk management and achieving financial soundness and stability of the bank).
b. Scope of policy should cover all levels and categories of employees whether regular or contractual as well as outsourcing arrangements with third-party service providers.
c. Broad structure of the Remuneration system (including but not limited to linking remuneration with performance and alignment of remuneration with risk taking).
d. Determinants of the mix of remuneration components (including but not limited to fixed and variable components; cash, equity and other non-cash benefits).
e. Description and details of major perquisites to be made part of the remuneration.
f. Authority matrix clarifying management’s approval limits for remunerations and any constraints that require approval from Nomination and Remuneration Committee.
g. A clear description of the responsibilities of the control functions, as well as human resources, related to participating in designing appropriate remuneration policies, developing performance indicators related to risk and behavior, and identifying, monitoring and reporting misconduct.
h. Criteria to be used for determining the value for allocation of the shares in relation to remuneration.
20. The Remuneration Policy should not be solely based on industry practices but should also take into account the business model, financial condition, operating performance and business prospects of the bank.
21. The review of Remuneration Policy to assess its adequacy and effectiveness should be made an integral part of the bank’s risk management framework.
3. Performance Measurement
22. Banks shall have a performance measurement system in place to evaluate and measure the performance of its employees at various levels in an objective manner.
23. Procedures and processes for performance appraisal and measurement should be clearly stated and documented. Such procedures and processes should provide for avoidance of undue influence and conflict of interest situations, and be transparent to the employees concerned.
24. Performance measurement procedures and processes should provide for measuring individual contribution, to the extent practicable, to the overall performance of the bank. The individual contributions measured should, however, be supplemented with managerial judgment in determining the performance based remuneration of an employee. Conduct goals and performance targets should work together as a part of employees’ remuneration to drive good behavior and address potential conflicts of interest.
25. Performance assessments and remuneration outcomes should consider all risks, including those associated with the bank main activities and those stemming from conduct that may not be consistent with laws and regulatory requirements, internal policies and procedures or the bank’s risk management framework. These factors should be given due weightage in performance measurement.
26. Gross revenue or profit earned should not be the sole factor when setting performance objectives and when measuring performance. Other factors including, at a minimum, risks associated with the underlying transactions, ethical behavior, quality of business transacted, customer satisfaction and risk adjusted return on capital should also be taken into account, wherever practicable, in performance management.
27. The performance measurement of senior management should be based on longer-term performance of the bank and accordingly the performance-based component of their remuneration should not be based solely on the current year’s performance. The performance assessments of senior management and other employees who have an oversight responsibility within the bank should also include considerations regarding their relevant oversight responsibility in relation to the risk of misconduct within their business line.
4. Determining Remuneration
4.1 Alignment of Remuneration with Risk
28. Banks shall ensure that the incentives provided by their remuneration system take into consideration risk, capital, liquidity and the likelihood and timeliness of earnings.
29. An employee’s remuneration should take into account all existing and potential risks including difficult-to-measure risks such as liquidity, cost of capital, reputation, regulatory and misconduct risks. Furthermore, the size of the variable remuneration pool and its allocation within the bank should take into account the full range of risks.
30. The processes for managing misconduct risks through remuneration system should include, at a minimum, ex ante processes that embed non-financial assessment criteria such as the quality of risk management, degree of compliance with laws and regulations and broader conduct objectives of the bank, including fair treatment of customers, into individual performance management and remuneration at all levels of the bank and as part of the broader governance and risk management framework. Such processes should be supported by ongoing programs including formal training courses that reinforce appropriate standards of behavior.
31. Control functions and Human Resources function should be adequately involved in remuneration design and decision-making to ensure effective remuneration incentives in addressing misconduct risk.
32. Remuneration payments should be sensitive to the time horizon of risks and, if needed, the variable component of remuneration should be deferred where risks are realized over long periods.
33. Banks shall employ an appropriate technique/criteria to adjust their accounting profits for the full range of identifiable risks keeping in view the size and complexity of its operations.
34. Adequate amounts of variable remuneration should be placed at risk of reduction, to help alignment of remuneration outcomes with adverse outcomes and/or risks that may manifest only with time.
4.2 Remuneration Structure
35. The remuneration structures for various levels of employees should be designed to promote effective risk management and achieve remuneration objectives.
36. The mix of forms of remuneration should vary depending on the employee’s position and role, it should take into account the full range of financial and non-financial incentives in an employment relationship, and may include cash, equity and other forms of remuneration.
37. The proportion of fixed and variable components of remuneration for different business lines should be determined taking into account the nature and level of responsibilities of an employee, business area in which they work, and the Remuneration Policy of the bank. Banks should, however, ensure that total variable remuneration does not limit their ability to strengthen their capital base.
38. The remuneration structure of employees working in control functions should be designed to ensure objectivity and independence of these functions. In this regard, it should be ensured that performance measurement and determination of remuneration of such employees are not dealt with by any person working in/associated with the business areas monitored by the control functions.
39. The determination of bonus pool should take into account the overall performance of the bank whereas its distribution to individual employees should be based on performance of the employee as well as that of the business unit or division in which they work. There should, however, be no guaranteed minimum bonuses and similar other payments, other than an employee’s salary, that are not based on performance.
40. Current and potential risks should be taken into account when determining the size and distribution of the variable remuneration. The variable remuneration of senior management as well as other employees whose actions have a material impact on the risk exposure of the bank should, therefore, be determined in line with the following:
a. A substantial proportion of remuneration should be variable and paid on the basis of individual, business-unit and bank-wide measures that adequately measure performance.
b. A substantial proportion of variable remuneration, of at least 40 percent, should be awarded in shares or share-linked instruments (or, where appropriate, other non-cash instruments) and should be subject to an appropriate share retention policy.
c. A substantial portion of variable remuneration, of at least 40 percent, should be payable under deferral arrangements over a period of years.
d. These proportions should increase significantly along with the level of seniority and/or responsibility. For the most senior managers and the most highly paid employees, the percentage of variable remuneration that is deferred should be substantially higher of at least above 60 percent.
41. The deferral period for remuneration should not be less than three years based on the nature of the business, its risks and the activities of the concerned employee.
42. The remaining portion of the deferred remuneration can be paid as cash remuneration vesting gradually. In the event of negative contributions of the bank and/or the relevant line of business in any year during the vesting period, any unvested portions are to be clawed back, subject to the realized performance of the bank and the business line.
4.3 Remuneration Adjustment
43. Remuneration system should provide for mechanisms to adjust variable remuneration, including, for instance, through in-year adjustment, and malus or clawback arrangements, which can reduce the variable remuneration after it is awarded or paid. Such mechanisms must be documented in the Bank’s policies and procedures.
44. The bank's poor financial performance during any period is expected to lead to a decrease in the total variable remuneration, taking into account both current remuneration and reductions in payment previously earned during that period. Banks should submit clear justifications of such decrease to SAMA as support documents along with the compliance report.
45. Remuneration adjustment should allow banks to adjust remuneration to account for risks that have subsequently occurred, including instances of employee misconduct or material error, material downturn in performance or a material failure of risk management.
46. Effective policies and procedures must be in place to set indicative criteria and cases that could trigger the use of remuneration adjustment and may result in reductions to variable remuneration regardless of the individual’s performance.
47. At a minimum, adjustment should occur in the following cases:
a. In cases of misconduct that have led to significant loss to the bank, its customers or any party or;
b. Where there is fraud, gross negligence or material failure of risk management controls, including violation of internal policies or any related rules or regulation.
48. Remuneration adjustment policies should take into account, as a minimum, those under review when determining accountability for adverse risk events; the liability or proximity to the misconduct, rank and role, individual’s motivation (e.g. personal gain, malice, fraud, ignorance, lack of training), negligence in exercise of individual’s duties, level of participation in and responsibility for the events under review, history of misconduct, actions that were taken or could have been taken to prevent such events from occurring, including any failures within the bank to internally supervise and oversee staff, and the root cause of the events triggering review.
49. When deciding the amounts of remuneration to be adjusted, performance and remuneration adjustment policies should take into account all relevant indicators of the severity of impact, which may include the cost of fines and regulatory actions, direct and indirect financial losses and/or the impact on profitability attributable to the relevant failure, any reputational damage, the impact of such events on customers, and costs to redress the events under review.
50. Where remuneration adjustments are made before the full impact of the risk management failures or misconduct is known, appropriate subsequent adjustments should be made to ensure that the final adjustment fully reflects the impact of the incident or misconduct.
51. Remuneration adjustment policies should provide that the granting and vesting of all awards made to individuals undergoing internal or external investigation may be frozen until the investigation has concluded and a decision has been made and communicated to the relevant employee(s).
52. The use of remuneration adjustment should not be limited to those most directly involved and responsible for misconduct, but it should extends beyond them. Specifically, adjustment should be considered for the heads of control functions and for employees in control or direct line of business functions who by virtue of their role could be considered responsible or accountable for the failure or for the weakness in the control framework relevant in the employee misconduct, if such failure or weakness was attributed to lack of due diligence or misuse. Also it should be considered for senior management or members of the Board or relevant committees who, while not directly responsible were either aware, or could have been reasonably expected to be aware due to their seniority or role in the bank, of the failure or misconduct at the time, but failed to take adequate steps to promptly address it.
53. Remuneration adjustment should be governed by clear procedures that:
a. Indicate the authority to approve remuneration adjustment and processes of escalating to human resources, control functions, and senior management and deciding cases that may trigger the use of remuneration adjustment for misconduct.
b. Ensure that control functions and human resources, are appropriately involved in the processes of remuneration adjustment, except for those persons who may also fall within the scope of the investigation.
c. Make clear the role of discretion in such processes, who is authorized to use such discretion and how such discretion would be appropriately bound by supporting governance and risk management processes.
d. Require adequate documentation and rationale of final decisions.
e. Ensure transparency by clearly communicating in writing to all affected individuals the value of remuneration adjustments made to variable remuneration and the reasons for such adjustments. That includes noticing the Board or Nomination and Remuneration Committee.
5. Remuneration Control
5.1 Disclosure Requirements
54. Banks shall disclose in the Bank’s Annual Financial Statements the aggregate quantitative information on remuneration paid to various categories of employees and their number with breakup of fixed and variable components and the forms of payment. The categorization of employees includes at a minimum senior management, employees engaged in control functions and outsourced employees.
55. Banks shall disclose in its Annual Financial Statements the salient features of its Remuneration Policy and its implications on the bank’s risk profile as well as the composition and the mandate of the Nomination and Remuneration Committee. Such disclosure should also provide information on the overall design of remuneration system and the manner of its implementation, description of the manner of risk adjustment, linkage of remuneration with actual performance, deferral policy and vesting criteria, parameters for allocating cash versus other forms of remuneration, and achievement of the stated policy objectives.
5.2 Compliance Report
56. Banks are required to submit a semiannual Compliance Report to SAMA that includes an assessment of the bank’s existing remuneration practices and alignment with these rules; by assuring full compliance, or highlighting gaps along with an action plan (how to cover the gap, responsible persons/ department and target date) in addition to updates on the progress of the action plan until all gaps are covered. The report should include the items mentioned in Appendix-I.
57. Banks shall submit, along-with the Compliance Report, the following about all types of remuneration:
a. Details of total remuneration including break-up of fixed and variable remuneration, and remuneration adjustments as per Appendix-II;
b. Details of remuneration of the top 12 highly compensated employees of the bank as per Appendix-III.
58. Banks shall submit its semiannual Compliance Report for the second half year before March 31, and for the first half of the year before August 31.
59. Banks shall submit the results of the annual review of the remuneration, and any consequential actions before March 31 of each year.
5.3 Supervisory Review
60. Banks are expected to use these rules in identification and assessment of risks arising out of remuneration policies and practices as part of its Internal Capital Adequacy Assessment Plan (ICAAP) and Internal Liquidity Adequacy Assessment Plan (ILAAP).
61. In case of material deficiencies from these rules or from the bank’s policies, SAMA could direct the concerned bank for rectification of deficiencies and may also prescribe increased capital or liquidity requirements for such bank. SAMA may also impose penalty or any other necessary measures in case of serious violations.
62. If needed, SAMA may limit a bank’s total variable remuneration as a percentage of total net revenues when it is inconsistent with the maintenance of a sound capital or liquidity base or with sound risk management practices. In addition, SAMA may also impose certain limits and constraints on bank’s remuneration structure, forms and deferment.
Appendix-I: Coverage of the Compliance Report
The report should cover all actions taken by the bank to comply with SAMA rules or other related regulations. It should contain at a minimum the following information:
1. Composition of the Nomination and Remuneration Committee including the names, qualification, status (whether shareholder, independent, non-executive) and terms of reference of the Committee;
2. Confirmation to the effect that the bank has formulated a Remuneration Policy for Senior Management with the approval of the General Assembly, and a Remuneration Policy for all other employees approved by the Board of Directors. The policies should be annexed with the report;
3. Confirmation to the effect that all employment contracts negotiated or renegotiated after issuance of SAMA’s rules are compliant with these rules. Also information regarding the number of contracts, if any, which were in force at the time of issuance of SAMA rules but are still non-compliant with these rules along-with the reasons thereof and the timeline for their regularization;
4. Details of the measures taken to ensure compliance with these rules by the bank’s subsidiaries and the name and location of all such subsidiaries and branches to which these rules have been applied;
5. Categories of employees and their number to which the measures taken to implement SAMA rules apply. Such categories of employees should, inter-alia, include senior management, employees engaged in risk taking activities as defined in the Remuneration Policy, employees working in control functions, other employees of the bank and outsourced employees/service providers (engaged in material risk taking activities on behalf of the bank, if allowed under the SAMA’s Rules on Outsourcing). Definitions for each category of those employees should be provided as well in detail;
6. Listing down the material changes to date in the remuneration practices of the bank/subsidiaries since implementation of these rules. Each of these changes should be elaborated with supporting information;
7. Description of / reference to the disclosures made in the bank’s Board of Directors Annual Report with regard to risk management framework, internal controls and Remuneration Policy and practices;
8. Confirmation to the effect that the bank has established appropriate compliance arrangements by seeking commitment from their employees not to use personal hedging strategies or remuneration - and liability - related insurance to undermine the risk alignment effects embedded in their remuneration arrangements;
9. Any unexpected issues that have been encountered to date in the implementation of these rules should be enumerated;
10. Details of the steps planned for the next half-year for further refinement of the remuneration practices.
Compliance Principles and Internal Control
Principles of Internal Auditing for Local Banks Operating in Saudi Arabia
No: 43037826 Date(g): 1/12/2021 | Date(h): 26/4/1443 Status: In-Force Translated Document
In line with the supervisory and regulatory role of SAMA, and its commitment to enhancing the systematic performance of internal audit units in independently and objectively evaluating the adequacy and effectiveness of governance processes, risk management, internal controls, and implemented policies and procedures. Based on the powers granted to it under its Law, issued by Royal Decree No. (M/36) dated 11/04/1442H, and other related regulations,
This is the first edition of the Principles of Internal Auditing for Local Banks Operating in the Kingdom.
For your information and action accordingly, effective as of 01/01/2022G.
Chapter One: Introduction, Definitions, and General Provisions
1. Introduction
1-1 SAMA has issued these principles based on its supervisory and regulatory powers as outlined in the following regulations:
A: The Saudi Central Bank Law, issued by Royal Decree No. (M/36) dated 11/04/1442 H.
B: The Banking Control Law, issued by Royal Decree No. (M/5) dated 22/02/1386 H.
1-2 These principles are structured and contextualized into three chapters: Chapter One: Clarifies the terms used and general provisions. Chapter Two: Provides an overview of the roles, responsibilities, and duties of the Board of Directors, the Audit Committee, and Executive Management in relation to internal audit, as stipulated by relevant regulations and guidelines, including the requirements for their effective implementation, Chapter Three: Includes detailed and comprehensive requirements concerning the activities, roles, and responsibilities of the internal audit function. It highlights its position as the third line of defense, complementing the first and second lines of defense. This chapter also underscores the role of internal audit as a tool for oversight and supervision within the bank, rather than a replacement for the bank's management, ensuring alignment with regulatory requirements, guidelines, and best practices, while considering the unique nature and application style of banking institutions.
2- Definitions
The following terms wherever they appear in these principles are intended to have the meanings specified next to each of them, unless the context requires otherwise:
Term Definition central bank Saudi Central Bank. Bank Local commercial banks licensed to conduct banking operations in the Kingdom. Board Board of Directors of the bank. Audit Committee One of the committees formed by the council, established by a decision from the ordinary general assembly Executive Management The bank's senior management, who are responsible for managing the bank's daily operations, proposing strategic decisions, and implementing them. Unit The internal audit unit in the bank, which is overseen by its head and staff responsible for internal auditing tasks and responsibilities Head of the Unit The person responsible for managing the unit. Internal Auditors The staff in the unit responsible for carrying out the tasks and responsibilities of internal auditing. Principles Principles of internal auditing for local banks operating in the Kingdom of Saudi Arabia. Internal Audit Function An independent evaluation activity that provides objective assurance and consulting services on the quality, adequacy, and effectiveness of the bank's internal control system. This involves a systematic, organized approach to auditing accounting, financial, operational processes, and more, and assessing and improving governance, risk management, and control effectiveness. Internal Audit Policy The official document approved by the Board that defines and clarifies the unit's purpose, scope of activity, organizational position, functional and administrative references, responsibilities, authority, relationships with other units, and the principles and methodology the bank follows regarding internal control. It also grants access to records, staff, and physical assets necessary to perform its duties. Regulations and Rules The regulations and rules that apply to the banking sector and its members. Instructions All that is issued by SAMA in its supervisory and regulatory capacities over the banking sector, as well as what is issued by relevant authorities in terms of regulations, rules, principles, frameworks, guidelines, and mandatory circulars Independence Free from circumstances and conditions that affect the unit's ability to perform internal auditing tasks and responsibilities in a professional, objective, and unbiased manner. Conflict of interest The situation or situations in which the head of the unit and its staff have, or appear to have, a direct or indirect interest or relationship in a matter under consideration by this person/people: for the purpose of making a decision regarding it, such that this interest or relationship prevents or leads to the belief that it has hindered their ability to express their opinion or make their decision independently, impartially, and objectively, without regard to this interest or relationship. Objectivity Neutral professional behavior based on facts that enables internal auditors to perform their tasks in a way that assures them of the quality of their work and its desired outcomes, without any substantial interference or influence from outside the unit affecting its quality or being swayed by personal beliefs and emotions Consulting services These are the consultations carried out at the specific request of one of the units in the bank First line of defense Business units responsible for identifying, assessing, and managing the risks of their activities early and continuously, and accepting those risks within acceptable limits. Second line of defense Regulatory units and support units such as risk management, compliance, legal, Sharia (if applicable), finance, and technology related to business units, responsible for verifying through a comprehensive and systematic perspective that the business units in the first line of defense have appropriately identified and are appropriately managing their business risks. Third line of defense The internal audit unit – the unit- responsible for independently and objectively evaluating and confirming the adequacy and effectiveness of governance, risk management, controls, policies, and procedures implemented by the first and second lines of defense, enhancing confidence in them, and providing the executive management with reasonable assurance that the policies and procedures align with the specified expectations. Stakeholders All those with a direct interest in the unit, specifically: the board, the audit committee, executive management, business units in the bank, external auditors, external consultants, and others. Indirectly, this includes shareholders, investors, and customers. 3. General Provisions
3-1 The general purpose of these principles is to establish the minimum requirements necessary for the internal audit function to perform efficiently and optimally within a unified, comprehensive, and robust framework. This framework serves as a tool to enhance self-regulation and lay the foundations for performing internal audits and improving the bank's operations and activities. The methods for implementing these principles depend on various factors, including: the size of the bank, the complexity of its operations, its geographical scope, regulatory framework, and the instructions it operates within. 3-2 The primary objectives of these principles are: 1) To protect the bank's assets, continuously ensure the soundness, adequacy, and effectiveness of processes, and the accuracy and reliability of reports, especially financial reports prepared for various purposes and stakeholders. This includes instilling confidence in these reports, enhancing the data contained within them, and protecting the interests of stakeholders. 2) To enhance compliance with the requirements of regulatory and supervisory authorities, ensuring that the bank and its employees adhere to laws, regulations, and instructions. 3-3 The internal audit function represents the third and final line of defense in the three lines of defense model. It is directly accountable to the Board and Audit Committee on a continuous and ongoing basis for evaluating and confirming the adequacy and effectiveness of governance, risk management, and control processes, as well as the policies and procedures implemented by the first and second lines of defense. This line of defense enhances confidence in it and contributes to the improvement of these processes through a structured risk-based approach, optimizing resource use by directing audit activities towards the bank's most significant and high-risk areas. It performs these activities objectively, considering the defined strategies and goals. The importance of this line of defense is bolstered by its independence, which strengthens its objectivity and credibility, ensures proactive effectiveness, provides new insights, identifies future impacts, and promotes appropriate ethics and values, thereby giving executive management reasonable assurance that policies and procedures align with defined expectations. 3-4 These principles do not alter the requirements imposed on banks by other relevant regulations, laws, and instructions. 3-5 SMA has issued several instructions related to internal audit requirements, and these principles should be read alongside them, as applicable, including but not limited to: 1) Key Principles of Governance in Financial Institutions under SAMA's supervision and control. 2) Principles of conduct and Work Ethics in financial institutions. 3) Principles of Compliance for Commercial Banks Operating in the Kingdom of Saudi Arabia. 4) Anti-Money Laundering and Counter-Terrorism Financing Guide. 5) Rules for Bank Account. 6) Regulatory rules for the operation of self-regulation units and committees. 7) Principles of financial fraud prevention in banks operating in the Kingdom. 8) Shariah Governance Framework for local banks operating in Saudi Arabia. 9) Whistleblowing Policy for financial institutions. 10) Risk Management Instructions. 11) Rules on Outsourcing. 12) Cyber Security Framework. 13) Business Continuity Management Framework. 14) Information Technology Governance Framework. 3-6 The internal audit function is subject to international attention, with various international bodies and organizations issuing guidance on it. These should be referenced and consulted, including but not limited to: 1) Basel Committee on Banking Supervision (BCBS). 2) Institute of Internal Auditors (IIA). 3) Committee of Sponsoring Organizations of the Treadway Commission (COSO). 4. Scope of Application
These guidelines apply to all local banks working in the kingdom.
Chapter Two: Roles and Responsibilities of the Board and Executive Management Regarding Internal Audit
Principle (1): Board Responsibilities for Internal Audit
5- To ensure the performance of the ordinary general assembly to its functions regarding the audit committee and internal auditing as specified, in accordance with the provisions of the Companies Law and its implementing regulations, the Corporate Governance Regulations issued by the Capital Market Authority, and the Key Principles of Governance in Financial Institutions issued by SAMA, the board is required to do the following: 5-1 submitting effective proposals and recommendations that enable the ordinary general assembly to carry out its functions. 5-2 Monitor any developments that occur in the regulations, rules, and instructions related to internal auditing from the relevant authorities from time to time. 6- Although the audit committee operates independently from the board and executive management, this does not exempt the board—according to the key principles of governance in financial institutions—from the responsibility of effectively overseeing the audit committee and monitoring its work and assigned duties. 7- The following responsibilities fall upon the board concerning the roles and responsibilities of executive management regarding internal auditing: 7-1 The ultimate responsibility for ensuring that executive management establishes and maintains an appropriate internal control framework that is efficient and effective, which identifies, measures, monitors, and manages all risks faced by the bank. 7-2 Ensuring the review of the effectiveness and efficiency of the internal control system based on information provided by the internal audit function, though not relying solely on it. 8- Without prejudice to the powers, duties, and responsibilities of the Board according to the relevant SAMA instructions and other regulatory authorities, the Board has the responsibility to continuously ensure the following with respect to the internal audit function: 8-1 Taking all necessary actions to ensure the existence and continued effectiveness of an independent and effective internal audit function within the bank, and periodically updating its organization and operating policies. 8-1 Ensuring that the size of the internal audit function, the qualifications and competence of its head and staff, are appropriate to the size of the bank, its nature of operations, the automated systems in use, and the complexity of its organizational structure. 8-3 Ensuring that the Audit Committee conducts an independent external evaluation of the quality of the internal audit function’s performance at least once every five years. Principle (2): Responsibilities of the Audit Committee towards the Unit
9- Without prejudice to the specific responsibilities and duties of the Audit Committee as defined by regulations and instructions issued by SAMA and other regulatory authorities, the Committee is responsible for the following requirements for effective oversight: 9-1 Recommend the board to approve the organizational structure of the unit and review it periodically as needed. 9-2 Recommend the board the appointment, reappointment, or dismissal of the head of the unit, or acceptance of their resignation. 9-3 Ensure the presence of appropriate human resources in the unit in terms of quantity, qualifications, and skills, especially in specialized topics, including, for example, units for: treasury, finance, international financial reporting standards, anti-money laundering and counter-terrorism financing, technology/cybersecurity risks, governance, Basel standards, liquidity, credit, and provisions, among others. 9-4 Review and approve the audit plan prepared by the head of the unit based on the results of the annual risk assessment, including the scope of the plan and the budget allocated for it. 9-5 Approve the strategy of the unit prepared by its head and monitor its performance alongside the execution of the annual audit plan, in alignment with the bank's overall strategy and objectives, and after coordinating with the relevant department in the bank. 9-6 Review and discuss internal audit reports. 9-7 Review the unit's performance to ensure its ability to carry out its responsibilities independently and objectively. 9-8 Approve performance measurement indicators for the head of the unit and evaluate their performance. 9-9 Ensure that the head of the unit possesses integrity and the ability to perform their duties with honesty, diligence, and responsibility. Verify compliance with regulations and instructions and confirm that they have not been previously involved in any violations. 9-10 Ensure that executive management takes the necessary corrective actions in a timely and appropriate manner to address weaknesses in controls, issues of compliance with policies, regulations, and instructions, as well as other violations and observations, and shortcomings identified and reported by the audit unit with recommendations. 9-11 Conduct the required independent external assessment—according to the approved audit policy to verify the quality of the unit's work at least once every five years. Principle (3): Roles and Responsibilities of Executive Management Regarding Internal Audit
10- The executive management has the following responsibilities: 10-1 Develop and apply appropriate and effective internal control systems and procedures, and maintain them. 10-2 Fully and unconditionally enable the internal audit unit to access all records, individuals, systems, and buildings, and provide them with the necessary information and data to perform their tasks in a timely and appropriate manner. 10-3 Provide the internal audit unit with updates on new initiatives, projects, products, operational changes, or any amendments to policies and procedures within the bank. 10-4 Ensure that all relevant risks (both known and anticipated) are identified and reported to the internal audit unit at an early stage. 10-5 Share their risk assessments with the internal audit unit to enable the unit to plan audits based on a risk-based approach. 10-6 Implement appropriate measures and corrective actions in a timely and suitable manner regarding all findings and recommendations received from the internal audit unit. 10-7 Encourage inviting representatives of the internal audit unit to attend various administrative committee meetings as permanent invitees, without granting them voting rights. 10-8 Including a key performance indicator for the executive management that reflects the effectiveness of its handling of the observations monitored by the unit in an appropriate manner and timing.
Chapter Three: Functions, Tasks, and Responsibilities of the Unit.
Principle (4): Key Characteristics of the Unit
Independence and Objectivity
11- The unit must be administratively independent from all other business units with activities subject to review, as well as from the first and second lines of defense, in a complementary manner. The unit should have sufficient organizational status and authority within the bank to perform its tasks objectively. The head of the unit and its staff should not undertake or be assigned any other tasks or work in the bank that could compromise their roles, except for internal audit activities, reviewing, and evaluating the effectiveness and efficiency of the internal control system.
12- The unit must have the authority to perform its tasks across all areas of the bank's operations and business units, without any restrictions from the executive management or any source other than its functional reference 13- The unit should have the freedom to discuss its views, results, evaluations, and conclusions directly with the Audit Committee and the Board, and to submit its reports directly through a clear organizational structure - functional link - to the Audit Committee.
14- The unit should not be involved in the preparation (design), selection, implementation, or management of specific internal control procedures. However, its independence does not preclude the executive management from requesting internal audit inputs on matters related to risks and internal control, provided that such advisory roles are well-documented in audit procedures and guidelines and are not interpreted as conflicting with its independence.
15- The rotation of staff in the unit to other business units should be governed by a written policy within its operational framework to avoid conflicts of interest. This includes a mandatory cooling-off period of no less than twelve months between the employee’s time in the unit and their subsequent review of activities in the bank’s operational areas where the rotation occurred.
16- A performance rewards for the head of the unit and its staff - if any - should be organized in a way that ensures no conflict of interest or compromise to the unit's independence and ability to work objectively, and in accordance with the relevant instructions issued by the central bank and the bank’s reward policies and practices. Their rewards should not be linked to the financial performance of the business activities subject to internal audit, and the head of the unit’s rewards should be recommended by the Audit Committee in accordance with the bank’s reward policies and practices.
17- The head of the unit should confirm annually - at a minimum - the organizational and functional independence of the unit's activities, either in a dedicated section of the annual report or through a separate official written statement.
18- The unit should have the right to request a meeting with the Audit Committee at any time if there is a need to discuss any topic it wishes to raise.
Professional Competence and Due Diligence
19- The head of the unit must possess leadership skills and the necessary skills to maintain the unit’s effectiveness. 20- The head of the unit must have an academic degree in one of the following: 20-1 Either in accounting, auditing, business administration, or other related fields to internal auditing, preferably holding a specialized professional certification in internal auditing or accounting such as (QIAI), (CIA), (SOCPA), (CPA), or an advanced degree in accounting, auditing, or business administration. 20-2 Or in specialized technical fields such as (CISA) Certified Information Systems Auditor or (CISM) Certified Information Security Manager, in this case, they also have to hold one of the professional or advanced certifications specified in (1) above. In both options, they must have sufficient practical experience in internal auditing and possess appropriate leadership skills to fulfill their responsibilities while maintaining the unit’s independence and objectivity. 21- The head of the unit, without conflicting with the bank’s general employment policies, procedures, and requirements, must establish standards to attract competent individuals to the unit who possess professional competence, scientific knowledge, experience, qualifications, skills, and the ability to gather and understand information, examine and evaluate evidence during the audit process, and communicate with stakeholders. This requirement also includes supporting and enabling national talents and training them. 22- The head of the unit must assess the skills of the unit’s staff, monitor their development, and ensure they receive continuous, relevant training to meet the technical requirements of banking activities, adapt to the increasing diversity of tasks due to new products, services, and procedures, and keep up with other developments in the financial sector. Professional Ethics for the Head of the Unit and Its Staff
23- In accordance with the Principles of Conduct and Work Ethics in Financial Institutions issued by SAMA, and to ensure the maintenance of professional standards for the unit at all times, the bank’s code of conduct and ethics should, at a minimum, include principles of objectivity, behavior, competence, confidentiality, and integrity, and should stipulate the following: 23-1 The necessity of demonstrating professionalism, integrity, honesty, and trustworthiness. 23-2 Emphasis on maintaining the confidentiality of information obtained during the performance of duties, avoiding the use of such information for personal gain or harmful activities, and taking care to protect the information acquired. 23-3 Avoidance of conflicts of interest. To this end, the head of the unit must take adequate measures to ensure that its staff consistently adhere to integrity, comply with internal audit principles, and follow the Principles of Conduct and Work Ethics in Financial Institutions issued by SAMA. Principle (5): Internal Audit Policy
24- The head of the unit must prepare and periodically update an internal audit policy, and have it approved by the board based on the recommendation of the audit committee. 25- The key items of the policy must include, at a minimum: 25-1 The purpose of establishing the unit, and its scope and methodology of work. 25-2 Its organizational position within the bank, its authorities, responsibilities, and its relationships with other control units. 25-3 The key characteristics of the unit as outlined in these principles. 25-4 Ensuring what enhances its role and performance of its duties and responsibilities. 25-5 The right to communicate directly with any bank employees, and to examine the activities of any bank unit or its affiliated entity, if the affiliated entities do not have independent review units or committees, without breaching related regulations and instructions. 25-6 The right to access any records, files, data, or physical assets of the bank, without conflicting with relevant SAMA instructions. 25-7 The right to obtain copies of records and supporting documents for audit activities, including access to administrative information systems, records, and minutes of all advisory bodies in the bank and decision-making entities. 25-8 The right to enable the unit to perform its role and achieve its responsibilities for reviewing all activities of the bank's units and its affiliated entities internally and externally, if the affiliated entities do not have independent review units or committees, without breaching related regulations and instructions. 25-9 The right to escalate to the audit committee without any restrictions when needed. 25-10 The obligation to communicate the results of internal auditors derived from their work, clarify the method of doing so, and specify the receiving entities - administrative dependencies - for these reports. 25-11 The unit's responsibility to the audit committee for all matters related to its performance of duties and responsibilities. 25-12 The responsibility of the head of the unit. 25-13 The conditions and terms for coordination and follow-up of work between the unit and external auditors. 25-14 The conditions and terms under which advisory or consulting services can be requested from the unit or assigned special tasks, without violating relevant instructions. 25-15 The commitment to conduct an independent external assessment of the unit's work quality and adherence to ethical conduct and compliance with internal audit principles for local banks in the country, at least once every five years. 25-16 In accordance with SAMA's instructions on Rules on Outsourcing tasks to third parties, the conditions and terms that determine the method, timing, and circumstances of outsourcing any of the unit's specialized limited tasks to external service providers, ensuring the primary basis and minimum requirement is the lack of specialized expertise within the unit for such tasks (e.g., information security), with the board being primarily responsible and the unit for proper oversight, performance under a non-disclosure agreement, achieving knowledge transfer and experience gain to unit staff, not affecting the unit's ability to work independently and objectively, and not contracting with a provider previously contracted for the same task unless at least three years have passed, and ensuring that the service provider is not a current external auditor of the bank, and does not impede the effectiveness of SAMA oversight, and obtaining its prior approval for the outsourcing. 25-17 The requirements and mechanisms for reviewing the bank's affiliated entities that do not have independent review units or committees. 25-18 The commitment to international standards for internal audit relevant to the field. 25-19 The scope and contents of the periodic report of the unit submitted to the board. 25-20 The authority to refer to the Unified Internal Audit Charter of the Institute of Internal Auditors and use the standards specified therein as a guideline when preparing the internal audit policy. Banks may add what they deem important, as necessary, without violating relevant regulations, policies, and procedures. 26- The policy should focus on the guiding principles for internal audit and control areas, including high-level guidance for each activity of the audit unit, and provide a formally documented mechanism to resolve any discrepancies in viewpoints that may arise with the unit, for example, regarding the classification of findings, general report classification, contents, prominent risks, etc. 27- This policy should be made available to all bank stakeholders for review through the appropriate mechanism followed by the bank.
Principle (6): Organization, Tasks, and Responsibilities of the Unit
Organizational Structure and Reporting
28- The unit must have a clearly defined organizational structure approved by the board, reporting functionally to the audit committee and administratively to the CEO. This structure should reflect the specialized roles within the unit and be appropriate to the size, nature, and complexity of the bank's operations. 29- It is preferable for the unit to form a specialized team of experienced and competent senior auditors to manage and ensure the execution of all audit requests required by SAMA, continuously providing high-quality outputs. 30- The unit should report its audit findings to the audit committee and the CEO, without the results of these reports affecting the performance evaluation and compensation of the unit’s head and its staff. 31- The unit must inform the executive management of all significant findings related to the implementation and maintenance of an appropriate and effective internal control system and procedures, enabling the executive management to take timely and appropriate corrective actions. The unit should also follow up on the results of these corrective actions with the executive management. Requirements and Responsibilities of the Unit Head
32- The unit head must possess the necessary independence, objectivity, competencies, and ethics to effectively perform their role and duties. 33- Their responsibilities must be clearly defined and should include, at a minimum, the following: 33-1 Attracting human resources with suitable qualifications and skills, based on a formal analysis of the unit’s actual needs required to perform its activities efficiently, and comparing those needs with the available human resources and their competency levels. Develop a plan to meet these needs and competencies, and formally share it with the audit committee for monitoring and evaluation. The analysis should consider international standards, emerging risk areas, and audit experience. 33-2 Working towards Saudization of the unit’s positions as required by relevant regulations. 33-3 Developing teams and skills related to audit techniques with the aid of technical systems and performance analysis programs to expand the scope of their reviews and manage system-related risks more comprehensively. 33-4 Continuously monitoring, evaluating, and developing the unit’s staff. 33-5 Ensuring the unit's adherence to integrity and compliance with sound internal audit standards. 33-6 Developing the internal audit plan and obtaining approval from the audit committee, and periodically reviewing and updating it. 33-7 Developing and periodically reviewing the internal audit policy as needed and at each audit committee cycle, and submitting it along with any updates to the board for approval based on the audit committee’s recommendation. 33-8 Formulating an internal audit strategy aligned with the bank’s strategy, obtaining approval from the audit committee, and regularly reporting the results and compliance to the committee. 33-9 Participating in relevant committees, such as those for risk and compliance, while adhering to Key Principles of Governance in Financial Institutions. 33-10 Meeting with the audit committee individually whenever necessary. 33-11 Monitoring the work of external service providers when some or part of the internal audit tasks are outsourced, ensuring their adherence to the internal audit policy, and verifying that they do not affect the unit’s independence and objectivity, and that they transfer relevant knowledge and experience to the unit's staff. 33-12 Preparing a detailed matrix listing and classifying potential risks resulting from suspending or postponing any audit activities or parts of them beyond the plan’s year, including an assessment and risk classification. This should address whether the suspension or postponement is requested by the unit or other units and submit it to the audit committee for approval of high and medium-risk cases, with reasons and considerations, ensuring that risks continue to be addressed. 33-13 Identifying factors to consider when selecting branch samples for field audits in the targeted geographic area. 33-14 Encouraging audit unit staff to obtain Certified Internal Auditor (CIA) certification and other professional certifications (or one of them) to enhance the competence of internal auditors in the banking sector. 33-15 Enabling and supporting the implementation of an independent external quality assessment of the audit unit’s work at least once every five years, to ensure the quality of audit outputs, in line with the board-approved policy, based on the direction and approval of the audit committee, and selecting the independent assessment provider. The results should be presented to the committee and reported to the board. SAMA's Non-Objection to Appointing or Changing the Unit Head
34- Taking into account the Requirements for Appointing to Senior Positions in financial institutions under the supervision of SAMA, and the Key Principles of Governance in Financial Institutions issued by SAMA; the bank must obtain SAMA’s prior non-objection to the appointment, assignment, or extension of the term of the head of the unit. Additionally, the bank must obtain SAMA’s prior non-objection if the head of the unit leaves their position (resignation, transfer to another role, termination of service, etc.), with documentation and explanation of the reason for the change.
Internal Work Procedures for the Unit
35- Procedural manuals should be developed for the unit (either as an independent document or as part of the audit manual) to guide its staff in performing daily activities. These manuals should cover all activities of the unit in detail, providing step-by-step instructions. Each activity should include a sequential workflow that outlines the complete cycle of each process along with descriptive guidance. The manuals should align with detailed guidelines for implementing the audit policy. 36- Detailed work guides should also be provided for using technical audit systems to assist both current and newly joined staff in using the systems effectively and understanding their capabilities. 37- When developing work procedures for the unit, reference should be made to the standards and guidelines from the Institute of Internal Auditors, including the "International Standards for the Professional Practice of Internal Auditing" and its updates, as well as best practices for guidance in the procedures. Units and Entities Subject to Internal Audit and the Audit Cycle
38- The unit must document a comprehensive list of the bank's units and its affiliated entities subject to audit, serving as a comprehensive framework for audit processes. 39- This list should cover all operational units, products, services, systems, risks, and processes of the bank. 40- The list should include all requirements set by SAMA for the unit and be part of the comprehensive audit framework. 41- Ensure that the comprehensive audit programs for this list cover relevant SAMA instructions and internal policies, and that they are developed for each unit within the bank and its affiliated entities within the comprehensive audit framework. 42- The unit should develop an official framework for assessing the risks of each unit in the bank and its affiliated entities listed separately. This framework should also identify risk factors, such as: the latest audit assessment, time elapsed since the last audit, applicable and realized risk levels, complexity, etc., as a basis for risk assessment. The frequency of audits for each unit in the bank and its affiliated entities may be based on this risk assessment (e.g., increasing the frequency for high-risk units and entities). 43- The unit should review all units in the bank and its affiliated entities documented in the list at least annually to ensure completeness and coverage of all units, products, systems, and procedures of the bank. 44- The unit should document an official audit cycle that covers all units in the bank and its affiliated entities listed, and execute this cycle within a defined period, which may extend from three to four years depending on the risk classification of each listed item, in accordance with the risk-based approach. Risk Assessment Methodology
45- The risk assessment methodology should include the following: 45-1 Documented and detailed guidelines that outline and assist internal auditors in classifying risks when preparing each observation. 45-2 Documented and detailed guidelines for assessing risks in the overall audit report. 45-3 Identification of quantitative and qualitative factors necessary to facilitate understanding and consistent application by audit staff. 45-4 Classification of internal violation reports from the bank—of which the audit unit should receive copies—based on their risk level and the extent of compliance with reaching the competent authority in the bank and their documentation. 45-5 All instances of non-compliance with SAMA instructions should be classified as high risk unless the non-classification is supported by specific justifications approved by the compliance unit. These justifications should be based on a risk classification mechanism that includes the size and impact of the non-compliance. Risk-Based Internal Audit Plan
46- The head of the unit is responsible for preparing the annual internal audit plan and its implementation schedules, and for seeking approval from the Audit Committee. When preparing the plan, a thorough risk assessment should be undertaken (considering inputs from executive management). The plan can be part of a multi-year plan, in which case it should be reviewed and updated annually aiming to respond to changes in the sector and in the bank's risk profile, or more frequently, throughout the year, to enable continuous and real-time assessment of areas where significant risks may arise. 47- The annual audit plan should include a list of business units and activities subject to audit and risk assessment, with well-prepared documentation to ensure a systematic audit approach. 48- In implementing the annual audit plan, audit work programs must include detailed audit procedures for each business unit subject to review, with sufficient clarifications regarding the scope of its relevance, surveys, and ensure coverage of all potential key or significant risks, control elements, and regulatory supervisory instructions. It should be taken into account that the assessment and analytical skills of internal auditors are essential to ensure a high quality of internal audit. 49- A list of all supervisory expectations from the audit units must be compiled, and this requirement should be stipulated in their policy or procedures. This list, along with the required areas in the comprehensive audit framework, should serve as sources among others, such as the audit cycle, the bank’s most significant risks, new or emerging risk areas, and so on, for developing the annual internal audit plan. The frequency of audits, wherever specified by SAMA, must exceed the internal risk assessment conducted by the audit unit. 50- Adequate resources must be available to support the unit in performing its duties, in accordance with the annual internal audit plan. 51- The unit should periodically conduct a self-assessment of specific requirements from SAMA and other regulatory bodies. Capabilities should be developed, and sufficient resources allocated to these areas, ensuring adequate space for them in the internal audit plan. Information Technology for the Unit
52- The unit should carry out its activities using appropriate technological systems to enhance the efficiency of the internal audit function. 53- The unit should conduct a formal gap analysis using current automation tools, address and close these gaps, highlight activities currently performed manually, and develop action plans to automate all such activities—wherever feasible—and escalate these plans to the Audit Committee for monitoring purposes. Quality Assurance and Performance Improvement Program
54- The unit should establish an internal function reporting directly to the head of the unit, dedicated to quality assurance and performance improvement, and should be staffed with qualified and suitably experienced resources. 55- The internal audit unit should implement a quality assurance and performance improvement program covering all aspects of internal audit activities. This program should include both internal evaluations (ongoing assessments and annual comprehensive reviews) and external evaluations (conducted at least once every five years), with the results reported to the Audit Committee. 56- The quality assurance and performance improvement unit must review and evaluate all activities and reports of the audit unit on an ongoing basis. The head of the audit unit must submit regular reports on the review and evaluation results of that unit (both ongoing and annual) to the Audit Committee. 57- The quality assurance and performance improvement unit should be responsible for reviewing and updating the internal policies and procedures of the internal audit unit, training and motivating its staff, and working on enhancing the quality of work and other performance improvement tasks. Periodic Reports to the Audit Committee
58- The internal audit unit should prepare periodic reports on its reviews and submit them to the Audit Committee. The committee, in turn, should submit these reports directly and independently to the board without any revisions from the executive management or any other source. The reports should, at a minimum, include: 58-1 A quarterly report: This should include an assessment of the internal control system of the units reviewed, the findings and recommendations related to the work units audited, the actions taken by each unit regarding the findings and recommendations from the previous review, and an explanation of the status of findings not addressed by the executive management. It should also detail instances of failure to respond promptly to those findings and recommendations, along with the reasons for such failures. 58-2 An annual general (comprehensive) report: This should include an assessment of the bank's internal control system and the audit activities conducted during the financial year compared to the approved plan. It should also state the reasons for any shortcomings or deviations from the plan, if any, within a deadline not exceeding the end of the following quarter after the end of the relevant financial year, or according to the dates in the approved annual plan. Database and Document/Report Storage
59- The audit unit must establish a database for its operations and update it continuously. 60- In accordance with relevant central bank regulations and other regulatory bodies; all internal audit reports, findings, recommendations, corrective action plans, and supporting documents should be stored electronically in the database. This includes any results obtained by independent auditors that were previously found by audit staff, and all work-related documents, internal audit achievements, results, recommendations, and measures taken in accordance with the relevant central bank instructions. 61- A formal manual (either independently or as part of the audit manual) for record retention and storage mechanisms should be prepared and approved. This manual should describe the methods of storage and details of all work papers and information to be retained, the minimum retention period, and the recommendations of the audit unit. This should be done considering the data and information retention regulations and instructions provided by the relevant supervisory regulatory authorities. Principle (7): Scope of the Unit's Work
62- The general scope of the unit includes every unit in the bank and its affiliated entities (that do not have independent audit units or committees), covering all activities, operations, products, and services of the bank, as well as the limited specialized tasks that may be outsourced to external service providers, including the review and assessment of the effectiveness of the internal control system, risk management, governance, compliance, and supervisory requirements, as well as consulting services. The unit should evaluate the entire bank, including branches and affiliated entities. 63- The unit is responsible, independently within its scope and work plan, for evaluating the following: 63-1 The effectiveness and adequacy of internal control functions, risk management, and governance in the context of current and potential future risks, including committees. 63-2 The procedures established by business units and support units. 63-3 The reliability of management information system policies and procedures, (including: data relevance, accuracy, completeness, availability, confidentiality, and comprehensiveness). 63-4 The level of compliance with regulations, policies, and internal procedures of the bank. 63-5 The adequacy and effectiveness of asset protection procedures. 63-6 The adequacy and effectiveness of all reports and their preparation mechanisms. 64- Participate, upon request, in internal investigations that do not conflict with the unit's scope, duties, and responsibilities, as deemed necessary by the head of the unit: the audit committee should be provided with reports on such investigations. 65- With consideration to the relevant instructions and the requirements for applying the risk-based approach and its methods, the unit must, in implementing the scope of its activities, properly cover in the audit plan the requirements of topics of regulatory and supervisory importance according to the timeframes specified for each requirement, or at least annually if no timeframes are specified, unless the risk assessment of the units requires a shorter period for the following activities: Risk Management Unit
66- The unit should primarily include the following in its plan concerning the Risk Management Unit: 66-1 Its organization and powers, including market, credit, liquidity, interest rate, operational risks, legal risks, and any other risks. 66-2 Assessment of risk tolerance, escalation of issues and decisions, and reporting on them. 66-3 The adequacy of policies and procedures for identifying, measuring, assessing, monitoring, and addressing emerging risks from the bank's activities, and reporting on them. 66-4 The integrity of its information systems, including the accuracy, reliability, and completeness of data used. 66-5 The approval and maintenance of risk models, this includes the process of verifying the consistency of information sources, timeliness, independence, and reliability of the sources of information used in these models. 66-6 The degree of significant differences between its views and those of the executive management regarding the level of risks facing the bank. 66-7 The compliance of all business units and their employees with the internal authority matrix of the bank, and ensuring no authority is exceeded.
Capital and Liquidity
67- The unit must address all requirements of the regulatory framework for capital and liquidity within its scope of activities, particularly: 67-1 The internal capital adequacy assessment document and the internal liquidity assessment document. 67-2 Regulations for determining and measuring the bank's regulatory capital, assessing the adequacy of its capital resources relative to risk exposures, and the minimum indicators approved. 67-3 The process for conducting stress tests for capital and liquidity levels, considering the frequency of such tests, their purpose, the reasonableness of hypothetical scenarios, assumptions used, and the reliability of procedures. 67-4 The bank's instructions and procedures for measuring and monitoring liquidity conditions relative to its risk register, external environment, and minimum regulatory (supervisory) requirements. Regulatory (Supervisory) and Internal Reporting
68- Evaluate the effectiveness of the process through which the Risk Unit and the relevant reporting unit communicate for issuing accurate, timely, and reliable reports, whether internally or for regulatory (supervisory) purposes. Compliance Unit
69- Assess the scope of activities of the Compliance Unit and evaluate the effectiveness of its execution of responsibilities related to compliance risks. 70- Cooperate with the Compliance Unit in following up on tasks, responsibilities, and activities requested by the central bank from the audit unit, as specified in terms of format and timing. Governance
71- Study the scope of governance activities at the bank, focusing on: 71-1 Evaluating the effectiveness of the unit responsible for governance in executing its responsibilities. 71-2 Reviewing all governance-related policies and procedures within the bank to ensure they align with regulations, rules, instructions, and updates, and assessing their implementation and effectiveness. 71-3 Ensuring the bank's compliance with all regulations from local supervisory authorities related to governance. 71-4 Ensuring the presence of an effective control system to prevent fraud within the bank. 71-5 The process of appointing bank representatives in its subsidiaries and ensuring there are policies and procedures governing this. Finance Unit
72- The audit unit should include the following aspects in its scope of work: 72-1 The organization and powers of the Finance Unit. 72-2 The adequacy and integrity of financial data and the financial systems, instructions, and procedures, including the identification, monitoring, measurement, and reporting of key data (e.g., profit or loss, financial instrument valuations, provisions), including necessary changes in accordance with international accounting standards and international financial reporting standards. 72-3 The approval and maintenance of pricing models, including verifying the consistency, timeliness, independence, and reliability of information sources used in these models. 72-4 The controls in place to prevent and detect violations. 72-5 Controls on the balance sheet, including reconciliation processes and procedures (e.g., adjustments), regulatory tasks and activities, and other ongoing activities that the audit units must review periodically, as documented in the comprehensive audit procedures and framework, along with the required compliance timing. Examples include but are not limited to information security (cybersecurity), business continuity, anti-money laundering and counter-terrorism financing, dormant accounts, and others currently and in the future. Principle (8): The Unit's Relationship with Second Line of Defense Units and External Auditors
(A) Relationship with Second Line of Defense Units
73- Second line of defense units are subject to independent review by the audit unit. Each of these units has areas closely related to other units in general and to the audit unit specifically. However, they are all organizationally separate from each other. Given the comprehensive coverage provided by the oversight performed by the second line of defense, particularly by the Risk Management Unit and the Compliance Unit, the audit unit relies on valuable information provided by these units. Nevertheless, the reliability of this information is subject to assessment by the Head of the Audit Unit. (B) Relationship with External Auditors
74- External auditors appointed by the bank play a crucial role in the continuous improvement of the bank’s internal control systems related to their scope of work. Therefore, their work should be complementary to the internal audit unit. This should be coordinated through a defined mechanism and regular meetings (based on the approved internal audit policy) to enable both parties to stay continuously informed about significant concerns. The audit committee must ensure that this coordination is in place and effectively implemented.
Principle (9): Internal Audit of the Bank’s Subsidiaries
75- In cases where the bank has a subsidiary with its own independent audit unit and audit committee while ensuring compliance with relevant regulations and instructions—it is preferable to: 75-1 Obtain a seat for the head of the bank’s unit or their delegate in the audit committees of the bank’s subsidiaries to monitor developments and ensure the effectiveness of internal controls within them. 75-2 Conduct limited tests to verify the quality of the subsidiary’s audit unit operations to ensure the soundness of its activities. 76- In cases where the bank has a subsidiary that does not have an independent audit unit and audit committee while ensuring compliance with relevant regulations and instructions—the following should be done: 76-1 The approved audit policy should define how the audit of such entities will be conducted. 76-2 The unit should report the results of the audit activities of these entities to the audit committee. Principles of compliance for commercial banks operating in the Kingdom of Saudi Arabia
No: 42005223 Date(g): 15/9/2020 | Date(h): 28/1/1442 Status: In-Force Translated Document
Based on the powers vested to SAMA under its Law issued by Royal Decree No. (23) dated 23/05/1377H, and the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386H, and with reference to the Compliance Manual for Banks Working in Saudi Arabia issued in the year (1429H/2008G). and in light of SAMA's supervisory and regulatory role, as well as its efforts to continuously improve and address banking regulatory issues and enhance sound practices in banking institutions.
Attached are the Principles of Commitment for Banks and Commercial Banks Operating in the Kingdom of Saudi Arabia, which aim to activate supervisory roles and enhance sound practices in banking institutions, replacing the aforementioned guide.
These principles shall apply as guiding rules until the end of 2020G, and a mandatory basis from 01/01/2021G.
Definitions
The terms and phrases below—wherever they appear in these principles—mean the definitions given next to each term, unless the context indicates otherwise:
1- Central Bank: The Saudi Central Bank. 2- Bank: Local commercial banks and branches of foreign banks licensed to conduct banking activities in the Kingdom in accordance with the Banking Control Law.
3- Council: The Board of Directors of the local bank. The primary officer in a foreign bank branch assumes the tasks and responsibilities of the Board of Directors in local banks wherever referenced in these principles.
4- Senior Management: The executive management of the local bank (CEO, Managing Director, General Manager) and senior executives responsible for managing the bank's operations, proposing and implementing strategic decisions, and the branch manager for foreign bank branches licensed to conduct banking activities in the Kingdom.
5- Compliance Function: An independent function at the first managerial level in senior management that identifies, evaluates, advises on, monitors, and reports on non-compliance risks related to the bank's exposure to regulatory, administrative penalties, financial losses, or harm to its reputation due to non-compliance with regulations, instructions, financial crime prevention requirements, or standards of conduct and professional practice. This function is carried out by an independent compliance unit in banks.
6- Compliance Policy: The policy approved by the Board of Directors of the bank and the head of the foreign bank branch that defines and outlines the comprehensive responsibilities of compliance, the authority of the compliance unit, and the main principles, pillars, and methodology the bank follows to manage compliance risks, including the elements outlined in Principle (1).
7- Compliance Unit: A unit at the group, sector, or department level, depending on the structure of first managerial level units in local banks, or a department, division, or section, etc., at the first managerial level reporting to the primary officer in foreign bank branches, where the head and compliance staff are solely responsible for compliance-related tasks and responsibilities.
8- Chief Compliance Officer: The CEO of the compliance unit in local banks and the executive in the first managerial level reporting directly to the head of the branch in foreign bank branches, whose responsibilities include coordinating the process of identifying non-compliance risks, providing advice to senior management on how to manage them, and overseeing the activities of compliance officers and staff.
9- Compliance Staff: All individuals performing compliance duties and responsibilities within the compliance unit.
10- Compliance Officer: An employee from other operational units, different from the compliance unit staff, designated by the Chief Compliance Officer to handle specific compliance responsibilities and tasks within their operational unit.
11- Compliance Risks: Risks resulting in or leading to the imposition of penalties and regulatory actions against the bank or significant financial losses, or damage to its reputation due to non-compliance with relevant regulations, instructions, and standards applicable to the bank, and ethical and behavioral codes governing banking activities, collectively referred to as "non-compliance risks."
12- Compliance Role: The description of responsibilities assigned to compliance staff within the bank.
13- Regulations: The regulations and rules applicable to the banking sector and its personnel.
14- Instructions: All directives issued by SAMA in its role as a supervisory and regulatory authority, and by other relevant authorities, including regulations, rules, principles, frameworks, guides, and mandatory circulars.
15- Compliance Systems, Rules, and Standards: The regulations and instructions applicable to the banking sector and its personnel.
16- Conflict of Interest: A situation where the Chief Compliance Officer, compliance staff, or compliance officers in other units may have a direct or indirect interest or relationship in a matter being reviewed by them for decision-making purposes; such that this interest or relationship prevents or leads to the belief that it interferes with their ability to express their opinion or make a decision independently and impartially, without considering this interest or relationship. * The name "Saudi Central Bank" replaced "Saudi Arabian Monetary Authority" according to the Saudi Central Bank Law No. (M/36) dated 11/04/1442H.
Introduction
17- SAMA issued these principles based on the powers granted to it and its supervisory and regulatory responsibilities as follows:
a. The Saudi Arabian Monetary Law, issued by Royal Decree No. (23) dated 23/05/1377H.
b. The Banking Control Law, issued by Royal Decree No. (M/5) dated 22/02/1386H.
c. The Anti-Money Laundering Law issued by Royal Decree No. M/20 dated 05/02/1439 H. and its implementing regulations issued by the State Security Presidency Decision No. (14525) dated 19/02/1439H.
d. The Law on Combating the Financing of Terrorism issued by Royal Decree No. (M21) dated 12/02/1439H and its Implementing Regulations issued by the Cabinet Decision No. (228) dated 02/05/1440H.
18- SAMA issued these principles as the first update to the Compliance Manual for Banks Working in Saudi Arabia issued by Circular No. 56202/M A T/787 dated 19/12/1429H. This issuance is part of SAMA’s efforts to continuously improve and address banking regulatory issues and enhance sound practices in banking institutions. It also emphasizes that bank officials must be convinced that compliance policies and procedures are effective and applied, and that senior management has appropriate corrective actions to address any non-compliance or deficiencies when detected.
19- Compliance with regulations and instructions starts from the top of the hierarchy, where the chairman, board members, and senior management should serve as examples in managing work and compliance.
20- Effective compliance requires continuous affirmation from senior management that a culture based on high standards of integrity and professional ethics prevails. Compliance should be an integral part of the bank’s culture and should not be limited to the compliance unit only. Each individual in the bank carries responsibility for compliance, and this responsibility must be integrated into the bank's operations and activities, ensuring high standards are met in its operations by constantly adhering to the spirit and letter of the regulations. It must also consider the impact of actions related to shareholders, customers, employees, and the market environment that could lead to significant negative reactions affecting the bank’s reputation, even if there is no actual violation of regulations.
21- Trust and integrity are the core values and highest priority in the relationship between the bank and its customers, forming the foundation upon which the bank builds its reputation with customers and stakeholders. Reputation protection must be a fundamental concern for managers and employees. They must exhibit a high level of trust, integrity, and professionalism in their duties and ensure their actions are always in compliance with the letter and spirit of regulations and instructions governing the banking sector.
22- These principles establish a framework for governance of compliance within the bank, consisting of the board and its responsibility for approving the compliance policy and overseeing the management of non-compliance risks, senior management and its responsibility for managing non-compliance risks, and the compliance unit with its responsibility for overall coordination of compliance and supporting senior management.
23- These principles begin by defining the responsibilities of the board and senior management regarding compliance as a primary importance, followed by the principles that should support the compliance unit within the bank.
24- Compliance systems, rules, and standards cover matters such as adherence to appropriate market practices, managing conflicts of interest, treating customers fairly, ensuring the suitability of advice given to customers, and specific areas such as anti-money laundering, combating terrorism financing, preventing the spread of weapons, Know Your Customer (KYC), anti-financial fraud, anti-corruption, and handling reports of violations.
25- Compliance systems, rules, and standards are based on multiple sources including the regulations and instructions applicable to the banking sector under the supervision of SAMA, regulations and instructions overseen by other official authorities with jurisdiction or in other countries where banks operate, prevailing banking practices, industry-supported business practices, internal conduct rules applied to bank employees, integrity and ethical behavior standards, and relevant requirements issued by international organizations and groups responsible for setting policies governing the supervision of banking and financial institutions, such as the Basel Committee on Banking Supervision, among others.
26- Compliance principles require that the compliance unit be independent, adequately resourced, clearly define its responsibilities, and be subject to independent and periodic review by the internal audit unit, as detailed in principles (5) to (8) below. These principles reflect the effectiveness of the compliance unit’s work.
27- The compliance unit and function in banks are considered one of the most important foundations and factors for their success, as they play a crucial role in maintaining their reputation and credibility, protecting shareholder and depositor interests, and providing protection from penalties. This is achieved through its activities and contributions as follows:
- Mitigating non-compliance risks, particularly regulatory, reputational, and financial penalty risks.
- Strengthening relationships with regulatory and supervisory authorities and addressing their feedback to identify and rectify deficiencies on a regular basis before they escalate.
- Contributing to the establishment of sound management and governance principles within banks.
- Ensuring compliance with regulations and instructions issued by supervisory and regulatory authorities, as well as other relevant authorities.
- Developing appropriate mechanisms and frameworks to combat money laundering, terrorism financing, weapons proliferation, financial fraud, and corruption, and providing insights, advice, and recommendations to address and correct deficiencies and violations.
- Carrying out the necessary procedures to address reports of violations submitted by bank employees and stakeholders, in alignment with the whistleblowing policy for financial institutions issued by SAMA. This ensures an objective and escalatory approach to handling the reports and devising a corrective action plan.
- Upholding values and professional practices in banking operations.
- Raising awareness among bank employees about the positives and negatives of their compliance and the risks associated with non-compliance with regulations and instructions issued by relevant regulatory and supervisory authorities.
28- The bank must organize its compliance unit such that the priorities for managing non-compliance risks align with its risk management strategy.
29- It should be understood that the scope of compliance frameworks and the diversity and complexity of compliance rules and their sources place the responsibility for managing non-compliance risks, verifying the level of compliance, and establishing the necessary controls to ensure compliance, whether at the level of business procedures, technical systems, or data protection, on the shoulders of senior management and all business units (groups and business sectors). This is achieved through conducting the necessary reviews and ensuring effective and continuous implementation. The role of the compliance unit is limited to compiling, communicating, and explaining the regulations and instructions to the business sectors immediately upon receiving them from supervisory and regulatory authorities or other relevant entities, obtaining confirmation from these sectors, ensuring they are included in policies and procedures, conducting continuous monitoring, and periodically identifying, detecting, and assessing non-compliance risks. It also involves reporting violations of compliance systems, rules, and standards, as well as submitting reports on non-compliance risks and violations.
30- The compliance principles apply to all commercial banks operating in the Kingdom and their branches and offices in foreign countries where they conduct banking activities, unless they conflict with the regulations and instructions of those countries. They represent the minimum necessary to achieve overall compliance effectiveness and specifically the effectiveness of the compliance unit and function. SAMA expects adherence to higher and more sound practices.
31- These principles should be read and applied in conjunction with several related instructions for the unit's operations, including but not limited to the following:
- Principles of Governance for Banks Operating in Saudi Arabia.
- Principles of Conduct and Work Ethics in Financial Institutions.
- Anti-Money Laundering and Counter-Terrorism Financing Guide.
- Rules for Bank Accounts.
- Regulatory Rules for the Operation of Self-Supervision Units and Committees.
- Guidelines for Combating Financial Fraud in Banks Operating in Saudi Arabia.
- Internal Control Guidelines.
- Sharia Governance Framework for Local Banks Operating in Saudi Arabia.
- Whistle blowing Policy for Financial Institutions.
- Instructions related to Risk Management.
- Requirements for Appointments to Senior Positions.
- Rules on Outsourcing.
- Mitigating non-compliance risks, particularly regulatory, reputational, and financial penalty risks.
Principles
Responsibilities of the Board of Directors Regarding Compliance.
Principle (1): Oversight of Non-Compliance Risk Management
The responsibility for effective oversight of non-compliance risk management lies with the Board of Directors in local banks and with the CEO/Branch Manager in foreign bank branches. To fulfill this responsibility, the following must be done:
32- Approve an effective compliance policy and oversee it, which includes at a minimum:
- 1. Establishing a permanent and effective compliance unit and updating its organization from time to time.
2. Promoting a culture of compliance, employee responsibilities, and penalties for neglect and the levels that must be achieved.
3. Supporting and promoting values of integrity and honesty throughout the bank.
4. Comprehensive and total commitment in all of the bank's policies to comply with regulations and instructions.
5. The necessary requirements for managing non-compliance risk matters.
6. Supervising the implementation of the policy, including ensuring that compliance-related issues are addressed by senior management quickly and effectively with the help of the compliance unit.
7. Committing to providing adequate resources to the compliance unit on a continuous basis.
8. Granting the compliance unit the necessary independency as per Principle (5).
9. Precisely defining the responsibilities of the compliance unit.
10. Having the internal audit unit review the activities of the compliance unit and compliance risks periodically.
11. Continuously overseeing efforts towards implementing the compliance policy, the performance level achieved through periodic reports, assessing the compliance unit's activities, identifying weaknesses, and efforts in training and awareness.
33- The board or a committee delegated by it must evaluate the effectiveness of non-compliance risk management in the bank at least once a year.
34- Approve updates to the compliance policy from time to time to enhance the effectiveness and efficiency of compliance, in line with instructions from SAMA regarding policy updates.
35- Approve the annual compliance report and provide SAMA with a copy. Responsibilities of Senior Management Regarding Compliance
Principle (2) General Principle: Effective Management of Non-Compliance Risks
Principle (3) Preparation, Update, and Approval of Compliance Policy, Responsibility, Sanctions, Monitoring, and Reporting on Non-Compliance Risks
The senior management of the bank is responsible for preparing, updating, and obtaining board approval for the compliance policy, and ensuring its dissemination. They must also ensure adherence to the policy and report on non-compliance risk management to the board.
Responsibility for Preparing, Updating, and Communicating the Compliance Policy
37- The senior management of the bank is responsible for preparing and updating the compliance policy for managing compliance matters and obtaining board approval for local banks, and the branch head for foreign bank branches, and communicating it to all bank sectors. The policy should include:
- The compliance principles that work units and their personnel must adhere to.
- An explanation of the key procedures for identifying and managing compliance risks throughout all levels of the bank's system.
- Enhancement of clarity and transparency by distinguishing between general standards applicable to all employees and specific standards and procedures that apply only to certain employee groups.
Responsibility for Adhering to the Compliance Policy, Taking Corrective Actions, and Applying Sanctions
38- The senior management has the duty to ensure adherence to the compliance policy and to ensure that appropriate corrective and disciplinary actions are taken in case of policy violations.
Oversight and Reporting
39- The senior management, with the assistance of the compliance unit, are responsible for:
- Identifying the principal non-compliance risks facing the bank, developing plans to manage and assess these risks at least annually. These plans should address any deficiencies in the policy, procedures, or implementation related to the effectiveness of the existing non-compliance risk management, as well as determine the need for any additional policies or procedures to address new non-compliance risks identified in the annual non-compliance risk assessment.
- Providing written reports to the board or its delegated committee, highlighting the bank's management of non-compliance risks at least once annually, to support board members in making informed decisions based on accurate information regarding the effectiveness of the bank’s non-compliance risk management.
- Reporting in writing to the board or its delegated committee immediately about any significant failures, deficiencies, or violations of non-compliance (e.g., non-compliance situations that may result in significant risks leading to legal or regulatory penalties, severe financial losses, or damage to the bank’s reputation).
- The compliance principles that work units and their personnel must adhere to.
Principle (4) Responsibility for Establishing and Developing the Compliance Unit
The senior management is responsible, under the compliance policy approved by the board, for establishing and developing a permanent and effective compliance unit within the bank, as follows:
Establishing, Supporting, and Developing the Compliance Unit
40- As a fundamental requirement of compliance, senior management in local banks, according to the compliance policy approved by the board, must establish, support, and develop an independent, permanent, and effective compliance unit with sufficient powers and responsibilities to oversee compliance. This includes having an independent compliance unit or head of compliance at the senior management level reporting directly to the top executive for foreign bank branches. The role of the compliance unit should be clearly communicated to all employees, encouraging them to consult the unit on compliance matters.
Reliance on the Compliance Unit
41- Senior management must take necessary measures to ensure that the bank relies on a permanent and effective compliance unit, which performs its duties in accordance with the "Compliance Unit Principles" mentioned later.
Coordination and Integration with Other Business Units
42- Achieving compliance requires senior management to foster a climate of trust and integration between the compliance unit and other business units, and to take the necessary measures and coordination to facilitate this relationship.
Appointment of the Head of Compliance and Compliance Unit Staff
43- The selection and nomination of the head of compliance and the staff of the compliance unit are subject to the Requirements for Appointments to Senior Positions issued by SAMA and any other relevant guidelines issued by SAMA. The responsibility for selecting compliance unit staff lies with the head of compliance in accordance with the bank’s internal employment and appointment requirements. Compliance Unit Principles
The main principles from Principle (5) to Principle (8) detail the practices, requirements, and proper applications necessary for the compliance unit. However, the methods for implementing these principles depend on various factors such as the size of the bank, the nature and complexity of the bank's activities, its geographic scope, and the regulatory framework and instructions under which it operates.
Principle (5) Independence
44- The compliance unit in the bank must be independent.
Concept of Independence for the Compliance Unit
45- The concept of independence in this principle refers to "the independence of the compliance unit from external interference by other operational units in performing its compliance duties or influencing them." This does not mean that the compliance unit should not work closely with other business units to facilitate compliance; rather, the working relationship should be cooperative between the compliance unit and other units, supporting the early identification and management of non-compliance risks. The various elements outlined below should serve as preventive measures to help ensure the effectiveness of the compliance unit. Regardless of the close working relationship between the compliance unit and other units, the method of implementing preventive measures depends to some extent on the specific responsibilities of each compliance unit employees.
Elements of the Concept of Independence
46- The concept of independence includes four interrelated elements that must be applied as follows:
- Element One: The Compliance Unit Must Have an Official Status in the Bank.
Element Two: In local banks, the compliance unit should be headed by an executive at the first managerial level. In branches of foreign banks, the unit should be led by a senior executive at the first managerial level who reports directly to the head of the branch. This position should include the overall responsibility for coordinating the management of compliance risks within the bank.
- Element Three: The personnel of the compliance unit, particularly the head of compliance, should not be placed in a position that could lead to potential conflicts of interest between their compliance responsibilities and any other responsibilities associated with their role.
- Element Four: All personnel within the compliance unit should have the right and authority to access and review all relevant information, records, and files, and communicate with bank employees as necessary to perform their duties.
The Official Organizational Status of the Compliance Unit
47- The Compliance Unit must have an official status within the bank that grants it appropriate recognition, authority, and independency. This should be outlined in the bank's compliance policy or in an official document related to the policy. All bank employees should be informed of the document specifying this status.
Key Items of the Compliance Unit's Organizational Document
48- The organizational document for the Compliance Unit, related to the compliance policy, must include at a minimum the following requirements:
- The role and responsibilities of the Compliance Unit.
- Procedures necessary to ensure the independency of the Compliance Unit.
- The relationship of the Compliance Unit with other risk units within the bank, and its relationship with the internal audit unit.
- The method for distributing compliance responsibilities in exceptional cases where, due to technical or specialized reasons, or where there is not a significant relationship with non-compliance risks, some compliance responsibilities may be assigned to employees in other operational units such as human resources, administrative affairs, branches, etc., and must be according to specific procedures outlining the role and authority of those units and designated officials.
- The Compliance Unit has the right to access the necessary information, records, and data to perform its responsibilities, and the requirement for bank employees to cooperate in providing this information.
- The Compliance Unit has the right to conduct necessary investigations by itself or through delegated external experts for potential policy violations or shortcomings in compliance policy implementation, and its authority to appoint or request external experts if needed.
- The Compliance Unit has the right to freely report investigation results to senior management and, when necessary, to the board or its authorized committee.
- The official obligations of the Compliance Unit regarding reporting to senior management.
- The Compliance Unit has the right to direct access to the board or its authorized committee.
Compliance Officer
Job Level49- Every local bank must appoint a Chief Compliance Officer, and every branch of a foreign bank must appoint a high-ranking officer at the first managerial level who reports directly to the branch’s chief officer. This role includes the overall responsibility of coordinating the identification of non-compliance risks at the bank, advising on their management, and supervising the activities of compliance officers and staff within the compliance unit.
Job Affiliation
50- The compliance officer at the first managerial level in the bank should be directly linked to the chief executive only in the senior management of local banks (Managing Director/CEO/General Manager) or to the chief officer of the branch in the case of foreign bank branches (according to the highest job title in the branch). The Chief Compliance Officer should not hold any direct or indirect responsibilities related to banking activities. They must have the authority to report and notify the board or its delegated committee of any significant weaknesses, deficiencies, or violations without fear of negative repercussions from management, other business units, or bank employees. No actions should be taken against them when reporting.
Notification of Appointment and Changes to the Board
51- For local banks, the board members must be notified when there is an appointment or change (resignation, transfer to another role, retirement, termination of service, etc.) of the Chief Compliance Officer, including documentation and reasons for the change.
SAMA's Non-Objection to Appointments and Changes
52- The bank must obtain a non-objection letter from SAMA for the appointment of the Chief Compliance Officer, in accordance with the Requirements for Appointments to Senior Positions. SAMA's non-objection is also required if the Chief Compliance Officer leaves the position (resignation, transfer to another role, termination of service, etc.), with documentation and reasons for the change.
Notifying Regulatory Authorities in the Host Countries
53- For banks licensed to conduct international banking activities with compliance officers from those countries, the regulatory authority in the host countries must be notified of the Chief Compliance Officer's appointment or departure if such notification is required by the host country regulations.
The Affiliation of the Compliance Officers and Staff with the Chief Compliance Officer 54- All staff in the compliance unit must report directly to the Chief Compliance Officer, ensuring that the unit can fulfill all responsibilities independently of other business units within the bank. Compliance officers assigned to compliance tasks in other business units should have a functional reporting relationship to those units but must also have a reporting line to the Chief Compliance Officer concerning their compliance responsibilities and reports. To avoid dual hierarchy, the compliance officers' reporting path to the Chief Compliance Officer regarding non-compliance risks should be the controlling and mandatory line.
Periodic Meetings
55- The Chief Compliance Officer should have the authority to hold regular meetings with senior management and heads of different business units to discuss compliance with regulations and instructions relevant to the operations and activities of each group, department, or sector. These meetings should be officially documented. It is preferable that senior management and heads of business units attend these meetings personally rather than sending representatives, as their active participation demonstrates:
- Leadership by example.
- Understanding of their responsibilities regarding compliance.
- Continuous reinforcement of compliance.
- Support for the compliance process.
Delegation of Responsibilities by the Chief Compliance Officer
56- The Chief Compliance Officer may delegate some of their authority to certain employees within the bank for performing tasks related to compliance, such as those in the Treasury Unit or the bank's overseas branches and offices. Any employee delegated these tasks will act as an assistant to the Chief Compliance Officer and will be under their authority concerning non-compliance risks while maintaining full independency in other banking tasks. The size of the bank and its operational capacity should be considered. Any delegation by the Chief Compliance Officer does not exempt them from responsibility; they remain accountable for all compliance-related tasks to the relevant parties.
Conflict of Interest
57- To ensure the independency and professionalism of the Chief Compliance Officer and the Compliance Unit staff, they should only hold responsibilities related to the Compliance Unit. For compliance officers in other business units assigned compliance oversight tasks within those units—if present—they must avoid conflicts of interest and disclose any situations that may result in a conflict of interest.
58- To ensure the independency of the Chief Compliance Officer and compliance unit staff is not undermined, their financial rewards must not be tied to the financial performance of the business activity for which they are executing compliance responsibilities. However, financial rewards may be linked to the overall financial performance of the bank. In all cases, the final approval of the rewards for the Chief Compliance Officer and compliance unit staff must come from the Board of Directors or a committee derived from it.
Direct Access to Information and Employees
59- To effectively manage compliance responsibilities as outlined in the compliance documentation and at all administrative levels within the bank where non-compliance risks may exist, the Compliance Unit must have the following principal rights and capabilities, without waiting for orders or instructions:
- The right to communicate with any employee and access any necessary information, records, and files needed to fulfill its responsibilities.
- The ability to carry out its responsibilities independently across all business units where non-compliance risks are present, including the right to investigate any potential violations of compliance policies and to seek assistance from internal specialists (e.g., legal affairs or internal audit) or engage external experts if necessary.
- The freedom to report any potential violations or transgressions uncovered during its investigations to senior management, without fear of retaliation or dissatisfaction from business units or other employees.
- Although the Compliance Unit should report administratively to the CEO/Managing Director/General Manager, it must also have the right to communicate directly with the board or its delegated committee, bypassing usual administrative reporting lines if necessary.
- The Chief Compliance Officer should meet with the board or its delegated committee at least once a year to help assess the board's evaluation of the bank's ability to manage non-compliance risks effectively.
- The Chief Compliance Officer must promptly and directly notify SAMA/General Directorate of Bank Supervision upon identifying strong indicators of significant or serious compliance failures or violations that impact the reputation of the banking sector and must ensure that SAMA is informed.
- Element One: The Compliance Unit Must Have an Official Status in the Bank.
Principle (6): Resources
The bank must provide the Compliance Unit with the necessary resources to perform its responsibilities effectively.
Resources and Effectiveness in Achieving Tasks60- The resources provided to the Compliance Unit must be both sufficient and appropriate to ensure effective coordination of non-compliance risk management within the bank.
Adequacy and Appropriateness of Resources
61- The Compliance Unit should have staff with the necessary qualifications, experience, and personal and professional attributes required to carry out its defined duties. Compliance Unit staff must also have a sound understanding of regulations and instructions and their actual impact on the bank's operations. Additionally, the professional skills of the Compliance Unit staff should be maintained and developed, especially in keeping up with developments in regulations, instructions, and technology, through ongoing and regular education and training.
Responsibility for Providing Resources and Its Impact
62- The responsibility for providing the necessary financial, human, and technical resources and directing them towards the compliance process lies with the board according to the approved policy and with senior management during the implementation and management of non-compliance risks and their development. It should be noted that increased compliance costs (e.g., development plans) can lead to enhanced effectiveness in identifying, measuring, monitoring, and controlling risks, thereby resulting in higher profits, better coordination of activities, and improved quality. Therefore, a periodic assessment should be conducted to ensure the adequacy of human and technical resources and determine whether additional support or development is needed to ensure the effective and efficient management of the compliance process.
Principle (7) Responsibilities of the Compliance Unit
Assisting Senior Management in Compliance Implementation
63- The responsibility for compliance and managing non-compliance risks at the bank lies with senior management. The role of the Compliance Unit is to assist senior management in effectively managing and addressing non-compliance risks (through advising, monitoring, and oversight). The Chief Compliance Officer supervises the implementation of compliance duties, which include executing the compliance program with its objectives and projects, and other approved tasks required for the effectiveness and role of compliance, aligned with the bank's risk strategy. If some of these responsibilities are carried out by employees in different business units (compliance officers), the distribution of these responsibilities must be clearly defined.
64- The responsibility for addressing and correcting any deficiencies or violations identified by the Compliance Unit rests with senior management and the heads of business units where deficiencies or violations have been observed. The Compliance Unit's role is limited to providing advice and follow-up with the heads of business units and reporting any shortcomings in addressing and correcting issues.
Communicating Regulations and Instructions and Monitoring Compliance
65- The Compliance Unit must ensure that senior management and various business units are appropriately and timely informed of regulations issued and instructions received from SAMA and other relevant official internal and external entities (such as countries and organizations related to banking regulation). These must be stored in a database and maintained continuously and accessibly, ensuring that policies, procedures, products, services, and advertising models comply with the relevant regulations and instructions. It is essential to understand the communicated instructions and seek clarifications from the Compliance Unit or SAMA if needed. The bank will not be exempt from regulatory penalties due to incorrect application of instructions.
66- All business units within the bank must obtain the Compliance Unit's approval before submitting requests for SAMA's approval for new products and services. The request for approval or non-objection from SAMA should be submitted to SAMA only by the Chief Compliance Officer.
67- The Compliance Unit must be involved in the decision-making process when assigning tasks to third parties to ensure there is no conflict with any instructions issued from SAMA or other relevant authorities.
Organizing Responsibilities
68- Not all compliance responsibilities are executed solely by the Compliance Unit. Some compliance tasks can be carried out by employees in various bank units and its foreign branches (compliance officers), with the Chief Compliance Officer overseeing their work through an organization approved by the board or a delegated committee.
69- Bank's organizational structures include specialized supervisory units requiring specialized expertise, such as credit risk monitoring units, information security units, and finance units. These specialized supervisory units are responsible for implementing compliance requirements related to their specialized tasks (e.g., taxation, zakat, credit risk, market risk, operational risk, information security, etc.). The Compliance Unit’s role concerning these specialized units is to obtain necessary assurances, documents, and evidence of their compliance responsibilities and required role, unless specialized expertise and competencies are assigned to the compliance unit to implement the compliance requirements related to the activities and tasks of those units, these responsibilities must be documented through a compliance policy to ensure the prevention of any overlap that may arise due to the similarity of supervisory roles between those units and the compliance unit.
70- To ensure that the Chief Compliance Officer and the Compliance Unit staff can perform their responsibilities effectively, the Compliance Unit must have the right to request the bank's legal department to:
- Provide advice on regulations and the drafting of instructions for the Compliance Unit, and to prepare necessary guidelines for employees. The Compliance Unit will focus on monitoring compliance, instructions, policies, and procedures, and prepare and submit reports to senior management.
- Investigate deficiencies and violations related to the implementation of relevant regulations and instructions concerning the tasks and operations of all units within the Compliance Unit.
- Provide legal opinions on the results of investigations conducted by the Compliance Unit from time to time.
Consultation
71- The Compliance Unit must provide advice to senior management regarding compliance regulations, rules, and standards, including updates on local and international developments in this area. This advisory role involves close collaboration between the Compliance Unit staff and the bank’s business units, offering support and guidance on their daily operations. The Compliance Unit is responsible for advising on compliance matters and serving as the point of contact for any compliance-related inquiries from its staff.
Guidance and Awareness
72- Training and educating all bank staff on relevant regulations and instructions pertaining to their individual responsibilities is a fundamental aspect of senior management's efforts to instill a compliance culture and encourage reporting of any violations to the Compliance Unit. Therefore, the Compliance Unit must continuously and proactively assist senior management in:
- Raising employee awareness about compliance issues and potential violations, recognizing that they are the first line of defense, and serving as an internal contact point for compliance-related questions from bank employees.
- Developing written guidance for employees that addresses the appropriate application of relevant regulations, compliance rules, and standards through policies and procedures. This includes preparing other guidance documents such as compliance manuals, internal codes of conduct, and practical guides.
- Ensuring that the annual training and awareness program for all employees includes a plan that meets the bank’s ongoing needs and can be promptly adjusted in response to new issues, observations, significant changes, or updates in regulations, or high employee turnover. Training should be provided through available methods within or outside the bank, particularly for new employees, to familiarize them with compliance requirements related to their banking operations before starting their duties, and for those who interact directly with the public, to periodically remind them of requirements such as sales and marketing instructions, anti-money laundering and counter-terrorism financing, due diligence, reporting suspicious transactions, and internal violations.
Identifying, Measuring, and Evaluating Non-Compliance Risks
Identifying Risks73- The Compliance Unit should proactively identify, document, and assess non-compliance risks related to the bank’s activities (regulatory, financial, reputational, or strategic risks), including new product developments, business practices, new types of business or customer relationships, or significant changes in the nature of these relationships. If the bank has a New Products Committee, representatives from the Compliance Unit should participate in this committee.
Measuring Risks
74- The Compliance Unit should study methods for measuring non-compliance risks both quantitatively and qualitatively (e.g., performance indicators related to compliance) and use these metrics to support the assessment, reduction, and management of non-compliance risks. Techniques such as aggregating or filtering data to identify potential non-compliance risk indicators (e.g., increasing customer complaints, fraud cases, reports, penalties, and payments) can be employed.
Evaluating Risks
75- The Compliance Unit should evaluate the adequacy of the bank's compliance policy and procedures, promptly address any identified deficiencies, and propose amendments when necessary, based on technical capability. It should also encourage and monitor the relevant departments to make necessary adjustments and corrections.
Monitoring, Testing, and Reporting
76- The Compliance Unit must continuously monitor and test compliance through adequate and representative tests. The results of compliance tests should be reported according to their administrative hierarchy and in accordance with the bank’s internal risk management procedures.
77- The chief compliance officer must submit regular written reports to senior management addressing compliance issues. These reports should include an assessment of non-compliance risks during the reporting period, note any changes in the level of non-compliance risk based on relevant metrics (e.g., performance indicators), and provide a summary of any identified violations and deficiencies, proposed corrective actions, and required correction dates, along with details of actions already taken. The reporting format should align with the bank's non-compliance risk profile and activities.
High-Risk Cases and Urgent Developments
78- The board or its delegated committee overseeing compliance policy implementation should be informed immediately of any significant compliance failures or deficiencies that could lead to substantial regulatory penalties, legal actions, financial losses, or damage to reputation. If the impact is deemed significant to the banking sector's reputation, SAMA and the general administration for bank supervision should be notified directly and immediately.
Annual Compliance Report
79- An annual compliance report should be prepared by senior management and presented to the board, covering at a minimum the requirements set forth by SAMA from time to time.
80- SAMA should receive the board-approved version of the annual compliance report by the end of April each year, sent by the Chairman of the Board of the local bank or the Chief of the foreign bank branch, as part of the bank’s self-assessment of its compliance.
Regulatory Responsibilities and Communication
81- As a regulatory basis, the Compliance Unit must undertake responsibilities and tasks directly and indirectly related to non-compliance risks, including: (1) compliance oversight (monitoring, relationship with SAMA, consultations), (2) anti-money laundering and counter-terrorism financing, (3) anti-fraud measures, (4) anti-corruption, (5) self-supervision, and (6) handling violation reports, and to take on the responsibility of developing the appropriate mechanisms and coordination for how to effectively meet the requirements of implementing the communicated security procedures within the institution.
82- The Compliance Unit is responsible for monitoring external regulatory bodies, standard-setting entities, and external experts concerning its regulatory responsibilities, particularly in anti-money laundering, counter-terrorism financing, and non-proliferation.
Compliance Program
83- The Compliance Unit should implement its responsibilities under a compliance program that outlines its planned activities, such as applying and reviewing specific policies and procedures, assessing non-compliance risks, conducting compliance tests, and raising employee awareness on compliance issues. The compliance program should be risk-based and overseen by the Chief Compliance Officer to ensure it adequately covers all activities and coordinates between the compliance units (monitoring compliance with regulations, anti-money laundering and counter-terrorism financing, anti-fraud, anti-corruption, and handling violation reports).
Compliance Unit Database
84- The Compliance Unit should establish and continuously update a database of all compliance regulations, rules, and standards, ensuring that all bank employees can access and benefit from it at all times.
Documentation
85- The Compliance Unit must document policies, procedures, plans, events, and work papers to fulfill its duties and responsibilities.
Warning Signs (Red Flags)
86- The compliance program must include a principle for warning signs to alert about violations of internal and external regulations and situations exposing the bank to non-compliance risks, such as rapid bank growth, opening new branches, high employee turnover, changes in programs, and the introduction of automated systems in workflows. This principle should also protect whistleblowers and include incentives in accordance with SAMA’s whistleblowing policy. Principle (8): Relationship Between the Compliance Unit and the Internal Audit Unit
Internal Audit Activities
87- The activities and scope of the Compliance Unit should be subject to periodic review by the Internal Audit Unit.
Independence of Both Units
88- The Compliance Unit and the Internal Audit Unit should be separate and independent within the bank. One of the primary responsibilities of the Compliance Unit is to monitor the bank's adherence to compliance rules. The Internal Audit Unit has a broader scope of responsibilities. Although there may be some overlap between the responsibilities of the two units in certain areas, each unit operates independently and any overlap should not impact the functioning of either unit.
Review of Compliance Unit Activities
89- To assess the efficiency and effectiveness of the Compliance Unit, non-compliance risks should be included in the risk assessment methodology adopted by the Internal Audit Unit. A periodic review program of the Compliance Unit’s activities should be established, including testing controls that align with the level of potential risks, in accordance with the requirements of these principles.
Integration in Risk Assessment
90- It is important to have a clear understanding within the bank regarding how the activities of risk assessment and testing are divided between the two units, and this should be documented in the bank’s compliance policy. The Internal Audit Unit should inform the head of Compliance Unit the audit results related to compliance within the bank.
Monitoring the Compliance of the Internal Audit Unit
91- The Compliance Unit plays a crucial role in monitoring the compliance process within the bank, which includes overseeing that the Internal Audit Unit carries out the tasks, responsibilities, and activities as required by SAMA in the specified manner and timeframe.
Oversight from a Specific Perspective
92- For further clarification regarding the role of both the Compliance Unit and the Internal Audit Unit as two independent entities, both the Compliance Unit and the Internal Audit Unit are responsible for overseeing the bank's activities, but each has its own perspective on oversight. The Compliance Unit focuses on identifying and clarifying the regulations, instructions, policies, and procedures that need to be implemented in the bank, ensuring that these are incorporated into the approved policies, procedures, and work programs, and continuously verifying that these policies and procedures are actually followed and effective in mitigating non-compliance risks, with regular updates. The role of the Internal Audit Unit involves conducting field and documentation audits on all bank units through sampling or comprehensive coverage, continually monitoring the internal control systems of the bank, and assessing compliance with the policies and procedures that the Compliance Unit has worked to implement and assist in preparing, based on regulations, instructions, and guidelines. Other Matters
Principle (9) Matters Related to External Operations
Compliance with Regulations and Instructions in the Host Country
93- Banks that choose to conduct banking activities in certain countries must adhere to the regulations, instructions, and laws applicable in those countries. The branches or offices, as well as the structure and responsibilities of the compliance function, must be aligned with the regulatory requirements and local instructions of those countries.
Higher Standards as a Basis When Regulatory Requirements Differ
94- When engaging in banking operations in specific countries, whether through branches or subsidiaries, it is important to recognize that regulatory requirements and instructions may vary from one country to another. These differences might depend on the type of business the bank is conducting or the form of its presence in those countries. Therefore, particular emphasis should be placed on the requirements outlined in Paragraph (2/6) of Section Two of the Anti-Money Laundering and Counter-Terrorism Financing Guide.
Compliance Officers in Host Countries
95- Banks that choose to operate in specific countries must comply with all local regulations and instructions applicable in those countries. For example, banks operating as subsidiaries must meet the regulatory and instructional requirements for companies in the host countries. Banks operating as foreign branches must fulfill the requirements specified for foreign bank branches. The bank must ensure that compliance responsibilities in host countries are carried out by employees with local knowledge and expertise, in addition to oversight by the Chief Compliance Officer in collaboration with other risk and control units in the home country.
Risk Assessment for Overseas Activities
96- Each bank must have implemented and updated procedures to identify and assess potential or increasing risks to its reputation regarding the products and activities offered in host countries through its subsidiaries or branches that are not permitted or practiced in the Kingdom. Principle (10) Delegation of Compliance Unit Tasks
Limited Delegation Agreement and Responsibility
97- The activity of the compliance unit is considered a primary function in managing non-compliance risks within the bank. While some specific activities may be delegated to specialized entities, they must remain under the supervision and responsibility of the Chief Compliance Officer. The Chief Compliance Officer is ultimately responsible for ensuring compliance and cannot delegate their responsibility to others.
Suitability of Agreements with Tasks
98- The bank must ensure that any agreements or arrangements for delegating some compliance tasks do not impede the effectiveness of supervision by SAMA or other regulatory and supervisory bodies. Regardless of delegating certain tasks that the bank deems necessary, the primary responsibility for ensuring compliance with all regulations and instructions remains with the board and senior management.
SAMA Approval
99- The delegation of any compliance activities is subject to the instructions issued by SAMA, including obtaining its non-objection prior to entering into any delegation agreements. Shariah Governance Framework for Local Banks Operating in Saudi Arabia
No: 41042498 Date(g): 12/2/2020 | Date(h): 18/6/1441 Status: In-Force Chapter One: Preliminary Provisions
Article 1: Introduction
Shariah governance has become an important requirement in the Islamic banking industry. Its effectiveness can lead to achieving a number of benefits, the most important of which are:
■ Limiting the risk of non-compliance with Shariah principles and rules.
■ Supporting the Islamic banking industry stability and economic growth.
■ Improving operational efficiency and decision making of the Islamic banking industry.
■ Attracting foreign investment in Shariah-compliant assets.
■ Increasing efficiency of internal capital management.
■ Enhancing trust among key stakeholders.
■ Strengthening relations with depositors, investors, and financiers.
In order to implement the effective Shariah governance requirements for banks and ensure that Islamic banking transactions in Saudi Arabia are Shariah compliant, SAMA issued this framework. To establish a robust and effective Shari’ah Governance Framework (SGF) for the banks conducting Shari’ah compliant banking, a minimum set of regulations and guidelines are issued for compliance by the banks. SGF does not contradict the requirements of other regulations rather it compliment already issued regulations and guidelines.
Article 2: Objectives of the Shariah Governance Framework
This framework aims to enhance the environment for compliance with Shariah principles and rules in banks in general. It also aims to define the tasks and responsibilities of the board of directors, executive management, Shariah committee, compliance department, risk management department, and internal audit department in relation to the application of the requirements of this framework.
To achieve this, the board and the executive management of the bank are expected to have a reasonable understanding of Shariah principles and their broad application in Islamic finance. The Shariah committee is expected to have sufficient knowledge of financial and banking aspects in general and Islamic finance in particular so as to be able to understand the Shariah matters presented to it. In addition, the committee is expected to constantly gain knowledge of Shariah and financial matters and laws, attend relevant training programs, continue to enhance knowledge and understanding, and keep abreast of the latest developments in the field of Islamic finance.
Article 3: Definitions
The following words and phrases, wherever mentioned in this framework, will have the meanings assigned to them unless the context requires otherwise:
SAMA: The Saudi Central Bank.
Bank: Any local bank that is licensed to carry out banking business in Saudi Arabia in accordance with the provisions of the Banking Control Law and that conducts Islamic banking.
Board: The board of directors of the bank.
Management: The bank executive management and senior executives that manage the bank business as well as propose and implement strategic decisions.
Committee: A Shariah committee responsible for supervising compliance with Shariah principles and rules and their application in the bank.
Committee Members: A group of specialists whose knowledge and experience are not limited only to the Shariah and related matters, but also include the jurisprudence of contemporary financial transactions used to form Shariah decisions given to the bank. These Shariah decisions are usually not directed to the public or entities engaging in other activities.
Independent Committee Member: A person who is completely independent in position and decisions and who meets the requirements for independence as stipulated in Paragraph 3 of Article 7 of this framework.
Shariah Compliant: Compliance with Shariah decisions issued by the bank’s Shariah committee.
Islamic Window : That part of a conventional bank (which may be a branch or a dedicated unit of that bank) that provides Shariah compliant finance and investment services both for assets and liabilities products.
Investment Account Holders: Bank customers who have Shariah-compliant investment accounts which may be restricted or unrestricted according to their Shariah and accounting status.
Bank Subsidiaries: Any legal entity controlled by the bank by owning more than half of its capital or voting rights or by forming its board of directors, including special-purpose entities.
Relatives:
- Fathers and mothers, grandfathers and grandmothers.
- Offspring and their children.
- Full and half siblings.
- Spouses.
Stakeholders: Any person who has an interest in the bank, such as shareholders, employees, investors, creditors, customers, suppliers and supervisors.
Chapter Two: Composition of the Shariah Governance Framework
Article 4: Composition of the Shariah Governance Framework
The bank shall establish a Shariah governance framework with emphasis on the key functions and elements that ensure effective implementation of this framework and according to the following:
1. The Shariah governance framework shall consist of a set of policies and procedures that describe the structure, roles, responsibilities, and tasks of the relevant departments as well as the communication arrangements among them.
2. These policies and procedures shall define the mechanism that a bank must follow to meet the requirements of this framework, including how committee meetings shall be conducted, how decisions are made and recorded, and how reports shall be prepared and submitted.
3. The bank shall establish formal reporting channels among the key units/departments to ensure effective and timely reporting. In this regard, the committee shall report to the board of directors.
4. The bank must establish a control mechanism to ensure that the objectives and operations of its Islamic banking activities are in compliance with Shariah principles and rules at all times.
5. The composition of the Shariah governance framework shall be supported by pillars that include effective tasks and responsibilities carried out by the board and the management, independence of the committee, and qualification of its members in addition to the effectiveness of the internal control functions which are Shariah compliance, Shariah non-compliance risk management, and Shariah internal audit.
6. Continuous assessment of the bank’s compliance with the Shariah principles and rules shall be carried out.
7. The bank shall manage the potential Shariah non-compliance risk resulting from Islamic banking which includes identifying the inherent risk and establishing controls to mitigate such risk.
8. A regular and periodic Shariah internal audit shall be conducted to verify the level of compliance of Islamic banking activities and operations with the Shariah principles and rules.
9. The bank shall establish a unit/department responsible for conducting research and studies on Shariah, coordinating between the management and the committee, and disseminating Shariah decisions to stakeholders within the bank in addition to acting as secretariat to the committee.
Chapter Three: Responsibilities of the Board and the Executive Management
Article 5: Responsibilities of the Board of Directors
1. The board is primarily responsible for the overall Shariah governance framework of the bank and the compliance of its Islamic banking activities with the Shariah principles and rules. The board is also responsible for approving the bank’s Shariah governance framework, performing continuous oversight over the effective functioning of the framework, and ensuring that the framework is commensurate with the size, complexity, and nature of the bank’s business.
2. The board shall approve all Shariah policies of the bank and supervising the effective implementation of these policies.
3. The board shall provide the necessary mechanisms and methodology for risk management to protect the interests of investment account holders through Profit-lost sharing accounts.
4. The board shall supervise the bank’s compliance and implementation of the Shariah decisions issued by the committee.
5. The board shall ensure that an effective communication policy among the key functions of the bank is in place to facilitate and allow the escalation of important matters related to compliance of Islamic banking activities with the Shariah principles and rules.
6. The board shall remunerate the Shariah committee members appropriately based on the recommendation of the nomination and remuneration committee of the board. Such remuneration shall be commensurate with the duties and responsibilities of these members and consistent with SAMA’s relevant instructions.
7. A formal procedure shall be adopted, as proposed by the nomination and remuneration committee, to assess the performance of the Shariah committee members based on competence, knowledge, contribution and effectiveness.
8. The resume of all the Shariah committee members shall be disclosed so that shareholders and investors can judge the competence and ability of these members to carry out their duties effectively.
9. The mechanism used to supervise the integrity and performance of the committee members shall be disclosed. Moreover, it must be taken into account not to nominate any member who has previously been convicted by a court judgment or of a crime impinging on honor or integrity.
Article 6: Responsibilities of the Executive Management
1. The management shall identify and refer any Shariah issues to the Shariah committee for decisions and provide the committee with the required information and disclosures in a timely manner.
2. The management shall monitor and implement the Shariah decisions issued by the committee.
3. The management shall provide continuous education and training programs to key internal stakeholders, including the board, the Shariah committee, and the employees related to Shariah and finance matters. This is to ensure that all departments/units associated with the Shariah governance framework of the bank are sufficiently exposed to current developments in Shariah related matters.
4. The management shall develop and adopt a holistic culture of Shariah compliance within the bank to comply with the Shariah principles and rules in its overall Islamic banking activities. In addition, all relevant employees are expected to be familiar with the Shariah-compliant products offered by the bank as well as similarities and differences between Shariah-compliant banking products and services and others that are conventional.
5. The management must ensure that Shariah policies and procedures are accessible to employees involved in the implementation of the Shariah governance framework.
6. The management shall ensure that all Islamic banking operations are carried out according to the bank’s Shariah policies and procedures and shall constantly review and update the policies and procedures to reflect market practices and developments.
7. If the management becomes aware that certain financial or Islamic banking transactions appear to involve operations that are not Shariah-compliant, the management shall:
a) Immediately inform the board and the committee.
b) Immediately stop providing any banking services or products in that business line related to the Shariah non-compliant operation.
Within (30) business days of becoming aware of such non-compliance, submit a plan to rectify the state of non-compliance with the Shariah principles and rules, to be approved by the board and endorsed by the committee.
Chapter Four: Formation, Appointment, and Membership of the Shariah Committee
Article 7: Formation of the Shariah Committee 1
The board shall form the Shariah committee and appoint its members, based on the recommendation of the nomination and remuneration committee, after obtaining SAMA’s written non-objection. The bank may obtain the approval of the general assembly to appoint the Shariah committee members if such is stated in the bank internal policy. The term of committee membership is three years. The committee shall be formed according to the following:
1. The number of its members must be proportionate with the size and nature of the bank business, provided that it is not less than three and not more than five.
2. The chairperson of the committee shall be an independent member.
3. The number of the independent members must not be less than two-thirds of the committee members. Independence of a committee member shall be invalidated in the following cases:
a) If the member owns five percent or more of the stock of the bank or one of its subsidiaries.
b) If the member is a representative of a corporate person who owns five percent or more of the stock of the bank or one of its subsidiaries.
c) If the member is a relative of any of the board members or senior executives in the bank or in one of its subsidiaries.
d) If the nominated member is a board member in one of the bank’s subsidiaries.
e) If the member is currently an employee, or used to be an employee during the past two years, of the bank, of a party that deals with the bank, or of a subsidiary, e.g. an accounting auditor or a main supplier, or held a controlling interest in any of these parties during the past two years.
f) If the member has a direct or indirect interest in the business and contracts executed for the bank.
g) If the member receives financial consideration from the bank in addition to the remuneration for their membership in the committee.
h) If the member has a credit relationship with the bank (credit cards, credit facilities, guarantees, etc.), under his name or the name of a relative, in excess of three hundred thousand Saudi riyals.
i) If the member engages in a business that would compete with the bank or conducts businesses in any of the bank's sub-activities.
j) If the member served for more than six consecutive years or nine nonconsecutive years as a member of the committee.
k) The business and contracts that serve a personal interest of a committee member, which requires a license from the ordinary general assembly, shall not be considered as interest invalidating independence of that committee member if such business and contracts are carried out according to the same terms and conditions adopted by the bank with all contractors and customers and are part of the bank’s usual activities unless the nomination and remuneration committee of the board deems otherwise.
If independence of any member is invalidated for any reason, the bank shall notify SAMA within five business days.
4. The bank shall not appoint any member of its committee from a Shariah Committee of another bank operating in Saudi Arabia. This is to ensure that the committee member would be more focused, avoiding conflict of interest, and maintaining the confidentiality of information.
5. The bank shall include a confidentiality clause in the contract or terms of appointment of the committee members to maintain the confidentiality and secrecy of the bank’s information.
6. Upon resignation/expiry of the term of membership of any committee member for any reason, the bank must notify SAMA in writing within five business days. The resigning member shall submit his resignation, along with his reasons, to the board with a copy to SAMA. Membership of a committee member may not be terminated before the expiry of its term except with an acceptable justification.
1 The article is for guidance and will be enforced starting from 01/01/2023.
Article 8: Membership of the Shariah Committee
The committee members shall be properly qualified to carry out the duties assigned to them. They shall have a clear understanding of their tasks and responsibilities and be able to exercise sound judgment with objectivity. These members shall also possess various professional, practical and administrative skills as well as experience in Shariah and financial matters. They shall have appropriate personal qualities, especially honesty and commitment in addition to a high degree of good reputation, competence and responsibility.The effectiveness of the committee depends on the experience and ability of its members to judge comprehensively as well as their participation in the committee’s discussions and familiarity with the topics raised before making any related decision. Moreover, a member's qualifications should include the following:
■ Leadership: A Committee member should have leadership skills and be able to grant powers that lead to stimulating performance, applying best practices in the field of effective management, and adhering to professional values and ethics.
■ Independence: It is the ability of a committee member to be impartial and objective in making a decision without any influence from the management or from other external entities.
■ Competence: This is reflected by the level of education, training, skills, and the desire to continue learning as well as the diversified experience of at least five years in various fields, including Islamic banking, compliance, and Shariah audit of financial transactions.
■ Shariah and financial knowledge: A member should have adequate Shariah knowledge in addition to the ability to read and understand financial statements and reports.
Article 9: Shariah Committee Meetings
1. The committee shall hold meetings on a regular basis, and whenever the need arises, to exercise its duties effectively and to ensure that the bank’s operations are not adversely affected by the difficulty in obtaining the committee’s decisions on Shariah matters that are referred to it.
2. The committee meetings shall be held periodically, at least once every three months.
3. For a committee meeting to be valid, it shall be attended by the majority of the members. The resolutions shall be adopted by the majority of votes of the attending members. In the case of a tie, the vote of the committee's chairperson shall prevail.
4. A committee member is expected to contribute to meetings and allocate sufficient time and effort to discharge their duties effectively. The member must attend at least (75) percent of the committee meetings held during the fiscal year.
5. The meetings shall be documented and minutes of meetings shall be prepared, including the discussions and deliberations. The committee’s decisions and voting results shall be documented and kept in a special and organized record. Names of the attending members shall be stated along with their objections (if any) and their reasons. All attending members shall sign the minutes of meetings.
Chapter Five: Responsibilities and Duties of the Shariah Committee
Article 10: Responsibilities of the Shariah Committee
The committee shall be responsible for all its decisions related to Shariah matters. The board must rely on the committee for issuing Shariah decisions related to engaging in Islamic banking activities. The committee shall perform the following tasks:
1. It shall supervise the compliance of Islamic banking transactions with the Shariah principles and rules. Shariah compliance reports and internal Shariah audit observations should enable the committee to identify issues that require attention and, where appropriate, propose corrective measures.
2. It shall issue decisions on Shariah matters so that the bank can comply with the Shariah principles and rules.
3. It shall ensure that the Shariah policies and procedures developed by the bank are consistent with the Shariah principles and rules.
4. To ensure that Islamic banking products are Shariah compliant, the committee shall approve the following:
a) The terms and conditions contained in the forms, contracts, agreements and other legal documents used in executing the transactions.
b) The product manual, marketing advertisements, illustrative pamphlets and brochures used to describe the product.
5. The committee shall assess the compliance and internal Shariah audit work to ensure compliance with the Shariah aspects. Such assessment is part of the tasks related to submitting the reports on assessment of Shariah compliance.
6. The related parties of the bank such as its legal consultant, external auditors, or consultant entities may seek advice from the Shariah committee on Shariah matters related to the bank operations, and the committee shall provide the necessary assistance in this regard.
7. It shall inform the board, and recommend appropriate corrective actions, if it is proven to the committee that the bank has engaged in Islamic banking activities that are not Shariah compliant.
8. The committee shall inform SAMA of cases in which Shariah non-compliant activities are not effectively or adequately addressed or no corrective actions are made by the bank.
9. It shall prepare an annual report on the compliance of the banking Islamic activities of the bank with the Shariah principles and rulesand submit it to the board.
Article 11: Responsibilities and Duties of the Chairperson
Without prejudice to the functions of the committee, the chairperson shall lead the committee, supervise the progress of its work, and effectively perform its duties, which are:
1. Ensuring that the committee members receive complete, clear, correct and not misleading information on a timely manner.
2. Verifying that the committee has discussed all Shariah matters submitted to it effectively and on a timely manner.
3. Encouraging the committee members to carry out their tasks effectively.
Article 12: Responsibilities and Duties of the Shariah Committee Members
1. Attending committee meetings and providing a legitimate excuse when absent after notifying the chairperson in advance.
2. Knowing clearly the duties and responsibilities arising from membership in the committee.
3. Dedicating sufficient time to carry out their responsibilities and to prepare for and participate in committee meetings effectively.
4. Enabling other committee members to express their views freely, encouraging the deliberation of certain topics, and taking opinions of specialists from the relevant department and others if the need arises.
5. Informing the board immediately and fully about any direct or indirect interest in the business and contracts executed for the bank, or the direct or indirect engagement in any business that would compete with the bank.
6. Refraining from disclosing any confidential information obtained through their membership in the committee.
Chapter Six: Independence and Confidentiality of Information
Article 13: Independence
The independence of the Shariah committee in performing its duties to issue objective and reliable Shariah decisions shall be observed continuously as follows:
1. The board shall recognize the independence of the committee and ensure its freedom from any influence that would hamper the committee from issuing objective Shariah decisions when deliberating issues presented to the committee.
2. The committee shall report to the board directly.
3. The Shariah decisions issued by the committee should not be modified or set aside without its approval.
4. The Shariah committee shall have accurate and complete information from the management. If the information provided is insufficient, the committee has the right to request additional information which shall be provided by the management.
5. If the committee is not provided with the required information, the board shall be informed of the fact and an appropriate action shall be taken to rectify the situation.
Article 14: Confidentiality of Information
1. Internal information obtained by the committee members in the course of their duties shall be kept confidential and shall not be misused. Confidential or sensitive information obtained by any member of the committee while performing his duties shall not be used in any manner that could be detrimental to the bank.
2. Notwithstanding the above, the committee will not be regarded as breaching the confidentiality code if the information was disclosed to SAMA when reporting serious breaches of Shariah Principles and Rules by the bank.
Article 15: Maintaining Professional Ethics, Judgment, and Consistency to Ensure Compliance with Shariah Principles and Rules
In ensuring the quality and consistency of the Shariah decisions, the committee shall develop a structured procedures for arriving at Shariah decisions to be documented, approved and maintained in order to ensure the credibility of decision making and protect the committee from undue influences. In this regard, please check the development process of Shariah-compliant products described in Chapter Nine of this framework.
Chapter Seven: Internal Control
Article 16: Internal Control
First: Shariah Compliance:
The Shariah compliance function refers to the regular assessment of the bank’s Islamic activities and operations to ensure that they are Shariah compliant. This function includes:
1. Ensuring of the bank’s level of compliance with the Shariah principles and rules, the corrective actions to resolve non-compliances, and the control mechanisms to avoid recurrences.
2. overall Islamic banking operations at the bank, including the development process of Shariah-compliant products, which starts from product structuring to product offering to customers (See Chapter Nine of this framework).
Second: Shariah Non-Compliance Risk Management:
The systematic approach of managing Shariah non-compliance risks will enable the bank to continue its Islamic banking operations and activities effectively without exposing the bank to unacceptable levels of risk. Risk management involves systematically identifying, measuring, monitoring and managing Shariah non-compliance risks to reduce potential cases of non-compliance, taking into account that:
1. The Shariah non-compliance risk management function shall be considered as part of the bank's integrated risk management framework.
2. Due to the technicality and complexity in managing the risk of non-compliance to the Shariah principles and rules, the function shall be performed by risk officers that have suitable qualifications and experience in the subject matter.
Third: Internal Shariah Audit:
The Shariah audit function refers to the independent assessment conducted to provide objective assurance in order to add value and improve the degree of compliance in relation to the bank’s Islamic operations and activities, with the aim of ensuring a sound and effective internal control system for Shariah compliance. Additionally, the following should be taken into account:
1. Internal Shariah audit on areas of relative importance shall be conducted at least once a year depending on the risk profile of the bank. Shariah audit may be conducted as part of the bank’s audit on specialized areas, according to the risk level and materiality of the impact of Shariah non-compliance in these areas.
2. The board audit committee shall determine the deliverables of the internal Shariah audit function after consulting with the Shariah committee. These deliverables shall be in line with accepted auditing standards.
3. The Shariah audit function shall be performed by internal auditors who have acquired adequate Shariah-related knowledge and training. In addition, the internal auditors may engage the expertise of the bank’s Shariah officer in performing the audit, as long as the objectivity of the audit is not compromised.
4. The findings and observations of the internal Shariah audit shall be submitted to both the board audit committee and the Shariah committee.
Chapter Eight: Islamic Window Operations
Article 17: Islamic Window Operations2
When engaging in Islamic banking activity through Islamic window operations, the bank shall ensure that adequate internal control systems and tools are in place to properly separate Shariah-compliant assets and finance sources from those assets and finance sources that are not compliant with the Shariah principles and rules. This is in addition to the other requirements of this framework. Moreover, the bank shall comply with the following requirements:
1. The bank shall keep a separate accounting records for Islamic banking operations and ensure that these records are properly maintained.
2. The bank shall prepare separate financial statements for its Islamic banking operations along with its periodical financial statements at least on a monthly basis.
3. An internal audit is required at least once a year to assess the bank’s compliance with the requirements mentioned in Paragraphs 1 and 2 of this Article.
2 The article is for guidance and will be enforced starting from 01/01/2023.
Chapter Nine: The Development Process of Shariah-Compliant Products
Article 18: The Development Process of Shariah-Compliant Products
This development process of Shariah-compliant products should be comprehensive and sufficient to reduce the possibilities of the committee rejecting the products due to non-compliance with the Shariah principles and rulesas a result of improper structuring of products, lack of insufficient internal research in understanding the Shariah concepts, or misrepresentation of the product at the issuance or marketing stage. In this regard, the bank shall comply with the following:
1. All Shariah issues related to the product development, design, and process must be referred to the committee. The request for an advice or a decision must be detailed for effective deliberation by the committee. This will include explaining the process involved, documents used, and other necessary information.
2. The committee approval shall be obtained for all Islamic banking products to be presented and for any subsequent amendments. The committee shall make detailed review of legal contracts and other documents related to the products and transactions.
3. Product development includes both pre-product approval (i.e. the process of product structuring and developing prior to introduction to the market) and post-product approval process (i.e. the process after the product has been offered to the customers and transactions have been carried out) as follows:
a) Pre-product Approval:
1) Pre-product approval process involves the issuance of Shariah decisions, product structuring or design of processes backed by comprehensive Shariah research, and review of contracts and agreements before the product is offered to customers.
2) The pre-product approval process shall include, among other things, a review of the concept, structure, terms and conditions, documentations, policies and procedures, pamphlets, brochures and advertising materials. These documents shall be approved by the committee.
b) Post-product Approval:
1) Shariah governance shall include the post-product approval process which involves Shariah compliance and internal audit.
2) Areas of potential Shariah non-compliance risks shall be identified, and appropriate relevant actions shall be proposed to the management.
Related Parties Rules for Banks
No: 43095743 Date(g): 16/6/2022 | Date(h): 17/11/1443 Status: In-Force In reference to the first update of the Related Parties Rules for Banks issued by the Central Bank Circular No. 41045379 dated 01/07/1441H, the Central Bank is keen to apply international standards and the safety of transactions with all related parties.
We would like to inform you that the Related Party Rules for Banks have been updated to comply with the standards of the Islamic Financial Services Board (IFSB), which replaces the above-mentioned rules, in addition to the updated rules that the Central Bank emphasizes all local banks to adhere to.
For your information and action accordingly as of 09/01/2022 G. Banks should send their compliance plans to this email address: BSD@SAMA.GOV.SA before the specified effective date.
1. Introduction
These Rules are issued by SAMA in exercise of the authority vested under the Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H and the Banking Control Law issued by the Royal Decree No. M/5 on 22-02-1386H (11 June 1966G) and the rules for Enforcing its Provisions issued by Ministerial Decision No 3/2149 on 14/10/1406H.
These rules define related parties, provide additional requirements in regards to exposures/transactions to related parties and reinforce and provide further guidance to Article 9 of the Banking Control Law.
Banks should also adhere to the related party requirements as prescribed in SAMA Principles of Corporate Governance and any relevant policies as applicable.
These Rules shall supersede the Related Parties Rules for Banks issued vide SAMA circular no. 41045379 dated 01/07/1441H. The changes from the previous version are underlined.
2. Definitions
The following terms and phrases, where used in these Rules, shall have the corresponding meanings, unless the context requires otherwise:
i. SAMA: The Saudi Central Bank.
ii. Rules: Related Parties Rules for Banks.
iii. Exposure/Transaction: both on and off-balance sheet exposures/transaction included in either the banking or trading books, and instruments with counterparty credit risk under the Basel risk-based capital framework. Banking and trading books have the same meaning as under the Basel risk-based capital framework. Additionally, all Shari’ah Based products and Shari'ah Compliant product exposures/transaction, including but not limited to; service contracts, asset purchases and sales, construction contracts, lease (ijarah) contracts, financings, borrowings (through Qard) and write-offs.
iv. Eligible Capital Base: is the effective amount of Tier 1 capital fulfilling the criteria defined in the Basel III Framework.
v. Control Relationship: control relationship will be deemed to exist automatically if one entity owns more than 50% of the voting rights of another entity. In addition, banks must determine whether a control relationship exists using the following criteria:
a. Voting agreements (e.g. control of a majority of voting rights pursuant to an agreement with other shareholders);
b. Significant influence on the appointment or dismissal of an entity’s administrative, management or governing body, such as the right to appoint or remove a majority of members in those bodies, or a majority of members have been appointed solely as a result of the exercise of an individual entity’s voting rights;
c. Significant influence on senior management, e.g. an entity has the power, pursuant to a contract or otherwise, to exercise a controlling influence over the management or policies of another entity (e.g. through consent rights over key decisions);
Banks are also expected to refer to criteria specified in appropriate internationally recognized accounting standards (The International Financial Reporting Standards - IFRS are applied to all banks in KSA) for further qualitatively based guidance when determining control.
vi. Related Party:
a. Substantial Shareholders of the bank.
b. Board members of the bank or any of its subsidiaries/ affiliates (Associates and joint venture as per the definitions giving by the accounting standards) and their relatives.
c. Shariah Committee Members of the bank (as appointed under the provisions of Shariah Governance Framework issued via SAMA circular no. 41042498 dated 18/06/1441 H and any future amendments on the framework), or their relatives.
d. Seniors Executives of the bank or any of its subsidiaries/ affiliates and their relatives.
e. Board members and Seniors Executives of Substantial Shareholders of the bank.
f. Entities other than companies owned by the following:
a. Board members of the bank or their relatives.
b. Shariah Committee Members of the bank or their relatives.
c. Seniors Executives of the bank or their relatives.
g. Companies in which of the following is a member of its Board of directors or is one of its Senior Executives or has influence on the company’s decisions even if only by giving advice or guidance:
a. Board members of the bank or their relatives.
b. Shariah Committee Members of the bank or their relatives.
c. Seniors Executives of the bank or their relatives.
h. Non-joint stock companies in which the following is partner:
a. Board members of the bank or their relatives.
b. Shariah Committee Members of the bank or their relatives.
c. Seniors Executives of the bank or their relatives.
i. Joint stock companies in which the following owns (5%) or more:
a. Board members of the bank or their relatives.
b. Shariah Committee Members of the bank or their relatives.
c. Seniors Executives of the bank or their relatives.
j. Subsidiary/ affiliate.
Advice or guidance that is provided on a professional basis by a person licensed to provide such advice shall be excluded from the provisions of paragraph (g).
vii. Relatives:
a. Fathers, mothers, grandfathers and grandmothers.
b. Children, grandchildren.
c. Siblings, maternal and paternal half-siblings.
d. Husbands and wives.
Where dependence criteria for relatives/ family members has been identified based on the Related Party definition, a bank may still demonstrate to SAMA in exceptional cases, that the family members clearly operate all business activities independent of each other with no economic interdependence, financial support or shareholding from the other family member.
viii. Substantial Shareholders: any person who owns 5% or more of the shares of the bank or voting rights therein.
ix. Security: means such security as would, in the opinion of the SAMA, be acceptable to a prudent banker and satisfies the following criteria:
a. The market value of the asset is readily determinable or can be reasonably established and verified.
b. The asset is marketable and there exists a readily available secondary market for disposing of the asset.
c. The bank’s right to repossess the asset is legally enforceable and without impediment.
d. The bank is able to secure control over the asset if necessary.
e. The bank has the expertise and systems to manage the asset concerned.
x. Senior Executive: the Managing Director, Chief Executive Officer, General Manager, their deputies, Chief Financial Officer, Managers of key departments, officers of risk management, internal audit, and compliance functions, and similar positions in the Bank, in addition to incumbents of any other positions determined by SAMA.
3. Scope and Level of Application
These rules shall be applicable to the following institutions:
i. All locally incorporated banks licensed and operating in the Kingdom of Saudi Arabia.
ii. All foreign branches and subsidiaries of locally incorporated banks operating outside the Kingdom of Saudi Arabia.
While applying the rules to subsidiaries and branches, banks shall also take into account legal and regulatory requirements of the concerned regulatory authorities.
4. Governance and Risk Management
i. The Board of the bank is ultimately responsible for oversight of the bank’s associations with its related parties and for approving policies governing the bank’s dealings and associations with its related parties. The Board must ensure that these policies are reviewed at least annually and that they remain adequate and appropriate for the bank’s risk appetite, risk profile, capital, balance sheet size and the complexity of the bank.
ii. A bank is required to have policies and procedures on related party exposures/transactions.
iii. A bank is required to have adequate systems and controls in place to identify, measure, monitor and report related party exposures/transactions of the bank in a timely basis and ensure related party exposures/transactions of the bank are reviewed at least quarterly.
iv. Exposures/transactions to related parties shall only be considered on arm’s length basis and without any preferential treatment. Furthermore, any such credit exposures/transactions should also be strictly in line with the bank’s credit policy and procedures and policies and procedures on related party exposures/transactions.
v. Any exposure/transaction to a related party or any variation of the terms of a related party exposure/transaction should be approved at the level of Board of Directors or its delegated authority. While considering any proposal of lending to a board member or any of their connected parties, the Board of Directors shall ensure that the concerned board member would neither participate in the discussion nor influence such a decision.
vi. A bank should institute procedures to prevent the beneficiaries of any credit exposure/transaction being part of the processing or approval of such exposure/transaction.
vii. Any facilities granted by a bank to its key executives/members of senior management as a part of their employment contract/compensation package shall be exempt from the application of these rules.
5. Exposure/Transaction Limits
5.1 Maximum Exposure/Transaction Limits
Exposures/transactions to related parties are subject to measurement requirements as prescribed in SAMA Rules on Large Exposures of Banks. Subject to the following limits:
i. The sum of all exposures/transactions values a bank has to a non-bank related party must not be higher than 5% of the bank’s available eligible capital base at all times. However, a bank may have exposure/transaction to its non-banking subsidiary in financial sector of up to 25% of the banks eligible capital.
ii. Banks exposures/transactions to a non-bank related party that is a listed company in the Saudi stock exchange are exempted from the 5% limit specified in section 5.1.i, the sum of all exposures/transactions values a bank has to a non-bank related party that is a listed company in the Saudi stock exchange must not be higher than 10% of the Bank’s available eligible capital base at all times.
iii. Where a related party is included within a Group of Connected Counterparties, the exposure/transaction limit specified under Sections 5.1.i and 5.1.ii above shall be applicable, in addition to the overall group exposure limit as specified in SAMA Rules on Large Exposures of Banks.
iv. A cumulative limit on all exposures/transactions to non-bank related parties shall be 50% of the banks eligible capital.
Any breaches of the exposure/transaction limits, must be communicated immediately to SAMA. The communication to SAMA must also include the bank’s action plan to bring the exposure/transaction to within the breached limit. Furthermore, any such breaches may attract punitive supervisory action depending upon their materiality.
5.2 Exposures/Transactions Exempted from Related Parties Limits.
The following exposures/transaction shall be exempt from the limits specified under these Rules:
i. Banks’ exposures/transactions to the Saudi Government, SAMA, Entities Connected with the Saudi Government, GCC and their central banks.
ii. Entities that are related to the bank only due to above sovereign ownership in both the entity and the bank. This also applies if there is a joint Board member representing and appointed by Saudi Government in both the related party entity and the bank. However, the representative himself or herself is not exempted from the limits specified in these rules.
6. Security for Related Party Transactions
i. Article 9 of the Banking Control Law requires banks not to grant, without security, a loan or credit facilities, or issue a guarantee or incur any other financial liability in respect to parties specified in the law.
ii. For loans, credit facilities, guarantees or other financial liabilities to establishments not taking the form of joint-stock companies in which any of its Directors or Auditors is a partner or is a manager or has a direct financial interest, banks are required to ensure such facilities are fully secured where control relationship by the party exists. Where no control relationship exists, security for the borrowing should be on pro rata basis. In other words, only the respective party’s effective share of the facility is required to be fully secured.
7. Reporting
Banks are required to submit to SAMA all exposures/transactions to related parties that exceeded 5% of the banks eligible capital base on the reporting date, on the prescribed format attached as per Appendix-I.
The above information shall be submitted to SAMA each calendar quarter within 30 calendar days of the end of each quarter.
8. Effective Date
These Rules shall come into force with effect from 1st of September 2022. Banks are required to ensure compliance with these Rules while taking any new exposure/transaction or renewing existing exposures/transactions after the effective date. Bank are required to submit to SAMA a list of all exposures/transactions (if any) that do not meet the requirements of these Rules, and a rectification plan where necessary.
Appendix-I
Name of the Bank:
Statement for the Month ended
Statement Showing Exposures/Transactions to Related Parties that Exceeded 5% of Bank's Eligible Capital Base
(All amounts are in SR thousands)
SR. No. Name and Location of Borrower Total Amount of Gross Exposure/transaction Value of Eligible Credit Risk Mitigates(CRM) Net Exposure/transaction Ratio of Net Exposure/transaction to Bank's Eligible Capital In Case if Exempted Exposures/transactions, State Reasons for Exemption On Bal. Sheet Off Bal. Sheet Total 1 2 3 4 5 (=3+4) 6 7(=5-6) 8 9
Total A. Aggregate of all Exposures/transactions to Related Parties (Incl. the above Exposures/transactions) B. Ratio of Aggregate Related Parties Exposures/transactions to Bank's Eligible Capital Prudential and Supervisory Requirements
Preface
Scope of Application of Basel Framework
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force Since the implementation of Basel II - SAMA’s Detailed Guidance Document Circular No.BCS290 dated June 2006, all local banks1 were required to apply the SAMA’s Basel requirements on a standalone and consolidated basis. The scope of application include, applying the framework to any holding company that is the parent entity within a banking group to ensure that it captures the risks of the banking group as a whole. As such, SAMA applies the framework to all local banks on a consolidated level and at every tier within the bank group, depending on the group structure to ensure that it captures the risk of the whole group, taking into account risks arising from individual entities in the group.
The scope remains unchanged since the issuance of Basel II –Detailed Guidance Document relating to Pillar 1 issued by SAMA in 2006 in addition, the prudential returns requirements are also aligned to the scope of application implemented by SAMA.
1 Local Banks who are engaged predominantly in banking business including licensed subsidiaries of banks located outside the kingdom, operating in Saudi Arabia.
Introduction
The Basel Framework comprises the minimum risk-based capital including the relevant capital buffers, leverage, liquidity and large exposure standards, the supervisory review process under Pillar 2 and public disclosures under Pillar 3, and designed to be applied on internationally active banks. The Basel framework is applied on a consolidated basis at the holding company level and at every tier within a banking group, depending on the group structure to ensure that it captures the risk of the whole banking group, taking into account risks arising from individual entities in the group.
Objective
The objectives of this Guidance Note is to clarify SAMA’s policy on the scope of application of the SAMA’s Basel Framework and the corresponding reporting requirements in view of banks’ enquiries on the revised Framework issued by SAMA in 2021 and 2022 as well as setting out SAMA’s expectations on banks’ group-wide risk oversight and monitoring practices. Banks should refer to the relevant policies on the specific requirements of the SAMA’s Basel Framework.
Definition
For the purpose of this Guidance Note only:
The Framework: Refers to SAMA Basel Framework which includes the minimum risk-based capital and the relevant capital buffers, leverage, liquidity and large exposure standards, the supervisory review process under Pillar 2 and public disclosures under Pillar 3.
Standalone (Solo) level: Refers to the local bank entity excluding it subsidiaries. For the avoidance of doubt, standalone level includes domestic and foreign branches and representative offices.
Consolidated level: Refers to the local bank entity and all consolidated financial subsidiaries2 where the bank have a majority ownership or – controlled.
Majority Ownership or –Controlled: Refers to ownership structure where one entity holds 50% or more of the equity of another entity or meet the control definition in the IFRS standards.
Financial subsidiary: Refers to a subsidiary engaged in predominantly financial activities3 including, but not limited to, investment firms, finance companies, payment companies and special purpose vehicles (SPVs) established to undertake financial-related activities.
2 Financial subsidiary does not include insurance company.
3 Financial activities include financial leasing, issuing credit cards, portfolio management, investment advisory, custodial and safekeeping services and other similar activities that are ancillary to the business of banking.Application of the Framework on Banking Groups in Saudi Arabia and Reporting Requirements
Scope of Application
1. Local banks must comply with SAMA’s Basel Framework (the Framework) at both standalone and consolidated level4.
2. For purposes of the Framework, the consolidation will include all subsidiaries undertaking financial or banking activities, which the bank have a majority ownership5 or –control, except insurance entities.
3. Where consolidation of a subsidiary is not feasible6, banks are required to seek SAMA’s approval to exclude the subsidiary from the scope of application and reporting requirements. The application should include proper justifications and risk management controls to ensure group risks are managed effectively.
4. Subject to SAMA discretion, the framework may apply to the bank subsidiaries at every tier or level within the banking group on a consolidated and/or on standalone basis, as applicable. In this regard, SAMA will, among others, take into consideration the type of subsidiary7, quantitative and qualitative factors such as size of assets and liabilities, nature of business activities and inter-connectedness within the group.
4 For avoidance of doubt, the Framework does not apply to branches of a bank licensed in another jurisdiction operating in Saudi Arabia (“foreign bank branches”). Foreign bank branches are to comply with their home regulator’s prudential requirements.
5 The minority interests (capital held by third parties) that arise can only be recognized in consolidated capital only if they meet the applicable definition of capital in SAMA's Final Guidance Document Concerning Implementation of Capital Reforms. Any minority interest in excess of the subsidiaries’ minimum regulatory capital requirements is not recognized.
6 For example subsidiaries acquired through debt previously contracted and held on a temporary basis, or subject to different laws and regulation that conflict with SAMA regulatory requirements.
7 The application will be restricted to financial subsidiaries that can follows SAMA regulatory requirementsPillar 2
5. For Pillar 2 purposes, SAMA applies its supervisory review process under Pillar 2 on a consolidated basis. This means SAMA’s supervisory assessment of banks’ risk management frameworks, capital and liquidity planning and adequacy will consider the nature and significance of business activities and associated risks of the subsidiaries, which are consolidated and not consolidated and their impact to the local bank and the overall banking group. This is consistent with SAMA’s consolidated supervision objective to ensure that risks within a banking group are adequately captured. In this regard, SAMA may also apply its supervisory discretion in extending the scope of application of other relevant prudential requirements, if warranted.
6. The bank’s Internal Capital Adequacy Assessment Plan (ICAAP) and its Internal Liquidity Adequacy Assessment Plan (ILAAP) should capture risks arising from consolidated subsidiaries in accordance to SAMA’s ICAAP and ILAAP requirements.
Pillar 3
7. For purposes of Pillar 3 Disclosure requirements, banks shall follow the Pillar 3 disclosure requirements, where disclosures shall be at the consolidated level only, unless otherwise specified by SAMA.
8. Banks are required to disclose that the insurance entity (within the group, if any) is not included in the scope of application as part of its Pillar 3 disclosures.
Reporting Requirements
9. Banks are required to report to SAMA two sets of prudential returns, the first set being the prudential returns at standalone level and the second set being the prudential returns at the consolidated level. For this purpose, banks shall use the relevant templates for the reporting of these prudential returns to SAMA.
10. Where reporting on standalone (e.g. reporting of risk-weighted assets, minimum regulatory capital and liquidity requirements at the bank entity level) is not feasible, banks are required to seek SAMA’s supervisory approval on a yearly basis for exemption from reporting on standalone basis. The application for exemption should include proper justifications and risk management controls to ensure risks are managed effectively.
11. Each consolidated subsidiary is not required to report its prudential returns to SAMA on a standalone basis. However, SAMA would expect the bank to have full risk oversight of its group’s subsidiary activities and be adequately informed of capital and liquidity adequacy of the overall group, including its major subsidiaries.
12. SAMA expect banks to have access to information on the activities and risk exposures of all their subsidiaries and attribute these risk exposures to the consolidated subsidiaries at all times. Banks are required to have internal systems to support the group-wide risk monitoring and reporting and to provide the information, as and when, required by SAMA.
Minimum Capital Requirements
Minimum Capital Requirements for Credit Risk
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force 1. Introduction
1.1 The Basel Committee on Banking Supervision issued the Basel III: Finalizing post-crisis reforms in December 2017, which includes among others, the revised framework for Credit Risk aimed to enhance the robustness and risk sensitivity of the standardized approaches, balances simplicity of the framework and, comparability in the calculation of risk weighted assets (RWAs) for credit risk using different available approaches.
1.2 This revised framework in risk-weighted assets for credit risk is issued by SAMA in exercise of the authority vested in SAMA under the Charter issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued 01/01/1386H.
1.3 This revised framework on risk-weighted assets for credit risk will supersede the following existing requirements related to the calculation of RWAs for credit risk:
- Circular No. BCS 242, Date: 11 April 2007 (Mapping of Credit Assessment Ratings Provided by Eligible External Credit Assessment Institution to Determine Risk Weighted Exposures).
- Circular No. 351000121270, Date: 17 July 2014 (Basel III - Internal Rating Based Approaches for Credit Risk).
- Circular No. 391000047997, Date: 14 January 2018 (Reducing RWA for mortgages to 50%).
- Circular No. 410589780000, Date: 1 June 2020 (Reducing RWA for MSMEs).
2. Scope of Application
1.4 This framework applies to all domestic banks both on a consolidated basis, which include all branches and subsidiaries, and on a standalone basis.
1.5 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.
3. Implementation Timeline
This framework will be effective on 01 January 2023.
4. SAMA Reporting Requirements
SAMA expects all banks to report their credit RWAs and capital charge using SAMA’s Q17 reporting template within 30 days after the end of each quarter.
5. Overview of Risk-Weighted Assets Approaches for Credit Risk
5.1 Banks can choose between two broad methodologies for calculating their risk-based capital requirements for credit risk. The first is the standardized approach, which is set out in chapters 6 to 9:
i. The standardized approach assigns standardized risk weights to exposures as described in chapter 7. Risk weighted assets are calculated as the product of the standardized risk weights and the exposure amount. Exposures should be risk-weighted net of specific provisions (including partial write-offs).
ii. To determine the risk weights in the standardized approach for certain exposure classes, banks may, as a starting point, use assessments by external credit assessment institutions (ECAIs) that are recognized as eligible for capital purposes by SAMA. The requirements covering the use of external ratings are set out in chapter 8.1
iii. The credit risk mitigation techniques that are permitted to be recognized under the standardized approach are set out in chapter 9.
5.2 The second risk-weighted assets approach is the internal ratings-based (IRB) approach, which allows banks to use their internal rating systems for credit risk. The IRB approach is set out in chapters 10 to 16. Banks must seek SAMA’s regulatory approval before they can use the IRB Approach for calculation of capital requirements for credit risk, subject to the Bank meeting all minimum requirements for the use of IRB Approach, supervisory review and validation exercise as may be carried out by SAMA.
5.3 This policy document also covers the treatment in banking book of the following exposures:
1. Securitization exposures (chapters 18 to 23);
2. Equity investments in funds (chapter 24); and
3. Exposures arising from unsettled transactions and failed trades (chapter 25).
1 The notations in chapters 7 to 9 follow the methodology used by one institution, Standard and Poor’s (S&P). The use of S&P credit ratings is an example only; those of some other external credit assessment institutions could equally well be used. The ratings used throughout this document, therefore, do not express any preferences or determinations on external assessment institutions.
6. Due Diligence Requirements
6.1 Banks must perform due diligence to ensure that they have an adequate understanding, at origination and thereafter on a regular basis (at least annually), of the risk profile and characteristics of their counterparties. In cases where ratings are used, due diligence is necessary to assess the risk of the exposure for risk management purposes and whether the risk weight applied is appropriate and prudent. The sophistication of the due diligence should be appropriate to the size and complexity of banks’ activities. Banks must take reasonable and adequate steps to assess the operating and financial performance levels and trends through internal credit analysis and/or other analytics outsourced to a third party, as appropriate for each counterparty. Banks must be able to access information about their counterparties on a regular basis to complete due diligence analyses.
6.2 For exposures to entities belonging to consolidated groups, due diligence should, to the extent possible, be performed at the solo entity level to which there is a credit exposure. In evaluating the repayment capacity of the solo entity, banks are expected to take into account the support of the group and the potential for it to be adversely impacted by problems in the group.
6.3 Banks should have in place effective internal policies, processes, systems and controls to ensure that the appropriate risk weights are assigned to counterparties. Banks must be able to demonstrate to SAMA that their due diligence analyses are appropriate.
7. Standardized Approach: Individual Exposures
Exposures to Sovereigns
7.1 Exposures to sovereigns and their central banks will be risk-weighted based on the external rating of the sovereign as follows:
Risk weight table for sovereigns and central banks Table 1 External rating AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– Unrated Risk weight 0% 20% 50% 100% 150% 100% 7.2 A 0% risk weight can be applied to banks’ exposures to Saudi sovereign (or SAMA) of incorporation denominated in Saudi Riyal and funded2 in Saudi Riyal (SAR).3 Exposures to Saudi sovereign of incorporation denominated in foreign currencies should be treated according to the Saudi sovereign external rating.
7.3 Sovereign exposures to the member countries of Gulf Cooperation Council (GCC) will also be risk-weighted based on the external rating of the respective country as per Table 1.
7.4 Exposures to the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Union, the European Stability Mechanism and the European Financial Stability Facility may receive a 0% risk weight.
2 This is to say that the bank would also have corresponding liabilities denominated in the domestic currency.
3 This lower risk weight may be extended to the risk-weighting of collateral and guarantees under the CRM framework (chapter 9)Exposures to Public Sector Entities (PSEs)
7.5 For the purposes of RWA treatment, domestic PSEs in general include government authorities, administrative and/or statutory bodies responsible to the government, which may be owned, controlled, and/or mostly funded by the government and not involved in any commercial undertakings.
7.6 Exposures to domestic PSEs will be risk-weighted based on the external rating of the Saudi sovereign external rating
Risk weight table for PSEs Based on external rating of sovereign Table 2 External rating of the sovereign AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– Unrated Risk weight 20% 50% 100% 100% 150% 100% 7.7 Foreign PSEs, including PSEs in GCC countries, shall be assigned a risk weight based on the external rating of the PSE respective country’s sovereign rating.
Exposures to Multilateral Development Banks (MDBs)
7.8 For the purposes of calculating capital requirements, a Multilateral Development Bank (MDB) is an institution created by a group of countries that provides financing and professional advice for economic and social development projects. MDBs have large sovereign memberships and may include both developed and /or developing countries. Each MDB has its own independent legal and operational status, but with a similar mandate and a considerable number of joint owners.
7.9 A 0% risk weight will be applied to exposures to specified MDBs that are recognized by the Basel Committee for Banking Supervision (BCBS) for fulfilling the following eligibility criteria:
1. very high-quality long-term issuer ratings, i.e. a majority of an MDB’s externalratings must be AAA;4
2. either the shareholder structure comprises a significant proportion of sovereigns with long-term issuer external ratings of AA– or better, or the majority of the MDB’s fund-raising is in the form of paid-in equity/capital and there is little or no leverage;
3. strong shareholder support demonstrated by the amount of paid-in capital contributed by the shareholders; the amount of further capital the MDBs have the right to call, if required, to repay their liabilities; and continued capital contributions and new pledges from sovereign shareholders;
4. adequate level of capital and liquidity (a case-by-case approach is necessary in order to assess whether each MDB’s capital and liquidity are adequate); and,
5. strict statutory lending requirements and conservative financial policies, which would include among other conditions a structured approval process,internal creditworthiness and risk concentration limits (per country, sector, and individual exposure and credit category), large exposures approval by the board or a committee of the board, fixed repayment schedules, effective monitoring of use of proceeds, status review process, and rigorous assessment of risk and provisioning to loan loss reserve.
7.10 The specified MDBs eligible for a 0% risk weight are as follows. This list is subject to review by SAMA from time to time.
1. The World Bank Group comprising the International Bank for Reconstruction and Development;
2. The International Finance Corporation;
3. The Multilateral Investment Guarantee Agency and the International Development Association;
4. The Asian Development Bank;
5. The African Development Bank;
6. The European Bank for Reconstruction and Development;
7. The Inter-American Development Bank;
8. The European Investment Bank,
9. The European Investment Fund;
10. The Caribbean Development Bank,
11. The Islamic Development Bank
12. The Nordic Investment Bank;
13. The Council of Europe Development Bank;
14. The International Finance Facility for Immunization; and
15. The Asian Infrastructure Investment Bank.
7.11 For exposures to all other MDBs, banks will assign to their MDB exposures the corresponding “base” risk weights determined by the external ratings according to Table 3.
Risk weight table for MDB exposures Table 3 External rating of counterparty AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– Unrated “Base” risk weight 20% 30% 50% 100% 150% 50% 4 MDBs that request to be added to the list of MDBs eligible for a 0% risk weight must comply with the AAA rating criterion at the time of the application to the BCBS. Once included in the list of eligible MDBs, the rating may be downgraded, but in no case lower than AA–. Otherwise, exposures to such MDBs will be subject to the treatment set out in paragraph 7.11
Exposures to Banks
7.12 For the purposes of calculating capital requirements, a bank exposure is defined as a claim (including loans and senior debt instruments, unless considered as subordinated debt for the purposes of paragraph 7.52) on any financial institution that is licensed to take deposits from the public and is subject to appropriate prudential standards and level of supervision5. The treatment associated with subordinated bank debt and equities is addressed in paragraphs 7.46 to 7.52.
Risk weight determination
7.13 Bank exposures will be risk-weighted based on the following hierarchy:
1. External Credit Risk Assessment Approach (ECRA): This approach applies to all rated exposures to banks. Banks will apply chapter 8 to determine which rating can be used and for which exposures.
2. Standardized Credit Risk Assessment Approach (SCRA): This approach is applicable to all exposures to banks that are unrated.
External Credit Risk Assessment Approach (ECRA)
7.14 Banks will assign to their rated bank exposures6 the corresponding “base” risk weights determined by the external ratings according to Table 4. Such ratings must not incorporate assumptions of implicit government support7, unless the rating refers to a public bank owned by its government. Banks may continue to use external ratings, which incorporate assumptions of implicit government support for up to a period of five years, from the date of effective implementation of this framework, when assigning the “base” risk weights in Table 4 to their bank exposures.
Risk weight table for bank exposures External Credit Risk Assessment Approach (ECRA) Table 4 External rating of counterparty AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– “Base” risk weight 20% 30% 50% 100% 150% Risk weight for short-term exposures 20% 20% 20% 50% 150% 7.15 Exposures to banks with an original maturity of three months or less, as well as exposures to banks that arise from the movement of goods across national borders with an original maturity of six months or less8 can be assigned a risk weight that correspond to the risk weights for short term exposures in Table 4.
7.16 Banks must perform due diligence to ensure that the external ratings appropriately and conservatively reflect the creditworthiness of the bank counterparties. If the due diligence analysis reflects higher risk characteristics than that implied by the external rating bucket of the exposure (i.e. AAA to AA– ; A+ to A– etc.), the bank must assign a risk weight at least one bucket higher than the “base” risk weight determined by the external rating. Due diligence analysis must never result in the application of a lower risk weight than that determined by the external rating.
Standardized Credit Risk Assessment Approach (SCRA)
7.17 Banks will apply the SCRA to all their unrated bank exposures. The SCRA requires banks to classify bank exposures into one of three risk-weight buckets (i.e. Grades A, B and C) and assign the corresponding risk weights in Table 5. Under the SCRA, exposures to banks without an external credit rating may receive a risk weight of 30%, provided that the counterparty bank has a Common Equity Tier 1 ratio which meets or exceeds 14% and a Tier 1 leverage ratio which meets or exceeds 5%. The counterparty bank must also satisfy all the requirements for Grade A classification. For the purposes of SCRA only, “published minimum regulatory requirements” in paragraphs 7.18 to 7.26 excludes liquidity standards.
Risk weight table for bank exposures Standardized Credit Risk Assessment Approach (SCRA) Table 5 Credit risk assessment of counterparty Grade A Grade B Grade C “Base” risk weight 40% 75% 150% Risk weight for shortterm exposures 20% 50% 150% SCRA: Grade A
7.18 Grade A refers to exposures to banks, where the counterparty bank has adequate capacity to meet their financial commitments (including repayments of principal and interest) in a timely manner, for the projected life of the assets or exposures and irrespective of the economic cycles and business conditions.
7.19 A counterparty bank classified into Grade A must meet or exceed the published minimum regulatory requirements and buffers established by its national supervisor as implemented in the jurisdiction where it is incorporated, except for bank-specific minimum regulatory requirements or buffers that may be imposed through supervisory actions (e.g. via the Supervisory Review Process) and not made public. If such minimum regulatory requirements and buffers (other than bank-specific minimum requirements or buffers) are not publicly disclosed or otherwise made available by the counterparty bank, then the counterparty bank must be assessed as Grade B or lower.
7.20 If as part of its due diligence, a bank assesses that a counterparty bank does not meet the definition of Grade A in paragraphs 7.18 and 7.19, exposures to the counterparty bank must be classified as Grade B or Grade C.
SCRA: Grade B
7.21 Grade B refers to exposures to banks, where the counterparty bank is subject to substantial credit risk, such as repayment capacities that are dependent on stable or favorable economic or business conditions.
7.22 A counterparty bank classified into Grade B must meet or exceed the published minimum regulatory requirements (excluding buffers) established by its national supervisor as implemented in the jurisdiction where it is incorporated, except for bank-specific minimum regulatory requirements that may be imposed through supervisory actions (e.g. via the Supervisory Review Process) and not made public. If such minimum regulatory requirements are not publicly disclosed or otherwise made available by the counterparty bank then the counterparty bank must be assessed as Grade C.
7.23 Banks will classify all exposures that do not meet the requirements outlined in paragraphs 7.18 and 7.19 into Grade B, unless the exposure falls within Grade C under paragraphs 7.24 to 7.26.
SCRA: Grade C
7.24 Grade C refers to higher credit risk exposures to banks, where the counterparty bank has material default risks and limited margins of safety. For these counterparties, adverse business, financial, or economic conditions are very likely to lead, or have led, to an inability to meet their financial commitments.
7.25 At a minimum, if any of the following triggers is breached, a bank must classify the exposure into Grade C:
1. The counterparty bank does not meet the criteria for being classified as Grade B with respect to its published minimum regulatory requirements, asset out in paragraphs 7.21 and 7.22 or
2. Where audited financial statements are required, the external auditor has issued an adverse audit opinion or has expressed substantial doubt about the counterparty bank’s ability to continue as a going concern in its financial statements or audited reports within the previous 12 months.
7.26 Even if the triggers set out in paragraph 7.25 are not breached, a bank may assess that the counterparty bank meets the definition in paragraph 7.24. In that case, the exposure to such counterparty bank must be classified into Grade C.
7.27 Exposures to banks with an original maturity of three months or less, as well as exposures to banks that arise from the movement of goods across national borders with an original maturity of six months or less,9 can be assigned a risk weight that correspond to the risk weights for short term exposures in Table 5.
7.28 To reflect transfer and convertibility risk under the SCRA, a risk-weight floor based on the risk weight applicable to exposures to the sovereign of the country where the bank counterparty is incorporated will be applied to the risk weight assigned to bank exposures. The sovereign floor applies when:
i. The exposure is not in the local currency of the jurisdiction of incorporation of the debtor bank; and
ii. For a borrowing booked in a branch of the debtor bank in a foreign jurisdiction, when the exposure is not in the local currency of the jurisdiction in which the branch operates. The sovereign floor will not apply to short-term (i.e. with a maturity below one year) self-liquidating, trade-related contingent items that arise from the movement of goods.
5 For internationally active banks, appropriate prudential standards (e.g. capital and liquidity requirements) and level of supervision should be in accordance with the Basel framework.
6 An exposure is rated from the perspective of a bank if the exposure is rated by a recognized “eligible credit assessment institution” (ECAI) which has been nominated by the bank (i.e. the bank has informed SAMA of its intention to use the ratings of such ECAI for regulatory purposes in a consistent manner paragraph 8.8 In other words, if an external rating exists but the credit rating agency is not a recognized ECAI by SAMA, or the rating has been issued by an ECAI which has not been nominated by the bank, the exposure would be considered as being unrated from the perspective of the bank
7 Implicit government support refers to the notion that the government would act to prevent bank creditors from incurring losses in the event of a bank default or bank distress.
8 This may include on-balance sheet exposures such as loans and off- balance sheet exposures such as self-liquidating trade-related contingent items.
9 This may include on-balance sheet exposures such as loans and off-balance sheet exposures such as self-liquidating trade-related contingent items.Exposures to Covered Bonds
7.29 Covered bonds are bonds issued by a bank or mortgage institution that are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.
Eligible assets
7.30 In order to be eligible for the risk weights set out in paragraph 7.34 the underlying assets (the cover pool) of covered bonds as defined in paragraph 7.29 shall meet the requirements set out in paragraph 7.33 and shall include any of the following:
1. claims on, or guaranteed by, sovereigns, their central banks, public sector entities or multilateral development banks;
2. claims secured by residential real estate that meet the criteria set out in paragraph 7.63 and with a loan-to-value ratio of 80% or lower;
3. claims secured by commercial real estate that meets the criteria set out in paragraph 7.63 and with a loan-to-value ratio of 60% or lower; or
4. Claims on, or guaranteed by banks that qualify for a 30% or lower risk weight. However, such assets cannot exceed 15% of covered bond issuances.
7.31 The nominal value of the pool of assets assigned to the covered bond instrument (s) by its issuer should exceed its nominal outstanding value by at least 10%. The value of the pool of assets for this purpose does not need to be that required by the legislative framework. However, if the legislative framework does not stipulate a requirement of at least 10%, the issuing bank needs to publicly disclose on a regular basis that their cover pool meets the 10% requirement in practice. In addition to the primary assets listed in this paragraph, additional collateral may include substitution assets (cash or short term liquid and secure assets held in substitution of the primary assets to top up the cover pool for management purposes) and derivatives entered into for the purposes of hedging the risks arising in the covered bond program.
7.32 The conditions set out in paragraphs 7.30 and 7.31 must be satisfied at the inception of the covered bond and throughout its remaining maturity.
Disclosure requirements
7.33 Exposures in the form of covered bonds are eligible for the treatment set out in paragraph 7.34, provided that the bank investing in the covered bonds can demonstrate to SAMA that:
1. It receives portfolio information at least on:
(a) the value of the cover pool and outstanding covered bonds;
(b) the geographical distribution and type of cover assets, loan size, interest rate and currency risks;
(c) the maturity structure of cover assets and covered bonds; and
(d) the percentage of loans more than 90 days past due; and
2. The issuer makes the information referred to in point (1) available to the bank at least semi-annually.
7.34 Covered bonds that meet the criteria set out in paragraphs 7.30 to 7.33 shall be risk-weighted based on the issue-specific rating or the issuer’s risk weight according to the rules outlined in chapter 8. For covered bonds with issue-specific ratings10, the risk weight shall be determined according to Table 6. For unrated covered bonds, the risk weight would be inferred from the issuer’s ECRA or SCRA risk weight according to Table 7.
Risk weight table for rated covered bond exposures Table 6 Issue-specific rating of the covered bond AAA to AA– A+ to A– BBB+ to BBB– BB+ to B– Below B– “Base” risk weight 10% 20% 20% 50% 100% Risk weight table for unrated covered bond exposures Table 7 Risk weight of the issuing bank 20% 30% 40% 50% 75% 100% 150% “Base” risk weight 10% 15% 20% 25% 35% 50% 100% 7.35 Banks must perform due diligence to ensure that the external ratings appropriately and conservatively reflect the creditworthiness of the covered bond and the issuing bank. If the due diligence analysis reflects higher risk characteristics than that implied by the external rating bucket of the exposure (i.e. AAA to AA–; A+ to A– etc.), the bank must assign a risk weight at least one bucket higher than the “base” risk weight determined by the external rating. Due diligence analysis must never result in the application of a lower risk weight than that determined by the external rating.
10 An exposure is rated from the perspective of a bank if the exposure is rated by a recognized ECAI which has been nominated by the bank (i.e. the bank has informed its supervisor of its intention to use the ratings of such ECAI for regulatory purposes in a consistent manner (see paragraph 8.8). In other words, if an external rating exists but the credit rating agency is not a recognized ECAI by SAMA, or the rating has been issued by an ECAI, which has not been nominated by the bank, the exposure would be considered as being unrated from the perspective of the bank.
Exposures to Securities Firms and Other Financial Institutions
7.36 Exposures to all securities firms and financial institutions will be treated as exposures to corporates.
Exposures to Corporates
7.37 Exposures to corporates include exposures (loans, bonds, receivables, etc.) to incorporated entities, associations, partnerships, proprietorships, trusts, funds and other entities with similar characteristics, except those, which qualify for one of the other exposure classes. The treatment associated with subordinated debt and equities of these counterparties is addressed in paragraphs 7.46 to 7.54. The corporate exposure class includes exposures to insurance companies and other financial corporates that do not meet the definitions of exposures to banks, or securities firms and other financial institutions, as determined in paragraphs 7.12 and 7.36 respectively. The corporate exposure class does not include exposures to individuals. The corporate exposure class differentiates between the following subcategories:
1. General corporate exposures;
2. Specialized lending exposures, as defined in paragraph 7.41
General corporate exposures
7.38 For corporate exposures, banks will assign “base” risk weights according to Table 8. Banks must perform due diligence to ensure that the external ratings appropriately and conservatively reflect the creditworthiness of the counterparties. Banks which have assigned risk weights to their rated bank exposures based on paragraph 7.14 must assign risk weights for all their corporate exposures according to Table 8. If the due diligence analysis reflects higher risk characteristics than that implied by the external rating bucket of the exposure (i.e. AAA to AA–; A+ to A– etc.), the bank must assign a risk weight at least one bucket higher than the “base” risk weight determined by the external rating. Due diligence analysis must never result in the application of a lower risk weight than that determined by the external rating.
7.39 Where banks have overseas operations, unrated corporate exposures of banks incorporated in jurisdictions that allow the use of external ratings for regulatory purposes will receive a 100% risk weight, with the exception of unrated exposures to corporate micro, small or medium-sized entities (MSMEs), as described in paragraph 7.40.
Risk weight table for corporate exposures Table 8 External rating of counterparty AAA to AA– A+ to A– BBB+ to BBB– BB+ to BB– Below BB– Unrated “Base” risk weight 20% 50% 75% 100% 150% 100% 7.40 The definitions of MSMEs shall continue to apply as per SAMA Circular No. 381000064902, Date: 15 March 2017 or any subsequent circulars, corporate MSMEs for the purpose of capital requirements are defined as corporate exposures where the reported annual revenues for the consolidated group of which the corporate MSME counterparty is a part is less than or equal to SAR 200 million for the most recent financial year. For unrated exposures to corporate MSMEs, an 85% risk weight will be applied. Exposures to MSMEs that meet the criteria in paragraphs 7.57 will be treated as regulatory retail MSME exposures and risk weighted at 75%.
Specialized lending
7.41 A corporate exposure will be treated as a specialized lending exposure if such lending possesses some or all of the following characteristics, either in legal formor economic substance:
1. The exposure is not related to real estate and is within the definitions of object finance, project finance or commodities finance under paragraph 7.42. If the activity is related to real estate, the treatment would be determined in accordance with paragraphs 7.61 to 7.83;
2. The exposure is typically to an entity (often a special purpose vehicle (SPV)) that was created specifically to finance and/or operate physical assets;
3. The borrowing entity has few or no other material assets or activities, and therefore little or no independent capacity to repay the obligation, apart from the income that it receives from the asset(s) being financed. The primary source of repayment of the obligation is the income generated by the asset(s), rather than the independent capacity of the borrowing entity; and
4. The terms of the obligation give the lender a substantial degree of control over the asset(s) and the income that it generates.
7.42 Exposures described in paragraph 7.41 will be classified in one of the following three subcategories of specialized lending:
1. Project finance
Refers to the method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the loan. This type of financing is usually for large, complex and expensive installations such as power plants, chemical processing plants, mines, transportation infrastructure, environment, media, and telecoms. Project finance may take the form of financing the construction of a new capital installation, or refinancing of an existing installation, with or without improvements.
2. Object finance
Refers to the method of funding the acquisition of equipment (e.g. ships, aircraft, satellites, railcars, and fleets) where the repayment of the loan is dependent on the cash flows generated by the specific assets that have been financed and pledged or assigned to the lender.
3. Commodities finance
Refers to short-term lending to finance reserves, inventories, or receivables of exchange-traded commodities (e.g. crude oil, metals, or crops), where the loan will be repaid from the proceeds of the sale of the commodity and the borrower has no independent capacity to repay the loan.
7.43 Banks will assign to their specialized lending exposures the risk weights determined by the issue-specific external ratings, if these are available, according to Table 8. Issuer ratings must not be used (i.e. paragraph 8.13 does not apply in the case of specialized lending exposures).
7.44 For specialized lending exposures for which an issue-specific external rating is not available, and for all specialized lending exposures of banks incorporated in jurisdictions that do not allow the use of external ratings for regulatory purposes, the following risk weights will apply:
1. Object and commodities finance exposures will be risk-weighted at 100%;
2. Project finance exposures will be risk-weighted at 130% during the pre-operational phase and 100% during the operational phase. Project finance exposures in the operational phase, which are deemed to be high quality, as described in paragraph 7.45,will be risk weighted at 80%. For this purpose, operational phase is defined as the phase in which the entity that was specifically created to finance the project has
(a) a positive net cash flow that is sufficient to cover any remaining contractual obligation, and
(b) Declining long-term debt.
7.45 A high quality project finance exposure refers to an exposure to a project finance entity that is able to meet its financial commitments in a timely manner and its ability to do so is assessed to be robust against adverse changes in the economic cycle and business conditions. The following conditions must also be met:
1. The project finance entity is restricted from acting to the detriment of the creditors (e.g. by not being able to issue additional debt without the consent of existing creditors);
2. The project finance entity has sufficient reserve funds or other financial arrangements to cover the contingency funding and working capital requirements of the project;
3. The revenues are availability-based11 or subject to a rate-of-return regulation or take-or-pay contract;
4. The project finance entity’s revenue depends on one main counterparty and this main counterparty shall be a central government, PSE or a corporate entity with a risk weight of 80% or lower;
5. The contractual provisions governing the exposure to the project finance entity provide for a high degree of protection for creditors in case of a default of the project finance entity;
6. The main counterparty or other counterparties which similarly comply with the eligibility criteria for the main counterparty will protect the creditors from the losses resulting from a termination of the project;
7. All assets and contracts necessary to operate the project have been pledged to the creditors to the extent permitted by applicable law; and
8. Creditors may assume control of the project finance entity in case of its default.
11 Availability-based revenues mean that once construction is completed, the project finance entity is entitled to payments from its contractual counterparties (e.g. the government), as long as contract conditions are fulfilled. Availability payments are sized to cover operating and maintenance costs, debt service costs and equity returns as the project finance entity operates the project. Availability payments are not subject to swings in demand, such as traffic levels, and are adjusted typically only for lack of performance or lack of availability of the asset to the public
Subordinated Debt, Equity and Other Capital Instruments
7.46 The treatment described in paragraphs 7.50 to 7.52. applies to subordinated debt, equity and other regulatory capital instruments issued by either corporates or banks, provided that such instruments are not deducted from regulatory capital or risk-weighted at 250% according to the Regulatory Capital Under Basel III Framework (Article 4.4 – Section A of SAMA Circular No. 341000015689, Date: 19 December 2012), or risk weighted at 1250% according to paragraph 7.54. It also excludes equity investments in funds treated under chapter 24.
7.47 Equity exposures are defined on the basis of the economic substance of the instrument. They include both direct and indirect ownership interests,12 whether voting or non-voting, in the assets and income of a commercial enterprise or of a financial institution that is not consolidated or deducted. An instrument is considered to be an equity exposure if it meets all of the following requirements:
1. It is irredeemable in the sense that the return of invested funds can be achieved only by the sale of the investment or sale of the rights to the investment or by the liquidation of the issuer;
2. It does not embody an obligation on the part of the issuer; and
3. It conveys a residual claim on the assets or income of the issuer.
7.48 In addition to instruments classified as equity as a result of paragraph 7.47, the following instruments must be categorized as an equity exposure:
1. An instrument with the same structure as those permitted as Tier 1 capital for banking organizations.
2. An instrument that embodies an obligation on the part of the issuer and meets any of the following conditions:
(a) The issuer may defer indefinitely the settlement of the obligation;
(b) The obligation requires (or permits at the issuer’s discretion) settlement by issuance of a fixed number of the issuer’s equity shares;
(c) The obligation requires (or permits at the issuer’s discretion) settlement by issuance of a variable number of the issuer’s equity shares and (ceteris paribus) any change in the value of the obligation is attributable to, comparable to, and in the same direction as, the change in the value of a fixed number of the issuer’s equity shares13; or,
(d) The holder has the option to require that the obligation be settled in equity shares, unless either (i) in the case of a traded instrument, SAMA is content that the bank has demonstrated that the instrument trades more like the debt of the issuer than like its equity, or (ii) in the case of non-traded instruments, SAMA is content that the bank has demonstrated that the instrument should be treated as a debt position. In cases (i) and (ii), the bank may decompose the risks for regulatory purposes, with the approval of SAMA.
7.49 Debt obligations and other securities, partnerships, derivatives or other vehicles structured with the intent of conveying the economic substance of equity ownership are considered an equity holding14. This includes liabilities from which the return is linked to that of equities15. Conversely, equity investments that are structured with the intent of conveying the economic substance of debt holdings or securitization exposures would not be considered an equity holding.16
7.50 Banks will assign a risk weight of 400% to speculative unlisted equity exposures described in paragraph 7.51 and a risk weight of 250% to all other equity holdings.
7.51 Speculative unlisted equity exposures are defined as equity investments in unlisted companies that are invested for short-term resale purposes or are considered venture capital or similar investments, which are subject to price volatility and are acquired in anticipation of significant future capital gains17.
7.52 Banks will assign a risk weight of 150% to subordinated debt and capital instruments other than equities.
7.53 Notwithstanding the risk weights specified in paragraphs 7.50 to 7.52, the risk weight for investments in significant minority- or majority-owned and – controlled commercial entities depends upon the application of two materiality thresholds:
1. For individual investments, 15% of the bank’s capital; and
2. For the aggregate of such investments, 60% of the bank’s capital.
7.54 Investments in significant minority- or majority-owned and –controlled commercial entities below the materiality thresholds in paragraph 7.52 must be risk- weighted as specified in paragraphs 7.47 to 7.52. Investments in excess of the materiality thresholds must be risk-weighted at 1250%.
12 Indirect equity interests include holdings of derivative instruments tied to equity interests, and holdings in corporations, partnerships, limited liability companies or other types of enterprises that issue ownership interests and are engaged principally in the business of investing in equity instruments.
13 For certain obligations that require or permit settlement by issuance of a variable number of the issuer’s equity shares, the change in the monetary value of the obligation is equal to the change in the fair value of a fixed number of equity shares multiplied by a specified factor. Those obligations meet the conditions of item (c) if both the factor and the referenced number of shares are fixed. For example, an issuer may be required to settle an obligation by issuing shares with a value equal to three times the appreciation in the fair value of 1,000 equity shares. That obligation is considered to be the same as an obligation that requires settlement by issuance of shares equal to the appreciation in the fair value of 3,000 equity shares.
14 Equities that are recorded as a loan but arise from a debt/equity swap made as part of the orderly realization or restructuring of the debt are included in the definition of equity holdings. However, these instruments may not attract a lower capital charge than would apply if the holdings remained in the debt portfolio.
15 SAMA may decide not to require that such liabilities be included where they are directly hedged by an equity holding, such that the net position does not involve material risk.
16 SAMA may consider to re-characterize debt holdings as equites for regulatory purposes and to otherwise ensure the proper treatment of holdings under the supervisory review process.
17 For example, investments in unlisted equities of corporate clients with which the bank has or intends to establish a long-term business relationship and debt-equity swaps for corporate restructuring purposes would be excluded.Retail Exposure Class
7.55 The retail exposure class excludes exposures within the real estate exposure class. The retail exposure class includes the following types of exposures:
1. Exposures to an individual person or persons; and
2. Exposures to MSMEs (as defined in paragraph 7.40) that meet the “regulatory retail” criteria set out in paragraph 7.57 below. Exposures to MSMEs that do not meet these criteria will be treated as corporate MSMEs exposures under paragraph 7.40.
7.56 Exposures within the retail exposure class will be treated according to paragraphs 7.57 to 7.59 below. For the purpose of determining risk weighted assets, the retail exposure class consists of the follow three sets of exposures:
1. “Regulatory retail” exposures that do not arise from exposures to “transactors” (as defined in paragraph 7.58).
2. “Regulatory retail” exposures to “transactors”.
3. “Other retail” exposures.
7.57 “Regulatory retail” exposures are defined as retail exposures that meet all of the criteria listed below:
1. Product criterion:
The exposure takes the form of any of the following: revolving credits and lines of credit (including credit cards, charge cards and overdrafts), personal term loans and leases (e.g. instalment loans, auto loans and leases, student and educational loans, personal finance) and small business facilities and commitments. Mortgage loans, derivatives and other securities (such as bonds and equities), whether listed or not, are specifically excluded from this category.
2. Low value of individual exposures:
The maximum aggregated exposure to one counterparty cannot exceed an absolute threshold of SAR 4.46 million.
3. Granularity criterion:
No aggregated exposure to one counterparty18 can exceed 0.2%19 of the overall regulatory retail portfolio. Defaulted retail exposures are to be excluded from the overall regulatory retail portfolio when assessing the granularity criterion.
7.58 “Transactors” are obligors in relation to facilities such as credit cards and charge cards where the balance has been repaid in full at each scheduled repayment date for the previous 12 months. Obligors in relation to overdraft facilities would also be considered as transactors if there has been no drawdown over the previous 12 months.
7.59 “Other retail” exposures are defined as exposures to an individual person or persons that do not meet all of the regulatory retail criteria in paragraph 7.57.
7.60 The risk weights that apply to exposures in the retail asset class are as follows:
1. Regulatory retail exposures that do not arise from exposures to transactors (as defined in paragraph 7.58) will be risk weighted at 75%.
2. Regulatory retail exposures that arise from exposures to transactors (as defined in paragraph 7.58)will be risk weighted at 45%.
3. Other retail exposures will be risk weighted at 100%.
18 Aggregated exposure means gross amount (i.e. not taking any credit risk mitigation into account) of all forms of retail exposures, excluding residential real estate exposures. In case of off-balance sheet claims, the gross amount would be calculated after applying credit conversion factors. In addition, “to one counterparty” means one or several entities that may be considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the limit would apply to the bank’s aggregated exposure on both businesses).
19 To apply the 0.2% threshold of the granularity criterion, banks must: first, identify the full set of exposures in the retail exposure class (as defined in paragraph 7.55); second, identify the subset of exposure that meet product criterion and do not exceed the threshold for the value of aggregated exposures to one counterparty (as defined in paragraph 7.57); and third, exclude any exposures that have a value greater than 0.2% of the subset before exclusionsReal Estate Exposure Class
7.61 Real estate is immovable property that is land, including agricultural land and forest, or anything treated as attached to land, in particular buildings, in contrast to being treated as movable/personal property. The real estate exposure asset class consists of:
1. Exposures secured by real estate that are classified as “regulatory real estate” exposures.
2. Exposures secured by real estate that are classified as “other real estate” exposures.
3. Exposures that are classified as “land acquisition, development and construction” (ADC) exposures.
7.62 “Regulatory real estate” exposures consist of:
1. “Regulatory residential real estate” exposures that are not “materially dependent on cash flows generated by the property”.
2. “Regulatory residential real estate” exposures that are “materially dependent on cash flows generated by the property”.
3. “Regulatory commercial real estate” exposures that are not “materially dependent on cash flows generated by the property”.
4. “Regulatory commercial real estate” exposures that are “materially dependent on cash flows generated by the property”.
Regulatory real estate exposures
7.63 For an exposure secured by real estate to be classified as a “regulatory real estate” exposure, the loan must meet the following requirements:
1. Finished property:
The exposure must be secured by a fully completed immovable property. This requirement does not apply to forest, desert and agricultural land. This criteria can be met by loans to individuals that are secured by residential property under construction or land upon which residential property would be constructed, provided that: (i) the property is a one-to-four family residential housing unit that will be the primary residence of the borrower and the lending to the individual is not, in effect, indirectly financing land acquisition, development and construction exposures described in paragraph 7.82; or (ii) sovereign or PSEs involved have the legal powers and ability to ensure that the property under construction will be finished.
2. Legal enforceability:
Any claim on the property taken must be legally enforceable in all relevant jurisdictions. The collateral agreement and the legal process underpinning it must be such that they provide for the bank to realize the value of the property within a reasonable time frame.
3. Claims over the property:
The loan is a claim over the property where the lender bank holds a first lien over the property, or a single bank holds the first lien and any sequentially lower ranking lien(s) (i.e. there is no intermediate lien from another bank) over the same property. However, where junior liens20 provide the holder with a claim for collateral that is legally enforceable and constitute an effective credit risk mitigant, junior liens held by a different bank than the one holding the senior lien mayalso be recognized.21 In order to meet the above requirements, the national frameworks governing liens should ensure the following: (i) each bank holding a lien on a property can initiate the sale of the property independently from other entities holding a lien on the property; and (ii) where the sale of the property is not carried out by means of a public auction, entities holding a senior lien take reasonable steps to obtain a fair market value or the best price that may be obtained in the circumstances when exercising any power of sale on their own (i.e. it is not possible for the entity holding the senior lien to sell the property on its own at a discounted value in detriment of the junior lien).
4. Ability of the borrower to repay:
The borrower must meet the requirements set according to paragraph 7.65.
5. Prudent value of property:
The property must be valued according to the criteria in paragraphs 7.66 to 7.68 for determining the value in the loan-to- value ratio (LTV). Moreover, the value of the property must not depend materially on the performance of the borrower.
6. Required documentation:
All the information required at loan origination and for monitoring purposes must be properly documented, including information on the ability of the borrower to repay and on the valuation of the property.
7.64 SAMA may require banks to increase the risk weights in the corresponding risk weight tables as appropriate if they are determined to be too low for real estate exposures based on default experience and other factors such as market price stability. Banks will be informed accordingly.
7.65 Banks should put in place underwriting policies with respect to the granting of mortgage loans that include the assessment of the ability of the borrower to repay. Underwriting policies must define a metric(s) (such as the loan’s debt service coverage ratio) and specify its (their) corresponding relevant level(s) to conduct such assessment22. Underwriting policies must also be appropriate when the repayment of the mortgage loan depends materially on the cash flows generated by the property, including relevant metrics (such as an occupancy rate of the property).
7.66 The LTV is the amount of the loan divided by the value of the property. When calculating the LTV, the loan amount will be reduced as the loan amortizes. The value of the property will be maintained at the value measured at origination, with the following exceptions:
1. SAMA may require banks to revise the property value downward. If the value has been adjusted downwards, a subsequent upwards adjustment can be made but not to a higher value than the value at origination.
2. The value must be adjusted if an extraordinary, idiosyncratic event occurs resulting in a permanent reduction of the property value.
3. Modifications made to the property that unequivocally increase its value could also be considered in the LTV.
7.67 The LTV must be prudently calculated in accordance with the following requirements:
1. Amount of the loan:
Includes the outstanding loan amount and any undrawn committed amount of the mortgage loan23. The loan amount must be calculated gross of any provisions and other risk mitigants, except for pledged deposits accounts with the lending bank that meet all requirements for on-balance sheet netting and have been unconditionally and irrevocably pledged for the sole purposes of redemption of the mortgage loan.24
2. Value of the property:
The valuation must be appraised independently25 using prudently conservative valuation criteria. To ensure that the value of the property is appraised in a prudently conservative manner, the valuation must exclude expectations on price increases and must be adjusted to take into account the potential for the current market price to be significantly above the value that would be sustainable over the life of the loan.26
7.68 A guarantee or financial collateral may be recognized as a credit risk mitigant in relation to exposures secured by real estate if it qualifies as eligible collateral under the credit risk mitigation framework (chapter 9). This may include mortgage insurance27 if it meets the operational requirements of the credit risk mitigation framework for a guarantee. Banks may recognize these risk mitigants in calculating the exposure amount; however, the LTV bucket and risk weight to be applied to the exposure amount must be determined before the application of the appropriate credit risk mitigation technique.
Definition of “regulatory residential real estate” exposures
7.69 A “regulatory residential real estate” exposure is a regulatory real estate exposure that is secured by a property that has the nature of a dwelling and satisfies all applicable laws and regulations enabling the property to be occupied for housing purposes (i.e. residential property).28
Definition of “regulatory commercial real estate” exposures
7.70 A “regulatory commercial real estate” exposure is regulatory real estate exposure that is not a regulatory residential real estate exposure.
Definition of exposures that are “materially dependent on cash flows generated by the property”
7.71 Regulatory real estate exposures (both residential and commercial) are classified as exposures that are “materially dependent on cash flows generated by the property” when the prospects for servicing the loan materially depend on the cash flows generated by the property securing the loan rather than on the underlying capacity of the borrower to service the debt from other sources. The primary source of these cash flows would generally be lease or rental payments, or the sale of the property. The distinguishing characteristic of these exposures compared to other regulatory real estate exposures is that both the servicing of the loan and the prospects for recovery in the event of default depend materially on the cash flows generated by the property securing the exposure.
7.72 It is expected that the material dependence condition, set out in paragraph 7.71 above, would predominantly apply to loans to corporates, MSMEs or SPVs, but is not restricted to those borrower types. As an example, a loan may be considered materially dependent if more than 50% of the income from the borrower used in the bank's assessment of its ability to service the loan is from cash flows generated by the residential property.
7.73 As exceptions to the definition contained in paragraph 7.71 above, the following types of regulatory real estate exposures are not classified as exposures that are materially dependent on cash flows generated by the property:
1. An exposure secured by a property that is the borrower’s primary residence;
2. An exposure secured by an income-producing residential housing unit, to an individual who has mortgaged less than two properties or housing units;
3. An exposure secured by residential real estate property to associations or cooperatives of individuals that are regulated under national law and exist with the only purpose of granting its members the use of a primary residence in the property securing the loans; and
4. An exposure secured by residential real estate property to public housing companies and not-for-profit associations regulated under national law that exist to serve social purposes and to offer tenants long-term housing.
Risk weights for regulatory residential real estate exposures that are not materially dependent on cash flows generated by the property
7.74 For regulatory residential real estate exposures that are not materially dependent on cash flow generated by the property, the risk weight to be assigned to the total exposure amount will be determined based on the exposure’s LTV ratio in Table 9 below. The use of the risk weights in Table 9 is referred to as the “whole loan” approach.
Whole loan approach risk weights for regulatory residential real estate exposures that are not materially dependent on cash flows generated by the property Table 9 Risk weight LTV ≤ 50% 50% < LTV ≤ 60% 60% < LTV ≤ 80% 80% < LT ≤ 90% 90% < LTV ≤ 100% LTV > 100% 20% 25% 30% 40% 50% 70% 7.75 As an alternative to the whole loan approach for regulatory residential real estate exposures that are not materially dependent on cash flows generated by the property, banks may apply the “loan splitting” approach. Under the loan splitting approach, the risk weight of 20% is applied to the part of the exposure up to 55% of the property value and the risk weight of the counterparty (as prescribed in paragraph Error! Reference source not found.) is applied to the residual exposure29. Where there are liens on the property that are not held by the bank, the treatment is as follows:
1. Where a bank holds the junior lien and there are senior liens not held by the bank, to determine the part of the bank’s exposure that is eligible for the 20% risk weight, the amount of 55% of the property value should be reduced by the amount of the senior liens not held by the bank. For example, for a loan of SAR 70,000 to an individual secured on a property valued at SAR 100,000, where there is also a senior ranking lien of SAR 10,000 held by another institution, the bank will apply a risk weight of 20% to SAR 45,000 (=max (SAR 55,000 – SAR 10,000, 0)) of the exposure and, according to paragraph Error! Reference source not found. a risk weight of 75% to the residual exposure of SAR 25,000. (this does not take into account the other loan taken by the borrower from the senior lien holder).
2. Where liens not held by the bank rank pari passu with the bank’s lien, to determine the part of the bank’s exposure that is eligible for the 20% risk weight, the amount of 55% of the property value, reduced by the amount of more senior liens not held by the bank (if any), should be reduced by the product of:
(i) 55% of the property value, reduced by the amount of any senior liens (if any, both held by the bank and held by other institutions); and
(ii) The amount of liens not held by the bank that rank pari passu with the bank’s lien divided by the sum of all pari passu liens. For example, for a loan of SAR 70,000 to an individual secured on a property valued at SAR 100,000, where there is also a pari passu ranking lien of SAR 10,000 held by another institution, the bank will apply a risk weight of 20% to SAR 48,125 (=SAR 55,000 – SAR 55,000 * SAR 10,000/SAR 80,000) of the exposure and, according to CRE20.89(1), a risk weight of 75% to the residual exposure of SAR 21,875. If both the loan and the bank’s lien is only SAR 30,000 and there is additionally a more senior lien of SAR 10,000 not held by the bank, the property value remaining available is SAR 33,750 (= (SAR 55,000 – SAR 10,000) - ((SAR 55,000 – SAR 10,000) * SAR 10,000/(SAR 10,000+ SAR 30,000)), and the bank will apply a risk weight of 20% to SAR 30,000.
Risk weights for regulatory residential real estate exposures that are materially dependent on cash flows generated by the property
7.76 For regulatory residential real estate exposures that are materially dependent on cash flows generated by the property, the risk weight to be assigned to the total exposure amount will be determined based on the exposure’s LTV ratio in Table10 below.
Risk weights for regulatory residential real estate exposures that are materially dependent on cash flows generated by the property Table 10 Risk weight LTV ≤ 50% 50% < LTV ≤ 60% 60% < LTV ≤ 80% 80% < LTV ≤ 90% 90% < LTV ≤ 100% LTV > 100% 30% 35% 45% 60% 75% 105% Risk weights for regulatory commercial real estate exposures that are not materially dependent on cash flows generated by the property
7.77 For regulatory commercial real estate exposures that are not materially dependent on cash flow generated by the property, the risk weight to be assigned to the total exposure amount will be determined based on the exposure’s LTV in Table 11 below (which sets out a whole loan approach). The risk weight of the counterparty for the purposes of Table 11 below and 7.78 below is prescribed in paragraph Error! Reference source not found..
Whole loan approach risk weights for regulatory commercial real estate exposures that are not materially dependent on cash flows generated by the property Table 11 Risk weight LTV ≤ 60% LTV > 60% Min (60%, RW of counterparty) RW of counterparty 7.78 Banks may apply the “loan splitting” approach, as an alternative to the whole loan approach, for regulatory commercial real estate exposures that are not materially dependent on cash flows generated by the property. Under the loan splitting approach, the risk weight of 60% or the risk weight of the counterparty, whichever is lower, is applied to the part of the exposure up to 55% of the property value30, and the risk weight of the counterparty is applied to the residual exposure
Risk weights for regulatory commercial real estate exposures that are materially dependent on cash flows generated by the property
7.79 For regulatory commercial real estate exposures that are materially dependent on cash flows generated by the property, the risk weight to be assigned to the total exposure amount will be determined based on the exposure’s LTV in Table 12 below.
Whole loan approach risk weights for regulatory commercial real estate exposures that are materially dependent on cash flows generated by the property Table 12 Risk weight LTV ≤ 60% 60% < LTV ≤ 80% LTV > 80% 70% 90% 110% Definition of “other real estate” exposures and applicable risk weights
7.80 An “other real estate” exposure is an exposure within the real estate asset class that is not a regulatory real estate exposure (as defined in paragraph 7.63 above) and is not a land ADC exposure (as defined in paragraph 7.82 below).
7.81 Other real estate exposures are risk weighted as follows:
1. The risk weight of the counterparty is used for other real estate exposures that are not materially dependent on the cash flows generated by the property. For exposures to individuals the risk weight applied will be 75%. For exposures to SMEs, the risk weight applied will be 85%. For exposures to other counterparties, the risk weight applied is the risk weight that would be assigned to an unsecured exposure to that counterparty.
2. The risk weight of 150% is used for other real estate exposures that are materially dependent on the cash flows generated by the property.
Definition of land acquisition, development and construction exposures and applicable risk weights
7.82 Land ADC exposures31 refers to loans to companies or SPVs financing any of the land acquisition for development and construction purposes, or development and construction of any residential or commercial property. ADC exposures will be risk-weighted at 150%, unless they meet the criteria in paragraph 7.83.
7.83 ADC exposures to residential real estate may be risk weighted at 100%, provided that the following criteria are met:
1. prudential underwriting standards meet the requirements in paragraph 7.63 (i.e. the requirements that are used to classify regulatory real estate exposures) where applicable;
2. Pre-sale or pre-lease contracts amount to a significant portion of total contracts or substantial equity at risk. Pre-sale or pre-lease contracts must be legally binding written contracts and the purchaser/renter must have made a substantial cash deposit which is subject to forfeiture if the contract is terminated. Equity at risk should be determined as an appropriate amount of borrower-contributed equity to the real estate’s appraised as-completed value.
20 Please refer to Art 24, the ‘Registered Real Estate Mortgage’s Law issued via Royal Decree No. M/49 dated 03/07/2012.
21 Likewise, this would apply to junior liens held by the same bank that holds the senior lien in case there is an intermediate lien from another bank (i.e. the senior and junior liens held by the bank are not in sequential ranking order
22 Metrics and levels for measuring the ability to repay should mirror the Financial Stability Board (FSB) Principles for sound residential mortgage underwriting practices (April 2012).
23 If a bank grants different loans secured by the same property and they are sequential in ranking order (i.e. there is no intermediate lien from another bank), the different loans should be considered as a single exposure for risk-weighting purposes, and the amount of the loans should be added to calculate the LTV
24 The loan amount of the junior liens must include all other loans secured with liens of equal or higher ranking than the bank’s lien securing the loan for purposes of defining the LTV bucket and risk weight for the junior lien. If there is insufficient information for ascertaining the ranking of the other liens, the bank should assume that these liens rank pari passu with the junior lien held by the bank. This treatment does not apply to exposures that are risk weighted according to the loan splitting approach (paragraphs 7.75 and 7.78), where the junior lien would be taken into account in the calculation of the value of the property. The bank will first determine the “base” risk weight based on Tables 9, 10, 11 or 12 as applicable and adjust the “base” risk weight by a multiplier of 1.25, for application to the loan amount of the junior lien. If the “base” risk weight corresponds to the lowest LTV bucket, the multiplier will not be applied. The resulting risk weight of multiplying the “base” risk weight by 1.25 will be capped at the risk weight applied to the exposure when the requirements in paragraph 7.63 are not met.
25 The valuation must be done independently from the bank’s mortgage acquisition, loan processing and loan decision process.
26 In the case where the mortgage loan is financing the purchase of the property, the value of the property for LTV purposes will not be higher than the effective purchase price.
27 A bank’s use of mortgage insurance should mirror the FSB Principles for sound residential mortgage underwriting (April 2012).
28 For residential property under construction described in paragraph 7.63(1), this means there should be an expectation that the property will satisfy all applicable laws and regulations enabling the property to be occupied for housing purposes.
29 For example, for a loan of SAR 70,000 to an individual secured on a property valued at SAR 100,000, the bank will apply a risk weight of 20% to SAR 55,000 of the exposure and, according to paragraph 7.82(1), a risk weight of 75% to the residual exposure of SAR 15,000. This gives total risk weighted assets for the exposure of SAR 22,250 = (0.20 * SAR 55,000) + (0.75 * SAR 15,000).
30 Where there are liens on the property that are not held by the bank, the part of the exposure up to 55% of the property value should be reduced by the amount of the senior liens not held by the bank and by a pro-rata percentage of any liens pari passu with the bank’s lien but not held by the bank. See paragraph 7.75 for examples of how this methodology applies in the case of residential retail exposures.
31 ADC exposures do not include the acquisition of forest or desert or agricultural land, where there is no planning consent or intention to apply for planning consent.Risk Weight Multiplier to Certain Exposures with Currency Mismatch
7.84 For unhedged retail and residential real estate exposures to individuals where the lending currency differs from the currency of the borrower’s source of income, banks will apply a 1.5 times multiplier to the applicable risk weight according to paragraphs 7.55 to 7.60 and 7.74 to 7.76, subject to a maximum risk weight of 150%.
7.85 For the purposes of paragraph 7.84, an unhedged exposure refers to an exposure to a borrower that has no natural or financial hedge against the foreign exchange risk resulting from the currency mismatch between the currency of the borrower’s income and the currency of the loan. A natural hedge exists where the borrower, in its normal operating procedures, receives foreign currency income that matches the currency of a given loan (e.g. remittances, rental incomes, salaries). A financial hedge generally includes a legal contract with a financial institution (e.g. forward contract). For the purposes of application of the multiplier, only these natural or financial hedges are considered sufficient where they cover at least 90% of the loan instalment, regardless of the number of hedges.
Off-Balance Sheet Items
7.86 Off-balance sheet items will be converted into credit exposure equivalents through the use of credit conversion factors (CCF). In the case of commitments, the committed but undrawn amount of the exposure would be multiplied by the CCF. For these purposes, commitment means any contractual arrangement that has been offered by the bank and accepted by the client to extend credit, purchase assets or issue credit substitutes.32 It includes any such arrangement that can be unconditionally cancelled by the bank at any time without prior notice to the obligor. It also includes any such arrangement that can be cancelled by the bank if the obligor fails to meet conditions set out in the facility documentation, including conditions that must be met by the obligor prior to any initial or subsequent drawdown under the arrangement. Counterparty risk weightings for over-the-counter (OTC) derivative transactions will not be subject to any specific ceiling.
7.87 A 100% CCF will be applied to the following items:
1. Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances).
2. Sale and repurchase agreements and asset sales with recourse33 where the credit risk remains with the bank.
3. The lending of banks’ securities or the posting of securities as collateral by banks, including instances where these arise out of repo-style transactions (i.e. repurchase/reverse repurchase and securities lending/securities borrowing transactions). The risk-weighting treatment for counterparty credit risk must be applied in addition to the credit risk charge on the securities or posted collateral, where the credit risk of the securities lent or posted as collateral remains with the bank. This paragraph does not apply to posted collateral related to derivative transactions that is treated in accordance with the counterparty credit risk standards.
4. Forward asset purchases, forward forward deposits and partly paid shares and securities,34 which represent commitments with certain drawdown.
5. Off-balance sheet items that are credit substitutes not explicitly included in any other category.
7.88 A 50% CCF will be applied to note issuance facilities and revolving underwriting facilities regardless of the maturity of the underlying facility.
7.89 A 50% CCF will be applied to certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions).
7.90 A 40% CCF will be applied to commitments, regardless of the maturity of the underlying facility, unless they qualify for a lower CCF.
7.91 A 20% CCF will be applied to both the issuing and confirming banks of short-term self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralized by the underlying shipment). Short term in this context means with a maturity below one year.
7.92 A 10% CCF will be applied to commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness. SAMA may require applying higher CCF to certain commitments as appropriate based on various factors, which may constrain banks’ ability to cancel the commitment in practice.
7.93 Where there is an undertaking to provide a commitment on an off-balance sheet item, banks are to apply the lower of the two applicable CCFs35.
32 Certain arrangements might be exempted from the definition of commitments provided that the following conditions are met: (i) the bank receives no fees or commissions to establish or maintain the arrangements; (ii) the client is required to apply to the bank for the initial and each subsequent drawdown; (iii) the bank has full authority, regardless of the fulfilment by the client of the conditions set out in the facility documentation, over the execution of each drawdown; and (iv) the bank’s decision on the execution of each drawdown is only made after assessing the creditworthiness of the client immediately prior to drawdown. Exempted arrangements that meet the above criteria are limited to certain arrangements for corporates and MSMEs, where counterparties are closely monitored on an ongoing basis.
33 These items are to be weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into.
34 These items are to be weighted according to the type of asset and not according to the type of counterparty with whom the transaction has been entered into.
35 For example, if a bank has a commitment to open short-term self- liquidating trade letters of credit arising from the movement of goods, a 20% CCF will be applied (instead of a 40% CCF); and if a bank has an unconditionally cancellable commitment described in paragraph 7.92 to issue direct credit substitutes, a 10% CCF will be applied (instead of a 100% CCF).Exposures that Give Rise to Counterparty Credit Risk
7.94 For exposures that give rise to counterparty credit risk according to paragraph 5.3 in The Counterparty Credit Risk (CCR) Framework (i.e. OTC derivatives, exchange-traded derivatives, long settlement transactions and securities financing transactions), the exposure amount to be used in the determination of RWA is to be calculated under the rules set out in chapters 3 to 8 in The Counterparty Credit Risk (CCR) Framework.
Credit Derivatives
7.95 A bank providing credit protection through a first-to-default or second-to-default credit derivative is subject to capital requirements on such instruments. For first- to-default credit derivatives, the risk weights of the assets included in the basket must be aggregated up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk- weighted asset amount. For second-to-default credit derivatives, the treatment is similar; however, in aggregating the risk weights, the asset with the lowest risk-weighted amount can be excluded from the calculation. This treatment applies respectively for nth-to-default credit derivatives, for which the n-1 assets with the lowest risk-weighted amounts can be excluded from the calculation.
Defaulted Exposures
7.96 For risk-weighting purposes under the standardized approach, a defaulted exposure is defined as one that is past due for more than 90 days, or is an exposure to a defaulted borrower. A defaulted borrower is a borrower in respect of whom any of the following events have occurred:
1. Any material credit obligation that is past due for more than 90 days. Overdrafts will be considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than current outstanding;
2. Any material credit obligation is on non-accrued status (e.g. the lending bank no longer recognizes accrued interest as income or, if recognized, makes an equivalent amount of provisions);
3. A write-off or account-specific provision is made as a result of a significant perceived decline in credit quality subsequent to the bank taking on any credit exposure to the borrower;
4. Any credit obligation is sold at a material credit-related economic loss;
5. A distressed restructuring of any credit obligation (i.e. a restructuring that may result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, interest or (where relevant) fees)is agreed by the bank;
6. The borrower’s bankruptcy or a similar order in respect of any of the borrower’s credit obligations to the banking group has been filed;
7. The borrower has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of any of the credit obligations to the banking group; or
8. Any other situation where the bank considers that the borrower is unlikely to pay its credit obligations in full without recourse by the bank to actions such as realizing security.
7.97 For retail exposures, the definition of default can be applied at the level of a particular credit obligation, rather than at the level of the borrower. As such, default by a borrower on one obligation does not require a bank to treat all other obligations to the banking group as defaulted.
7.98 With the exception of residential real estate exposures treated under paragraph 7.99, the unsecured or unguaranteed portion of a defaulted exposure shall be risk- weighted net of specific provisions and partial write-offs as follows:
1. 150% risk weight when specific provisions are less than 20% of the outstanding amount of the loan; and
2. 100% risk weight when specific provisions are equal or greater than 20% and less than 50% of the outstanding amount of the loan.
3. 50% risk weight when specific provisions are equal to or greater than 50% of the outstanding amount of the loan.
7.99 Defaulted residential real estate exposures where repayments do not materially depend on cash flows generated by the property securing the loan shall be risk- weighted net of specific provisions and partial write-offs at 100%. Guarantees or financial collateral which are eligible according to the credit risk mitigation framework might be taken into account in the calculation of the exposure in accordance with paragraph 7.68.
7.100 For the purpose of defining the secured or guaranteed portion of the defaulted exposure, eligible collateral and guarantees will be the same as for credit risk.
Other assets
7.101 Article 4.4 – Section A of SAMA Guidance Document Concerning the Implementation of Basel III (Circular No. 341000015689, Date: 19 December 2012) - specifies a deduction treatment for the following exposures: significant investments in the common shares of unconsolidated financial institutions, mortgage servicing rights, and deferred tax assets that arise from temporary differences. The exposures are deducted in the calculation of Common Equity Tier1 if they exceed the thresholds set out in that article. A 250% risk weight applies to the amount of the three “threshold deduction” items listed in the article that are not deducted by the article.
7.102 The standard risk weight for all other assets will be 100%, with the exception of the following exposures:
1. A 0% risk weight will apply to:
(a) Cash owned and held at the bank or in transit; and
(b) Gold bullion held at the bank or held in another bank on an allocated basis, to the extent the gold bullion assets are backed by gold bullion liabilities.
2. A 20% risk weight will apply to cash items in the process of collection.
8. Standardized Approach: the Use of External Rating
Recognition of External Ratings by SAMA
8.1 The following ECAIs qualify as Eligible ECAI’s in Saudi Arabia,
(1) Standard & Poor's (S&P);
(2) Moody's; and
(3) Fitch.
The recognition process
8.2 Only credit assessments from credit rating agencies recognized as external credit assessment institutions (ECAIs) will be allowed. SAMA will determine on a continuous basis whether an ECAI meets the criteria listed in 8.3 and recognition will only be provided in respect of ECAI ratings for types of exposure where all criteria and conditions are met. SAMA will also take into account the criteria and conditions provided in the International Organization of Securities Commissions' Code of Conduct Fundamentals for Credit Rating Agencies when determining ECAI eligibility.
Eligibility criteria
8.3 An ECAI must satisfy each of the following eight criteria.
(1) Objectivity:
The methodology for assigning external ratings must be rigorous, systematic, and subject to some form of validation based on historical experience. Moreover, external ratings must be subject to ongoing review and responsive to changes in financial condition. Before being recognized by SAMA, a rating methodology for each market segment, including rigorous back testing, must have been established for at least one year and preferably three years.
(2) Independence:
An ECAI should be independent and should not be subject to political or economic pressures that may influence the rating. In particular, an ECAI should not delay or refrain from taking a rating action based on its potential effect (economic, political or otherwise). The rating process should be as free as possible from any constraints that could arise in situations where the composition of the board of directors or the shareholder structure of the credit rating agency may be seen as creating a conflict of interest. Furthermore, an ECAI should separate operationally, legally and, if practicable, physically its rating business from other businesses and analysts.
(3) International access/transparency:
The individual ratings, the key elements underlining the ratings assessments and whether the issuer participated in the rating process should be publicly available on a non-selective basis, unless they are private ratings, which should be at least available to both domestic and foreign institutions with legitimate interest and on equivalent terms. In addition, the ECAI’s general procedures, methodologies and assumptions for arriving at ratings should be publicly available.
(4) Disclosure:
An ECAI should disclose the following information: its code of conduct; the general nature of its compensation arrangements with assessed entities; any conflict of interest, the ECAI's compensation arrangements, its rating assessment methodologies, including the definition of default, the time horizon, and the meaning of each rating; the actual default rates experienced in each assessment category; and the transitions of the ratings, e.g. the likelihood of AA ratings becoming A over time. A rating should be disclosed as soon as practicably possible after issuance. When disclosing a rating, the information should be provided in plain language, indicating the nature and limitation of credit ratings and the risk of unduly relying on them to make investments.
(5) Resources:
An ECAI should have sufficient resources to carry out high-quality credit assessments. These resources should allow for substantial ongoing contact with senior and operational levels within the entities assessed in order to add value to the credit assessments. In particular, ECAIs should assign analysts with appropriate knowledge and experience to assess the creditworthiness of the type of entity or obligation being rated. Such assessments should be based on methodologies combining qualitative and quantitative approaches.
(6) Credibility:
To some extent, credibility is derived from the criteria above. In addition, the reliance on an ECAI’s external ratings by independent parties (investors, insurers, trading partners) is evidence of the credibility of the ratings of an ECAI. The credibility of an ECAI is also underpinned by the existence of internal procedures to prevent the misuse of confidential information. In order to be eligible for recognition, an ECAI does not have to assess firms in more than one country.
(7) Cooperation with SAMA:
ECAIs should notify SAMA of significant changes to methodologies and provide access to external ratings and other relevant data in order to support initial and continued determination of eligibility.
8.4 Regarding the disclosure of conflicts of interest referenced in paragraph 8.3(4) above, at a minimum, the following situations and their influence on the ECAI’s credit rating methodologies or credit rating actions shall be disclosed:
(1) The ECAI is being paid to issue a credit rating by the rated entity or by the obligor, originator, underwriter, or arranger of the rated obligation;
(2) The ECAI is being paid by subscribers with a financial interest that could be affected by a credit rating action of the ECAI;
(3) The ECAI is being paid by rated entities, obligors, originators, underwriters, arrangers, or subscribers for services other than issuing credit ratings or providing access to the ECAI’s credit ratings;
(4) The ECAI is providing a preliminary indication or similar indication of credit quality to an entity, obligor, originator, underwriter, or arranger prior to being hired to determine the final credit rating for the entity, obligor, originator, underwriter, or arranger; and
(5) The ECAI has a direct or indirect ownership interest in a rated entity or obligor, or a rated entity or obligor has a direct or indirect ownership interest in the ECAI.
8.5 Regarding the disclosure of an ECAI's compensation arrangements referenced in (4) above:
(1) An ECAI should disclose the general nature of its compensation arrangements with rated entities, obligors, lead underwriters, or arrangers.
(2) When the ECAI receives from a rated entity, obligor, originator, lead underwriter, or arranger compensation unrelated to its credit rating services, the ECAI should disclose such unrelated compensation as a percentage of total annual compensation received from such rated entity, obligor, lead underwriter, or arranger in the relevant credit rating report or elsewhere, as appropriate.
(3) An ECAI should disclose in the relevant credit rating report or elsewhere, as appropriate, if it receives 10% or more of its annual revenue from a single client (e.g. a rated entity, obligor, originator, lead underwriter, arranger, or subscriber, or any of their affiliates).
Implementation Considerations
The mapping of Credit Assessments by ECAIs
8.6 SAMA will be assigning eligible ECAIs’ ratings to the risk weights available under the standardized risk weighting framework, i.e. deciding which rating categories correspond to which risk weights.
8.7 Banks can use the following mapping of ECAIs’ ratings. This mapping will be subject to review by SAMA as appropriate and banks will be informed accordingly.
SAMA S&P Moody's Fitch 1 AAA Aaa AAA AA+ Aa1 AA+ AA Aa2 AA AA- Aa3 AA- 2 A+ A1 A+ A A2 A A- A3 A- 3 BBB+ Baa1 BBB+ BBB Baa2 BBB BBB- Baa3 BBB- 4 BB+ Ba1 BB+ BB Ba2 BB BB- Ba3 BB- B+ B1 B+ B B2 B B- B3 B- 5 CCC+ Caa1 CCC+ CCC Caa2 CCC CCC- Caa3 CCC- CC Ca CC C C C D D 6 Unrated Unrated Unrated 8.8 Banks must use the chosen ECAIs and their ratings consistently for all types of exposure where they have been recognized by SAMA as an eligible ECAI, for both risk-weighting and risk management purposes. Banks are not allowed to “cherry-pick” the ratings provided by different ECAIs and to arbitrarily change the use of ECAIs.
8.9 Banks must use the global rating scale provided by the ECAIs consistently for all types of exposures, the use of national rating scales is subject to mapping to the global rating.
Multiple external ratings
8.10 If there is only one rating by an ECAI chosen by a bank for a particular exposure, that rating should be used to determine the risk weight of the exposure.
8.11 If there are two ratings by ECAIs chosen by a bank that map into different risk weights, the higher risk weight will be applied.
8.12 If there are three or more ratings with different risk weights, the two ratings that correspond to the lowest risk weights should be referred to. If these give rise to the same risk weight, that risk weight should be applied. If different, the higher risk weight should be applied.
Determination of whether an exposure is rated: Issue-specific and issuer ratings
8.13 Where a bank invests in a particular issue that has an issue-specific rating, the risk weight of the exposure will be based on this rating. Where the bank’s exposure is not an investment in a specific rated issue, the following general principles apply.
(1) In circumstances where the borrower has a specific rating for an issued debt – but the bank’s exposure is not an investment in this particular debt – a high-quality credit rating (one which maps into a risk weight lower than that which applies to an unrated exposure) on that specific debt may only be applied to the bank’s unrated exposure if this exposure ranks in all respects pari passu or senior to the exposure with a rating. If not, the external rating cannot be used and the unassessed exposure will receive the risk weight for unrated exposures.
(2) In circumstances where the borrower has an issuer rating, this rating typically applies to senior unsecured exposures to that issuer. Consequently, only senior exposures to that issuer will benefit from a high-quality issuer rating. Other unassessed exposures of a highly rated issuer will be treated as unrated. If either the issuer or a single issue has a low-quality rating (mapping into a risk weight equal to or higher than that which applies to unrated exposures), an unassessed exposure to the same counterparty that ranks pari passu or is subordinated to either the senior unsecured issuer rating or the exposure with a low-quality rating will be assigned the same risk weight as is applicable to the low-quality rating.
(3) In circumstances where the issuer has a specific high-quality rating (one which maps into a lower risk weight) that only applies to a limited class of liabilities (such as a deposit rating or a counterparty risk rating), this may only be used in respect of exposures that fall within that class.
8.14 Whether the bank intends to rely on an issuer- or an issue-specific rating, the rating must take into account and reflect the entire amount of credit risk exposure the bank has with regard to all payments owed to it. For example, if a bank is owed both principal and interest, the rating must fully take into account and reflect the credit risk associated with repayment of both principal and interest.
8.15 In order to avoid any double-counting of credit enhancement factors, no supervisory recognition of credit risk mitigation techniques will be taken into account if the credit enhancement is already reflected in the issue specific rating (see paragraph 9.5).
Domestic currency and foreign currency ratings
8.16 Where exposures are risk-weighted based on the rating of an equivalent exposure to that borrower, the general rule is that foreign currency ratings would be used for exposures in foreign currency. Domestic currency ratings, if separate, would only be used to risk-weight exposures denominated in the domestic currency36.
Short-term/long-term ratings
8.17 For risk-weighting purposes, short-term ratings are deemed to be issue-specific. They can only be used to derive risk weights for exposures arising from the rated facility. They cannot be generalized to other short-term exposures, except under the conditions in paragraph 8.19. In no event can a short-term rating be used to support a risk weight for an unrated long-term exposure. Short-term ratings may only be used for short-term exposures against banks and corporates. Table 1337 38 below provides a framework for banks’ exposures to specific short-term facilities, such as a particular issuance of commercial paper:
Risk weight table for specific short-term ratings Table 13 External rating A-1/P-1 A-2/P-2 A-3/P-3 Others Risk weight 20% 50% 100% 150% 8.18 If a short-term rated facility attracts a 50% risk-weight, unrated short-term exposures cannot attract a risk weight lower than 100%. If an issuer has a short-term facility with an external rating that warrants a risk weight of 150%, all unrated exposures, whether long-term or short-term, should also receive a 150% risk weight, unless the bank uses recognized credit risk mitigation techniques for such exposures.
8.19 In cases where short-term ratings are available, the following interaction with the general preferential treatment for short-term exposures to banks as described in paragraph 7.15 will apply:
(1) The general preferential treatment for short-term exposures applies to all exposures to banks of up to three months original maturity when there is no specific short-term exposure rating.
(2) When there is a short-term rating and such a rating maps into a risk weight that is more favorable (i.e. lower) or identical to that derived from the general preferential treatment, the short-term rating should be used for the specific exposure only. Other short-term exposures would benefit from the general preferential treatment.
(3) When a specific short-term rating for a short term exposure to a bank maps into a less favorable (higher) risk weight, the general short-term preferential treatment for interbank exposures cannot be used. All unrated short-term exposures should receive the same risk weighting as that implied by the specific short-term rating.
8.20 When a short-term rating is to be used, the institution making the assessment needs to meet all of the eligibility criteria for recognizing ECAIs, as described in paragraph 8.3, in terms of its short-term ratings.
Level of application of the rating
8.21 External ratings for one entity within a corporate group cannot be used to risk-weight other entities within the same group.
Use of unsolicited ratings
8.22 As a general rule, banks should use solicited ratings from eligible ECAIs. Banks are not permitted to use unsolicited ratings.
36 However, when an exposure arises through a bank’s participation in a loan that has been extended, or has been guaranteed against convertibility and transfer risk, by certain multilateral development banks (MDBs), its convertibility and transfer risk can be considered by SAMA to be effectively mitigated. To qualify, MDBs must have preferred creditor status recognized in the market and be included in the first footnote in paragraph 7.9. In such cases, for risk- weighting purposes, the borrower’s domestic currency rating may be used instead of its foreign currency rating. In the case of a guarantee against convertibility and transfer risk, the local currency rating can be used only for the portion that has been guaranteed. The portion of the loan not benefiting from such a guarantee will be risk-weighted based on the foreign currency rating.
37 The notations follow the methodology used by S&P and by Moody’s Investors Service. The A-1 rating of S&P includes both A-1+ and A-1–.
38 The “others” category includes all non-prime and B or C ratings.9. Standardized Approach: Credit Risk Mitigation
9.1 Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralized by first-priority claims, in whole or in part with cash or securities, a loan exposure may be guaranteed by a third party, or a bank may buy a credit derivative to offset various forms of credit risk. Additionally banks may agree to net loans owed to them against deposits from the same counterparty39.
9.2 The framework set out in this chapter is applicable to banking book exposures that are risk-weighted under the standardized approach.
General requirements
9.3 No transaction in which credit risk mitigation (CRM) techniques are used shall receive a higher capital requirement than an otherwise identical transaction where such techniques are not used.
9.4 The requirements of chapter 19 in Pillar 3 Disclosure Requirements Framework must be fulfilled for banks to obtain capital relief in respect of any CRM techniques.
9.5 The effects of CRM must not be double-counted. Therefore, no additional supervisory recognition of CRM for regulatory capital purposes will be granted on exposures for which the risk weight already reflects that CRM. Consistent with paragraph 8.14, principal-only ratings will also not be allowed within the CRM framework.
9.6 While the use of CRM techniques reduces or transfers credit risk, it may simultaneously increase other risks (i.e. residual risks). Residual risks include legal, operational, liquidity and market risks. Therefore, banks must employ robust procedures and processes to control these risks, including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from the bank’s use of CRM techniques and its interaction with the bank’s overall credit risk profile. Where these risks are not adequately controlled, SAMA may impose additional capital charges or take other supervisory actions in the supervisory review process.
9.7 In order for CRM techniques to provide protection, the credit quality of the counterparty must not have a material positive correlation with the employed CRM technique or with the resulting residual risks (as defined in paragraph 9.6). For example, securities issued by the counterparty (or by any counterparty- related entity) provide little protection as collateral and are thus ineligible.
9.8 In the case where a bank has multiple CRM techniques covering a single exposure(e.g. a bank has both collateral and a guarantee partially covering an exposure), the bank must subdivide the exposure into portions covered by each type of CRM technique (e.g. portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately. When credit protection provided by a single protection provider has differing maturities, they must be subdivided into separate protection as well.
Legal requirements
9.9 In order for banks to obtain capital relief for any use of CRM techniques, all documentation used in collateralized transactions, on-balance sheet netting agreements, guarantees and credit derivatives must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well-founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.
General treatment of maturity mismatches
9.10 For the purposes of calculating risk-weighted assets, a maturity mismatch occurs when the residual maturity of a credit protection arrangement (e.g. hedge) is less than that of the underlying exposure.
9.11 In the case of financial collateral, maturity mismatches are not allowed under the simple approach (see paragraph 9.33).
9.12 Under the other approaches, when there is a maturity mismatch the credit protection arrangement may only be recognized if the original maturity of the arrangement is greater than or equal to one year, and its residual maturity is greater than or equal to three months. In such cases, credit risk mitigation may be partially recognized as detailed below in paragraph 9.13.
9.13 When there is a maturity mismatch with recognized credit risk mitigants, the following adjustment applies, where:
(1) Pa = value of the credit protection adjusted for maturity mismatch
(2) P = credit protection amount (e.g. collateral amount, guarantee amount)adjusted for any haircuts
(3) t = min {T, residual maturity of the credit protection arrangement expressed in years}
(4) T = min {five years, residual maturity of the exposure expressed in years}
9.14 The maturity of the underlying exposure and the maturity of the hedge must both be defined conservatively. The effective maturity of the underlying must be gauged as the longest possible remaining time before the counterparty is scheduled to fulfil its obligation, taking into account any applicable grace period. For the hedge, (embedded) options that may reduce the term of the hedge must be taken into account so that the shortest possible effective maturity is used. For example: where, in the case of a credit derivative, the protection seller has a call option, the maturity is the first call date. Likewise, if the protection buyer owns the call option and has a strong incentive to call the transaction at the first call date, for example because of a step-up in cost from this date on, the effective maturity is the remaining time to the first call date.
Currency mismatches
9.15 Currency mismatches are allowed under all approaches. Under the simple approach there is no specific treatment for currency mismatches, given that a minimum risk weight of 20% (floor) is generally applied. Under the comprehensive approach and in case of guarantees and credit derivatives, a specific adjustment for currency mismatches is prescribed in paragraph 9.51 and 9.81 to 0, respectively.
39 In this section, “counterparty” is used to denote a party to whom a bank has an on- or off-balance sheet credit exposure. That exposure may, for example, take the form of a loan of cash or securities (where the counterparty would traditionally be called the borrower), of securities posted as collateral, of a commitment or of exposure under an over-the-counter (OTC) derivatives contract.
Overview of Credit Risk Mitigation Techniques
Collateralized Transactions
9.16 A collateralized transaction is one in which:
(1) banks have a credit exposure or a potential credit exposure; and
(2) that credit exposure or potential credit exposure is hedged in whole or in part by collateral posted by a counterparty or by a third party on behalf of the counterparty.
9.17 Where banks take eligible financial collateral, they may reduce their regulatory capital requirements through the application of CRM techniques40.
9.18 Banks may opt for either:
(1) The simple approach, which replaces the risk weight of the counterparty withthe risk weight of the collateral for the collateralized portion of the exposure(generally subject to a 20% floor); or
(2) The comprehensive approach, which allows a more precise offset of collateral against exposures, by effectively reducing the exposure amount bya volatility-adjusted value ascribed to the collateral.
9.19 Detailed operational requirements for both the simple approach and comprehensive approach are given in paragraph 9.32 to 9.64.Banks may operate under either, but not both, approaches in the banking book.
9.20 For collateralized OTC transactions, exchange traded derivatives and long settlement transactions, banks may use the standardized approach for counterparty credit risk (chapter 6) or the internal models method (chapter 7) in The Counterparty Credit Risk (CCR) Framework to calculate the exposure amount, in accordance with paragraphs 9.65 to 9.66.
On-Balance Sheet Netting
9.21 Where banks have legally enforceable netting arrangements for loans and deposits that meet the conditions in 9.67 and 9.68 they may calculate capital requirements on the basis of net credit exposures as set out in that paragraph.
Guarantees and Credit Derivatives
9.22 Where guarantees or credit derivatives fulfil the minimum operational conditions set out in paragraphs 9.69 to 9.71, banks may take account of the credit protection offered by such credit risk mitigation techniques in calculating capital requirements.
9.23 A range of guarantors and protection providers are recognized and a substitution approach applies for capital requirement calculations. Only guarantees issued by or protection provided by entities with a lower risk weight than the counterparty lead to reduced capital charges for the guaranteed exposure, since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor or protection provider, whereas the uncovered portion retains the risk weight of the underlying counterparty.
9.24 Detailed conditions and operational requirements for guarantees and credit derivatives are given in paragraphs 9.69 to 9.83.
40 Alternatively, banks with appropriate supervisory approval may instead use the internal models method in the Counterparty Credit Risk (CCR) Framework to determine the exposure amount, taking into account collateral.
Collateralized Transactions
General requirements
9.25 Before capital relief is granted in respect of any form of collateral, the standards set out below in paragraphs 9.26 ,9.31 must be met, irrespective of whether the simple or the comprehensive approach is used. Banks that lend securities or post collateral must calculate capital requirements for both of the following: (i) the credit risk or market risk of the securities, if this remains with the bank; and (ii) the counterparty credit risk arising from the risk that the borrower of the securities may default.
9.26 The legal mechanism by which collateral is pledged or transferred must ensure that the bank has the right to liquidate or take legal possession of it, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the counterparty (and, where applicable, of the custodian holding the collateral). Additionally, banks must take all steps necessary to fulfil those requirements under the law applicable to the bank’s interest in the collateral for obtaining and maintaining an enforceable security interest, e.g. by registering it with a registrar, or for exercising a right to net or set off in relation to the title transfer of the collateral.
9.27 Banks must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed, and that collateral can be liquidated promptly.
9.28 Banks must ensure that sufficient resources are devoted to the orderly operation of margin agreements with OTC derivative and securities-financing counterparties, as measured by the timeliness and accuracy of its outgoing margin calls and response time to incoming margin calls. Banks must have collateral risk management policies in place to control, monitor and report:
(1) The risk to which margin agreements expose them (such as the volatility and liquidity of the securities exchanged as collateral);
(2) The concentration risk to particular types of collateral;
(3) The reuse of collateral (both cash and non-cash) including the potential liquidity shortfalls resulting from the reuse of collateral received from counterparties; and
(4) The surrender of rights on collateral posted to counterparties.
9.29 Where the collateral is held by a custodian, banks must take reasonable steps to ensure that the custodian segregates the collateral from its own assets.
9.30 A capital requirement must be applied on both sides of a transaction. For example, both repos and reverse repos will be subject to capital requirements. Likewise, both sides of a securities lending and borrowing transaction will be subject to explicit capital charges, as will the posting of securities in connection with derivatives exposures or with any other borrowing transaction.
9.31 Where a bank, acting as an agent, arranges a repo-style transaction (i.e. repurchase / reverse repurchase and securities lending/borrowing transactions) between a customer and a third party and provides a guarantee to the customer that the third party will perform on its obligations, then the risk to the bank is the same as if the bank had entered into the transaction as a principal. In such circumstances, a bank must calculate capital requirements as if it were itself the principal.
The simple approach: general requirements
9.32 Under the simple approach, the risk weight of the counterparty is replaced by the risk weight of the collateral instrument collateralizing or partially collateralizing the exposure.
9.33 For collateral to be recognized in the simple approach, it must be pledged for at least the life of the exposure and it must be marked to market and revalued with a minimum frequency of six months. Those portions of exposures collateralized by the market value of recognized collateral receive the risk weight applicable to the collateral instrument. The risk weight on the collateralized portion is subject to a floor of 20% except under the conditions specified in paragraphs 9.36 to 9.39. The remainder of the exposure must be assigned the risk weight appropriate to the counterparty. Maturity mismatches are not allowed under the simple approach (see paragraphs 9.10 to 9.11).
The simple approach: eligible financial collateral
9.34 The following collateral instruments are eligible for recognition in the simple approach:
(1) Cash (as well as certificates of deposit or comparable instruments issued by the lending bank) on deposit with the bank that is incurring the counterparty exposure41 42.
(2) Gold.
(3) Debt securities that meet the following conditions:
(a) Debt securities rated43 by a recognized external credit assessment institution (ECAI) where these are either:
(i) At least BB- when issued by sovereigns or public sector entities (PSEs) that are treated as sovereigns; or
(ii) At least BBB- when issued by other entities (including banks and other prudentially regulated financial institutions); or
(iii) At least A-3/P-3 for short-term debt instruments.
(b) Debt securities not rated by a recognized ECAI where these are:
(i) Issued by a bank; and
(ii) Listed on a recognized exchange; and
(iii) Classified as senior debt; and
(iv) All rated issues of the same seniority by the issuing bank are rated at least BBB– or a-3/p-3 by a recognized ECAI; and
(v) The bank holding the securities as collateral has no information to suggest that the issue justifies a rating below BBB– or A-3/P-3 (as applicable); and
(vi) SAMA is sufficiently confident that the market liquidity of the security is adequate.
(4) Equities (including convertible bonds) that are included in a main index.
(5) Undertakings for Collective Investments in Transferable Securities (UCITS)and mutual funds where:
(a) a price for the units is publicly quoted daily; and
(b) the UCITS/mutual fund is limited to investing in the instruments listed in this paragraph.44
9.35 Resecuritizations as defined in the securitization chapters 18 to 23 are not eligible financial collateral.
Simple approach: exemptions to the risk-weight floor
9.36 Repo-style transactions that fulfil all of the following conditions are exempted from the risk-weight floor under the simple approach:
(1) Both the exposure and the collateral are cash or a sovereign security or PSE security qualifying for a 0% risk weight under the standardized approach (chapter 0);
(2) Both the exposure and the collateral are denominated in the same currency;
(3) Either the transaction is overnight or both the exposure and the collateral are marked to market daily and are subject to daily remargining;
(4) Following a counterparty’s failure to remargin, the time that is required between the last mark-to-market before the failure to remargin and the liquidation of the collateral is considered to be no more than four business days;
(5) The transaction is settled across a settlement system proven for that type of transaction;
(6) The documentation covering the agreement is standard market documentation for repo-style transactions in the securities concerned;
(7) The transaction is governed by documentation specifying that if the counterparty fails to satisfy an obligation to deliver cash or securities or to deliver margin or otherwise defaults, then the transaction is immediately terminable; and
(8) Upon any default event, regardless of whether the counterparty is insolvent or bankrupt, the bank has the unfettered, legally enforceable right to immediately seize and liquidate the collateral for its benefit.
9.37 Transactions with core market participants; SAMA and Saudi sovereign only.
9.38 Repo transactions that fulfil the requirement in paragraph 9.36 receive a 10% risk weight, as an exemption to the risk weight floor described in paragraph 9.33. If the counterparty to the transaction is a core market participant, banks may apply a risk weight of 0% to the transaction.
9.39 The 20% floor for the risk weight on a collateralized transaction does not apply and a 0% risk weight may be applied to the collateralized portion of the exposure where the exposure and the collateral are denominated in the same currency, and either:
(1) The collateral is cash on deposit as defined in paragraph 9.34(1); or
(2) The collateral is in the form of sovereign/PSE securities eligible for a 0% risk weight, and its market value has been discounted by 20%.
The comprehensive approach: general requirements
9.40 In the comprehensive approach, when taking collateral, banks must calculate their adjusted exposure to a counterparty in order to take account of the risk mitigating effect of that collateral. Banks must use the applicable supervisory haircuts to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either45, as occasioned by market movements. Unless either side of the transaction is cash or a zero haircut is applied, the volatility-adjusted exposure amount is higher than the nominal exposure and the volatility-adjusted collateral value is lower than the nominal collateral value.
9.41 The size of the haircuts that banks must use depends on the prescribed holding period for the transaction. For the purposes of chapter 9,the holding period is the period of time over which exposure or collateral values are assumed to move before the bank can close out the transaction. The supervisory prescribed minimum holding period is used as the basis for the calculation of the standard supervisory haircuts.
9.42 The holding period, and thus the size of the individual haircuts depends on the type of instrument, type of transaction, residual maturity and the frequency of marking to market and remargining as provided in paragraphs 9.49 to 9.50. For example, repo-style transactions subject to daily marking-to-market and to daily remargining will receive a haircut based on a 5-business day holding period and secured lending transactions with daily mark-to-market and no remargining clauses will receive a haircut based on a 20-business day holding period. Haircuts must be scaled up using the square root of time formula depending on the actual frequency of remargining or marking to market. This formula is included in paragraph 9.58.
9.43 Additionally, where the exposure and collateral are held in different currencies, banks must apply an additional haircut to the volatility-adjusted collateral amount in accordance with paragraphs 9.51 and 9.81 to 0 to take account of possible future fluctuations in exchange rates.
9.44 The effect of master netting agreements covering securities financing transactions (SFTs) can be recognized for the calculation of capital requirements subject to the conditions and requirements in paragraphs 9.61 to 9.64 . Where SFTs are subject to a master netting agreement whether they are held in the banking book or trading book, a bank may choose not to recognize the netting effects in calculating capital. In that case, each transaction will be subject to a capital charge as if there were no master netting agreement.
The comprehensive approach: eligible financial collateral
9.45 The following collateral instruments are eligible for recognition in the comprehensive approach:
(1) All of the instruments listed in paragraph 9.34;
(2) Equities and convertible bonds that are not included in a main index but which are listed on a recognized security exchange;
(3) UCITS/mutual funds which include the instruments in point (2).
The comprehensive approach: calculation of capital requirement
9.46 For a collateralized transaction, the exposure amount after risk mitigation is calculated using the formula that follows, where:
(1) E* = the exposure value after risk mitigation
(2) E = current value of the exposure
(3) He = haircut appropriate to the exposure
(4) C = the current value of the collateral received
(5) Hc = haircut appropriate to the collateral
(6) Hfx = haircut appropriate for currency mismatch between the collateral and exposure
9.47 In the case of maturity mismatches, the value of the collateral received (collateral amount) must be adjusted in accordance with paragraphs 9.10 to 0.
9.48 The exposure amount after risk mitigation (E*) must be multiplied by the risk weight of the counterparty to obtain the risk-weighted asset amount for the collateralized transaction.
9.49 The following supervisory haircuts in table 14 below (assuming daily mark-to- market, daily remargining and a 10 business day holding period), expressed as percentages, must be used to determine the haircuts appropriate to the collateral (Hc) and to the exposure (He):
Supervisory haircuts for comprehensive approach Table 14 Issue rating for debt securities Residual maturity Sovereigns Other issuers Securitization exposures AAA to AA–/A-1 < 1 year 0.5 1 2 >1 year, < 3 years 2 3 8 >3 years, < 5 years 4 >5 years, < 10 years 4 6 16 > 10 years 12 A+ to BBB–/A-2/A-3/P-3 and unrated bank securities 9.34(3)(b) < 1 year 1 2 4 >1 year, < 3 years 3 4 12 >3 years, < 5 years 6 >5 years, < 10 years 6 12 24 > 10 years 20 BB+ to BB– All 15 Not eligible Not eligible Main index equities (including convertible bonds) and gold 20 Other equities and convertible bonds listed on a recognized exchange 30 UCITS/mutual funds Highest haircut applicable to any security in which the fund can invest, unless the bank can apply the look-through approach (LTA) for equity investments in funds, in which case the bank may use a weighted average of haircuts applicable to instruments held by the fund. Cash in the same currency 0 9.50 In paragraph 9.49 :
(1) “Sovereigns” includes: PSEs that are treated as sovereigns by SAMA, as well as multilateral development banks receiving a 0% risk weight.
(2) “Other issuers” includes: PSEs that are not treated as sovereigns by SAMA.
(3) “Securitization exposures” refers to exposures that meet the definition set forth in the securitization framework.
(4) “Cash in the same currency” refers to eligible cash collateral specified in paragraph 9.34(1).
9.51 The haircut for currency risk (Hfx) where exposure and collateral are denominated in different currencies is 8% (also based on a 10-business day holding period and daily mark-to-market).
9.52 For SFTs and secured lending transactions, a haircut adjustment may need to be applied in accordance with paragraphs 9.55 to 9.58.
9.53 For SFTs in which the bank lends, or posts as collateral, non-eligible instruments, the haircut to be applied on the exposure must be 30%. For transactions in which the bank borrows non-eligible instruments, credit risk mitigation may not be applied.
9.54 Where the collateral is a basket of assets, the haircut (H) on the basket must be calculated using the formula that follows, where:
(1) aiis the weight of the asset (as measured by units of currency) in the basket
(2) Hi the haircut applicable to that asset
The comprehensive approach: adjustment for different holding periods and non-daily mark-to-market or remargining
9.55 For some transactions, depending on the nature and frequency of the revaluation and remargining provisions, different holding periods and thus different haircuts must be applied. The framework for collateral haircuts distinguishes between repo-style transactions (i.e. repo/reverse repos and securities lending/borrowing),” other capital markets-driven transactions” (i.e. OTC derivatives transactions and margin lending) and secured lending. In capital-market-driven transactions and repo-style transactions, the documentation contains remargining clauses; in secured lending transactions, it generally does not.
9.56 The minimum holding period for various products is summarized in table 15 below:
Minimum holding periods Table 15 Summary of minimum holding periods and remargining/revaluation periods Transaction type Minimum holding period Minimum remargining/revaluation period Repo-style transaction five business days daily remargining Other capital market transactions 10 business days daily remargining Secured lending 20 business days daily revaluation 9.57 Regarding the minimum holding periods set out in paragraph 9.56, if a netting set includes both repo-style and other capital market transactions, the minimum holding period of ten business days must be used. Furthermore, a higher minimum holding period must be used in the following cases:
(1) For all netting sets where the number of trades exceeds 5,000 at any point during a quarter, a 20-business day minimum holding period for the following quarter must be used.
(2) For netting sets containing one or more trades involving illiquid collateral, a minimum holding period of 20 business days must be used. "Illiquid collateral" must be determined in the context of stressed market conditions and will be characterized by the absence of continuously active markets where a counterparty would, within two or fewer days, obtain multiple price quotations that would not move the market or represent a price reflecting a market discount. Examples of situations where trades are deemed illiquid for this purpose include, but are not limited to, trades that are not marked daily and trades that are subject to specific accounting treatment for valuation purposes (e.g. repo-style transactions referencing securities whose fair value is determined by models with inputs that are not observed in the market).
(3) If a bank has experienced more than two margin call disputes on a particular netting set over the previous two quarters that have lasted longer than the bank's estimate of the margin period of risk (as defined in The Counterparty Credit Risk (CCR) Framework), then for the subsequent two quarters the bank must use a minimum holding period that is twice the level that would apply excluding the application of this sub-paragraph.
9.58 When the frequency of remargining or revaluation is longer than the minimum, the minimum haircut numbers must be scaled up depending on the actual number of business days between remargining or revaluation. The 10-business day haircuts provided in paragraphs 9.49 to 9.50 are the default haircuts and these haircuts must be scaled up or down using the formula below, where:
(1) H = haircut
(2) H10 = 10-business day haircut for instrument
(3) TM = minimum holding period for the type of transaction.
(4) NR = actual number of business days between remargining for capital market transactions or revaluation for secured transactions
The comprehensive approach: exemptions under the comprehensive approach for qualifying repo-style transactions involving core market participants
9.59 For repo-style transactions with core market participants as defined in paragraph 9.37 and that satisfy the conditions in paragraph 9.36, a haircut of zero can be applied.
9.60 Where, under the comprehensive approach, a foreign supervisor applies a specific carve-out to repo-style transactions in securities issued by its domestic government, banks are allowed to adopt the same approach to the same transactions.
The comprehensive approach: treatment under the comprehensive approach of SFTs covered by master netting agreements
9.61 The effects of bilateral netting agreements covering SFTs may be recognized on a counterparty-by-counterparty basis if the agreements are legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of whether the counterparty is insolvent or bankrupt. In addition, netting agreements must:
(1) Provide the non-defaulting party the right to terminate and close out in a timely manner all transactions under the agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;
(2) Provide for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it so that a single net amount is owed by one party to the other;
(3) Allow for the prompt liquidation or set-off of collateral upon the event of default; and
(4) Be, together with the rights arising from the provisions required in (1) to (3) above, legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of the counterparty’s insolvency or bankruptcy.
9.62 Netting across positions in the banking and trading book may only be recognized when the netted transactions fulfil the following conditions:
(1) All transactions are marked to market daily46; and
(2) The collateral instruments used in the transactions are recognized as eligible financial collateral in the banking book.
9.63 The formula in paragraph 9.64 will be used to calculate the counterparty credit risk capital requirements for SFTs with netting agreements. This formula includes the current exposure, an amount for systematic exposure of the securities based on the net exposure, an amount for the idiosyncratic exposure of the securities based on the gross exposure, and an amount for currency mismatch. All other rules regarding the calculation of haircuts under the comprehensive approach stated in paragraphs 9.40 to 9.60 equivalently apply for banks using bilateral netting agreements for SFTs.
9.64 Banks using standard supervisory haircuts for SFTs conducted under a master netting agreement must use the formula that follows to calculate their exposure amount, where:
(1) E* is the exposure value of the netting set after risk mitigation
(2) Ei is the current value of all cash and securities lent, sold with an agreement to repurchase or otherwise posted to the counterparty under the netting agreement
(3) Cj is the current value of all cash and securities borrowed, purchased with an agreement to resell or otherwise held by the bank under the netting agreement
(4) 
(5) 
(6) Es is the net current value of each security issuance under the netting set(always a positive value)
(7) Hs is the haircut appropriate to ES as described in tables of paragraphs 9.49 to 9.50, as applicable
(a) Hs has a positive sign if the security is lent, sold with an agreement to repurchased, or transacted in manner similar to either securities lending or a repurchase agreement
(b) Hs has a negative sign if the security is borrowed, purchased with an agreement to resell, or transacted in a manner similar to either a securities borrowing or reverse repurchase agreement
(8) N is the number of security issues contained in the netting set (except that issuances where the value Es is less than one tenth of the value of the largest Es in the netting set are not included the count)
(9) Efx is the absolute value of the net position in each currency fx different from the settlement currency
(10) Hfx is the haircut appropriate for currency mismatch of currency fx
Collateralized OTC derivatives, exchange traded derivatives and long settlement transactions
9.65 Under the standardized approach for Counterparty Credit Risk Framework (SA-CCR), the calculation of the counterparty credit risk charge for an individual contract will be calculated using the following formula, where:
(1) Alpha = 1.4
(2) RC = the replacement cost calculated according to paragraphs 6.5 to 6.22 in The Counterparty Credit Risk (CCR) Framework.
(3) PFE = the amount for potential future exposure calculated according to paragraphs 6.23 to 6.76 in the CCR framework.
9.66 As an alternative to the SA-CCR for the calculation of the counterparty credit risk charge, banks may also use the internal models method as set out in chapter 7 of the Counterparty Credit Risk (CCR) Framework, subject to SAMA’s approval.
41 Cash-funded credit-linked notes issued by the bank against exposures in the banking book that fulfil the criteria for credit derivatives are treated as cash-collateralized transactions.
42 When cash on deposit, certificates of deposit or comparable instruments issued by the lending bank are held as collateral at a third- party bank in a non-custodial arrangement, if they are openly pledged/assigned to the lending bank and if the pledge/assignment is unconditional and irrevocable, the exposure amount covered by the collateral (after any necessary haircuts for currency risk) receives the risk weight of the third-party bank.
43 When debt securities that do not have an issue specific rating are issued by a rated sovereign, banks may treat the sovereign issuer rating as the rating of the debt security.
44 However, the use or potential use by a UCITS/mutual fund of derivative instruments solely to hedge investments listed in this paragraph and paragraph 9.45 shall not prevent units in that UCITS/mutual fund from being eligible financial collateral.
45 Exposure amounts may vary where, for example, securities are being lent.
46 The holding period for the haircuts depends, as in other repo-style transactions, on the frequency of margining.
On-Balance Sheet Netting
9.67 A bank may use the net exposure of loans and deposits as the basis for its capital adequacy calculation in accordance with the formula in paragraph 9.46, when the bank:
(1) Has a well-founded legal basis for concluding that the netting or offsetting agreement is enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt;
(2) Is able at any time to determine those assets and liabilities with the same counterparty that are subject to the netting agreement;
(3) Monitors and controls its roll-off risks; and
(4) Monitors and controls the relevant exposures on a net basis,
9.68 When calculating the net exposure described in the paragraph above, assets (loans) are treated as exposure and liabilities (deposits) as collateral. The haircuts are zero except when a currency mismatch exists. A 10-business day holding period applies when daily mark-to-market is conducted. For on-balance sheet netting, the requirements in paragraphs 9.49, 9.58 and 9.10 to 0 must be applied.
Guarantees and Credit Derivatives
Operational requirements for guarantees and credit derivatives
9.69 If conditions set below are met, banks can substitute the risk weight of the counterparty with the risk weight of the guarantor.
9.70 A guarantee (counter-guarantee) or credit derivative must satisfy the following requirements:
(1) it represents a direct claim on the protection provider;
(2) it is explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible;
(3) other than non-payment by a protection purchaser of money due in respect of the credit protection contract it is irrevocable;
(4) there is no clause in the contract that would allow the protection provider unilaterally to cancel the credit cover, change the maturity agreed ex post, or that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure;
(5) it must be unconditional; there should be no clause in the protection contract outside the direct control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the underlying counterparty fails to make the payment(s) due.
9.71 In the case of maturity mismatches, the amount of credit protection that is provided must be adjusted in accordance with paragraphs 9.10 to 0.
Specific operational requirements for guarantees
9.72 In addition to the legal certainty requirements in paragraph 9.9, in order for a guarantee to be recognized, the following requirements must be satisfied:
(1) On the qualifying default/non-payment of the counterparty, the bank may in a timely manner pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal action in order to pursue the counterparty for payment.
(2) The guarantee is an explicitly documented obligation assumed by the guarantor.
(3) Except as noted in the following sentence, the guarantee covers all types of payments the underlying counterparty is expected to make under the documentation governing the transaction, for example notional amount, margin payments, etc. Where a guarantee covers payment of principal only, interests and other uncovered payments must be treated as an unsecured amount in accordance with the rules for proportional cover described in paragraph 9.79.
Specific operational requirements for credit derivatives
9.73 In addition to the legal certainty requirements in paragraph 9.9, in order for a credit derivative contract to be recognized, the following requirements must be satisfied:
(1) The credit events specified by the contracting parties must at a minimum cover:
(a) failure to pay the amounts due under terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with the grace period in the underlying obligation);
(b) bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
(c) restructuring47 of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. write-off, specific provision or other similar debit to the profit and loss account).
(2) If the credit derivative covers obligations that do not include the underlying obligation, point (7) below governs whether the asset mismatch is permissible.
(3) The credit derivative shall not terminate prior to expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay. In the case of a maturity mismatch, the provisions of paragraphs 9.10 to 0 must be applied.
(4) Credit derivatives allowing for cash settlement are recognized for capital purposes insofar as a robust valuation process is in place in order to estimate loss reliably. There must be a clearly specified period for obtaining post- credit-event valuations of the underlying obligation. If the reference obligation specified in the credit derivative for purposes of cash settlement is different from the underlying obligation, section (7) below governs whether the asset mismatch is permissible.
(5) If the protection purchaser’s right/ability to transfer the underlying obligation to the protection provider is required for settlement, the terms of the underlying obligation must provide that any required consent to such transfer may not be unreasonably withheld.
(6) The identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the protection seller. The protection buyer must have the right/ability to inform the protection provider of the occurrence of a credit event.
(7) A mismatch between the underlying obligation and the reference obligation under the credit derivative (i.e. the obligation used for purposes of determining cash settlement value or the deliverable obligation) is permissible if:
(a) The reference obligation ranks pari passu with or is junior to the underlying obligation; and
(b) The underlying obligation and reference obligation share the same obligor (i.e. The same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.
(8) A mismatch between the underlying obligation and the obligation used for purposes of determining whether a credit event has occurred is permissible if:
(a) The latter obligation ranks pari passu with or is junior to the underlying obligation; and
(b) The underlying obligation and reference obligation share the same obligor (i.e. The same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.
9.74 When the restructuring of the underlying obligation is not covered by the credit derivative, but the other requirements in paragraph 9.73 are met, partial recognition of the credit derivative will be allowed. If the amount of the credit derivative is less than or equal to the amount of the underlying obligation, 60% of the amount of the hedge can be recognized as covered. If the amount of the credit derivative is larger than that of the underlying obligation, then the amount of eligible hedge is capped at 60% of the amount of the underlying obligation.
Range of eligible guarantors (counter-guarantors)/protection providers and credit derivatives
9.75 Credit protection given by the following entities can be recognized when they have a lower risk weight than the counterparty:
(1) Sovereign entities48, PSEs, multilateral development banks (MDBs), banks, securities firms and other prudentially regulated financial institutions with alower risk weight than the counterparty49;
(2) Other entities that are externally rated except when credit protection is provided to a securitization exposure. This would include credit protection provided by a parent, subsidiary and affiliate companies when they have a lower risk weight than the obligor;
(3) When credit protection is provided to a securitization exposure, other entities that currently are externally rated BBB– or better and that were externally rated A– or better at the time the credit protection was provided. This would include credit protection provided by parent, subsidiary and affiliate companies when they have a lower risk weight than the obligor.
9.76 Only credit default swaps and total return swaps that provide credit protection equivalent to guarantees are eligible for recognition50. The following exception applies: where a bank buys credit protection through a total return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection will not be recognized.
9.77 First-to-default and all other nth-to-default credit derivatives (i.e. by which a bank obtains credit protection for a basket of reference names and where the first- ornth–to-default among the reference names triggers the credit protection and terminates the contract) are not eligible as a credit risk mitigation technique and therefore cannot provide any regulatory capital relief. In transactions in which a bank provided credit protection through such instruments, it shall apply the treatment described in paragraph 7.94.
Risk-weight treatment of transactions in which eligible credit protection is provided
9.78 The general risk-weight treatment for transactions in which eligible credit protection is provided is as follows:
(1) The protected portion is assigned the risk weight of the protection provider. The uncovered portion of the exposure is assigned the risk weight of the underlying counterparty.
(2) Materiality thresholds on payments below which the protection provider is exempt from payment in the event of loss are equivalent to retained first- loss positions. The portion of the exposure that is below a materiality threshold must be assigned a risk weight of 1250% by the bank purchasing the credit protection.
9.79 Where losses are shared pari passu on a pro rata basis between the bank and the guarantor, capital relief is afforded on a proportional basis, i.e. the protected portion of the exposure receives the treatment applicable to eligible guarantees /credit derivatives, with the remainder treated as unsecured.
9.80 Where the bank transfers a portion of the risk of an exposure in one or more tranches to a protection seller or sellers and retains some level of the risk of the loan, and the risk transferred and the risk retained are of different seniority, banks may obtain credit protection for either the senior tranches (e.g. the second-loss portion) or the junior tranche (e.g. the first-loss portion). In this case the rules as set out in the securitization standard apply.
Currency mismatches
9.81 Where the credit protection is denominated in a currency different from that in which the exposure is denominated – i.e. there is a currency mismatch – the amount of the exposure deemed to be protected must be reduced by the application of a haircut HFX, using the formula that follows, where:
(1) G = nominal amount of the credit protection
(2) HFX = haircut appropriate for currency mismatch between the credit protection and underlying obligation
9.82 The currency mismatch haircut for a 10-business day holding period (assuming daily marking to market) is 8%. This haircut must be scaled up using the square root of time formula, depending on the frequency of revaluation of the credit protection as described in paragraph 9.58.
Sovereign guarantees and counter-guarantees
9.83 As specified in paragraph 7.2, a 0% risk weight may be applied to a bank’s exposures to Saudi sovereign (or SAMA) where the exposure is denominated in and funded in Saudi Riyal. This treatment can be extended to portions of exposures guaranteed by the sovereign (or central bank), where the guarantee is denominated in the domestic currency and the exposure is funded in that currency. An exposure may be covered by a guarantee that is indirectly counter-guaranteed by a sovereign. Such an exposure may be treated as covered by a sovereign guarantee provided that:
(1) the sovereign counter-guarantee covers all credit risk elements of the exposure;
(2) both the original guarantee and the counter-guarantee meet all operational requirements for guarantees, except that the counter-guarantee need not be direct and explicit to the original exposure; and
(3) SAMA is satisfied that the cover is robust and that no historical evidence suggests that the coverage of the counter-guarantee is less than effectively.
47 When hedging corporate exposures, this particular credit event is not required to be specified provided that: (1) a 100% vote is needed to amend maturity, principal, coupon, currency or seniority status of the underlying corporate exposure; and (2) the legal domicile in which the corporate exposure is governed has a well-established bankruptcy code that allows for a company to reorganize/restructure and provides for an orderly settlement of creditor claims. If these conditions are not met, then the treatment in paragraph 9.74 may be eligible.
48 This includes the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Union, the European Stability Mechanism and the European Financial Stability Facility, as well as MDBs eligible for a 0% risk weight as defined in paragraph 7.9.
49 A prudentially regulated financial institution is defined as: a legal entity supervised by a regulator that imposes prudential requirements consistent with international norms or a legal entity (parent company or subsidiary) included in a consolidated group 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, broker/dealers, thrifts and futures commission merchants, and qualifying central counterparties as defined in chapter 8 of the Credit Counterparty Risk (CCR) framework.
50 Cash-funded credit-linked notes issued by the bank against exposures in the banking book that fulfil all minimum requirements for credit derivatives are treated as cash-collateralized transactions. However, in this case the limitations regarding the protection provider as set out in paragraph 9.75 do not apply.10. IRB Approach: Overview and Asset Class Definitions
10.1 This chapter describes the internal ratings-based (IRB) approach for credit risk. Subject to certain minimum conditions and disclosure requirements, banks that have received SAMA’s approval to use the IRB approach may rely on their own internal estimates of risk components in determining the capital requirement for a given exposure. The risk components include measures of the probability of default (PD), loss given default (LGD), the exposure at default (EAD), and effective maturity (M). In some cases, banks may be required to use a supervisory value as opposed to an internal estimate for one or more of the risk components.
10.2 The IRB approach is based on measures of unexpected losses (UL) and expected losses. The risk-weight functions, as outlined in chapter 11, produce capital requirements for the UL portion. Expected losses are treated separately, as outlined in chapter 15.
10.3 In this chapter, first the asset classes (e.g. corporate exposures and retail exposures) eligible for the IRB approach are defined. Second, there is a description of the risk components to be used by banks by asset class. Third, the requirements are outlined that relate to a bank’s adoption of the IRB approach at the asset class level and the related roll-out requirements. In cases where an IRB treatment is not specified, the risk weight for those other exposures is 100%, except when a 0% risk weight applies under the standardized approach, and the resulting risk-weighted assets are assumed to represent UL only. Moreover, banks must apply the risk weights referenced in paragraphs 7.53, 7.54 and 7.101 of the standardized approach to the exposures referenced in those paragraphs (that is, investments that are assessed against certain materiality thresholds).
Categorization of Exposures
10.4 Under the IRB approach, banks must categorize banking-book exposures into broad classes of assets with different underlying risk characteristics, subject to the definitions set out below. The classes of assets are (a) corporate, (b) sovereign, (c) bank, (d) retail, and (e) equity. Within the corporate asset class, five sub-classes of specialized lending are separately identified. Within the retail asset class, three sub-classes are separately identified. Within the corporate and retail asset classes, a distinct treatment for purchased receivables may also apply provided that certain conditions are met. For the equity asset class, the IRB approach is not permitted, as outlined further below.
10.5 The classification of exposures in this way is broadly consistent with established bank practice. However, some banks may use different definitions in their internal risk management and measurement systems. Banks are required to apply the appropriate treatment to each exposure for the purposes of deriving their minimum capital requirement. Banks must demonstrate to SAMA that their methodology for assigning exposures to different classes is appropriate and consistent over time.
Definition of Corporate Exposures
10.6 In general, a corporate exposure is defined as a debt obligation of a corporation, partnership, or proprietorship. Banks are permitted to distinguish separately exposures to micro, small or medium-sized entities (MSME), as defined in paragraph 11.8.
10.7 In addition to general corporates, within the corporate asset class five sub-classes of specialized lending (SL) are identified. Such lending possesses all the following characteristics, in legal form or economic substance:
(1) The exposure is typically to an entity (often a special purpose vehicle (SPV)) that was created specifically to finance and/or operate physical assets,
(2) The borrowing entity has little or no other material assets or activities, and therefore little or no independent capacity to repay the obligation, apart from the income that it receives from the asset(s) being financed;
(3) The terms of the obligation give the lender a substantial degree of control over the asset(s) and the income that it generates; and
(4) As a result of the preceding factors, the primary source of repayment of the obligation is the income generated by the asset(s), rather than the independent capacity of a broader commercial enterprise.
10.8 The five sub-classes of SL are project finance (PF), object finance (OF), commodities finance (CF), income-producing real estate (IPRE) lending, and high-volatility commercial real estate (HVCRE) lending. Each of these subclasses is defined below.
Project Finance
10.9 PF is a method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, environment, and telecommunications infrastructure. Project finance may take the form of financing of the construction of a new capital installation, or refinancing of an existing installation, with or without improvements.
10.10 In such transactions, the lender is usually paid solely or almost exclusively out of the money generated by the contracts for the facility’s output, such as the electricity sold by a power plant. The borrower is usually an SPV that is not permitted to perform any function other than developing, owning, and operating the installation. The consequence is that repayment depends primarily on the project’s cash flow and on the collateral value of the project’s assets. In contrast, if repayment of the exposure depends primarily on a well-established, diversified, credit-worthy, contractually obligated end user for repayment, it is considered a secured exposure to that end-user.
Object Finance
10.11 OF refers to a method of funding the acquisition of physical assets (e.g. ships, aircraft, satellites, railcars, or fleets) where the repayment of the exposure is dependent on the cash flows generated by the specific assets that have been financed and pledged or assigned to the lender. A primary source of these cash flows might be rental or lease contracts with one or several third parties. In contrast, if the exposure is to a borrower whose financial condition and debt servicing capacity enables it to repay the debt without undue reliance on the specifically pledged assets, the exposure should be treated as a collateralized corporate exposure.
Commodities Finance
10.12 CF refers to structured short-term lending to finance reserves, inventories, or receivables of exchange-traded commodities (e.g. crude oil, metals, or crops), where the exposure will be repaid from the proceeds of the sale of the commodity and the borrower has no independent capacity to repay the exposure. This is the case when the borrower has no other activities and no other material assets on its balance sheet. The structured nature of the financing is designed to compensate for the weak credit quality of the borrower. The exposure’s rating reflects its self-liquidating nature and the lender’s skill in structuring the transaction rather than the credit quality of the borrower.
10.13 Such lending can be distinguished from exposures financing the reserves, inventories, or receivables of other more diversified corporate borrowers. Banks are able to rate the credit quality of the latter type of borrowers based on their broader ongoing operations. In such cases, the value of the commodity serves as a risk mitigant rather than as the primary source of repayment.
Income-Producing Real Estate Lending
10.14 IPRE lending refers to a method of providing funding to real estate (such as, office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, or hotels) where the prospects for repayment and recovery on the exposure depend primarily on the cash flows generated by the asset. The primary source of these cash flows would generally be lease or rental payments or the sale of the asset. The borrower may be, but is not required to be, an SPV, an operating company focused on real estate construction or holdings, or an operating company with sources of revenue other than real estate. The distinguishing characteristic of IPRE versus other corporate exposures that are collateralized by real estate is the strong positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property.
High-Volatility Commercial Real Estate Lending
10.15 HVCRE lending is the financing of commercial real estate that exhibits higher loss rate volatility (i.e. higher asset correlation) compared to other types of SL. HVCRE includes:
(1) Commercial real estate exposures secured by properties of types that are categorized by SAMA as sharing higher volatilities in portfolio default rates;
(2) Loans financing any of the land acquisition, development and construction (ADC) phases for properties of those types in such jurisdictions; and
(3) Loans financing ADC of any other properties where the source of repayment at origination of the exposure is either the future uncertain sale of the property or cash flows whose source of repayment is substantially uncertain (e.g. the property has not yet been leased to the occupancy rate prevailing in that geographic market for that type of commercial real estate), unless the borrower has substantial equity at risk. Commercial ADC loans exempted from treatment as HVCRE loans on the basis of certainty of repayment or borrower equity are, however, ineligible for the additional reductions for SL exposures described in paragraph 13.4.
Definition of Sovereign Exposures
10.16 This asset class covers all exposures to counterparties treated as sovereigns under the standardized approach. This includes sovereigns (and their central banks), certain public sector entities (PSEs) identified as sovereigns in the standardized approach, multilateral development banks (MDBs) that meet the criteria for a 0% risk weight and referred to in the first footnote in paragraph 7.9, and the entities referred to in paragraph 7.4.
Definition of Bank Exposures
10.17 This asset class covers exposures to banks as defined in paragraph 7.12 and those securities firms and other financial institutions set out in paragraph 7.36 that are treated as exposures to banks. Bank exposures also include covered bonds as defined in paragraph 7.29 as well as claims on all domestic PSEs that are not treated as exposures to sovereigns under the standardized approach, and MDBs that do not meet the criteria for a 0% risk weight under the standardized approach (i.e. MDBs that are not listed in paragraph 7.10). This asset class also includes exposures to the entities listed in this paragraph that are in the form of subordinated debt or regulatory capital instruments (which form their own asset class within the standardized approach), provided that such instruments: (i) do not fall within the scope of equity exposures as defined in paragraph 10.24; (ii) are not deducted from regulatory capital or risk-weighted at 250% according to Article 4.4 – Section A of SAMA Guidance Document Concerning the Implementation of Basel III (Circular No. 341000015689, Date: 19 December 2012); and (iii) are not risk weighted at 1250% according to paragraph 7.54.
Definition of Retail Exposures
10.18 An exposure is categorized as a retail exposure if it meets all of the criteria set out in paragraph 10.19 (which relate to the nature of the borrower and value of individual exposures) and all of the criteria set out in paragraph 10.20 (which relate to the size of the pool of exposures).
10.19 The criteria related to the nature of the borrower and value of the individual exposures are as follows:
(1) Exposures to individuals - such as revolving credits and lines of credit (e.g. credit cards, overdrafts, or retail facilities secured by financial instruments) as well as personal term loans and leases (e.g. instalment loans, auto loans and leases, student and educational loans, personal finance, or other exposures with similar characteristics) – are generally eligible for retail treatment regardless of exposure size.
(2) Where a loan is a residential mortgage (including first and subsequent liens, term loans and revolving home equity lines of credit) it is eligible for retail treatment regardless of exposure size so long as the credit is an exposure to an individual51.
(3) Where loans are extended to MSMEs and managed as retail exposures they are eligible for retail treatment provided the total exposure of the banking group to a MSME borrower (on a consolidated basis where applicable) is less than SAR 4.46 million. MSMEs loans extended through or guaranteed by an individual are subject to the same exposure threshold.
10.20 The criteria related to the size of the pool of exposures are as follows:
(1) The exposure must be one of a large pool of exposures, which are managed by the bank on a pooled basis.
(2) Where a loan gives rise to a small business exposure below SAR 4 million, it may be treated as retail exposures if the bank treats such exposures in its internal risk management systems consistently over time and in the same manner as other retail exposures. This requires that such an exposure be originated in a similar manner to other retail exposures. Furthermore, it must not be managed individually in a way comparable to corporate exposures, but rather as part of a portfolio segment or pool of exposures with similar risk characteristics for purposes of risk assessment and quantification. However, this does not preclude retail exposures from being treated individually at some stages of the risk management process. The fact that an exposure is rated individually does not by itself deny the eligibility as a retail exposure.
10.21 Within the retail asset class category, banks are required to identify separately three sub-classes of exposures:
(1) Residential mortgage loans, as defined above;
(2) Qualifying revolving retail exposures, as defined in the following paragraph; and
(3) All other retail exposures.
Definition of qualifying revolving retail exposures
10.22 All of the following criteria must be satisfied for a sub-portfolio to be treated as a qualifying revolving retail exposure (QRRE). These criteria must be applied at a sub-portfolio level consistent with the bank’s segmentation of its retail activities generally. Segmentation at the national or country level (or below) should be the general rule.
(1) The exposures are revolving, unsecured, and uncommitted (both contractually and in practice). In this context, revolving exposures are defined as those where customers’ outstanding balances are permitted to fluctuate based on their decisions to borrow and repay, up to a limit established by the bank.
(2) The exposures are to individuals.
(3) The maximum exposure to a single individual in the sub-portfolio is SAR 400,000 or less.
(4) Because the asset correlation assumptions for the QRRE risk-weight function are markedly below those for the other retail risk-weight function at low PD values, banks must demonstrate that the use of the QRRE risk-weight function is constrained to portfolios that have exhibited low volatility of loss rates, relative to their average level of loss rates, especially within the low PD bands.
(5) Data on loss rates for the sub-portfolio must be retained in order to allow analysis of the volatility of loss rates.
(6) The supervisor must concur that treatment as a qualifying revolving retail exposure is consistent with the underlying risk characteristics of the sub-portfolio.
10.23 The QRRE sub-class is split into exposures to transactors and revolvers. A QRRE transactor is an exposure to an obligor that meets the definition set out in paragraph 7.56. That is, the exposure is to an obligor in relation to a facility such as credit card or charge card where the balance has been repaid in full at each scheduled repayment date for the previous 12 months, or the exposure is in relation to an overdraft facility if there have been no drawdowns over the previous 12 months. All exposures that are not QRRE transactors are QRRE revolvers, including QRRE exposures with less than 12 months of repayment history.
51 SAMA may exclude from the retail residential mortgage sub-asset class loans to individuals that have mortgaged no more than two properties or housing units, and treat such loans as corporate exposures.
Definition of Equity Exposures
10.24 This asset class covers exposures to equities as defined in paragraphs 7.47 to 7.49.
Definition of Eligible Purchased Receivables
10.25 Eligible purchased receivables are divided into retail and corporate receivables as defined below.
Retail receivables
10.26 Purchased retail receivables, provided the purchasing bank complies with the IRB rules for retail exposures, are eligible for the top-down approach as permitted within the existing standards for retail exposures. The bank must also apply the minimum operational requirements as set in chapters 14 and 16.
Corporate receivables
10.27 In general, for purchased corporate receivables, banks are expected to assess the default risk of individual obligors as specified in paragraphs 11.3 to 11.12 consistent with the treatment of other corporate exposures. However, the topdown approach may be used, provided that the purchasing bank’s programme for corporate receivables complies with both the criteria for eligible receivables and the minimum operational requirements of this approach. The use of the topdown purchased receivables treatment is limited to situations where it would be an undue burden on a bank to be subjected to the minimum requirements for the IRB approach to corporate exposures that would otherwise apply. Primarily, it is intended for receivables that are purchased for inclusion in asset-backed securitization structures, but banks may also use this approach, with the approval of SAMA, for appropriate on-balance sheet exposures that share the same features.
10.28 SAMA may deny the use of the top-down approach for purchased corporate receivables depending on the bank’s compliance with minimum requirements. In particular, to be eligible for the proposed ‘top-down’ treatment, purchased corporate receivables must satisfy the following conditions:
(1) The receivables are purchased from unrelated, third party sellers, and as such the bank has not originated the receivables either directly or indirectly.
(2) The receivables must be generated on an arm’s-length basis between the seller and the obligor. (As such, intercompany accounts receivable and receivables subject to contra-accounts between firms that buy and sell to each other are ineligible.52)
(3) The purchasing bank has a claim on all proceeds from the pool of receivables or a pro-rata interest in the proceeds.53
(4) SAMA may establish concentration limits above which capital charges must be calculated using the minimum requirements for the bottom-up approach for corporate exposures.
10.29 The existence of full or partial recourse to the seller does not automatically disqualify a bank from adopting this top-down approach, as long as the cash flows from the purchased corporate receivables are the primary protection against default risk as determined by the rules in paragraphs 14.4 to 14.7 for purchased receivables and the bank meets the eligibility criteria and operational requirements.
52 Contra-accounts involve a customer buying from and selling to the same firm. The risk is that debts may be settled through payments in kind rather than cash. Invoices between the companies may be offset against each other instead of being paid. This practice can defeat a security interest when challenged in court.
53 Claims on tranches of the proceeds (first loss position, second loss position, etc.) would fall under the securitization treatment.Foundation and Advanced Approaches
10.30 For each of the asset classes covered under the IRB framework, there are three key elements:
(1) Risk components: estimates of risk parameters provided by banks, some of which are supervisory estimates.
(2) Risk-weight functions: the means by which risk components are transformed into risk-weighted assets and therefore capital requirements.
(3) Minimum requirements: the minimum standards that must be met in order for a bank to use the IRB approach for a given asset class.
10.31 For certain asset classes, there are two broad approaches: a foundation and an advanced approach. Under the foundation approach (F-IRB approach), as a general rule, banks provide their own estimates of PD and rely on supervisory estimates for other risk components. Under the advanced approach (A-IRB approach), banks provide their own estimates of PD, LGD and EAD, and their own calculation of M, subject to meeting minimum standards. For both the foundation and advanced approaches, banks must always use the risk-weight functions provided in this Framework for the purpose of deriving capital requirements. The full suite of approaches is described below.
10.32 For exposures to equities, as defined in paragraph 10.24, the IRB approaches are not permitted (see paragraph 10.41). In addition, the A-IRB approach cannot be used for the following:
(1) Exposures to general corporates (i.e. exposures to corporates that are not classified as specialized lending) belonging to a group with total consolidated annual revenues greater than SAR 2,230m.
(2) Exposures in the bank asset class in paragraph 10.17, and other securities firms and financial institutions (including insurance companies and any other financial institutions in the corporate asset class).
10.33 In making the assessment for the revenue threshold in paragraph 10.32, the amounts must be as reported in the audited financial statements of the corporates or, for corporates that are part of consolidated groups, their consolidated groups (according to the accounting standard applicable to the ultimate parent of the consolidated group). The figures must be based on the average amounts calculated over the prior three years, or on the latest amounts updated every three years by the bank.
Corporate, Sovereign and Bank Exposures
10.34 Under the foundation approach, banks must provide their own estimates of PD associated with each of their borrower grades, but must use supervisory estimates for the other relevant risk components. The other risk components are LGD, EAD and M54.
10.35 Under the advanced approach, banks must calculate the effective maturity (M)55 and provide their own estimates of PD, LGD and EAD.
10.36 There is an exception to this general rule for the five sub-classes of assets identified as SL.
The SL categories: PF, OF, CF, IPRE and HVCRE
10.37 Banks that do not meet the requirements for the estimation of PD under the corporate foundation approach for their SL exposures are required to map their internal risk grades to five supervisory categories, each of which is associated with a specific risk weight. This approach is termed the ‘supervisory slotting criteria approach’.
10.38 Banks that meet the requirements for the estimation of PD are able to use the foundation approach to corporate exposures to derive risk weights for all classes of SL exposures except HVCRE. SAMA may consider allowing banks meeting these requirements for HVCRE exposures to use a foundation approach that is similar in all respects to the corporate approach, with the exception of a separate risk-weight function as described in paragraph 11.11.
10.39 Banks that meet the requirements for the estimation of PD, LGD and EAD are able to use the advanced approach to corporate exposures to derive risk weights for all classes of SL exposures except HVCRE. SAMA may consider allowing banks meeting these requirements for HVCRE exposure are able to use an advanced approach that is similar in all respects to the corporate approach, with the exception of a separate risk-weight function as described in paragraph 11.11.
54 As noted in paragraph 12.44 2012.44, SAMA may require banks using the foundation approach to calculate M using the definition provided in paragraphs 12.46 to 12.55.
55 At the discretion of SAMA, certain domestic exposures may be exempt from the calculation of M (see paragraph 12.44).Retail Exposures
10.40 For retail exposures, banks must provide their own estimates of PD, LGD and EAD. There is no foundation approach for this asset class.
Equity Exposures
10.41 All equity exposures are subject to the approach set out in paragraph 7.50 of the standardized approach for credit risk, with the exception of equity investments in funds that are subject to the requirements set out in chapter 24.
Eligible Purchased Receivables
10.42 The treatment potentially straddles two asset classes. For eligible corporate receivables, both a foundation and advanced approach are available subject to certain operational requirements being met. As noted in paragraph 10.27, for corporate purchased receivables, banks are in general expected to assess the default risk of individual obligors. The bank may use the A-IRB treatment for purchased corporate receivables (paragraphs 14.6 to 14.7) only for exposures to individual corporate obligors that are eligible for the A-IRB approach according to paragraphs 10.32 and 10.33. Otherwise, the F-IRB treatment for purchased corporate receivables should be used. For eligible retail receivables, as with the retail asset class, only the A-IRB approach is available.
Adoption of the IRB Approach for Asset Classes
10.43 Once a bank adopts an IRB approach for part of its holdings within an asset class, it is expected to extend it across all holdings within that asset class. In this context, the relevant assets classes are as follows:
(1) Sovereigns
(2) Banks
(3) Corporates (excluding specialized lending and purchased receivables)
(4) Specialized lending
(5) Corporate purchased receivables
(6) QRRE
(7) Retail residential mortgages
(8) Other retail (excluding purchased receivables)
(9) Retail purchased receivables.
10.44 For many banks, it may not be practicable for various reasons to implement the IRB approach for an entire asset class across all business units at the same time. Furthermore, once on IRB, data limitations may mean that banks can meet the standards for the use of own estimates of LGD and EAD for some but not all of their exposures within an asset class at the same time (for example, exposures that are in the same asset class, but are in different business units).
10.45 As such, SAMA will consider allowing banks to adopt a phased rollout of the IRB approach across an asset class. The phased rollout includes: (i) adoption of IRB across the asset class within the same business unit; (ii) adoption of IRB for the asset class across business units in the same banking group; and (iii) move from the foundation approach to the advanced approach for certain risk components where use of the advanced approach is permitted. However, when a bank adopts an IRB approach for an asset class within a particular business unit, it must apply the IRB approach to all exposures within that asset class in that unit.
10.46 If a bank intends to adopt an IRB approach to an asset class, it must produce an implementation plan, specifying to what extent and when it intends to roll out the IRB approaches within the asset class and business units. The plan should be realistic, and must be agreed with the SAMA. It should be driven by the practicality and feasibility of moving to the more advanced approaches, and not motivated by a desire to adopt an approach that minimizes its capital charge. During the roll-out period, SAMA will ensure that no capital relief is granted for intra-group transactions which are designed to reduce a banking group’s aggregate capital charge by transferring credit risk among entities on the standardized approach, foundation and advanced IRB approaches. This includes, but is not limited to, asset sales or cross guarantees.
10.47 Some exposures that are immaterial in terms of size and perceived risk profile within their asset class may be exempt from the requirements in the previous two paragraphs, subject to supervisory approval. Capital requirements for such operations will be determined according to the standardized approach, SAMA will determine whether a bank should hold more capital under the supervisory review process for such positions.
10.48 Banks adopting an IRB approach for an asset class are expected to continue to employ an IRB approach for that asset class. A voluntary return to the standardized or foundation approach is permitted only in extraordinary circumstances, such as divestiture of a large fraction of the bank’s credit-related business in that asset class, and must be approved by SAMA
10.49 Given the data limitations associated with SL exposures, a bank may remain on the supervisory slotting criteria approach for one or more of the PF, OF, CF, IPRE or HVCRE sub-classes, and move to the foundation or advanced approach for the other sub-classes. However, a bank should not move to the advanced approach for the HVCRE sub-class without also doing so for material IPRE exposures at the same time.
10.50 Irrespective of the materiality, exposures to central counterparties arising from over-the-counter derivatives, exchange traded derivatives transactions and securities financing transactions must be treated according to the dedicated treatment laid down in chapter 8 of The Counterparty Credit Risk (CCR) Framework.
11. IRB Approach: Risk Weight Functions
11.1 This chapter presents the calculation of risk weighted assets under the internal ratings-based (IRB) approach for: (i) corporate, sovereign and bank exposures; and (ii) retail exposures. Risk weighted assets are designed to address unexpected losses from exposures. The method of calculating expected losses, and for determining the difference between that measure and provisions, is described in chapter 15.
Explanation of the Risk-Weight Functions
11.2 Regarding the risk-weight functions for deriving risk weighted assets set out in this chapter:
(1) Probability of default (PD) and loss-given-default (LGD) are measured as decimals
(2) Exposure at default (EAD) is measured as currency (e.g. SAR), except where explicitly noted otherwise
(3) ln denotes the natural logarithm
(4) N(x) denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x). The normal cumulative distribution function is, for example, available in Excel as the function NORMSDIST.
(5) G(z) denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value of x such that N(x) = z). The inverse of the normal cumulative distribution function is, for example, available in Excelas the function NORMSINV.
Risk-Weighted Assets for Exposures that are in Default
11.3 The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph 16.82) and the bank’s best estimate of expected loss (described in paragraph 16.85). The risk- weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.
Risk-Weighted Assets for Corporate, Sovereign and Bank Exposures that are not in Default
Risk-weight functions for corporate, sovereign and bank exposures
11.4 The derivation of risk-weighted assets is dependent on estimates of the PD, LGD, EAD and, in some cases, effective maturity (M), for a given exposure.
11.5 For exposures not in default, the formula for calculating risk-weighted assets is as follows
11.6 Regarding the formula set out in paragraph 11.5 above, M is the effective maturity, calculated according to paragraphs 12.43 to 12.54, and the following term is used to refer to a specific part of the capital requirements formula:
11.7 A multiplier of 1.25 is applied to the correlation parameter of all exposures to financial institutions meeting the following criteria:
(1) Regulated financial institutions whose total assets are greater than or equal to SAR 375 billion. The most recent audited financial statement of the parent company and consolidated subsidiaries must be used in order to determine asset size. For the purpose of this paragraph, a regulated financial institutionis 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, Broker/Dealers, Banks, Thrifts and Futures Commission Merchants.
(2) Unregulated financial institutions, regardless of size. Unregulated financial institutions are, for the purposes of this paragraph, legal entities whose main business includes: the management of financial assets, lending, factoring, leasing, provision of credit enhancements, securitization, investments, financial custody, central counterparty services, proprietary trading and other financial services activities identified by supervisors.
Firm-size adjustment for micro, small or medium-sized entities (MSMEs)
11.8 Under the IRB approach for corporate credits, banks will be permitted to separately distinguish exposures to MSME borrowers (defined as corporate exposures where the reported revenues for the consolidated group of which the firm is a part is less than SAR 223 million) from those to large firms. A firm-size adjustment (i.e. 0.04 x (1 – (S – 5) / 45)) is made to the corporate risk weight formula for exposures to MSME borrowers. S is expressed as total annual revenues in millions of SAR with values of S falling in the range of equal to or less than SAR 223 million or greater than or equal to SAR 22.3 million. Reported revenue of less than SAR 20 million will be treated as if they were equivalent to SAR 20 million for the purposes of the firm-size adjustment for MSME borrowers.
11.9 SAMA may allow banks, as a failsafe, to substitute total assets of the consolidated group for total revenues in calculating the MSME threshold and the firm-size adjustment. However, total assets should be used only when total revenues are not a meaningful indicator of firm size.
Risk weights for specialized lending
11.10 Regarding project finance, object finance, commodities finance and income producing real estate sub-asset classes of specialized lending (SL):
(1) Banks that meet the requirements for the estimation of PD will be able to use the foundation IRB (F-IRB) approach for the corporate asset class to derive risk weights for SL sub-classes. As specified in paragraph 13.2, banks that do not meet the requirements for the estimation of PD will be required to use the supervisory slotting approach.
(2) Banks that meet the requirements for the estimation of PD, LGD and EAD (where relevant) will be able to use the advanced IRB (A-IRB) approach for the corporate asset class to derive risk weights for SL subclasses.
11.11 Regarding the high volatility commercial real estate (HVCRE) sub-asset class of specialized lending, banks that meet the requirements for the estimation of PD and whose supervisor has chosen to implement a foundation or advanced approach to HVCRE exposures will use the same formula for the derivation of risk weights that is used for other SL exposures, except that they will apply the following asset correlation formula:
11.12 Banks that do not meet the requirements for estimation of LGD or EAD for HVCRE exposures must use the supervisory parameters for LGD and EAD for corporate exposures, or use the supervisory slotting approach. Risk-weighted assets for retail exposures that are not in default
11.13 There are three separate risk-weight functions for retail exposures, as defined in paragraphs 11.14 to 11.16. Risk weights for retail exposures are based on separate assessments of PD and LGD as inputs to the risk-weight functions. None of the three retail risk-weight functions contain the full maturity adjustment component that is present in the risk-weight function for exposures to banks, sovereigns and corporates.
Retail residential mortgage exposures
11.14 For exposures defined in paragraph 10.18 that are not in default and are secured or partly secured56 by residential mortgages, risk weights will be assigned based on the following formula:
Qualifying revolving retail exposures
11.15 For qualifying revolving retail exposures as defined in paragraphs 10.21 and 10.22 that are not in default, risk weights are defined based on the following formula:
Other retail exposures
11.16 For all other retail exposures that are not in default, risk weights are assigned based on the following function, which allows correlation to vary with PD:
56 This means that risk weights for residential mortgages also apply to the unsecured portion of such residential mortgages.
12. IRB Approach: Risk Components
12.1 This chapter presents the calculation of the risk components (PD, LGD, EAD, M) that are used in the formulas set out in chapter 11. In calculating these components, the legal certainty standards for recognizing credit risk mitigation under the standardized approach to credit risk (chapter 9) apply for both the foundation and advanced internal ratings-based (IRB) approaches.
Risk Components for Corporate, Sovereign and Bank Exposures
12.2 Paragraphs 12.2 to 12.56, sets out the calculation of the risk components for corporate, sovereign and bank exposures. In the case of an exposure that is guaranteed by a sovereign, the floors that apply to the risk components do not apply to that part of the exposure covered by the sovereign guarantee (i.e. any part of the exposure that is not covered by the guarantee is subject to the relevant floors).
Probability of default (PD)
12.3 For corporate, sovereign and bank exposures, the PD is the one-year PD associated with the internal borrower grade to which that exposure is assigned. The PD of borrowers assigned to a default grade(s), consistent with the reference definition of default, is 100%. The minimum requirements for the derivation of the PD estimates associated with each internal borrower grade are outlined in paragraphs 16.76 to 16.78.
12.4 With the exception of exposures in the sovereign asset class, the PD for each exposure that is used as input into the risk weight formula and the calculation of expected loss must not be less than 0.05%.
Loss given default (LGD)
12.5 A bank must provide an estimate of the LGD for each corporate, sovereign and bank exposure. There are two approaches for deriving this estimate: a foundation approach and an advanced approach. As noted in paragraph 10.32, the advanced approach is not permitted for exposures to certain entities.
LGD under the foundation internal ratings-based (F-IRB) approach: treatment of unsecured claims and non-recognized collateral
12.6 Under the foundation approach, senior claims on sovereigns, banks, securities firms and other financial institutions (including insurance companies and any financial institutions in the corporate asset class) that are not secured by recognized collateral will be assigned a 45% LGD. Senior claims on other corporates that are not secured by recognized collateral will be assigned a 40% LGD.
12.7 All subordinated claims on corporates, sovereigns and banks will be assigned a 75% LGD. A subordinated loan is a facility that is expressly subordinated to another facility.
LGD under the F-IRB approach: collateral recognition
12.8 In addition to the eligible financial collateral recognized in the standardized approach, under the F-IRB approach some other forms of collateral, known as eligible IRB collateral, are also recognized. These include receivables, specified commercial and residential real estate, and other physical collateral, where they meet the minimum requirements set out in paragraphs 16.130 to 16.146. For eligible financial collateral, the requirements are identical to the operational standards as set out in the credit risk mitigation section of the standardized approach (see chapter 9).
12.9 The simple approach to collateral presented in the standardized approach is not available to banks applying the IRB approach.
12.10 The LGD applicable to a collateralized transaction (LGD*) must be calculated as the exposure weighted average of the LGD applicable to the unsecured part of an exposure (LGDU) and the LGD applicable to the collateralized part of an exposure (LGDS). Specifically, the formula that follows must be used, where:
(1) E is the current value of the exposure (i.e. cash lent or securities lent or posted). In the case of securities lent or posted the exposure value has to be increased by applying the appropriate haircuts (HE) according to the comprehensive approach for financial collateral.
(2) ES is the current value of the collateral received after the application of the haircut applicable for the type of collateral (HC) and for any currency mismatches between the exposure and the collateral, as specified in paragraphs 12.11 to 12.12. ES is capped at the value of E ∙ (1+HE).
(3) EU = E ∙ (1+HE) – ES. The terms EU and ES are only used to calculate LGD*. Banks must continue to calculate EAD without taking into account the presence of any collateral, unless otherwise specified.
(4) LGDU is the LGD applicable for an unsecured exposure, as set out in paragraphs 12.6 and 12.7.
(5) LGDS is the LGD applicable to exposures secured by the type of Collateral used in the transaction, as specified in paragraph 12.11.
12.11 Table 16 below specifies the LGDS and haircuts applicable in the formula setout in paragraph 12.10:
Table 16 Type of collateral LGDS Haircut Eligible financial collateral 0% As determined by the haircuts that apply in the comprehensive formula of the standardized approach for credit risk (paragraph 9.49).
The haircuts have to be adjusted for different holding periods and non-daily re-margining or revaluation according to paragraphs 9.55 to 9.58 of the standardized approach.
Eligible receivables 20% 40% Eligible residential real estate / commercial real estate 20% 40% Other eligible physical collateral 25% 40% Ineligible collateral Not applicable 100% 12.12 When eligible collateral is denominated in a different currency to that of the exposure, the haircut for currency risk is the same haircut that applies in the comprehensive approach (paragraph 9.51 of the standardized approach).
12.13 Banks that lend securities or post collateral must calculate capital requirements for both of the following: (i) the credit risk or market risk of the securities, if this remains with the bank; and (ii) the counterparty credit risk arising from the risk that the borrower of the securities may default. Paragraphs 12.37 to 12.43 set out the calculation the EAD arising from transactions that give rise to counterparty credit risk. For such transactions the LGD of the counterparty must be determined using the LGD specified for unsecured exposures, as set out in paragraphs 12.6 and 12.7.
LGD under the F-IRB approach: methodology for the treatment of pools of collateral
12.14 In the case where a bank has obtained multiple types of collateral it may apply the formula set out in paragraph 12.10 sequentially for each individual type of collateral. In doing so, after each step of recognizing one individual type of collateral, the remaining value of the unsecured exposure (EU) will be reduced by the adjusted value of the collateral (ES) recognized in that step. In line with paragraph 12.10, the total of ES across all collateral types is capped at the value of E ∙ (1+HE). This results in the formula that follows, where for each collateral type i:
(1) LGDSi is the LGD applicable to that form of collateral (as specified in paragraph 0).
(2) ESi is the current value of the collateral received after the application of the haircut applicable for the type of collateral (HC) (as specified in paragraph 0).
LGD under the advanced approach
12.15 Subject to certain additional minimum requirements specified below (and the conditions set out in paragraph 10.32), SAMA may permit banks to use their own internal estimates of LGD for corporate and sovereign exposures. LGD must be measured as the loss given default as a percentage of the EAD. Banks eligible for the IRB approach that are unable to meet these additional minimum requirements must utilize the foundation LGD treatment described above.
12.16 The LGD for each corporate exposure that is used as input into the risk weight formula and the calculation of expected loss must not be less than the parameter floors indicated in table 17 below (the floors do not apply to the LGD for exposures in the sovereign asset class):
LGD parameter floors for corporate exposures Table 17 Unsecured Secured 25% Varying by collateral type: • 0% financial
• 10% receivables
• 10% commercial or residential real
• estate 15% other physical12.17 The LGD floors for secured exposures in the table above apply when the exposure is fully secured (i.e. the value of collateral after the application of haircuts exceeds the value of the exposure). The LGD floor for a partially secured exposure is calculated as a weighted average of the unsecured LGD floor for the unsecured portion and the secured LGD floor for the secured portion. That is, the following formula should be used to determine the LGD floor, where:
(1) LGDU floor and LGDS floor are the floor values for fully unsecured and fully secured exposures respectively, as specified in the table in paragraph 12.10.
(2) The other terms are defined as set out in paragraphs 12.10 and 0.
12.18 In cases where a bank has met the conditions to use their own internal estimates of LGD for a pool of unsecured exposures, and takes collateral against one of these exposures, it may not be able to model the effects of the collateral (i.e. it may not have enough data to model the effect of the collateral on recoveries). In such cases, the bank is permitted to apply the formula set out in paragraphs 12.10 or 12.14, with the exception that the LGDU term would be the bank’s own internal estimate of the unsecured LGD. To adopt this treatment the collateral must be eligible under the F-IRB and the bank’s estimate of LGDU must not take account of any effects of collateral recoveries.
12.19 The minimum requirements for the derivation of LGD estimates are outlined in paragraphs 16.82 to 16.87.
Treatment of certain repo-style transactions
12.20 Banks that want to recognize the effects of master netting agreements on repo style transactions for capital purposes must apply the methodology outlined in paragraph 12.38 for determining E* for use as the EAD in the calculation of counterparty credit risk. For banks using the advanced approach, own LGD estimates would be permitted for the unsecured equivalent amount (E*) used to calculate counterparty credit risk. In both cases banks, in addition to counterparty credit risk, must also calculate the capital requirements relating to any credit or market risk to which they remain exposed arising from the underlying securities in the master netting agreement.
Treatment of guarantees and credit derivatives
12.21 There are two approaches for recognition of credit risk mitigation (CRM) in the form of guarantees and credit derivatives in the IRB approach: a foundation approach for banks using supervisory values of LGD, and an advanced approach for those banks using their own internal estimates of LGD.
12.22 Under either approach, CRM in the form of guarantees and credit derivatives must not reflect the effect of double default (see paragraph 16.101). As such, to the extent that the CRM is recognized by the bank, the adjusted risk weight will not be less than that of a comparable direct exposure to the protection provider. Consistent with the standardized approach, banks may choose not to recognize credit protection if doing so would result in a higher capital requirement.
Treatment of guarantees and credit derivatives: recognition under the foundation approach
12.23 For banks using the foundation approach for LGD, the approach to guarantees and credit derivatives closely follows the treatment under the standardized approach as specified in paragraphs 9.69 to 9.83. The range of eligible guarantors is the same as under the standardized approach except that companies that are internally rated may also be recognized under the foundation approach. To receive recognition, the requirements outlined in paragraphs 9.69 to 9.74 of the standardized approach must be met.
12.24 Eligible guarantees from eligible guarantors will be recognized as follows:
(1) For the covered portion of the exposure, a risk weight is derived by taking:
(a) The risk-weight function appropriate to the type of guarantor, and
(b) The pd appropriate to the guarantor’s borrower grade.
(2) The bank may replace the LGD of the underlying transaction with the LGD applicable to the guarantee taking into account seniority and any collateralization of a guaranteed commitment. For example, when a bank has a subordinated claim on the borrower but the guarantee represents a senior claim on the guarantor this may be reflected by using an LGD applicable for senior exposures (see paragraph 12.6) instead of an LGD applicable for subordinated exposures.
(3) In case the bank applies the standardized approach to direct exposures to the guarantor it may only recognize the guarantee by applying the standardized approach to the covered portion of the exposure.
12.25 The uncovered portion of the exposure is assigned the risk weight associated with the underlying obligor.
12.26 Where partial coverage exists, or where there is a currency mismatch between the underlying obligation and the credit protection, it is necessary to split the exposure into a covered and an uncovered amount. The treatment in the foundation approach follows that outlined in paragraphs 9.79 to 9.80 of the standardized approach, and depends upon whether the cover is proportional or tranched.
Treatment of guarantees and credit derivatives: recognition under the advanced approach
12.27 Banks using the advanced approach for estimating LGDs may reflect the riskmitigating effect of guarantees and credit derivatives through either adjusting PD or LGD estimates. Whether adjustments are done through PD or LGD, they must be done in a consistent manner for a given guarantee or credit derivative type. In doing so, banks must not include the effect of double default in such adjustments. Thus, the adjusted risk weight must not be less than that of a comparable direct exposure to the protection provider. In case the bank applies the standardized approach to direct exposures to the guarantor it may only recognize the guarantee by applying the standardized approach to the covered portion of the exposure. In case the bank applies the F-IRB approach to direct exposures to the guarantor it may only recognize the guarantee by determining the risk weight for the comparable direct exposure to the guarantor according to the F-IRB approach.
12.28 A bank relying on own-estimates of LGD has the option to adopt the treatment outlined in paragraphs 12.23 to 12.26 above for banks under the F-IRB approach, or to make an adjustment to its LGD estimate of the exposure to reflect the presence of the guarantee or credit derivative. Under this option, there are no limits to the range of eligible guarantors although the set of minimum requirements provided in paragraphs 16.103 to 16.104 the type of guarantee must be satisfied. For credit derivatives, the requirements of paragraphs 16.109 to 16.110 must be satisfied57. For exposures for which a bank has permission to use its own estimates of LGD, the bank may recognize the risk mitigating effects of first-to-default credit derivatives, but may not recognize the risk mitigating effects of second-to-default or more generally nth-to-default credit derivatives.
Exposure at default (EAD)
12.29 The following sections apply to both on and off-balance sheet positions. All exposures are measured gross of specific provisions or partial write-offs. The EAD on drawn amounts should not be less than the sum of: (i) the amount by which a bank’s regulatory capital would be reduced if the exposure were written-off fully; and (ii) any specific provisions and partial write-offs. When the difference between the instrument’s EAD and the sum of (i) and (ii) is positive, this amount is termed a discount. The calculation of risk-weighted assets is independent of any discounts. Under the limited circumstances described in paragraph 15.4, discounts may be included in the measurement of total eligible provisions for purposes of the EL-provision calculation set out in chapter 15.
Exposure measurement for on-balance sheet items
12.30 On-balance sheet netting of loans and deposits will be recognized subject to the same conditions as under paragraph 9.67 of the standardized approach. Where currency or maturity mismatched on-balance sheet netting exists, the treatment follows the standardized approach, as set out in paragraphs 9.10 and 9.12 to 9.15
Exposure measurement for off-balance sheet items (with the exception of derivatives)
12.31 For off-balance sheet items there are two approaches for the estimation of EAD: a foundation approach and an advanced approach. When only the drawn balances of revolving facilities have been securitized, banks must ensure that they continue to hold required capital against the undrawn balances associated with the securitized exposures.
12.32 In the foundation approach, EAD is calculated as the committed but undrawn amount multiplied by a credit conversion factor (CCF). In the advanced approach, EAD for undrawn commitments may be calculated as the committed but undrawn amount multiplied by a CCF or derived from direct estimates of total facility EAD. In both the foundation approach and advanced approaches, the definition of commitments is the same as in the standardized approach, as set out in paragraph 7.86.
EAD under the foundation approach
12.33 The types of instruments and the CCFs applied to them under the F-IRB approach are the same as those in the standardized approach, as set out in paragraphs 7.86 to 7.93.
12.34 The amount to which the CCF is applied is the lower of the value of the unused committed credit line, and the value that reflects any possible constraining of the availability of the facility, such as the existence of a ceiling on the potential lending amount which is related to a borrower’s reported cash flow. If the facility is constrained in this way, the bank must have sufficient line monitoring and management procedures to support this contention.
12.35 Where a commitment is obtained on another off-balance sheet exposure, banks under the foundation approach are to apply the lower of the applicable CCFs.
EAD under the advanced approach
12.36 Banks which meet the minimum requirements for use of their own estimates of EAD (see paragraphs 16.88 to 16.97) will be allowed for exposures for which A-IRB is permitted (see paragraph 10.31) to use their own internal estimates of EAD for undrawn revolving commitments58 to extend credit, purchase assets or issue credit substitutes provided the exposure is not subject to a CCF of 100% in the foundation approach (see paragraph 12.33). Standardized approach CCFs must be used for all other off-balance sheet items (for example, undrawn nonrevolving commitments), and must be used where the minimum requirements for own estimates of EAD are not met. The EAD for each exposure that is not in the sovereign asset class that is used as input into the risk weight formula and the calculation of expected loss is subject to a floor that is the sum of: (i) the on balance sheet amount; and (ii) 50% of the off balance sheet exposure using the applicable CCF in the standardized approach.
Exposures that give rise to counterparty credit risk
12.37 For exposures that give rise to counterparty credit risk according to The Counterparty Credit Risk (CCR) Framework (i.e. OTC derivatives, exchange- traded derivatives, long settlement transactions and securities financing transactions (SFTs)), the EAD is to be calculated under the rules set in chapters 3 to 8 of the Counterparty Credit Risk (CCR) framework.
12.38 For SFTs, banks may recognize a reduction in the counterparty credit risk requirement arising from the effect of a master netting agreement providing that it satisfy the criteria set out in paragraphs 9.61 and 9.62 of the standardized approach. The bank must calculate E*, which is the exposure to be used for the counterparty credit risk requirement taking account of the risk mitigation of collateral received, using the formula set out in paragraph 9.64 of the standardized approach. In calculating risk-weighted assets and expected loss (EL) amounts for the counterparty credit risk arising from the set of transactions covered by the master netting agreement, E* must be used as the EAD of the counterparty.
12.39 As an alternative to the use of standard haircuts for the calculation of the counterparty credit risk requirement for SFTs set out in paragraph 12.38, banks may be permitted to use a value-at-risk (VaR) models approach to reflect price volatility of the exposures and the financial collateral. This approach can take into account the correlation effects between security positions. This approach applies to single SFTs and SFTs covered by netting agreements on a counter party-by-counterparty basis, both under the condition that the collateral is revalued on a daily basis. This holds for the underlying securities being different and unrelated to securitizations. The master netting agreement must satisfy the criteria set out in paragraphs 9.61 and 9.62 of the standardized approach. The VaR models approach is available to banks that have received supervisory recognition for an internal market risk model according to paragraph 10.2 in The Market Risk Framework. Banks which have not received market risk model recognition can separately apply for supervisory recognition to use their internal VaR models for the calculation of potential price volatility for SFTs, provided the model meets the requirements of paragraph 10.2 in The Market Risk Framework. Although the market risk standards have changed from a 99% VaR to a 97.5% expected shortfall, the VaR models approach to SFTs retains the use of a 99% VaR to calculate the counterparty credit risk for SFTs. The VaR model needs to capture risk sufficient to pass the back testing and profit and loss attribution tests of paragraph 10.4 in The Market Risk Framework. The default risk charge of paragraphs 13.18 to 13.39 in The Market Risk Framework is not required in the VaR model for SFTs.
12.40 The quantitative and qualitative criteria for recognition of internal market risk models for SFTs are in principle the same as in paragraphs 10.5 to 10.16 and 13.1 to 13.12 in The Market Risk Framework. The minimum liquidity horizon or the holding period for SFTs is 5 business days for margined repo-style transactions, rather than the 10 business days in paragraph 13.12 in The Market Risk Framework. For other transactions eligible for the VaR models approach, the 10 business day holding period will be retained. The minimum holding period should be adjusted upwards for market instruments where such a holding period would be inappropriate given the liquidity of the instrument concerned.
12.41 The calculation of the exposure E* for banks using their internal model to calculate their counterparty credit risk requirement will be as follows, where banks will use the previous day's VaR number:
12.42 Subject to SAMA’s approval, instead of using the VaR approach, banks may also calculate an effective expected positive exposure for repo-style and other similar SFTs, in accordance with the internal models method set out in the counterparty credit risk standards.
12.43 As in the standardized approach, for transactions where the conditions in paragraph 9.36 are met, and in addition, the counterparty is a core market participant as specified in paragraph 9.37, banks can apply a zero H. A netting set that contains any transaction that does not meet the requirements in paragraph 9.36 of the standardized approach is not eligible for this treatment.
Effective maturity (M)
12.44 Effective maturity (M) will be 2.5 years for exposures to which the bank applies the foundation approach, except for repo-style transactions where the effective maturity is 6 months (i.e. M=0.5). Banks using the foundation and advanced approaches are required to measure M for each facility using the definition provided below.
12.45 Banks using any element of the A-IRB approach are required to measure effective maturity for each facility as defined below.
12.46 Except as noted in paragraph 12.51, the effective maturity (M) is subject to a floor of one year and a cap of 5 years.
12.47 For an instrument subject to a determined cash flow schedule, effective maturity M is defined as follows, where CFt denotes the cash flows (principal, interest payments and fees) contractually payable by the borrower in period t:
12.48 If a bank is not in a position to calculate the effective maturity of the contracted payments as noted above, it is allowed to use a more conservative measure of M such as that it equals the maximum remaining time (in years) that the borrower is permitted to take to fully discharge its contractual obligation (principal, interest, and fees) under the terms of loan agreement. Normally, this will correspond to the nominal maturity of the instrument.
12.49 For derivatives subject to a master netting agreement, the effective maturity is defined as the weighted average maturity of the transactions within the netting agreement. Further, the notional amount of each transaction should be used for weighting the maturity.
12.50 For revolving exposures, effective maturity must be determined using the maximum contractual termination date of the facility. Banks must not use the repayment date of the current drawing.
12.51 The one-year floor, set out in paragraph 12.46 above, does not apply to certain short- term exposures, comprising fully or nearly-fully collateralized59 capital market- driven transactions (i.e. OTC derivatives transactions and margin lending) and repo- style transactions (i.e. repos/reverse repos and securities lending/borrowing) with an original maturity of less than one year, where the documentation contains daily re-margining clauses. For all eligible transactions the documentation must require daily revaluation, and must include provisions that must allow for the prompt liquidation or setoff of the collateral in the event of default or failure to re-margin. The maturity of such transactions must be calculated as the greater of one-day, and the effective maturity (M, consistent with the definition above), except for transactions subject to a master netting agreement, where the floor is determined by the minimum holding period for the transaction type, as required by paragraph 12.54.
12.52 The one-year floor, set out in paragraph 12.46 above, also does not apply to the following exposures:
(1) Short-term self-liquidating trade transactions. Import and export letters of credit and similar transactions should be accounted for at their actual remaining maturity.
(2) Issued as well as confirmed letters of credit that are short term (i.e. have a maturity below one year) and self-liquidating.
12.53 In addition to the transactions considered in paragraph 12.51 above, other short term exposures with an original maturity of less than one year that are not part of a bank’s ongoing financing of an obligor may be eligible for exemption from the one-year floor. After a careful review of the particular circumstances, SAMA will define the types of short-term exposures that might be considered eligible for this treatment. The results of these reviews might, for example, include transactions such as:
(1) Some capital market-driven transactions and repo-style transactions that might not fall within the scope of paragraph 12.51.
(2) Some trade finance transactions that are not exempted by paragraph 12.52.
(3) Some exposures arising from settling securities purchases and sales. This could also include overdrafts arising from failed securities settlements provided that such overdrafts do not continue more than a short, fixed number of business days.
(4) Some exposures arising from cash settlements by wire transfer, including overdrafts arising from failed transfers provided that such overdrafts do not continue more than a short, fixed number of business days.
(5) Some exposures to banks arising from foreign exchange settlements.
(6) Some short-term loans and deposits.
12.54 For transactions falling within the scope of paragraph 12.51 subject to a master netting agreement, the effective maturity is defined as the weighted average maturity of the transactions. A floor equal to the minimum holding period for the transaction type set out in paragraph 9.56 of the standardized approach will apply to the average. Where more than one transaction type is contained in the master netting agreement a floor equal to the highest holding period will apply to the average. Further, the notional amount of each transaction should be used for weighting maturity.
12.55 Where there is no explicit definition, the effective maturity (M) assigned to all exposures is set at 2.5 years unless otherwise specified in paragraph 12.44.
Treatment of maturity mismatches
12.56 The treatment of maturity mismatches under IRB is identical to that in the standardized approach (see paragraphs 9.10 to 0).
Risk components for retail exposures
12.57 Paragraphs 12.57 to 12.67 set out the calculation of the risk components for retail exposures. In the case of an exposure that is guaranteed by a sovereign, the floors that apply to the risk components do not apply to that part of the exposure covered by the sovereign guarantee (i.e. any part of the exposure that is not covered by the guarantee is subject to the relevant floors).
Probability of default (PD) and loss given default (LGD)
12.58 For each identified pool of retail exposures, banks are expected to provide an estimate of the PD and LGD associated with the pool, subject to the minimum requirements as set out in chapter 16. Additionally, the PD for retail exposures is the greater of: (i) the one-year PD associated with the internal borrower grade to which the pool of retail exposures is assigned; and (ii) 0.1% for qualifying revolving retail exposure (QRRE) revolvers (see paragraph 10.22 for the definition of QRRE revolvers) and 0.05% for all other exposures. The LGD for each exposure that is used as input into the risk weight formula and the calculation of expected loss must not be less than the parameter floors indicated in table 18 below:
LGD parameter floors for retail exposures Table 18 Type of exposure Unsecured Secured Mortgages Not applicable 5% QRRE (transactors and revolvers) 50% Not applicable Other retail 30% Varying by collateral type:
• 0% financial
• 10% receivables
• 10% commercial or residential real estate
• 15% other physical12.59 Regarding the LGD parameter floors set out in the table above, the LGD floors forpartially secured exposures in the “other retail” category should be calculated according to the formula set out in paragraph 12.17. The LGD floor for residential mortgages is fixed at 5%, irrespective of the level of collateral provided by the property.
Recognition of guarantees and credit derivatives
12.60 Banks may reflect the risk-reducing effects of guarantees and credit derivatives, either in support of an individual obligation or a pool of exposures, through an adjustment of either the PD or LGD estimate, subject to the minimum requirements in paragraphs 16.99 to 16.110. Whether adjustments are done through PD or LGD, they must be done in a consistent manner for a given guarantee or credit derivative type. In case the bank applies the standardized approach to direct exposures to the guarantor it may only recognize the guarantee by applying the standardized approach risk weight to the covered portion of the exposure.
12.61 Consistent with the requirements outlined above for corporate and bank exposures, banks must not include the effect of double default in such adjustments. The adjusted risk weight must not be less than that of a comparable direct exposure to the protection provider. Consistent with the standardized approach, banks may choose not to recognize credit protection if doing so would result in a higher capital requirement.
Exposure at default (EAD)
12.62 Both on- and off-balance sheet retail exposures are measured gross of specific provisions or partial write-offs. The EAD on drawn amounts should not be less than the sum of: (i) the amount by which a bank’s regulatory capital would be reduced if the exposure were written-off fully; and (ii) any specific provisions and partial write-offs. When the difference between the instrument’s EAD and the sum of (i) and (ii) is positive, this amount is termed a discount. The calculation of risk-weighted assets is independent of any discounts. Under the limited circumstances described in paragraph 15.4, discounts may be included in the measurement of total eligible provisions for purposes of the EL-provision calculation set out in chapter 15.
12.63 On-balance sheet netting of loans and deposits of a bank to or from a retail customer will be permitted subject to the same conditions outlined in paragraphs 9.67 and 9.68 of the standardized approach. The definition of commitment is the same as in the standardized approach, as set out in paragraph 7.86. Banks must use their own estimates of EAD for undrawn revolving commitments to extend credit, purchase assets or issue credit substitutes provided the exposure is not subject to a CCF of 100% in the standardized approach (see paragraph 7.84) and the minimum requirements in paragraphs 16.88 to 16.98 are satisfied. Foundation approach CCFs must be used for all other off-balance sheet items (for example, undrawn non- revolving commitments), and must be used where the minimum requirements for own estimates of EAD are not met.
12.64 Regarding own estimates of EAD, the EAD for each exposure that is used as input into the risk weight formula and the calculation of expected loss is subject to a floor that is the sum of: (i) the on balance sheet amount; and (ii) 50% of the off balance sheet exposure using the applicable CCF in the standardized approach.
12.65 For retail exposures with uncertain future drawdown such as credit cards, banks must take into account their history and/or expectation of additional drawings prior to default in their overall calibration of loss estimates. In particular, where a bank does not reflect conversion factors for undrawn lines in its EAD estimates, it must reflect in its LGD estimates the likelihood of additional drawings prior to default. Conversely, if the bank does not incorporate the possibility of additional drawings in its LGD estimates, it must do so in its EAD estimates.
12.66 When only the drawn balances of revolving retail facilities have been securitized, banks must ensure that they continue to hold required capital against the undrawn balances associated with the securitized exposures using the IRB approach to credit risk for commitments.
12.67 To the extent that foreign exchange and interest rate commitments exist within a bank’s retail portfolio for IRB purposes, banks are not permitted to provide their internal assessments of credit equivalent amounts. Instead, the rules for the standardized approach continue to apply.
57 When credit derivatives do not cover the restructuring of the underlying obligation, the partial recognition set out in paragraph 9.74 of the standardized approach applies.
58 A revolving loan facility is one that lets a borrower obtain a loan where the borrower has the flexibility to decide how often to withdraw from the loan and at what time intervals. A revolving facility allows the borrower to drawdown, repay and re-draw loans advanced to it. Facilities that allow prepayments and subsequent redraws of those prepayments are considered as revolving.
59 The intention is to include both parties of a transaction meeting these conditions where neither of the parties is systematically under- collateralized.13. IRB Approach: Supervisory Slotting Approach for Specialized Lending
13.1 This chapter sets out the calculation of risk weighted assets and expected losses for specialized lending (SL) exposures subject to the supervisory slotting approach. The method for determining the difference between expected losses and provisions is set out in chapter 15.
Risk Weights for Specialized Lending (PF, OF, CF and IPRE)
13.2 For project finance (PF), object finance (OF), commodities finance (CF) and income producing real estate (IPRE) exposures, banks that do not meet the requirements for the estimation of probability of default (PD) under the corporate internal ratings-based (IRB) approach will be required to map their internal grades to five supervisory categories, each of which is associated with a specific risk weight. The slotting criteria on which this mapping must be based are provided in paragraph 13.13 for PF exposures, paragraph 13.15 for OF exposures, paragraph 013.6 for CF exposures and paragraph 13.14 for IPRE exposures. The risk weights for unexpected losses (UL) associated with each supervisory category are shown in table 19 below:
Supervisory categories and unexpected loss (UL) risk weights for other SL exposures Table 19 Strong Good Satisfactory Weak Default 70% 90% 115% 250% 0% 13.3 Although banks are expected to map their internal ratings to the supervisory categories for specialized lending using the slotting criteria, each supervisory category broadly corresponds to a range of external credit assessments as outlined in table 20 below.
Table 20 Strong Good Satisfactory Weak Default BBB- or better BB+ or BB BB- or B+ B to C Not applicable 13.4 SAMA may allow banks to assign preferential risk weights of 50% to “strong” exposures, and 70% to “good” exposures, provided they have a remaining maturity of less than 2.5 years or SAMA determines that banks’ underwriting and other risk characteristics are substantially stronger than specified in the slotting criteria for the relevant supervisory risk category.
Risk weights for Specialized Lending (HVCRE)
13.5 For high-volatility commercial real estate (HVCRE) exposures, banks that do not meet the requirements for estimation of PD, or did not obtain SAMA’s approval to implement the foundation or advanced approaches to HVCRE, must map their internal grades to five supervisory categories, each of which is associated with a specific risk weight. The slotting criteria on which this mapping must be based are the same as those for IPRE, as provided in paragraph 13.14. The risk weights associated with each supervisory category are shown in table 21 below:
Table 21 Supervisory categories and unexpected loss (UL) risk weights for other SL exposures Strong Good Satisfactory Weak Default 95% 120% 140% 250% 0% 13.6 As indicated in paragraph 13.3, each supervisory category broadly corresponds to a range of external credit assessments.
13.7 SAMA may allow banks to assign preferential risk weights of 70% to “strong” exposures, and 95% to “good” exposures, provided they have a remaining maturity of less than 2.5 years or SAMA determines that banks’ underwriting and other risk characteristics are substantially stronger than specified in the slotting criteria for the relevant supervisory risk category.
Expected Loss for Specialized Lending (SL) Exposures Subject to the Supervisory Slotting Criteria
13.8 For SL exposures subject to the supervisory slotting criteria, the expected loss (EL) amount is determined by multiplying 8% by the risk-weighted assets produced from the appropriate risk weights, as specified below, multiplied by exposure at default.
13.9 The risk weights for SL, other than HVCRE, are as shown in table 22 below:
Table 22 Strong Good Satisfactory Weak Default 5% 10% 35% 100% 625% 13.10 Where, SAMA allow banks to assign preferential risk weights to non-HVCRE SL exposures falling into the “strong” and “good” supervisory categories as outlined in paragraph 13.4, the corresponding expected loss (EL) risk weight is 0% for “strong” exposures, and 5% for “good” exposures.
13.11 The risk weights for HVCRE are as shown in table 23 below:
Table 23 Strong Good Satisfactory Weak Default 5% 5% 35% 100% 625% 13.12 Even where, SAMA allow banks to assign preferential risk weights to HVCRE exposures falling into the “strong” and “good” supervisory categories as outlined in paragraph 13.7, the corresponding EL risk weight will remain at 5% for both “strong” and “good” exposures.
Supervisory Slotting Criteria for Specialized Lending
13.13 Table 24 below sets out the supervisory rating grades for project finance exposures subject to the supervisory slotting approach.
Table 24 Strong Good Satisfactory Weak Financial strength Market conditions Few competing suppliers or substantial and durable advantage in location, cost, or technology. Demand is strong and growing Few competing suppliers or better than average location, cost, or technology but this situation may not last. Demand is strong and stable Project has no advantage in location, cost, or technology. Demand is adequate and stable Project has worse than average location, cost, or technology. Demand is weak and declining Financial ratios (eg debt service coverage ratio (DSCR), loan life coverage ratio, project life coverage ratio, and debt-to-equity ratio) Strong financial ratios considering the level of project risk; very robust economic assumptions Strong to acceptable financial ratios considering the level of project risk; robust project economic assumptions Standard financial ratios considering the level of project risk Aggressive financial ratios considering the level of project risk Stress analysis The project can meet its financial obligations under sustained, severely stressed economic or sectoral conditions The project can meet its financial obligations under normal stressed economic or sectoral conditions. The project is only likely to default under severe economic conditions The project is vulnerable to stresses that are not uncommon through an economic cycle, and may default in a normal downturn The project is likely to default unless conditions improve soon Financial structure Duration of the credit compared to the duration of the project Useful life of the project significantly exceeds tenor of the loan Useful life of the project exceeds tenor of the loan Useful life of the project exceeds tenor of the loan Useful life of the project may not exceed tenor of the loan Amortisation schedule Amortising debt Amortising debt Amortising debt repayments with limited bullet payment Bullet repayment or amortising debt repayments with high bullet repayment Political and legal environment Political risk, including transfer risk, considering project type and mitigants Very low exposure; strong mitigation instruments, if needed Low exposure; satisfactory mitigation instruments, if needed Moderate exposure; fair mitigation instruments High exposure; no or weak mitigation instruments Force majeure risk (war, civil unrest, etc.), Low exposure Acceptable exposure Standard protection Significant risks, not fully mitigated Government support and project's importance for the country over the long term Project of strategic importance for the country (preferably export-oriented). Strong support from Government Project considered important for the country. Good level of support from Government Project may not be strategic but brings unquestionable benefits for the country. Support from Government may not be explicit Project not key to the country. No or weak support from Government Stability of legal and regulatory environment (risk of change in law) Favourable and stable regulatory environment over the long term Favourable and stable regulatory environment over the medium term Regulatory changes can be predicted with a fair level of certainty Current or future regulatory issues may affect the project Acquisition of all necessary supports and approvals for such relief from local content laws Strong Satisfactory Fair Weak Enforceability of contracts, collateral and security Contracts, collateral and security are enforceable Contracts, collateral and security are enforceable Contracts, collateral and security are considered enforceable even if certain non-key issues may exist There are unresolved key issues in respect if actual enforcement of contracts, collateral and security Transaction characteristics Design and technology risk Fully proven technology and design Fully proven technology and design Proven technology and design — start-up issues are mitigated by a strong completion package Unproven technology and design; technology issues exist and/or complex design Construction risk Permitting and siting All permits have been obtained Some permits are still outstanding but their receipt is considered very likely Some permits are still outstanding but the permitting process is well defined and they are considered routine Key permits still need to be obtained and are not considered routine. Significant conditions may be attached Type of construction contract Fixed-price date-certain turnkey construction engineering and procurement contract (EPC) Fixed-price date-certain turnkey construction EPC Fixed-price date-certain turnkey construction contract with one or several contractors No or partial fixed-price turnkey contract and/or interfacing issues with multiple contractors Completion guarantees Substantial liquidated damages supported by financial substance and/or strong completion guarantee from sponsors with excellent financial standing Significant liquidated damages supported by financial substance and/or completion guarantee from sponsors with good financial standing Adequate liquidated damages supported by financial substance and/or completion guarantee from sponsors with good financial standing Inadequate liquidated damages or not supported by financial substance or weak completion guarantees Track record and financial strength of contractor in constructing similar projects. Strong Good Satisfactory Weak Operating risk Scope and nature of operations and maintenance (O & M) contracts Strong longterm O&M contract, preferably with contractual performance incentives, and/or O&M reserve accounts Long-term O&M contract, and/or O&M reserve accounts Limited O&M contract or O&M reserve account No O&M contract: risk of high operational cost overruns beyond mitigants Operator's expertise, track record, and financial strength Very strong, or committed technical assistance of the sponsors Strong Acceptable Limited/weak, or local operator dependent on local authorities Off-take risk (a) If there is a take-or-pay or fixed-price off-take contract: Excellent creditworthiness of off-taker; strong termination clauses; tenor of contract comfortably exceeds the maturity of the debt Good creditworthiness of off-taker; strong termination clauses; tenor of contract exceeds the maturity of the debt Acceptable financial standing of off-taker; normal termination clauses; tenor of contract generally matches the maturity of the debt Weak off-taker; weak termination clauses; tenor of contract does not exceed the maturity of the debt (b) If there is no take-or-pay or fixed-price off-take contract: Project produces essential services or a commodity sold widely on a world market; output can readily be absorbed at projected prices even at lower than historic market growth rates Project produces essential services or a commodity sold widely on a regional market that will absorb it at projected prices at historical growth rates Commodity is sold on a limited market that may absorb it only at lower than projected prices Project output is demanded by only one or a few buyers or is not generally sold on an organized market Supply risk Price, volume and transportation risk of feedstocks; supplier's track record and financial strength Long-term supply contract with supplier of excellent financial standing Long-term supply contract with supplier of good financial standing Long-term supply contract with supplier of good financial standing — a degree of price risk may remain Short-term supply contract or long-term supply contract with financially weak supplier — a degree of price risk definitely remains Reserve risks (e.g. natural resource development) Independently audited, proven and developed reserves well in excess of requirements over lifetime of the project Independently audited, proven and developed reserves in excess of requirements over lifetime of the project Proven reserves can supply the project adequately through the maturity of the debt Project relies to some extent on potential and undeveloped reserves Strength of Sponsor Sponsor's track record, financial strength, and country/sector experience Strong sponsor with excellent track record and high financial standing Good sponsor with satisfactory track record and good financial standing Adequate sponsor with adequate track record and good financial standing Weak sponsor with no or questionable track record and/or financial weaknesses Sponsor support, as evidenced by equity, ownership clause and incentive to inject additional cash if necessary Strong. Project is highly strategic for the sponsor (core business — long-term strategy) Good. Project is strategic for the sponsor (core business — long-term strategy) Acceptable. Project is considered important for the sponsor (core business) Limited. Project is not key to sponsor's long-term strategy or core business Security Package Assignment of contracts and accounts Fully comprehensive Comprehensive Acceptable Weak Pledge of assets, taking into account quality, value and liquidity of assets First perfected security interest in all project assets, contracts, permits and accounts necessary to run the project Perfected security interest in all project assets, contracts, permits and accounts necessary to run the project Acceptable security interest in all project assets, contracts, permits and accounts necessary to run the project Little security or collateral for lenders; weak negative pledge clause Lender's control over cash flow (eg cash sweeps, independent escrow accounts) Strong Satisfactory Fair Weak Strength of the covenant package (mandatory prepayments, payment deferrals, payment cascade, dividend restrictions…) Covenant package is strong for this type of project Covenant package is satisfactory for this type of project Covenant package is fair for this type of project Covenant package is Insufficient for this type of project Project may issue no additional debt Project may issue extremely limited additional debt Project may issue limited additional debt Project may issue unlimited additional debt 13.14 Table 25 below sets out the supervisory rating grades for income producing real estate exposures and high-volatility commercial real estate exposures subject to the supervisory slotting approach.
Table 25 Strong Good Satisfactory Weak Financial strength Market conditions The supply and demand for the project's type and location are currently in equilibrium. The number of competitive properties coming to market is equal or lower than forecasted demand The supply and demand for the project's type and location are currently in equilibrium. The number of competitive properties coming to market is roughly equal to forecasted demand Market conditions are roughly in equilibrium. Competitive properties are coming on the market and others are in the planning stages. The project's design and capabilities may not be state of the art compared to new projects Market conditions are weak. It is uncertain when conditions will improve and return to equilibrium. The project is losing tenants at lease expiration. New lease terms are less favourable compared to those expiring Financial ratios and advance rate The property's DSCR is considered strong (DSCR is not relevant for the construction phase) and its loan-to-value ratio (LTV) is considered low given its property type. Where a secondary market exists, the transaction is underwritten to market standards The DSCR (not relevant for development real estate) and LTV are satisfactory. Where a secondary market exists, the transaction is underwritten to market standards The property's DSCR has deteriorated and its value has fallen, increasing its LTV The property's DSCR has deteriorated significantly and its LTV is well above underwriting standards for new loans Stress analysis The property's resources, contingencies and liability structure allow it to meet its financial obligations during a period of severe financial stress (e.g. interest rates, economic growth) The property can meet its financial obligations under a sustained period of financial stress (eg interest rates, economic growth). The property is likely to default only under severe economic conditions During an economic downturn, the property would suffer a decline in revenue that would limit its ability to fund capital expenditures and significantly increase the risk of default The property's financial condition is strained and is likely to default unless conditions improve in the near term Cash-flow predictability (a) For complete and stabilised property. The property's leases are long-term with creditworthy tenants and their maturity dates are scattered. The property has a track record of tenant retention upon lease expiration. Its vacancy rate is low. Expenses (maintenance, insurance, security, and property taxes) are predictable Most of the property's leases are long-term, with tenants that range in creditworthiness. The property experiences a normal level of tenant turnover upon lease expiration. Its vacancy rate is low. Expenses are predictable Most of the property's leases are medium rather than long-term with tenants that range in creditworthiness. The property experiences a moderate level of tenant turnover upon lease expiration. Its vacancy rate is moderate. Expenses are relatively predictable but vary in relation to revenue The property's leases are of various terms with tenants that range in creditworthiness. The property experiences a very high level of tenant turnover upon lease expiration. Its vacancy rate is high. Significant expenses are incurred preparing space for new tenants (b) For complete but not stabilised property Leasing activity meets or exceeds projections. The project should achieve stabilisation in the near future Leasing activity meets or exceeds projections. The project should achieve stabilisation in the near future Most leasing activity is within projections; however, stabilisation will not occur for some time Market rents do not meet expectations. Despite achieving target occupancy rate, cash flow coverage is tight due to disappointing revenue (c) For construction phase The property is entirely pre-leased through the tenor of the loan or presold to an investment grade tenant or buyer, or the bank has a binding commitment for take-out financing from an investment grade lender The property is entirely pre leased or presold to a creditworthy tenant or buyer, or the bank has a binding commitment for permanent financing from a creditworthy lender Leasing activity is within projections but the building may not be preleased and there may not exist a take-out financing. The bank may be the permanent lender The property is deteriorating due to cost overruns, market deterioration, tenant cancellations or other factors. There may be a dispute with the party providing the permanent financing Asset characteristics Location Property is located in highly desirable location that is convenient to services that tenants desire Property is located in desirable location that is convenient to services that tenants desire The property location lacks a competitive advantage The property's location, configuration, design and maintenance have contributed to the property's difficulties Design and condition Property is favoured due to its design, configuration, and maintenance, and is highly competitive with new properties Property is appropriate in terms of its design, configuration and maintenance. The property's design and capabilities are competitive with new properties Property is adequate in terms of its configuration, design and maintenance Weaknesses exist in the property's configuration, design or maintenance Property is under construction Construction budget is conservative and technical hazards are limited. Contractors are highly qualified Construction budget is conservative and technical hazards are limited. Contractors are highly qualified Construction budget is adequate and contractors are ordinarily qualified Project is over budget or unrealistic given its technical hazards. Contractors may be under qualified Strength of Sponsor/Developer Financial capacity and willingness to support the property. The sponsor/develop er made a substantial cash contribution to the construction or purchase of the property. The sponsor/develop er has substantial resources and limited direct and contingent liabilities. The sponsor/develop er's properties are diversified geographically and by property type The sponsor/develop er made a material cash contribution to the construction or purchase of the property. The sponsor/develop er's financial condition allows it to support the property in the event of a cash flow shortfall. The sponsor/develop er's properties are located in several geographic regions The sponsor/develop er's contribution may be immaterial or non-cash. The sponsor/develop er is average to below average in financial resources The sponsor/developer lacks capacity or willingness to support the property Reputation and track record with similar properties. Experienced management and high sponsors’ quality. Strong reputation and lengthy and successful record with similar properties Appropriate management and sponsors’ quality. The sponsor or management has a successful record with similar properties Moderate management and sponsors’ quality. Management or sponsor track record does not raise serious concerns Ineffective management and substandard sponsors’ quality. Management and sponsor difficulties have contributed to difficulties in managing properties in the past Relationships with relevant real estate actors Strong relationships with leading actors such as leasing agents Proven relationships with leading actors such as leasing agents Adequate relationships with leasing agents and other parties providing important real estate services Poor relationships with leasing agents and/or other parties providing important real estate services Security Package Nature of lien Perfected first lien Perfected first lien. Lenders in some markets extensively use loan structures that include junior liens. Junior liens may be indicative of this level of risk if the total LTV inclusive of all senior positions does not exceed a typical first loan LTV. Perfected first lien. Lenders in some markets extensively use loan structures that include junior liens. Junior liens may be indicative of this level of risk if the total LTV inclusive of all senior positions does not exceed a typical first loan LTV. Ability of lender to foreclose is constrained Assignment of rents (for projects leased to long-term tenants) The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to remit rents directly to the lender, such as a current rent roll and copies of the project's leases The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to the tenants to remit rents directly to the lender, such as current rent roll and copies of the project's leases The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to the tenants to remit rents directly to the lender, such as current rent roll and copies of the project's leases The lender has not obtained an assignment of the leases or has not maintained the information necessary to readily provide notice to the building's tenants Quality of the insurance coverage Appropriate Appropriate Appropriate Substandard 13.15 Table 26 below sets out the supervisory rating grades for object finance exposures subject to the supervisory slotting approach.
Table 26 Strong Good Satisfactory Weak Financial strength Market conditions Demand is strong and growing, strong entry barriers, low sensitivity to changes in technology and economic outlook Demand is strong and stable. Some entry barriers, some sensitivity to changes in technology and economic outlook Demand is adequate and stable, limited entry barriers, significant sensitivity to changes in technology and economic outlook Demand is weak and declining, vulnerable to changes in technology and economic outlook, highly uncertain environment Financial ratios (DSCR and LTV) Strong financial ratios considering the type of asset. Very robust economic assumptions Strong / acceptable financial ratios considering the type of asset. Robust project economic assumptions Standard financial ratios for the asset type Aggressive financial ratios considering the type of asset Stress analysis Stable long term revenues, capable of withstanding severely stressed conditions through an economic cycle Satisfactory short-term revenues. Loan can withstand some financial adversity. Default is only likely under severe economic conditions Uncertain short-term revenues. Cash flows are vulnerable to stresses that are not uncommon through an economic cycle. The loan may default in a normal downturn Revenues subject to strong uncertainties; even in normal economic conditions the asset may default, unless conditions improve Market liquidity Market is structured on a worldwide basis; assets are highly liquid Market is worldwide or regional; assets are relatively liquid Market is regional with limited prospects in the short term, implying lower liquidity Local market and/or poor visibility. Low or no liquidity, particularly on niche markets Political and legal environment Political risk, including transfer risk Very low; strong mitigation instruments, if needed Low; satisfactory mitigation instruments, if needed Moderate; fair mitigation instruments High; no or weak mitigation instruments Legal and regulatory risks Jurisdiction is favourable to repossession and enforcement of contracts Jurisdiction is favourable to repossession and enforcement of contracts Jurisdiction is generally favourable to repossession and enforcement of contracts, even if repossession might be long and/or difficult Poor or unstable legal and regulatory environment. Jurisdiction may make repossession and enforcement of contracts lengthy or impossible Transaction characteristics Financing term compared to the economic life of the asset Full payout profile/minimum balloon. No grace period Balloon more significant, but still at satisfactory levels Important balloon with potentially grace periods Repayment in fine or high balloon Operating risk Permits / licensing All permits have been obtained; asset meets current and foreseeable safety regulations All permits obtained or in the process of being obtained; asset meets current and foreseeable safety regulations Most permits obtained or in process of being obtained, outstanding ones considered routine, asset meets current safety regulations Problems in obtaining all required permits, part of the planned configuration and/or planned operations might need to be revised Scope and nature of O & M contracts Strong longterm O&M contract, preferably with contractual performance incentives, and/or O&M reserve accounts (if needed) Long-term O&M contract, and/or O&M reserve accounts (if needed) Limited O&M contract or O&M reserve account (if needed) No O&M contract: risk of high operational cost overruns beyond mitigants Operator's financial strength, track record in managing the asset type and capability to re-market asset when it comes off-lease Excellent track record and strong re-marketing capability Satisfactory track record and re-marketing capability Weak or short track record and uncertain re-marketing capability No or unknown track record and inability to re-market the asset Asset characteristics Configuration, size, design and maintenance (ie age, size for a plane) compared to other assets on the same market Strong advantage in design and maintenance. Configuration is standard such that the object meets a liquid market Above average design and maintenance. Standard configuration, maybe with very limited exceptions — such that the object meets a liquid market Average design and maintenance. Configuration is somewhat specific, and thus might cause a narrower market for the object Below average design and maintenance. Asset is near the end of its economic life. Configuration is very specific; the market for the object is very narrow Resale value Current resale value is well above debt value Resale value is moderately above debt value Resale value is slightly above debt value Resale value is below debt value sensitivity of the asset value and liquidity to economic cycles Asset value and liquidity are relatively insensitive to economic cycles Asset value and liquidity are sensitive to economic cycles Asset value and liquidity are quite sensitive to economic cycles Asset value and liquidity are highly sensitive to economic cycles Strength of sponsor Operator's financial strength, track record in managing the asset type and capability to re-market asset when it comes off-lease Excellent track record and strong re-marketing capability Satisfactory track record and re-marketing capability Weak or short track record and uncertain re-marketing capability No or unknown track record and inability to remarket the asset Sponsors’ track record and financial strength Sponsors with excellent track record and high financial standing Sponsors with good track record and good financial standing Sponsors with adequate track record and good financial standing Sponsors with no or questionable track record and/or financial weaknesses Security Package Asset control Legal documentation provides the lender effective control (e.g. a first perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it Legal documentation provides the lender effective control (e.g. a perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it Legal documentation provides the lender effective control (e.g. a perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it The contract provides little security to the lender and leaves room to some risk of losing control on the asset Rights and means at the lender's disposal to monitor the location and condition of the asset The lender is able to monitor the location and condition of the asset, at any time and place (regular reports, possibility to lead inspections) The lender is able to monitor the location and condition of the asset, almost at any time and place The lender is able to monitor the location and condition of the asset, almost at any time and place The lender is able to monitor the location and condition of the asset are limited Insurance against damages Insurance against damages Insurance against damages Insurance against damages Insurance against damages 13.16 Table 27 below sets out the supervisory rating grades for commodities finance exposures subject to the supervisory slotting approach.
Table 27 Strong Good Satisfactory Weak Financial strength Degree of over collateralisation of trade Strong Good Satisfactory Weak Political and legal environment Country risk No country risk Limited exposure to country risk (in particular, offshore location of reserves in an emerging country) Exposure to country risk (in particular, offshore location of reserves in an emerging country) Strong exposure to country risk (in particular, inland reserves in an emerging country) Mitigation of country risks Very strong mitigation: Strong offshore mechanisms Strategic commodity 1st class buyer Strong mitigation: Offshore mechanisms Strategic commodity Strong buyer Acceptable mitigation: Offshore mechanisms Less strategic commodity Acceptable buyer Only partial mitigation: No offshore mechanisms Non-strategic commodity Weak buyer Asset characteristics Liquidity and susceptibility to damage Commodity is quoted and can be hedged through futures or over-the-counter (OTC) instruments. Commodity is not susceptible to damage Commodity is quoted and can be hedged through OTC instruments. Commodity is not susceptible to damage Commodity is not quoted but is liquid. There is uncertainty about the possibility of hedging. Commodity is not susceptible to damage Commodity is not quoted. Liquidity is limited given the size and depth of the market. No appropriate hedging instruments. Commodity is susceptible to damage Strength of sponsor Financial strength of trader Very strong, relative to trading philosophy and risks Strong Adequate Weak Track record, including ability to manage the logistic process Extensive experience with the type of transaction in question. Strong record of operating success and cost efficiency Sufficient experience with the type of transaction in question. Above average record of operating success and cost efficiency Limited experience with the type of transaction in question. Average record of operating success and cost efficiency Limited or uncertain track record in general. Volatile costs and profits Trading controls and hedging policies Strong standards for counterparty selection, hedging, and monitoring Adequate standards for counterparty selection, hedging, and monitoring Past deals have experienced no or minor problems Trader has experienced significant losses on past deals Quality of financial disclosure Excellent Good Satisfactory Financial disclosure contains some uncertainties or is insufficient Security package Asset control First perfected security interest provides the lender legal control of the assets at any time if needed First perfected security interest provides the lender legal control of the assets at any time if needed At some point in the process, there is a rupture in the control of the assets by the lender. The rupture is mitigated by knowledge of the trade process or a third party undertaking as the case may be Contract leaves room for some risk of losing control over the assets. Recovery could be jeopardised Insurance against damages Strong insurance coverage including collateral damages with top quality insurance companies Satisfactory insurance coverage (not including collateral damages) with good quality insurance companies Fair insurance coverage (not including collateral damages) with acceptable quality insurance companies Weak insurance coverage (not including collateral damages) or with weak quality insurance companies 14. IRB Approach: RWA for Purchased Receivables
14.1 This chapter presents the method of calculating the unexpected loss capital requirements for purchased receivables. For such assets, there are internal ratings-based (IRB) capital charges for both default risk and dilution risk.
Risk-Weighted Assets for Default Risk
14.2 For receivables belonging unambiguously to one asset class, the IRB risk weight for default risk is based on the risk-weight function applicable to that particular exposure type, as long as the bank can meet the qualification standards for this particular risk-weight function. For example, if banks cannot comply with the standards for qualifying revolving retail exposures (defined in paragraph 10.22), they should use the risk-weight function for other retail exposures. For hybrid pools containing mixtures of exposure types, if the purchasing bank cannot separate the exposures by type, the risk-weight function producing the highest capital requirements for the exposure types in the receivable pool applies.
14.3 For purchased retail receivables, a bank must meet the risk quantification standards for retail exposures but can utilize external and internal reference data to estimate the probabilities of default (PDs) and losses-given-default (LGDs). The estimates for PD and LGD (or expected loss, EL) must be calculated for the receivables on a stand-alone basis; that is, without regard to any assumption of recourse or guarantees from the seller or other parties.
14.4 For purchased corporate receivables the purchasing bank is expected to apply the existing IRB risk quantification standards for the bottom-up approach. However, for eligible purchased corporate receivables, and subject to supervisory permission, a bank may employ the following top-down procedure for calculating IRB risk weights for default risk:
(1) The purchasing bank will estimate the pool’s one-year EL for default risk, expressed in percentage of the exposure amount (i.e. the total exposure-at-default, or EAD, amount to the bank by all obligors in the receivables pool). The estimated EL must be calculated for the receivables on a stand-alone basis; that is, without regard to any assumption of recourse or guarantees from the seller or other parties. The treatment of recourse or guarantees covering default risk (and/or dilution risk) is discussed separately below.
(2) Given the EL estimate for the pool’s default losses, the risk weight for default risk is determined by the risk-weight function for corporate exposures60. As described below, the precise calculation of risk weights for default risk depends on the bank’s ability to decompose EL into its PD and LGD components in a reliable manner. Banks can utilize external and internal data to estimate PDs and LGDs. However, the advanced approach will not be available for banks that use the foundation approach for corporate exposures.
Foundation IRB treatment
14.5 The risk weight under the foundation IRB treatment is determined as follows:
(1) If the purchasing bank is unable to decompose EL into its PD and LGD components in a reliable manner, the risk weight is determined from the corporate risk-weight function using the following specifications:
(a) If the bank can demonstrate that the exposures are exclusively senior claims to corporate borrowers:
(i) An LGD of 40% can be used.
(ii) PD will be calculated by dividing the EL using this LGD.
(iii) EAD will be calculated as the outstanding amount minus the capital charge for dilution prior to credit risk mitigation (KDilution).
(iv) EAD for a revolving purchase facility is the sum of the current amount of receivables purchased plus 40% of any undrawn purchase commitments minus KDilution.
(b) If the bank cannot demonstrate that the exposures are exclusively senior claims to corporate borrowers:
(i) PD is the bank’s estimate of EL.
(ii) LGD will be 100%.
(iii) EAD is the amount outstanding minus KDilution.
(iv) EAD for a revolving purchase facility is the sum of the current amount of receivables purchased plus 40% of any undrawn purchase commitments minus KDilution.
(2) If the purchasing bank is able to estimate PD in a reliable manner, the risk weight is determined from the corporate risk-weight functions according to the specifications for LGD, effective maturity (M) and the treatment of guarantees under the foundation approach as given in paragraphs 12.6 to 12.14, 12.20 to 12.26 and 12.44.
Advanced IRB treatment
14.6 Under the advanced IRB approach, if the purchasing bank can estimate either the pool’s default-weighted average loss rates given default (as defined in paragraph 16.82) or average PD in a reliable manner, the bank may estimate the other parameter based on an estimate of the expected long-run loss rate. The bank may: (i) use an appropriate PD estimate to infer the long-run default- weighted average loss rate given default; or (ii) use a long-run default-weighted average loss rate given default to infer the appropriate PD. In either case, the LGD used for the IRB capital calculation for purchased receivables cannot be less than the long-run default-weighted average loss rate given default and must be consistent with the concepts defined in paragraph 16.82. The risk weight for the purchased receivables will be determined using the bank’s estimated PD and LGD as inputs to the corporate risk-weight function. Similar to the foundation IRB treatment, EAD will be the amount outstanding minus KDilution. EAD for a revolving purchase facility will be the sum of the current amount of receivables purchased plus 40% of any undrawn purchase commitments minus KDilution(thus, banks using the advanced IRB approach will not be permitted to use their internal EAD estimates for undrawn purchase commitments).
14.7 For drawn amounts, M will equal the pool’s exposure-weighted average effective maturity (as defined in paragraphs 12.44 to 12.55). This same value of M will also be used for undrawn amounts under a committed purchase facility provided the facility contains effective covenants, early amortization triggers, or other features that protect the purchasing bank against a significant deterioration in the quality of the future receivables it is required to purchase over the facility’s term. Absent such effective protections, the M for undrawn amounts will be calculated as the sum of: (a) the longest-dated potential receivable under the purchase agreement;and (b) the remaining maturity of the purchase facility.
60 The firm-size adjustment for small or medium-sized entities, as defined in paragraph 11.8, will be the weighted average by individual exposure of the pool of purchased corporate receivables. If the bank does not have the information to calculate the average size of the pool, the firm-size adjustment will not apply.
Risk-Weighted Assets for Dilution Risk
14.8 Dilution refers to the possibility that the receivable amount is reduced through cash or non-cash credits to the receivable’s obligor61. For both corporate and retail receivables, unless the bank can demonstrate to its supervisor that the dilution risk for the purchasing bank is immaterial, the treatment of dilution risk must be the following:
(1) At the level of either the pool as a whole (top-down approach) or the individual receivables making up the pool (bottom-up approach), the purchasing bank will estimate the one-year EL for dilution risk, also expressed in percentage of the receivables amount. Banks can utilize external and internal data to estimate EL. As with the treatments of default risk, this estimate must be computed on a stand-alone basis; that is, under the assumption of no recourse or other support from the seller or third-party guarantors.
(2) For the purpose of calculating risk weights for dilution risk, the corporate risk-weight function must be used with the following settings:
(a) The PD must be set equal to the estimated EL.
(b) The LGD must be set at 100%.
(c) An appropriate maturity treatment applies when determining the capital requirement for dilution risk. If a bank can demonstrate that the dilution risk is appropriately monitored and managed to be resolved within one year, the supervisor may allow the bank to apply a one-year maturity.
14.9 This treatment will be applied regardless of whether the underlying receivables are corporate or retail exposures, and regardless of whether the risk weights for default risk are computed using the standard IRB treatments or, for corporate receivables, the top-down treatment described above.
61 Examples include offsets or allowances arising from returns of goods sold, disputes regarding product quality, possible debts of the borrower to a receivables obligor, and any payment or promotional discounts offered by the borrower (e.g. a credit for cash payments within 30 days)
Treatment of Purchase Price Discounts for Receivables
14.10 In many cases, the purchase price of receivables will reflect a discount (not to be confused with the discount concept defined in paragraphs 12.29 and 12.62) that provides first loss protection for default losses, dilution losses or both. To the extent that a portion of such a purchase price discount may be refunded to the seller based on the performance of the receivables, the purchaser may recognize this refundable amount as first-loss protection and hence treat this exposure under the securitization chapters 18 to 23, while the seller providing such a refundable purchase price discount must treat the refundable amount as a first-loss position under the securitization chapters. Non-refundable purchase price discounts for receivables do not affect either the EL-provision calculation in chapter 15 or the calculation of risk-weighted assets.
14.11 When collateral or partial guarantees obtained on receivables provide first loss protection (collectively referred to as mitigants in this paragraph), and these mitigants cover default losses, dilution losses, or both, they may also be treated as first loss protection under the securitization chapters (see paragraph 22.10). When the same mitigant covers both default and dilution risk, banks using the Securitization Internal Ratings-Based Approach (SEC-IRBA) that are able to calculate an exposure-weighted LGD must do so as defined in paragraph 22.21.
Recognition of Credit Risk Mitigants
14.12 Credit risk mitigants will be recognized generally using the same type of framework as set forth in paragraphs 12.21 to 12.2862.In particular, a guarantee provided by the seller or a third party will be treated using the existing IRB rules for guarantees, regardless of whether the guarantee covers default risk, dilution risk, or both.
(1) If the guarantee covers both the pool’s default risk and dilution risk, the bank will substitute the risk weight for an exposure to the guarantor in place of the pool’s total risk weight for default and dilution risk.
(2) If the guarantee covers only default risk or dilution risk, but not both, the bank will substitute the risk weight for an exposure to the guarantor in place of the pool’s risk weight for the corresponding risk component (default or dilution). The capital requirement for the other component will then be added.
(3) If a guarantee covers only a portion of the default and/or dilution risk, the uncovered portion of the default and/or dilution risk will be treated as per the existing credit risk mitigation rules for proportional or tranched coverage (i.e. the risk weights of the uncovered risk components will be added to the risk weights of the covered risk components)
62 At SAMA’s discretion, banks may recognize guarantors that are internally rated and associated with a PD equivalent to less than A- under the foundation IRB approach for purposes of determining capital requirements for dilution risk.
15. IRB Approach: Treatment of Expected Losses and Provisions
15.1 This chapter discusses the calculation of expected losses (EL) under the internal ratings-based (IRB) approach, and the method by which the difference between provisions (e.g. specific provisions, partial write-offs, portfolio-specific general provisions such as country risk provisions or general provisions) and EL may be included in or must be deducted from regulatory capital, as outlined in the definition of capital rules, articles 2.2.3 and 4.1.4 – Section A of SAMA Guidance Document Concerning the Implementation of Basel III (Circular No. 341000015689, Date: 19 December 2012). The treatment of EL and provisions related to securitization exposures is outlined in paragraph 18.36.
Calculation of Expected Losses
15.2 A bank must sum the EL amount (defined as EL multiplied by exposure at default)associated with its exposures to which the IRB approach is applied (excluding the EL amount associated with securitization exposures) to obtain a total EL amount.
15.3 Banks must calculate EL as probability of default (PD) x loss-given-default (LGD) for corporate, sovereign, bank, and retail exposures not in default. For corporate, sovereign, bank, and retail exposures that are in default, banks must use their best estimate of expected loss as defined in paragraph 16.85 for exposures subject to the advanced approach and for exposures subject to the foundation approach banks must use the supervisory LGD. For exposures subject to the supervisory slotting criteria EL is calculated as described in the chapter on the supervisory slotting approach (paragraphs 13.8 to 13.12). Securitization exposures do not contribute to the EL amount, as set out in in paragraph 18.36.
Calculation of Provisions
Exposures subject to the IRB approach for credit risk
15.4 Total eligible provisions are defined as the sum of all provisions (e.g. specific provisions, partial write-offs, portfolio-specific general provisions such as country risk provisions or general provisions) that are attributed to exposures treated under the IRB approach. In addition, total eligible provisions may include any discounts on defaulted assets. General and specific provisions set aside against securitization exposures must not be included in total eligible provisions.
Portion of exposures subject to the standardized approach for credit risk
15.5 Banks using the standardized approach for a portion of their credit risk exposures (see paragraphs 10.43 to 10.48), must determine the portion of general provisions attributed to the standardized or IRB treatment of provisions according to the methods outlined in paragraphs 15.6 and 15.7 below.
15.6 Banks should generally attribute total general provisions on a pro rata basis according to the proportion of credit risk-weighted assets subject to the standardized and IRB approaches. However, when one approach to determining credit risk-weighted assets (i.e. standardized or IRB approach) is used exclusively within an entity, general provisions booked within the entity using the standardized approach may be attributed to the standardized treatment. Similarly, general provisions booked within entities using the IRB approach may be attributed to the total eligible provisions as defined in paragraph 15.4.
15.7 At SAMA’s discretion, banks using both the standardized and IRB approaches may rely on their internal methods for allocating general provisions for recognition in capital under either the standardized or IRB approach, subject to the following conditions. Where the internal allocation method is made available, the national supervisor will establish the standards surrounding their use. Banks will need to obtain prior approval from their SAMA to use an internal allocation method for this purpose.
Treatment of EL and Provisions
15.8 As specified in articles 2.2.3 and 4.1.4 – Section A of SAMA Guidance Document Concerning the Implementation of Basel III (Circular No. 341000015689, Date: 19 December 2012), Banks using the IRB approach must compare the total amount of total eligible provisions (as defined in paragraph 15.4) with the total EL amount as calculated within the IRB approach (as defined in paragraph 15.2). In addition, article 2.2.3 in the aforementioned rules outlines the treatment for that portion of a bank that is subject to the standardized approach for credit risk when the bank uses both the standardized and IRB approaches.
15.9 Where the calculated EL amount is lower than the total eligible provisions of the bank, SAMA will consider whether the EL fully reflects the conditions in the market in which it operates before allowing the difference to be included in Tier 2 capital. If specific provisions exceed the EL amount on defaulted assets this assessment also needs to be made before using the difference to offset the EL amount on non-defaulted assets.
16. IRB Approach: Minimum Requirements to Use IRB Approach
16.1 This chapter presents the minimum requirements for entry and on-going use of the internal ratings-based (IRB) approach. The minimum requirements are set out in the following 11 sections:
(1) Composition of minimum requirements
(2) Compliance with minimum requirements
(3) Rating system design
(4) Risk rating system operations
(5) Corporate governance and oversight
(6) Use of internal ratings
(7) Risk quantification
(8) Validation of internal estimates
(9) Supervisory loss-given-default (LGD) and exposure at default (EAD) estimates
(10) Requirements for recognition of leasing
(11) Disclosure requirements
16.2 The minimum requirements in the sections that follow cut across asset classes. Therefore, more than one asset class may be discussed within the context of a given minimum requirement.
Section 1: Composition of Minimum Requirements
16.3 To be eligible for the IRB approach a bank must demonstrate to SAMA that it meets certain minimum requirements at the outset and on an ongoing basis. Many of these requirements are in the form of objectives that a qualifying bank’s risk rating systems must fulfil. The focus is on banks’ abilities to rank order and quantify risk in a consistent, reliable and valid fashion.
16.4 The overarching principle behind these requirements is that rating and risk estimation systems and processes provide for a meaningful assessment of borrower and transaction characteristics; a meaningful differentiation of risk; and reasonably accurate and consistent quantitative estimates of risk. Furthermore, the systems and processes must be consistent with internal use of these estimates.
16.5 The minimum requirements set out in this chapter apply to all asset classes unless noted otherwise. The standards related to the process of assigning exposures to borrower or facility grades (and the related oversight, validation, etc.) apply equally to the process of assigning retail exposures to pools of homogenous exposures, unless noted otherwise.
16.6 The minimum requirements set out in this chapter apply to both foundation and advanced approaches unless noted otherwise. Generally, all IRB banks must produce their own estimates of probability of default (PD63) and must adhere to the overall requirements for rating system design, operations, controls, and corporate governance, as well as the requisite requirements for estimation and validation of PD measures. Banks wishing to use their own estimates of LGD and EAD must also meet the incremental minimum requirements for these risk factors included in paragraphs 16.82 to 16.110.
63 Banks are not required to produce their own estimates of PD for exposures subject to the supervisory slotting approach
Section 2: Compliance with Minimum Requirements
16.7 To be eligible for an IRB approach, a bank must demonstrate to SAMA that it meets the IRB requirements in this framework, at the outset and on an ongoing basis. Banks’ overall credit risk management practices must also be consistent with the evolving sound practice/guidelines issued by SAMA.
16.8 There may be circumstances when a bank is not in complete compliance with all the minimum requirements. Where this is the case, the bank must produce a plan for a timely return to compliance, and seek approval from its supervisor, or the bank must demonstrate that the effect of such noncompliance is immaterial in terms of the risk posed to the institution. Failure to produce an acceptable plan or satisfactorily implement the plan or to demonstrate immateriality will lead SAMA to reconsider the bank’s eligibility for the IRB approach. Furthermore, for the duration of any noncompliance, SAMA will consider the need for the bank to hold additional capital under the supervisory review process or take other appropriate supervisory action.
Section 3: Rating System Design
16.9 The term “rating system” comprises all of the methods, processes, controls, and data collection and IT systems that support the assessment of credit risk, the assignment of internal risk ratings, and the quantification of default and loss estimates.
16.10 Within each asset class, a bank may utilize multiple rating methodologies /systems. For example, a bank may have customized rating systems for specific industries or market segments (e.g. middle market, and large corporate). If a bank chooses to use multiple systems, the rationale for assigning a borrower to a rating system must be documented and applied in a manner that best reflects the level of risk of the borrower. Banks must not allocate borrowers across rating systems inappropriately to minimize regulatory capital requirements (i.e. cherry- picking by choice of rating system). Banks must demonstrate that each system used for IRB purposes is in compliance with the minimum requirements at the outset and on an ongoing basis.
Rating dimensions: standards for corporate, sovereign and bank exposures
16.11 A qualifying IRB rating system must have two separate and distinct dimensions:
(1) the risk of borrower default; and
(2) transaction-specific factors.
16.12 The first dimension must be oriented to the risk of borrower default. Separate exposures to the same borrower must be assigned to the same borrower grade, irrespective of any differences in the nature of each specific transaction. There are two exceptions to this. Firstly, in the case of country transfer risk, where a bank may assign different borrower grades depending on whether the facility is denominated in local or foreign currency. Secondly, when the treatment of associated guarantees to a facility may be reflected in an adjusted borrower grade. In either case, separate exposures may result in multiple grades for the same borrower. A bank must articulate in its credit policy the relationship between borrower grades in terms of the level of risk each grade implies. Perceived and measured risk must increase as credit quality declines from one grade to the next. The policy must articulate the risk of each grade in terms of both a description of the probability of default risk typical for borrowers assigned the grade and the criteria used to distinguish that level of credit risk.
16.13 The second dimension must reflect transaction-specific factors, such as collateral, seniority, product type, etc. For exposures subject to the foundation IRB approach, this requirement can be fulfilled by the existence of a facility dimension, which reflects both borrower and transaction-specific factors. For example, a rating dimension that reflects expected loss (EL) by incorporating both borrower strength (PD) and loss severity (LGD) considerations would qualify. Likewise a rating system that exclusively reflects LGD would qualify. Where a rating dimension reflects EL and does not separately quantify LGD, the supervisory estimates of LGD must be used.
16.14 For banks using the advanced approach, facility ratings must reflect exclusively LGD. These ratings can reflect any and all factors that can influence LGD including, but not limited to, the type of collateral, product, industry, and purpose. Borrower characteristics may be included as LGD rating criteria only to the extent they are predictive of LGD. Banks may alter the factors that influence facility grades across segments of the portfolio as long as they can satisfy their supervisor that it improves the relevance and precision of their estimates.
16.15 Banks using the supervisory slotting criteria are exempt from this two dimensional requirement for these exposures. Given the interdependence between borrower/transaction characteristics in exposures subject to the supervisory slotting approaches, banks may satisfy the requirements under this heading through a single rating dimension that reflects EL by incorporating both borrower strength (PD) and loss severity (LGD) considerations. This exemption does not apply to banks using the general corporate foundation or advanced approach for the specialized lending (SL) sub-class.
Rating dimensions: standards for retail exposures
16.16 Rating systems for retail exposures must be oriented to both borrower and transaction risk, and must capture all relevant borrower and transaction characteristics. Banks must assign each exposure that falls within the definition of retail for IRB purposes into a particular pool. Banks must demonstrate that this process provides for a meaningful differentiation of risk, provides for a grouping of sufficiently homogenous exposures, and allows for accurate and consistent estimation of loss characteristics at pool level.
16.17 For each pool, banks must estimate PD, LGD, and EAD. Multiple pools may share identical PD, LGD and EAD estimates. At a minimum, banks should consider the following risk drivers when assigning exposures to a pool:
(1) Borrower risk characteristics (e.g. borrower type, demographics such as age /occupation).
(2) Transaction risk characteristics, including product and/or collateral types (e.g. loan to value measures, seasoning64, guarantees; and seniority (first vs. second lien)). Banks must explicitly address cross collateral provisions where present.
(3) Delinquency of exposure: Banks are expected to separately identify exposures that are delinquent and those that are not.
Rating structure: standards for corporate, sovereign and bank exposures
16.18 A bank must have a meaningful distribution of exposures across grades with no excessive concentrations, on both its borrower-rating and its facility-rating scales.
16.19 To meet this objective, a bank must have a minimum of seven borrower grades for non-defaulted borrowers and one for those that have defaulted. Banks with lending activities focused on a particular market segment may satisfy this requirement with the minimum number of grades.
16.20 A borrower grade is defined as an assessment of borrower risk on the basis of a specified and distinct set of rating criteria, from which estimates of PD are derived. The grade definition must include both a description of the degree of default risk typical for borrowers assigned the grade and the criteria used to distinguish that level of credit risk. Furthermore, “+” or “-” modifiers to alpha or numeric grades will only qualify as distinct grades if the bank has developed complete rating descriptions and criteria for their assignment, and separately quantifies PDs for these modified grades.
16.21 Banks with loan portfolios concentrated in a particular market segment and range of default risk must have enough grades within that range to avoid undue concentrations of borrowers in particular grades. Significant concentrations within a single grade or grades must be supported by convincing empirical evidence that the grade or grades cover reasonably narrow PD bands and that the default risk posed by all borrowers in a grade fall within that band.
16.22 There is no specific minimum number of facility grades for banks using the advanced approach for estimating LGD. A bank must have a sufficient number of facility grades to avoid grouping facilities with widely varying LGDs into a single grade. The criteria used to define facility grades must be grounded in empirical evidence.
16.23 Banks using the supervisory slotting criteria must have at least four grades for non-defaulted borrowers, and one for defaulted borrowers. The requirements for SL exposures that qualify for the corporate foundation and advanced approaches are the same as those for general corporate exposures.
Rating structure: standards for retail exposures
16.24 For each pool identified, the bank must be able to provide quantitative measures of loss characteristics (PD, LGD, and EAD) for that pool. The level of differentiation for IRB purposes must ensure that the number of exposures in a given pool is sufficient so as to allow for meaningful quantification and validation of the loss characteristics at the pool level. There must be a meaningful distribution of borrowers and exposures across pools. A single pool must not include an undue concentration of the bank’s total retail exposure.
Rating criteria
16.25 A bank must have specific rating definitions, processes and criteria for assigning exposures to grades within a rating system. The rating definitions and criteria must be both plausible and intuitive and must result in a meaningful differentiation of risk.
(1) The grade descriptions and criteria must be sufficiently detailed to allow those charged with assigning ratings to consistently assign the same grade to borrowers or facilities posing similar risk. This consistency should exist across lines of business, departments and geographic locations. If rating criteria and procedures differ for different types of borrowers or facilities, the bank must monitor for possible inconsistency, and must alter rating criteria to improve consistency when appropriate.
(2) Written rating definitions must be clear and detailed enough to allow third parties to understand the assignment of ratings, such as internal audit or an equally independent function and supervisors, to replicate rating assignments and evaluate the appropriateness of the grade/pool assignments.
(3) The criteria must also be consistent with the bank’s internal lending standards and its policies for handling troubled borrowers and facilities.
16.26 To ensure that banks are consistently taking into account available information, they must use all relevant and material information in assigning ratings to borrowers and facilities. Information must be current. The less information a bank has, the more conservative must be its assignments of exposures to borrower and facility grades or pools. An external rating can be the primary factor determining an internal rating assignment; however, the bank must ensure that it considers other relevant information.
Rating criteria: exposures subject to the supervisory slotting approach
16.27 Banks using the supervisory slotting criteria must assign exposures to their internal rating grades based on their own criteria, systems and processes, subject to compliance with the requisite minimum requirements. Banks must then map these internal rating grades into the five supervisory rating categories. The slotting criteria tables in the supervisory slotting approach chapter 13 provide, for each sub-class of SL exposures, the general assessment factors and characteristics exhibited by the exposures that fall under each of the supervisory categories. Each lending activity has a unique table describing the assessment factors and characteristics.
16.28 The criteria that banks use to assign exposures to internal grades will not perfectly align with criteria that define the supervisory categories; however, banks must demonstrate that their mapping process has resulted in an alignment of grades which is consistent with the preponderance of the characteristics in the respective supervisory category. Banks should take special care to ensure that any over rides of their internal criteria do not render the mapping process ineffective.
Rating assignment horizon
16.29 Although the time horizon used in PD estimation is one year (as described in paragraph 16.62), banks are expected to use a longer time horizon in assigning ratings.
16.30 A borrower rating must represent the bank’s assessment of the borrower’s ability and willingness to contractually perform despite adverse economic conditions or the occurrence of unexpected events. The range of economic conditions that are considered when making assessments must be consistent with current conditions and those that are likely to occur over a business cycle within the respective industry/geographic region. Rating systems should be designed in such a way that idiosyncratic or industry-specific changes are a driver of migrations from one category to another, and business cycle effects may also be a driver.
16.31 PD estimates for borrowers that are highly leveraged or for borrowers whose assets are predominantly traded assets must reflect the performance of the underlying assets based on periods of stressed volatilities.
16.32 Given the difficulties in forecasting future events and the influence they will have on a particular borrower’s financial condition, a bank must take a conservative view of projected information. Furthermore, where limited data are available, a bank must adopt a conservative bias to its analysis.
Use of models
16.33 The requirements in this section apply to statistical models and other mechanical methods used to assign borrower or facility ratings or in estimation of PDs, LGDs, or EADs. Credit scoring models and other mechanical rating procedures generally use only a subset of available information. Although mechanical rating procedures may sometimes avoid some of the idiosyncratic errors made by rating systems in which human judgement plays a large role, mechanical use of limited information also is a source of rating errors. Credit scoring models and other mechanical procedures are permissible as the primary or partial basis of rating assignments, and may play a role in the estimation of loss characteristics. Sufficient human judgement and human oversight is necessary to ensure that all relevant and material information, including that which is outside the scope of the model, is also taken into consideration, and that the model is used appropriately.
(1) The burden is on the bank to satisfy its supervisor that a model or procedure has good predictive power and that regulatory capital requirements will not be distorted as a result of its use. The variables that are input to the model must form a reasonable set of predictors. The model must be accurate on average across the range of borrowers or facilities to which the bank is exposed and there must be no known material biases.
(2) The bank must have in place a process for vetting data inputs into a statistical default or loss prediction model which includes an assessment of the accuracy, completeness and appropriateness of the data specific to the assignment of an approved rating.
(3) The bank must demonstrate that the data used to build the model are representative of the population of the bank’s actual borrowers or facilities.
(4) When combining model results with human judgement, the judgement must take into account all relevant and material information not considered by the model. The bank must have written guidance describing how human judgement and model results are to be combined.
(5) The bank must have procedures for human review of model-based rating assignments. Such procedures should focus on finding and limiting errors associated with known model weaknesses and must also include credible ongoing efforts to improve the model’s performance.
(6) The bank must have a regular cycle of model validation that includes monitoring of model performance and stability; review of model relationships; and testing of model outputs against outcomes.
Documentation of rating system design
16.34 Banks must document in writing their rating systems’ design and operational details. The documentation must evidence banks’ compliance with the minimum standards, and must address topics such as portfolio differentiation, rating criteria, responsibilities of parties that rate borrowers and facilities, definition of what constitutes a rating exception, parties that have authority to approve exceptions, frequency of rating reviews, and management oversight of the rating process. A bank must document the rationale for its choice of internal rating criteria and must be able to provide analyses demonstrating that rating criteria and procedures are likely to result in ratings that meaningfully differentiate risk. Rating criteria and procedures must be periodically reviewed to determine whether they remain fully applicable to the current portfolio and to external conditions. In addition, a bank must document a history of major changes in the risk rating process, and such documentation must support identification of changes made to the risk rating process subsequent to the last supervisory review. The organization of rating assignment, including the internal control structure, must also be documented.
16.35 Banks must document the specific definitions of default and loss used internally and demonstrate consistency with the reference definitions set out in paragraphs 16.67 to 16.75.
16.36 If the bank employs statistical models in the rating process, the bank must document their methodologies. This material must:
(1) Provide a detailed outline of the theory, assumptions and/or mathematical and empirical basis of the assignment of estimates to grades, individual obligors, exposures, or pools, and the data source(s) used to estimate the model;
(2) Establish a rigorous statistical process (including out-of-time and out- of-sample performance tests) for validating the model; and
(3) Indicate any circumstances under which the model does not work effectively.
16.37 Use of a model obtained from a third-party vendor that claims proprietary technology is not a justification for exemption from documentation or any other of the requirements for internal rating systems. The burden is on the model’s vendor and the bank to satisfy SAMA.
64 For each pool where the banks estimate PD and LGD, banks should analyze the representativeness of the age of the facilities (in terms of time since origination for PD and time since the date of default for LGD) in the data used to derive the estimates of the bank’s actual facilities. In certain market conditions, default rates peak several years after origination or recovery rates show a low point several years after default, as such banks should adjust the estimates with an adequate margin of conservatism to account for the lack of representativeness as well as anticipated implications of rapid exposure growth.
Section 4: Risk Rating System Operations
Coverage of ratings
16.38 For corporate, sovereign and bank exposures, each borrower and all recognized guarantors must be assigned a rating and each exposure must be associated with a facility rating as part of the loan approval process. Similarly, for retail, each exposure must be assigned to a pool as part of the loan approval process.
16.39 Each separate legal entity to which the bank is exposed must be separately rated. A bank must have policies acceptable to its supervisor regarding the treatment of individual entities in a connected group including circumstances under which the same rating may or may not be assigned to some or all related entities. Those policies must include a process for the identification of specific wrong way risk for each legal entity to which the bank is exposed. Transactions with counterparties where specific wrong way risk has been identified need to be treated differently when calculating the EAD for such exposures (see paragraph 7.48 in the CCR framework).
Integrity of rating process: standards for corporate, sovereign and bank exposures
16.40 Rating assignments and periodic rating reviews must be completed or approved by a party that does not directly stand to benefit from the extension of credit. Independence of the rating assignment process can be achieved through a range of practices that will be carefully reviewed by SAMA. These operational processes must be documented in the bank’s procedures and incorporated into bank policies. Credit policies and underwriting procedures must reinforce and foster the independence of the rating process.
16.41 Borrowers and facilities must have their ratings refreshed at least on an annual basis. Certain credits, especially higher risk borrowers or problem exposures, must be subject to more frequent review. In addition, banks must initiate a new rating if material information on the borrower or facility comes to light.
16.42 The bank must have an effective process to obtain and update relevant and material information on the borrower’s financial condition, and on facility characteristics that affect LGDs and EADs (such as the condition of collateral). Upon receipt, the bank needs to have a procedure to update the borrower’s rating in a timely fashion.
Integrity of rating process: standards for retail exposures
16.43 A bank must review the loss characteristics and delinquency status of each identified risk pool on at least an annual basis. It must also review the status of individual borrowers within each pool as a means of ensuring that exposures continue to be assigned to the correct pool. This requirement may be satisfied by review of a representative sample of exposures in the pool.
Overrides
16.44 For rating assignments based on expert judgement, banks must clearly articulate the situations in which bank officers may override the outputs of the rating process, including how and to what extent such overrides can be used and by whom. For model-based ratings, the bank must have guidelines and processes for monitoring cases where human judgement has overridden the model’s rating, variables were excluded or inputs were altered. These guidelines must include identifying personnel that are responsible for approving these overrides. Banks must identify overrides and separately track their performance.
Data maintenance
16.45 A bank must collect and store data on key borrower and facility characteristics to provide effective support to its internal credit risk measurement and management process, to enable the bank to meet the other requirements in this document, and to serve as a basis for supervisory reporting. These data should be sufficiently detailed to allow retrospective re-allocation of obligors and facilities to grades, for example if increasing sophistication of the internal rating system suggests that finer segregation of portfolios can be achieved. Furthermore, banks must collect and retain data on aspects of their internal ratings as required by Pillar 3 Disclosure Requirements Framework.
Data maintenance: for corporate, sovereign and bank exposures
16.46 Banks must maintain rating histories on borrowers and recognized guarantors, including the rating since the borrower/guarantor was assigned an internal grade, the dates the ratings were assigned, the methodology and key data used to derive the rating and the person/model responsible. The identity of borrowers and facilities that default, and the timing and circumstances of such defaults, must be retained. Banks must also retain data on the PDs and realized default rates associated with rating grades and ratings migration in order to track the predictive power of the borrower rating system.
16.47 Banks using the advanced IRB approach must also collect and store a complete history of data on the LGD and EAD estimates associated with each facility and the key data used to derive the estimate and the person/model responsible. Banks must also collect data on the estimated and realized LGDs and EADs associated with each defaulted facility. Banks that reflect the credit risk mitigating effects of guarantees/credit derivatives through LGD must retain data on the LGD of the facility before and after evaluation of the effects of the guarantee/credit derivative. Information about the components of loss or recovery for each defaulted exposure must be retained, such as amounts recovered, source of recovery (e.g. collateral, liquidation proceeds and guarantees), time period required for recovery, and administrative costs.
16.48 Banks under the foundation approach which utilize supervisory estimates are encouraged to retain the relevant data (i.e. data on loss and recovery experience for corporate exposures under the foundation approach, data on realized losses for banks using the supervisory slotting criteria).
Data maintenance: for retail exposures
16.49 Banks must retain data used in the process of allocating exposures to pools, including data on borrower and transaction risk characteristics used either directly or through use of a model, as well as data on delinquency. Banks must also retain data on the estimated PDs, LGDs and EADs, associated with pools of exposures. For defaulted exposures, banks must retain the data on the pools to which the exposure was assigned over the year prior to default and the realized outcomes on LGD and EAD.
Stress tests used in assessment of capital adequacy
16.50 An IRB bank must have in place sound stress testing processes for use in the assessment of capital adequacy. Stress testing must involve identifying possible events or future changes in economic conditions that could have unfavorable effects on a bank’s credit exposures and assessment of the bank’s ability to withstand such changes. Examples of scenarios that could be used are:
(1) Economic or industry downturns;
(2) Market-risk events; and
(3) Liquidity conditions.
16.51 In addition to the more general tests described above, the bank must perform a credit risk stress test to assess the effect of certain specific conditions on its IRB regulatory capital requirements. The test to be employed would be one chosen by the bank, subject to supervisory review. The test to be employed must be meaningful and reasonably conservative. Individual banks may develop different approaches to undertaking this stress test requirement, depending on their circumstances. For this purpose, the objective is not to require banks to consider worst-case scenarios. The bank’s stress test in this context should, however, consider at least the effect of mild recession scenarios. In this case, one example might be to use two consecutive quarters of zero growth to assess the effect on the bank’s PDs, LGDs and EADs, taking account – on a conservative basis- of the bank’s international diversification.
16.52 Whatever method is used, the bank must include a consideration of the following sources of information. First, a bank’s own data should allow estimation of the ratings migration of at least some of its exposures. Second, banks should consider information about the impact of smaller deterioration in the credit environment on a bank’s ratings, giving some information on the likely effect of bigger, stress circumstances. Third, banks should evaluate evidence of ratings migration in external ratings. This would include the bank broadly matching its buckets to rating categories.
Section 5: Corporate Governance and Oversight
Corporate governance
16.53 All material aspects of the rating and estimation processes must be approved by the bank’s board of directors or a designated authority. These parties must possess a general understanding of the bank’s risk rating system and detailed comprehension of its associated management reports. Senior management must provide notice to the board of directors or a designated committee thereof of material changes or exceptions from established policies that will materially impact the operations of the bank’s rating system.
16.54 Senior management also must have a good understanding of the rating system’s design and operation, and must approve material differences between established procedure and actual practice. Management must also ensure, on an ongoing basis, that the rating system is operating properly. Management and staff in the credit control function must meet regularly to discuss the performance of the rating process, areas needing improvement, and the status of efforts to improve previously identified deficiencies.
16.55 Internal ratings must be an essential part of the reporting to these parties. Reporting must include risk profile by grade, migration across grades, estimation of the relevant parameters per grade, and comparison of realized default rates (and LGDs and EADs for banks on advanced approaches) against expectations. Reporting frequencies may vary with the significance and type of information and the level of the recipient.
Credit risk control
16.56 Banks must have independent credit risk control units that are responsible for the design or selection, implementation and performance of their internal rating systems. The unit(s) must be functionally independent from the personnel and management functions responsible for originating exposures. Areas of responsibility must include:
(1) Testing and monitoring internal grades;
(2) Production and analysis of summary reports from the bank’s rating system, to include historical default data sorted by rating at the time of default and one year prior to default, grade migration analyses, and monitoring of trends in key rating criteria;
(3) Implementing procedures to verify that rating definitions are consistently applied across departments and geographic areas;
(4) Reviewing and documenting any changes to the rating process, including the reasons for the changes; and
(5) Reviewing the rating criteria to evaluate if they remain predictive of risk. Changes to the rating process, criteria or individual rating parameters must be documented and retained for SAMA to review.
16.57 A credit risk control unit must actively participate in the development, selection, implementation and validation of rating models. It must assume oversight and supervision responsibilities for any models used in the rating process, and ultimate responsibility for the ongoing review and alterations to rating models.
Internal and external audit
16.58 Internal audit or an equally independent function must review at least annually, the bank’s rating system and its operations, including the operations of the creditfunction and the estimation of PDs, LGDs and EADs. Areas of review include adherence to all applicable minimum requirements. Internal audit must document its findings.
Section 6: Use of Internal Ratings
16.59 Internal ratings and default and loss estimates must play an essential role in the credit approval, risk management, internal capital allocations, and corporate governance functions of banks using the IRB approach. Ratings systems and estimates designed and implemented exclusively for the purpose of qualifying for the IRB approach and used only to provide IRB inputs are not acceptable. It is recognized that banks will not necessarily be using exactly the same estimates for both IRB and all internal purposes. For example, pricing models are likely to use PDs and LGDs relevant to the life of the asset. Where there are such differences, a bank must document them and demonstrate their reasonableness to SAMA.
16.60 A bank must have a credible track record in the use of internal ratings information. Thus, the bank must demonstrate that it has been using a rating system that was broadly in line with the minimum requirements articulated in this document for at least the three years prior to qualification. A bank using the advanced IRB approach must demonstrate that it has been estimating and employing LGDs and EADs in a manner that is broadly consistent with the minimum requirements for use of own estimates of LGDs and EADs for at least the three years prior to qualification. Improvements to a bank’s rating system will not render a bank non-compliant with the three-year requirement.
Section 7: Risk Quantification
Overall requirements for estimation (structure and intent)
16.61 This section addresses the broad standards for own-estimates of PD, LGD, and EAD. Generally, all banks using the IRB approaches must estimate a PD65 for each internal borrower grade for corporate, sovereign and bank exposures or for each pool in the case of retail exposures.
16.62 PD estimates must be a long-run average of one-year default rates for borrowers in the grade, with the exception of retail exposures as set out in paragraphs 16.80 and 16.81. Requirements specific to PD estimation are provided in paragraphs 16.76 to 16.81. Banks on the advanced approach must estimate an appropriate LGD (as defined in paragraphs 16.82 to 16.87) for each of its facilities (or retail pools). For exposures subject to the advanced approach, banks must also estimate an appropriate long-run default-weighted average EAD for each of its facilities as defined in paragraphs 16.88 and 16.89. Requirements specific to EAD estimation appear in paragraphs 16.88 to 16.98. For corporate, sovereign and bank exposures, banks that do not meet the requirements for own-estimates of EAD or LGD, above, must use the supervisory estimates of these parameters. Standards for use of such estimates are set out in paragraphs 16.127 to 16.144.
16.63 Internal estimates of PD, LGD, and EAD must incorporate all relevant, material and available data, information and methods. A bank may utilize internal data and data from external sources (including pooled data). Where internal or external data is used, the bank must demonstrate that its estimates are representative of long run experience.
16.64 Estimates must be grounded in historical experience and empirical evidence, and not based purely on subjective or judgmental considerations. Any changes in lending practice or the process for pursuing recoveries over the observation period must be taken into account. A bank’s estimates must promptly reflect the implications of technical advances and new data and other information, as it becomes available. Banks must review their estimates on a yearly basis or more frequently.
16.65 The population of exposures represented in the data used for estimation, and lending standards in use when the data were generated, and other relevant characteristics should be closely matched to or at least comparable with those of the bank’s exposures and standards. The bank must also demonstrate that economic or market conditions that underlie the data are relevant to current and foreseeable conditions. For estimates of LGD and EAD, banks must take into account paragraphs 16.82 to 16.98. The number of exposures in the sample and the data period used for quantification must be sufficient to provide the bank with confidence in the accuracy and robustness of its estimates. The estimation technique must perform well in out-of-sample tests.
16.66 In general, estimates of PDs, LGDs, and EADs are likely to involve unpredictable errors. In order to avoid over-optimism, a bank must add to its estimates a margin of conservatism that is related to the likely range of errors. Where methods and data are less satisfactory and the likely range of errors is larger, the margin of conservatism must be larger. SAMA may, on case by case basis, allow some flexibility in application of the required standards for data that are collected prior to the date of implementation of this Framework. However, in such cases banks must demonstrate that appropriate adjustments have been made to achieve broad equivalence to the data without such flexibility. Data collected beyond the date of implementation must conform to the minimum standards unless otherwise stated.
Definition of default
16.67 A default is considered to have occurred with regard to a particular obligor when either or both of the two following events have taken place.
(1) The bank considers that the obligor is unlikely to pay its credit obligations to the banking group in full, without recourse by the bank to actions such as realizing security (if held).
(2) The obligor is past due more than 90 days on any material credit obligation to the banking group. Overdrafts will be considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than current out standings.
16.68 The elements to be taken as indications of unlikeliness to pay include:
(1) The bank puts the credit obligation on non-accrued status.
(2) The bank makes a charge-off or account-specific provision resulting from a significant perceived decline in credit quality subsequent to the bank taking on the exposure.
(3) The bank sells the credit obligation at a material credit-related economic loss.
(4) The bank consents to a distressed restructuring of the credit obligation where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, interest or (where relevant) fees.
(5) The bank has filed for the obligor’s bankruptcy or a similar order in respect of the obligor’s credit obligation to the banking group.
(6) The obligor has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of the credit obligation to the banking group.
16.69 SAMA will provide appropriate guidance as to how these elements must be implemented and monitored.
16.70 For retail exposures, the definition of default can be applied at the level of a particular facility, rather than at the level of the obligor. As such, default by a borrower on one obligation does not require a bank to treat all other obligations to the banking group as defaulted.
16.71 A bank must record actual defaults on IRB exposure classes using this reference definition. A bank must also use the reference definition for its estimation of PDs, and (where relevant) LGDs and EADs. In arriving at these estimations, a bank may use external data available to it that is not itself consistent with that definition, subject to the requirements set out in paragraph 16.77. However, in such cases, banks must demonstrate to SAMA that appropriate adjustments to the data have been made to achieve broad equivalence with the reference definition. This same condition would apply to any internal data used up to implementation of this Framework. Internal data (including that pooled by banks) used in such estimates beyond the date of implementation of this Framework must be consistent with the reference definition.
16.72 If the bank considers that a previously defaulted exposure’s status is such that no trigger of the reference definition any longer applies, the bank must rate the borrower and estimate LGD as they would for a non-defaulted facility. Should the reference definition subsequently be triggered, a second default would be deemed to have occurred.
Re-ageing
16.73 The bank must have clearly articulated and documented policies in respect of the counting of days past due, in particular in respect of the re-ageing of the facilities and the granting of extensions, deferrals, renewals and rewrites to existing accounts. At a minimum, the re-ageing policy must include: (a) approval authorities and reporting requirements; (b) minimum age of a facility before it is eligible for re-ageing; (c) delinquency levels of facilities that are eligible for re- ageing; (d) maximum number of re-ageings per facility; and (e) a reassessment of the borrower’s capacity to repay. These policies must be applied consistently over time, and must support the ‘use test’ (ie if a bank treats a re-aged exposure in a similar fashion to other delinquent exposures more than the past-due cut off point, this exposure must be recorded as in default for IRB purposes).
Treatment of overdrafts
16.74 Authorized overdrafts must be subject to a credit limit set by the bank and brought to the knowledge of the client. Any break of this limit must be monitored; if the account were not brought under the limit after 90 to 180 days (subject to the applicable past-due trigger), it would be considered as defaulted. Non-authorized overdrafts will be associated with a zero limit for IRB purposes. Thus, days past due commence once any credit is granted to an unauthorized customer; if such credit were not repaid within 90 to 180 days, the exposure would be considered in default. Banks must have in place rigorous internal policies for assessing the creditworthiness of customers who are offered overdraft accounts.
Definition of loss for all asset classes
16.75 The definition of loss used in estimating LGD is economic loss. When measuring economic loss, all relevant factors should be taken into account. This must include material discount effects and material direct and indirect costs associated with collecting on the exposure. Banks must not simply measure the loss recorded in accounting records, although they must be able to compare accounting and economic losses. The bank’s own workout and collection expertise significantly influences their recovery rates and must be reflected in their LGD estimates, but adjustments to estimates for such expertise must be conservative until the bank has sufficient internal empirical evidence of the impact of its expertise.
Requirements specific to PD estimation: corporate, sovereign and bank exposures
16.76 Banks must use information and techniques that take appropriate account of the long-run experience when estimating the average PD for each rating grade. For example, banks may use one or more of the three specific techniques set out below: internal default experience, mapping to external data, and statistical default models.
16.77 Banks may have a primary technique and use others as a point of comparison and potential adjustment. SAMA will not be satisfied by mechanical application of a technique without supporting analysis. Banks must recognize the importance of judgmental considerations in combining results of techniques and in making adjustments for limitations of techniques and information. For all methods listed below, banks must estimate a PD for each rating grade based on the observed historical average one-year default rate that is a simple average based on number of obligors (count weighted). Weighting approaches, such as EAD weighting, are not permitted.
(1) A bank may use data on internal default experience for the estimation of PD. A bank must demonstrate in its analysis that the estimates are reflective of underwriting standards and of any differences in the rating system that generated the data and the current rating system. Where only limited data are available, or where underwriting standards or rating systems have changed, the bank must add a greater margin of conservatism in its estimate of PD. The use of pooled data across institutions may also be recognized. A bank must demonstrate that the internal rating systems and criteria of other banks in the pool are comparable with its own.
(2) Banks may associate or map their internal grades to the scale used by an external credit assessment institution or similar institution and then attribute the default rate observed for the external institution’s grades to the bank’s grades. Mappings must be based on a comparison of internal rating criteria to the criteria used by the external institution and on a comparison of the internal and external ratings of any common borrowers. Biases or inconsistencies in the mapping approach or underlying data must be avoided. The external institution’s criteria underlying the data used for quantification must be oriented to the risk of the borrower and not reflect transaction characteristics. The bank’s analysis must include a comparison of the default definitions used, subject to the requirements in paragraphs 16.67 to 16.72. The bank must document the basis for the mapping.
(3) A bank is allowed to use a simple average of default-probability estimates for individual borrowers in a given grade, where such estimates are drawn from statistical default prediction models. The bank’s use of default probability models for this purpose must meet the standards specified in paragraph 16.33.
16.78 Irrespective of whether a bank is using external, internal, or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used must be at least five years for at least one source. If the available observation period spans a longer period for any source, and this data are relevant and material, this longer period must be used. The data should include a representative mix of good and bad years.
Requirements specific to PD estimation: retail exposures
16.79 Given the bank-specific basis of assigning exposures to pools, banks must regard internal data as the primary source of information for estimating loss characteristics. Banks are permitted to use external data or statistical models for quantification provided a strong link can be demonstrated between: (a) the bank’s process of assigning exposures to a pool and the process used by the external data source; and (b) between the bank’s internal risk profile and the composition of the external data. In all cases banks must use all relevant and material data sources as points of comparison.
16.80 One method for deriving long-run average estimates of PD and default- weighted average loss rates given default (as defined in paragraph 16.82) for retail would be based on an estimate of the expected long-run loss rate. A bank may (i) use an appropriate PD estimate to infer the long-run default-weighted average loss rate given default, or (ii) use a long-run default-weighted average loss rate given default to infer the appropriate PD. In either case, it is important to recognize that the LGD used for the IRB capital calculation cannot be less than the long-run default-weighted average loss rate given default and must be consistent with the concepts defined in paragraph 16.82.
16.81 Irrespective of whether banks are using external, internal, pooled data sources, or a combination of the three, for their estimation of loss characteristics, the length of the underlying historical observation period used must be at least five years. If the available observation spans a longer period for any source, and these data are relevant, this longer period must be used. The data should include a representative mix of good and bad years of the economic cycle relevant for the portfolio. The PD should be based on the observed historical average one-year default rate.
Requirements specific to own-LGD estimates: standards for all asset classes
16.82 A bank must estimate an LGD for each facility that aims to reflect economic downturn conditions where necessary to capture the relevant risks. This LGD cannot be less than the long-run default-weighted average loss rate given default calculated based on the average economic loss of all observed defaults within the data source for that type of facility. In addition, a bank must take into account the potential for the LGD of the facility to be higher than the default-weighted average during a period when credit losses are substantially higher than average. For certain types of exposures, loss severities may not exhibit such cyclical variability and LGD estimates may not differ materially from the long-run default- weighted average. However, for other exposures, this cyclical variability in loss severities may be important and banks will need to incorporate it into their LGD estimates. For this purpose, banks may make reference to the averages of loss severities observed during periods of high credit losses, forecasts based on appropriately conservative assumptions, or other similar methods. Appropriate estimates of LGD during periods of high credit losses might be formed using either internal and/or external data. SAMA will continue to monitor and encourage the development of appropriate approaches to this issue.
16.83 In its analysis, the bank must consider the extent of any dependence between the risk of the borrower and that of the collateral or collateral provider. Cases where there is a significant degree of dependence must be addressed in a conservative manner. Any currency mismatch between the underlying obligation and the collateral must also be considered and treated conservatively in the bank’s assessment of LGD.
16.84 LGD estimates must be grounded in historical recovery rates and, when applicable, must not solely be based on the collateral’s estimated market value. This requirement recognizes the potential inability of banks to gain both control of their collateral and liquidate it expeditiously. To the extent that LGD estimates take into account the existence of collateral, banks must establish internal requirements for collateral management, operational procedures, legal certainty and risk management process that are generally consistent with those required for the foundation IRB approach.
16.85 Recognizing the principle that realized losses can at times systematically exceed expected levels, the LGD assigned to a defaulted asset should reflect the possibility that the bank would have to recognize additional, unexpected losses during the recovery period. For each defaulted asset, the bank must also construct its best estimate of the expected loss on that asset based on current economic circumstances and facility status. The amount, if any, by which the LGD on a defaulted asset exceeds the bank’s best estimate of expected loss on the asset represents the capital requirement for that asset, and should be set by the bank on a risk-sensitive basis in accordance with paragraph 11.3.Instances where the best estimate of expected loss on a defaulted asset is less than the sum of specific provisions and partial charge- offs on that asset will attract supervisory scrutiny and must be justified by the bank.
Requirements specific to own-LGD estimates: additional standards for corporate and sovereign exposures
16.86 Estimates of LGD must be based on a minimum data observation period that should ideally cover at least one complete economic cycle but must in any case be no shorter than a period of seven years for at least one source. If the available observation period spans a longer period for any source, and the data are relevant, this longer period must be used.
Requirements specific to own-LGD estimates: additional standards for retail exposures
16.87 The minimum data observation period for LGD estimates for retail exposures is five years. The less data a bank has the more conservative it must be in its estimation.
Requirements specific to own-EAD estimates: standards for all asset classes
16.88 EAD for an on-balance sheet or off-balance sheet item is defined as the expected gross exposure of the facility upon default of the obligor. For on-balance sheet items, banks must estimate EAD at no less than the current drawn amount, subject to recognizing the effects of on-balance sheet netting as specified in the foundation approach. The minimum requirements for the recognition of netting are the same as those under the foundation approach. The additional minimum requirements for internal estimation of EAD under the advanced approach, therefore, focus on the estimation of EAD for off- balance sheet items (excluding transactions that expose banks to counterparty credit risk as set out in chapter 5 of the Counterparty Credit Risk (CCR) framework). Banks using the advanced approach must have established procedures in place for the estimation of EAD for off-balance sheet items. These must specify the estimates of EAD to be used for each facility type. Banks’ estimates of EAD should reflect the possibility of additional drawings by the borrower up to and after the time a default event is triggered. Where estimates of EAD differ by facility type, the delineation of these facilities must be clear and unambiguous.
16.89 Under the advanced approach, banks must assign an estimate of EAD for each eligible facility. It must be an estimate of the long-run default-weighted average EAD for similar facilities and borrowers over a sufficiently long period of time, but with a margin of conservatism appropriate to the likely range of errors in the estimate. If a positive correlation can reasonably be expected between the default frequency and the magnitude of EAD, the EAD estimate must incorporate a larger margin of conservatism. Moreover, for exposures for which EAD estimates are volatile over the economic cycle, the bank must use EAD estimates that are appropriate for an economic downturn, if these are more conservative than the long-run average. For banks that have been able to develop their own EAD models, this could be achieved by considering the cyclical nature, if any, of the drivers of such models. Other banks may have sufficient internal data to examine the impact of previous recession(s). However, some banks may only have the option of making conservative use of external data. Moreover, where a bank bases its estimates on alternative measures of central tendency (such as the median or a higher percentile estimate) or only on ‘downturn’ data, it should explicitly confirm that the basic downturn requirement of the framework is met, ie the bank’s estimates do not fall below a (conservative) estimate of the long-run default- weighted average EAD for similar facilities.
16.90 The criteria by which estimates of EAD are derived must be plausible and intuitive, and represent what the bank believes to be the material drivers of EAD. The choices must be supported by credible internal analysis by the bank. The bank must be able to provide a breakdown of its EAD experience by the factors it sees as the drivers of EAD. A bank must use all relevant and material information in its derivation of EAD estimates. Across facility types, a bank must review its estimates of EAD when material new information comes to light and at least on an annual basis.
16.91 Due consideration must be paid by the bank to its specific policies and strategies adopted in respect of account monitoring and payment processing. The bank must also consider its ability and willingness to prevent further drawings in circumstances short of payment default, such as covenant violations or other technical default events. Banks must also have adequate systems and procedures in place to monitor facility amounts, current outstandings against committed lines and changes in outstandings per borrower and per grade. The bank must be able to monitor outstanding balances on a daily basis.
16.92 Banks’ EAD estimates must be developed using a 12-month fixed-horizon approach; i.e. for each observation in the reference data set, default outcomes must be linked to relevant obligor and facility characteristics twelve months prior to default.
16.93 As set out in paragraph 16.65, banks’ EAD estimates should be based on reference data that reflect the obligor, facility and bank management practice characteristics of the exposures to which the estimates are applied. Consistent with this principle, EAD estimates applied to particular exposures should not be based on data that comingle the effects of disparate characteristics or data from exposures that exhibit different characteristics (e.g. same broad product grouping but different customers that are managed differently by the bank). The estimates should be based on appropriately homogenous segments. Alternatively, the estimates should be based on an estimation approach that effectively disentangles the impact of the different characteristics exhibited within the relevant dataset. Practices that generally do not comply with this principle include use of estimates based or partly based on:
(1) SME/midmarket data being applied to large corporate obligors.
(2) Data from commitments with ‘small’ unused limit availability being applied to facilities with ‘large’ unused limit availability.
(3) Data from obligors already identified as problematic at reference date being applied to current obligors with no known issues (e.g. customers at reference date who were already delinquent, watch listed by the bank, subject to recent bank-initiated limit reductions, blocked from further drawdowns or subject to other types of collections activity).
(4) Data that has been affected by changes in obligors’ mix of borrowing and other credit-related products over the observation period unless that data has been effectively mitigated for such changes, e.g. by adjusting the data to remove the effects of the changes in the product mix. SAMA expects banks to demonstrate a detailed understanding of the impact of changes in customer product mix on EAD reference data sets (and associated EAD estimates) and that the impact is immaterial or has been effectively mitigated within each bank’s estimation process. Banks’ analyses in this regard will be actively challenged by SAMA. Effective mitigation would not include: setting floors to credit conversion factor (CCF)/EAD observations; use of obligor-level estimates that do not fully cover the relevant product transformation options or inappropriately combine products with very different characteristics (e.g. revolving and non-revolving products); adjusting only ‘material’ observations affected by product transformation; generally excluding observations affected by product profile transformation (thereby potentially distorting the representativeness of the remaining data).
16.94 A well-known feature of the commonly used undrawn limit factor (ULF) approach66 to estimating CCFs is the region of instability associated with facilities close to being fully drawn at reference date. Banks should ensure that their EAD estimates are effectively quarantined from the potential effects of this region of instability.
(1) An acceptable approach could include using an estimation method other than the ULF approach that avoids the instability issue by not using potentially small undrawn limits that could approach zero in the denominator or, as appropriate, switching to a method other than the ULF as the region of instability is approached, e.g. a limit factor, balance factor or additional utilization factor approach67. Note that, consistent with paragraph 16.93, including limit utilization as a driver in EAD models could quarantine much of the relevant portfolio from this issue but, in the absence of other actions, leaves open how to develop appropriate EAD estimates to be applied to exposures within the region of instability.
(2) Common but ineffective approaches to mitigating this issue include capping and flooring reference data (e.g. observed CCFs at 100 per cent and zero respectively) or omitting observations that are judged to be affected.
16.95 EAD reference data must not be capped to the principal amount outstanding or facility limits. Accrued interest, other due payments and limit excesses should be included in EAD reference data.
16.96 For transactions that expose banks to counterparty credit risk, estimates of EAD must fulfil the requirements set forth in the counterparty credit risk standards.
Requirements specific to own-EAD estimates: additional standards for corporate and sovereign exposures
16.97 Estimates of EAD must be based on a time period that must ideally cover a complete economic cycle but must in any case be no shorter than a period of seven years. If the available observation period spans a longer period for any source, and the data are relevant, this longer period must be used. EAD estimates must be calculated using a default-weighted average and not a time- weighted average.
Requirements specific to own-EAD estimates: additional standards for retail exposures
16.98 The minimum data observation period for EAD estimates for retail exposures is five years. The less data a bank has, the more conservative it must be in its estimation.
Requirements for assessing effect of guarantees : standards for corporate and sovereign exposures where own estimates of LGD are used and standards for retail exposures
16.99 When a bank uses its own estimates of LGD, it may reflect the risk-mitigating effect of guarantees through an adjustment to PD or LGD estimates. The option to adjust LGDs is available only to those banks that have been approved to use their own internal estimates of LGD. For retail exposures, where guarantees exist, either in support of an individual obligation or a pool of exposures, a bank may reflect the risk-reducing effect either through its estimates of PD or LGD, provided this is done consistently. In adopting one or the other technique, a bank must adopt a consistent approach, both across types of guarantees and over time.
16.100 In all cases, both the borrower and all recognized guarantors must be assigned a borrower rating at the outset and on an ongoing basis. A bank must follow all minimum requirements for assigning borrower ratings set out in this document, including the regular monitoring of the guarantor’s condition and ability and willingness to honour its obligations. Consistent with the requirements in paragraphs 16.46 and 16.47, a bank must retain all relevant information on the borrower absent the guarantee and the guarantor. In the case of retail guarantees, these requirements also apply to the assignment of an exposure to a pool, and the estimation of PD.
16.101 In no case can the bank assign the guaranteed exposure an adjusted PD or LGD such that the adjusted risk weight would be lower than that of a comparable, direct exposure to the guarantor. Neither criteria nor rating processes are permitted to consider possible favorable effects of imperfect expected correlation between default events for the borrower and guarantor for purposes of regulatory minimum capital requirements. As such, the adjusted risk weight must not reflect the risk mitigation of “double default.”
16.102 In case the bank applies the standardized approach to direct exposures to the guarantor, the guarantee may only be recognized by treating the covered portion of the exposure as a direct exposure to the guarantor under the standardized approach. Similarly, in case the bank applies the foundation IRB approach to direct exposures to the guarantor, the guarantee may only be recognized by applying the foundation IRB approach to the covered portion of the exposure. Alternatively, banks may choose to not recognize the effect of guarantees on their exposures.
16.103 There are no restrictions on the types of eligible guarantors. The bank must, however, have clearly specified criteria for the types of guarantors it will recognize for regulatory capital purposes.
16.104 The guarantee must be evidenced in writing, non-cancellable on the part of the guarantor, in force until the debt is satisfied in full (to the extent of the amount and tenor of the guarantee) and legally enforceable against the guarantor in a jurisdiction where the guarantor has assets to attach and enforce a judgement. The guarantee must also be unconditional; there should be no clause in the protection contract outside the direct control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due. However, under the advanced IRB approach, guarantees that only cover loss remaining after the bank has first pursued the original obligor for payment and has completed the workout process may be recognized.
16.105 In case of guarantees where the bank applies the standardized approach to the covered portion of the exposure, the scope of guarantors and the minimum requirements as under the standardized approach apply.
16.106 A bank must have clearly specified criteria for adjusting borrower grades or LGD estimates (or in the case of retail and eligible purchased receivables, the process of allocating exposures to pools) to reflect the impact of guarantees for regulatory capital purposes. These criteria must be as detailed as the criteria for assigning exposures to grades consistent with paragraphs 16.25 and 16.26, and must follow all minimum requirements for assigning borrower or facility ratings set out in this document.
16.107 The criteria must be plausible and intuitive, and must address the guarantor’s ability and willingness to perform under the guarantee. The criteria must also address the likely timing of any payments and the degree to which the guarantor’s ability to perform under the guarantee is correlated with the borrower’s ability to repay. The bank’s criteria must also consider the extent to which residual risk to the borrower remains, for example a currency mismatch between the guarantee and the underlying exposure.
16.108 In adjusting borrower grades or LGD estimates (or in the case of retail and eligible purchased receivables, the process of allocating exposures to pools), banks must take all relevant available information into account.
Requirements for assessing effect of credit derivatives: standards for corporate and sovereign exposures where own estimates of LGD are used and standards for retail exposures
16.109 The minimum requirements for guarantees are relevant also for single-name credit derivatives. Additional considerations arise in respect of asset mismatches. The criteria used for assigning adjusted borrower grades or LGD estimates (or pools) for exposures hedged with credit derivatives must require that the asset on which the protection is based (the reference asset) cannot be different from the underlying asset, unless the conditions outlined in the foundation approach are met.
16.110 In addition, the criteria must address the payout structure of the credit derivative and conservatively assess the impact this has on the level and timing of recoveries. The bank must also consider the extent to which other forms of residual risk remain.
Requirements for assessing effect of guarantees and credit derivatives: standards for banks using foundation LGD estimates
16.111 The minimum requirements outlined in paragraphs 16.99 to 16.110 apply to banks using the foundation LGD estimates with the following exceptions:
(1) The bank is not able to use an ‘LGD-adjustment’ option; and
(2) The range of eligible guarantees and guarantors is limited to those outlined in paragraph 12.28.
Requirements specific to estimating PD and LGD (or EL) for qualifying purchased receivables
16.112 The following minimum requirements for risk quantification must be satisfied for any purchased receivables (corporate or retail) making use of the top-down treatment of default risk and/or the IRB treatments of dilution risk.
16.113 The purchasing bank will be required to group the receivables into sufficiently homogeneous pools so that accurate and consistent estimates of PD and LGD (or EL) for default losses and EL estimates of dilution losses can be determined. In general, the risk bucketing process will reflect the seller’s underwriting practices and the heterogeneity of its customers. In addition, methods and data for estimating PD, LGD, and EL must comply with the existing risk quantification standards for retail exposures. In particular, quantification should reflect all information available to the purchasing bank regarding the quality of the underlying receivables, including data for similar pools provided by the seller, by the purchasing bank, or by external sources. The purchasing bank must determine whether the data provided by the seller are consistent with expectations agreed upon by both parties concerning, for example, the type, volume and on-going quality of receivables purchased. Where this is not the case, the purchasing bank is expected to obtain and rely upon more relevant data.
16.114 A bank purchasing receivables has to justify confidence that current and future advances can be repaid from the liquidation of (or collections against) the receivables pool. To qualify for the top-down treatment of default risk, the receivable pool and overall lending relationship should be closely monitored and controlled. Specifically, a bank will have to demonstrate the following:
(1) Legal certainty (see paragraph 16.115).
(2) Effectiveness of monitoring systems (see paragraph 16.116)
(3) Effectiveness of work-out systems (see paragraph 16.117)
(4) Effectiveness of systems for controlling collateral, credit availability, and cash (see paragraph 16.118)
(5) Compliance with the bank’s internal policies and procedures (see paragraphs 16.119 and 16.120)
16.115 Legal certainty: the structure of the facility must ensure that under all foreseeable circumstances the bank has effective ownership and control of the cash remittances from the receivables, including incidences of seller or servicer distress and bankruptcy. When the obligor makes payments directly to a seller or servicer, the bank must verify regularly that payments are forwarded completely and within the contractually agreed terms. As well, ownership over the receivables and cash receipts should be protected against bankruptcy ‘stays’ or legal challenges that could materially delay the lender’s ability to liquidate/assign the receivables or retain control over cash receipts.
16.116 Effectiveness of monitoring systems: the bank must be able to monitor both the quality of the receivables and the financial condition of the seller and servicer. In particular:
(1) The bank must:
(a) assess the correlation among the quality of the receivables and the financial condition of both the seller and servicer; and
(b) have in place internal policies and procedures that provide adequate safeguards to protect against such contingencies, including the assignment of an internal risk rating for each seller and servicer.
(2) The bank must have clear and effective policies and procedures for determining seller and servicer eligibility. The bank or its agent must conduct periodic reviews of sellers and servicers in order to verify the accuracy of reports from the seller/servicer, detect fraud or operational weaknesses, and verify the quality of the seller’s credit policies and servicer’s collection policies and procedures. The findings of these reviews must be well documented.
(3) The bank must have the ability to assess the characteristics of the receivables pool, including:
(a) over-advances;
(b) history of the seller’s arrears, bad debts, and bad debt allowances;
(c) payment terms; and
(d) potential contra accounts.
(4) The bank must have effective policies and procedures for monitoring on anaggregate basis single-obligor concentrations both within and across receivables pools.
(5) The bank must receive timely and sufficiently detailed reports of receivables ageings and dilutions to:
(a) ensure compliance with the bank’s eligibility criteria and advancing policies governing purchased receivables; and
(b) provide an effective means with which to monitor and confirm the seller’s terms of sale (e.g. invoice date ageing) and dilution.
16.117 Effectiveness of work-out systems: an effective programme requires systems and procedures not only for detecting deterioration in the seller’s financial condition and deterioration in the quality of the receivables at an early stage, but also for addressing emerging problems pro-actively. In particular:
(1) The bank should have clear and effective policies, procedures, and information systems to monitor compliance with (a) all contractual terms of the facility (including covenants, advancing formulas, concentration limits, early amortization triggers, etc.) as well as (b) the bank’s internal policies governing advance rates and receivables eligibility. The bank’s systems should track covenant violations and waivers as well as exceptions to established policies and procedures.
(2) To limit inappropriate draws, the bank should have effective policies and procedures for detecting, approving, monitoring, and correcting over- advances.
(3) The bank should have effective policies and procedures for dealing with financially weakened sellers or servicers and/or deterioration in the quality of receivable pools. These include, but are not necessarily limited to, early termination triggers in revolving facilities and other covenant protections, a structured and disciplined approach to dealing with covenant violations, and clear and effective policies and procedures for initiating legal actions and dealing with problem receivables.
16.118 Effectiveness of systems for controlling collateral, credit availability, and cash: the bank must have clear and effective policies and procedures governing the control of receivables, credit, and cash. In particular:
(1) Written internal policies must specify all material elements of the receivables purchase programme, including the advancing rates, eligible collateral, necessary documentation, concentration limits, and how cash receipts are to be handled. These elements should take appropriate account of all relevant and material factors, including the seller’s/servicer’s financial condition, risk concentrations, and trends in the quality of the receivables and the seller’s customer base.
(2) Internal systems must ensure that funds are advanced only against specified supporting collateral and documentation (such as servicer attestations, invoices, shipping documents, etc.).
16.119 Compliance with the bank’s internal policies and procedures: given the reliance on monitoring and control systems to limit credit risk, the bank should have an effective internal process for assessing compliance with all critical policies and procedures, including:
(1) Regular internal and/or external audits of all critical phases of the bank’s receivables purchase programme.
(2) Verification of the separation of duties:
(a) between the assessment of the seller/servicer and the assessment of the obligor; and
(b) between the assessment of the seller/servicer and the field audit of the seller/servicer.
16.120 A bank’s effective internal process for assessing compliance with all critical policies and procedures should also include evaluations of back office operations, with particular focus on qualifications, experience, staffing levels, and supporting systems.
65 Banks are not required to produce their own estimates of PD for exposures subject to the supervisory slotting approach.
66 A specific type of CCF, where predicted additional drawings in the lead- up to default are expressed as a percentage of the undrawn limit that remains available to the obligor under the terms and conditions of a facility, ie EAD=B0=Bt+ULF[Lt –Bt], where B0 = facility balance at date of default; Bt = current balance (for predicted EAD) or balance at reference date (for observed EAD); Lt = current limit (for predicted EAD) or limit at reference date (for realized/observed EAD).
67 A limit factor (LF) is a specific type of CCF, where the predicted balance at default is expressed as a percentage of the total limit that is available to the obligor under the terms and conditions of a credit facility, ie EAD=B0= LF[Lt], where B0 = facility balance at date of default; Bt = current balance (for predicted EAD) or balance at reference date (for observed EAD); Lt = current limit (for predicted EAD) or limit at reference date (for realized/observed EAD). A balance factor (BF) is a specific type of CCF, where the predicted balance at default is expressed as a percentage of the current balance that has been drawn down under a credit facility, i.e. EAD=B0=BF[Bt]. An additional utilization factor (AUF) is a specific type of CCF, where predicted additional drawings in the lead-up to default are expressed as a percentage of the total limit that is available to the obligor under the terms and conditions of a credit facility, i.e. EAD = B0 = Bt + AUF[Lt].Section 8: Validation of Internal Estimates
16.121 Banks must have a robust system in place to validate the accuracy and consistency of rating systems, processes, and the estimation of all relevant risk components. A bank must demonstrate to its supervisor that the internal validation process enables it to assess the performance of internal rating and risk estimation systems consistently and meaningfully.
16.122 Banks must regularly compare realized default rates with estimated PDs for each grade and be able to demonstrate that the realized default rates are within the expected range for that grade. Banks using the advanced IRB approach must complete such analysis for their estimates of LGDs and EADs. Such comparisons must make use of historical data that are over as long a period as possible. The methods and data used in such comparisons by the bank must be clearly documented by the bank. This analysis and documentation must be updated at least annually.
16.123 Banks must also use other quantitative validation tools and comparisons with relevant external data sources. The analysis must be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period. Banks’ internal assessments of the performance of their own rating systems must be based on long data histories, covering a range of economic conditions, and ideally one or more complete business cycles.
16.124 Banks must demonstrate that quantitative testing methods and other validation methods do not vary systematically with the economic cycle. Changes in methods and data (both data sources and periods covered) must be clearly and thoroughly documented.
16.125 Banks must have well-articulated internal standards for situations where deviations in realized PDs, LGDs and EADs from expectations become significant enough to call the validity of the estimates into question. These standards must take account of business cycles and similar systematic variability in default experiences. Where realized values continue to be higher than expected values, banks must revise estimates upward to reflect their default and loss experience.
16.126 Where banks rely on supervisory, rather than internal, estimates of risk parameters, they are encouraged to compare realized LGDs and EADs to those set by SAMA. The information on realized LGDs and EADs should form part of the bank’s assessment of economic capital.
Section 9: Supervisory LGD and EAD Estimates
16.127 Banks under the foundation IRB approach, which do not meet the requirements for own-estimates of LGD and EAD, above, must meet the minimum requirements described in the standardized approach to receive recognition for eligible financial collateral (as set out in the credit risk mitigation section of the standardized approach, chapter 9). They must meet the following additional minimum requirements in order to receive recognition for additional collateral types.
Definition of eligibility of commercial and residential real estate as collateral
16.128 Eligible commercial and residential real estate collateral for corporate, sovereign and bank exposures are defined as:
(1) Collateral where the risk of the borrower is not materially dependent upon the performance of the underlying property or project, but rather on the underlying capacity of the borrower to repay the debt from other sources. As such, repayment of the facility is not materially dependent on any cash flow generated by the underlying commercial or residential real estate serving as collateral; and
(2) Additionally, the value of the collateral pledged must not be materially dependent on the performance of the borrower. This requirement is not intended to preclude situations where purely macro-economic factors affect both the value of the collateral and the performance of the borrower.
16.129 In light of the generic description above and the definition of corporate exposures, income producing real estate that falls under the SL asset class is specifically excluded from recognition as collateral for corporate exposures.68
Operational requirements for eligible commercial or residential real estate
16.130 Subject to meeting the definition above, commercial and residential real estate will be eligible for recognition as collateral for corporate claims only if all of the following operational requirements are met.
(1) Legal enforceability: any claim on collateral taken must be legally enforceable in all relevant jurisdictions, and any claim on collateral must be properly filed on a timely basis. Collateral interests must reflect a perfected lien (i.e. all legal requirements for establishing the claim have been fulfilled). Furthermore, the collateral agreement and the legal process underpinning it must be such that they provide for the bank to realize the value of the collateral within a reasonable timeframe.
(2) Objective market value of collateral: the collateral must be valued at or less than the current fair value under which the property could be sold under private contract between a willing seller and an arm’s-length buyer on the date of valuation.
(3) Frequent revaluation: the bank is expected to monitor the value of the collateral on a frequent basis and at a minimum once every year. More frequent monitoring is suggested where the market is subject to significant changes in conditions. Statistical methods of evaluation (e.g. reference to house price indices, sampling) may be used to update estimates or to identify collateral that may have declined in value and that may need re- appraisal. A qualified professional must evaluate the property when information indicates that the value of the collateral may have declined materially relative to general market prices or when a credit event, such as default, occurs.
(4) Junior liens: In some member countries, eligible collateral will be restricted to situations where the lender has a first charge over the property. Junior liens may be taken into account where there is no doubt that the claim for collateral is legally enforceable and constitutes an efficient credit risk mitigant. Where junior liens are recognized the bank must first take the haircut value of the collateral, then reduce it by the sum of all loans with liens that rank higher than the junior lien, the remaining value is the collateral that supports the loan with the junior lien. In cases where liens are held by third parties that rank pari passu with the lien of the bank, only the proportion of the collateral (after the application of haircuts and reductions due to the value of loans with liens that rank higher than the lien of the bank) that is attributable to the bank may be recognized.
16.131 Additional collateral management requirements are as follows:
(1) The types of commercial and residential real estate collateral accepted by the bank and lending policies (advance rates) when this type of collateral is taken must be clearly documented.
(2) The bank must take steps to ensure that the property taken as collateral is adequately insured against damage or deterioration.
(3) The bank must monitor on an ongoing basis the extent of any permissible prior claims (e.g. tax) on the property.
(4) The bank must appropriately monitor the risk of environmental liability arising in respect of the collateral, such as the presence of toxic material on a property.
Requirements for recognition of financial receivables : definition of eligible receivables
16.132 Eligible financial receivables are claims with an original maturity of less than or equal to one year where repayment will occur through the commercial or financial flows related to the underlying assets of the borrower. This includes both self-liquidating debt arising from the sale of goods or services linked to a commercial transaction and general amounts owed by buyers, suppliers, renters, national and local governmental authorities, or other non-affiliated parties not related to the sale of goods or services linked to a commercial transaction. Eligible receivables do not include those associated with securitizations, sub- participations or credit derivatives.
Requirements for recognition of financial receivables: legal certainty
16.133 The legal mechanism by which collateral is given must be robust and ensure that the lender has clear rights over the proceeds from the collateral.
16.134 Banks must take all steps necessary to fulfil local requirements in respect of the enforceability of security interest, e.g. by registering a security interest with a registrar. There should be a framework that allows the potential lender to have a perfected first priority claim over the collateral.
16.135 All documentation used in collateralized transactions must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well-founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.
16.136 The collateral arrangements must be properly documented, with a clear and robust procedure for the timely collection of collateral proceeds. Banks’ procedures should ensure that any legal conditions required for declaring the default of the customer and timely collection of collateral are observed. In the event of the obligor’s financial distress or default, the bank should have legal authority to sell or assign the receivables to other parties without consent of the receivables’ obligors.
Requirements for recognition of financial receivables: risk management
16.137 The bank must have a sound process for determining the credit risk in the receivables. Such a process should include, among other things, analyses of the borrower’s business and industry (e.g. effects of the business cycle) and the types of customers with whom the borrower does business. Where the bank relies on the borrower to ascertain the credit risk of the customers, the bank must review the borrower’s credit policy to ascertain its soundness and credibility.
16.138 The margin between the amount of the exposure and the value of the receivables must reflect all appropriate factors, including the cost of collection, concentration within the receivables pool pledged by an individual borrower, and potential concentration risk within the bank’s total exposures.
16.139 The bank must maintain a continuous monitoring process that is appropriate for the specific exposures (either immediate or contingent) attributable to the collateral to be utilized as a risk mitigant. This process may include, as appropriate and relevant, ageing reports, control of trade documents, borrowing base certificates, frequent audits of collateral, confirmation of accounts, control of the proceeds of accounts paid, analyses of dilution (credits given by the borrower to the issuers) and regular financial analysis of both the borrower and the issuers of the receivables, especially in the case when a small number of large-sized receivables are taken as collateral. Observance of the bank’s overall concentration limits should be monitored. Additionally, compliance with loan covenants, environmental restrictions, and other legal requirements should be reviewed on a regular basis
16.140 The receivables pledged by a borrower should be diversified and not be unduly correlated with the borrower. Where the correlation is high, e.g. where some issuers of the receivables are reliant on the borrower for their viability or the borrower and the issuers belong to a common industry, the attendant risks should be taken into account in the setting of margins for the collateral pool as a whole. Receivables from affiliates of the borrower (including subsidiaries and employees) will not be recognized as risk mitigants.
16.141 The bank should have a documented process for collecting receivable payments in distressed situations. The requisite facilities for collection should be in place, even when the bank normally looks to the borrower for collections.
Requirements for recognition of other physical collateral
16.142 SAMA may allow for recognition of the credit risk mitigating effect of certain other physical collateral when the following conditions are met:
(1) The bank demonstrates to the satisfaction of SAMA that there are liquid markets for disposal of collateral in an expeditious and economically efficient manner. Banks must carry out a reassessment of this condition both periodically and when information indicates material changes in the market.
(2) The bank demonstrates to the satisfaction of SAMA that there are well- established, publicly available market prices for the collateral. Banks must also demonstrate that the amount they receive when collateral is realized does not deviate significantly from these market prices.
16.143 In order for a given bank to receive recognition for additional physical collateral, it must meet all the requirements in paragraphs 16.130 and 16.131, subject to the following modifications:
(1) With the sole exception of permissible prior claims specified in the footnote to paragraph 16.130, only first liens on, or charges over, collateral are permissible. As such, the bank must have priority over all other lenders to the realized proceeds of the collateral.
(2) The loan agreement must include detailed descriptions of the collateral and the right to examine and revalue the collateral whenever this is deemed necessary by the lending bank.
(3) The types of physical collateral accepted by the bank and policies and practices in respect of the appropriate amount of each type of collateral relative to the exposure amount must be clearly documented in internal credit policies and procedures and available for examination and/or audit review.
(4) Bank credit policies with regard to the transaction structure must address appropriate collateral requirements relative to the exposure amount, the ability to liquidate the collateral readily, the ability to establish objectively a price or market value, the frequency with which the value can readily be obtained (including a professional appraisal or valuation), and the volatility of the value of the collateral. The periodic revaluation process must pay particular attention to “fashion-sensitive” collateral to ensure that valuations are appropriately adjusted downward of fashion, or model-year, obsolescence as well as physical obsolescence or deterioration.
(5) In cases of inventories (e.g. raw materials, work-in-process, finished goods, dealers’ inventories of autos) and equipment, the periodic revaluation process must include physical inspection of the collateral.
16.144 General Security Agreements, and other forms of floating charge, can provide the lending bank with a registered claim over a company’s assets. In cases where the registered claim includes both assets that are not eligible as collateral under the foundation IRB and assets that are eligible as collateral under the foundation IRB, the bank may recognize the latter. Recognition is conditional on the claims meeting the operational requirements set out in paragraphs 16.127 to 16.143.
68 In exceptional circumstances for well-developed and long-established markets, mortgages on office and/or multi-purpose commercial premises and/or multi-tenanted commercial premises may have the potential to receive recognition as collateral in the corporate portfolio. This exceptional treatment will be subject to very strict conditions. In particular, two tests must be fulfilled, namely that (i) losses stemming from commercial real estate lending up to the lower of 50% of the market value or 60% of loan-to value based on mortgage-lending- value must not exceed 0.3% of the outstanding loans in any given year; and that (ii) overall losses stemming from commercial real estate lending must not exceed 0.5% of the outstanding loans in any given year. This is, if either of these tests is not satisfied in a given year, the eligibility to use this treatment will cease and the original eligibility criteria would need to be satisfied again before it could be applied in the future. Countries applying such a treatment must publicly disclose that these are met.
Section 10: Requirements for Recognition of Leasing
16.145 Leases other than those that expose the bank to residual value risk (see paragraph 16.146) will be accorded the same treatment as exposures collateralized by the same type of collateral. The minimum requirements for the collateral type must be met (commercial or residential real estate or other collateral). In addition, the bank must also meet the following standards:
(1) Robust risk management on the part of the lessor with respect to the location of the asset, the use to which it is put, its age, and planned obsolescence;
(2) A robust legal framework establishing the lessor’s legal ownership of the asset and its ability to exercise its rights as owner in a timely fashion; and
(3) The difference between the rate of depreciation of the physical asset and the rate of amortization of the lease payments must not be so large as to overstate the credit risk mitigation attributed to the leased assets.
16.146 Leases that expose the bank to residual value risk will be treated in the following manner. Residual value risk is the bank’s exposure to potential loss due to the fair value of the equipment declining below its residual estimate at lease inception.
(1) The discounted lease payment stream will receive a risk weight appropriate for the lessee’s financial strength (PD) and supervisory or own-estimate of LGD, whichever is appropriate.
(2) The residual value will be risk-weighted at 100%.
Section 11: Disclosure Requirements
16.147 In order to be eligible for the IRB approach, banks must meet the disclosure requirements set out in Pillar 3 Disclosure Requirements Framework. These are minimum requirements for use of IRB: failure to meet these will render banks ineligible to use the relevant IRB approach.
17. Transition
Phase-in for Standardized Approach Treatment of Equity Exposures
17.1 The risk weight treatment described in paragraph 7.50 will be subject to a five-year linear phase-in arrangement from 1 January 2023. For speculative unlisted equity exposures, the applicable risk weight will start at 100% and increase by 60 percentage points at the end of each year until the end of Year 5. For all other equity holdings, the applicable risk weight will start at 100% and increase by 30 percentage points at the end of each year until the end of Year 5.
Phase-in for the Removal of the Internal Ratings-Based Approach for Equity Exposures
17.2 The requirement to use the standardized approach for equity exposures in paragraph 10.41 will be subject to a five-year linear phase-in arrangement from 1 January 2023. During the phase-in period, the risk weight for equity exposures will be the greater of:
(1) The risk weight as calculated using the internal ratings-based approach that applied to equity exposures prior to 1 January 2023; and
(2) The risk weight set for the linear phase-in arrangement under the standardized approach for credit risk (see paragraph 17.1 above).
18. Securitization: General Provisions
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force Scope and Definitions of Transactions Covered Under the Securitization Framework
18.1 Banks must apply the securitization framework for determining regulatory capital requirements on exposures arising from traditional and synthetic securitizations or similar structures that contain features common to both. Since securitizations may be structured in many different ways, the capital treatment of a securitization exposure must be determined on the basis of its economic substance rather than its legal form. Banks are encouraged to consult with SAMA when there is uncertainty about whether a given transaction should be considered a securitization. For example, transactions involving cash flows from real estate (e.g. rents) may be considered specialized lending exposures, if warranted.
18.2 A traditional securitization is a structure where the cash flow from an underlying pool of exposures is used to service at least two different stratified risk positions or tranches reflecting different degrees of credit risk. Payments to the investors depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the entity originating those exposures. The stratified/tranched structures that characterize securitizations differ from ordinary senior/subordinated debt instruments in that junior securitization tranches can absorb losses without interrupting contractual payments to more senior tranches, whereas subordination in a senior/subordinated debt structure is a matter of priority of rights to the proceeds of liquidation.
18.3 A synthetic securitization is a structure with at least two different stratified risk positions or tranches that reflect different degrees of credit risk where credit risk of an underlying pool of exposures is transferred, in whole or in part, through the use of funded (e.g. credit-linked notes) or unfunded (e.g. credit default swaps) credit derivatives or guarantees that serve to hedge the credit risk of the portfolio. Accordingly, the investors’ potential risk is dependent upon the performance of the underlying pool.
18.4 Banks’ exposures to a securitization are hereafter referred to as “securitization exposures”. Securitization exposures can include but are not restricted to the following: asset-backed securities, mortgage-backed securities, credit enhancements, liquidity facilities, interest rate or currency swaps, credit derivatives and tranched cover as described in 9.81. Reserve accounts, such as cash collateral accounts, recorded as an asset by the originating bank must also be treated as securitization exposures.
18.5 Resecuritization exposure is a securitization exposure in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is a securitization exposure. In addition, an exposure to one or more resecuritization exposures is a resecuritization exposure. An exposure resulting from retranching of a securitization exposure is not a resecuritization exposure if the bank is able to demonstrate that the cash flows to and from the bank could be replicated in all circumstances and conditions by an exposure to the securitization of a pool of assets that contains no securitization exposures.
18.6 Underlying instruments in the pool being securitized may include but are not restricted to the following: loans, commitments, asset-backed and mortgage- backed securities, corporate bonds, equity securities, and private equity investments. The underlying pool may include one or more exposures.
Definitions and General Terminology
18.7 For risk-based capital purposes, a bank is considered to be an originator with regard to a certain securitization if it meets either of the following conditions:
(1) The bank originates directly or indirectly underlying exposures included in the securitization; or
(2) The bank serves as a sponsor of an asset-backed commercial paper (ABCP) conduit or similar programme that acquires exposures from third-party entities. In the context of such programmes, a bank would generally be considered a sponsor and, in turn, an originator if it, in fact or in substance, manages or advises the programme, places securities into the market, or provides liquidity and/or credit enhancements.
18.8 An ABCP programme predominantly issues commercial paper to third-party investors with an original maturity of one year or less and is backed by assets or other exposures held in a bankruptcy-remote, special purpose entity.
18.9 A clean-up call is an option that permits the securitization exposures (e.g. asset- backed securities) to be called before all of the underlying exposures or securitization exposures have been repaid. In the case of traditional securitizations, this is generally accomplished by repurchasing the remaining securitization exposures once the pool balance or outstanding securities have fallen below some specified level. In the case of a synthetic transaction, the clean- up call may take the form of a clause that extinguishes the credit protection.
18.10 A credit enhancement is a contractual arrangement in which the bank or other entity retains or assumes a securitization exposure and, in substance, provide some degree of added protection to other parties to the transaction.
18.11 A credit-enhancing interest-only strip (I/O) is an on-balance sheet asset that
(1) Represents a valuation of cash flows related to future margin income, and
(2) Is subordinated.
18.12 An early amortization provision is a mechanism that, once triggered, accelerates the reduction of the investor’s interest in underlying exposures of a securitization of revolving credit facilities and allows investors to be paid out prior to the originally stated maturity of the securities issued. A securitization of revolving credit facilities is a securitization in which one or more underlying exposures represent, directly or indirectly, current or future draws on a revolving credit facility. Examples of revolving credit facilities include but are not limited to credit card exposures, home equity lines of credit, commercial lines of credit, and other lines of credit.
18.13 Excess spread (or future margin income) is defined as gross finance charge collections and other income received by the trust or special purpose entity (SPE, as defined below) minus certificate interest, servicing fees, charge-offs, and other senior trust or SPE expenses.
18.14 Implicit support arises when a bank provides support to a securitization in excess of its predetermined contractual obligation.
18.15 For risk-based capital purposes, an internal ratings-based (IRB) pool means a securitization pool for which a bank is able to use an IRB approach to calculate capital requirements for all underlying exposures given that it has approval to apply IRB for the type of underlying exposures and it has sufficient information to calculate IRB capital requirements for these exposures. A bank which has a SAMA-approved IRB approach for the entire pool of exposures underlying a given securitization exposure that cannot estimate capital requirements for all underlying exposures using an IRB approach would be expected to demonstrate to SAMA why it is unable to do so. However, SAMA may prohibit a bank from treating an IRB pool as such in the case of particular structures or transactions, including transactions with highly complex loss allocations, tranches whose credit enhancement could be eroded for reasons other than portfolio losses, and tranches of portfolios with high internal correlations (such as portfolios with high exposure to single sectors or with high geographical concentration).
18.16 For risk-based capital purposes, a mixed pool means a securitization pool for which a bank is able to calculate IRB parameters for some, but not all, underlying exposures in a securitization.
18.17 For risk-based capital purposes, a standardized approach (SA) pool means a securitization pool for which a bank does not have approval to calculate IRB parameters for any underlying exposures; or for which, while the bank has approval to calculate IRB parameters for some or all of the types of underlying exposures, it is unable to calculate IRB parameters for any underlying exposures because of lack of relevant data, or is prohibited by SAMA from treating the pool as an IRB pool pursuant to 18.15.
18.18 A securitization exposure (tranche) is considered to be a senior exposure (tranche) if it is effectively backed or secured by a first claim on the entire amount of the assets in the underlying securitized pool.69 While this generally includes only the most senior position within a securitization transaction, in some instances there may be other claims that, in a technical sense, may be more senior in the waterfall (e.g. a swap claim) but may be disregarded for the purpose of determining which positions are treated as senior. Different maturities of several senior tranches that share pro rata loss allocation shall have no effect on the seniority of these tranches, since they benefit from the same level of credit enhancement. The material effects of differing tranche maturities are captured by maturity adjustments on the risk weights to be assigned to the securitization exposures. For example:
(1) In a typical synthetic securitization, an unrated tranche would be treated as a senior tranche, provided that all of the conditions for inferring a rating from a lower tranche that meets the definition of a senior tranche are fulfilled.
(2) In a traditional securitization where all tranches above the first-loss piece are rated, the most highly rated position would be treated as a senior tranche. When there are several tranches that share the same rating, only the most senior tranche in the cash flow waterfall would be treated as senior (unless the only difference among them is the effective maturity). Also, when the different ratings of several senior tranches only result from a difference in maturity, all of these tranches should be treated as a senior tranche.
(3) Usually, a liquidity facility supporting an ABCP programme would not be the most senior position within the programme; the commercial paper, which benefits from the liquidity support, typically would be the most senior position. However, a liquidity facility may be viewed as covering all losses on the underlying receivables pool that exceed the amount of overcollateralization/reserves provided by the seller and as being most senior if it is sized to cover all of the outstanding commercial paper and other senior debt supported by the pool, so that no cash flows from the underlying pool could be transferred to the other creditors until any liquidity draws were repaid in full. In such a case, the liquidity facility can be treated as a senior exposure. Otherwise, if these conditions are not satisfied, or if for other reasons the liquidity facility constitutes a mezzanine position in economic substance rather than a senior position in the underlying pool, the liquidity facility should be treated as a nonsenior exposure.
18.19 For risk-based capital purposes, the exposure amount of a securitization exposure is the sum of the on-balance sheet amount of the exposure, or carrying value – which takes into account purchase discounts and writedowns/specific provisions the bank took on this securitization exposure – and the off-balance sheet exposure amount, where applicable.
18.20 A bank must measure the exposure amount of its off-balance sheet securitization exposures as follows:
(1) For credit risk mitigants sold or purchased by the bank, use the treatment set out in 18.56 to 18.62
(2) For facilities that are not credit risk mitigants, use a credit conversion factor (CCF) of 100%. If contractually provided for, servicers may advance cash to ensure an uninterrupted flow of payments to investors so long as the servicer is entitled to full reimbursement and this right is senior to other claims on cash flows from the underlying pool of exposures. The undrawn portion of servicer cash advances or facilities may receive the CCF for unconditionally cancellable commitments under chapters 5 to 7 and;
(3) For derivatives contracts other than credit risk derivatives contracts, such as interest rate or currency swaps sold or purchased by the bank, use the measurement approach set out in counterparty credit risk overview chapter of Minimum Capital Requirements for Counterparty Credit Risk and Credit Valuation Adjustment.
18.21 An SPE is a corporation, trust or other entity organized for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the credit risk of an originator or seller of exposures. SPEs, normally a trust or similar entity, are commonly used as financing vehicles in which exposures are sold to the SPE in exchange for cash or other assets funded by debt issued by the trust.
18.22 For risk-based capital purposes, tranche maturity (MT) is the tranche’s remaining effective maturity in years and can be measured at the bank’s discretion in either of the following manners. In all cases, MT will have a floor of one year and a cap of five years.
(1) As the euro70 weighted-average maturity of the contractual cash flows of the tranche, as expressed below, where CFt denotes the cash flows (principal, interest payments and fees) contractually payable by the borrower in period t. The contractual payments must be unconditional and must not be dependent on the actual performance of the securitized assets. If such unconditional contractual payment dates are not available, the final legal maturity shall be used.
(2) On the basis of final legal maturity of the tranche, where ML is the final legal maturity of the tranche.
18.23 When determining the maturity of a securitization exposure, banks should take into account the maximum period of time they are exposed to potential losses from the securitized assets. In cases where a bank provides a commitment, the bank should calculate the maturity of the securitization exposure resulting from this commitment as the sum of the contractual maturity of the commitment and the longest maturity of the asset(s) to which the bank would be exposed after a draw has occurred. If those assets are revolving, the longest contractually possible remaining maturity of the asset that might be added during the revolving period would apply, rather than the (longest) maturity of the assets currently in the pool. The same treatment applies to all other instruments where the risk of the commitment/protection provider is not limited to losses realized until the maturity of that instrument (e.g. total return swaps). For credit protection instruments that are only exposed to losses that occur up to the maturity of that instrument, a bank would be allowed to apply the contractual maturity of the instrument and would not have to look through to the protected position.
69 If a senior tranche is retranched or partially hedged (i.e. not on a pro rata basis), only the new senior part would be treated as senior for capital purposes.
70 The euro designation is used for illustrative purposes only.Operational Requirements for the Recognition of Risk Transference
18.24 An originating bank may exclude underlying exposures from the calculation of risk-weighted assets only if all of the following conditions have been met. Banks meeting these conditions must still hold regulatory capital against any securitization exposures they retain.
(1) Significant credit risk associated with the underlying exposures has been transferred to third parties.
(2) The transferor does not maintain effective or indirect control over the transferred exposures. The exposures are legally isolated from the transferor in such a way (e.g. through the sale of assets or through sub-participation) that the exposures are put beyond the reach of the transferor and its creditors, even in bankruptcy or receivership. Banks should obtain legal opinion71 that confirms true sale. The transferor’s retention of servicing rights to the exposures will not necessarily constitute indirect control of the exposures. The transferor is deemed to have maintained effective control over the transferred credit risk exposures if it:
(a) Is able to repurchase from the transferee the previously transferred exposures in order to realize their benefits; or
(b) Is obligated to retain the risk of the transferred exposures.
(3) The securities issued are not obligations of the transferor. Thus, investors who purchase the securities only have claim to the underlying exposures.
(4) The transferee is an SPE and the holders of the beneficial interests in that entity have the right to pledge or exchange them without restriction, unless such restriction is imposed by a risk retention requirement.
(5) Clean-up calls must satisfy the conditions set out in 18.28.
(6) The securitization does not contain clauses that
(a) Require the originating bank to alter the underlying exposures such that the pool’s credit quality is improved unless this is achieved by selling exposures to independent and unaffiliated third parties at market prices;
(b) Allow for increases in a retained first-loss position or credit enhancement provided by the originating bank after the transaction’s inception; or
(c) Increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the underlying pool.
(7) There must be no termination options/triggers except eligible clean-up calls, termination for specific changes in tax and regulation or early amortization provisions such as those set out in 18.27.
18.25 For synthetic securitizations, the use of credit risk mitigation (CRM) techniques (i.e. collateral, guarantees and credit derivatives) for hedging the underlying exposure may be recognized for risk-based capital purposes only if the conditions outlined below are satisfied:
(1) Credit risk mitigants must comply with the requirements set out in chapter 9.
(2) Eligible collateral is limited to that specified in 9.34. Eligible collateral pledged by SPEs may be recognized.
(3) Eligible guarantors are defined in 9.76. Banks may not recognize SPEs as eligible guarantors in the securitization framework.
(4) Banks must transfer significant credit risk associated with the underlying exposures to third parties.
(5) The instruments used to transfer credit risk may not contain terms or conditions that limit the amount of credit risk transferred, such as those provided below:
(a) Clauses that materially limit the credit protection or credit risk transference (e.g. an early amortization provision in a securitization of revolving credit facilities that effectively subordinates the bank’s interest; significant materiality thresholds below which credit protection is deemed not to be triggered even if a credit event occurs; or clauses that allow for the termination of the protection due to deterioration in the credit quality of the underlying exposures);
(b) Clauses that require the originating bank to alter the underlying exposure to improve the pool’s average credit quality;
(c) Clauses that increase the banks’ cost of credit protection in response to deterioration in the pool’s quality;
(d) Clauses that increase the yield payable to parties other than the originating bank, such as investors and third-party providers of credit enhancements, in response to a deterioration in the credit quality of the reference pool; and
(e) Clauses that provide for increases in a retained first-loss position or credit enhancement provided by the originating bank after the transaction’s inception.
(6) A bank should obtain legal opinion that confirms the enforceability of the contract.
(7) Clean-up calls must satisfy the conditions set out in 18.28.
18.26 A securitization transaction is deemed to fail the operational requirements set out in 18.24 or 18.25 if the bank
(1) Originates/sponsors a securitization transaction that includes one or more revolving credit facilities, and
(2) The securitization transaction incorporates an early amortization or similar provision that, if triggered, would
(a) Subordinate the bank’s senior or pari passu interest in the underlying revolving credit facilities to the interest of other investors;
(b) Subordinate the bank’s subordinated interest to an even greater degree relative to the interests of other parties; or
(c) In other ways increases the bank’s exposure to losses associated with the underlying revolving credit facilities.
18.27 If a securitization transaction contains one of the following examples of an early amortization provision and meets the operational requirements set forth in 18.24 or 18.25, an originating bank may exclude the underlying exposures associated with such a transaction from the calculation of risk-weighted assets, but must still hold regulatory capital against any securitization exposures they retain in connection with the transaction:
(1) Replenishment structures where the underlying exposures do not revolve and the early amortization ends the ability of the bank to add new exposures;
(2) Transactions of revolving credit facilities containing early amortization features that mimic term structures (i.e. where the risk on the underlying revolving credit facilities does not return to the originating bank) and where the early amortization provision in a securitization of revolving credit facilities does not effectively result in subordination of the originator’s interest;
(3) Structures where a bank securitizes one or more revolving credit facilities and where investors remain fully exposed to future drawdowns by borrowers even after an early amortization event has occurred; or
(4) The early amortization provision is solely triggered by events not related to the performance of the underlying assets or the selling bank, such as material changes in tax laws or regulations.
18.28 For securitization transactions that include a clean-up call, no capital will be required due to the presence of a clean-up call if the following conditions are met:
(1) The exercise of the clean-up call must not be mandatory, in form or in substance, but rather must be at the discretion of the originating bank;
(2) The clean-up call must not be structured to avoid allocating losses to credit enhancements or positions held by investors or otherwise structured to provide credit enhancement; and
(3) The clean-up call must only be exercisable when 10% or less of the original underlying portfolio or securities issued remains, or, for synthetic securitizations, when 10% or less of the original reference portfolio value remains.
18.29 Securitization transactions that include a clean-up call that does not meet all of the criteria stated in 18.28 above result in a capital requirement for the originating bank. For a traditional securitization, the underlying exposures must be treated as if they were not securitized. Additionally, banks must not recognize in regulatory capital any gain on sale, in accordance with SAMA Circular No. 341000015689, Date: 19 December 2012. For synthetic securitizations, the bank purchasing protection must hold capital against the entire amount of the securitized exposures as if they did not benefit from any credit protection. If a synthetic securitization incorporates a call (other than a clean-up call) that effectively terminates the transaction and the purchased credit protection on a specific date, the bank must treat the transaction in accordance with 18.65.
18.30 If a clean-up call, when exercised, is found to serve as a credit enhancement, the exercise of the clean-up call must be considered a form of implicit support provided by the bank and must be deducted from regulatory capital.
71 Legal opinion is not limited to legal advice from qualified legal counsel, but allows written advice from in-house lawyers.
Due Diligence Requirements
18.31 For a bank to use the risk weight approaches of the securitization framework, it must have the information specified in 18.32 to 18.34. Otherwise, the bank must assign a 1250% risk weight to any securitization exposure for which it cannot perform the required level of due diligence.
18.32 As a general rule, a bank must, on an ongoing basis, have a comprehensive understanding of the risk characteristics of its individual securitization exposures, whether on- or off-balance sheet, as well as the risk characteristics of the pools underlying its securitization exposures.
18.33 Banks must be able to access performance information on the underlying pools on an ongoing basis in a timely manner. Such information may include, as appropriate: exposure type; percentage of loans 30, 60 and 90 days past due; default rates; prepayment rates; loans in foreclosure; property type; occupancy; average credit score or other measures of credit worthiness; average loan-to- value ratio; and industry and geographical diversification. For resecuritizations, banks should have information not only on the underlying securitization tranches, such as the issuer name and credit quality, but also on the characteristics and performance of the pools underlying the securitization tranches.
18.34 A bank must have a thorough understanding of all structural features of a securitization transaction that would materially impact the performance of the bank’s exposures to the transaction, such as the contractual waterfall and waterfall-related triggers, credit enhancements, liquidity enhancements, market value triggers, and deal-specific definitions of default.
Calculation of Capital Requirements and Risk-Weighted Assets
18.35 Regulatory capital is required for banks’ securitization exposures, including those arising from the provision of credit risk mitigants to a securitization transaction, investments in asset-backed securities, retention of a subordinated tranche, and extension of a liquidity facility or credit enhancement, as set forth in the following sections. Repurchased securitization exposures must be treated as retained securitization exposures.
18.36 For the purposes of the expected loss (EL) provision calculation set out in chapter 15, securitization exposures do not contribute to the EL amount. Similarly, neither general nor specific provisions against securitization exposures or underlying assets still held on the balance sheet of the originator are to be included in the measurement of eligible provisions. However, originator banks can offset 1250% risk-weighted securitization exposures by reducing the securitization exposure amount by the amount of their specific provisions on underlying assets of that transaction and non-refundable purchase price discounts on such underlying assets. Specific provisions on securitization exposures will be taken into account in the calculation of the exposure amount, as defined in 18.19 and 18.20. General provisions on underlying securitized exposures are not to be taken into account in any calculation.
18.37 The risk-weighted asset amount of a securitization exposure is computed by multiplying the exposure amount by the appropriate risk weight determined in accordance with the hierarchy of approaches in 18.41 to 18.48. Risk weight caps for senior exposures in accordance with 18.50 and 18.51 or overall caps in accordance with 18.52 to 18.55 may apply. Overlapping exposures will be risk-weighted as defined in 18.38 and 18.40.
18.38 For the purposes of calculating capital requirements, a bank’s exposure A overlaps another exposure B if in all circumstances the bank will preclude any loss for the bank on exposure B by fulfilling its obligations with respect to exposure A. For example, if a bank provides full credit support to some notes and holds a portion of these notes, its full credit support obligation precludes any loss from its exposure to the notes. If a bank can verify that fulfilling its obligations with respect to exposure A will preclude a loss from its exposure to B under any circumstance, the bank does not need to calculate risk-weighted assets for its exposure B.
18.39 To arrive at an overlap, a bank may, for the purposes of calculating capital requirements, split or expand72 its exposures. For example, a liquidity facility may not be contractually required to cover defaulted assets or may not fund an ABCP programme in certain circumstances. For capital purposes, such a situation would not be regarded as an overlap to the notes issued by that ABCP conduit. However, the bank may calculate risk-weighted assets for the liquidity facility as if it were expanded (either in order to cover defaulted assets or in terms of trigger events) to preclude all losses on the notes. In such a case, the bank would only need to calculate capital requirements on the liquidity facility.
18.40 Overlap could also be recognized between relevant capital charges for exposures in the trading book and capital charges for exposures in the banking book, provided that the bank is able to calculate and compare the capital charges for the relevant exposures.
18.41 Securitization exposures will be treated differently depending on the type of underlying exposures and/or on the type of information available to the bank. Securitization exposures to which none of the approaches laid out in 18.42 to 18.48 can be applied must be assigned a 1250% risk weight.
18.42 A bank must use the Securitization Internal ratings-based approach (SEC-IRBA) as described in chapter 22 for a securitization exposure of an IRB pool as defined in 18.15, unless otherwise determined by SAMA.
18.43 If a bank cannot use the SEC-IRBA, it must use the Securitization External Ratings-Based Approach (SEC-ERBA) as described in 20.1 to 20.7 for a securitization exposure to an SA pool as defined in 18.17 provided that
(1) The bank is located in a jurisdiction that permits use of the SEC-ERBA and
(2) The exposure has an external credit assessment that meets the operational requirements for an external credit assessment in paragraph 20.8, or there is an inferred rating that meets the operational requirements for inferred ratings in 20.9 and 20.10.
18.44 A bank operating in Saudi Arabia that permit to use the SEC-ERBA may use an Internal Assessment Approach (SEC-IAA) as described in 21.1 to 21.4 for an unrated securitization exposure (e.g. liquidity facilities and credit enhancements) to an SA pool within an ABCP programme. In order to use an SEC-IAA, a bank must have SAMA approval to use the IRB approach for non- securitization exposures. A bank should consult with SAMA on whether and when it can apply the IAA to its securitization exposures, especially where the bank can apply the IRB for some, but not all, underlying exposures.
18.45 A bank that cannot use the SEC-ERBA or an SEC-IAA for its exposure to an SA pool may use the Standardized Approach (SEC-SA) as described in 19.1 to 19.15.
18.46 Securitization exposures of mixed pools: where a bank can calculate KIRB on at least 95% of the underlying exposure amounts of a securitization, the bank must apply the SEC-IRBA calculating the capital charge for the underlying pool as follows, where d is the percentage of the exposure amount of underlying exposures for which the bank can calculate KIRB over the exposure amount of all underlying exposures; and KIRB and KSA are as defined in 22.2 to 22.5 and 19.2 to 19.4, respectively:
Capital charge for mixed pool = d x KIRB + (1- d) x KSA
18.47 Where the bank cannot calculate KIRB on at least 95% of the underlying exposures, the bank must use the hierarchy for securitization exposures of SA pools as set out in 18.43 to 18.45.
18.48 For resecuritization exposures, banks must apply the SEC-SA, with the adjustments in paragraph 19.16. For exposures to securitizations of nonperforming loans as defined in paragraph 23.1, banks must apply the framework with the adjustments laid out in Securitization of non-performing loans in chapter 23.
18.49 When a bank provides implicit support to a securitization, it must, at a minimum, hold capital against all of the underlying exposures associated with the securitization transaction as if they had not been securitized. Additionally, banks would not be permitted to recognize in regulatory capital any gain on sale, in accordance with SAMA Circular No. 341000015689, Date: 19 December 2012.
72 That is, splitting exposures into portions that overlap with another exposure held by the bank and other portions that do not overlap; and expanding exposures by assuming for capital purposes that obligations with respect to one of the overlapping exposures are larger than those established contractually. The latter could be done, for instance, by expanding either the trigger events to exercise the facility and/or the extent of the obligation.
Caps for Securitization Exposures
18.50 Banks may apply a “look-through” approach to senior securitization exposures, whereby the senior securitization exposure could receive a maximum risk weight equal to the exposure weighted-average risk weight applicable to the underlying exposures, provided that the bank has knowledge of the composition of the underlying exposures at all times. The applicable risk weight under the IRB framework would be calculated taking into account the expected loss portion. In particular:
(1) In the case of pools where the bank uses exclusively the SA or the IRB approach, the risk weight cap for senior exposures would equal the exposure weighted-average risk weight that would apply to the underlying exposures under the SA or IRB framework, respectively.
(2) In the case of mixed pools, when applying the SEC-IRBA, the SA part of the underlying pool would receive the corresponding SA risk weight, while the IRB portion would receive IRB risk weights. When applying the SEC-SA or the SEC-ERBA, the risk weight cap for senior exposures would be based on the SA exposure weighted-average risk weight of the underlying assets, whether or not they are originally IRB.
18.51 Where the risk weight cap results in a lower risk weight than the floor risk weight of 15%, the risk weight resulting from the cap should be used.
18.52 A bank (originator, sponsor or investors) using the SEC-IRBA for a securitization exposure may apply a maximum capital requirement for the securitization exposures it holds equal to the IRB capital requirement (including the expected loss portion) that would have been assessed against the underlying exposures had they not been securitized and treated under the appropriate sections of chapters 10 to chapter 16. In the case of mixed pools, the overall cap should be calculated by adding up the capital before securitization; that is, by adding up the capital required under the general credit risk framework for the IRB and for the SA part of the underlying pool.
18.53 An originating or sponsor bank using the SEC-ERBA or SEC-SA for a securitization exposure may apply a maximum capital requirement for the securitization exposures it holds equal to the capital requirement that would have been assessed against the underlying exposures had they not been securitized. In the case of mixed pools, the overall cap should be calculated by adding up the capital before securitization; that is, by adding up the capital required under the general credit risk framework for the IRB and for the SA part of the underlying pool, respectively. The IRB part of the capital requirement includes the expected loss portion.
18.54 The maximum aggregated capital requirement for a bank's securitization exposures in the same transaction will be equal to KP * P. In order to apply a maximum capital charge to a bank's securitization exposure, a bank will need the following inputs:
(1) The largest proportion of interest that the bank holds for each tranche of a given pool (P). In particular:
(a) For a bank that has one or more securitization exposure(s) that reside in a single tranche of a given pool, P equals the proportion (expressed as a percentage) of securitization exposure(s) that the bank holds in that given tranche (calculated as the total nominal amount of the bank's securitization exposure(s) in the tranche) divided by the nominal amount of the tranche.
(b) For a bank that has securitization exposures that reside in different tranches of a given securitization, P equals the maximum proportion of interest across tranches, where the proportion of interest for each of the different tranches should be calculated as described above.
(2) Capital charge for underlying pool (KP):
(a) For an IRB pool, KP equals KIRB as defined in 22.2 to 22.13.
(b) For an SA pool, KP equals KSA as defined in 19.2 to 19.5.
(c) For a mixed pool, KP equals the exposure-weighted average capital charge of the underlying pool using KSA for the proportion of the underlying pool for which the bank cannot calculate KIRB, and KIRB for the proportion of the underlying pool for which a bank can calculate KIRB
18.55 In applying the capital charge cap, the entire amount of any gain on sale and credit-enhancing interest-only strips arising from the securitization transaction must be deducted in accordance with SAMA Circular No. 341000015689, Date: 19 December 2012.
Treatment of Credit Risk Mitigation for Securitization Exposures
18.56 A bank may recognize credit protection purchased on a securitization exposure when calculating capital requirements subject to the following:
(1) Collateral recognition is limited to that permitted under the credit risk mitigation framework – in particular, paragraph 9.34 when the bank applies the SEC-ERBA or SEC-SA, and paragraph 12.7 when the bank applies the SEC-IRBA. Collateral pledged by SPEs may be recognized;
(2) Credit protection provided by the entities listed in paragraph 9.75 may berecognized. SPEs cannot be recognized as eligible guarantors; and
(3) Where guarantees or credit derivatives fulfil the minimum operational conditions as specified in paragraphs 9.69 to 9.74, banks can take account of such credit protection in calculating capital requirements for securitization exposures.
18.57 When a bank provides full (or pro rata) credit protection to a securitization exposure, the bank must calculate its capital requirements as if it directly holds the portion of the securitization exposure on which it has provided credit protection (in accordance with the definition of tranche maturity given in 18.22 and 18.23).
18.58 Provided that the conditions set out in 18.56 are met, the bank buying full (or pro rata) credit protection may recognize the credit risk mitigation on the securitization exposure in accordance with the CRM framework.
18.59 In the case of tranched credit protection, the original securitization tranche will be decomposed into protected and unprotected sub-tranches:73
(1) The protection provider must calculate its capital requirement as if directly exposed to the particular sub-tranche of the securitization exposure on which it is providing protection, and as determined by the hierarchy of approaches for securitization exposures and according to 18.60 to 18.62.
(2) Provided that the conditions set out in 18.56 are met, the protection buyer may recognize tranched protection on the securitization exposure. In doing so, it must calculate capital requirements for each sub-tranche separately and as follows:
(a) For the resulting unprotected exposure(s), capital requirements will be calculated as determined by the hierarchy of approaches for securitization exposures and according to 18.60 to 18.62.
(b) For the guaranteed/protected portion, capital requirements will be calculated according to the applicable CRM framework (in accordance with the definition of tranche maturity given in 18.22 and 18.23).
18.60 If, according to the hierarchy of approaches determined by 18.41 to 18.48, the bank must use the SEC-IRBA or SEC-SA, the parameters A and D should be calculated separately for each of the subtranches as if the latter would have been directly issued as separate tranches at the inception of the transaction. The value for KIRB (respectively KSA) will be computed on the underlying portfolio of the original transaction.
18.61 If, according to the hierarchy of approaches determined by 18.41 to 18.48, the bank must use the SEC-ERBA for the original securitization exposure; the relevant risk weights for the different subtranches will be calculated subject to the following:
(1) For the sub-tranche of highest priority,74 the bank will use the risk weight of the original securitization exposure.
(2) For a sub-tranche of lower priority:
(a) Banks must infer a rating from one of the subordinated tranches in the original transaction. The risk weight of the sub-tranche of lower priority will be then determined by applying the inferred rating to the SEC- ERBA. Thickness input T will be computed for the subtranche of lower priority only.
(b) Should it not be possible to infer a rating the risk weight for the subtranche of lower priority will be computed using the SEC-SA applying the adjustments to the determination of A and D described in 18.60 above. The risk weight for this sub-tranche will be obtained as the greater of
(i) The risk weight determined through the application of the SEC-SA with the adjusted A, D points and
(ii) The SEC-ERBA risk weight of the original securitization exposure prior to recognition of protection.
18.62 Under all approaches, a lower-priority sub-tranche must be treated as a non-senior securitization exposure even if the original securitization exposure prior to protection qualifies as senior as defined in 18.18.
18.63 A maturity mismatch exists when the residual maturity of a hedge is less than that of the underlying exposure.
18.64 When protection is bought on a securitization exposure(s), for the purpose of setting regulatory capital against a maturity mismatch, the capital requirement will be determined in accordance with 9.10 to 9.14. When the exposures being hedged have different maturities, the longest maturity must be used.
18.65 When protection is bought on the securitized assets, maturity mismatches may arise in the context of synthetic securitizations (when, for example, a bank uses credit derivatives to transfer part or all of the credit risk of a specific pool of assets to third parties). When the credit derivatives unwind, the transaction will terminate. This implies that the effective maturity of all the tranches of the synthetic securitization may differ from that of the underlying exposures. Banks that synthetically securitize exposures held on their balance sheet by purchasing tranched credit protection must treat such maturity mismatches in the following manner: For securitization exposures that are assigned a risk weight of 1250%, maturity mismatches are not taken into account. For all other securitization exposures, the bank must apply the maturity mismatch treatment set forth in 9.10 to 9.14. When the exposures being hedged have different maturities, the longest maturity must be used.
73 The envisioned decomposition is theoretical and it should not be viewed as a new securitization transaction. The resulting subtranches should not be considered resecuritisations solely due to the presence of the credit protection.
74 ‘Sub-tranche of highest priority’ only describes the relative priority of the decomposed tranche. The calculation of the risk weight of each sub- tranche is independent from the question if this sub-tranche is protected (i.e. risk is taken by the protection provider) or is unprotected (i.e. risk is taken by the protection buyer).Simple, Transparent and Comparable Securitizations: Scope of and Conditions for Alternative Treatment
18.66 Only traditional securitizations including exposures to ABCP conduits and exposures to transactions financed by ABCP conduits fall within the scope of the simple, transparent and comparable (STC) framework. Exposures to securitizations that are STC-compliant can be subject to alternative capital treatment as determined by 19.20 to 19.22, 20.11 to 20.14 and 22.27 to 22.29.
18.67 For regulatory capital purposes, the following will be considered STC- compliant:
(1) Exposures to non-ABCP, traditional securitizations that meet the criteria in 18.72 to 18.95; and
(2) Exposures to ABCP conduits and/or transactions financed by ABCP conduits, where the conduit and/or transactions financed by it meet the criteria in 18.96 to 18.165.
18.68 The originator/sponsor must disclose to investors all necessary information at the transaction level to allow investors to determine whether the securitization is STC- compliant. Based on the information provided by the originator/sponsor, the investor must make its own assessment of the securitization’s STC compliance status as defined in 18.67 above, before applying the alternative capital treatment.
18.69 For retained positions where the originator has achieved significant risk transfer in accordance with 18.24, the determination shall be made only by the originator retaining the position.
18.70 STC criteria need to be met at all times. Checking the compliance with some of the criteria might only be necessary at origination (or at the time of initiating the exposure, in case of guarantees or liquidity facilities) to an STC securitization. Notwithstanding, investors and holders of the securitization positions are expected to take into account developments that may invalidate the previous compliance assessment, for example deficiencies in the frequency and content of the investor reports, in the alignment of interest, or changes in the transaction documentation at variance with relevant STC criteria.
18.71 In cases where the criteria refer to underlying assets – including, but not limited to 18.94 and 18.95 and the pool is dynamic, the compliance with the criteria will be subject to dynamic checks every time that assets are added to the pool.
Simple, Transparent and Comparable Term Securitizations: Criteria for Regulatory Capital Purposes
18.72 All criteria must be satisfied in order for a securitization to receive alternative regulatory capital treatment.
Criterion A1: Nature of Assets
18.73 In simple, transparent and comparable securitizations, the assets underlying the securitization should be credit claims or receivables that are homogeneous. In assessing homogeneity, consideration should be given to asset type, jurisdiction, legal system and currency. As more exotic asset classes require more complex and deeper analysis, credit claims or receivables should have contractually identified periodic payment streams relating to rental,75 principal, interest, or principal and interest payments. Any referenced interest payments or discount rates should be based on commonly encountered market interest rates,76 but should not reference complex or complicated formulae or exotic derivatives.77
(1) For capital purposes, the “homogeneity” criterion should be assessed taking into account the following principles:
(a) The nature of assets should be such that investors would not need to analyze and assess materially different legal and/or credit risk factors and risk profiles when carrying out risk analysis and due diligence checks.
(b) Homogeneity should be assessed on the basis of common risk drivers, including similar risk factors and risk profiles.
(c) Credit claims or receivables included in the securitization should have standard obligations, in terms of rights to payments and/or income from assets and that result in a periodic and well-defined stream of payments to investors. Credit card facilities should be deemed to resultin a periodic and well-defined stream of payments to investors for the purposes of this criterion.
(d) Repayment of noteholders should mainly rely on the principal and interest proceeds from the securitized assets. Partial reliance on refinancing or re-sale of the asset securing the exposure may occur provided that re-financing is sufficiently distributed within the pool and the residual values on which the transaction relies are sufficiently low and that the reliance on refinancing is thus not substantial.
(2) Examples of “commonly encountered market interest rates” would include:
(a) Interbank rates and rates set by monetary policy authorities, such as the London Interbank Offered Rate (Libor), the Euro Interbank Offered Rate (Euribor) and the fed funds rate; and
(b) Sectoral rates reflective of a lender’s cost of funds, such as internal interest rates that directly reflect the market costs of a bank’s funding or that of a subset of institutions.
(3) Interest rate caps and/or floors would not automatically be considered exotic derivatives.
75 Payments on operating and financing leases are typically considered to be rental payments rather than payments of principal and interest.
76 Commonly encountered market interest rates may include rates reflective of a lender’s cost of funds, to the extent that sufficient data are provided to investors to allow them to assess their relation to other market rates.
77 The Global Association of Risk Professionals defines an exotic instrument as a financial asset or instrument with features making it more complex than simpler, plain vanilla, products.Criterion A2: Asset Performance History
18.74 In order to provide investors with sufficient information on an asset class to conduct appropriate due diligence and access to a sufficiently rich data set to enable a more accurate calculation of expected loss in different stress scenarios, verifiable loss performance data, such as delinquency and default data, should be available for credit claims and receivables with substantially similar risk characteristics to those being securitized, for a time period long enough to permit meaningful evaluation by investors. Sources of and access to data and the basis for claiming similarity to credit claims or receivables being securitized should be clearly disclosed to all market participants.
(1) In addition to the history of the asset class within a jurisdiction, investors should consider whether the originator, sponsor, servicer and other parties with a fiduciary responsibility to the securitization have an established performance history for substantially similar credit claims or receivables to those being securitized and for an appropriately long period of time. It is not the intention of the criteria to form an impediment to the entry of new participants to the market, but rather that investors should take into account the performance history of the asset class and the transaction parties when deciding whether to invest in a securitization.78
(2) The originator/sponsor of the securitization, as well as the original lender who underwrites the assets, must have sufficient experience in originating exposures similar to those securitized. For capital purposes, investors must determine whether the performance history of the originator and the original lender for substantially similar claims or receivables to those being securitized has been established for an "appropriately long period of time”. This performance history must be no shorter than a period of seven years for non-retail exposures. For retail exposures, the minimum performance history is five years.
78 This “additional consideration” may form part of investors’ due diligence process, but does not form part of the criteria when determining whether a securitization can be considered “simple, transparent and comparable”.
Criterion A3: Payment Status
18.75 Non-performing credit claims and receivables are likely to require more complex and heightened analysis. In order to ensure that only performing credit claims and receivables are assigned to a securitization, credit claims or receivables being transferred to the securitization may not, at the time of inclusion in the pool, include obligations that are in default or delinquent or obligations for which the transferor79 or parties to the securitization80 are aware of evidence indicating a material increase in expected losses or of enforcement actions.
(1) To prevent credit claims or receivables arising from credit-impaired borrowers from being transferred to the securitization, the originator or sponsor should verify that the credit claims or receivables meet the following conditions:
(a) The obligor has not been the subject of an insolvency or debt restructuring process due to financial difficulties within three years priorto the date of origination;81 and
(b) The obligor is not recorded on a public credit registry of persons with an adverse credit history; and,
(c) The obligor does not have a credit assessment by an ECAI or a credit score indicating a significant risk of default; and
(d) The credit claim or receivable is not subject to a dispute between the obligor and the original lender.
(2) The assessment of these conditions should be carried out by the originator or sponsor no earlier than 45 days prior to the closing date. Additionally, at the time of this assessment, there should to the best knowledge of the originator or sponsor be no evidence indicating likely deterioration in the performance status of the credit claim or receivable.
(3) Additionally, at the time of their inclusion in the pool, at least one payment should have been made on the underlying exposures, except in the case of revolving asset trust structures such as those for credit card receivables, trade receivables, and other exposures payable in a single instalment, at maturity.
79 Eg the originator or sponsor.
80 Eg the servicer or a party with a fiduciary responsibility
81 This condition would not apply to borrowers that previously had credit incidents but were subsequently removed from credit registries as a result of the borrower cleaning their records. This is the case in jurisdictions in which borrowers have the “right to be forgotten”.Criterion A4: Consistency of Underwriting
18.76 Investor analysis should be simpler and more straightforward where the securitization is of credit claims or receivables that satisfy materially nondeteriorating origination standards. To ensure that the quality of the securitized credit claims and receivables is not affected by changes in underwriting standards, the originator should demonstrate to investors that any credit claims or receivables being transferred to the securitization have been originated in the ordinary course of the originator’s business to materially non-deteriorating underwriting standards. Where underwriting standards change, the originator should disclose the timing and purpose of such changes. Underwriting standards should not be less stringent than those applied to credit claims and receivables retained on the balance sheet. These should be credit claims or receivables which have satisfied materially nondeteriorating underwriting criteria and for which the obligors have been assessed as having the ability and volition to make timely payments on obligations; or on granular pools of obligors originated in the ordinary course of the originator’s business where expected cash flows have been modelled to meet stated obligations of the securitization under prudently stressed loan loss scenarios.
(1) In all circumstances, all credit claims or receivables must be originated in accordance with sound and prudent underwriting criteria based on an assessment that the obligor has the “ability and volition to make timely payments” on its obligations.
(2) The originator/sponsor of the securitization is expected, where underlying credit claims or receivables have been acquired from third parties, to review the underwriting standards (i.e. to check their existence and assess their quality) of these third parties and to ascertain that they have assessed the obligors’ “ability and volition to make timely payments on obligations”.
Criterion A5: Asset Selection and Transfer
18.77 Whilst recognizing that credit claims or receivables transferred to a securitization will be subject to defined criteria,82 the performance of the securitization should not rely upon the ongoing selection of assets through active management83 on a discretionary basis of the securitization’s underlying portfolio. Credit claims or receivables transferred to a securitization should satisfy clearly defined eligibility criteria. Credit claims or receivables transferred to a securitization after the closing date may not be actively selected, actively managed or otherwise cherry- picked on a discretionary basis. Investors should be able to assess the credit risk of the asset pool prior to their investment decisions.
18.78 In order to meet the principle of true sale, the securitization should effect true sale such that the underlying credit claims or receivables:
(1) Are enforceable against the obligor and their enforceability is included in the representations and warranties of the securitization;
(2) Are beyond the reach of the seller, its creditors or liquidators and are not subject to material recharacterisation or clawback risks;
(3) Are not effected through credit default swaps, derivatives or guarantees, but by a transfer of the credit claims or the receivables to the securitization;
(4) Demonstrate effective recourse to the ultimate obligation for the underlying credit claims or receivables and are not a securitization of other securitizations; and
(5) For regulatory capital purposes, an independent third-party legal opinion must support the claim that the true sale and the transfer of assets under the applicable laws comply with the points under 18.78 (1) to 18.78 (4).
18.79 Securitizations employing transfers of credit claims or receivables by other means should demonstrate the existence of material obstacles preventing true sale at issuance84 and should clearly demonstrate the method of recourse to ultimate obligors.85 In such jurisdictions, any conditions where the transfer of the credit claims or receivable is delayed or contingent upon specific events and any factors affecting timely perfection of claims by the securitization should be clearly disclosed. The originator should provide representations and warranties that the credit claims or receivables being transferred to the securitization are not subject to any condition or encumbrance that can be foreseen to adversely affect enforceability in respect of collections due.
82 Eg the size of the obligation, the age of the borrower or the loan-to- value of the property, debt-to-income and/or debt service coverage ratios.
83 Provided they are not actively selected or otherwise cherry-picked on a discretionary basis, the addition of credit claims or receivables during the revolving periods or their substitution or repurchasing due to the breach of representations and warranties do not represent active portfolio management.
84 Eg the immediate realization of transfer tax or the requirement to notify all obligors of the transfer.
85 Eg equitable assignment, perfected contingent transfer.Criterion A6: Initial and Ongoing Data
18.80 To assist investors in conducting appropriate due diligence prior to investing in a new offering, sufficient loan-level data in accordance with applicable laws or, in the case of granular pools, summary stratification data on the relevant risk characteristics of the underlying pool should be available to potential investors before pricing of a securitization. To assist investors in conducting appropriate and ongoing monitoring of their investments’ performance and so that investors that wish to purchase a securitization in the secondary market have sufficient information to conduct appropriate due diligence, timely loan-level data in accordance with applicable laws or granular pool stratification data on the risk characteristics of the underlying pool and standardized investor reports should be readily available to current and potential investors at least quarterly throughout the life of the securitization. Cut-off dates of the loan-level or granular pool stratification data should be aligned with those used for investor reporting. To provide a level of assurance that the reporting of the underlying credit claims or receivables is accurate and that the underlying credit claims or receivables meet the eligibility requirements, the initial portfolio should be reviewed86 for conformity with the eligibility requirements by an appropriate legally accountable and independent third party, such as an independent accounting practice or the calculation agent or management company for the securitization.
86 The review should confirm that the credit claims or receivables transferred to the securitization meet the portfolio eligibility requirements. The review could, for example, be undertaken on a representative sample of the initial portfolio, with the application of a minimum confidence level. The verification report need not be provided but its results, including any material exceptions, should be disclosed in the initial offering documentation.
Criterion B7: Redemption Cash Flows
18.81 Liabilities subject to the refinancing risk of the underlying credit claims or receivables are likely to require more complex and heightened analysis. To help ensure that the underlying credit claims or receivables do not need to be refinanced over a short period of time, there should not be a reliance on the sale or refinancing of the underlying credit claims or receivables in order to repay the liabilities, unless the underlying pool of credit claims or receivables is sufficiently granular and has sufficiently distributed repayment profiles. Rights to receive income from the assets specified to support redemption payments should be considered as eligible credit claims or receivables in this regard.87
87 For example, associated savings plans designed to repay principal at maturity.
Criterion B8: Currency and Interest Rate Asset and Liability Mismatches
18.82 To reduce the payment risk arising from the different interest rate and currency profiles of assets and liabilities and to improve investors’ ability to model cash flows, interest rate and foreign currency risks should be appropriately mitigated88 at all times, and if any hedging transaction is executed the transaction should be documented according to industry-standard master agreements. Only derivatives used for genuine hedging of asset and liability mismatches of interest rate and / or currency should be allowed.
(1) For capital purposes, the term “appropriately mitigated” should be understood as not necessarily requiring a completely perfect hedge. The appropriateness of the mitigation of interest rate and foreign currency through the life of the transaction must be demonstrated by making available to potential investors, in a timely and regular manner, quantitative information including the fraction of notional amounts that are hedged, as well as sensitivity analysis that illustrates the effectiveness of the hedge under extreme but plausible scenarios.
(2) If hedges are not performed through derivatives, then those riskmitigating measures are only permitted if they are specifically created and used for the purpose of hedging an individual and specific risk, and not multiple risks at the same time (such as credit and interest rate risks). Non-derivative risk mitigation measures must be fully funded and available at all times.
88 The term “appropriately mitigated” should be understood as not necessarily requiring a matching hedge. The appropriateness of hedging through the life of the transaction should be demonstrated and disclosed on a continuous basis to investors.
Criterion B9: Payment Priorities and Observability
18.83 To prevent investors being subjected to unexpected repayment profiles during the life of a securitization, the priorities of payments for all liabilities in all circumstances should be clearly defined at the time of securitization and appropriate legal comfort regarding their enforceability should be provided. To ensure that junior noteholders do not have inappropriate payment preference over senior noteholders that are due and payable, throughout the life of a securitization, or, where there are multiple securitizations backed by the same pool of credit claims or receivables, throughout the life of the securitization programme, junior liabilities should not have payment preference over senior liabilities which are due and payable. The securitization should not be structured as a “reverse” cash flow waterfall such that junior liabilities are paid where due and payable senior liabilities have not been paid. To help provide investors with full transparency over any changes to the cash flow waterfall, payment profile or priority of payments that might affect a securitization, all triggers affecting the cash flow waterfall, payment profile or priority of payments of the securitization should be clearly and fully disclosed both in offering documents and in investor reports, with information in the investor report that clearly identifies the breach status, the ability for the breach to be reversed and the consequences of the breach. Investor reports should contain information that allows investors to monitor the evolution over time of the indicators that are subject to triggers. Any triggers breached between payment dates should be disclosed to investors on a timely basis in accordance with the terms and conditions of all underlying transaction documents.
18.84 Securitizations featuring a replenishment period should include provisions for appropriate early amortization events and/or triggers of termination of the replenishment period, including, notably:
(1) Deterioration in the credit quality of the underlying exposures;
(2) A failure to acquire sufficient new underlying exposures of similar credit quality; and
(3) The occurrence of an insolvency-related event with regard to the originator or the servicer.
18.85 Following the occurrence of a performance-related trigger, an event of default or an acceleration event, the securitization positions should be repaid in accordance with a sequential amortization priority of payments, in order of tranche seniority, and there should not be provisions requiring immediate liquidation of the underlying assets at market value.
18.86 To assist investors in their ability to appropriately model the cash flow waterfall of the securitization, the originator or sponsor should make available to investors, both before pricing of the securitization and on an ongoing basis, a liability cash flow model or information on the cash flow provisions allowing appropriate modelling of the securitization cash flow waterfall.
18.87 To ensure that debt forgiveness, forbearance, payment holidays and other asset performance remedies can be clearly identified, policies and procedures, definitions, remedies and actions relating to delinquency, default or restructuring of underlying debtors should be provided in clear and consistent terms, such that investors can clearly identify debt forgiveness, forbearance, payment holidays, restructuring and other asset performance remedies on an ongoing basis.
Criterion B10: Voting and Enforcement Rights
18.88 To help ensure clarity for securitization note holders of their rights and ability to control and enforce on the underlying credit claims or receivables, upon insolvency of the originator or sponsor, all voting and enforcement rights related to the credit claims or receivables should be transferred to the securitization. Investors’ rights in the securitization should be clearly defined in all circumstances, including the rights of senior versus junior note holders.
Criterion B11: Documentation Disclosure and Legal Review
18.89 To help investors to fully understand the terms, conditions, legal and commercial information prior to investing in a new offering89 and to ensure that this information is set out in a clear and effective manner for all programmes and offerings, sufficient initial offering90 and draft underlying91 documentation should be made available to investors (and readily available to potential investors on a continuous basis) within a reasonably sufficient period of time prior to pricing, or when legally permissible, such that the investor is provided with full disclosure of the legal and commercial information and comprehensive risk factors needed to make informed investment decisions. Final offering documents should be available from the closing date and all final underlying transaction documents shortly thereafter. These should be composed such that readers can readily find, understand and use relevant information. To ensure that all the securitization’s underlying documentation has been subject to appropriate review prior to publication, the terms and documentation of the securitization should be reviewed by an appropriately experienced third party legal practice, such as a legal counsel already instructed by one of the transaction parties, e.g. by the arranger or the trustee. Investors should be notified in a timely fashion of any changes in such documents that have an impact on the structural risks in the securitization.
89 For the avoidance of doubt, any type of securitization should be allowed to fulfil the requirements of 18.894018.89 once it meets its prescribed standards of disclosure and legal review.
90 Eg offering memorandum, draft offering document or draft prospectus, such as a “red herring”
91 Eg asset sale agreement, assignment, novation or transfer agreement; servicing, backup servicing, administration and cash management agreements; trust/management deed, security deed, agency agreement, account bank agreement, guaranteed investment contract, incorporated terms or master trust framework or master definitions agreement as applicable; any relevant inter-creditor agreements, swap or derivative documentation, subordinated loan agreements, start-up loan agreements and liquidity facility agreements; and any other relevant underlying documentation, including legal opinions.Criterion B12: Alignment of Interest
18.90 In order to align the interests of those responsible for the underwriting of the credit claims or receivables with those of investors, the originator or sponsor of the credit claims or receivables should retain a material net economic exposure and demonstrate a financial incentive in the performance of these assets following their securitization.
Criterion C13: Fiduciary and Contractual Responsibilities
18.91 To help ensure servicers have extensive workout expertise, thorough legal and collateral knowledge and a proven track record in loss mitigation, such parties should be able to demonstrate expertise in the servicing of the underlying credit claims or receivables, supported by a management team with extensive industry experience. The servicer should at all times act in accordance with reasonable and prudent standards. Policies, procedures and risk management controls should be well documented and adhere to good market practices and relevant regulatory regimes. There should be strong systems and reporting capabilities in place.
(1) In assessing whether “strong systems and reporting capabilities are in place” for capital purposes, well documented policies, procedures and risk management controls, as well as strong systems and reporting capabilities, may be substantiated by a third-party review for non-banking entities.
18.92 The party or parties with fiduciary responsibility should act on a timely basis in the best interests of the securitization note holders, and both the initial offering and all underlying documentation should contain provisions facilitating the timely resolution of conflicts between different classes of note holders by the trustees, to the extent permitted by applicable law. The party or parties with fiduciary responsibility to the securitization and to investors should be able to demonstrate sufficient skills and resources to comply with their duties of care in the administration of the securitization vehicle. To increase the likelihood that those identified as having a fiduciary responsibility towards investors as well as the servicer execute their duties in full on a timely basis, remuneration should be such that these parties are incentivized and able to meet their responsibilities in full and on a timely basis.
Criterion C14: Transparency to Investors
18.93 To help provide full transparency to investors, assist investors in the conduct of their due diligence and to prevent investors being subject to unexpected disruptions in cash flow collections and servicing, the contractual obligations, duties and responsibilities of all key parties to the securitization, both those with a fiduciary responsibility and of the ancillary service providers, should be defined clearly both in the initial offering and all underlying documentation. Provisions should be documented for the replacement of servicers, bank account providers, derivatives counterparties and liquidity providers in the event of failure or non- performance or insolvency or other deterioration of creditworthiness of any such counterparty to the securitization. To enhance transparency and visibility over all receipts, payments and ledger entries at all times, the performance reports to investors should distinguish and report the securitization’s income and disbursements, such as scheduled principal, redemption principal, scheduled interest, prepaid principal, past due interest and fees and charges, delinquent, defaulted and restructured amounts under debt forgiveness and payment holidays, including accurate accounting for amounts attributable to principal and interest deficiency ledgers.
(1) For capital purposes, the terms “initial offering” and “underlying transaction documentation” should be understood in the context defined by 18.89.
(2) The term “income and disbursements” should also be understood as including deferment, forbearance, and repurchases among the items described.
Criterion D15: Credit Risk of Underlying Exposures
18.94 At the portfolio cut-off date the underlying exposures have to meet the conditions under the Standardized Approach for credit risk, and after taking into account any eligible credit risk mitigation, for being assigned a risk weight equal to or smaller than:
(1) 40% on a value-weighted average exposure basis for the portfolio where the exposures are "regulatory residential real estate" exposures as defined in paragraph 7.69;
(2) 50% on an individual exposure basis where the exposure is a "regulatory commercial real estate" exposure as defined in paragraph 7.70, an "other real estate" exposure as defined in paragraph 7.80 or a land ADC exposure as defined in paragraph 7.82;
(3) 75% on an individual exposure basis where the exposure is a "regulatory retail" exposure, as defined in paragraph 7.57; or
(4) 100% on an individual exposure basis for any other exposure.
Criterion D16: Granularity of the Pool
18.95 At the portfolio cut-off date, the aggregated value of all exposures to a single obligor shall not exceed 1% of the aggregated outstanding exposure value of all exposures in the portfolio. Where structurally concentrated corporate loan markets available for securitization subject to ex ante supervisory approval and only for corporate exposures, the applicable maximum concentration threshold could be increased to 2% if the originator or sponsor retains subordinated tranche(s) that form loss absorbing credit enhancement, as defined in 22.16, and which cover at least the first 10% of losses. These tranche(s) retained by the originator or sponsor shall not be eligible for the STC capital treatment.
Simple, Transparent and Comparable Short-Term Securitizations: Criteria for Regulatory Capital Purposes
18.96 The following definitions apply when the terms are used in 18.97 to 18.165:
(1) ABCP conduit/conduit – ABCP conduit, being the special purpose vehicle which can issue commercial paper;
(2) ABCP programme – the programme of commercial paper issued by an ABCP conduit;
(3) Assets/asset pool – the credit claims and/or receivables underlying a transaction in which the ABCP conduit holds a beneficial interest;
(4) Investor – the holder of commercial paper issued under an ABCP programme, or any type of exposure to the conduit representing a financing liability of the conduit, such as loans;
(5) Obligor – borrower underlying a credit claim or a receivable that is part of an asset pool;
(6) Seller – a party that:
(a) Concluded (in its capacity as original lender) the original agreement that created the obligations or potential obligations (under a credit claim or a receivable) of an obligor or purchased the obligations or potential obligations from the original lender(s); and
(b) Transferred those assets through a transaction or passed on the interest92 to the ABCP conduit.
(7) Sponsor – sponsor of an ABCP conduit. It may also be noted that other relevant parties with a fiduciary responsibility in the management and administration of the ABCP conduit could also undertake control of some of the responsibilities of the sponsor; and
(8) Transaction – An individual transaction in which the ABCP conduit holds a beneficial interest. A transaction may qualify as a securitization, but may also be a direct asset purchase, the acquisition of undivided interest in a replenishing pool of asset, a secured loan etc.
18.97 For exposures at the conduit level (e.g. exposure arising from investing in the commercial papers issued by the ABCP programme or sponsoring arrangements at the conduit/programme level), compliance with the short-term STC capital criteria is only achieved if the criteria are satisfied at both the conduit and transaction levels.
18.98 In the case of exposures at the transaction level, compliance with the short-term STC capital criteria is considered to be achieved if the transaction level criteria are satisfied for the transactions to which support is provided.
92 For instance, transactions in which assets are sold to a special purpose entity sponsored by a bank’s customer and then either a security interest in the assets is granted to the ABCP conduit to secure a loan made by the ABCP conduit to the sponsored special purpose entity, or an undivided interest is sold to the ABCP conduit.
Criterion A1: Nature of Assets (Conduit Level)
18.99 The sponsor should make representations and warranties to investors that the criterion set out in 18.100 below are met, and explain how this is the case on an overall basis. Only if specified should this be done for each transaction. Provided that each individual underlying transaction is homogeneous in terms of asset type, a conduit may be used to finance transactions of different asset types. Programme wide credit enhancement should not prevent a conduit from qualifying for STC, regardless of whether such enhancement technically creates resecuritisation.
Criterion A1: Nature of Assets (Transaction Level)
18.100 The assets underlying a transaction in a conduit should be credit claims or receivables that are homogeneous, in terms of asset type.93 The assets underlying each individual transaction in a conduit should not be composed of “securitization exposures” as defined in 18.4. Credit claims or receivables underlying a transaction in a conduit should have contractually identified periodic payment streams relating to rental,94 principal, interest, or principal and interest payments. Credit claims or receivables generating a single payment stream would equally qualify as eligible. Any referenced interest payments or discount rates should be based on commonly encountered market interest rates,95 but should not reference complex or complicated formulae or exotic derivatives.96
93 For the avoidance of doubt, this criterion does not automatically exclude securitizations of equipment leases and securitizations of auto loans and leases from the short-term STC framework.
94 Payments on operating and financing lease are typically considered to be rental payments rather than payments of principal and interest.
95 Commonly encountered market interest rates may include rates reflective of a lender’s cost of funds, to the extent sufficient data is provided to the sponsors to allow them to assess their relation to other market rates.
96 The Global Association of Risk Professionals defines an exotic instrument as a financial asset or instrument with features making it more complex than simpler, plain vanilla, products.Additional Guidance for Criterion A1
18.101 The “homogeneity” criterion should be assessed taking into account the following principles:
(1) The nature of assets should be such that there would be no need to analyze and assess materially different legal and/or credit risk factors and risk profiles when carrying out risk analysis and due diligence checks for the transaction.
(2) Homogeneity should be assessed on the basis of common risk drivers, including similar risk factors and risk profiles.
(3) Credit claims or receivables included in the securitization should have standard obligations, in terms of rights to payments and/or income from assets and that result in a periodic and well-defined stream of payments to investors. Credit card facilities should be deemed to result in a periodic and well-defined stream of payments to investors for the purposes of this criterion.
(4) Repayment of the securitization exposure should mainly rely on the principal and interest proceeds from the securitized assets. Partial reliance on refinancing or re-sale of the asset securing the exposure may occur provided that re-financing is sufficiently distributed within the pool and the residual values on which the transaction relies are sufficiently low and that the reliance on refinancing is thus not substantial.
18.102 Examples of “commonly encountered market interest rates” would include:
(1) Interbank rates and rates set by monetary policy authorities, such as Libor, Euribor and the fed funds rate; and
(2) Sectoral rates reflective of a lender’s cost of funds, such as internal interest rates that directly reflect the market costs of a bank’s funding or that of a subset of institutions.
18.103 Interest rate caps and/or floors would not automatically be considered exotic derivatives.
18.104 The transaction level requirement is still met if the conduit does not purchase the underlying asset with a refundable purchase price discount but instead acquires a beneficial interest in the form of a note which itself might qualify as a securitization exposure, as long as the securitization exposure is not subject to any further tranching (i.e. has the same economic characteristic as the purchase of the underlying asset with a refundable purchase price discount).
Criterion A2: Asset Performance History (Conduit Level)
18.105 In order to provide investors with sufficient information on the performance history of the asset types backing the transactions, the sponsor should make available to investors, sufficient loss performance data of claims and receivables with substantially similar risk characteristics, such as delinquency and default data of similar claims, and for a time period long enough to permit meaningful evaluation. The sponsor should disclose to investors the sources of such data and the basis for claiming similarity to credit claims or receivables financed by the conduit. Such loss performance data may be provided on a stratified basis.97
97 Stratified means by way of example, all materially relevant data on the conduit’s composition (outstanding balances, industry sector, obligor concentrations, maturities, etc.) and conduit’s overview and all materially relevant data on the credit quality and performance of underlying transactions, allowing investors to identify collections, and as applicable, debt restructuring, forgiveness, forbearance, payment holidays, repurchases, delinquencies and defaults.
Criterion A2: Asset Performance History (Transaction Level)
18.106 In order to provide the sponsor with sufficient information on the performance history of each asset type backing the transactions and to conduct appropriate due diligence and to have access to a sufficiently rich data set to enable a more accurate calculation of expected loss in different stress scenarios, verifiable loss performance data, such as delinquency and default data, should be available for credit claims and receivables with substantially similar risk characteristics to those being financed by the conduit, for a time period long enough to permit meaningful evaluation by the sponsor.
Additional Requirement for Criterion A2
18.107 The sponsor of the securitization, as well as the original lender who underwrites the assets, must have sufficient experience in the risk analysis/underwriting of exposures or transactions with underlying exposures similar to those securitized. The sponsor should have well documented procedures and policies regarding the underwriting of transactions and the ongoing monitoring of the performance of the securitized exposures. The sponsor should ensure that the seller(s) and all other parties involved in the origination of the receivables have experience in originating same or similar assets, and are supported by a management with industry experience. For the purpose of meeting the short-term STC capital criteria, investors must request confirmation from the sponsor that the performance history of the originator and the original lender for substantially similar claims or receivables to those being securitized has been established for an "appropriately long period of time”. This performance history must be no shorter than a period of five years for non-retail exposures. For retail exposures, the minimum performance history is three years.
Criterion A3: Asset Performance History (Conduit Level)
18.108 The sponsor should, to the best of its knowledge and based on representations from sellers, make representations and warranties to investors that the criterion set out in 18.109 below is met with respect to each transaction.
Criterion A3: Asset Performance History (Transaction Level)
18.109 The sponsor should obtain representations from sellers that the credit claims or receivables underlying each individual transaction are not, at the time of acquisition of the interests to be financed by the conduit, in default or delinquent or subject to a material increase in expected losses or of enforcement actions.
Additional Requirement for Criterion A3
18.110 To prevent credit claims or receivables arising from credit-impaired borrowers from being transferred to the securitization, the original seller or sponsor should verify that the credit claims or receivables meet the following conditions for each transaction:
(1) The obligor has not been the subject of an insolvency or debt restructuring process due to financial difficulties in the three years prior to the date of origination;98
(2) The obligor is not recorded on a public credit registry of persons with an adverse credit history;
(3) The obligor does not have a credit assessment by an external credit assessment institution or a credit score indicating a significant risk of default; and
(4) The credit claim or receivable is not subject to a dispute between the obligor and the original lender.
18.111 The assessment of these conditions should be carried out by the original seller or sponsor no earlier than 45 days prior to acquisition of the transaction by the conduit or, in the case of replenishing transactions, no earlier than 45 days prior to new exposures being added to the transaction. In addition, at the time of the assessment, there should to the best knowledge of the original seller or sponsor be no evidence indicating likely deterioration in the performance status of the credit claim or receivable. Further, at the time of their inclusion in the pool, at least one payment should have been made on the underlying exposures, except in the case of replenishing asset trust structures such as those for credit card receivables, trade receivables, and other exposures payable in a single instalment, at maturity.
98 This condition would not apply to borrowers that previously had credit incidents but were subsequently removed from credit registries as a result of the borrowers cleaning their records. This is the case in jurisdictions in which borrowers have the “right to be forgotten”.
Criterion A4: Consistency of Underwriting (Conduit Level)
18.112 The sponsor should make representations and warranties to investors that:
(1) It has taken steps to verify that for the transactions in the conduit, any underlying credit claims and receivables have been subject to consistent underwriting standards, and explain how.
(2) When there are material changes to underwriting standards, it will receive from sellers disclosure about the timing and purpose of such changes.
18.113 The sponsor should also inform investors of the material selection criteria applied when selecting sellers (including where they are not financial institutions).
Criterion A4: Consistency of Underwriting (Transaction Level)
18.114 The sponsor should ensure that sellers (in their capacity of original lenders) intransactions with the conduit demonstrate to it that:
(1) Any credit claims or receivables being transferred to or through a transaction held by the conduit have been originated in the ordinary course of the seller’s business subject to materially non-deteriorating underwriting standards. Those underwriting standards should also not be less stringent than those applied to credit claims and receivables retained on the balance sheet of theseller and not financed by the conduit; and
(2) The obligors have been assessed as having the ability and volition to make timely payments on obligations.
18.115 The sponsor should also ensure that sellers disclose to it the timing and purpose of material changes to underwriting standards.
Additional Requirement for Criterion A4
18.116 In all circumstances, all credit claims or receivables must be originated in accordance with sound and prudent underwriting criteria based on an assessment that the obligor has the “ability and volition to make timely payments” on its obligations. The sponsor of the securitization is expected, where underlying credit claims or receivables have been acquired from third parties, to review the underwriting standards (i.e. to check their existence and assess their quality) of these third parties and to ascertain that they have assessed the obligors’ “ability and volition to make timely payments” on their obligations.
Criterion A5: Asset Selection and Transfer (Conduit Level)
18.117 The sponsor should:
(1) Provide representations and warranties to investors about the checks, in nature and frequency, it has conducted regarding enforceability of underlying assets.
(2) Disclose to investors the receipt of appropriate representations and warranties from sellers that the credit claims or receivables being transferred to the transactions in the conduit are not subject to any condition or encumbrance that can be foreseen to adversely affect enforce ability in respect of collections due.
Criterion A5: Asset Selection and Transfer (Transaction Level)
18.118 The sponsor should be able to assess thoroughly the credit risk of the asset pool prior to its decision to provide full support to any given transaction or to the conduit. The sponsor should ensure that credit claims or receivables transferred to or through a transaction financed by the conduit:
(1) Satisfy clearly defined eligibility criteria; and
(2) Are not actively selected after the closing date, actively managed99 or otherwise cherry-picked on a discretionary basis.
18.119 The sponsor should ensure that the transactions in the conduit effect true sale such that the underlying credit claims or receivables:
(1) Are enforceable against the obligor;
(2) Are beyond the reach of the seller, its creditors or liquidators and are not subject to material re-characterization or clawback risks;
(3) Are not effected through credit default swaps, derivatives or guarantees, but by a transfer100 of the credit claims or the receivables to the transaction; and
(4) Demonstrate effective recourse to the ultimate obligation for the underlying credit claims or receivables and are not a re-securitization position.
18.120 The sponsor should ensure that in applicable jurisdictions, for conduits employing transfers of credit claims or receivables by other means, sellers can demonstrate to it the existence of material obstacles preventing true sale at issuance (e.g. the immediate realization of transfer tax or the requirement to notify all obligors of the transfer) and should clearly demonstrate the method of recourse to ultimate obligors (e.g. equitable assignment, perfected contingent transfer). In such jurisdictions, any conditions where the transfer of the credit claims or receivables is delayed or contingent upon specific events and any factors affecting timely perfection of claims by the conduit should be clearly disclosed.
18.121 The sponsor should ensure that it receives from the individual sellers (either in their capacity as original lender or servicer) representations and warranties that the credit claims or receivables being transferred to or through the transaction are not subject to any condition or encumbrance that can be foreseen to adversely affect enforceability in respect of collections due.
99 Provided they are not actively selected or otherwise cherry picked on a discretionary basis, the addition of credit claims or receivables during the replenishment periods or their substitution or repurchasing due to the breach of representations and warranties do not represent active portfolio management.
100 This requirement should not affect jurisdictions whose legal frameworks provide for a true sale with the same effects as described above, but by means other than a transfer of the credit claims or receivables.Additional Requirement for Criterion A5
18.122 An in-house legal opinion or an independent third-party legal opinion must support the claim that the true sale and the transfer of assets under the applicable laws comply with 18.118 (1) and 18.118 (2) at the transaction level.
Criterion A6: Initial and Ongoing Data (Conduit Level)
18.123 To assist investors in conducting appropriate due diligence prior to investing in a new programme offering, the sponsor should provide to potential investors sufficient aggregated data that illustrate the relevant risk characteristics of the underlying asset pools in accordance with applicable laws. To assist investors in conducting appropriate and ongoing monitoring of their investments’ performance and so that investors who wish to purchase commercial paper have sufficient information to conduct appropriate due diligence, the sponsor should provide timely and sufficient aggregated data that provide the relevant risk characteristics of the underlying pools in accordance with applicable laws. The sponsor should ensure that standardized investor reports are readily available to current and potential investors at least monthly. Cut off dates of the aggregated data should be aligned with those used for investor reporting.
Criterion A6: Initial and Ongoing Data (Transaction Level)
18.124 The sponsor should ensure that the individual sellers (in their capacity of servicers) provide it with:
(1) Sufficient asset level data in accordance with applicable laws or, in the case of granular pools, summary stratification data on the relevant risk characteristics of the underlying pool before transferring any credit claims or receivables to such underlying pool.
(2) Timely asset level data in accordance with applicable laws or granular pool stratification data on the risk characteristics of the underlying pool on an ongoing basis. Those data should allow the sponsor to fulfil its fiduciary duty at the conduit level in terms of disclosing information to investors including the alignment of cut off dates of the asset level or granular pool stratification data with those used for investor reporting.
18.125 The seller may delegate some of these tasks and, in this case, the sponsor should ensure that there is appropriate oversight of the outsourced arrangements.
Additional Requirement for Criterion A6
18.126 The standardized investor reports which are made readily available to current and potential investors at least monthly should include the following information:
(1) Materially relevant data on the credit quality and performance of underlying assets, including data allowing investors to identify dilution, delinquencies and defaults, restructured receivables, forbearance, repurchases, losses, recoveries and other asset performance remedies in the pool;
(2) The form and amount of credit enhancement provided by the seller and sponsor at transaction and conduit levels, respectively;
(3) Relevant information on the support provided by the sponsor; and
(4) The status and definitions of relevant triggers (such as performance, termination or counterparty replacement triggers).
Criterion B7: Full Support (Conduit Level Only)
18.127 The sponsor should provide the liquidity facility(ies) and the credit protection support101 for any ABCP programme issued by a conduit. Such facility(ies) and support should ensure that investors are fully protected against credit risks, liquidity risks and any material dilution risks of the underlying asset pools financed by the conduit. As such, investors should be able to rely on the sponsor to ensure timely and full repayment of the commercial paper.
101 A sponsor can provide full support either at ABCP programme level or at transaction level, i.e. by fully supporting each transaction within an ABCP programme.
Additional Requirement for Criterion B7
18.128 While liquidity and credit protection support at both the conduit level and transaction level can be provided by more than one sponsor, the majority of the support (assessed in terms of coverage) has to be made by a single sponsor (referred to as the “main sponsor”).102 An exception can however be made for a limited period of time, where the main sponsor has to be replaced due to a material deterioration in its credit standing.
18.129 The full support provided should be able to irrevocably and unconditionally pay the ABCP liabilities in full and on time. The list of risks provided in 18.127 that have to be covered is not comprehensive but rather provides typical examples.
18.130 Under the terms of the liquidity facility agreement:
(1) Upon specified events affecting its creditworthiness, the sponsor shall be obliged to collateralize its commitment in cash to the benefit of the investors or otherwise replace itself with another liquidity provider.
(2) If the sponsor does not renew its funding commitment for a specific transaction or the conduit in its entirety, the sponsor shall collateralize its commitments regarding a specific transaction or, if relevant, to the conduit in cash at the latest 30 days prior to the expiration of the liquidity facility, and no new receivables should be purchased under the affected commitment.
18.131 The sponsor should provide investors with full information about the terms of the liquidity facility (facilities) and the credit support provided to the ABCP conduit and the underlying transactions (in relation to the transactions, redacted where necessary to protect confidentiality).
102 “Liquidity and credit protection support” refers to support provided by the sponsors. Any support provided by the seller is excluded.
Criterion B8: Redemption Cash Flow (Transaction Level Only)
18.132 Unless the underlying pool of credit claims or receivables is sufficiently granular and has sufficiently distributed repayment profiles, the sponsor should ensure that the repayment of the credit claims or receivables underlying any of the individual transactions relies primarily on the general ability and willingness of the obligor to pay rather than the possibility that the obligor refinances or sells the collateral and that such repayment does not primarily rely on the drawing of an external liquidity facility provided to this transaction.
Additional Requirement for Criterion B8
18.133 Sponsors cannot use support provided by their own liquidity and credit facilities towards meeting this criterion. For the avoidance of doubt, the requirement that the repayment shall not primarily rely on the drawing of an external liquidity facility does not apply to exposures in the form of the notes issued by the ABCP conduit.
Criterion B9: Currency and Interest Rate Asset and Liability Mismatches (Conduit Level)
18.134 The sponsor should ensure that any payment risk arising from different interest rate and currency profiles not mitigated at transaction-level or arising at conduit level is appropriately mitigated. The sponsor should also ensure that derivative are used for genuine hedging purposes only and that hedging transactions are documented according to industry-standard master agreements. The sponsor should provide sufficient information to investors to allow them to assess how the payment risk arising from the different interest rate and currency profiles of assets and liabilities are appropriately mitigated, whether at the conduit or at transaction level.
Criterion B9: Currency and Interest Rate Asset and Liability Mismatches (Transaction Level)
18.135 To reduce the payment risk arising from the different interest rate and currency profiles of assets and liabilities, if any, and to improve the sponsor’s ability to analyze cash flows of transactions, the sponsor should ensure that interest rate and foreign currency risks are appropriately mitigated. The sponsor should also ensure that derivatives are used for genuine hedging purposes only and that hedging transactions are documented according to industry-standard master agreements.
Additional Requirement for Criterion B9
18.136 The term “appropriately mitigated” should be understood as not necessarily requiring a completely perfect hedge. The appropriateness of the mitigation of interest rate and foreign currency risks through the life of the transaction must be demonstrated by making available, in a timely and regular manner, quantitative information including the fraction of notional amounts that are hedged, as well as sensitivity analysis that illustrates the effectiveness of the hedge under extreme but plausible scenarios. The use of risk-mitigating measures other than derivatives is permitted only if the measures are specifically created and used for the purpose of hedging an individual and specific risk. Non-derivative risk mitigation measures must be fully funded and available at all times.
Criterion B10: Payment Priorities and Observability (Conduit Level)
18.137 The commercial paper issued by the ABCP programme should not include extension options or other features which may extend the final maturity of the asset-backed commercial paper, where the right of trigger does not belong exclusively to investors. The sponsor should:
(1) Make representations and warranties to investors that the criterion set out in 18.138 to 18.143 is met and in particular, that it has the ability to appropriately analyze the cash flow waterfall for each transaction which qualifies as a securitization; and
(2) Make available to investors a summary (illustrating the functioning) of these waterfalls and of the credit enhancement available at programme level and transaction level.
Criterion B10: Payment Priorities and Observability (Transaction Level)
18.138 To prevent the conduit from being subjected to unexpected repayment profiles from the transactions, the sponsor should ensure that priorities of payments are clearly defined at the time of acquisition of the interests in these transactions by the conduit; and appropriate legal comfort regarding the enforceability is provided.
18.139 For all transactions which qualify as a securitization, the sponsor should ensure that all triggers affecting the cash flow waterfall, payment profile or priority of payments are clearly and fully disclosed to the sponsor both in the transactions’ documentation and reports, with information in the reports that clearly identifies any breach status, the ability for the breach to be reversed and the consequences of the breach. Reports should contain information that allows sponsors to easily ascertain the likelihood of a trigger being breached or reversed. Any triggers breached between payment dates should be disclosed to sponsors on a timely basis in accordance with the terms and conditions of the transaction documents.
18.140 For any of the transactions where the beneficial interest held by the conduit qualifies as a securitization position, the sponsor should ensure that any subordinated positions do not have inappropriate payment preference over payments to the conduit (which should always rank senior to any other position) and which are due and payable.
18.141 Transactions featuring a replenishment period should include provisions for appropriate early amortization events and/or triggers of termination of the replenishment period, including, notably, deterioration in the credit quality of the underlying exposures; a failure to replenish sufficient new underlying exposures of similar credit quality; and the occurrence of an insolvency related event with regard to the individual sellers.
18.142 To ensure that debt forgiveness, forbearance, payment holidays, restructuring, dilution and other asset performance remedies can be clearly identified, policies and procedures, definitions, remedies and actions relating to delinquency, default, dilution or restructuring of underlying debtors should be provided in clear and consistent terms, such that the sponsor can clearly identify debt forgiveness, forbearance, payment holidays, restructuring, dilution and other asset performance remedies on an ongoing basis.
18.143 For each transaction which qualifies as a securitization, the sponsor should ensure it receives both before the conduit acquires a beneficial interest in the transaction and on an ongoing basis, the liability cash flow analysis or information on the cash flow provisions allowing appropriate analysis of the cash flow waterfall of these transactions.
Criterion B11: Voting and Enforcement Rights (Conduit Level)
18.144 To provide clarity to investors, the sponsor should make sufficient information available in order for investors to understand their enforcement rights on the underlying credit claims or receivables in the event of insolvency of the sponsor.
Criterion B11: Voting and Enforcement Rights (Transaction Level)
18.145 For each transaction, the sponsor should ensure that, in particular upon insolvency of the seller or where the obligor is in default on its obligation, all voting and enforcement rights related to the credit claims or receivables are, if applicable:
(1) Transferred to the conduit; and
(2) Clearly defined under all circumstances, including with respect to the rights of the conduit versus other parties with an interest (e.g. sellers), where relevant.
Criterion B12: Documentation, Disclosure and Legal Review (Conduit level Only)
18.146 To help investors understand fully the terms, conditions, and legal information prior to investing in a new programme offering and to ensure that this information is set out in a clear and effective manner for all programme offerings, the sponsor should ensure that sufficient initial offering documentation for the ABCP programme is provided to investors (and readily available to potential investors on a continuous basis) within a reasonably sufficient period of time prior to issuance, such that the investor is provided with full disclosure of the legal information and comprehensive risk factors needed to make informed investment decisions. These should be composed such that readers can readily find, understand and use relevant information.
18.147 The sponsor should ensure that the terms and documentation of a conduit and the ABCP programme it issues are reviewed and verified by an appropriately experienced and independent legal practice prior to publication and in the case of material changes. The sponsor should notify investors in a timely fashion of any changes in such documents that have an impact on the structural risks in the ABCP programme.
Additional Requirement for Criterion B12
18.148 To understand fully the terms, conditions and legal information prior to including a new transaction in the ABCP conduit and ensure that this information is set out in a clear and effective manner, the sponsor should ensure that it receives sufficient initial offering documentation for each transaction and that it is provided within a reasonably sufficient period of time prior to the inclusion in the conduit, with full disclosure of the legal information and comprehensive risk factors needed to supply liquidity and/or credit support facilities. The initial offering document for each transaction should be composed such that readers can readily find, understand and use relevant information. The sponsor should also ensure that the terms and documentation of a transaction are reviewed and verified by an appropriately experienced and independent legal practice prior to the acquisition of the transaction and in the case of material changes.
Criterion B13: Alignment of Interest (Conduit Level Only)
18.149 In order to align the interests of those responsible for the underwriting of the credit claims and receivables with those of investors, a material net economic exposure should be retained by the sellers or the sponsor at transaction level, or by the sponsor at the conduit level. Ultimately, the sponsor should disclose to investors how and where a material net economic exposure is retained by the seller at transaction level or by the sponsor at transaction or conduit level, and demonstrate the existence of a financial incentive in the performance of the assets.
Criterion B14: Cap on Maturity Transformation (Conduit Level Only)
18.150 Maturity transformation undertaken through ABCP conduits should be limited. The sponsor should verify and disclose to investors that the weighted average maturity of all the transactions financed under the ABCP conduit is three years or less. This number should be calculated as the higher of:
(1) The exposure-weighted average residual maturity of the conduit’s beneficial interests held or the assets purchased by the conduit in order to finance the transactions of the conduit103; and
(2) The exposure-weighted average maturity of the underlying assets financed by the conduit calculated by:
(a) Taking an exposure-weighted average of residual maturities of the underlying assets in each pool; and
(b) Taking an exposure-weighted average across the conduit of the pool-level averages as calculated in Step 2a.104
103 Including purchased securitization notes, loans, asset-backed deposits and purchased credit claims and/or receivables held directly on the conduit’s balance sheet.
104 Where it is impractical for the sponsor to calculate the pool-level weighted average maturity in Step 2a (because the pool is very granular or dynamic), sponsors may instead use the maximum maturity of the assets in the pool as defined in the legal agreements governing the pool (e.g. investment guidelines).Criterion C15: Financial Institution (Conduit Level Only)
18.151 The sponsor should be a financial institution that is licensed to take deposits from the public, and is subject to appropriate prudential standards and levels of supervision.
Criterion C16: Fiduciary and Contractual Responsibilities (Conduit Level)
18.152 The sponsor should, based on the representations received from seller(s) and all other parties responsible for originating and servicing the asset pools, make representations and warranties to investors that:
(1) The various criteria defined at the level of each underlying transaction are met, and explain how;
(2) Seller(s)’s policies, procedures and risk management controls are well- documented, adhere to good market practices and comply with the relevant regulatory regimes; and that strong systems and reporting capabilities are in place to ensure appropriate origination and servicing of the underlying assets.
18.153 The sponsor should be able to demonstrate expertise in providing liquidity and credit support in the context of ABCP conduits, and is supported by a management team with extensive industry experience. The sponsor should at all times act in accordance with reasonable and prudent standards. Policies, procedures and risk management controls of the sponsor should be well documented and the sponsor should adhere to good market practices and relevant regulatory regime. There should be strong systems and reporting capabilities in place at the sponsor. The party or parties with fiduciary responsibility should act on a timely basis in the best interests of the investors.
Criterion C16: Fiduciary and Contractual Responsibilities (Transaction Level)
18.154 The sponsor should ensure that it receives representations from the sellers(s) and all other parties responsible for originating and servicing the asset pools that they:
(1) Have well-documented procedures and policies in place to ensure appropriate servicing of the underlying assets;
(2) Have expertise in the origination of same or similar assets to those in the asset pools;
(3) Have extensive servicing and workout expertise, thorough legal and collateral knowledge and a proven track record in loss mitigation for the same or similar assets;
(4) Have expertise in the servicing of the underlying credit claims or receivables;and
(5) Are supported by a management team with extensive industry experience.
Additional Requirement for Criterion C16
18.155 In assessing whether “strong systems and reporting capabilities are in place”, well documented policies, procedures and risk management controls, as well as strong systems and reporting capabilities, may be substantiated by a third- party review for sellers that are non-banking entities.
Criterion C17: Transparency to Investors (Conduit Level)
18.156 The sponsor should ensure that the contractual obligations, duties and responsibilities of all key parties to the conduit, both those with a fiduciary responsibility and the ancillary service providers, are defined clearly both in the initial offering and any relevant underlying documentation of the conduit and the ABCP programme it issues. The “underlying documentation” does not refer to the documentation of the underlying transactions.
18.157 The sponsor should also make representations and warranties to investors that the duties and responsibilities of all key parties are clearly defined at transaction level.
18.158 The sponsor should ensure that the initial offering documentation disclosed to investors contains adequate provisions regarding the replacement of key counterparties of the conduit (e.g. bank account providers and derivatives counterparties) in the event of failure or non-performance or insolvency or deterioration of creditworthiness of any such counterparty.
18.159 The sponsor should also make representations and warranties to investors that provisions regarding the replacement of key counterparties at transaction level are well-documented.
18.160 The sponsor should provide sufficient information to investors about the liquidity facility(ies) and credit support provided to the ABCP programme for them to understand its functioning and key risks.
Criterion C17: Transparency to Investors (Transaction Level)
18.161 The sponsor should conduct due diligence with respect to the transactions on behalf of the investors. To assist the sponsor in meeting its fiduciary and contractual obligations, the duties and responsibilities of all key parties to all transactions (both those with a fiduciary responsibility and of the ancillary service providers) should be defined clearly in all underlying documentation of these transactions and made available to the sponsor.
18.162 The sponsor should ensure that provisions regarding the replacement of key counterparties (in particular the servicer or liquidity provider) in the event of failure or non-performance or insolvency or other deterioration of any such counterparty for the transactions are well-documented (in the documentation of these individual transactions).
18.163 The sponsor should ensure that for all transactions the performance reports include all of the following: the transactions’ income and disbursements, such as scheduled principal, redemption principal, scheduled interest, prepaid principal, past due interest and fees and charges, delinquent, defaulted, restructured and diluted amounts, as well as accurate accounting for amounts attributable to principal and interest deficiency ledgers.
Criterion D18: Credit Risk of Underlying Exposures (Transaction Level Only)
18.164 At the date of acquisition of the assets, the underlying exposures have to meet the conditions under the Standardized Approach for credit risk and, after account is taken of any eligible credit risk mitigation, be assigned a risk weight equal to or smaller than:
(1) 40% on a value-weighted average exposure basis for the portfolio where the exposures are "regulatory residential real estate" exposures as defined in paragraph 7.69;
(2) 50% on an individual exposure basis where the exposure is a "regulatory commercial real estate" exposure as defined in paragraph 7.70, an "other real estate" exposure as defined in paragraph 7.80 or a land ADC exposure as defined in paragraph 7.82;
(3) 75% on an individual exposure basis where the exposure is a "regulatory retail" exposure as defined in paragraph 7.57; or
(4) 100% on an individual exposure basis for any other exposure.
Criterion D19: Granularity of the Pool (Conduit Level Only)
18.165 At the date of acquisition of any assets securitized by one of the conduits' transactions, the aggregated value of all exposures to a single obligor at that date shall not exceed 2% of the aggregated outstanding exposure value of all exposures in the programme. Where structurally concentrated corporate loan markets, subject to ex ante supervisory approval and only for corporate exposures, the applicable maximum concentration threshold could be increased to 3% if the sellers or sponsor retain subordinated tranche(s) that form loss-absorbing credit enhancement, as defined in 22.16,
19. Securitization: Standardized Approach
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force Standardized Approach (SEC-SA)
19.1 To calculate capital requirements for a securitization exposure to a standardized approach (SA) pool using the securitization standardized approach (SEC-SA), a bank would use a supervisory formula and the following bank-supplied inputs: the SA capital charge had the underlying exposures not been securitized (KSA); the ratio of delinquent underlying exposures to total underlying exposures in the securitization pool (W); the tranche attachment point (A); and the tranche detachment point (D). The inputs A and D are defined in paragraphs 22.14 and 22.15 respectively. Where the only difference between exposures to a transaction is related to maturity, A and D will be the same. KSA and W are defined in 19.2 to 19.4 and 19.6.
19.2 KSA is defined as the weighted-average capital charge of the entire portfolio of underlying exposures, calculated using the risk-weighted asset amounts in chapter 7 in relation to the sum of the exposure amounts of underlying exposures, multiplied by 8%. This calculation should reflect the effects of any credit risk mitigant that is applied to the underlying exposures (either individually or to the entire pool), and hence benefits all of the securitization exposures. KSA is expressed as a decimal between zero and one (that is, a weighted-average risk weight of 100% means that KSA would equal 0.08).
19.3 For structures involving a special purpose entity (SPE), all of the SPE’s exposures related to the securitization are to be treated as exposures in the pool. Exposures related to the securitization that should be treated as exposures in the pool include assets in which the SPE may have invested, comprising reserve accounts, cash collateral accounts and claims against counterparties resulting from interest swaps or currency swaps.105 Notwithstanding, the bank can exclude the SPE’s exposures from the pool for capital calculation purposes if the bank can demonstrate to SAMA that the risk does not affect its particular securitization exposure or that the risk is immaterial - for example, because it has been mitigated.106
19.4 In the case of funded synthetic securitizations, any proceeds of the issuances of credit-linked notes or other funded obligations of the SPE that serve as collateral for the repayment of the securitization exposure in question, and for which the bank cannot demonstrate to SAMA that they are immaterial, have to be included in the calculation of KSA if the default risk of the collateral is subject to the tranched loss allocation.107
19.5 In cases where a bank has set aside a specific provision or has a non- refundable purchase price discount on an exposure in the pool, KSA must be calculated using the gross amount of the exposure without the specific provision and/or non- refundable purchase price discount.
19.6 The variable W equals the ratio of the sum of the nominal amount of delinquent underlying exposures (as defined in paragraph 20.7 below) to the nominal amount of underlying exposures.
19.7 Delinquent underlying exposures are underlying exposures that are 90 days or more past due, subject to bankruptcy or insolvency proceedings, in the process of foreclosure, held as real estate owned, or in default, where default is defined within the securitization deal documents.
19.8 The inputs KSA and W are used as inputs to calculate KA, as follows:
KA = (1 - W) x KSA + 0.5W
19.9 In case a bank does not know the delinquency status, as defined above, for no more than 5% of underlying exposures in the pool, the bank may still use the SEC-SA by adjusting its calculation of KA as follows:
19.10 If the bank does not know the delinquency status for more than 5%, the securitization exposure must be risk weighted at 1250%.
19.11 Capital requirements are calculated under the SEC-SA as follows, where KSSFA(KA) is the capital requirement per unit of the securitization exposure and the variables a, u, and l are defined as:
(1) a = - (1/(p * KA))
(2) u = D- KA
(3) l = max (4 - KA; 0)
19.12 The supervisory parameter p in the context of the SEC-SA is set equal to 1 for a securitization exposure that is not a resecuritization exposure.
19.13 The risk weight assigned to a securitization exposure when applying the SEC-SA would be calculated as follows:
(1) When D for a securitization exposure is less than or equal to KA, the exposure must be assigned a risk weight of 1250%.
(2) When A for a securitization exposure is greater than or equal to KA, the risk weight of the exposure, expressed as a percentage, would equal KSSFA(KA) times 12.5
(3) When A is less than KA and D is greater than KA, the applicable risk weight is a weighted average of 1250% and 12.5 times KSSFA(KA) according to the following formula:
19.14 The risk weight for market risk hedges such as currency or interest rate swaps will be inferred from a securitization exposure that is pari passu to the swaps or, if such an exposure does not exist, from the next subordinated tranche.
19.15 The resulting risk weight is subject to a floor risk weight of 15%. Moreover, when a bank applies the SEC-SA to an unrated junior exposure in a transaction where the more senior tranches (exposures) are rated and therefore no rating can be inferred for the junior exposure, the resulting risk weight under SEC-SA for the junior unrated exposure shall not be lower than the risk weight for the next more senior rated exposure.
105 In particular, in the case of swaps other than credit derivatives, the numerator of KSA must include the positive current market value times the risk weight of the swap provider times 8%. In contrast, the denominator should not take into account such a swap, as such a swap would not provide a credit enhancement to any tranche.
106 Certain best market practices can eliminate or at least significantly reduce the potential risk from a default of a swap provider. Examples of such features could be cash collateralization of the market value in combination with an agreement of prompt additional payments in case of an increase of the market value of the swap and minimum credit quality of the swap provider with the obligation to post collateral or present an alternative swap provider without any costs for the SPE in the event of a credit deterioration on the part of the original swap provider. If SAMA are satisfied with these risk mitigants and accept that the contribution of these exposures to the risk of the holder of a securitization exposure is insignificant, SAMA may allow the bank to exclude these exposures from the KSA calculation.
107 As in the case of swaps other than credit derivatives, the numerator of KSA (i.e. weighted-average capital charge of the entire portfolio of underlying exposures) must include the exposure amount of the collateral times its risk weight times 8%, but the denominator should be calculated without recognition of the collateral.Resecuritisation Exposures
19.16 For resecuritization exposures, banks must apply the SEC-SA specified in 19.1 to 19.15, with the following adjustments:
(1) The capital requirement of the underlying securitization exposures is calculated using the securitization framework;
(2) Delinquencies (W) are set to zero for any exposure to a securitization tranche in the underlying pool; and
(3) The supervisory parameter p is set equal to 1.5, rather than 1 as for securitization exposures.
19.17 If the underlying portfolio of a resecuritization consists in a pool of exposures to securitization tranches and to other assets, one should separate the exposures to securitization tranches from exposures to assets that are not securitizations. The KA parameter should be calculated for each subset individually, applying separate W parameters; these calculated in accordance with 19.6 and 19.7 in the subsets where the exposures are to assets that are not securitization tranches, and set to zero where the exposures are to securitization tranches. The KA for the resecuritization exposure is then obtained as the nominal exposure weighted- average of the KA’s for each subset considered.
19.18 The resulting risk weight is subject to a floor risk weight of 100%.
19.19 The caps described in 18.50 to 18.55 cannot be applied to resecuritization exposures.
Alternative Capital Treatment for Term STC Securitizations and Short- Term STC Securitizations Meeting the STC Criteria for Capital Purposes
19.20 Securitization transactions that are assessed as simple, transparent and comparable (STC)-compliant for capital purposes as defined in 18.67 can be subject to capital requirements under the securitization framework, taking into account that, when the SEC-SA is used, 19.21 and 19.22 are applicable instead of 19.12 and 19.15 respectively.
19.21 The supervisory parameter p in the context of the SEC-SA is set equal to 0.5 for an exposure to an STC securitization.
19.22 The resulting risk weight is subject to a floor risk weight of 10% for senior tranches, and 15% for non-senior tranches.
20. Securitization: External- Ratings-Based Approach (SEC- ERBA)
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force External-Ratings-Based Approach (SEC-ERBA)
20.1 For securitization exposures that are externally rated, or for which an inferred rating is available, risk-weighted assets under the securitization external ratings- based approach (SEC-ERBA) will be determined by multiplying securitization exposure amounts (as defined in 18.19) by the appropriate risk weights as determined by 19.2 to 19.7, provided that the operational criteria in 20.8 to 20.10 are met.108
20.2 For exposures with short-term ratings, or when an inferred rating based on a short-term rating is available, the following risk weights in table 28 below will apply:
ERBA risk weights for short-term ratings Table 28 External credit assessment A-1/P-1 A-2/P-2 A-3/P-3 All other ratings Risk weight 15% 50% 100% 1250% 20.3 For exposures with long-term ratings, or when an inferred rating based on a long-term rating is available, the risk weights depend on
(1) The external rating grade or an available inferred rating;
(2) The seniority of the position;
(3) The tranche maturity; and
(4) In the case of non-senior tranches, the tranche thickness.
20.4 Specifically, for exposures with long-term ratings, risk weights will be determined according to Table 29 and will be adjusted for tranche maturity (calculated according to 18.22 and 18.23), and tranche thickness for non-senior tranches according to 20.5.
ERBA risk weights for long-term ratings Table 29 Rating Senior tranche Non-senior (thin) tranche Tranche maturity (MT) Tranche maturity (MT) 1 year 5 years 1 year 5 years AAA 15% 20% 15% 70% AA+ 15% 30% 15% 90% AA 25% 40% 30% 120% AA- 30% 45% 40% 140% A+ 40% 50% 60% 160% A 50% 65% 80% 180% A- 60% 70% 120% 210% BBB+ 75% 90% 170% 260% BBB 90% 105% 220% 310% BBB- 120% 140% 330% 420% BB+ 140% 160% 470% 580% BB 160% 180% 620% 760% BB- 200% 225% 750% 860% B+ 250% 280% 900% 950% B 310% 340% 1050% 1050% B- 380% 420% 1130% 1130% CCC+/CCC/CCC- 460% 505% 1250% 1250% Below CCC- 1250% 1250% 1250% 1250% 20.5 The risk weight assigned to a securitization exposure when applying the SEC-ERBA is calculated as follows:
(1) To account for tranche maturity, banks shall use linear interpolation between the risk weights for one and five years.
(2) To account for tranche thickness, banks shall calculate the risk weight for non- senior tranches as follows, where T equals tranche thickness, and is measured a minus A, as defined, respectively, in 22.15 and 22.14:
Risk weight = (risk weight from table after adjusting for maturity) x (1 - min(T,50%))
20.6 In the case of market risk hedges such as currency or interest rate swaps, the risk weight will be inferred from a securitization exposure that is pari passu to the swaps or, if such an exposure does not exist, from the next subordinated tranche.
20.7 The resulting risk weight is subject to a floor risk weight of 15%. In addition, the resulting risk weight should never be lower than the risk weight corresponding to a senior tranche of the same securitization with the same rating and maturity.
108 The rating designations used in Tables 28 and 29 are for illustrative purposes only and do not indicate any preference for, or endorsement of, any particular external assessment system.
Operational Requirements for Use of External Credit Assessments
20.8 The following operational criteria concerning the use of external credit assessments apply in the securitization framework:
(1) To be eligible for risk-weighting purposes, the external credit assessment must take into account and reflect the entire amount of credit risk exposure the bank has with regard to all payments owed to it. For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with timely repayment of both principal and interest.
(2) The external credit assessments must be from an eligible external credit assessment institution (ECAI) as recognized by SAMA in accordance with SAMA Circular No. BCS 242, Date: 11 April 2007 (Mapping of Credit Assessment Ratings Provided by Eligible External Credit Assessment Institution to Determine Risk Weighted Exposures) as outlined in chapter 8 with the following exception. In contrast with 8.3 (3), an eligible credit assessment, procedures, methodologies, assumptions and the key elements underlying the assessments must be publicly available, on a non-selective basis and free of charge.109 In other words, a rating must be published in an accessible form and included in the ECAI’s transition matrix. Also, loss and cash flow analysis as well as sensitivity of ratings to changes in the underlying rating assumptions should be publicly available. Consequently, ratings that are made available only to the parties to a transaction do not satisfy this requirement.
(3) Eligible ECAIs must have a demonstrated expertise in assessing securitizations, which may be evidenced by strong market acceptance.
(4) Where two or more eligible ECAIs can be used and these assess the credit risk of the same securitization exposure differently, paragraph 8.8 will apply.
(5) Where credit risk mitigation (CRM) is provided to specific underlying exposures or the entire pool by an eligible guarantor as defined in chapter 9 and is reflected in the external credit assessment assigned to a securitization exposure(s), the risk weight associated with that external credit assessment should be used. In order to avoid any double-counting, no additional capital recognition is permitted. If the CRM provider is not recognized as an eligible guarantor under chapter 9, the covered securitization exposures should be treated as unrated.
(6) In the situation where a credit risk mitigant solely protects a specific securitization exposure within a given structure (e.g. asset-backed security tranche) and this protection is reflected in the external credit assessment, the bank must treat the exposure as if it is unrated and then apply the CRM treatment outlined in chapter 9 or in the foundation internal ratings-based (IRB) approach of chapters 10 to 16, to recognize the hedge.
(7) A bank is not permitted to use any external credit assessment for risk-weighting purposes where the assessment is at least partly based on unfunded support provided by the bank. For example, if a bank buys asset- backed commercial paper (ABCP) where it provides an unfunded securitization exposure extended to the ABCP programme (e.g. liquidity facility or credit enhancement), and that exposure plays a role in determining the credit assessment on the ABCP, the bank must treat the ABCP as if it were not rated. The bank must continue to hold capital against the other securitization exposures it provides (e.g. against the liquidity facility and/or credit enhancement).
109 Where the eligible credit assessment is not publicly available free of charge, the ECAI should provide an adequate justification, within its own publicly available code of conduct, in accordance with the “comply or explain” nature of the International Organization of Securities Commissions’ Code of Conduct Fundamentals for Credit Rating Agencies.
Operational Requirements for Inferred Ratings
20.9 In accordance with the hierarchy of approaches determined in 18.41 to 18.47, a bank must infer a rating for an unrated position and use the SEC-ERBA provided that the requirements set out in 20.10 are met. These requirements are intended to ensure that the unrated position is pari passu or senior in all respects to an externally-rated securitization exposure termed the “reference securitization exposure”.
20.10 The following operational requirements must be satisfied to recognize inferred ratings:
(1) The reference securitization exposure (e.g. asset-backed security) must rank pari passu or be subordinate in all respects to the unrated securitization exposure. Credit enhancements, if any, must be taken into account when assessing the relative subordination of the unrated exposure and the reference securitization exposure. For example, if the reference securitization exposure benefits from any third-party guarantees or other credit enhancements that are not available to the unrated exposure, then the latter may not be assigned an inferred rating based on the reference securitization exposure.
(2) The maturity of the reference securitization exposure must be equal to or longer than that of the unrated exposure.
(3) On an ongoing basis, any inferred rating must be updated continuously to reflect any subordination of the unrated position or changes in the external rating of the reference securitization exposure.
(4) The external rating of the reference securitization exposure must satisfy the general requirements for recognition of external ratings as delineated in 20.8.
Alternative Capital Treatment for Term STC Securitizations and Short- Term STC Securitizations Meeting the STC Criteria for Capital Purposes
20.11 Securitization transactions that are assessed as simple, transparent and comparable (STC)-compliant for capital purposes as defined in 18.67 can be subject to capital requirements under the securitization framework, taking into account that, when the SEC-ERBA is used, 20.12, 20.13, and 20.14 are applicable instead of 20.2, 20.4 and 20.7 respectively.
20.12 For exposures with short-term ratings, or when an inferred rating based on a short-term rating is available, the following risk weights in table 30 below will apply:
ERBA STC risk weights for short-term ratings Table 30 External credit assessment A-1/P-1 A-2/P-2 A-3/P-3 All other ratings Risk weight 10% 30% 60% 1250% 20.13 For exposures with long-term ratings, risk weights will be determined according to Table 31 and will be adjusted for tranche maturity (calculated according to 18.22 and 18.23), and tranche thickness for non-senior tranches according to 20.5 and 20.6.
ERBA STC risk weights for long-term ratings Table 31 Rating Senior tranche Non-senior (thin) tranche Tranche maturity (MT) Tranche maturity (MT) 1 year 5 years 1 year 5 years AAA 10% 10% 15% 40% AA+ 10% 15% 15% 55% AA 15% 20% 15% 70% AA- 15% 25% 25% 80% A+ 20% 30% 35% 95% A 30% 40% 60% 135% A- 35% 40% 95% 170% BBB+ 45% 55% 150% 225% BBB 55% 65% 180% 255% BBB- 70% 85% 270% 345% BB+ 120% 135% 405% 500% BB 135% 155% 535% 655% BB- 170% 195% 645% 740% B+ 225% 250% 810% 855% B 280% 305% 945% 945% B- 340% 380% 1015% 1015% CCC+/CCC/CCC- 415% 455% 1250% 1250% Below CCC- 1250% 1250% 1250% 1250% 20.14 The resulting risk weight is subject to a floor risk weight of 10% for senior tranches, and 15% for non-senior tranches.
21. Securitization: Internal Assessment Approach (SEC- IAA)
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force Internal Assessment Approach (SEC-IAA)
21.1 In the event that banks have securitization exposures where the IAA treatment applies, banks shall notify SAMA of the transactions and seek approval to apply the IAA treatment. Subject to SAMA approval, a bank may use its internal assessments of the credit quality of its securitization exposures extended to ABCP programmes (e.g. liquidity facilities and credit enhancements) provided that the bank has at least one approved IRB model (which does not need to be applicable to the securitized exposures) and if the bank's internal assessment process meets the operational requirements set out below. Internal assessments of exposures provided to ABCP programmes must be mapped to equivalent external ratings of an ECAI. Those rating equivalents are used to determine the appropriate risk weights under the SECERBA for the exposures.
21.2 A bank's internal assessment process must meet the following operational requirements in order to use internal assessments in determining the IRB capital requirement arising from liquidity facilities, credit enhancements, or other exposures extended to an ABCP programme:
(1) For the unrated exposure to qualify for the internal assessment approach (SEC-IAA), the ABCP must be externally rated. The ABCP itself is subject to the SEC-ERBA.
(2) The internal assessment of the credit quality of a securitization exposure to the ABCP programme must be based on ECAI criteria for the asset type purchased, and must be the equivalent of at least investment grade when initially assigned to an exposure. In addition, the internal assessment must be used in the bank's internal risk management processes, including management information and economic capital systems, and generally must meet all the relevant requirements of the IRB framework.
(3) In order for banks to use the SEC-IAA, SAMA must be satisfied
(a) That the ECAI meets the ECAI eligibility criteria outlined in chapter 8 and
(b) With the ECAI rating methodologies used in the process.
(4) Banks demonstrate to the satisfaction of SAMA how these internal assessments correspond to the relevant ECAI's standards. For instance, when calculating the credit enhancement level in the context of the SEC- IAA, SAMA may, if warranted, disallow on a full or partial basis any seller- provided recourse guarantees or excess spread, or any other first- loss credit enhancements that provide limited protection to the bank.
(5) The bank's internal assessment process must identify gradations of risk. Internal assessments must correspond to the external ratings of ECAIs.
(6) The bank's internal assessment process, particularly the stress factors for determining credit enhancement requirements, must be at least as conservative as the publicly available rating criteria of the major ECAIs that are externally rating the ABCP programme's commercial paper for the asset type being purchased by the programme. However, banks should consider, to some extent, all publicly available ECAI rating methodologies in developing their internal assessments.
(a) In the case where the commercial paper issued by an ABCP programme is externally rated by two or more ECAIs and the different ECAIs' benchmark stress factors require different levels of credit enhancement to achieve the same external rating equivalent, the bank must apply the ECAI stress factor that requires the most conservative or highest level of credit protection. For example, if one ECAI required enhancement of 2.5 to 3.5 times historical losses for an asset type to obtain a single A rating equivalent and another required two to three times historical losses, the bank must use the higher range of stress factors in determining the appropriate level of seller-provided credit enhancement.
(b) When selecting ECAIs to externally rate an ABCP, a bank must not choose only those ECAIs that generally have relatively less restrictive rating methodologies. In addition, if there are changes in the methodology of one of the selected ECAIs, including the stress factors, that adversely affect the external rating of the programme's commercial paper, then the revised rating methodology must be considered in evaluating whether the internal assessments assigned to ABCP programme exposures are in need of revision.
(c) A bank cannot utilize an ECAI's rating methodology to derive an internal assessment if the ECAI's process or rating criteria are not publicly available. However, banks should consider the non-publicly available methodology - to the extent that they have access to such information -in developing their internal assessments, particularly if it is more conservative than the publicly available criteria.
(d) In general, if the ECAI rating methodologies for an asset or exposure are not publicly available, then the IAA may not be used. However, in certain instances - for example, for new or uniquely structured transactions, which are not currently addressed by the rating criteria of an ECAI rating the programme's commercial paper - a bank may discuss the specific transaction with SAMA to determine whether the IAA may be applied to the related exposures.
(7) Internal or external auditors, an ECAI, or the bank's internal credit review or risk management function must perform regular reviews of the internal assessment process and assess the validity of those internal assessments. If the bank's internal audit, credit review or risk management functions perform the reviews of the internal assessment process, then these functions must be independent of the ABCP programme business line, as well as the underlying customer relationships.
(8) The bank must track the performance of its internal assessments over time to evaluate the performance of the assigned internal assessments and make adjustments, as necessary, to its assessment process when the performance of the exposures routinely diverges from the assigned internal assessments on those exposures.
(9) The ABCP programme must have credit and investment guidelines, i.e. underwriting standards, for the ABCP programme. In the consideration of an asset purchase, the ABCP programme (i.e. the programme administrator) should develop an outline of the structure of the purchase transaction. Factors that should be discussed include the type of asset being purchased; type and monetary value of the exposures arising from the provision of liquidity facilities and credit enhancements; loss waterfall; and legal and economic isolation of the transferred assets from the entity selling the assets.
(10) A credit analysis of the asset seller's risk profile must be performed and should consider, for example, past and expected future financial performance; current market position; expected future competitiveness; leverage, cash flow and interest coverage; and debt rating. In addition, a review of the seller's underwriting standards, servicing capabilities and collection processes should be performed.
(11) The ABCP programme's underwriting policy must establish minimum asset eligibility criteria that, among other things:
(a) Exclude the purchase of assets that are significantly past due or defaulted;
(b) Limit excess concentration to individual obligor or geographical area; and
(c) Limit the tenor of the assets to be purchased.
(12) The ABCP programme should have collection processes established that consider the operational capability and credit quality of the servicer. The programme should mitigate to the extent possible seller/servicer risk through various methods, such as triggers based on current credit quality that would preclude commingling of funds and impose lockbox arrangements that would help ensure the continuity of payments to the ABCP programme.
(13) The aggregate estimate of loss on an asset pool that the ABCP programme is considering purchasing must consider all sources of potential risk, such as credit and dilution risk. If the seller-provided credit enhancement is sized based on only credit-related losses, then a separate reserve should be established for dilution risk, if dilution risk is material for the particular exposure pool. In addition, in sizing the required enhancement level, the bank should review several years of historical information, including losses, delinquencies, dilutions and the turnover rate of the receivables. Furthermore, the bank should evaluate the characteristics of the underlying asset pool (e.g. weighted-average credit score) and should identify any concentrations to an individual obligor or geographical region and the granularity of the asset pool.
(14) The ABCP programme must incorporate structural features into the purchase of assets in order to mitigate potential credit deterioration of the underlying portfolio. Such features may include wind-down triggers specific to a pool of exposures.
21.3 The exposure amount of the securitization exposure to the ABCP programme must be assigned to the risk weight in the SEC-ERBA appropriate to the credit rating equivalent assigned to the bank's exposure.
21.4 If a bank's internal assessment process is no longer considered adequate, SAMA may preclude the bank from applying the SEC-IAA to its ABCP exposures, both existing and newly originated, for determining the appropriate capital treatment until the bank has remedied the deficiencies. In this instance, the bank must revert to the SEC-SA described in 19.1 to 19.15.
22. Securitization: Internal- Ratings-Based Approach
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force Internal Ratings-Based Approach (SEC-IRBA)
22.1 To calculate capital requirements for a securitization exposure to an internal ratings-based (IRB) pool, a bank must use the securitization internal ratings- based approach (SEC-IRBA) and the following bank-supplied inputs: the IRB capital charge had the underlying exposures not been securitized (KIRB), the tranche attachment point (A), the tranche detachment point (D) and the supervisory parameter p, as defined below. Where the only difference between exposures to a transaction is related to maturity, A and D will be the same.
Definition of KIRB
22.2 KIRB is the ratio of the following measures, expressed in decimal form (e.g. a capital charge equal to 15% of the pool would be expressed as 0.15):
(1) The IRB capital requirement (including the expected loss portion and, where applicable, dilution risk as discussed in paragraphs 22.11 to 22.13 below) for the underlying exposures in the pool; to
(2) The exposure amount of the pool (e.g. the sum of drawn amounts related to securitized exposures plus the exposure-at-default associated with undrawn commitments related to securitized exposures).110 111
22.3 Notwithstanding the clarification in paragraphs 18.46 and 18.47 for mixed pools, 22.2 (1) must be calculated in accordance with applicable minimum IRB standards in chapters 10 to 16 as if the exposures in the pool were held directly by the bank. This calculation should reflect the effects of any credit risk mitigant that is applied on the underlying exposures (either individually or to the entire pool), and hence benefits all of the securitization exposures.
22.4 For structures involving a special purpose entity (SPE), all of the SPE's exposures related to the securitization are to be treated as exposures in the pool. Exposures related to the securitization that should be treated as exposures in the pool could include assets in which the SPE may have invested a reserve account, such as a cash collateral account or claims against counterparties resulting from interest swaps or currency swaps.112 Notwithstanding, the bank can exclude the SPE's exposures from the pool for capital calculation purposes if the bank can demonstrate to SAMA that the risk of the SPE's exposures is immaterial (for example, because it has been mitigated113) or that it does not affect the bank's securitization exposure.
22.5 In the case of funded synthetic securitizations, any proceeds of the issuances of credit-linked notes or other funded obligations of the SPE that serve as collateral for the repayment of the securitization exposure in question and for which the bank cannot demonstrate to SAMA that it is immaterial must be included in the calculation of KIRB if the default risk of the collateral is subject to the tranched loss allocation.114
22.6 To calculate KIRB, the treatment for eligible purchased receivables described in paragraphs 10.25 to 10.29, 14.2 to 14.7, 16.106, 16.108, 16.112 to 16.120 may be used, with the particularities specified in 22.7 to 22.9, if, according to IRB minimum requirements:
(1) For non-retail assets, it would be an undue burden on a bank to assess the default risk of individual obligors; and
(2) For retail assets, a bank is unable to primarily rely on internal data.
22.7 22.6 above applies to any securitized exposure, not just purchased receivables. For this purpose, "eligible purchased receivables" should be understood as referring to any securitized exposure for which the conditions of paragraph 22.6 are met, and "eligible purchased corporate receivables" should be understood as referring to any securitized non-retail exposure. All other IRB minimum requirements must be met by the bank.
22.8 SAMA may deny the use of a top-down approach, as defined in 14.8 (1), for eligible purchased receivables for securitized exposures depending on the bank's compliance with minimum requirements.
22.9 The requirements to use a top-down approach for the eligible purchased receivables are generally unchanged when applied to securitizations except in the following cases:
(1) The requirement in paragraph 10.30 for the bank to have a claim on all proceeds from the pool of receivables or a pro-rata interest in the proceeds does not apply. Instead, the bank must have a claim on all proceeds from the pool of securitized exposures that have been allocated to the bank's exposure in the securitization in accordance with the terms of the related securitization documentation;
(2) In paragraph 16.113, the purchasing bank should be interpreted as the bank calculating KIRB;
(3) In paragraphs 16.115 to 16.120 "a bank" should be read as "the bank estimating probability of default, loss-given-default (LGD) or expected loss for the securitized exposures"; and
(4) If the bank calculating KIRB cannot itself meet the requirements in paragraphs 16.115 to 16.119, it must instead ensure that it meets these requirements through a party to the securitization acting for and in the interest of the investors in the securitization, in accordance with the terms of the related securitization documents. Specifically, requirements for effective control and ownership must be met for all proceeds from the pool of securitized exposures that have been allocated to the bank's exposure to the securitization. Further, in paragraph 16.117 (1), the relevant eligibility criteria and advancing policies are those of the securitization, not those of the bank calculating KIRB.
22.10 In cases where a bank has set aside a specific provision or has a non- refundable purchase price discount on an exposure in the pool, the quantities defined in paragraphs 22.2 (1) and 22.2 (2) must be calculated using the gross amount of the exposure without the specific provision and/or non- refundable purchase price discount.
22.11 Dilution risk in a securitization must be recognized if it is not immaterial, as demonstrated by the bank to SAMA (see paragraph 14.8), whereby the provisions of paragraphs 22.2 to 22.5 shall apply.
22.12 Where default and dilution risk are treated in an aggregate manner (e.g. an identical reserve or overcollateralization is available to cover losses for both risks), in order to calculate capital requirements for the securitization exposure, a bank must determine KIRB for dilution risk and default risk, respectively, and combine them into a single KIRB prior to applying the SEC-IRBA.
22.13 In certain circumstances, pool level credit enhancement will not be available to cover losses from either credit risk or dilution risk. In the case of separate waterfalls for credit risk and dilution risk, a bank should consult with SAMA as to how the capital calculation should be performed.
110 KIRB must also include the unexpected loss and the expected loss associated with defaulted exposures in the underlying pool.
111 Undrawn balances should not be included in the calculation of KIRB in cases where only the drawn balances of revolving facilities have been securitized.
112 In particular, in the case of swaps other than credit derivatives, the numerator of KIRB must include the positive current market value times the risk weight of the swap provider times 8%. In contrast, the denominator should not take into account such a swap, as such a swap would not provide a credit enhancement to any tranche.
113 Certain best market practices can eliminate or at least significantly reduce the potential risk from a default of a swap provider. Examples of such features could be: cash collateralization of the market value in combination with an agreement of prompt additional payments in case of an increase of the market value of the swap; and minimum credit quality of the swap provider with the obligation to post collateral or present an alternative swap provider without any costs for the SPE in the event of a credit deterioration on the part of the original swap provider. If SAMA are satisfied with these risk mitigants and accept that the contribution of these exposures to the risk of the holder of a securitization exposure is insignificant, SAMA may allow the bank to exclude these exposures from the KIRB calculation.
114 As in the case of swaps other than credit derivatives, the numerator of K IRB (i.e. quantity 22.2(1)) must include the exposure amount of the collateral times its risk weight times 8%, but the denominator should be calculated without recognition of the collateral.Definition of Attachment Point (A), Detachment Point (D) and Supervisory Parameter (p)
22.14 The input A represents the threshold at which losses within the underlying pool would first be allocated to the securitization exposure. This input, which is a decimal value between zero and one, equals the greater of
(1) zero and
(2) The ratio of
(a) The outstanding balance of all underlying assets in the securitization minus the outstanding balance of all tranches that rank senior or pari passu to the tranche that contains the securitization exposure of the bank (including the exposure itself) to
(b) The outstanding balance of all underlying assets in the securitization.
22.15 The input D represents the threshold at which losses within the underlying pool result in a total loss of principal for the tranche in which a securitization exposure resides. This input, which is a decimal value between zero and one, equals the greater of
(1) zero and
(2) The ratio of
(a) The outstanding balance of all underlying assets in the securitization minus the outstanding balance of all tranches that rank senior to the tranche that contains the securitization exposure of the bank to
(b) The outstanding balance of all underlying assets in the securitization.
22.16 For the calculation of A and D, overcollateralization and funded reserve accounts must be recognized as tranches; and the assets forming these reserve accounts must be recognized as underlying assets. Only the loss-absorbing part of the funded reserve accounts that provide credit enhancement can be recognized as tranches and underlying assets. Unfunded reserve accounts, such as those to be funded from future receipts from the underlying exposures (e.g. unrealized excess spread) and assets that do not provide credit enhancement like pure liquidity support, currency or interest-rate swaps, or cash collateral accounts related to these instruments must not be included in the above calculation of A and D. Banks should take into consideration the economic substance of the transaction and apply these definitions conservatively in the light of the structure.
22.17 The supervisory parameter p in the context of the SEC-IRBA is expressed as follows, where:
(1) 0.3 denotes the p-parameter floor;
(2) N is the effective number of loans in the underlying pool, calculated as described in 22.20;
(3) KIRB is the capital charge of the underlying pool (as defined in 22.2 to 22.5);
(4) LGD is the exposure-weighted average loss-given-default of the underlying pool, calculated as described in 22.21);
(5) MT is the maturity of the tranche calculated according to 18.22 and 18.23; and
(6) The parameters A, B, C, D, and E are determined according to Table 32:
Look-up table for supervisory parameters A, B, C, D and E Table 32 A B C D E Wholesale Senior, granular (N≥25) 0 3.56 -1.85 0.55 0.07 Senior, non-granular (N<25) 0.11 2.61 -2.91 0.68 0.07 Non-senior, granular (N≥25) 0.16 2.87 -1.03 0.21 0.07 Non-senior, non-granular (N<25) 0.22 2.35 -2.46 0.48 0.07 Retai Senior 0 0 -7.48 0.71 0.24 Non-senior 0 0 -5.78 0.55 0.27 22.18 If the underlying IRB pool consists of both retail and wholesale exposures, the pool should be divided into one retail and one wholesale subpool and, for each subpool, a separate p-parameter (and the corresponding input parameters N, KIRB and LGD) should be estimated. Subsequently, a weighted average p-parameter for the transaction should be calculated on the basis of the p-parameters of each subpool and the nominal size of the exposures in each subpool.
22.19 If a bank applies the SEC-IRBA to a mixed pool as described in 18.46 and 18.47, the calculation of the p-parameter should be based on the IRB underlying assets only. The SA underlying assets should not be considered for this purpose.
22.20 The effective number of exposures, N, is calculated as follows, where EADi represents the exposure-at-default associated with the ith instrument in the pool. Multiple exposures to the same obligor must be consolidated (i.e. treated as a single instrument).
22.21 The exposure-weighted average LGD is calculated as follows, where LGDi represents the average LGD associated with all exposures to the ith obligor. When default and dilution risks for purchased receivables are treated in an aggregate manner (e.g. a single reserve or overcollateralization is available to cover losses from either source) within a securitization, the LGD input must be constructed as a weighted average of the LGD for default risk and the 100% LGD for dilution risk. The weights are the stand-alone IRB capital charges for default risk and dilution risk, respectively.
22.22 Under the conditions outlined below, banks may employ a simplified method for calculating the effective number of exposures and the exposure-weighted average LGD. Let Cm in the simplified calculation denote the share of the pool corresponding to the sum of the largest m exposures (e.g. a 15% share corresponds to a value of 0.15). The level of m is set by each bank.
(1) If the portfolio share associated with the largest exposure, C1, is no more than 0.03 (or 3% of the underlying pool), then for purposes of the SEC-IRBA the bank may set LGD as 0.50 and N equal to the following amount:
(2) Alternatively, if only C1 is available and this amount is no more than 0.03, then the bank may set LGD as 0.50 and N as 1/C1.
Calculation of Risk Weight
22.23 The formulation of the SEC-IRBA is expressed as follows, where:
(1) 
is the capital requirement per unit of securitization exposure under the SEC-IRBA, which is a function of three variables;
(2) The constant e is the base of the natural logarithm (which equals 2.71828);
(3) The variable a is defined as -(1 / (p * KIRB));
(4) The variable u is defined as D - KIRB; and
(5) The variable l is defined as the maximum of A - KIRB and zero.
22.24 The risk weight assigned to a securitization exposure when applying the SEC- IRBA is calculated as follows:
(1) When D for a securitization exposure is less than or equal to KIRB, the exposure must be assigned a risk weight of 1250%.
(2) When A for a securitization exposure is greater than or equal to KIRB, the risk weight of the exposure, expressed as a percentage, would equal times 12.5.
(3) When A is less than KIRB and D is greater than KIRB the applicable risk weight is a weighted average of 1250% and 12.5 times according to the following formula:
22.25 The risk weight for market risk hedges such as currency or interest rate swaps will be inferred from a securitization exposure that is pari passu to the swaps or, if such an exposure does not exist, from the next subordinated tranche.
22.26 The resulting risk weight is subject to a floor risk weight of 15%.
Alternative Capital Treatment for Term Securitizations and Short-Term Securitizations Meeting the STC Criteria for Capital Purposes
22.27 Securitization transactions that are assessed as simple, transparent and comparable (STC)-compliant for capital purposes in 18.67 can be subject to capital requirements under the securitization framework, taking into account that, when the SEC-IRBA is used, 22.28 and 22.29 are applicable instead of 22.17 and 22.26 respectively.
22.28 The supervisory parameter p in SEC-IRBA for an exposure to an STC securitization is expressed as follows, where:
(1) 0.3 denotes the p-parameter floor;
(2) N is the effective number of loans in the underlying pool, calculated as described in 22.20;
(3) KIRB is the capital charge of the underlying pool (as defined in 22.2 to 22.5);
(4) GD is the exposure-weighted average loss-given-default of the underlying pool, calculated as described in 22.21;
(5) MT is the maturity of the tranche calculated according to 18.22 and 18.23; and
(6) The parameters A, B, C, D, and E are determined according to Table 33:
Look-up table for supervisory parameters A, B, C, D and E Table 33 A B C D E Wholesale Senior, granular (N≥25) 0 3.56 -1.85 0.55 0.07 Senior, non-granular (N<25) 0.11 2.61 -2.91 0.68 0.07 Non-senior, granular (N≥25) 0.16 2.87 -1.03 0.21 0.07 Non-senior, non-granular (N<25) 0.22 2.35 -2.46 0.48 0.07 Retai Senior 0 0 -7.48 0.71 0.24 Non-senior 0 0 -5.78 0.55 0.27 22.29 The resulting risk weight is subject to a floor risk weight of 10% for senior tranches, and 15% for non-senior tranches.
23. Securitizations of Non- Performing Loans
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force Securitization of Non-Performing Loans
23.1 A non-performing loan securitization (NPL securitization) means a securitization where the underlying pool's variable W, as defined in 19.6, is equal to or higher than 90% at the origination cut-off date and at any subsequent date on which assets are added to or removed from the underlying pool due to replenishment, restructuring or any other relevant reason. The underlying pool of exposures of an NPL securitization may only comprise loans, loan-equivalent financial instruments or tradable instruments used for the sole purpose of loan sub-participation as referred to in 18.24 (2). Loan-equivalent financial instruments include, for example, bonds not listed on a trading venue. For the avoidance of doubt, an NPL securitization may not be backed by exposures to other securitizations.
23.2 SAMA may provide for a stricter definition of NPL securitizations than that laid out in 23.1 above. For these purposes, SAMA may:
(1) Raise the minimum level of W to a level higher than 90%; or
(2) Require that the non-delinquent exposures in the underlying pool comply with a set of minimum criteria, or preclude certain types of non-delinquent exposures from forming part of the underlying pools of NPL securitizations.
23.3 A bank is precluded from applying the SEC-IRBA to an exposure to an NPL securitization where the bank uses the foundation approach as referred to in 10.35 to calculate the KIRB of the underlying pool of exposures.
23.4 The risk weight applicable to exposures to NPL securitizations according to Internal ratings-based approach (SEC-IRBA) set out in chapter 22, Standardized approach (SEC-SA) outlined in chapter 19, or the look-through approach in 24718.50 is floored at 100%.
23.5 Where, according to the hierarchy of approaches in 18.41 to 18.47, the bank must use the SEC-IRBA or the SEC-SA, a bank may apply a risk weight of 100% to the senior tranche of an NPL securitization provided that the NPL securitization is a traditional securitization and the sum of the non- refundable purchase price discounts (NRPPD), calculated as described in 23.6 below, is equal to or higher than 50% of the outstanding balance of the pool of exposures.
23.6 For the purposes of 23.5, NRPPD is the difference between the outstanding balance of the exposures in the underlying pool and the price at which these exposures are sold by the originator to the securitization entity, when neither originator nor the original lender are reimbursed for this difference. In cases where the originator underwrites tranches of the NPL securitization for subsequent sale, the NRPPD may include the differences between the nominal amount of the tranches and the price at which these tranches are first sold to unrelated third parties. For any given piece of a securitization tranche, only its initial sale from the originator to investors is taken into account in the determination of NRPPD. The purchase prices of subsequent re-sales are not considered.
23.7 An originator or sponsor bank may apply the capital requirement cap specified in 18.54 to the aggregated capital requirement for its exposures to the same NPL securitization. The same applies to an investor bank, provided that it is using the SEC-IRBA for an exposure to the NPL securitization.
24. Equity Investments in Funds
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force Introduction
24.1 Equity investments in funds that are held in the banking book must be treated in a manner consistent with one or more of the following three approaches, which vary in their risk sensitivity and conservatism: the “look-through approach” (LTA), the “mandate-based approach” (MBA), and the “fall-back approach” (FBA). The requirements set out in this chapter apply to banks’ equity investments in all types of funds, including off-balance sheet exposures (e.g. unfunded commitments to subscribe to a fund’s future capital calls). Exposures, including underlying exposures held by funds, that are required to be deducted according to the Regulatory Capital Under Basel III Framework (SAMA Circular No. 341000015689, Date: 19 December 2012) are excluded from the risk weighting treatment outlined in this chapter.
The Look-Through Approach
24.2 The LTA requires a bank to risk weight the underlying exposures of a fund as if the exposures were held directly by the bank. This is the most granular and risk-sensitive approach. It must be used when:
(1) There is sufficient and frequent information provided to the bank regarding the underlying exposures of the fund; and
(2) Such information is verified by an independent third party.
24.3 To satisfy condition (1) above, the frequency of financial reporting of the fund must be the same as, or more frequent than, that of the bank’s and the granularity of the financial information must be sufficient to calculate the corresponding risk weights. To satisfy condition (2) above, there must be verification of the underlying exposures by an independent third party, such as the depository or the custodian bank or, where applicable, the management company.115
24.4 Under the LTA banks must risk weight all underlying exposures of the fund as if those exposures were directly held. This includes, for example, any underlying exposure arising from the fund’s derivatives activities for situations in which the underlying receives a risk weighting treatment under the calculation of minimum risk based capital requirements and the associated counterparty credit risk (CCR) exposure. Instead of determining a credit valuation adjustment (CVA) charge associated with the fund’s derivatives exposures in accordance with the Minimum Capital Requirements for CVA, banks must multiply the CCR exposure by a factor of 1.5 before applying the risk weight associated with the counterparty.116
24.5 Banks may rely on third-party calculations for determining the risk weights associated with their equity investments in funds (i.e. the underlying risk weights of the exposures of the fund) if they do not have adequate data or information to perform the calculations themselves. In such cases, the applicable risk weight shall be 1.2 times higher than the one that would be applicable if the exposure were held directly by the bank.117
115 An external audit is not required.
116 A bank is only required to apply the 1.5 factor for transactions that are within the scope of the Minimum Capital Requirements for CVA.
117 For instance, any exposure that is subject to a 20% risk weight under the standardized approach would be weighted at 24% (1.2 * 20%) when the look through is performed by a third party.The Mandate-Based Approach
24.6 The second approach, the MBA, provides a method for calculating regulatory capital that can be used when the conditions for applying the LTA are not met.
24.7 Under the MBA, banks may use the information contained in a fund's mandate or in the national regulations governing such investment funds.118 To ensure that all underlying risks are taken into account (including CCR) and that the MBA renders capital requirements no less than the LTA, the risk- weighted assets for the fund's exposures are calculated as the sum of the following three items :
(1) Balance sheet exposures (i.e. the funds' assets) are risk weighted assuming the underlying portfolios are invested to the maximum extent allowed under the fund's mandate in those assets attracting the highest capital requirements, and then progressively in those other assets implying lower capital requirements. If more than one risk weight can be applied to a given exposure, the maximum risk weight applicable must be used.119
(2) Whenever the underlying risk of a derivative exposure or an off-balance-sheet item receives a risk weighting treatment under the risk-based capital requirements standards, the notional amount of the derivative position or of the off-balance sheet exposure is risk weighted accordingly.120 121
(3) The CCR associated with the fund's derivative exposures is calculated using the standardized approach to counterparty credit risk (SA-CCR, see standardized approach for counterparty credit risk). SA-CCR calculates the counterparty credit risk exposure of a netting set of derivatives by multiplying (i) the sum of the replacement cost and potential future exposure; by (ii) an alpha factor set at 1.4. Whenever the replacement cost is unknown, the exposure measure for CCR will be calculated in a conservative manner by using the sum of the notional amounts of the derivatives in the netting set as a proxy for the replacement cost, and the multiplier used in the calculation of the potential future exposure will be equal to 1. Whenever the potential future exposure is unknown, it will be calculated as 15% of the sum of the notional values of the derivatives in the netting set.122 The risk weight associated with the counterparty is applied to the counterparty credit risk exposure. Instead of determining a CVA charge associated with the fund's derivative exposures in accordance with the Minimum Capital Requirements for CVA, banks must multiply the CCR exposure by a factor of 1.5 before applying the risk weight associated with the counterparty.123
118 Information used for this purpose is not strictly limited to a fund’s mandate or national regulations governing like funds. It may also be drawn from other disclosures of the fund.
119 For instance, for investments in corporate bonds with no ratings restrictions, a risk weight of 150% must be applied.
120 If the underlying is unknown, the full notional amount of derivative positions must be used for the calculation.
121 If the notional amount of derivatives mentioned in Error! Reference source not found. is unknown, it will be estimated conservatively using the maximum notional amount of derivatives allowed under the mandate.
122 For instance, if both the replacement cost and add-on components are unknown, the CCR exposure will be calculated as: 1.4 * (sum of notionals in netting set +0.15*sum of notionals in netting set).
123 A bank is only required to apply the 1.5 factor for transactions that are within the scope of the Minimum Capital Requirements for CVA.The Fall-Back Approach
24.8 Where neither the LTA nor the MBA is feasible, banks are required to apply the FBA. The FBA applies a 1250% risk weight to the bank’s equity investment in the fund.
Treatment of Funds that Invest in Other Funds
24.9 When a bank has an investment in a fund (e.g. Fund A) that itself has an investment in another fund (e.g. Fund B), which the bank identified by using either the LTA or the MBA, the risk weight applied to the investment of the first fund (i.e. Fund A’s investment in Fund B) can be determined by using one of the three approaches set out above. For all subsequent layers (e.g. Fund B’s investments in Fund C and so forth), the risk weights applied to an investment in another fund (Fund C) can be determined by using the LTA under the condition that the LTA was also used for determining the risk weight for the investment in the fund at the previous layer (Fund B). Otherwise, the FBA must be applied.
Partial Use of an Approach
24.10 A bank may use a combination of the three approaches when determining the capital requirements for an equity investment in an individual fund, provided that the conditions set out in paragraphs 24.1 to Error! Reference source not found. are met.
Leverage Adjustment
24.11 Leverage is defined as the ratio of total assets to total equity. Leverage is taken into account in the MBA by using the maximum financial leverage permitted in the fund’s mandate or in the national regulation governing the fund.
24.12 When determining the capital requirement related to its equity investment in a fund, a bank must apply a leverage adjustment to the average risk weight of the fund, as set out in Error! Reference source not found., subject to a cap of 1250%.
24.13 After calculating the total risk-weighted assets of the fund according to the LTA or the MBA, banks will calculate the average risk weight of the fund (Avg RWfund) by dividing the total risk-weighted assets by the total assets of the fund.
Using Avg RWfund and taking into account the leverage of a fund (Lvg), the risk- weighted assets for a bank’s equity investment in a fund can be represented as follows:
RWAinvestment = Avg RWfund * Lvg * equity investment
24.14 The effect of the leverage adjustments depends on the underlying riskiness of the portfolio (i.e. the average risk weight) as obtained by applying the standardized approach or the IRB approaches for credit risk. The formula can therefore be re- written as:
RWAinvestment = RWAfund * percentage of shares
Application of the LTA and MBA to Banks Using the IRB Approach
24.15 Equity investments in funds that are held in the banking book must be treated in a consistent manner based on 24.1 to Error! Reference source not found., as adjusted by Error! Reference source not found. to Error! Reference source not found.
24.16 Under the LTA:
(1) Banks using an IRB approach must calculate the IRB risk components (i.e. PD of the underlying exposures and, where applicable, LGD and EAD) associated with the fund’s underlying exposures (except where the underlying exposures are equity exposures, in respect of which the standardized approach must be used as required by 10.34).
(2) Banks using an IRB approach may use the standardized approach for credit risk (chapter 7) when applying risk weights to the underlying components of funds if they are permitted to do so under the provisions relating to the adoption of the IRB approach set out in chapter 10 in the case of directly held investments. In addition, when an IRB calculation is not feasible(e.g. the bank cannot assign the necessary risk components to the underlying exposures in a manner consistent with its own underwriting criteria), the methods set out in Error! Reference source not found. below must be used.
(3) Banks may rely on third-party calculations for determining the risk weights associated with their equity investments in funds (i.e. the underlying risk weights of the exposures of the fund) if they do not have adequate data or information to perform the calculations themselves. In this case, the third party must use the methods set out in Error! Reference source not found. below, with the applicable risk weight set 1.2 times higher than the one that would be applicable if the exposure were held directly by the bank.
24.17 In cases when the IRB calculation is not feasible (Error! Reference source not found. (2) above), a third-party is performing the calculation of risk weights (Error! Reference source not found. (3) above) or when the bank is using the MBA the following methods must be used to determine the risk weights associated with the fund’s underlying exposures:
(1) For securitization exposures, the Securitization External-ratings-based approach (SEC-ERBA) set out in chapter 20; the Standardized approach (SEC-SA) set out in chapter 19, if the bank is not able to use the SECERBA; or a 1250% risk weight where the specified requirements for using the SEC-ERBA or SEC-SA are not met; and
(2) The standardized approach (chapter 7) for all other exposures.
25. Capital Treatment of Unsettled Transactions and Failed Trades
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force Overarching Principles
25.1 Banks are exposed to the risk associated with unsettled securities, commodities, and foreign exchange transactions from trade date. Irrespective of the booking or the accounting of the transaction, unsettled transactions must be taken into account for regulatory capital requirements purposes.
25.2 Banks are encouraged to develop, implement and improve systems for tracking and monitoring the credit risk exposure arising from unsettled transactions and failed trades as appropriate so that they can produce management information that facilitates timely action. Banks must closely monitor securities, commodities, and foreign exchange transactions that have failed, starting the first day they fail.
Delivery-versus-payment transactions
25.3 Transactions settled through a delivery-versus-payment system (DvP),124 providing simultaneous exchanges of securities for cash, expose firms to a risk of loss on the difference between the transaction valued at the agreed settlement price and the transaction valued at current market price (i.e. positive current exposure). Banks must calculate a capital requirement for such exposures if the payments have not yet taken place five business days after the settlement date, see paragraph Error! Reference source not found. below.
Non-delivery-versus-payment transactions (free deliveries)
25.4 Transactions where cash is paid without receipt of the corresponding receivable (securities, foreign currencies, gold, or commodities) or, conversely, deliverables were delivered without receipt of the corresponding cash payment (non-DvP, or free deliveries) expose firms to a risk of loss on the full amount of cash paid or deliverables delivered. Banks that have made the first contractual payment/delivery leg must calculate a capital requirement for the exposure if the second leg has not been received by the end of the business day. The requirement increases if the second leg has not been received within five business days. See paragraphs Error! Reference source not found. to Error! Reference source not found..
124 For the purpose of this Framework, DvP transactions include payment- versus-payment transactions.
Scope of Requirements
25.5 The capital treatment set out in this chapter is applicable to all transactions on securities, foreign exchange instruments, and commodities that give rise to a risk of delayed settlement or delivery. This includes transactions through recognized clearing houses and central counterparties that are subject to daily mark-to- market and payment of daily variation margins and that involve a mismatched trade. The treatment does not apply to the instruments that are subject to the counterparty credit risk requirements set out in the Minimum Capital Requirements for Counterparty Credit Risk (CCR) and Credit Valuation Adjustment (CVA) (i.e. over-the-counter derivatives, exchange- traded derivatives, long settlement transactions, securities financing transactions).
25.6 Where they do not appear on the balance sheet (i.e. settlement date accounting), the unsettled exposure amount will receive a 100% credit conversion factor to determine the credit equivalent amount.
25.7 In cases of a system-wide failure of a settlement, clearing system or central counterparty, SAMA may waive capital requirements until the situation is rectified.
25.8 Failure of a counterparty to settle a trade in itself will not be deemed a default for purposes of credit risk under the Basel Framework.
Capital Requirements for DvP Transactions
25.9 For DvP transactions, if the payments have not yet taken place five business days after the settlement date, firms must calculate a capital requirement by multiplying the positive current exposure of the transaction by the appropriate factor, according to the Table 34 below.
Table 34 Number of business days after the agreed settlement date Corresponding risk multiplier From 5 to 15 8% From 16 to 30 50% From 31 to 45 75% 46 or more 100% Capital Requirements for Non-DvP Transactions (Free Deliveries)
25.10 For non-DvP transactions (i.e. free deliveries), after the first contractual payment/delivery leg, the bank that has made the payment will treat its exposure as a loan if the second leg has not been received by the end of the business day.125 This means that:
(1) For counterparties to which the bank applies the standardized approach to credit risk, the bank will use the risk weight applicable to the counterparty set out in chapter 7.
(2) For counterparties to which the bank applies the internal ratings-based (IRB) approach to credit risk, the bank will apply the appropriate IRB formula (set out in chapter 11) applicable to the counterparty (set out in chapter 10). When applying this requirement, if the bank has no other banking book exposures to the counterparty (that are subject to the IRB approach), the bank may assign a probability of default to the counterparty on the basis of its external rating. Banks using the Advanced IRB approach may use a 45% loss-given- default (LGD) in lieu of estimating LGDs so long as they apply it to all failed trade exposures. Alternatively, banks using the IRB approach may opt to apply the standardized approach risk weights applicable to the counterparty set out in chapter 7.
25.11 As an alternative to Error! Reference source not found. (1) and Error! Reference source not found. (2) above, when exposures are not material, banks may choose to apply a uniform 100% risk-weight to these exposures, in order to avoid the burden of a full credit assessment.
25.12 If five business days after the second contractual payment/delivery date the second leg has not yet effectively taken place, the bank that has made the first payment leg will risk weight the full amount of the value transferred plus replacement cost, if any, at 1250%. This treatment will apply until the second payment/delivery leg is effectively made.
125 If the dates when two payment legs are made are the same according to the time zones where each payment is made, it is deemed that they are settled on the same day. For example, if a bank in Tokyo transfers Yen on day X (Japan Standard Time) and receives corresponding US Dollar via the Clearing House Interbank Payments System on day X (US Eastern Standard Time), the settlement is deemed to take place on the same value date.
26. Illustrative Risk Weights Calculated Under the Internal Ratings-Based (IRB) Approach to Credit Risk
26.1 Table 1 provides illustrative risk weights calculated for four exposure types under the IRB approach to credit risk. Each set of risk weights for unexpected loss (UL) was produced using the appropriate risk-weight function of the risk-weight functions set out in Chapter 11 of Minimum Capital Requirements for Credit Risk. The inputs used to calculate the illustrative risk weights include measures of the probability of default (PD), loss-given-default (LGD), and an assumed effective maturity (M) of 2.5 years, where applicable.
26.2 A firm-size adjustment applies to exposures made to small or medium-sized entity borrowers (defined as corporate exposures where the reported sales for the consolidated group of which the firm is a part is less than €50 million). Accordingly, the firm-size adjustment was made in determining the second set of risk weights provided in column two for corporate exposures given that the turnover of the firm receiving the exposure is assumed to be €5 million.
Illustrative IRB risk weights for UL Table 1 Asset class Corporate Exposures Residential Mortgages Other Retail Exposures Qualifying Revolving Retail Exposures LGD: 40% 40% 45% 25% 45% 85% 50% 85% Turnover (millions of €): 50 5 Maturity: 2.5 years 2.5 years PD: 0.05% 17.47% 13.69% 6.23% 3.46% 6.63% 12.52% 1.68% 2.86% 0.10% 26.36% 20.71% 10.69% 5.94% 11.16% 21.08% 3.01% 5.12% 0.25% 43.97% 34.68% 21.30% 11.83% 21.15% 39.96% 6.40% 10.88% 0.40% 55.75% 43.99% 29.94% 16.64% 28.42% 53.69% 9.34% 15.88% 0.50% 61.88% 48.81% 35.08% 19.49% 32.36% 61.13% 11.16% 18.97% 0.75% 73.58% 57.91% 46.46% 25.81% 40.10% 75.74% 15.33% 26.06% 1.00% 82.06% 64.35% 56.40% 31.33% 45.77% 86.46% 19.14% 32.53% 1.30% 89.73% 70.02% 67.00% 37.22% 50.80% 95.95% 23.35% 39.70% 1.50% 93.86% 72.99% 73.45% 40.80% 53.37% 100.81% 25.99% 44.19% 2.00% 102.09% 78.71% 87.94% 48.85% 57.99% 109.53% 32.14% 54.63% 2.50% 108.58% 83.05% 100.64% 55.91% 60.90% 115.03% 37.75% 64.18% 3.00% 114.17% 86.74% 111.99% 62.22% 62.79% 118.61% 42.96% 73.03% 4.00% 124.07% 93.37% 131.63% 73.13% 65.01% 122.80% 52.40% 89.08% 5.00% 133.20% 99.79% 148.22% 82.35% 66.42% 125.45% 60.83% 103.41% 6.00% 141.88% 106.21% 162.52% 90.29% 67.73% 127.94% 68.45% 116.37% 10.00% 171.63% 130.23% 204.41% 113.56% 75.54% 142.69% 93.21% 158.47% 15.00% 196.92% 152.81% 235.72% 130.96% 88.60% 167.36% 115.43% 196.23% 20.00% 211.76% 167.48% 253.12% 140.62% 100.28% 189.41% 131.09% 222.86% 27. Illustrative Examples for Recognition of Dilution Risk When Applying the Securitization Internal Ratings-Based Approach (SEC-IRBA) to Securitization Exposures
27.1. The following two examples are provided to illustrate the recognition of dilution risk according to Paragraph 22.12 of Minimum Capital Requirements for Credit Risk and Paragraph 22.13 of Minimum Capital Requirements for Credit Risk . The first example in 27.2 to 27.5 assumes a common waterfall for default and dilution losses. The second example in 27.6 to 27.16 assumes a non-common waterfall for default and dilution losses.
27.2. Common waterfall for default and dilution losses: in the first example, it is assumed that losses resulting from either defaults or dilution within the securitised pool will be subject to a common waterfall, ie the loss allocation process does not distinguish between different sources of losses within the pool.
27.3. The pool is characterised as follows. For the sake of simplicity, it is assumed that all exposures have the same size, same PD, same LGD and same maturity.
(1) Pool of €1,000,000 of corporate receivables
(2) N = 100
(3) M = 2.5 years126
(4) PDDilution = 0.55%
(5) LGDDilution =100%
(6) PDDefault = 0.95%
(7) LGDDefault = 45%
27.4. The capital structure is characterised as follows:
(1) Tranche A is a senior note of €700,000
(2) Tranche B is a second-loss guarantee of €250,000
(3) Tranche C is a purchase discount of €50,000
(4) Final legal maturity of transaction / all tranches = 2.875 years, ie MT = 2.5 years127
27.5. RWA calculation:
(1) Step 1: calculate KIRB, Dilution and KIRB, Default for the underlying portfolio:
(a) KIRB, Dilution = €1,000,000 x (161.44% x 8% + 0.55% x 100%) / €1,000,000 = 13.47%
(b) KIRB, Default = (€1,000,000 – €129,200)128 x (90.62% x 8% + 0.95% x 45%) / €1,000,000 = 6.69%
(2) Step 2: calculate KIRB, Pool = KIRB, Dilution + KIRB, Default = 13.47% + 6.69% = 20.16%
(3) Step 3: apply the SEC-IRBA to the three tranches
(a) Pool parameters:
(i) N = 100
(ii) LGDPool = (LGDDefault x KIRB, Default + LGDDilution x KIRB, Dilution) / KIRB, Pool = (45% x 6.69% + 100% x 13.47%) / 20.16% = 81.75%
(b) Tranche parameters:
(i) MT = 2.5 years
(ii) Attachment and detachment points shown in Table 2
Attachment and detachment points for each tranche Table 2 Attachment point Detachment point Tranche A 30% 100% Tranche B 5% 30% Tranche C 0% 5% (4) Resulting risk-weighted exposure amounts shown in Table 3
Risk-weighted exposure amounts for each tranche Table 3 SEC-IRBA risk weight RWA Tranche A 21.22% €148,540 Tranche B 1013.85% €2,534,625 Tranche C 1250% €625,000 27.6. Non-common waterfall for default and dilution losses: in the second example, it is assumed that the securitisation transaction does not have one common waterfall for losses due to defaults and dilutions, ie for the determination of the risk of a specific tranche it is not only relevant what losses might be realised within the pool but also if those losses are resulting from default or a dilution event.
27.7. As the SEC-IRBA assumes that there is one common waterfall, it cannot be applied without adjustments. The following example illustrates one possible scenario and a possible adjustment specific to this scenario.
27.8. While this example is meant as a guideline, a bank should nevertheless consult with its national supervisor as to how the capital calculation should be performed (see paragraph 22.13 of Minimum Capital Requirements for Credit Risk).
27.9. The pool is characterized as in 27.3.
27.10. The capital structure is characterized as follows:
(1) Tranche A is a senior note of €950,000
(2) Tranche C is a purchase discount of €50,000
(3) Tranches A and C will cover both default and dilution losses
(4) In addition, the structure also contains a second-loss guarantee of €250,000 (Tranche B)129 that covers only dilution losses exceeding a threshold of €50,000 up to maximum aggregated amount of €300,000, which leads to the following two waterfalls:
(a) Default waterfall
(i) Tranche A is a senior note of €950,000
(ii) Tranche C is a purchase discount of €50,000130
(b) Dilution waterfall
(i) Tranche A is a senior note of €700,000
(ii) Tranche B is a second-loss guarantee of €250,000
(iii) Tranche C is a purchase discount of €50,000131
(5) MT of all tranches is 2.5 years.
27.11. Tranche C is treated as described in 27.4 to 27.7.
27.12. Tranche B (second-loss guarantee) is exposed only to dilution risk, but not to default risk. Therefore, KIRB, for the purpose of calculating a capital requirement for Tranche B, can be limited to KIRB, Dilution. However, as the holder of Tranche B cannot be sure that Tranche C will still be available to cover the first dilution losses when they are realised – because the credit enhancement might already be depleted due to earlier default losses – to ensure a prudent treatment, it cannot recognise the purchase discount as credit enhancement for dilution risk. In the capital calculation, the bank providing Tranche B should assume that €50,000 of the securitised assets have already been defaulted and hence Tranche C is no longer available as credit enhancement and the exposure of the underlying assets has been reduced to €950,000. When calculating KIRB for Tranche B, the bank can assume that KIRB is not affected by the reduced portfolio size.
27.13. RWA calculation for tranche B:
(1) Step 1: calculate KIRB,Pool.
KIRB,Pool = KIRB,Dilution = 13.47%
(2) Step 2: apply the SEC-IRBA.
(a) Pool parameters:
(i) N = 100
(ii) LGDPool = LGDDilution = 100%
(b) Tranche parameters:
(i) MT = 2.5 years
(ii) Attachment point = 0%
(iii) Detachment point = €250,000 / €950,000 = 26.32%
(3) Resulting risk-weighted exposure amounts for Tranche B:
(a) SEC-IRBA risk weight = 886.94%
(b) RWA = €2,217,350
27.14. The holder of Tranche A (senior note) will take all default losses not covered by the purchase discount and all dilution losses not covered by the purchase discount or the second-loss guarantee. A possible treatment for Tranche A would be to add KIRB, Default and KIRB, Dilution (as in 27.4 to 27.7), but not to recognize the second-loss guarantee as credit enhancement at all because it is covering only dilution risk.
27.15. Although this is a simple approach, it is also fairly conservative. Therefore the following alternative for the senior tranche could be considered:
(1) Calculate the RWA amount for Tranche A under the assumption that it is only exposed to losses resulting from defaults. This assumption implies that Tranche A is benefiting from a credit enhancement of €50,000.
(2) Calculate the RWA amounts for Tranche C and (hypothetical) Tranche A* under the assumption that they are only exposed to dilution losses. Tranche A* should be assumed to absorb losses above €300,000 up to €1,000,000. With respect to dilution losses, this approach would recognize that the senior tranche investor cannot be sure if the purchase price discount will still be available to cover those losses when needed as it might have already been used for defaults. Consequently, from the perspective of the senior investor, the purchase price discount could only be recognized for the calculation of the capital requirement for default or dilution risk but not for both.132
(3) Sum up the RWA amounts under 27.15(1) and 27.15(2) and apply the relevant risk weight floor in paragraph 22.26 of Minimum Capital Requirements for Credit Risk or paragraph 22.29 of Minimum Capital Requirements for Credit Risk to determine the final RWA amount for the senior note investor.
27.16. RWA calculation for Tranche A:
(1) Step 1: calculate RWA for 27.15 (1).
(a) Pool parameters:
(i) KIRB,Pool = KIRB,Default = 6.69%
(ii) LGDPool = LGDDefault = 45%
(b) Tranche parameters:
(i) MT = 2.5 years
(ii) Attachment point = €50,000 / €1,000,000 = 5%
(iii) Detachment point = €1,000,000 / €1,000,000 = 100%
(c) Resulting risk-weighted exposure amounts:
(i) SEC-IRBA risk weight = 51.67%
(ii) RWA = €490,865
(2) Step 2: calculate RWA for 27.15(2).
(a) Pool parameters:
(i) KIRB,Pool = KIRB,Dilution = 13.47%
(ii) LGDPool = LGDDilution = 100%
(b) Tranche parameters:
(i) MT = 2.5 years
(ii) Attachment and detachment points shown in Table 4
Attachment and detachment points for each tranche Table 4 Attachment point Detachment point Tranche A* 30% 100% Tranche C 0% 5% (c) Resulting risk-weighted exposure amounts shown in Table 5
Risk-weighted exposure amounts for each tranche Table 5 SEC-IRBA risk weight Tranche A* 11.16% €78,120 Tranche C 1250% €625,000 (3) Step 3: Sum up the RWA of 27.16 (1) and 27.16 (2)133
(a) Final RWA amount for investor in Tranche A = €490,865 + €78,120 + €625,000 = €1,193,985
(b) Implicit risk weight for Tranche A = max (15%, €1,193,985 / €950,000) = 125.68%
126 For the sake of simplicity, the possibility described in paragraph 14.8 of Minimum Capital Requirements for Credit Risk to set MDilution = 1 is not used in this example.
127 The rounding of the maturity calculation is shown for example purposes
128 As described in paragraph 14.5 of Minimum Capital Requirements for Credit Risk, when calculating the default risk of exposures with non-immaterial dilution risk “EAD will be calculated as the outstanding amount minus the capital requirement for dilution prior to credit risk mitigation”.
129 For the sake of simplicity, it is assumed that the second-loss guarantee is cash-collateralised
130 Subject to the condition that it is not already being used for realised dilution losses.
131 Subject to the condition that it is not already being used for realised default losses.
132 In this example, the purchase price discount was recognised in the default risk calculation, but banks could also choose to use it for the dilution risk calculation. It is also assumed that the second-loss dilution guarantee explicitly covers dilution losses above €50,000 up to €300,000. If the guarantee instead covered €250,000 dilution losses after the purchase discount has been depleted (irrespective of whether the purchase discount has been used for dilution or default losses), then the senior note holder should assume that he is exposed to dilution losses from €250,000 up to €1,000,000 (instead of €0 to €50,000 + €300,000 to €1,000,000).
133 The correct application of the overall risk weight floor is such that the intermediate results (in this case the risk weight for Tranche A*) are calculated without the floor and the floor is only enforced in the last step (ie Step 3(b)).28. Equity Investments in Funds: Illustrative Example of the Calculation of Risk-Weighted Assets (RWA) Under the Look-Through Approach (LTA)
28.1 Consider a fund that replicates an equity index. Moreover, assume the following:
(1) The bank uses the standardised approach (SA) for credit risk when calculating its capital requirements for credit risk and for determining counterparty credit risk exposures it uses the SA-CCR.
(2) The bank owns 20% of the shares of the fund.
(3) The fund holds forward contracts on listed equities that are cleared through a qualifying central counterparty (with a notional amount of USD 100); and
(4) The fund presents the following balance sheet:
Assets Cash USD 20 Government bonds (AAA-rated) USD 30 Variation margin receivable (ie collateral posted by the bank to the CCP in respect of the forward contracts) USD 50 Liabilities Notes payable USD 5 Equity Shares, retained earnings and other reserves USD 95 28.2 The funds exposures will be risk weighted as follows:
(1) The RWA for the cash (RWAcash) are calculated as the exposure of USD 20 multiplied by the applicable SA risk weight of 0%. Thus, RWAcash = USD 0.
(2) The RWA for the government bonds (RWAbonds) are calculated as the exposure of USD 30 multiplied by the applicable SA risk weight of 0%. Thus, RWAbonds = USD 0.
(3) The RWA for the exposures to the listed equities underlying the forward contracts (RWAunderlying) are calculated by multiplying the following three amounts: (1) the SA credit conversion factor of 100% that is applicable to forward purchases; (2) the exposure to the notional of USD 100; and (3) the applicable risk weight for listed equities under the SA which is 250%. Thus, RWAunderlying = 100% * USD100 * 250% = USD 250.
(4) The forward purchase equities expose the bank to counterparty credit risk in respect of the market value of the forwards and the collateral posted that is not held by the CCP on a bankruptcy remote basis. For the sake of simplicity, this example assumes the application of SA-CCR results in an exposure value of USD 56. The RWA for counterparty credit risk (RWACCR) are determined by multiplying the exposure amount by the relevant risk weight for trade exposures to CCPs, which 2% in this case (see chapter 8 of Minimum Capital Requirements for Credit Risk for the capital requirements for bank exposures to CCPs). Thus, RWACCR = USD 56 * 2% = USD 1.12. (Note: There is no credit valuation adjustment, or CVA, charge assessed since the forward contracts are cleared through a CCP.)
28.3 The total RWA of the fund are therefore USD 251.12 = (0 + 0 +250 + 1.12).
28.4 The leverage of a fund under the LTA is calculated as the ratio of the fund’s total assets to its total equity, which in this examples is 100/95.
28.5 Therefore, the RWA for the bank’s equity investment in the fund is calculated as the product of the average risk weight of the fund, the fund’s leverage and the size of the banks equity investment. That is:
29. Equity Investments in Funds: Illustrative Example of the Calculation of RWA Under the Mandate-Based Approach (MBA)
29.1 Consider a fund with assets of USD 100, where it is stated in the mandate that the fund replicates an equity index. In addition to being permitted to invest its assets in either cash or listed equities, the mandate allows the fund to take long positions in equity index futures up to a maximum nominal amount equivalent to the size of the fund’s balance sheet (USD 100). This means that the total on balance sheet and off balance sheet exposures of the fund can reach USD 200. Consider also that a maximum financial leverage (fund assets/fund equity) of 1.1 applies according to the mandate. The bank holds 20% of the shares of the fund, which represents an investment of USD 18.18.
29.2 First, the on-balance sheet exposures of USD 100 will be risk weighted according to the risk weights applied to listed equity exposures (RW=250%), ie RWAon-BS = USD 100 * 250% = USD 250.
29.3 Second, we assume that the fund has exhausted its limit on derivative positions, ie USD 100 notional amount. The RWA for the maximum notional amount of underlying the derivatives positions calculated by multiplying the following three amounts: (1) the SA credit conversion factor of 100% that is applicable to forward purchases; (2) the maximum exposure to the notional of USD 100; and (3) the applicable risk weight for listed equities under the SA which is 250%. Thus, RWAunderlying = 100% * USD100 * 250% = USD 250.
29.4 Third, we would calculate the counterparty credit risk associated with the derivative contract. As set out in paragraph 24.7 of Minimum Capital Requirements for Credit Risk (3):
(1) If we do not know the replacement cost related to the futures contract, we would approximate it by the maximum notional amount, ie USD 100.
(2) If we do not know the aggregate add-on for potential future exposure, we would approximate this by 15% of the maximum notional amount (ie 15% of USD 100=USD 15).
(3) The CCR exposure is calculated by multiplying (i) the sum of the replacement cost and aggregate add-on for potential future exposure; by (ii) 1.4, which is the prescribed value of alpha.
29.5 The counterparty credit risk exposure in this example, assuming the replacement cost and aggregate add-on amounts are unknown, is therefore USD 161 (= 1.4 *(100+15)). Assuming the futures contract is cleared through a qualifying CCP, a risk weight of 2% applies, so that RWACCR = USD 161 * 2% = USD 3.2. There is no CVA charge assessed since the futures contract is cleared through a CCP.
29.6 The RWA of the fund is hence obtained by adding RWAon-BS, RWAunderlying and RWACCR, ie USD 503.2 (=250 + 250 + 3.2).
29.7 The RWA (USD 503.2) will be divided by the total assets of the fund (USD 100) resulting in an average risk-weight of 503.2%. The bank’s total RWA associated with its equity investment is calculated as the product of the average risk weight of the fund, the fund’s maximum leverage and the size of the bank’s equity investment. That is the bank’s total associated RWA are 503.2% * 1.1 * USD 18.18 = USD 100.6.
30. Equity Investments in Funds: Illustrative Examples of the Leverage Adjustment
30.1 Consider a fund with assets of USD 100 that invests in corporate debt. Assume that the fund is highly levered with equity of USD 5 and debt of USD 95. Such a fund would have financial leverage of 100/5=20. Consider the two cases below.
30.2 In Case 1 the fund specializes in low-rated corporate debt, it has the following balance sheet:
Assets Cash USD 10 A+ to A- bonds USD 20 BBB+ to BBBbonds USD 30 BB+ to BB- bonds USD 40 Liabilities Debt Debt USD 95 Equity Shares, retained earnings and other reserves USD 5 30.3 The average risk weight of the fund is (USD10*0% + USD20*50% + USD30*75% + USD40*100%)/USD100 = 72.5%. The financial leverage of 20 would result in an effective risk weight of 1,450% for banks’ investments in this highly levered fund, however, this is capped at a conservative risk weight of 1,250%.
30.4 In Case 2 the fund specializes in high-rated corporate debt, it has the following balance sheet:
Assets Cash USD 5 AAA to AA- bonds USD 75 A+ to A- bonds USD 20 Liabilities Debt USD 95 Equity Shares, retained earnings and other reserves USD 5 30.5 The average risk weight of the fund is (USD5*0% + USD75*20% + USD20*50%)/USD100 = 25%. The financial leverage of 20 results in an effective risk weight of 500%.
30.6 The above examples illustrate that the rate at which the 1,250% cap is reached depends on the underlying riskiness of the portfolio (as judged by the average risk weight) as captured by SA risk weights or the IRB approach. For example, for a “risky” portfolio (72.5% average risk weight), the 1,250% limit is reached fairly quickly with a leverage of 17.2x, while for a “low risk” portfolio (25% average risk weight) this limit is reached at a leverage of 50x.
Minimum Capital Requirements for Market Risk
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force 1- Introduction
This framework sets outs the amended Minimum Capital Requirements for Market Risk, In addition, this framework shall supersede all SAMA circulars regarding the Minimum Capital Requirements of the Market Risk issued before the date of issuing this framework.
This updated framework is issued by SAMA in exercise of the authority vested in SAMA under the Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued 01/01/1386H.
2- Definitions
Market risk:
The risk of losses in on- and off-balance sheet risk positions arising from movements in market prices.
Trading desk:
A group of traders or trading accounts in a business line within a bank that follows defined trading strategies with the goal of generating revenues or maintaining market presence from assuming and managing risk.
Pricing model:
A model that is used to determine the value of an instrument (mark-to-market or mark-to-model) as a function of pricing parameters or to determine the change in the value of an instrument as a function of risk factors. A pricing model may be the combination of several calculations; eg a first valuation technique to compute a price, followed by valuation adjustments for risks that are not incorporated in the first step.
Notional value:
The notional value of a derivative instrument is equal to the number of units underlying the instrument multiplied by the current market value of each unit of the underlying.
Financial instrument:
Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments include primary financial instruments (or cash instruments) and derivative financial instruments.
Instrument:
The term used to describe financial instruments, instruments on foreign exchange (FX) and commodities.
Embedded derivative:
A component of a financial instrument that includes a non-derivative host contract. For example, the conversion option in a convertible bond is an embedded derivative.
Look-through approach:
An approach in which a bank determines the relevant capitalrequirements for a position that has underlyings (such as an index instrument, multi-underlying option, or an equity investment in a fund) as if the underlying positions were held directly by the bank.
Risk factor:
A principal determinant of the change in value of an instrument (eg an exchange rate or interest rate).
Risk position:
The portion of the current value of an instrument that may be subject to losses due to movements in a risk factor. For example, a bond denominated in a currency different to a bank’s reporting currency has risk positions in general interest rate risk, credit spread risk (non- securitisation) and FX risk, where the risk positions are the potential losses to the current value of the instrument that could occur due to a change in the relevant underlying risk factors (interest rates, credit spreads, or exchange rates).
Risk bucket:
A defined group of risk factors with similar characteristics.
Risk class:
A defined list of risks that are used as the basis for calculating market risk capital requirements: general interest rate risk, credit spread risk (non-securitisation), credit spread risk (securitisation: non-correlation trading portfolio), credit spread risk (securitisation: correlation trading portfolio), FX risk, equity risk and commodity risk.
Sensitivity:
A bank’s estimate of the change in value of an instrument due to a small change in one of its underlying risk factors. Delta and vega risks are sensitivities.
Delta risk:
The linear estimate of the change in value of a financial instrument due to a movement in the value of a risk factor. The risk factor could be the price of an equity or commodity, or a change in an interest rate, credit spread or FX rate.
Vega risk:
The potential loss resulting from the change in value of a derivative due to a change in the implied volatility of its underlying.
Curvature risk:
The additional potential loss beyond delta risk due to a change in a risk factor for financial instruments with optionality. In the standardised approach in the market risk framework, it is based on two stress scenarios involving an upward shock and a downward shock to each regulatory risk factor.
Value at risk (VaR):
A measure of the worst expected loss on a portfolio of instruments resulting from market movements over a given time horizon and a pre-defined confidence level.
Expected shortfall (ES):
A measure of the average of all potential losses exceeding the VaR at a given confidence level.
Jump-to-default (JTD):
The risk of a sudden default. JTD exposure refers to the loss that could be incurred from a JTD event.
Liquidity horizon:
The time assumed to be required to exit or hedge a risk position without materially affecting market prices in stressed market conditions.
Basis risk:
The risk that prices of financial instruments in a hedging strategy are imperfectly correlated, reducing the effectiveness of the hedging strategy.
Diversification:
The reduction in risk at a portfolio level due to holding risk positions in different instruments that are not perfectly correlated with one another.
Hedge:
The process of counterbalancing risks from exposures to long and short risk positions in correlated instruments.
Offset:
The process of netting exposures to long and short risk positions in the same risk factor.
Standalone:
Being capitalised on a stand-alone basis means that risk positions are booked in a discrete, non-diversifiable trading book portfolio so that the risk associated with those risk positions cannot diversify, hedge or offset risk arising from other risk positions, nor be diversified, hedged or offset by them.
Real prices:
A term used for assessing whether risk factors pass the risk factor eligibility test. A price will be considered real if it is (i) a price from an actual transaction conducted by the bank, (ii) a price from an actual transaction between other arm’s length parties (eg at an exchange), or (iii) a price taken from a firm quote (ie a price at which the bank could transact with an arm’s length party).
Modellable risk factor:
Risk factors that are deemed modellable, based on the number of representative real price observations and additional qualitative principles related to the data used for the calibration of the ES model. Risk factors that do not meet the requirements for the risk factor eligibility test are deemed as non-modellable risk factors (NMRF).
Backtesting:
The process of comparing daily actual and hypothetical profits and losses with model-generated VaR measures to assess the conservatism of risk measurement systems.
Profit and loss (P&L) attribution (PLA):
A method for assessing the robustness of banks’ risk management models by comparing the risk-theoretical P&L predicted by trading desk risk management models with the hypothetical P&L.
Trading desk risk management model:
The trading desk risk management model (pertaining to desks) includes all risk factors that are included in the bank’s ES model with supervisory parameters and any risk factors deemed not modellable, which are therefore not included in the ES model for calculating the respective regulatory capital requirement, but are included in NMRFs.
Actual P&L (PLA):
The actual P&L derived from the daily P&L process. It includes intraday trading as well as time effects and new and modified deals, but excludes fees and commissions as well as valuation adjustments for which separate regulatory capital approaches have been otherwise specified as part of the rules or which are deducted from Common Equity Tier 1. Any other valuation adjustments that are market risk-related must be included in the APL. As is the case for the hypothetical P&L, the APL should include FX and commodity risks from positions held in the banking book
Hypothetical P&L (HPL):
The daily P&L produced by revaluing the positions held at the end of the previous day using the market data at the end of the current day. Commissions, fees, intraday trading and new/modified deals, valuation adjustments for which separate regulatory capital approaches have been otherwise specified as part of the rules and valuation adjustments which are deducted from CET1 are excluded from the HPL. Valuation adjustments updated daily should usually be included in the HPL. Time effects should be treated in a consistent manner in the HPL and risk-theoretical P&L.
Risk-theoretical P&L (RTPL):
The daily desk-level P&L that is predicted by the valuation engines in the trading desk risk management model using all risk factors used in the trading desk risk management model (ie including the NMRFs).
Credit valuation adjustment (CVA):
An adjustment to the valuation of a derivative transaction to account for the credit risk of contracting parties.
CVA risk:
The risk of changes to CVA arising from changes in credit spreads of the contracting parties, compounded by changes to the value or variability in the value of the underlying of the derivative transaction.
3- Scope of Application
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.
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.
3.3 The risks subject to market risk capital requirements include but are not limited to:
(1) Default risk, interest rate risk, credit spread risk, equity risk, foreign exchange (FX) risk and commodities risk for trading book instruments; and
(2) FX risk and commodities risk for banking book instruments.
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.
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:
(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.
(2) The risk position is of a structural (ie non-dealing) nature such as positions stemming from:
(a) Investments in affiliated but not consolidated entities denominated in foreign currencies; or
(b) Investments in consolidated subsidiaries or branches denominated in foreign currencies.
(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.
(4) The exclusion from the calculation is made for at least six months.
(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.
(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.
(7) Banks are required to document and have available for SAMA review the positions and amounts to be excluded from market risk capital requirements.
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.
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:
(1) Holdings of the bank’s own eligible regulatory capital instruments; and
(2) Holdings of other banks’, securities firms’ and other financial entities’ eligible regulatory capital instruments, as well as intangible assets,
(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.
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.
(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
(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).
(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.
(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.
1 The positions of less than wholly owned subsidiaries would be subject to the generally accepted accounting principles in the country where the parent company is supervised.
Methods of Measuring Market Risk
3.9 In determining the market risk for regulatory capital requirements, a bank may choose between two broad methodologies: the standardised approach as described in [6] to [9] and internal models approach (IMA) for market risk as described in [10] to [13]. SAMA approval is required before using the IMA approach. SAMA may allow banks that maintain smaller or simpler trading books to use the simplified alternative to the standardised approach as set out in [14]. The use of the simplified alternative is subject to SAMA approval and oversight.
(1) To determine the appropriateness of the simplified alternative for use by a bank for the purpose of its market risk capital requirements, SAMA will consider the following indicative criteria:
(a) The bank should not be a global systemically important bank (G-SIB) or a domestic systemically important bank (D-SIB).
(b) The bank should not use the IMA for any of its trading desks.
(c) The bank should not hold any correlation trading positions.
(2) SAMA can mandate that banks with relatively complex or sizeable risks in particular risk classes to apply the full standardised approach instead of the simplified alternative, even if those banks meet the indicative eligibility criteria referred to above.
3.10 All banks must calculate the capital requirements using the standardised approach any other approach must be approved by SAMA. Banks that are approved by SAMA to use the IMA for market risk capital requirements must also calculate and report the capital requirement values calculated as set out below.
(1) A bank that uses the IMA for any of its trading desks must also calculate the capital requirement under the standardised approach for all instruments across all trading desks, regardless of whether those trading desks are eligible for the IMA.
(2) In addition, a bank that uses the IMA for any of its trading desks must calculate the standardised approach capital requirement for each trading desk that is eligible for the IMA as if that trading desk were a standalone regulatory portfolio (ie with no offsetting across trading desks). This will:
(a) Serve as an indication of the fallback capital requirement for those desks that fail the eligibility criteria for inclusion in the bank’s internal model as outlined in [10], [12] and [13];
(b) Generate information on the capital outcomes of the internal models relative to a consistent benchmark and facilitate comparison in implementation between banks and/or across jurisdictions;
(c) Monitor over time the relative calibration of standardised and modelled approaches, facilitating adjustments as needed; and
(d) Provide macroprudential insight in an ex ante consistent format.
3.11 All banks must calculate the market risk capital requirement using the standardised approach for the following:
(1) Securitisation exposures; and
(2) Equity investments in funds that cannot be looked through but are assigned to the trading book in accordance to the conditions set out in [5.8](5)(b).
4- Trading Book Policy Statement (TPS) and Definition of a Trading Desk
4.1 All banks with market risk exposures are required to have a Trading Book Policy Statement (TPS). A bank’s trading book policy statement must detail:
(a) Whether the bank intends to operate a trading book and whether it has relevant positions in market risk;
(b) Who can approve or modify the trading book policy statement;
(c) The activities the bank considers to be trading and as constituting part of the trading book for the purposes of calculating capital;
(d) The valuation methodology to be adopted for trading book exposures, including:
(i) The extent to which an exposure can be marked-to-market daily by reference to an active, liquid two-way market;
(ii) For exposures that are marked-to-model, the extent to which the bank can:
(A) Identify the material risks of the exposure;
(B) Hedge the material risks of the exposure with instruments for which there is an active, liquid two-way market; and
(C) Derive reliable estimates for the key assumptions and parameters used in the model; and
(iii) The extent to which the bank can and is required to generate valuations for the exposure that can be validated externally in a consistent manner;
(e) Whether there are any structural foreign exchange positions. Where appropriate, the operational definition of positions to be excluded from the calculation of a bank’s foreign exchange exposure must be outlined. A description of the policies covering the identification and management of structural foreign exchange positions, to ensure that trading activities are not classified as structural, must also be included;
(f) When and how the statement will be subject to regular review;
(g) The extent to which legal restrictions or other operational requirements would impede the bank’s ability to effect an immediate liquidation or hedge of an exposure in the trading book; and
(h) The extent to which the bank is required to, and can, actively risk manage an exposure within its trading operations.
4.2 A bank must immediately notify SAMA of any material changes to its trading book policy statement.
4.3 The trading book policy statement must be incorporated in the bank’s risk management strategy required.
4.4 For the purposes of market risk capital calculations, a trading desk is a group of traders or trading accounts that implements a well-defined business strategy operating within a clear risk management structure.
4.5 Trading desks are defined by the bank but subject to SAMA approval for capital purposes.
(1) A bank is allowed to propose the trading desk structure per their organisational structure, consistent with the requirements set out in [4.7].
(2) A bank must prepare a policy document for each trading desk it defines, documenting how the bank satisfies the key elements in [4.7].
(3) SAMA will treat the definition of the trading desk as part of the initial model approval for the trading desk, as well as ongoing approval:
(a) SAMA will determine, based on the size of the bank’s overall trading operations, whether the proposed trading desk definitions are sufficiently granular.
(b) SAMA will check that the bank’s proposed definition of trading desk meets the criteria listed in key elements set out in [4.7].
4.6 Within SAMA approved trading desk structure, banks may further define operational subdesks without the need for SAMA approval. These subdesks would be for internal operational purposes only and would not be used in the market risk capital framework.
4.7 The key attributes of a trading desk are as follows:
(1) A trading desk for the purposes of the regulatory capital charge is an unambiguously defined group of traders or trading accounts.
(a) A trading account is an indisputable and unambiguous unit of observation in accounting for trading activity.
(b) The trading desk must have one head trader and can have up to two head traders provided their roles, responsibilities and authorities are either clearly separated or one has ultimate oversight over the other.
(i) The head trader must have direct oversight of the group of traders or trading accounts.
(ii) Each trader or each trading account in the trading desk must have a clearly defined specialty (or specialities).
(c) Each trading account must only be assigned to a single trading desk. The desk must have a clearly defined risk scope consistent with its pre-established objectives. The scope should include specification of the desk’s overall risk class and permitted risk factors.
(d) There is a presumption that traders (as well as head traders) are allocated to one trading desk. A bank can deviate from this presumption and may assign an individual trader to work across several trading desks provided it can be justified to the SAMA on the basis of sound management, business and/or resource allocation reasons. Such assignments must not be made for the only purpose of avoiding other trading desk requirements (eg to optimise the likelihood of success in the backtesting and profit and loss attribution tests).
(e) The trading desk must have a clear reporting line to bank senior management, and should have a clear and formal compensation policy clearly linked to the pre-established objectives of the trading desk.
(2) A trading desk must have a well-defined and documented business strategy, including an annual budget and regular management information reports (including revenue, costs and risk-weighted assets).
(a) There must be a clear description of the economics of the business strategy for the trading desk, its primary activities and trading/hedging strategies.
(i) Economics: what is the economics behind the strategy (eg trading on the shape of the yield curve)? How much of the activities are customer driven? Does it entail trade origination and structuring, or execution services, or both?
(ii) Primary activities: what is the list of permissible instruments and, out of this list, which are the instruments most frequently traded?
(iii) Trading/hedging strategies: how would these instruments be hedged, what are the expected slippages and mismatches of hedges, and what is the expected holding period for positions?
(b) The management team at the trading desk (starting from the head trader) must have a clear annual plan for the budgeting and staffing of the trading desk.
(c) A trading desk’s documented business strategy must include regular Management Information reports, covering revenue, costs and risk- weighted assets for the trading desk.
(3) A trading desk must have a clear risk management structure.
(a) Risk management responsibilities: the bank must identify key groups and personnel responsible for overseeing the risk-taking activities at the trading desk.
(b) A trading desk must clearly define trading limits based on the business strategy of the trading desk and these limits must be reviewed at least annually by senior management at the bank. In setting limits, the trading desk must have:
(i) Well defined trading limits or directional exposures at the trading desk level that are based on the appropriate market risk metric (eg sensitivity of credit spread risk and/or jump-to-default for a credit trading desk), or just overall notional limits; and
(ii) Well-defined trader mandates.
(c) A trading desk must produce, at least weekly, appropriate risk management reports. This would include, at a minimum:
(i) Profit and loss reports, which would be periodically reviewed, validated and modified (if necessary) by Product Control; and
(ii) Internal and regulatory risk measure reports, including trading desk value-at-risk (VaR) / expected shortfall (ES), trading desk VaR/ES sensitivities to risk factors, backtesting and p-value.
4.8 The bank must prepare, evaluate, and have available for SAMA the following for all trading desks:
(1) Inventory ageing reports;
(2) Daily limit reports including exposures, limit breaches, and follow-up action;
(3) Reports on intraday limits and respective utilisation and breaches for banks with active intraday trading; and
(4) Reports on the assessment of market liquidity.
4.9 Any foreign exchange or commodity positions held in the banking book must be included in the market risk capital requirement as set out in [3.3]. For regulatory capital calculation purposes, these positions will be treated as if they were held on notional trading desks within the trading book.
5- Boundary Between the Banking Book and the Trading Book
Scope of the Trading Book
5.1 A trading book consists of all instruments that meet the specifications for trading book instruments set out in [5.2] through [5.13]. All other instruments must be included in the banking book.
5.2 Instruments comprise financial instruments, foreign exchange (FX), and commodities. A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments include primary financial instruments (or cash instruments) and derivative financial instruments. A financial asset is any asset that is cash, the right to receive cash or another financial asset or a commodity, or an equity instrument. A financial liability is the contractual obligation to deliver cash or another financial asset or a commodity. Commodities also include non-tangible (ie non-physical) goods such as electric power.
The credit spread risk (CSR) capital requirement applies to money market instruments to the extent such instruments are covered instruments (ie they meet the definition of instruments to be included in the trading book as specified in [5.2] through [5.13].
5.3 Banks may only include a financial instrument, instruments on FX or commodity in the trading book when there is no legal impediment against selling or fully hedging it.
5.4 Banks must fair value daily any trading book instrument and recognise any valuation change in the profit and loss (P&L) account.
Instruments designated under the fair value option may be allocated to the trading book, but only if they comply with all the relevant requirements for trading book instruments set out in [5].
Standards for Assigning Instruments to the Regulatory Books
5.5 Any instrument a bank holds for one or more of the following purposes must, when it is first recognised on its books, be designated as a trading book instrument, unless specifically otherwise provided for in [5.3] or [5.8]:
(1) short-term resale;
(2) profiting from short-term price movements;
(3) locking in arbitrage profits; or
(4) hedging risks that arise from instruments meeting (1), (2) or (3) above.
5.6 Any of the following instruments is seen as being held for at least one of the purposes listed in [5.5] and must therefore be included in the trading book, unless specifically otherwise provided for in [5.3] or [5.8]:
(1) instruments in the correlation trading portfolio;
(2) instruments that would give rise to a net short credit or equity position in the banking book;2 or
(3) instruments resulting from underwriting commitments, where underwriting commitments refer only to securities underwriting, and relate only to securities that are expected to be actually purchased by the bank on the settlement date.
Banks should continuously manage and monitor their banking book positions to ensure that any instrument that individually has the potential to create a net short credit or equity position in the banking book is not actually creating a non-negligible net short position at any point in time.
5.7 Any instrument which is not held for any of the purposes listed in [5.5] at inception, nor seen as being held for these purposes according to [5.6], must be assigned to the banking book.
5.8 The following instruments must be assigned to the banking book:
(1) unlisted equities;
(2) instruments designated for securitisation warehousing;
(3) real estate holdings, where in the context of assigning instrument to the trading book, real estate holdings relate only to direct holdings of real estate as well as derivatives on direct holdings;
(4) retail and small or medium-sized enterprise (SME) credit;
(5) equity investments in a fund, unless the bank meets at least one of the following conditions:
(a) the bank is able to look through the fund to its individual components and there is sufficient and frequent information, verified by an independent third party, provided to the bank regarding the fund’s composition; or
(b) the bank obtains daily price quotes for the fund and it has access to the information contained in the fund’s mandate or in the national regulations governing such investment funds;
(6) hedge funds;
(7) derivative instruments and funds that have the above instrument types as underlying assets; or
(8) instruments held for the purpose of hedging a particular risk of a position in the types of instrument above.
Retail and SME lending commitments are excluded from the trading book.
5.9 There is a general presumption that any of the following instruments are being held for at least one of the purposes listed in [5.5] and therefore are trading book instruments, unless specifically otherwise provided for in [5.3] or [5.8]:
(1) instruments held as accounting trading assets or liabilities;3
(2) instruments resulting from market-making activities;
(3) equity investments in a fund excluding those assigned to the banking book in accordance with [5.8](5);
(4) listed equities;4
(5) trading-related repo-style transaction;5 or
(6) options including embedded derivatives6 from instruments that the institution issued out of its own banking book and that relate to credit or equity risk.
Trading-related repo-style transactions comprise those entered into for the purposes of market-making, locking in arbitrage profits or creating short credit or equity positions.
Liabilities issued out of the bank’s own banking book that contain embedded derivatives and thereby meet the criteria of [5.9](6) should be bifurcated. This means that banks should split the liability into two components: (i) the embedded derivative, which is assigned to the trading book; and (ii) the residual liability, which is retained in the banking book. No internal risk transfers are necessary for this bifurcation. Likewise, where such a liability is unwound, or where an embedded option is exercised, both the trading and banking book components are conceptually unwound simultaneously and instantly retired; no transfers between trading and banking book are necessary.
An option that manages FX risk in the banking book is covered by the presumptive list of trading book instruments included in [5.9](6). Only with SAMA Written approval may a bank include in its banking book an option that manages banking book FX risk.
The reference in [5.9](6) that relate to credit or equity risk include; a floor to an equity- linked bond is an embedded option with an equity as part of the underlying, and therefore the embedded option should be bifurcated and included in the trading book.
5.10 Banks are allowed to deviate from the presumptive list specified in [5.9] according to the process set out below7.
(1) If a bank believes that it needs to deviate from the presumptive list established in [5.9] for an instrument, it must submit a request to SAMA and receive Written approval. In its request, the bank must provide evidence that the instrument is not held for any of the purposes in [5.5].
(2) In cases where this approval is not given by SAMA, the instrument must be designated as a trading book instrument. Banks must document any deviations from the presumptive list in detail on an on-going basis.
2 A bank will have a net short risk position for equity risk or credit risk in the banking book if the present value of the banking book increases when an equity price decreases or when a credit spread on an issuer or group of issuers of debt increases.
3 Under IFRS (IAS 39) and US GAAP, these instruments would be designated as held for trading. Under IFRS 9, these instruments would be held within a trading business model. These instruments would be fair valued through the P&L account.
4 Subject to SAMA review, certain listed equities may be excluded from the market risk framework. Examples of equities that may be excluded include, but are not limited to, equity positions arising from deferred compensation plans, convertible debt securities, loan products with interest paid in the form of “equity kickers”, equities taken as a debt previously contracted, bank- owned life insurance products, and legislated programmes. The set of listed equities that the bank wishes to exclude from the market risk framework should be made available to, and discussed with, SAMA and should be managed by a desk that is separate from desks for proprietary or short-term buy/sell instruments.
5 Repo-style transactions that are (i) entered for liquidity management and (ii) valued at accrual for accounting purposes are not part of the presumptive list of [5.9].
6 An embedded derivative is a component of a hybrid contract that includes a non- derivative host such as liabilities issued out of the bank’s own banking book that contain embedded derivatives. The embedded derivative associated with the issued instrument (ie host) should be bifurcated and separately recognised on the bank’s balance sheet for accounting purposes.
7 The presumptions for the designation of an instrument to the trading book or banking book set out in this text will be used where a designation of an instrument to the trading book or banking book is not otherwise specified in this text.SAMA Supervisory Expectation
5.11 Notwithstanding the process established in [5.10] for instruments on the presumptive list, SAMA may require the bank to provide evidence that an instrument in the trading book is held for at least one of the purposes of [5.5]. If SAMA is of the view that a bank has not provided enough evidence or if SAMA believes the instrument customarily would belong in the banking book, SAMA may require the bank to assign the instrument to the banking book, except if it is an instrument listed under [5.6].
5.12 SAMA may require the bank to provide evidence that an instrument in the banking book is not held for any of the purposes of [5.5]. If SAMA is of the view that a bank has not provided enough evidence, or if SAMA believes such instruments would customarily belong in the trading book, SAMA may require the bank to assign the instrument to the trading book, except if it is an instrument listed under [5.8].
Documentation of Instrument Designation
5.13 A bank must have clearly defined policies, procedures and documented practices for determining which instruments to include in or to exclude from the trading book for the purposes of calculating their regulatory capital, ensuring compliance with the criteria set forth in this section, and taking into account the bank’s risk management capabilities and practices. A bank’s internal control functions must conduct an ongoing evaluation of instruments both in and out of the trading book to assess whether its instruments are being properly designated initially as trading or non-trading instruments in the context of the bank’s trading activities. Compliance with the policies and procedures must be fully documented and subject to periodic (at least yearly) internal audit and the results must be available for SAMA review.
Restrictions on Moving Instruments Between the Regulatory Books
5.14 Apart from moves required by [5.5] through [5.10], there is a strict limit on the ability of banks to move instruments between the trading book and the banking book by their own discretion after initial designation, which is subject to the process in [5.15] and [5.16]. Switching instruments for regulatory arbitrage is strictly prohibited. In practice, switching should be rare and will be allowed by SAMA only in extraordinary circumstances. Examples are a major publicly announced event, such as a bank restructuring that results in the permanent closure of trading desks, requiring termination of the business activity applicable to the instrument or portfolio or a change in accounting standards that allows an item to be fair-valued through P&L. Market events, changes in the liquidity of a financial instrument, or a change of trading intent alone are not valid reasons for reassigning an instrument to a different book. When switching positions, banks must ensure that the standards described in [5.5] to [5.10] are always strictly observed.
In the context of [5.14], “change in accounting standards” refers to the accounting standards themselves changing, rather than the accounting classification of an instrument changing.
5.15 Without exception, a capital benefit as a result of switching will not be allowed in any case or circumstance. This means that the bank must determine its total capital requirement (across the banking book and trading book) before and immediately after the switch. If this capital requirement is reduced as a result of this switch, the difference as measured at the time of the switch will be imposed on the bank as a disclosed Pillar 1 capital surcharge. This surcharge will be allowed to run off as the positions mature or expire, in a manner agreed with SAMA. To maintain operational simplicity, it is not envisaged that this additional capital requirement would be recalculated on an ongoing basis, although the positions would continue to also be subject to the ongoing capital requirements of the book into which they have been switched.
If an instrument is reclassified for accounting purposes (eg reclassification to accounting trading assets or liabilities through P&L), an automatic prudential switch may be necessary given the requirements set out in [5.5] and [5.10](1). In this situation, The disallowance of capital benefits [5.15] (regarding an additional Pillar 1 capital requirement) as a result of switching positions from one book to another applies without exception and in any case or circumstance. It is therefore independent of whether the switch has been made at the discretion of the bank or is beyond its control, eg in the case of the delisting of an equity.
5.16 Any reassignment between books must be approved by senior management and SAMA as follows. Any reallocation of securities between the trading book and banking book, including outright sales at arm’s length, should be considered a reassignment of securities and is governed by requirements of this paragraph.
(1) Any reassignment must be approved by senior management thoroughly documented; determined by internal review to be in compliance with the bank’s policies; subject to prior approval by SAMA based on supporting documentation provided by the bank; and publicly disclosed.
(2) Unless required by changes in the characteristics of a position, any such reassignment is irrevocable.
(3) If an instrument is reclassified to be an accounting trading asset or liability there is a presumption that this instrument is in the trading book, as described in [5.9]. Accordingly, in this case an automatic switch without approval of SAMA is acceptable.
The treatment specified for internal risk transfers applies only to risk transfers done via internal derivatives trades. The reallocation of securities between trading and banking book should be considered a re-assignment of securities and is governed by [5.16].
5.17 A bank must adopt relevant policies that must be updated at least yearly. Updates should be based on an analysis of all extraordinary events identified during the previous year. Updated policies with changes highlighted must be sent to SAMA. Policies must include the following:
(1) The reassignment restriction requirements in [5.14] through [5.16], especially the restriction that re-designation between the trading book and banking book may only be allowed in extraordinary circumstances, and a description of the circumstances or criteria where such a switch may be considered.
(2) The process for obtaining senior management and SAMA approval for such a transfer.
(3) How a bank identifies an extraordinary event.
(4) A requirement that re-assignments into or out of the trading book be publicly disclosed at the earliest reporting date.
Treatment of Internal Risk Transfers
5.18 An internal risk transfer is an internal written record of a transfer of risk within the banking book, between the banking and the trading book or within the trading book (between different desks).
5.19 There will be no regulatory capital recognition for internal risk transfers from the trading book to the banking book. Thus, if a bank engages in an internal risk transfer from the trading book to the banking book (eg for economic reasons) this internal risk transfer would not be taken into account when the regulatory capital requirements are determined.
5.20 For internal risk transfers from the banking book to the trading book, [5.21] to [5.27]apply.
Internal risk transfer of credit and equity risk from banking book to trading book.
5.21 When a bank hedges a banking book credit risk exposure or equity risk exposure using a hedging instrument purchased through its trading book (ie using an internal risk transfer),
(1) The credit exposure in the banking book is deemed to be hedged for capital requirement purposes if and only if:
(a) The trading book enters into an external hedge with an eligible third- party protection provider that exactly matches the internal risk transfer; and
(b) The external hedge meets the requirements of paragraphs 9.73 to 9.74 and 9.76 9.77 of the SAMA Minimum Capital Requirements for Market Risk vis-a-vis the banking book exposure8.
(2) The equity exposure in the banking book is deemed to be hedged for capital requirement purposes if and only if:
(a) The trading book enters into an external hedge from an eligible third- party protection provider that exactly matches the internal risk transfer; and
(b) The external hedge is recognised as a hedge of a banking book equity exposure.
(3) External hedges for the purposes of [5.21](1) can be made up of multiple transactions with multiple counterparties as long as the aggregate external hedge exactly matches the internal risk transfer, and the internal risk transfer exactly matches the aggregate external hedge.
5.22 Where the requirements in [5.21] are fulfilled, the banking book exposure is deemed to be hedged by the banking book leg of the internal risk transfer for capital purposes in the banking book. Moreover both the trading book leg of the internal risk transfer and the external hedge must be included in the market risk capital requirements.
5.23 Where the requirements in [5.21] are not fulfilled, the banking book exposure is not deemed to be hedged by the banking book leg of the internal risk transfer for capital purposes in the banking book. Moreover, the third-party external hedge must be fully included in the market risk capital requirements and the trading book leg of the internal risk transfer must be fully excluded from the market risk capital requirements.
5.24 A banking book short credit position or a banking book short equity position created by an internal risk transfer9 and not capitalised under banking book rules must be capitalised under the market risk rules together with the trading book exposure.
Internal risk transfer of general interest rate risk from banking book to trading book.
5.25 When a bank hedges a banking book interest rate risk exposure using an internal risk transfer with its trading book, the trading book leg of the internal risk transfer is treated as a trading book instrument under the market risk framework if and only if:
(1) The internal risk transfer is documented with respect to the banking book interest rate risk being hedged and the sources of such risk;
(2) The internal risk transfer is conducted with a dedicated internal risk transfer trading desk which has been specifically approved by SAMA for this purpose; and
(3) The internal risk transfer must be subject to trading book capital requirements under the market risk framework on a stand-alone basis for the dedicated internal risk transfer desk, separate from any other Generalised Interest Rate Risk (GIRR) or other market risks generated by activities in the trading book.
5.26 Where the requirements in [5.25] are fulfilled, the banking book leg of the internal risk transfer must be included in the banking book’s measure of interest rate risk exposures for regulatory capital purposes.
5.27 The SAMA-approved internal risk transfer desk may include instruments purchased from the market (ie external parties to the bank). Such transactions may be executed directly between the internal risk transfer desk and the market. Alternatively, the internal risk transfer desk may obtain the external hedge from the market via a separate non-internal risk transfer trading desk acting as an agent, if and only if the GIRR internal risk transfer entered into with the non-internal risk transfer trading desk exactly matches the external hedge from the market. In this latter case the respective legs of the GIRR internal risk transfer are included in the internal risk transfer desk and the non-internal risk transfer desk.
Internal risk transfers within the scope of application of the market risk capital requirement.
5.28 Internal risk transfers between trading desks within the scope of application of the market risk capital requirements (including FX risk and commodities risk in the banking book) will generally receive regulatory capital recognition. Internal risk transfers between the internal risk transfer desk and other trading desks will only receive regulatory capital recognition if the constraints in [5.25] to [5.27] are fulfilled.
5.29 The trading book leg of internal risk transfers must fulfil the same requirements under [25] as instruments in the trading book transacted with external counterparties.
Eligible hedges for the CVA capital requirement.
5.30 Eligible external hedges that are included in the credit valuation adjustment (CVA) capital requirement must be removed from the bank’s market risk capital requirement calculation.
FX and commodity risk, arising from CVA hedges that are eligible under the CVA standard, are excluded from the bank’s market risk capital requirements calculation
5.31 Banks may enter into internal risk transfers between the CVA portfolio and the trading book. Such an internal risk transfer consists of a CVA portfolio side and a non-CVA portfolio side. Where the CVA portfolio side of an internal risk transfer is recognised in the CVA risk capital requirement, the CVA portfolio side should be excluded from the market risk capital requirement, while the non-CVA portfolio side should be included in the market risk capital requirement.
5.32 In any case, such internal CVA risk transfers can only receive regulatory capital recognition if the internal risk transfer is documented with respect to the CVA risk being hedged and the sources of such risk.
5.33 Internal CVA risk transfers that are subject to curvature, default risk or residual risk add-on as set out in [6] through [9] may be recognised in the CVA portfolio capital requirement and market risk capital requirement only if the trading book additionally enters into an external hedge with an eligible third-party protection provider that exactly matches the internal risk transfer.
5.34 Independent from the treatment in the CVA risk capital requirement and the market risk capital requirement, internal risk transfers between the CVA portfolio and the trading book can be used to hedge the counterparty credit risk exposure of a derivative instrument in the trading or banking book as long as the requirements of [5.21] are met.
8 With respect to paragraph 9.74 of the SAMA Minimum Capital Requirements for Credit Risk, the cap of 60% on a credit derivative without a restructuring obligation only applies with regard to recognition of credit risk mitigation of the banking book instrument for regulatory capital purposes and not with regard to the amount of the internal risk transfer.
9 Banking book instruments that are over-hedged by their respective documented internal risk transfer create a short (risk) position in the banking book.6- Standardised Approach: General Provisions and Structure
General Provisions
6.1 For the purpose of calculating the market risk capital requirements, all Banks (D-SIBs and Non D-SIBs) are required to calculate the market risk capital charge by using the Standardised Approach.
6.2 The risk-weighted assets for market risk under the standardised approach are determined by multiplying the capital requirements calculated as set out in [6] to [9] by 12.5.
6.3 A bank must also determine its regulatory capital requirements for market risk according to the standardised approach for market risk at the demand of SAMA.
Structure of the Standardised Approach
6.4 The standardised approach capital requirement is the simple sum of three components: the capital requirement under the sensitivities-based method, the default risk capital (DRC) requirement and the residual risk add-on (RRAO).
(1) The capital requirement under the sensitivities-based method must be calculated by aggregating three risk measures – delta, vega and curvature, as set out in [7]:
(a) Delta: a risk measure based on sensitivities of an instrument to regulatory delta risk factors.
(b) Vega: a risk measure based on sensitivities to regulatory vega risk factors.
(c) Curvature: a risk measure which captures the incremental risk not captured by the delta risk measure for price changes in an option. Curvature risk is based on two stress scenarios involving an upward shock and a downward shock to each regulatory risk factor.
(d) The above three risk measures specify risk weights to be applied to the regulatory risk factor sensitivities. To calculate the overall capital requirement, the risk-weighted sensitivities are aggregated using specified correlation parameters to recognise diversification benefits between risk factors. In order to address the risk that correlations may increase or decrease in periods of financial stress, a bank must calculate three sensitivities-based method capital requirement values, based on three different scenarios on the specified values for the correlation parameters as set out in [7.6] and [7.7]].
(2) The DRC requirement captures the jump-to-default risk for instruments subject to credit risk as set out in [8.2]. It is calibrated based on the credit risk treatment in the banking book in order to reduce the potential discrepancy in capital requirements for similar risk exposures across the bank. Some hedging recognition is allowed for similar types of exposures (corporates, sovereigns, and local governments/municipalities).
(3) SAMA recognaize that not all market risks can be captured in the standardised approach, as this might necessitate an unduly complex regime. An RRAO is thus introduced to ensure sufficient coverage of market risks for instruments specified in [9.2]. The calculation method for the RRAO is set out in [9.8].
Definition of Correlation Trading Portfolio
6.5 For the purpose of calculating the credit spread risk capital requirement under the sensitivities based method and the DRC requirement, the correlation trading portfolio is defined as the set of instruments that meet the requirements of (1) or (2) below.
(1) The instrument is a securitisation position that meets the following requirements:
(a) The instrument is not a re-securitisation position, nor a derivative of securitisation exposures that does not provide a pro rata share in the proceeds of a securitisation tranche, where the definition of securitisation positon is identical to that used in the credit risk framework.
(b) All reference entities are single-name products, including single-name credit derivatives, for which a liquid two-way market exists10, including traded indices on these reference entities.
(c) The instrument does not reference an underlying that is treated as a retail exposure, a residential mortgage exposure, or a commercial mortgage exposure under the standardised approach to credit risk.
(d) The instrument does not reference a claim on a special purpose entity.
(2) The instrument is a non-securitisation hedge to a position described above.
10 A two-way market is deemed to exist where there are independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid-ask quotes can be determined within one day and the transaction settled at such price within a relatively short time frame in conformity with trade custom.
7- Standardised Approach: Sensitivities-Based Method
Main Concepts of the Sensitivities-Based Method
7.1 The sensitivities of financial instruments to a prescribed list of risk factors are used to calculate the delta, vega and curvature risk capital requirements. These sensitivities are risk-weighted and then aggregated, first within risk buckets (risk factors with common characteristics) and then across buckets within the same risk class as set out in [7.8] to [7.14]. The following terminology is used in the sensitivities-based method:
(1) Risk class: seven risk classes are defined (in [7.39] to [7.89]).
(a) General interest rate risk (GIRR)
(b) Credit spread risk (CSR): non-securitisations
(c) CSR: securitisations (non-correlation trading portfolio, or non-CTP)
(d) CSR: securitisations (correlation trading portfolio, or CTP)
(e) Equity risk
(f) Commodity risk
(g) Foreign exchange (FX) risk
(2) Risk factor: variables (eg an equity price or a tenor of an interest rate curve) that affect the value of an instrument as defined in [7.8] to [7.14]
(3) Bucket: a set of risk factors that are grouped together by common characteristics (eg all tenors of interest rate curves for the same currency), as defined in [7.39] to [7.89].
(4) Risk position: the portion of the risk of an instrument that relates to a risk factor. Methodologies to calculate risk positions for delta, vega and curvature risks are set out in [7.3] to [7.5] and [7.15] to [7.26].
(a) For delta and vega risks, the risk position is a sensitivity to a risk factor.
(b) For curvature risk, the risk position is based on losses from two stress scenarios.
(5) Risk capital requirement: the amount of capital that a bank should hold as a consequence of the risks it takes; it is computed as an aggregation of risk positions first at the bucket level, and then across buckets within a risk class defined for the sensitivities-based method as set out in [7.3] to [7.7].
Instruments Subject to Each Component of the Sensitivities-Based Method
7.2 In applying the sensitivities-based method, all instruments held in trading desks as set out in [4] and subject to the sensitivities-based method (ie excluding instruments where the value at any point in time is purely driven by an exotic underlying as set out in [9.3]), are subject to delta risk capital requirements. Additionally, the instruments specified in (1) to (4) are subject to vega and curvature risk capital requirements:
(1) Any instrument with optionality11.
(2) Any instrument with an embedded prepayment option12 this is considered an instrument with optionality according to above (1). The embedded option is subject to vega and curvature risk with respect to interest rate risk and CSR (non-securitisation and securitisation) risk classes. When the prepayment option is a behavioural option the instrument may also be subject to the residual risk add-on (RRAO) as per [9]. The pricing model of the bank must reflect such behavioural patterns where relevant. For securitisation tranches, instruments in the securitised portfolio may have embedded prepayment options as well. In this case the securitisation tranche may be subject to the RRAO.
(3) Instruments whose cash flows cannot be written as a linear function of underlying notional. For example, the cash flows generated by a plain-vanilla option cannot be written as a linear function (as they are the maximum of the spot and the strike). Therefore, all options are subject to vega risk and curvature risk. Instruments whose cash flows can be written as a linear function of underlying notional are instruments without optionality (eg cash flows generated by a coupon bearing bond can be written as a linear function) and are not subject to vega risk nor curvature risk capital requirements.
(4) Curvature risks may be calculated for all instruments subject to delta risk, not limited to those subject to vega risk as specified in (1) to (3) above. For example, where a bank manages the non-linear risk of instruments with optionality and other instruments holistically, the bank may choose to include instruments without optionality in the calculation of curvature risk. This treatment is allowed subject to all of the following restrictions:
(a) Use of this approach shall be applied consistently through time.
(b) Curvature risk must be calculated for all instruments subject to the sensitivities- based method.
11 For example, each instrument that is an option or that includes an option (eg an embedded option such as convertibility or rate dependent prepayment and that is subject to the capital requirements for market risk). A non-exhaustive list of example instruments with optionality includes: calls, puts, caps, floors, swaptions, barrier options and exotic options.
12 An instrument with a prepayment option is a debt instrument which grants the debtor the right to repay part of or the entire principal amount before the contractual maturity without having to compensate for any foregone interest. The debtor can exercise this option with a financial gain to obtain funding over the remaining maturity of the instrument at a lower rate in other ways in the market.Process to Calculate the Capital Requirement Under the Sensitivities-Based Method
7.3 As set out in [7.1], the capital requirement under the sensitivities-based method is calculated by aggregating delta, vega and curvature capital requirements. The relevant paragraphs that describe this process are as follows:
(1) The risk factors for delta, vega and curvature risks for each risk class are defined in [7.8] to [7.14].
(2) The methods to risk weight sensitivities to risk factors and aggregate them to calculate delta and vega risk positions for each risk class are set out in [7.4] and [7.15] to [7.95], which include the definition of delta and vega sensitivities, definition of buckets, risk weights to apply to risk factors, and correlation parameters.
(3) The methods to calculate curvature risk are set out in [7.5] and [7.96] to [7.101], which include the definition of buckets, risk weights and correlation parameters.
(4) The risk class level capital requirement calculated above must be aggregated to obtain the capital requirement at the entire portfolio level as set out in [7.6] and [7.7].
Calculation of the delta and vega risk capital requirement for each risk class
7.4 For each risk class, a bank must determine its instruments’ sensitivity to a set of prescribed risk factors, risk weight those sensitivities, and aggregate the resulting risk-weighted sensitivities separately for delta and vega risk using the following step-by-step approach:
(1) For each risk factor (as defined in [7.8] to [7.14]), a sensitivity is determined as set out in [7.15] to [7.38].
(2) Sensitivities to the same risk factor must be netted to give a net sensitivity Sk across all instruments in the portfolio to each risk factor k. In calculating the net sensitivity, all sensitivities to the same given risk factor (eg all sensitivities to the one-year tenor point of the three-month Euribor swap curve) from instruments of opposite direction should offset, irrespective of the instrument from which they derive. For instance, if a bank’s portfolio is made of two interest rate swaps on three-month Euribor with the same fixed rate and same notional but of opposite direction, the GIRR on that portfolio would be zero.
(3) The weighted sensitivity WSk is the product of the net sensitivity Sk and the corresponding risk weight RWk as defined in [7.39] to [7.95].
(4) Within bucket aggregation: the risk position for delta (respectively vega) bucket b, Kb, must be determined by aggregating the weighted sensitivities to risk factors within the same bucket using the prescribed correlation ρkɭ set out in the following formula, where the quantity within the square root function is floored at zero:
(5) Across bucket aggregation: The delta (respectively vega) risk capital requirement is calculated by aggregating the risk positions across the delta (respectively vega) buckets within each risk class, using the corresponding prescribed correlations γbc as set out in the following formula, where:
(a) Sb = ∑k WSk for all risk factors in bucket b, and Sc = ∑k WSk in bucket c.
(b) If these values for Sb and Sc described in above [7.4](5)(a) produce a negative number for the overall sum of ∑b Kb2 + ∑b ∑c≠b γbc SbSc, the bank is to calculate the delta (respectively vega) risk capital requirement using an alternative specification whereby:
(i) Sb=max [min (∑k WSk, Kb), - Kb] for all risk factors in bucket b; and
(ii) Sc=max [min (∑k WSk, Kc), - Kc] for all risk factors in bucket c.
Calculation of the curvature risk capital requirement for each risk class
7.5 For each risk class, to calculate curvature risk capital requirements a bank must apply an upward shock and a downward shock to each prescribed risk factor and calculate the incremental loss for instruments sensitive to that risk factor above that already captured by the delta risk capital requirement using the following step- by-step approach:
(1) For each instrument sensitive to curvature risk factor k, an upward shock and a downward shock must be applied to k. The size of shock (ie risk weight) is set out in [7.98] and [7.99].
(a) For example for GIRR, all tenors of all the risk free interest rate curves within a given currency (eg three-month Euribor, six-month Euribor, one year Euribor, etc for the euro) must be shifted upward applying the risk weight as set out in [7.99]. The resulting potential loss for each instrument, after the deduction of the delta risk positions, is the outcome of the upward scenario. The same approach must be followed on a downward scenario.
(b) If the price of an instrument depends on several risk factors, the curvature risk must be determined separately for each risk factor.
(2) The net curvature risk capital requirement, determined by the values CVR 
and CVR
for a bank’s portfolio for risk factor k described in above [7.5] (1) is calculated by the formula below. It calculates the aggregate incremental loss beyond the delta capital requirement for the prescribed shocks, where
(a) i is an instrument subject to curvature risks associated with risk factor k;
(b) xk is the current level of risk factor k;
(c) Vi (Xk) is the price of instrument i at the current level of risk factor k;
(d) Vi (Xk(RW (curvature)+)) and Vi (Xk(RW (curvature)-)) denote the price of instrument i after xk is shifted (ie “shocked”) upward and downward respectively;
(e) (curvature) is the risk weight for curvature risk factor k for instrument i; and
(f) Sik is the delta sensitivity of instrument i with respect to the delta risk factor that corresponds to curvature risk factor k, where:
(i) For the FX and equity risk classes, Sik is the delta sensitivity of instrument i; and
(iii) For the GIRR, CSR and commodity risk classes, Sik is the sum of delta sensitivities to all tenors of the relevant curve of instrument i with respect to curvature risk factor k.
(3) Within bucket aggregation: the curvature risk exposure must be aggregated within each bucket using the corresponding prescribed correlation ρkɭ as set out in the following formula, where:
(a) The bucket level capital requirement (Kb) is determined as the greater of the capital requirement under the upward scenario ( 
) and the capital requirement under the downward scenario (Kb
). Notably, the selection of upward and downward scenarios is not necessarily the same across the high, medium and low correlations scenarios specified in [7.6].
(i) Where Kb = K , this shall be termed “selecting the upward scenario”.
(ii) Where Kb = Kb , this shall be termed “selecting the downward scenario”.
(iii) In the specific case where K = Kb if ∑kCVR>∑k CVR, it is deemed that the upward scenario is selected; otherwise the downward scenario is selected.
(b) Ψ(CVRk, CVRɭ) takes the value 0 if CVRk and CVRɭ both have negative signs and the value 1 otherwise.
(4) Across bucket aggregation: curvature risk positions must then be aggregated across buckets within each risk class, using the corresponding prescribed correlations γbc, where:
(a) Sb = ∑k CVR for all risk factors in bucket b, when the upward scenario has been selected for bucket b in above (3)(a). Sb = ∑k CVR otherwise; and
(b) (Sb, Sc) takes the value 0 if Sb and Sc both have negative signs and 1 otherwise.
The delta used for the calculation of the curvature risk capital requirement should be the same as that used for calculating the delta risk capital requirement. The assumptions that are used for the calculation of the delta (ie sticky delta for normal or log-normal volatilities) should also be used for calculating the shifted or shocked price of the instrument.
[7.17] states that banks must determine each delta sensitivity, vega sensitivity and curvature scenario based on instrument prices or pricing models that an independent risk control unit within a bank uses to report market risks or actual profits and losses to senior management. Banks should use zero rate or market rate sensitivities consistent with the pricing models referenced in that paragraph.
Calculation of aggregate sensitivities-based method capital requirement
7.6 In order to address the risk that correlations increase or decrease in periods of financial stress, the aggregation of bucket level capital requirements and risk class level capital requirements per each risk class for delta, vega, and curvature risks as specified in [7.4] to [7.5] must be repeated, corresponding to three different scenarios on the specified values for the correlation parameter ρkɭ (correlation between risk factors within a bucket) and γbc (correlation across buckets within a risk class).
(1) Under the “medium correlations” scenario, the correlation parameters ρkɭ and γbc as specified in [7.39] to [7.101] apply.
(2) Under the “high correlations” scenario, the correlation parameters ρkɭ and γbc that are specified in [7.39] to [7.101] are uniformly multiplied by 1.25, with ρkɭ and γbc subject to a cap at 100%.
(3) Under the “low correlations” scenario, the correlation parameters ρkɭ and γbc that are specified in 7.39 to 7.101] are replaced by ρ 
= max(2 x ρkɭ - 100%;75%x ρkɭ) γ
and =max(2x γbc -100%;75%x γbc).
7.7 The total capital requirement under the sensitivities-based method is aggregated as follows:
(1) For each of three correlation scenarios, the bank must simply sum up the separately calculated delta, vega and curvature capital requirements for all risk classes to determine the overall capital requirement for that scenario.
(2) The sensitivities-based method capital requirement is the largest capital requirement from the three scenarios.
(a) For the calculation of capital requirements for all instruments in all trading desks using the standardised approach as set out in [3.10](1) and [17.2] and [13.40], the capital requirement is calculated for all instruments in all trading desks.
(b) For the calculation of capital requirements for each trading desk using the standardised approach as if that desk were a standalone regulatory portfolio as set out in [3.8](2), the capital requirements under each correlation scenario are calculated and compared at each trading desk level, and the maximum for each trading desk is taken as the capital requirement.
Sensitivities-Based Method: Risk Factor and Sensitivity Definitions
Risk factor definitions for delta, vega and curvature risks
7.8 GIRR factors
(1) Delta GIRR: the GIRR delta risk factors are defined along two dimensions: (i) a risk-free yield curve for each currency in which interest rate-sensitive instruments are denominated and (ii) the following tenors: 0.25 years, 0.5 years, 1 year, 2 years, 3 years, 5 years, 10 years, 15 years, 20 years and 30 years, to which delta risk factors are assigned13.
(a) The risk-free yield curve per currency should be constructed using money market instruments held in the trading book that have the lowest credit risk, such as overnight index swaps (OIS). Alternatively, the risk-free yield curve should be based on one or more market- implied swap curves used by the bank to mark positions to market. For example, interbank offered rate (BOR) swap curves.
(b) When data on market-implied swap curves described in above (1)(a) are insufficient, the risk-free yield curve may be derived from the most appropriate sovereign bond curve for a given currency. In such cases the sensitivities related to sovereign bonds are not exempt from the CSR capital requirement: when a bank cannot perform the decomposition y=r+cs, any sensitivity to y is allocated both to the GIRR and to CSR classes as appropriate with the risk factor and sensitivity definitions in the standardised approach. Applying swap curves to bond-derived sensitivities for GIRR will not change the requirement for basis risk to be captured between bond and credit default swap (CDS) curves in the CSR class.
(c) For the purpose of constructing the risk-free yield curve per currency, an OIS curve (such as Eonia or a new benchmark rate) and a BOR swap curve (such as three-month Euribor or other benchmark rates) must be considered two different curves. Two BOR curves at different maturities (eg three-month Euribor and six-month Euribor) must be considered two different curves. An onshore and an offshore currency curve (eg onshore Indian rupee and offshore Indian rupee) must be considered two different curves.
(2) The GIRR delta risk factors also include a flat curve of market-implied inflation rates for each currency with term structure not recognised as a risk factor.
(a) The sensitivity to the inflation rate from the exposure to implied coupons in an inflation instrument gives rise to a specific capital requirement. All inflation risks for a currency must be aggregated to one number via simple sum.
(b) This risk factor is only relevant for an instrument when a cash flow is functionally dependent on a measure of inflation (eg the notional amount or an interest payment depending on a consumer price index). GIRR risk factors other than for inflation risk will apply to such an instrument notwithstanding.
(c) Inflation rate risk is considered in addition to the sensitivity to interest rates from the same instrument, which must be allocated, according to the GIRR framework, in the term structure of the relevant risk-free yield curve in the same currency.
(3) The GIRR delta risk factors also include one of two possible cross-currency basis risk factors14 for each currency (ie each GIRR bucket) with the term structure not recognised as a risk factor (ie both cross-currency basis curves are flat).
(a) The two cross-currency basis risk factors are basis of each currency over USD or basis of each currency over EUR. For instance, an AUD- denominated bank trading a JPY/USD cross-currency basis swap would have a sensitivity to the JPY/USD basis but not to the JPY/EUR basis.
(b) Cross-currency bases that do not relate to either basis over USD or basis over EUR must be computed either on “basis over USD” or “basis over EUR” but not both. GIRR risk factors other than for cross-currency basis risk will apply to such an instrument notwithstanding.
(c) Cross-currency basis risk is considered in addition to the sensitivity to interest rates from the same instrument, which must be allocated, according to the GIRR framework, in the term structure of the relevant risk-free yield curve in the same currency.
(4) Vega GIRR: within each currency, the GIRR vega risk factors are the implied volatilities of options that reference GIRR-sensitive underlyings; as defined along two dimensions:15
(a) The maturity of the option: the implied volatility of the option as mapped to one or several of the following maturity tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.
(b) The residual maturity of the underlying of the option at the expiry date of the option: the implied volatility of the option as mapped to two (or one) of the following residual maturity tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.
(5) Curvature GIRR:
(a) The GIRR curvature risk factors are defined along only one dimension: the constructed risk-free yield curve per currency with no term structure decomposition. For example, the euro, Eonia, three-month Euribor and six- month Euribor curves must be shifted at the same time in order to compute the euro-relevant risk-free yield curve curvature risk capital requirement. For the calculation of sensitivities, all tenors (as defined for delta GIRR) are to be shifted in parallel.
(b) There is no curvature risk capital requirement for inflation and cross-currency basis risks.
(6) The treatment described in above (1)(b) for delta GIRR also applies to vega GIRR and curvature GIRR risk factors.
Different results can be produced depending on the bank’s curve methodology as diversification will be different for different methodologies. For example, if three-month Euribor is constructed as a “spread to EONIA”, this curve will be a spread curve and can be considered a different yield curve for the purpose of computing risk-weighted PV01 and subsequent diversification. [7.8](1)(c)states that for the purpose of constructing the risk-free yield curve per currency, an overnight index swap curve (such as EONIA) and an interbank offered rate curve (such as three-month Euribor) must be considered two different curves, with distinct risk factors in each tenor bucket, for the purpose of computing the risk capital requirement.
For GIRR, CSR, equity risk, commodity risk or FX risk, risk factors need to be assigned to prescribed tenors. Banks are not permitted to perform capital computations based on internally used tenors. Risk factors and sensitivities must be assigned to the prescribed tenors. As stated in footnote 14 to [7.8] and footnote 19 to [7.25], the assignment of risk factors and sensitivities to the specified tenors should be performed by linear interpolation or a method that is most consistent with the pricing functions used by the independent risk control function of the bank to report market risks or profits and losses to senior management.
When calculating the cross-currency basis spread (CCBS) capital requirement: since pricing models use a term structure-based CCBS curve, Banks may use a term structure-based CCBS curve and aggregate sensitivities to individual tenors by simple sum.
Inflation and cross-currency bases are included in the GIRR vega risk capital requirement. As no maturity dimension is specified for the delta capital requirement for inflation or cross-currency bases (ie the possible underlying of the option), the vega risk for inflation and cross-currency bases should be considered only along the single dimension of the maturity of the option.
For the specified instruments, delta, vega and curvature capital requirements must be computed for both GIRR and CSR.
Repo rate risk factors for fixed income funding instruments are subject to the GIRR capital requirement. A relevant repo curve should be considered by currency.
The risk weights floored for interest rate and credit instruments is not permitted in the market risk standard when applying the risk weights for GIRR or for CSR, given that there is a possibility of the interest rates being negative (eg for JPY and EUR curves)
7.9 CSR non-securitisation risk factors
(1) Delta CSR non-securitisation: the CSR non-securitisation delta risk factors are defined along two dimensions:
(a) The relevant issuer credit spread curves (bond and CDS); and
(b) The following tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.
(2) Vega CSR non-securitisation: the vega risk factors are the implied volatilities of options that reference the relevant credit issuer names as underlyings (bond and CDS); further defined along one dimension - the maturity of the option. This is defined as the implied volatility of the option as mapped to one or several of the following maturity tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.
(3) Curvature CSR non-securitisation: the CSR non-securitisation curvature risk factors are defined along one dimension: the relevant issuer credit spread curves (bond and CDS). For instance, the bond-inferred spread curve of an issuer and the CDS-inferred spread curve of that same issuer should be considered a single spread curve. For the calculation of sensitivities, all tenors (as defined for CSR) are to be shifted in parallel.
For callable bonds, options on sovereign bond futures and bond options, the delta, vega and curvature capital requirements must be computed for both GIRR and CSR.
Bond and CDS credit spreads are considered distinct risk factors under [7.19](1), and pkɭ (basis) referenced in [7.54] and [7.55] is meant to capture only the bond-CDS basis.
7.10 CSR securitisation: non-CTP risk factors
(1) For securitisation instruments that do not meet the definition of CTP as set out in [6.5] (ie, non-CTP), the sensitivities of delta risk factors (ie CS01) must be calculated with respect to the spread of the tranche rather than the spread of the underlying of the instruments.
(2) Delta CSR securitisation (non-CTP): the CSR securitisation delta risk factors are defined along two dimensions:
(a) Tranche credit spread curves; and
(b) The following tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years to which delta risk factors are assigned.
(3) Vega CSR securitisation (non-CTP): Vega risk factors are the implied volatilities of options that reference non-CTP credit spreads as underlyings (bond and CDS); further defined along one dimension - the maturity of the option. This is defined as the implied volatility of the option as mapped to one or several of the following maturity tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.
(4) Curvature CSR securitisation (non-CTP): the CSR securitisation curvature risk factors are defined along one dimension, the relevant tranche credit spread curves (bond and CDS). For instance, the bond-inferred spread curve of a given Spanish residential mortgage- backed security (RMBS) tranche and the CDS-inferred spread curve of that given Spanish RMBS tranche would be considered a single spread curve. For the calculation of sensitivities, all the tenors are to be shifted in parallel.
7.11 CSR securitisation: CTP risk factors
(1) For securitisation instruments that meet the definition of a CTP as set out in [6.5], the sensitivities of delta risk factors (ie CS01) must be computed with respect to the names underlying the securitisation or nth-to-default instrument.
(2) Delta CSR securitisation (CTP): the CSR correlation trading delta risk factors are defined along two dimensions:
(a) The relevant underlying credit spread curves (bond and CDS); and
(b) The following tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years, to which delta risk factors are assigned.
(3) Vega CSR securitisation (CTP): the vega risk factors are the implied volatilities of options that reference CTP credit spreads as underlyings (bond and CDS), as defined along one dimension, the maturity of the option. This is defined as the implied volatility of the option as mapped to one or several of the following maturity tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.
(4) Curvature CSR securitisation (CTP): the CSR correlation trading curvature risk factors are defined along one dimension, the relevant underlying credit spread curves (bond and CDS). For instance, the bond-inferred spread curve of a given name within an iTraxx series and the CDS-inferred spread curve of that given underlying would be considered a single spread curve. For the calculation of sensitivities, all the tenors are to be shifted in parallel.
7.12 Equity risk factors
(1) Delta equity: the equity delta risk factors are:
(a) all the equity spot prices; and
(b) all the equity repurchase agreement rates (equity repo rates).
(2) Vega equity:
(a) The equity vega risk factors are the implied volatilities of options that reference the equity spot prices as underlyings as defined along one dimension, the maturity of the option. This is defined as the implied volatility of the option as mapped to one or several of the following maturity tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.
(b) There is no vega risk capital requirement for equity repo rates.
(3) Curvature equity:
(a) The equity curvature risk factors are all the equity spot prices.
(b) There is no curvature risk capital requirement for equity repo rates.
Repo rate risk factors for fixed income funding instruments are subject to the GIRR capital requirement. A relevant repo curve should be considered by currency.
7.13 Commodity risk factors
(1) Delta commodity: the commodity delta risk factors are all the commodity spot prices. However for some commodities such as electricity (which is defined to fall within bucket 3 (energy – electricity and carbon trading) in [7.82] the relevant risk factor can either be the spot or the forward price, as transactions relating to commodities such as electricity are more frequent on the forward price than transactions on the spot price. Commodity delta risk factors are defined along two dimensions:
(a) Legal terms with respect to the delivery location16 of the commodity; and
(b) Time to maturity of the traded instrument at the following tenors: 0 years, 0.25 years, 0.5 years, 1 year, 2 years, 3 years, 5 years, 10 years, 15 years, 20 years and 30 years.
(2) Vega commodity: the commodity vega risk factors are the implied volatilities of options that reference commodity spot prices as underlyings. No differentiation between commodity spot prices by the maturity of the underlying or delivery location is required. The commodity vega risk factors are further defined along one dimension, the maturity of the option. This is defined as the implied volatility of the option as mapped to one or several of the following maturity tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.
(3) Curvature commodity: the commodity curvature risk factors are defined along only one dimension, the constructed curve (ie no term structure decomposition) per commodity spot prices. For the calculation of sensitivities, all tenors (as defined for delta commodity) are to be shifted in parallel.
The current prices for futures and forward contracts should be used to compute the commodity delta risk factors. Commodity delta should be allocated to the relevant tenor based on the tenor of the futures and forward contract and given that spot commodity price positions should be slotted into the first tenor (0 years).
7.14 FX risk factors
(1) Delta FX: the FX delta risk factors are defined below.
(a) The FX delta risk factors are all the exchange rates between the currency in which an instrument is denominated and the reporting currency. For transactions that reference an exchange rate between a pair of non-reporting currencies, the FX delta risk factors are all the exchange rates between:
(i) the reporting currency; and
(ii) both the currency in which an instrument is denominated and any other currencies referenced by the instrument.17
(b) Subject to SAMA approval, FX risk may alternatively be calculated relative to a base currency instead of the reporting currency. In such case the bank must account for not only:
(i) the FX risk against the base currency; but also
(ii) the FX risk between the reporting currency and the base currency (ie translation risk).
(c) The resulting FX risk calculated relative to the base currency as set out in (b) is converted to the capital requirements in the reporting currency using the spot reporting/base exchange rate reflecting the FX risk between the base currency and the reporting currency.
(d) The FX base currency approach may be allowed under the following conditions:
(i) To use this alternative, a bank may only consider a single currency as its base currency; and
(ii) The bank shall demonstrate to SAMA that calculating FX risk relative to their proposed base currency provides an appropriate risk representation for their portfolio (for example, by demonstrating that it does not inappropriately reduce capital requirements relative to those that would be calculated without the base currency approach) and that the translation risk between the base currency and the reporting currency is taken into account.
(2) Vega FX: the FX vega risk factors are the implied volatilities of options that reference exchange rates between currency pairs; as defined along one dimension, the maturity of the option. This is defined as the implied volatility of the option as mapped to one or several of the following maturity tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.
(3) Curvature FX: the FX curvature risk factors are defined below.
(a) The FX curvature risk factors are all the exchange rates between the currency in which an instrument is denominated and the reporting currency. For transactions that reference an exchange rate between a pair of non-reporting currencies, the FX risk factors are all the exchange rates between:
(i) the reporting currency; and
(ii) both the currency in which an instrument is denominated and any other currencies referenced by the instrument.
(b) Where SAMA approval for the base currency approach has been granted for delta risks, FX curvature risks shall also be calculated relative to a base currency instead of the reporting currency, and then converted to the capital requirements in the reporting currency using the spot reporting/base exchange rate.
(4) No distinction is required between onshore and offshore variants of a currency for all FX delta, vega and curvature risk factors.
[7.14](4) states: “No distinction is required between onshore and offshore variants of a currency for all FX delta, vega and curvature risk factors.” This is also apply for deliverable/non-deliverable variants (eg KRO vs KRW, BRO vs BRL, INO vs INR)
Sensitivities-based method: definition of sensitivities
7.15 Sensitivities for each risk class must be expressed in the reporting currency of the bank.
7.16 For each risk factor defined in [7.8] to [7.14], sensitivities are calculated as the change in the market value of the instrument as a result of applying a specified shift to each risk factor, assuming all the other relevant risk factors are held at the current level as defined in [7.17] to [7.38].
As per [7.17], a bank may make use of alternative formulations of sensitivities based on pricing models that the bank’s independent risk control unit uses to report market risks or actual profits and losses to senior management. In doing so, the bank is to demonstrate to SAMA that the alternative formulations of sensitivities yield results very close to the prescribed formulations.
Requirements on instrument price or pricing models for sensitivity calculation
7.17 In calculating the risk capital requirement under the sensitivities-based method in [7], the bank must determine each delta and vega sensitivity and curvature scenario based on instrument prices or pricing models that an independent risk control unit within a bank uses to report market risks or actual profits and losses to senior management.
[7.17] states that banks must determine each delta sensitivity, vega sensitivity and curvature scenario based on instrument prices or pricing models that an independent risk control unit within a bank uses to report market risks or actual profits and losses to senior management. Banks should use zero rate or market rate sensitivities consistent with the pricing models referenced in that paragraph.
7.18 A key assumption of the standardised approach for market risk is that a bank’s pricing models used in actual profit and loss reporting provide an appropriate basis for the determination of regulatory capital requirements for all market risks. To ensure such adequacy, banks must at a minimum establish a framework for Prudent Valuation Guidance set out in Basel Framework .
Sensitivity definitions for delta risk
7.19 Delta GIRR: the sensitivity is defined as the PV01. PV01 is measured by changing the interest rate r at tenor t (rt) of the risk-free yield curve in a given currency by 1 basis point (ie 0.0001 in absolute terms) and dividing the resulting change in the market value of the instrument (Vi) by 0.0001 (ie 0.01%) as follows, where:
(1) rt is the risk-free yield curve at tenor t;
(2) cst is the credit spread curve at tenor t; and
(3) Vi is the market value of the instrument i as a function of the risk-free interest rate curve and credit spread curve:
7.20 Delta CSR non-securitisation, securitisation (non-CTP) and securitisation (CTP): the sensitivity is defined as CS01. The CS01 (sensitivity) of an instrument i is measured by changing a credit spread cs at tenor t (cst) by 1 basis point (ie 0.0001 in absolute terms) and dividing the resulting change in the market value of the instrument (Vi) by 0.0001 (ie 0.01%) as follows:
In cases where the bank does not have counterparty-specific money market curves, the bank can proxy PV01 to CS01
7.21 Delta equity spot: the sensitivity is measured by changing the equity spot price by 1 percentage point (ie 0.01 in relative terms) and dividing the resulting change in the market value of the instrument (Vi) by 0.01 (ie 1%) as follows, where:
(1) k is a given equity;
(2) EQk is the market value of equity k; and
(3) Vi is the market value of instrument i as a function of the price of equity k.
7.22 Delta equity repo rates: the sensitivity is measured by applying a parallel shift to the equity repo rate term structure by 1 basis point (ie 0.0001 in absolute terms) and dividing the resulting change in the market value of the instrument Vi by 0.0001 (ie 0.01%) as follows, where:
(1) k is a given equity;
(2) RTSk is the repo term structure of equity k; and
(3) Vi is the market value of instrument i as a function of the repo term structure of equity k.
7.23 Delta commodity: the sensitivity is measured by changing the commodity spot price by 1 percentage point (ie 0.01 in relative terms) and dividing the resulting change in the market value of the instrument Vi by 0.01 (ie 1%) as follows, where:
(1) k is a given commodity;
(2) CTYk is the market value of commodity k; and
(3) Vi is the market value of instrument i as a function of the spot price of commodity k:
7.24 Delta FX: the sensitivity is measured by changing the exchange rate by 1 percentage point (ie 0.01 in relative terms) and dividing the resulting change in the market value of the instrument Vi by 0.01 (ie 1%), where:
(1) k is a given currency;
(2) FXk is the exchange rate between a given currency and a bank’s reporting currency or base currency, where the FX spot rate is the current market price of one unit of another currency expressed in the units of the bank’s reporting currency or base currency; and
(3) Vi is the market value of instrument i as a function of the exchange rate k:
Sensitivity definitions for vega risk
7.25 The option-level vega risk sensitivity to a given risk factor18 is measured by multiplying vega by the implied volatility of the option as follows, where:
(1) vega, ∂vi/∂σi, is defined as the change in the market value of the option Vi as a result of a small amount of change to the implied volatility σi, and
(2) the instrument’s vega and implied volatility used in the calculation of vega sensitivities must be sourced from pricing models used by the independent risk control unit of the bank.
7.26 The following sets out how to derive vega risk sensitivities in specific cases:
(1) Options that do not have a maturity, are assigned to the longest prescribed maturity tenor, and these options are also assigned to the RRAO.
(2) Options that do not have a strike or barrier and options that have multiple strikes or barriers, are mapped to strikes and maturity used internally to price the option, and these options are also assigned to the RRAO.
(3) CTP securitisation tranches that do not have an implied volatility, are not subject to vega risk capital requirement. Such instruments may not, however, be exempt from delta and curvature risk capital requirements.
Under the sensitivities-based method and In the case where options do not have a specified maturity (eg cancellable swaps), the bank must assign those options to the longest prescribed maturity tenor for vega risk sensitivities and also assign such options to the RRAO.
In the case of the bank viewing the optionality of the cancellable swap as a swaption, the bank must assign the swaption to the longest prescribed maturity tenor for vega risk sensitivities (as it does not have a specified maturity) and derive the residual maturity of the underlying of the option accordingly.
Requirements on sensitivity computations
7.27 When computing a first-order sensitivity for instruments subject to optionality, banks should assume that the implied volatility either:
(1) remains constant, consistent with a “sticky strike” approach; or
(2) follows a “sticky delta” approach, such that implied volatility does not vary with respect to a given level of delta.
7.28 For the calculation of vega sensitivities, the distribution assumptions (ie log-normal assumptions or normal assumptions) for pricing models are applied as follows:
(1) For the computation of a vega GIRR or CSR sensitivity, banks may use either the log- normal or normal assumptions.
(2) For the computation of a vega equity, commodity or FX sensitivity, banks must use the log-normal assumption.19
To compute vega GIRR, banks may choose a mix of log-normal and normal assumptions for different currencies.
7.29 If, for internal risk management, a bank computes vega sensitivities using different definitions than the definitions set out in this standard, the bank may transform the sensitivities computed for internal risk management purposes to deduce the sensitivities to be used for the calculation of the vega risk measure.
7.30 All vega sensitivities must be computed ignoring the impact of credit valuation adjustments (CVA).
Treatment of index instruments and multi-underlying options
7.31 In the delta and curvature risk context: for index instruments and multi-underlying options, a look-through approach should be used. However, a bank may opt not to apply the look-through approach for instruments referencing any listed and widely recognised and accepted equity or credit index, where:
(1) it is possible to look-through the index (ie the constituents and their respective weightings are known);
(2) the index contains at least 20 constituents;
(3) no single constituent contained within the index represents more than 25% of the total index;
(4) the largest 10% of constituents represents less than 60% of the total index; and
(5) the total market capitalisation of all the constituents of the index is no less than USD 40 billion.
7.32 For a given instrument, irrespective of whether a look-through approach is adopted or not, the sensitivity inputs used for the delta and curvature risk calculation must be consistent.
7.33 Where a bank opts not to apply the look-through approach in accordance with [7.31], a single sensitivity shall be calculated to each widely recognised and accepted index that an instrument references. The sensitivity to the index should be assigned to the relevant delta risk bucket defined in [7.53] and [7.72] as follows:
(1) Where more than 75% of constituents in that index (taking into account the weightings of that index) would be mapped to a specific sector bucket (ie bucket 1 to bucket 11 for equity risk, or bucket 1 to bucket 16 for CSR), the sensitivity to the index shall be mapped to that single specific sector bucket and treated like any other single-name sensitivity in that bucket.
(2) In all other cases, the sensitivity may be mapped to an “index” bucket (ie bucket 12 or bucket 13 for equity risk; or bucket 17 or bucket 18 for CSR).
7.34 A look-through approach must always be used for indices that do not meet the criteria set out in [7.31](2) to [7.31](5), and for any multi-underlying instruments that reference a bespoke set of equities or credit positions.
(1) Where a look-through approach is adopted, for index instruments and multi-underlying options other than the CTP, the sensitivities to constituent risk factors from those instruments or options are allowed to net with sensitivities to single-name instruments without restriction.
(2) Index CTP instruments cannot be broken down into its constituents (ie the index CTP should be considered a risk factor as a whole) and the above-mentioned netting at the issuer level does not apply either.
(3) Where a look-through approach is adopted, it shall be applied consistently through time,20 and shall be used for all identical instruments that reference the same index.
Treatment of equity investments in funds
7.35 For equity investments in funds that can be looked through as set out in [5.8](5)(a), banks must apply a look-through approach and treat the underlying positions of the fund as if the positions were held directly by the bank (taking into account the bank’s share of the equity of the fund, and any leverage in the fund structure), except for the funds that meet the following conditions:
(1) For funds that hold an index instrument that meets the criteria set out under [7.31], banks must still apply a look-through and treat the underlying positions of the fund as if the positions were held directly by the bank, but the bank may then choose to apply the “no look-through” approach for the index holdings of the fund as set out in [7.33].
(2) For funds that track an index benchmark, a bank may opt not to apply the look-through approach and opt to measure the risk assuming the fund is a position in the tracked index only where:
(a) the fund has an absolute value of a tracking difference (ignoring fees and commissions) of less than 1%; and
(b) the tracking difference is checked at least annually and is defined as the annualised return difference between the fund and its tracked benchmark over the last 12 months of available data (or a shorter period in the absence of a full 12 months of data).
7.36 For equity investments in funds that cannot be looked through (ie do not meet the criterion set out in [5.8](5)(a)), but that the bank has access to daily price quotes and knowledge of the mandate of the fund (ie meet both the criteria set out in [5.8](5)(b)), banks may calculate capital requirements for the fund in one of three ways:
(1) If the fund tracks an index benchmark and meets the requirement set out in [7.35](2)(a) and (b), the bank may assume that the fund is a position in the tracked index, and may assign the sensitivity to the fund to relevant sector specific buckets or index buckets as set out in [7.33].
(2) Subject to SAMA approval, the bank may consider the fund as a hypothetical portfolio in which the fund invests to the maximum extent allowed under the fund’s mandate in those assets attracting the highest capital requirements under the sensitivities-based method, and then progressively in those other assets implying lower capital requirements. If more than one risk weight can be applied to a given exposure under the sensitivities-based method, the maximum risk weight applicable must be used.
(a) This hypothetical portfolio must be subject to market risk capital requirements on a stand-alone basis for all positions in that fund, separate from any other positions subject to market risk capital requirements.
(b) The counterparty credit and CVA risks of the derivatives of this hypothetical portfolio must be calculated using the simplified methodology set out in accordance with paragraph 80(vii)(c) of the banking book equity investment in funds treatment.
(3) A bank may treat their equity investment in the fund as an unrated equity exposure to be allocated to the “other sector” bucket (bucket 11). In applying this treatment, banks must also consider whether, given the mandate of the fund, the default risk capital (DRC) requirement risk weight prescribed to the fund is sufficiently prudent (as set out in [8.8]), and whether the RRAO should apply (as set out in [9.6]).
7.37 As per the requirement in [5.8](5), net long equity investments in a given fund in which the bank cannot look through or does not meet the requirements of [5.8](5) for the fund must be assigned to the banking book. Net short positions in funds, where the bank cannot look through or does not meet the requirements of [5.8](5), must be excluded from any trading book capital requirements under the market risk framework, with the net position instead subjected to a 100% capital requirement.
Treatment of vega risk for multi-underlying instruments
7.38 In the vega risk context:
(1) Multi-underlying options (including index options) are usually priced based on the implied volatility of the option, rather than the implied volatility of its underlying constituents and a look-through approach may not need to be applied, regardless of the approach applied to the delta and curvature risk calculation as set out in [7.31] through [6.35].21
(2) For indices, the vega risk with respect to the implied volatility of the multiunderlying options will be calculated using a sector specific bucket or an index bucket defined in [7.53] and [7.72] as follows:
(a) Where more than 75% of constituents in that index (taking into account the weightings of that index) would be mapped to a single specific sector bucket (ie bucket 1 to bucket 11 for equity risk; or bucket 1 to bucket 16 for CSR), the sensitivity to the index shall be mapped to that single specific sector bucket and treated like any other single-name sensitivity in that bucket.
(b) In all other cases, the sensitivity may be mapped to an “index” bucket (ie bucket 12 or bucket 13 for equity risk or bucket 17 or bucket 18 for CSR).
13 The assignment of risk factors to the specified tenors should be performed by linear interpolation or a method that is most consistent with the pricing functions used by the independent risk control function of a bank to report market risks or P&L to senior management.
14 Cross-currency basis are basis added to a yield curve in order to evaluate a swap for which the two legs are paid in two different currencies. They are in particular used by market participants to price cross-currency interest rate swaps paying a fixed or a floating leg in one currency, receiving a fixed or a floating leg in a second currency, and including an exchange of the notional in the two currencies at the start date and at the end date of the swap.
15 For example, an option with a forward starting cap, lasting 12 months, consists of four consecutive caplets on USD three month Libor. There are four (independent) options, with option expiry dates in 12, 15, 18 and 21 months. These options are all on underlying USD three-month Libor; the underlying always matures three months after the option expiry date (its residual maturity being three months). Therefore, the implied volatilities for a regular forward starting cap, which would start in one year and last for 12 months should be defined along the following two dimensions: (i) the maturity of the option’s individual components (caplets) – 12, 15, 18 and 21 months; and (ii) the residual maturity of the underlying of the option – three months.
16 For example, a contract that can be delivered in five ports can be considered having the same delivery location as another contract if and only if it can be delivered in the same five ports. However, it cannot be considered having the same delivery location as another contract that can be delivered in only four (or less) of those five ports.
17 For example, for an FX forward referencing USD/JPY, the relevant risk factors for a CAD- reporting bank to consider are the exchange rates USD/CAD and JPY/CAD. If that CAD- reporting bank calculates FX risk relative to a USD base currency, it would consider separate deltas for the exchange rate JPY/USD risk and CAD/USD FX translation risk and then translate the resulting capital requirement to CAD at the USD/CAD spot exchange rate.
18 As specified in the vega risk factor definitions in [7.8] to [7.14], the implied volatility of the option must be mapped to one or more maturity tenors.
19 Since vega (, ∂v/∂σi) of an instrument is multiplied by its implied volatility ( ), the vega risk sensitivity for that instrument will be the same under the log-normal assumption and the normal assumption. As a consequence, banks may use a log-normal or normal assumption for GIRR and CSR (in recognition of the trade-offs between constrained specification and computational burden for a standardised approach). For the other risk classes, banks must only use a log-normal assumption (in recognition that this is aligned with common practices across jurisdictions).
20 In other words, a bank can initially not apply a look-through approach, and later decide to apply it. However once applied (for a certain type of instrument referencing a particular index), the bank will require SAMA approval to revert to a “no look-through” approach.
21 As specified in the vega risk factor definitions in [7.8] to [7.14], the implied volatility of an option must be mapped to one or more maturity tenors.Sensitivities-Based Method: Definition of Delta Risk Buckets, Risk Weights and Correlations
7.39 [7.41] to [7.89] set out buckets, risk weights and correlation parameters for each risk class to calculate delta risk capital requirement as set out in [7.4].
7.40 The prescribed risk weights and correlations in [7.41] to [7.89] have been calibrated to the liquidity adjusted time horizon related to each risk class.
Delta GIRR buckets, risk weights and correlations
7.41 Each currency is a separate delta GIRR bucket, so all risk factors in risk-free yield curves for the same currency in which interest rate-sensitive instruments are denominated are grouped into the same bucket.
7.42 For calculating weighted sensitivities, the risk weights for each tenor in risk-free yield curves are set in Table 1 as follows:
Delta GIRR buckets and risk weights Table 1 Tenor 0.25 year 0.5 year 1 year 2 year 3 year Risk weight 1.7% 1.7% 1.6% 1.3% 1.2% Tenor 5 year 10 year 15 year 20 year 30 year Risk weight (percentage points) 1.1% 1.1% 1.1% 1.1% 1.1%
7.43
The risk weight for the inflation risk factor and the cross-currency basis risk factors, respectively, is set at 1.6%.
7.44 For specified currencies by the Basel Committee,22 the above risk weights may, at the discretion of the bank, be divided by the square root of 2.
7.45 For aggregating GIRR risk positions within a bucket, the correlation parameter ρkl between weighted sensitivities WSk and WSl within the same bucket (ie same currency), same assigned tenor, but different curves is set at 99.90%. In aggregating delta risk positions for cross-currency basis risk for onshore and offshore curves, which must be considered two different curves as set out in [7.8], a bank may choose to aggregate all cross-currency basis risk for a currency (ie “Curr/USD” or “Curr/EUR”) for both onshore and offshore curves by a simple sum of weighted sensitivities.
7.46 The delta risk correlation ρkl between weighted sensitivities WSk and WSl within the same bucket with different tenor and same curve is set in the following Table 2:23
Delta GIRR correlations (ρkl) within the same bucket, with different tenor and same curve Table 2 0.25 year 0.5 year 1 year 2 year 3 year 5 year 10 year 15 year 20 year 30 year 0.25 year 100.0% 97.0% 91.4% 81.1% 71.9% 56.6% 40.0% 40.0% 40.0% 40.0% 0.5 year 97.0% 100.0% 97.0% 91.4% 86.1% 76.3% 56.6% 41.9% 40.0% 40.0% 1 year 91.4% 97.0% 100.0% 97.0% 94.2% 88.7% 76.3% 65.7% 56.6% 41.9% 2 year 81.1% 91.4% 97.0% 100.0% 98.5% 95.6% 88.7% 82.3% 76.3% 65.7% 3 year 71.9% 86.1% 94.2% 98.5% 100.0% 98.0% 93.2% 88.7% 84.4% 76.3% 5 year 56.6% 76.3% 88.7% 95.6% 98.0% 100.0% 97.0% 94.2% 91.4% 86.1% 10 year 40.0% 56.6% 76.3% 88.7% 93.2% 97.0% 100.0% 98.5% 97.0% 94.2% 15 year 40.0% 41.9% 65.7% 82.3% 88.7% 94.2% 98.5% 100.0% 99.0% 97.0% 20 year 40.0% 40.0% 56.6% 76.3% 84.4% 91.4% 97.0% 99.0% 100.0% 98.5% 30 year 40.0% 40.0% 41.9% 65.7% 76.3% 86.1% 94.2% 97.0% 98.5% 100.0%
7.47
Between two weighted sensitivities WSk and WSl within the same bucket with different tenor and different curves, the correlation ρkl is equal to the correlation parameter specified in [7.46] multiplied by 99.90%.24
7.48 The delta risk correlation ρkl between a weighted sensitivity WSk to the inflation curve and a weighted sensitivity WSl to a given tenor of the relevant yield curve is 40%.
7.49 The delta risk correlation ρkl between a weighted sensitivity WSk to a cross-currency basis curve and a weighted sensitivity WSl to each of the following curves is 0%:
(1) a given tenor of the relevant yield curve;
(2) the inflation curve; or
(3) another cross-currency basis curve (if relevant).
7.50 For aggregating GIRR risk positions across different buckets (ie different currencies), the parameter γbc is set at 50%.
Delta CSR non-securitisations buckets, risk weights and correlations
7.51 For delta CSR non-securitisations, buckets are set along two dimensions – credit quality and sector – as set out in Table 3. The CSR non-securitisation sensitivities or risk exposures should first be assigned to a bucket defined before calculating weighted sensitivities by applying a risk weight.
Buckets for delta CSR non-securitisations Table 3 Bucket number Credit quality Sector 1 Investment grade (IG) Sovereigns including central banks, multilateral development banks 2 Local government, government-backed non-financials, education, public administration 3 Financials including government-backed financials 4 Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 5 Consumer goods and services, transportation and storage, administrative and support service activities 6 Technology, telecommunications 7 Health care, utilities, professional and technical activities 8 Covered bonds25 9 High yield (HY) & non-rated (NR) Sovereigns including central banks, multilateral development banks 10 Local government, government-backed non-financials, education, public administration 11 Financials including government-backed financials 12 Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 13 Consumer goods and services, transportation and storage, administrative and support service activities 14 Technology, telecommunications 15 Health care, utilities, professional and technical activities 16 Other sector26 17 IG indices 18 HY indices
Consistent with the treatment of external ratings under SAMA Minimum Capital Requirements for Credit Risk paragraphs 8.10 and 8.12, if there are two ratings which map into different risk weights, the higher risk weight should be applied. If there are three or more ratings with different risk weights, the ratings corresponding to the two lowest risk weights should be referred to and the higher of those two risk weights will be applied.
Consistent with the treatment where there are no external ratings, banks may, subject to SAMA approval:
- For the purpose of assigning delta CSR non-securitisation risk weights, map the internal rating to an external rating, and assign a risk weight corresponding to either “investment grade” or “high yield” in [7.51];
- For the purpose of assigning default risk weights under the DRC requirement, map the internal rating to an external rating, and assign a risk weight corresponding to one of the seven external ratings in the table included [8.24]; or
- Apply the risk weights specified in [7.51] and [8.24] for unrated/non-rated categories.
7.52 To assign a risk exposure to a sector, banks must rely on a classification that is commonly used in the market for grouping issuers by industry sector.
(1) The bank must assign each issuer to one and only one of the sector buckets in the table under [7.51].
(2) Risk positions from any issuer that a bank cannot assign to a sector in this fashion must be assigned to the other sector (ie bucket 16).
7.53 For calculating weighted sensitivities, the risk weights for buckets 1 to 18 are set out in Table 4. Risk weights are the same for all tenors (ie 0.5 years, 1 year, 3 years, 5 years, 10 years) within each bucket: Risk weights for buckets for delta CSR non-securitisations
Risk weights for buckets for delta CSR non-securitisations Table 4 Bucket number Risk weight 1 0.5% 2 1.0% 3 5.0% 4 3.0% 5 3.0% 6 2.0% 7 1.5% 8 2.5%27 9 2.0% 10 4.0% 11 12.0% 12 7.0% 13 8.5% 14 5.5% 15 5.0% 16 12.0% 17 1.5% 18 5.0%
7.54
For buckets 1 to 15, for aggregating delta CSR non-securitisations risk positions within a bucket, the correlation parameter ρkl between two weighted sensitivities WSk and WSɭ within the same bucket, is set as follows, where:
(1) ρkl (name) is equal to 1 where the two names of sensitivities k and ∫ are identical, and 35% otherwise;
(2) ρkl (tenor) is equal to 1 if the two tenors of the sensitivities k and ∫ are identical, and to 65% otherwise; and
(3) ρkl (basis) is equal to 1 if the two sensitivities are related to same curves, and 99.90% otherwise.
Bond and CDS credit spreads are considered distinct risk factors under [7.9](1), and ρkl(basis) referenced in [7.54] and [7.55] is meant to capture only the bond-CDS basis.
7.55 For buckets 17 and 18, for aggregating delta CSR non-securitisations risk positions within a bucket, the correlation parameter ρkl between two weighted sensitivities WSk and WSi within the same bucket is set as follows, where:
(1) ρk (name) is equal to 1 where the two names of sensitivities k and ∫ are identical, and 80% otherwise;
(2) ρk (tenor) is equal to 1 if the two tenors of the sensitivities k and ∫ are identical, and to 65% otherwise; and
(3) ρkl (basis) is equal to 1 if the two sensitivities are related to same curves, and 99.90%.
7.56 The correlations above do not apply to the other sector bucket (ie bucket 16).
(1) The aggregation of delta CSR non-securitisation risk positions within the other sector bucket (ie bucket 16) would be equal to the simple sum of the absolute values of the net weighted sensitivities allocated to this bucket. The same method applies to the aggregation of vega risk positions.
(2) The aggregation of curvature CSR non-securitisation risk positions within the other sector bucket (ie bucket 16) would be calculated by the formula below.
7.57 For aggregating delta CSR non-securitisation risk positions across buckets 1 to 16, the correlation parameter γbc is set as follows, where:
(1) γbc(rating) is equal to 50% where the two buckets b and c are both in buckets 1 to 15 and have a different rating category (either IG or HY/NR). γbc(rating) is equal to 1 otherwise; and
(2) γbc(sector) is equal to 1 if the two buckets belong to the same sector, and to the specified numbers in Table 5 otherwise.
Values of γbc(sector) where the buckets do not belong to the same sector Table 5 Bucket 1/9 2/10 3/11 4/12 5/13 6/14 7/15 8 16 17 18 1/9 75% 10% 20% 25% 20% 15% 10% 0% 45% 45% 2/10 5% 15% 20% 15% 10% 10% 0% 45% 45% 3/11 5% 15% 20% 5% 20% 0% 45% 45% 4/12 20% 25% 5% 5% 0% 45% 45% 5/13 25% 5% 15% 0% 45% 45% 6/14 5% 20% 0% 45% 45% 7/15 5% 0% 45% 45% 8 0% 45% 45% 16 0% 0% 17 75% 18 Delta CSR securitisation (CTP) buckets, risk weights and correlations
7.58 Sensitivities to CSR arising from the CTP and its hedges are treated as a separate risk class as set out in 7.1]. The buckets, risk weights and correlations for the CSR securitisations (CTP) apply as follows:
(1) The same bucket structure and correlation structure apply to the CSR securitisations (CTP) as those for the CSR non-securitisation framework as set out in [7.51] to [7.57] with an exception of index buckets (ie buckets 17 and 18).
(2) The risk weights and correlation parameters of the delta CSR nonsecuritisations are modified to reflect longer liquidity horizons and larger basis risk as specified in [7.59] to [7.61].
7.59 For calculating weighted sensitivities, the risk weights for buckets 1 to 16 are set out in Table 6. Risk weights are the same for all tenors (ie 0.5 years, 1 year, 3 years, 5 years, 10 years) within each bucket:
Risk weights for sensitivities to CSR arising from the CTP Table 6 Bucket number Risk weight 1 4.0% 2 4.0% 3 8.0% 4 5.0% 5 4.0% 6 3.0% 7 2.0% 8 6.0% 9 13.0% 10 13.0% 11 16.0% 12 10.0% 13 12.0% 14 12.0% 15 12.0% 16 13.0%
7.60
For aggregating delta CSR securitisations (CTP) risk positions within a bucket, the delta risk correlation ρkl is derived the same way as in [7.54] and [7.55], except that the correlation parameter applying when the sensitivities are not related to same curves, ρkl (basis), is modified.
(1) ρkl (basis) is now equal to 1 if the two sensitivities are related to same curves, and 99.00% otherwise.
(2) The identical correlation parameters for ρkl(name) and ρkl(tenor) to CSR non-securitisation as set out in [7.54] and [7.55] apply.
7.61 For aggregating delta CSR securitisations (CTP) risk positions across buckets, the correlation parameters for γbc are identical to CSR non-securitisation as set out in [7.57].
Delta CSR securitisation (non-CTP) buckets, risk weights and correlations
7.62 For delta CSR securitisations not in the CTP, buckets are set along two dimensions– credit quality and sector – as set out in Table 7. The delta CSR securitisation (non-CTP) sensitivities or risk exposures must first be assigned to a bucket before calculating weighted sensitivities by applying a risk weight.
Buckets for delta CSR securitisations (non-CTP) Table 7 Bucket number Credit quality Sector 1 Senior investment grade (IG) RMBS – Prime 2 RMBS – Mid-prime 3 RMBS – Sub-prime 4 CMBS 5 Asset-backed securities (ABS) – Student loans 6 ABS – Credit cards 7 ABS – Auto 8 Collateralised loan obligation (CLO) non-CTP 9 Non-senior IG RMBS – Prime 10 RMBS – Mid-prime 11 RMBS – Sub-prime 12 Commercial mortgage-backed securities (CMBS) 13 ABS – Student loans 14 ABS – Credit cards 15 ABS – Auto 16 CLO non-CTP 17 High yield & non-rated RMBS – Prime 18 RMBS – Mid-prime 19 RMBS – Sub-prime 20 CMBS 21 ABS – Student loans 22 ABS – Credit cards 23 ABS – Auto 24 CLO non-CTP 25 Other Sector29
7.63
To assign a risk exposure to a sector, banks must rely on a classification that is commonly used in the market for grouping tranches by type.
(1) The bank must assign each tranche to one of the sector buckets in above Table 7.
(2) Risk positions from any tranche that a bank cannot assign to a sector in this fashion must be assigned to the other sector (ie bucket 25).
7.64 For calculating weighted sensitivities, the risk weights for buckets 1 to 8 (senior IG) are set out in Table 8:
Risk weights for buckets 1 to 8 for delta CSR securitisations (non-CTP) Table 8 Bucket number Risk weight (in percentage points) 1 0.9% 2 1.5% 3 2.0% 4 2.0% 5 0.8% 6 1.2% 7 1.2% 8 1.4%
7.65
The risk weights for buckets 9 to 16 (non-senior investment grade) are then equal to the corresponding risk weights for buckets 1 to 8 scaled up by a multiplication by 1.25. For instance, the risk weight for bucket 9 is equal to 1.25 × 0.9% = 1.125%.
7.66 The risk weights for buckets 17 to 24 (high yield and non-rated) are then equal to the corresponding risk weights for buckets 1 to 8 scaled up by a multiplication by 1.75. For instance, the risk weight for bucket 17 is equal to 1.75 × 0.9% = 1.575%.
7.67 The risk weight for bucket 25 is set at 3.5%.
7.68 For aggregating delta CSR securitisations (non-CTP) risk positions within a bucket, the correlation parameter ρkl between two sensitivities WSk and WSl within the same bucket, is set as follows, where:
(1) ρkl (tranche) is equal to 1 where the two names of sensitivities k and l are within the same bucket and related to the same securitisation tranche (more than 80% overlap in notional terms), and 40% otherwise;
(2) ρkl (tenor) is equal to 1 if the two tenors of the sensitivities k and l are identical, and to 80% otherwise; and
(3) ρkl (basis) is equal to 1 if the two sensitivities are related to same curves, and 99.90% otherwise.
[7.68] includes ρkl (tranche) , which equals 1 where the two sensitivities within the same bucket are related to the same securitisation tranche, or 40% otherwise. There is no issuer factor. This mean a two sensitivities relating to the same issuer but different tranches require 40% correlation. There is no granularity for issuers in the delta CSR securitisation part as set out in [7.10]. Where two tranches have exactly the same issuer, same tenor and same basis, but different tranches (ie different credit quality), the correlation must be 40%.
7.69 The correlations above do not apply to the other sector bucket (ie bucket 25).
(1) The aggregation of delta CSR securitisations (non-CTP) risk positions within the other sector bucket would be equal to the simple sum of the absolute values of the net weighted sensitivities allocated to this bucket. The same method applies to the aggregation of vega risk position.
(2) The aggregation of curvature CSR risk positions within the other sector bucket (ie bucket 16) would be calculated by the formula below.
7.70 For aggregating delta CSR securitisations (non-CTP) risk positions across buckets 1 to 24, the correlation parameter γbc is set as 0%.
7.71 For aggregating delta CSR securitisations (non-CTP) risk positions between the other sector bucket (ie bucket 25) and buckets 1 to 24, the correlation parameter γbc is set at 1. Bucket level capital requirements will be simply summed up to the overall risk class level capital requirements, with no diversification or hedging effects recognised with any bucket.
Equity risk buckets, risk weights and correlations
7.72 For delta equity risk, buckets are set along three dimensions – market capitalisation, economy and sector – as set out in Table 9. The equity risk sensitivities or exposures must first be assigned to a bucket before calculating weighted sensitivities by applying a risk weight.
Buckets for delta sensitivities to equity risk Table 9 Bucket number Market cap Economy Sector 1 Large Emerging market economy Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities 2 Telecommunications, industrials 3 Basic materials, energy, agriculture, manufacturing, mining and quarrying 4 Financials including government-backed financials, real estate activities, technology 5 Advanced economy Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities 6 Telecommunications, industrials 7 Basic materials, energy, agriculture, manufacturing, mining and quarrying 8 Financials including government-backed financials, real estate activities, technology 9 Small Emerging market economy All sectors described under bucket numbers 1, 2, 3 and 4 10 Advanced economy All sectors described under bucket numbers 5, 6, 7 and 8 11 Other sector30 12 Large market cap, advanced economy equity indices (non-sector specific) 13 Other equity indices (non-sector specific)
7.73
Market capitalisation (market cap) is defined as the sum of the market capitalisations based on the market value of the total outstanding shares issued by the same listed legal entity or a group of legal entities across all stock markets globally, where the total outstanding shares issued by the group of legal entities refer to cases where the listed entity is a parent company of a group of legal entities. Under no circumstances should the sum of the market capitalisations of multiple related listed entities be used to determine whether a listed entity is “large market cap” or “small market cap”.
7.74 Large market cap is defined as a market capitalisation equal to or greater than USD 2 billion and small market cap is defined as a market capitalisation of less than USD 2 billion.
7.75 The advanced economies are Canada, the United States, Mexico, the euro area, the non-euro area western European countries (the United Kingdom, Norway, Sweden, Denmark and Switzerland), Japan, Oceania (Australia and New Zealand), Singapore and Hong Kong SAR.
An equity issuer must be allocated to a particular bucket according to the most material country or region in which the issuer operates. As stated in [7.76]: “For multinational multisector equity issuers, the allocation to a particular bucket must be done according to the most material region and sector in which the issuer operates.
7.76 To assign a risk exposure to a sector, banks must rely on a classification that is commonly used in the market for grouping issuers by industry sector.
(1) The bank must assign each issuer to one of the sector buckets in the table under [7.72] and it must assign all issuers from the same industry to the same sector.
(2) Risk positions from any issuer that a bank cannot assign to a sector in this fashion must be assigned to the other sector (ie bucket 11).
(3) For multinational multi-sector equity issuers, the allocation to a particular bucket must be done according to the most material region and sector in which the issuer operates.
7.77 For calculating weighted sensitivities, the risk weights for the sensitivities to each of equity spot price and equity repo rates for buckets 1 to 13 are set out in Table 10:
Risk weights for buckets 1 to 13 for sensitivities to equity risk Table 10 Bucket number Risk weight for equity spot price Risk weight for equity repo rate 1 55% 0.55% 2 60% 0.60% 3 45% 0.45% 4 55% 0.55% 5 30% 0.30% 6 35% 0.35% 7 40% 0.40% 8 50% 0.50% 9 70% 0.70% 10 50% 0.50% 11 70% 0.70% 12 15% 0.15% 13 25% 0.25%
7.78
For aggregating delta equity risk positions within a bucket, the correlation parameter ρkl between two sensitivities WSk and WSl within the same bucket is set at as follows
(1) The correlation parameter ρkl is set at 99.90%, where:
(a) one is a sensitivity to an equity spot price and the other a sensitivity to an equity repo rates; and
(b) both are related to the same equity issuer name.
(2) The correlation parameter ρkl is set out in (a) to (d) below, where both sensitivities are to equity spot price, and where:
(a) 15% between two sensitivities within the same bucket that fall under large market cap, emerging market economy (bucket number 1, 2, 3 or 4).
(b) 25% between two sensitivities within the same bucket that fall under large market cap, advanced economy (bucket number 5, 6, 7 or 8).
(c) 7.5% between two sensitivities within the same bucket that fall under small market cap, emerging market economy (bucket number 9).
(d) 12.5% between two sensitivities within the same bucket that fall under small market cap, advanced economy (bucket number 10).
(e) 80% between two sensitivities within the same bucket that fall under either index bucket (bucket number 12 or 13)
(3) The same correlation parameter ρkl as set out in above (2)(a) to (d) apply, where both sensitivities are to equity repo rates.
(4) The correlation parameter ρkl is set as each parameter specified in above (2)(a) to (d) multiplied by 99.90%, where:
(a) One is a sensitivity to an equity spot price and the other a sensitivity to an equity repo rate; and
(b) Each sensitivity is related to a different equity issuer name.
7.79 The correlations set out above do not apply to the other sector bucket (ie bucket 11).
(1) The aggregation of equity risk positions within the other sector bucket capital requirement would be equal to the simple sum of the absolute values of the net weighted sensitivities allocated to this bucket. The same method applies to the aggregation of vega risk positions.
(2) The aggregation of curvature equity risk positions within the other sector bucket (ie bucket 11) would be calculated by the formula:
7.80 For aggregating delta equity risk positions across buckets 1 to 13, the correlation parameter γbc is set at:
(1) 15% if bucket b and bucket c fall within bucket numbers 1 to 10;
(2) 0% if either of bucket b and bucket c is bucket 11;
(3) 75% if bucket b and bucket c are bucket numbers 12 and 13 (i.e. one is bucket 12, one is bucket 13); and
(4) 45% otherwise.
Commodity risk buckets, risk weights and correlations
7.81 For delta commodity risk, 11 buckets that group commodities by common characteristics are set out in Table 11.
7.82 For calculating weighted sensitivities, the risk weights for each bucket are set out in Table 11:
Delta commodity buckets and risk weights Table 11 Bucket number Commodity bucket Examples of commodities allocated to each commodity bucket (non-exhaustive) Risk weight 1 Energy - solid combustibles Coal, charcoal, wood pellets, uranium 30% 2 Energy - liquid combustibles Light-sweet crude oil; heavy crude oil; West Texas Intermediate (WTI) crude; Brent crude; etc (ie various types of crude oil)
Bioethanol; biodiesel; etc (ie various biofuels)
Propane; ethane; gasoline; methanol; butane; etc (ie various petrochemicals)
Jet fuel; kerosene; gasoil; fuel oil; naphtha; heating oil; diesel etc (ie various refined fuels)35% 3 Energy - electricity and carbon trading Spot electricity; day-ahead electricity; peak electricity; off-peak electricity (ie various electricity types)
Certified emissions reductions; in-delivery month EU allowance; Regional Greenhouse Gas Initiative CO2 allowance; renewable energy certificates; etc (ie various carbon trading emissions)60% 4 Freight Capesize; Panamax; Handysize; Supramax (ie various types of dry-bulk route)
Suezmax; Aframax; very large crude carriers (ie various liquid-bulk/gas shipping route)80% 5 Metals — non-precious Aluminium; copper; lead; nickel; tin; zinc (ie various base metals)
Steel billet; steel wire; steel coil; steel scrap; steel rebar; iron ore; tungsten; vanadium; titanium; tantalum (ie steel raw materials)
Cobalt; manganese; molybdenum (ie various minor metals)40% 6 Gaseous combustibles Natural gas; liquefied natural gas 45% 7 Precious metals (including gold) Gold; silver; platinum; palladium 20% 8 Grains and oilseed Corn; wheat; soybean seed; soybean oil; soybean meal; oats; palm oil; canola; barley; rapeseed seed; rapeseed oil; rapeseed meal; red bean; sorghum; coconut oil; olive oil; peanut oil; sunflower oil; rice 35% 9 Livestock and dairy Live cattle; feeder cattle; hog; poultry; lamb; fish; shrimp; milk; whey; eggs; butter; cheese 25% 10 Softs and other agriculturals Cocoa; arabica coffee; robusta coffee; tea; citrus juice; orange juice; potatoes; sugar; cotton; wool; lumber;pulp; rubber 35% 11 Other commodity Potash; fertilizer; phosphate rocks (ie various industrial materials)
Rare earths; terephthalic acid; flat glass50%
7.83
For the purpose of aggregating commodity risk positions within a bucket using a correlation parameter, the correlation parameter ρkl between two sensitivities WSk and WSl within the same bucket, is set as follows, where:
(1) ρkl(cty) is equal to 1 where the two commodities of sensitivities k and l are identical, and to the intra-bucket correlations in Table 12 otherwise, where, any two commodities are considered distinct commodities if in the market two contracts are considered distinct when the only difference between each other is the underlying commodity to be delivered. For example, WTI and Brent in bucket 2 (ie energy – liquid combustibles) would typically be treated as distinct commodities;
(2) ρkl(tenor) is equal to 1 if the two tenors of the sensitivities k and l are identical, and to 99.00% otherwise; and
(3) ρkl(basis) is equal to 1 if the two sensitivities are identical in the delivery location of a commodity, and 99.90% otherwise.
Values of ρkl(cty) for intra-bucket correlations Table 12 Bucket number Commodity bucket Correlation ρkl(cty) 1 Energy - Solid combustibles 55% 2 Energy - Liquid combustibles 95% 3 Energy - Electricity and carbon trading 40% 4 Freight 80% 5 Metals - non-precious 60% 6 Gaseous combustibles 65% 7 Precious metals (including gold) 55% 8 Grains and oilseed 45% 9 Livestock and dairy 15% 10 Softs and other agriculturals 40% 11 Other commodity 15%
Instruments with a spread as their underlying are considered sensitive to different risk factors. In the example cited, the swap will be sensitive to both WTI and Brent, each of which require a capital charge at the risk factor level (ie delta of WTI and delta of Brent). The correlation to aggregate capital charges is specified in [7.83].
7.84 For determining whether the commodity correlation parameter (ρkl(cty)) as set out in Table 12 in [7.83](1)(a) should apply, this paragraph provides non-exhaustive examples of further definitions of distinct commodities as follows:
(1) For bucket 3 (energy – electricity and carbon trading):
(a) Each time interval (i) at which the electricity can be delivered and (ii) that is specified in a contract that is made on a financial market is considered a distinct electricity commodity (eg peak and off-peak).
(b) Electricity produced in a specific region (eg Electricity NE, Electricity SE or Electricity North) is considered a distinct electricity commodity.
(2) For bucket 4 (freight):
(a) Each combination of freight type and route is considered a distinct commodity.
(b) Each week at which a good has to be delivered is considered a distinct commodity.
7.85 For aggregating delta commodity risk positions across buckets, the correlation parameter ybc is set as follows:
(1) 20% if bucket b and bucket c fall within bucket numbers 1 to 10; and
(2) 0% if either bucket b or bucket c is bucket number 11.
Foreign exchange risk buckets, risk weights and correlations
7.86 An FX risk bucket is set for each exchange rate between the currency in which an instrument is denominated and the reporting currency.
7.87 A unique relative risk weight equal to 15% applies to all the FX sensitivities.
7.88 For specified currency pairs,32 and for currency pairs forming first- order crosses across these specified currency pairs,33 the above risk weight may at the discretion of the bank be divided by the square root of 2.
7.89 For aggregating delta FX risk positions across buckets, the correlation parameter Ybc is uniformly set to 60%.
22 Specified currencies by the Basel Committee are: EUR, USD, GBP, AUD, JPY, SEK, CAD as well as the domestic reporting currency of a bank.
23 The delta GIRR correlation parameters (ρkl) set out in Table 2 is determined by ma
, where Tk (respectivelyTl) is the tenor that relates to WSk (respectively WSl); and θ is set at 3%. For example, the correlation between a sensitivity to the one-year tenor of the Eonia swap curve and the a sensitivity to the five-year tenor of the Eonia swap curve in the same currency is max 
= 88.69%
24 For example, the correlation between a sensitivity to the one-year tenor of the Eonia swap curve and a sensitivity to the five-year tenor of the three-month Euribor swap curve in the same currency is (88.69%) . (0.999) = 88.60%.
25 Covered bonds must meet the definition provided by Large Exposure Rules for Banks issued via SAMA circular No. 1651 / 67 dated 09/01/1441.
26 Credit quality is not a differentiating consideration for this bucket.
27 For covered bonds that are rated AA- or higher, the applicable risk weight may at the discretion of the bank be 1.5%..
28 For example, a sensitivity to the five-year Apple bond curve and a sensitivity to the 10- year Google CDS curve would be 35% . .65% . 99.90% = 22.73%.
29 Credit quality is not a differentiating consideration for this bucket.
30 Market capitalisation or economy (ie advanced or emerging market) is not a differentiating consideration for this bucket.
31 For example, the correlation between the sensitivity to Brent, one-year tenor, for delivery in Le Havre and the sensitivity to WTI, five-year tenor, for delivery in Oklahoma is 95% - 99.00% - 99.90% = 93.96%.
32 Specified currency pairs are: SAR/USD, USD/EUR, USD/JPY, USD/GBP, USD/AUD, USD/CAD, USD/CHF, USD/MXN, USD/CNY, USD/NZD, USD/RUB, USD/HKD, USD/SGD, USD/TRY, USD/KRW, USD/SEK, USD/ZAR, USD/INR, USD/NOK, USD/BRL.
33 example, EUR/AUD is not among the selected currency pairs specified by the Basel Committee, but is a first-order cross of USD/EUR and USD/AUD.Sensitivities-Based Method: Definition of Vega Risk Buckets, Risk Weights and Correlations
7.90 [7.91] to [7.95] set out buckets, risk weights and correlation parameters to calculate vega risk capital requirement as set out in [7.4].
7.91 The same bucket definitions for each risk class are used for vega risk as for delta risk.
7.92 For calculating weighted sensitivities for vega risk, the risk of market illiquidity is incorporated into the determination of vega risk, by assigning different liquidity horizons for each risk class as set out in Table 13. The risk weight for each risk class34 is also set out in Table 13.
Regulatory liquidity horizon, LHrisk class and risk weights per risk class Table 13 Risk class LHrisk class Risk weights GIRR 60 100% CSR non-securitisations 120 100% CSR securitisations (CTP) 120 100% CSR securitisations (non-CTP) 120 100% Equity (large cap and indices) 20 77.78% Equity (small cap and other sector) 60 100% Commodity 120 100% FX 40 100%
7.93
For aggregating vega GIRR risk positions within a bucket, the correlation parameter ρkl is set as follows, where:
(1) pkl (option maturity) is equal to ? 
, where:
(a) α is set at 1%;
(b) Tk (respectively Tl) is the maturity of the option from which the vega sensitivity VRk (VRl) is derived, expressed as a number of years; and
(2) pkl(underlyins maturity) is equal to ? 
, where:
(a) α is set at 1%; and
(b) Tku (respectively Tlu) is the maturity of the underlying of the option from which the sensitivity VRk (VRl) is derived, expressed as a number of years after the maturity of the option.
7.95 For aggregating vega risk positions across different buckets within a risk class (GIRR and non- GIRR), the same correlation parameters for γbc, as specified for delta correlations for each risk class in [7.39] to [7.89] are to be used for the aggregation of vega risk (eg γbc = 50% is to be used for the aggregation of vega risk sensitivities across different GIRR buckets).
34 risk weight for a given vega risk factor k (RWk) is determined by RWk = min
, where RW∂ is set at 55%; and LHrisk class is specified per risk class in Table 13.Sensitivities-Based Method: Definition of Curvature Risk Buckets, Risk Weights and Correlations
7.96 [7.97] to [7.101] set out buckets, risk weights and correlation parameters to calculate curvature risk capital requirement as set out in [7.5].
7.97 The delta buckets are replicated for the calculation of curvature risk capital requirement, unless specified otherwise in the preceding paragraphs within [7.8] to [7.89].
7.98 For calculating the net curvature risk capital requirement CVRk for risk factor k for FX and equity risk classes, the curvature risk weight, which is the size of a shock to the given risk factor, is a relative shift equal to the respective delta risk weight. For FX curvature, for options that do not reference a bank’s reporting currency (or base currency as set out in [7.14](b)) as an underlying, net curvature risk charges (CVRk+ and CVRk- ) may be divided by a scalar of 1.5. Alternatively, and subject to SAMA approval, a bank may apply the scalar of 1.5 consistently to all FX instruments provided curvature sensitivities are calculated for all currencies, including sensitivities determined by shocking the reporting currency (or base currency where used) relative to all other currencies.
7.99 For calculating the net curvature risk capital requirement CVRk for curvature risk factor k for GIRR, CSR and commodity risk classes, the curvature risk weight is the parallel shift of all the tenors for each curve based on the highest prescribed delta risk weight for each risk class. For example, in the case of GIRR the risk weight assigned to 0.25-year tenor (ie the most punitive tenor risk weight) is applied to all the tenors simultaneously for each risk-free yield curve (consistent with a “translation”, or “parallel shift” risk calculation).
7.100 For aggregating curvature risk positions within a bucket, the curvature risk correlations pkl are determined by squaring the corresponding delta correlation parameters pkl except for CSR non-securitisations and CSR securitisations (CTP). In applying the high and low correlations scenario set out in [7.6], the curvature risk capital requirements are calculated by applying the curvature correlation parameters pkl determined in this paragraph.
(1) For CSR non-securitisations and CSR securitisations (CTP), consistent with [7.9] which defines a bucket along one dimension (ie the relevant credit spread curve), the correlation parameter pkl as defined in [7.54] and [7.55] is not applicable to the curvature risk capital requirement calculation. Thus, the correlation parameter is determined by whether the two names of weighted sensitivities are the same. In the formula in [7.54] and [7.55], the correlation parameters pkl(basis) and pkl(tenor) need not apply and only correlation parameter pkl (name) applies between two weighted sensitivities within the same bucket. This correlation parameter should be squared.
[7.100] states that, for curvature risk of CSR non-securitisation, the correlation parameters pkl(basis) and pkl(tenor) need not apply and only correlation parameter pkl(name) applies between two sensitivities WSk and WSl within the same bucket.
7.101 For aggregating curvature risk positions across buckets, the curvature risk correlations γbc are determined by squaring the corresponding delta correlation parameters γbc. For instance, when aggregating C VREUR and CVRUSD for the GIRR, the correlation should be 50%2 = 25% . In applying the high and low correlations scenario set out in [7.6], the curvature risk capital requirements are calculated by applying the curvature correlation parameters γbc, (ie the square of the corresponding delta correlation parameter).
8- Standardised Approach: Default Risk Capital Requirement
Main Concepts of Default Risk Capital Requirements
8.1 The default risk capital (DRC) requirement is intended to capture jump-to-default (JTD) risk that may not be captured by credit spread shocks under the sensitivities- based method. DRC requirements provide some limited hedging recognition. In this chapter offsetting refers to the netting of exposures to the same obligor (where a short exposure may be subtracted in full from a long exposure) and hedging refers to the application of a partial hedge benefit from the short exposures (where the risk of long and short exposures in distinct obligors do not fully offset due to basis or correlation risks).
Instruments Subject to the Default Risk Capital Requirement
8.2 The DRC requirement must be calculated for instruments subject to default risk:
(1) Non-securitisation portfolios
(2) Securitisation portfolio (non-correlation trading portfolio, or non-CTP)
(3) Securitisation (correlation trading portfolio, or CTP)
Overview of Drc Requirement Calculation
8.3 The following step-by-step approach must be followed for each risk class subject to default risk. The specific definition of gross JTD risk, net JTD risk, bucket, risk weight and the method for aggregation of DRC requirement across buckets are separately set out per each risk class in subsections in [8.9] to [8.26].
(1) The gross JTD risk of each exposure is computed separately.
(2) With respect to the same obligator, the JTD amounts of long and short exposures are offset (where permissible) to produce net long and/or net short exposure amounts per distinct obligor.
(3) Net JTD risk positions are then allocated to buckets.
(4) Within a bucket, a hedge benefit ratio is calculated using net long and short JTD risk positions. This acts as a discount factor that reduces the amount of net short positions to be netted against net long positions within a bucket. A prescribed risk weight is applied to the net positions which are then aggregated.
(5) Bucket level DRC requirements are aggregated as a simple sum across buckets to give the overall DRC requirement.
8.4 No diversification benefit is recognised between the DRC requirements for:
(1) non-securitisations;
(2) securitisations (non-CTP) ; and
(3) securitisations (CTP).
8.5 For traded non-securitisation credit and equity derivatives, JTD risk positions by individual constituent issuer legal entity should be determined by applying a look- through approach.
The JTD equivalent is defined as the difference between the value of the security or product assuming that each single name referenced by the security or product, separately from the others, defaults (with zero recovery) and the value of the security or product assuming that none of the names referenced by the security or product default.
8.6 For the CTP, the capital requirement calculation includes the default risk for non securitisation hedges. These hedges must be removed from the calculation of default risk non-securitisation.
8.7 Claims on sovereigns, public sector entities and multilateral development banks would be subject to a zero default risk weight in line with paragraphs 7.1 through 7.11 in the SAMA Minimum Capital Requirements for Credit Risk framework. SAMA apply a non-zero risk weight to securities issued by certain foreign governments, including to securities denominated in a currency other than that of the issuing government.
8.8 For claims on an equity investment in a fund that is subject to the treatment specified in [7.36](3) (ie treated as an unrated “other sector” equity), the equity investment in the fund shall be treated as an unrated equity instrument. Where the mandate of that fund allows the fund to invest in primarily high-yield or distressed names, banks shall apply the maximum risk weight per Table 2 in [8.24] that is achievable under the fund’s mandate (by calculating the effective average risk weight of the fund when assuming that the fund invests first in defaulted instruments to the maximum possible extent allowed under its mandate, and then in CCC-rated names to the maximum possible extent, and then B-rated, and then BB-rated). Neither offsetting nor diversification between these generated exposures and other exposures is allowed.
Default Risk Capital Requirement for Non-Securitisations
Gross jump-to-default risk positions (gross JTD)
8.9 The gross JTD risk position is computed exposure by exposure. For instance, if a bank has a long position on a bond issued by Apple, and another short position on a bond issued by Apple, it must compute two separate JTD exposures.
8.10 For the purpose of DRC requirements, the determination of the long/short direction of positions must be on the basis of long or short with respect to whether the credit exposure results in a loss or gain in the case of a default.
(1) Specifically, a long exposure is defined as a credit exposure that results in a loss in the case of a default.
(2) For derivative contracts, the long/short direction is also determined by whether the contract will result in a loss in the case of a default (ie long or short position is not determined by whether the option or credit default swap (CDS), is bought or sold). Thus, for the purpose of DRC requirements, a sold put option on a bond is a long credit exposure, since a default results in a loss to the seller of the option.
8.11 The gross JTD is a function of the loss given default (LGD), notional amount (or face value) and the cumulative profit and loss (P&L) already realised on the position, where:
(1) notional is the bond-equivalent notional amount (or face value) of the position; and
(2) P&L is the cumulative mark-to-market loss (or gain) already taken on the exposure. P&L is equal to the market value minus the notional amount, where the market value is the current market value of the position.
8.12 For calculating the gross JTD, LGD is set as follows:
(1) Equity instruments and non-senior debt instruments are assigned an LGD of 100%.
(2) Senior debt instruments are assigned an LGD of 75%.
(3) Covered bonds, as defined within [7.51], are assigned an LGD of 25%.
(4) When the price of the instrument is not linked to the recovery rate of the defaulter (eg a foreign exchange-credit hybrid option where the cash flows are swap of cash flows, long EUR coupons and short USD coupons with a knockout feature that ends cash flows on an event of default of a particular obligor), there should be no multiplication of the notional by the LGD.
8.13 In calculating the JTD as set out in [8.11], the notional amount of an instrument that gives rise to a long (short) exposure is recorded as a positive (negative) value, while the P&L loss (gain) is recorded as a negative (positive) value. If the contractual or legal terms of the derivative allow for the unwinding of the instrument with no exposure to default risk, then the JTD is equal to zero.
8.14 The notional amount is used to determine the loss of principal at default, and the mark-to-market loss is used to determine the net loss so as to not double-count the mark-to-market loss already recorded in the market value of the position.
(1) For all instruments, the notional amount is the notional amount of the instrument relative to which the loss of principal is determined. Examples are as follows:
(a) For a bond, the notional amount is the face value.
(b) For credit derivatives, the notional amount of a CDS contract or a put option on a bond is the notional amount of the derivative contract.
(c) In the case of a call option on a bond, the notional amount to be used in the JTD calculation is zero (since, in the event of default, the call option will not be exercised). In this case, a JTD would extinguish the call option’s value and this loss would be captured through the mark- to-market P&L term in the JTD calculation.
(2) Table 1 illustrates examples of the notional amounts and market values for a long credit position with a mark-to-market loss to be used in the JTD calculation, where:
(a) the bond-equivalent market value is an intermediate step in determining the P&L for derivative instruments;
(b) the mark-to-market value of CDS or an option takes an absolute value; and
(c) the strike amount of the bond option is expressed in terms of the bond price (not the yield).
Examples of components for a long credit position in the JTD calculation Table 1 Instrument Notional Bond-equivalent market value P&L Bond Face value of bond Market value of bond Market value - face value CDS Notional of CDS Notional of CDS -| mark- to-market (MtM) value of CDS | -| MtM value of CDS | Sold put option on a bond Notional of option Strike amount -| MtM value of option | (Strike -| MtM value of option |) - Notional Bought call option on a bond 0 MtM value of option MtM value of option P&L = bond-equivalent market value - notional.
With this representation of the P&L for a sold put option, a lower strike results in a lower JTD loss.
The convertible bonds are not treated the same way as vanilla bonds in computing the DRC requirement Banks should also consider the P&L of the equity optionality embedded within a convertible bond when computing its DRC requirement. A convertible bond can be decomposed into a vanilla bond and a long equity option. Hence, treating the convertible bond as a vanilla bond will potentially underestimate the JTD risk of the instrument.
8.15 To account for defaults within the one-year capital horizon, the JTD for all exposures of maturity less than one year and their hedges are scaled by a fraction of a year. No scaling is applied to the JTD for exposures of one year or greater.35 For example, the JTD for a position with a six month maturity would be weighted by one-half, while the JTD for a position with a one year maturity would have no scaling applied to the JTD.
8.16 Cash equity positions (ie stocks) are assigned to a maturity of either more than one year or three months, at banks’ discretion.
[8.16] states that for the standardised approach DRC requirement, cash equity positions may be attributed a maturity of three months or a maturity of more than one year, at firms’ discretion. Such restrictions do not exist in [13] for the internal models approach, which allows banks discretion to apply a 60-day liquidity horizon for equity sub-portfolios. Furthermore, [8.15] states “... the JTD for all exposures of maturity less than one year and their hedges are scaled by a fraction of a year”. Given the above- mentioned paragraphs, for purposes of the standardised approach DRC requirement, the bank is not permitted to assign cash equities and equity derivatives such as index futures any maturity between three months and one year on a sub-portfolio basis in order to avoid broken hedges As required by [8.16], cash equity positions are assigned a maturity of either more than one year or three months. There is no discretion permitted to assign cash equity positions to any maturity between three months and one year. In determining the offsetting criterion, [8.17] specifies that the maturity of the derivatives contract be considered, not the maturity of the underlying instrument. [8.18] further states that the maturity weighting applied to the JTD for any product with maturity of less than three months is floored at three months. To illustrate how the standardised approach DRC requirement should be calculated with a simple hypothetical portfolio, consider equity index futures with one month to maturity and a negative market value of EUR 10 million (–EUR 10 million, maturity 1M), hedged with the underlying equity positions with a positive market value of EUR 10 million (+EUR 10 million). Both positions in the example should be considered having a three-month maturity. Based on [8.15], which requires maturity scaling, defined as a fraction of the year, of positions and their hedge, the JTD for the above trading portfolio would be calculated as follows: 1/4*10 – 1/4*10 = 0.
8.17 For derivative exposures, the maturity of the derivative contract is considered in determining the offsetting criterion, not the maturity of the underlying instrument.
8.18 The maturity weighting applied to the JTD for any sort of product with a maturity of less than three months (such as short term lending) is floored at a weighting factor of one-fourth or, equivalently, three months (that means that the positions having shorter-than-three months remaining maturity would be regarded as having a remaining maturity of three months for the purpose of the DRC requirement).
In the case where a total return swap (TRS) with a maturity of one month is hedged by the underlying equity, and if there were sufficient legal terms on the TRS such that there is no settlement risk at swap maturity as the swap is terminated based on the executed price of the stock/bond hedge and any unwind of the TRS can be delayed (beyond the swap maturity date) in the event of hedge disruption until the stock/bond can be liquidated. The net JTD for such a position would be zero. If the contractual/legal terms of the derivative allow for the unwinding of both legs of the position at the time of expiry of the first to mature with no exposure to default risk of the underlying credit beyond that point, then the JTD for the maturity-mismatched position is equal to zero.
Net jump-to-default risk positions (net JTD)
8.19 Exposures to the same obligator may be offset as follows:
(1) The gross JTD risk positions of long and short exposures to the same obligor may be offset where the short exposure has the same or lower seniority relative to the long exposure. For example, a short exposure in an equity may offset a long exposure in a bond, but a short exposure in a bond cannot offset a long exposure in the equity.
(2) For the purposes of determining whether a guaranteed bond is an exposure to the underlying obligor or an exposure to the guarantor, the credit risk mitigation requirements set out in paragraphs 9.70 and 9.72 of the SAMA Minimum Capital Requirements for Credit Risk.
(3) Exposures of different maturities that meet this offsetting criterion may be offset as follows.
(a) Exposures with maturities longer than the capital horizon (one year) may be fully offset.
(b) An exposure to an obligor comprising a mix of long and short exposures with a maturity less than the capital horizon (equal to one year) must be weighted by the ratio of the exposure’s maturity relative to the capital horizon. For example, with the one-year capital horizon, a three-month short exposure would be weighted so that its benefit against long exposures of longer-than- one-year maturity would be reduced to one quarter of the exposure size.36
8.20 In the case of long and short offsetting exposures where both have a maturity under one year, the scaling can be applied to both the long and short exposures.
8.21 Finally, the offsetting may result in net long JTD risk positions and net short JTD risk positions. The net long and net short JTD risk positions are aggregated separately as described below.
Calculation of default risk capital requirement for non-securitisation
8.22 For the default risk of non-securitisations, three buckets are defined as:
(1) corporates;
(2) sovereigns; and
(3) local governments and municipalities.
8.23 In order to recognise hedging relationship between net long and net short positions within a bucket, a hedge benefit ratio is computed as follows.
(1) A simple sum of the net long JTD risk positions (not risk-weighted) must be calculated, where the summation is across the credit quality categories (ie rating bands). The aggregated amount is used in the numerator and denominator of the expression of the hedge benefit ratio (HBR) below.
(2) A simple sum of the net (not risk-weighted) short JTD risk positions must be calculated, where the summation is across the credit quality categories (ie rating bands). The aggregated amount is used in the denominator of the expression of the HBR below.
(3) The HBR is the ratio of net long JTD risk positions to the sum of net long JTD and absolute value of net short JTD risk positions:
8.24 For calculating the weighted net JTD, default risk weights are set depending on the credit quality categories (ie rating bands) for all three buckets (ie irrespective of the type of counterparty), as set out in Table 2:
Default risk weights for non-securitisations by credit quality category Table 2 Credit quality category Default risk weight AAA 0.5% AA 2% A 3% BBB 6% BB 15% B 30% CCC 50% Unrated 15% Defaulted 100%
8.25
The capital requirement for each bucket is to be calculated as the combination of the sum of the risk-weighted long net JTD, the HBR, and the sum of the risk- weighted short net JTD, where the summation for each long net JTD and short net JTD is across the credit quality categories (ie rating bands). In the following formula, DRC stands for DRC requirement; and i refers to an instrument belonging to bucket b.
8.26 No hedging is recognised between different buckets - the total DRC requirement for non- securitisations must be calculated as a simple sum of the bucket level capital requirements.
35 Note that this paragraph refers to the scaling of gross JTD (ie not net JTD).
36 SAMA Minimum Capital Requirements for Credit Risk.Default Risk Capital Requirement for Securitisations (Non-CTP)
Gross jump-to-default risk positions (gross JTD)
8.27 For the computation of gross JTD on securitisations, the same approach must be followed as for default risk (non-securitisations), except that an LGD ratio is not applied to the exposure. Because the LGD is already included in the default risk weights for securitisations to be applied to the securitisation exposure (see below), to avoid double counting of LGD the JTD for securitisations is simply the market value of the securitisation exposure (ie the JTD for tranche positions is their market value).
8.28 For the purposes of offsetting and hedging recognition for securitisations (non-CTP), positions in underlying names or a non-tranched index position may be decomposed proportionately into the equivalent replicating tranches that span the entire tranche structure. When underlying names are treated in this way, they must be removed from the non-securitisation default risk treatment.
Net jump-to-default risk positions (net JTD)
8.29 For default risk of securitisations (non-CTP), offsetting is limited to a specific securitisation exposure (ie tranches with the same underlying asset pool). This means that:
(1) no offsetting is permitted between securitisation exposures with different underlying securitised portfolio (ie underlying asset pools), even if the attachment and detachment points are the same; and
(2) no offsetting is permitted between securitisation exposures arising from different tranches with the same securitised portfolio.
8.30 Securitisation exposures that are otherwise identical except for maturity may be offset. The same offsetting rules for non-securitisations including scaling down positions of less than one year as set out in [8.15] through [8.18] apply to JTD risk positions for securitisations (non- CTP). Offsetting within a specific securitisation exposure is allowed as follows.
(1) Securitisation exposures that can be perfectly replicated through decomposition may be offset. Specifically, if a collection of long securitisation exposures can be replicated by a collection of short securitisation exposures, then the securitisation exposures may be offset.
(2) Furthermore, when a long securitisation exposure can be replicated by a collection of short securitisation exposures with different securitised portfolios, then the securitisation exposure with the “mixed” securitisation portfolio may be offset by the combination of replicating securitisation exposures.
(3) After the decomposition, the offsetting rules would apply as in any other case. As in the case of default risk (non-securitisations), long and short securitisation exposures should be determined from the perspective of long or short the underlying credit, eg the bank making losses on a long securitisation exposure in the event of a default in the securitised portfolio.
Calculation of default risk capital requirement for securitisations (non-CTP)
8.31 For default risk of securitisations (non-CTP), the buckets are defined as follows:
(1) Corporates (excluding small and medium enterprises) – this bucket takes into account all regions.
(2) Other buckets – these are defined along two dimensions:
(a) Asset classes: the 11 asset classes are defined as asset-backed commercial paper; auto Loans/Leases; residential mortgage-backed securities (MBS); credit cards; commercial MBS; collateralised loan obligations; collateralised debt obligation (CDO)-squared; small and medium enterprises; student loans, other retail; and other wholesale.
(b) Regions: the four regions are defined as Asia, Europe, North America and all other.
8.32 To assign a securitisation exposure to a bucket, banks must rely on a classification that is commonly used in the market for grouping securitisation exposures by type and region of underlying.
(1) The bank must assign each securitisation exposure to one and only one of the buckets above and it must assign all securitisations with the same type and region of underlying to the same bucket.
(2) Any securitisation exposure that a bank cannot assign to a type or region of underlying in this fashion must be assigned to the “other bucket”.
8.33 The capital requirement for default risk of securitisations (non-CTP) is determined using a similar approach to that for non-securitisations. The DRC requirement within a bucket is calculated as follows:
(1) The hedge benefit discount HBR, as defined in [8.23], is applied to net short securitisation exposures in that bucket.
(2) The capital requirement is calculated as in [8.25].
8.34 For calculating the weighted net JTD, the risk weights of securitisation exposures are defined by the tranche instead of the credit quality. The risk weight for securitisations (non-CTP) is applied as follows:
(1) The default risk weights for securitisation exposures are based on the corresponding risk weights for banking book instruments, as set out in 18 to 22 of Minimum Capital Requirements for Credit Risk with the following modification: the maturity component in the banking book securitisation framework is set to zero (ie a one-year maturity is assumed) to avoid doublecounting of risks in the maturity adjustment (of the banking book approach) since migration risk in the trading book will be captured in the credit spread capital requirement. (2) Following the corresponding treatment in the banking book, the hierarchy of approaches in determining the risk weights should be applied at the underlying pool level.
(3) The capital requirement under the standardised approach for an individual cash securitisation position can be capped at the fair value of the transaction.
8.35 No hedging is recognised between different buckets. Therefore, the total capital requirement for default risk securitisations must be calculated as a simple sum of the bucket-level capital requirements.
Default Risk Capital Requirement for Securitisations (CTP)
Gross jump-to-default risk positions (gross JTD)
8.36 For the computation of gross JTD on securitisations (CTP), the same approach must be followed as for default risk-securitisations (non-CTP) as described in [8.27].
8.37 The gross JTD for non-securitisations (CTP) (ie single-name and index hedges) positions is defined as their market value.
8.38 Nth-to-default products should be treated as tranched products with attachment and detachment points defined below, where “Total names” is the total number of names in the underlying basket or pool:
(1) Attachment point = (N – 1) / Total names
(2) Detachment point = N / Total names
Net jump-to-default risk positions (net JTD)
8.39 Exposures that are otherwise identical except for maturity may be offset. The same concept of long and short positions from a perspective of loss or gain in the event of a default as set out in [8.10] and offsetting rules for non-securitisations including scaling down positions of less than one year as set out in [8.15] to [8.18] apply to JTD risk positions for securitisations (non-CTP).
(1) For index products, for the exact same index family (eg CDX.NA.IG), series (eg series 18) and tranche (eg 0–3%), securitisation exposures should be offset (netted) across maturities (subject to the offsetting allowance as described above).
(2) Long and short exposures that are perfect replications through decomposition may be offset as follows. When the offsetting involves decomposing single name equivalent exposures, decomposition using a valuation model would be allowed in certain cases as follows. Such decomposition is the sensitivity of the security’s value to the default of the underlying single name obligor. Decomposition with a valuation model is defined as follows: a single name equivalent constituent of a securitisation (eg tranched position) is the difference between the unconditional value of the securitisation and the conditional value of the securitisation assuming that the single name defaults, with zero recovery, where the value is determined by a valuation model. In such cases, the decomposition into single-name equivalent exposures must account for the effect of marginal defaults of the single names in the securitisation, where in particular the sum of the decomposed single name amounts must be consistent with the undecomposed value of the securitisation. Further, such decomposition is restricted to vanilla securitisations (eg vanilla CDOs, index tranches or bespokes); while the decomposition of exotic securitisations (eg CDO squared) is prohibited.
(3) Moreover, for long and short positions in index tranches, and indices (non- tranched), if the exposures are to the exact same series of the index, then offsetting is allowed by replication and decomposition. For instance, a long securitisation exposure in a 10–15% tranche vs combined short securitisation exposures in 10–12% and 12–15% tranches on the same index/series can be offset against each other. Similarly, long securitisation exposures in the various tranches that, when combined perfectly, replicate a position in the index series (non-tranched) can be offset against a short securitisation exposure in the index series if all the positions are to the exact same index and series (eg CDX.NA.IG series 18). Long and short positions in indices and single-name constituents in the index may also be offset by decomposition. For instance, single-name long securitisation exposures that perfectly replicate an index may be offset against a short securitisation exposure in the index. When a perfect replication is not possible, then offsetting is not allowed except as indicated in the next sentence. Where the long and short securitisation exposures are otherwise equivalent except for a residual component, the net amount must show the residual exposure. For instance, a long securitisation exposure in an index of 125 names, and short securitisation exposures of the appropriate replicating amounts in 124 of the names, would result in a net long securitisation exposure in the missing 125th name of the index.
(4) Different tranches of the same index or series may not be offset (netted), different series of the same index may not be offset, and different index families may not be offset.
Calculation of default risk capital requirement for securitisations (CTP)
8.40 For default risk of securitisations (CTP), each index is defined as a bucket of its own. A non- exhaustive list of indices include: CDX North America IG, iTraxx Europe IG, CDX HY, iTraxx XO, LCDX (loan index), iTraxx LevX (loan index), Asia Corp, Latin America Corp, Other Regions Corp, Major Sovereign (G7 and Western Europe) and Other Sovereign.
8.41 Bespoke securitisation exposures should be allocated to the index bucket of the index they are a bespoke tranche of. For instance, the bespoke tranche 5% - 8% of a given index should be allocated to the bucket of that index.
8.42 The default risk weights for securitisations applied to tranches are based on the corresponding risk weights for the banking book instruments, as set out in 18 to 22 of SAMA Minimum Capital Requirements for Credit Risk, with the following modification: the maturity component in the banking book securitisation framework is set to zero, ie a one-year maturity is assumed to avoid double-counting of risks in the maturity adjustment (of the banking book approach) since migration risk in the trading book will be captured in the credit spread capital requirement..
8.43 For the non-tranched products, the same risk weights for non-securitisations as set out in [8.24] apply. For the tranched products, banks must derive the risk weight using the banking book treatment as set out in [8.42].
8.44 Within a bucket (ie for each index) at an index level, the capital requirement for default risk of securitisations (CTP) is determined in a similar approach to that for non-securitisations.
(1) The hedge benefit ratio (HBR), as defined in [8.23], is modified and applied to net short positions in that bucket as in the formula below, where the subscript ctp for the term HBRctp indicates that the HBR is determined using the combined long and short positions across all indices in the CTP (ie not only the long and short positions of the bucket by itself). The summation of risk-weighted amounts in the formula spans all exposures relating to the index (ie index tranche, bespoke, non-tranche index or single name).
(2) A deviation from the approach for non-securitisations is that no floor at zero applies at the bucket level, and consequently, the DRC requirement at the index level (DRCb) can be negative.
8.45 The total DRC requirement for securitisations (CTP) is calculated by aggregating bucket level capital amounts as follows. For instance, if the DRC requirement for the index CDX North America IG is +100 and the DRC requirement for the index Major Sovereign (G7 and Western Europe) is - 100, the total DRC requirement for the CTP is 100 - 0.5 × 100 = 50.37
37 The procedure for the DRCb and DRCctp terms accounts for the basis risk in cross index hedges, as the hedge benefit from cross-index short positions is discounted twice, first by the hedge benefit ratio HBR in DRCb, and again by the term 0.5 in the DRCCtp equation.
9- Standardised Approach: Residual Risk Add-on
9.1 The residual risk add-on (RRAO) is to be calculated for all instruments bearing residual risk separately in addition to other components of the capital requirement under the standardised approach.
Instruments Subject to the Residual Risk Add-on
9.2 Instruments with an exotic underlying and instruments bearing other residual risks are subject to the RRAO.
9.3 Instruments with an exotic underlying are trading book instruments with an underlying exposure that is not within the scope of delta, vega or curvature risk treatment in any risk class under the sensitivities-based method or default risk capital (DRC) requirements in the standardised approach.38
The future realised volatility is considered an “exotic underlying” for the purpose of the RRAO
9.4 Instruments bearing other residual risks are those that meet criteria (1) and (2) below:
(1) Instruments subject to vega or curvature risk capital requirements in the trading book and with pay-offs that cannot be written or perfectly replicated as a finite linear combination of vanilla options with a single underlying equity price, commodity price, exchange rate, bond price, credit default swap price or interest rate swap; or
(2) Instruments which fall under the definition of the correlation trading portfolio (CTP) in [6.5], except for those instruments that are recognised in the market risk framework as eligible hedges of risks within the CTP.
The bonds with multiple call dates would be considered as instruments bearing other residual risks for the purpose of the RRAO as they are path-dependent options.
9.5 A non-exhaustive list of other residual risks types and instruments that may fall within the criteria set out in [9.4] include:
(1) Gap risk: risk of a significant change in vega parameters in options due to small movements in the underlying, which results in hedge slippage. Relevant instruments subject to gap risk include all path dependent options, such as barrier options, and Asian options as well as all digital options.
(2) Correlation risk: risk of a change in a correlation parameter necessary for determining the value of an instrument with multiple underlyings. Relevant instruments subject to correlation risk include all basket options, best-of- options, spread options, basis options, Bermudan options and quanto options.
(3) Behavioural risk: risk of a change in exercise/prepayment outcomes such as those that arise in fixed rate mortgage products where retail clients may make decisions motivated by factors other than pure financial gain (such as demographical features and/or and other social factors). A callable bond may only be seen as possibly having behavioural risk if the right to call lies with a retail client.
9.6 When an instrument is subject to one or more of the following risk types, this by itself will not cause the instrument to be subject to the RRAO:
(1) Risk from a cheapest-to-deliver option;
(2) Smile risk: the risk of a change in an implied volatility parameter necessary for determining the value of an instrument with optionality relative to the implied volatility of other instruments optionality with the same underlying and maturity, but different moneyness;
(3) Correlation risk arising from multi-underlying European or American plain vanilla options, and from any options that can be written as a linear combination of such options. This exemption applies in particular to the relevant index options;
(4) Dividend risk arising from a derivative instrument whose underlying does not consist solely of dividend payments; and
(5) Index instruments and multi-underlying options of which treatment for delta, vega or curvature risk are set out in [7.31] and [7.32]. These are subject to the RRAO if they fall within the definitions set out in this chapter. For funds that are subject to the treatment specified in [7.36](3) (ie treated as an unrated “other sector” equity), banks shall assume the fund is exposed to exotic underlying exposures, and to other residual risks, to the maximum possible extent allowed under the fund’s mandate.
9.7 In cases where a transaction exactly matches with a third-party transaction (ie a back-to-back transaction), the instruments used in both transactions must be excluded from the RRAO capital requirement. Any instrument that is listed and/or eligible for central clearing must be excluded from the RRAO.
Hedges (for example, dividend swaps hedging dividend risks) may be excluded from the RRAO only if the hedge exactly matches the trade (ie via a back-to-back transaction) as per [9.7]. For the example cited, dividend swaps should remain within the RRAO.
As per [9.7], The total return swap (TRS) on an underlying product may be excluded from the RRAO capital requirement if there is an equal and opposite exposure in the same TRS. If no exactly matching transaction exists, the entire notional of the TRS would be allocated to the RRAO.
38 Examples of exotic underlying exposures include: longevity risk, weather, natural disasters, future realised volatility (as an underlying exposure for a swap).
Calculation of the Residual Risk Add-on
9.8 The residual risk add-on must be calculated in addition to any other capital requirements within the standardised approach. The residual risk add-on is to be calculated as follows.
(1) The scope of instruments that are subject to the RRAO must not have an impact in terms of increasing or decreasing the scope of risk factors subject to the delta, vega, curvature or DRC treatments in the standardised approach.
(2) The RRAO is the simple sum of gross notional amounts of the instruments bearing residual risks, multiplied by a risk weight.
(a) The risk weight for instruments with an exotic underlying specified in [9.3] is 1.0%.
(b) The risk weight for instruments bearing other residual risks specified in [9.4] is 0.1%.39
39 Where the bank cannot satisfy the RRAO provides a sufficiently prudent capital charge, then the bank will address any potentially under-capitalised risks by imposing a conservative additional capital charge under Pillar 2.
10- Internal Models Approach: General Provisions
General Criteria
10.1 The use of internal models for the purposes of determining market risk capital requirements is conditional upon the explicit approval from SAMA
10.2 SAMA will only approve a bank’s use of internal models to determine market risk capital requirements if, at a minimum:
(1) SAMA is satisfied that the bank’s risk management system is conceptually sound and is implemented with integrity;
(2) the bank has, in SAMA view, a sufficient number of staff skilled in the use of sophisticated models not only in the trading area but also in the risk control, audit and, if necessary, back office areas;
(3) the bank’s trading desk risk management model has, in SAMA judgement, a proven track record of reasonable accuracy in measuring risk;
(4) the bank regularly conducts stress tests along the lines set out in [10.19] to [10.23]; and
(5) the positions included in the bank’s internal trading desk risk management models for determining minimum market risk capital requirements are held in trading desks that have been approved for the use of those models and that have passed the required tests described in [10.17].
(6) A bank must also be able to participate in testing exercises to provide any additional information required to satisfy SAMA of the adequacy of the internal model (both prior to model approval and subsequently, if SAMA wishes to review the internal model).
10.3 SAMA may insist on a period of initial monitoring and live testing of a bank’s internal trading desk risk management model before it is used for the purposes of determining the bank’s market risk capital requirements.
10.4 The scope of trading portfolios that are eligible to use internal models to determine market risk capital requirements is determined based on a three-prong approach as follows:
(1) The bank must satisfy SAMA that both the bank’s organisational infrastructure (including the definition and structure of trading desks) and its bank-wide internal risk management model meet qualitative evaluation criteria, as set out in [10.5] to [10.16].
(2) The bank must nominate individual trading desks, as defined in [4.1] to [4.6], for which the bank seeks model approval in order to use the internal models approach (IMA).
(a) The bank must nominate trading desks that it intends to be in-scope for model approval and trading desks that are out-of-scope for the use of the IMA. The bank must specify in writing the basis for these nominations.
(b) The bank must not nominate trading desks to be out-of-scope for model approval due to capital requirements for a particular trading desk determined using the standardised approach being lower than those determined using the IMA.
(c) The bank must use the standardised approach to determine the market risk capital requirements for trading desks that are out-of-scope for model approval. The positions in these out-of-scope trading desks are to be combined with all other positions that are subject to the standardised approach in order to determine the bank’s standardised approach capital requirements.
(d) Trading desks that the bank does not nominate for model approval at the time of model approval will be ineligible to use the IMA for a period of at least one year from the date of the latest internal model approval.
(3) The bank must receive SAMA approval to use the IMA on individual trading desks. Following the identification of eligible trading desks, this step determines which trading desks will be in-scope to use the IMA and which risk factors within in-scope trading desks are eligible to be included in the bank’s internal expected shortfall (ES) models to determine market risk capital requirements as set out in [13].
(a) Each trading desk must satisfy profit and loss (P&L) attribution (PLA) tests on an ongoing basis to be eligible to use the IMA to determine market risk capital requirements. In order to conduct the PLA test, the bank must identify the set of risk factors to be used to determine its market risk capital requirements.
(b) Each trading desk also must satisfy backtesting requirements on an ongoing basis to be eligible to use the IMA to determine market risk capital requirements as set out in [12.4] to [12.19].
(c) Banks must conduct PLA tests and backtesting on a quarterly basis to update the eligibility and trading desk classification in PLA for trading desks in-scope to use the IMA.
(d) The market risk capital requirements for risk factors that satisfy the risk factor eligibility test as set out in [11.12] to [11.24] must be determined using ES models as specified in [13.1] to [13.15].
(e) The market risk capital requirements for risk factors that do not satisfy the risk factor eligibility test must be determined using stressed expected shortfall (SES) models as specified in [13.16] to [13.17]
The model approval process requires an overall assessment of a bank’s bank-wide internal risk capital model. The term “bank-wide” is defined as pertaining to the group of trading desks that the bank nominates as in-scope in their application for the IMA.
Securitisation positions are out of scope for IMA regulatory capital treatment, and as a result they are not taken into account for the model eligibility tests. This implies that banks are not allowed to include securitisations in trading desks for which they determine market risk capital requirements using the IMA. Securitisations must be included in trading desks for which capital requirements are determined using the standardised approach. Banks are allowed to also include hedging instruments in trading desks which include securitisations and are capitalised using the standardised approach.
Qualitative Standards
10.5 In order to use the IMA to determine market risk capital requirements, the bank must have market risk management systems that are conceptually sound and implemented with integrity. Accordingly, the bank must meet the qualitative criteria set out below on an ongoing basis. SAMA will assess that the bank has met the criteria before the bank is permitted to use the IMA.
10.6 The bank must have an independent risk control unit that is responsible for the design and implementation of the bank’s market risk management system. The risk control unit should produce and analyse daily reports on the output of the trading desk’s risk management model, including an evaluation of the relationship between measures of risk exposure and trading limits. This risk control unit must be independent of business trading units and should report directly to senior management of the bank.
10.7 The bank’s risk control unit must conduct regular backtesting and PLA assessments at the trading desk level. The bank must also conduct regular backtesting of its bank-wide internal models used for determining market risk capital requirements.
10.8 A distinct unit of the bank that is separate from the unit that designs and implements the internal models must conduct the initial and ongoing validation of all internal models used to determine market risk capital requirements. The model validation unit must validate all internal models used for purposes of the IMA on at least an annual basis.
10.9 The board of directors, relevant board committee and senior management of the bank must be actively involved in the risk control process and must devote appropriate resources to risk control as an essential aspect of the business. In this regard, the daily reports prepared by the independent risk control unit must be reviewed by a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual traders and reductions in the bank’s overall risk exposure.
10.10 Internal models used to determine market risk capital requirements are likely to differ from those used by a bank in its day-to-day internal risk management functions. Nevertheless, the core design elements of both the market risk capital requirement model and the internal risk management model should be the same.
(1) Valuation models that are a feature of both models should be similar. These valuation models must be an integral part of the internal identification, measurement, management and internal reporting of price risks within the bank’s trading desks.
(2) Internal risk management models should, at a minimum, be used to assess the risk of the positions that are subject to market risk capital requirements, although they may assess a broader set of positions.
(3) The construction of a trading desk risk management model must be based on the methodologies used in the bank’s internal risk management model with regard to risk factor identification, parameter estimation and proxy concepts and deviate only if this is appropriate due to regulatory requirements. A bank’s market risk capital requirement model and its internal risk management model should address an identical set of risk factors.
10.11 A routine and rigorous programme of stress testing is required. The results of stress testing must be:
(1) reviewed at least monthly by senior management;
(2) used in the bank’s internal assessment of capital adequacy; and
(3) reflected in the policies and limits set by the bank’s management and its board of directors.
10.12 Where stress tests reveal particular vulnerability to a given set of circumstances, the bank must take prompt action to mitigate those risks appropriately (eg by hedging against that outcome, reducing the size of the bank’s exposures or increasing capital).
10.13 The bank must maintain a protocol for compliance with a documented set of internal manuals, policies, controls and procedures concerning the operation of the internal market risk management model. The bank’s risk management model must be well documented. Such documentation may include a comprehensive risk management manual that describes the basic principles of the risk management model and that provides a detailed explanation of the empirical techniques used to measure market risk.
10.14 The bank must receive approval from SAMA prior to implementing any significant changes to its internal models used to determine market risk capital requirements.
10.15 The bank’s internal models for determining market risk capital requirements must address the full set of positions that are in the scope of application of the model. All models’ measurements of risk must be based on a sound theoretical basis, calculated correctly, and reported accurately.
10.16 The bank’s internal audit and validation functions or external auditor must conduct an independent review of the market risk measurement system on at least an annual basis. The scope of the independent review must include both the activities of the business trading units and the activities of the independent risk control unit. The independent review must be sufficiently detailed to determine which trading desks are impacted by any failings. At a minimum, the scope of the independent review must include the following:
(1) the organisation of the risk control unit;
(2) the adequacy of the documentation of the risk management model and process;
(3) the accuracy and appropriateness of market risk management models (including any significant changes);
(4) the verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;
(5) the approval process for risk pricing models and valuation systems used by the bank’s front- and back-office personnel;
(6) the scope of market risks reflected in the trading desk risk management models;
(7) the integrity of the management information system;
(8) the accuracy and completeness of position data;
(9) the accuracy and appropriateness of volatility and correlation assumptions;
(10) the accuracy of valuation and risk transformation calculations;
(11) the verification of trading desk risk management model accuracy through frequent backtesting and PLA assessments; and
(12) the general alignment between the model to determine market risk capital requirements and the model the bank uses in its day-to-day internal management functions.
Model Validation Standards
10.17 Banks must maintain a process to ensure that their internal models have been adequately validated by suitably qualified parties independent of the model development process to ensure that each model is conceptually sound and adequately reflects all material risks. Model validation must be conducted both when the model is initially developed and when any significant changes are made to the model. The bank must revalidate its models periodically, particularly when there have been significant structural changes in the market or changes to the composition of the bank’s portfolio that might lead to the models no longer being adequate. Model validation must include PLA and backtesting, and must, at a minimum, also include the following:
(1) Tests to demonstrate that any assumptions made within internal models are appropriate and do not underestimate risk. This may include reviewing the appropriateness of assumptions of normal distributions and any pricing models.
(2) Further to the regulatory backtesting programmes, model validation must assess the hypothetical P&L (HPL) calculation methodology.
(3) The bank must use hypothetical portfolios to ensure that internal models are able to account for particular structural features that may arise. For example, where the data history for a particular instrument does not meet the quantitative standards in [13.1] to [13.12] and the bank maps these positions to proxies, the bank must ensure that the proxies produce conservative results under relevant market scenarios, with sufficient consideration given to ensuring:
(a) that material basis risks are adequately reflected (including mismatches between long and short positions by maturity or by issuer); and
(b) that the models reflect concentration risk that may arise in an undiversified portfolio.
External Validation
10.18 The model validation conducted by external auditors and/or supervisory authorities of a bank’s internal model to determine market risk capital requirements should, at a minimum, include the following steps:
(1) Verification that the internal validation processes described in [10.17] are operating in a satisfactory manner;
(2) Confirmation that the formulae used in the calculation process, as well as for the pricing of options and other complex instruments, are validated by a qualified unit, which in all cases should be independent from the bank’s trading area;
(3) Confirmation that the structure of internal models is adequate with respect to the bank’s activities and geographical coverage;
(4) Review of the results of both the bank’s backtesting of its internal models (ie comparison of value-at-risk with actual P&L and HPL) and its PLA process to ensure that the models provide a reliable measure of potential losses over time. On request, a bank should make available to SAMA and/or to its external auditors the results as well as the underlying inputs to ES calculations and details of the PLA exercise; and
(5) Confirmation that data flows and processes associated with the risk measurement system are transparent and accessible. On request and in accordance with procedures, the bank should provide SAMA and its external auditors access to the models’ specifications and parameters.
Stress Testing
10.19 Banks that use the IMA for determining market risk capital requirements must have in place a rigorous and comprehensive stress testing programme both at the trading desk level and at the bank-wide level.
10.20 Banks’ stress scenarios must cover a range of factors that (i) can create extraordinary losses or gains in trading portfolios, or (ii) make the control of risk in those portfolios very difficult. These factors include low-probability events in all major types of risk, including the various components of market, credit and operational risks. A bank must design stress scenarios to assess the impact of such factors on positions that feature both linear and non-linear price characteristics (ie options and instruments that have option-like characteristics).
10.21 Banks’ stress tests should be of a quantitative and qualitative nature, incorporating both market risk and liquidity risk aspects of market disturbances.
(1) Quantitative elements should identify plausible stress scenarios to which banks could be exposed.
(2) Qualitatively, a bank’s stress testing programme should evaluate the capacity of the bank’s capital to absorb potential significant losses and identify steps the bank can take to reduce its risk and conserve capital.
10.22 Banks should routinely communicate results of stress testing to senior management and should periodically communicate those results to the bank’s board of directors.
10.23 Banks should combine the use of SAMA stress scenarios with stress tests developed by the bank itself to reflect its specific risk characteristics. Stress scenarios may include the following:
(1) SAMA scenarios requiring no simulations by the bank. A bank should have information on the largest losses experienced during the reporting period and may be required to make this available for SAMA review. SAMA may compare this loss information to the level of capital requirements that would result from a bank’s internal measurement system. For example, the bank may be required to provide SAMA with an assessment of how many days of peak day losses would have been covered by a given ES estimate.
(2) Scenarios requiring a simulation by the bank. Banks should subject their portfolios to a series of simulated stress scenarios and provide SAMA with the results. These scenarios could include testing the current portfolio against past periods of significant disturbance (eg the 1987 equity crash, the Exchange Rate Mechanism crises of 1992 and 1993, the increase in interest rates in the first quarter of 1994, the 1998 Russian financial crisis, the 2000 bursting of the technology stock bubble, the 2007–08 subprime mortgage crisis, or the 2011–12 Euro zone crisis) incorporating both the significant price movements and the sharp reduction in liquidity associated with these events. A second type of scenario would evaluate the sensitivity of the bank’s market risk exposure to changes in the assumptions about volatilities and correlations. Applying this test would require an evaluation of the historical range of variation for volatilities and correlations and evaluation of the bank’s current positions against the extreme values of the historical range. Due consideration should be given to the sharp variation that at times has occurred in a matter of days in periods of significant market disturbance. For example, the abovementioned situations involved correlations within risk factors approaching the extreme values of 1 or –1 for several days at the height of the disturbance.
(3) Bank-developed stress scenarios. In addition to the scenarios prescribed by SAMA under [10.23](1), a bank should also develop its own stress tests that it identifies as most adverse based on the characteristics of its portfolio (eg problems in a key region of the world combined with a sharp move in oil prices). A bank should provide SAMA with a description of the methodology used to identify and carry out the scenarios as well as with a description of the results derived from these scenarios.
11- Internal Models Approach: Model Requirements
Specification of Market Risk Factors
11.1 An important part of a bank’s trading desk internal risk management model is the specification of an appropriate set of market risk factors. Risk factors are the market rates and prices that affect the value of the bank’s trading positions. The risk factors contained in a trading desk risk management model must be sufficient to represent the risks inherent in the bank’s portfolio of on- and off-balance sheet trading positions. Although banks will have some discretion in specifying the risk factors for their internal models, the following requirements must be fulfilled.
11.2 A bank’s market risk capital requirement models should include all risk factors that are used for pricing. In the event a risk factor is incorporated in a pricing model but not in the trading desk risk management model, the bank must support this omission to the satisfaction of SAMA.
11.3 A bank’s market risk capital requirement model must include all risk factors that are specified in the standardised approach for the corresponding risk class, as set out in [6] to [8]. In the event a standardised approach risk factor is not included in the market risk capital requirement model, the bank must support this omission to the satisfaction of SAMA.
(1) For securitised products, banks are prohibited from using internal models to determine market risk capital requirements. Banks must use the standardised approach to determine the market risk capital requirements for securitised products as set out in [3.11]. Accordingly, a bank’s market risk capital requirement model should not specify risk factors for securitisations as defined in [7.10] to [7.11].
11.4 A bank’s market risk capital requirement model and any stress scenarios calculated for non- modellable risk factors must address non-linearities for options and other relevant products (eg mortgage-backed securities), as well as correlation risk and relevant basis risks (eg basis risks between credit default swaps and bonds).
11.5 A bank may use proxies for which there is an appropriate track record for their representation of a position (eg an equity index used as a proxy for a position in an individual stock). In the event a bank uses proxies, the bank must support their use to the satisfaction of SAMA.
11.6 For general interest rate risk, a bank must use a set of risk factors that corresponds to the interest rates associated with each currency in which the bank has interest rate sensitive on- or off- balance sheet trading positions.
(1) The trading desk risk management model must model the yield curve using one of a number of generally accepted approaches (eg estimating forward rates of zero coupon yields).
(2) The yield curve must be divided into maturity segments in order to capture variation in the volatility of rates along the yield curve.
(3) For material exposures to interest rate movements in the major currencies and markets, banks must model the yield curve using a minimum of six risk factors.
(4) The number of risk factors used ultimately should be driven by the nature of the bank’s trading strategies. A bank with a portfolio of various types of securities across many points of the yield curve and that engages in complex arbitrage strategies would require the use of a greater number of risk factors than a bank with less complex portfolios.
11.7 The trading desk risk management model must incorporate separate risk factors to capture credit spread risk (eg between bonds and swaps). A variety of approaches may be used to reflect the credit spread risk arising from less-than-perfectly correlated movements between government and other fixed income instruments, such as specifying a completely separate yield curve for non- government fixed income instruments (eg swaps or municipal securities) or estimating the spread over government rates at various points along the yield curve.
11.8 For exchange rate risk, the trading desk risk management model must incorporate risk factors that correspond to the individual foreign currencies in which the bank’s positions are denominated. Because the output of a bank’s risk measurement system will be expressed in the bank’s reporting currency, any net position denominated in a foreign currency will introduce foreign exchange risk. A bank must utilise risk factors that correspond to the exchange rate between the bank’s reporting currency and each foreign currency in which the bank has a significant exposure.
11.9 For equity risk, a bank must utilise risk factors that correspond to each of the equity markets in which the bank holds significant positions.
(1) At a minimum, a bank must utilise risk factors that reflect market-wide movements in equity prices (eg a market index). Positions in individual securities or in sector indices may be expressed in beta-equivalents relative to a market-wide index.
(2) A bank may utilise risk factors that correspond to various sectors of the overall equity market (eg industry sectors or cyclical and non-cyclical sectors). Positions in individual securities within each sector may be expressed in beta-equivalents relative to a sector index.
(3) A bank may also utilise risk factors that correspond to the volatility of individual equities.
(4) The sophistication and nature of the modelling technique for a given market should correspond to the bank’s exposure to the overall market as well as the bank’s concentration in individual equities in that market.
11.10 For commodity risk, bank must utilise risk factors that correspond to each of the commodity markets in which the bank holds significant positions.
(1) For banks with relatively limited positions in commodity-based instruments, the bank may utilise a straightforward specification of risk factors. Such a specification could entail utilising one risk factor for each commodity price to which the bank is exposed (including different risk factors for different geographies where relevant).
(2) For a bank with active trading in commodities, the bank’s model must account for variation in the convenience yield40 between derivatives positions such as forwards and swaps and cash positions in the commodity.
11.11 For the risks associated with equity investments in funds:
(1) For funds that meet the criterion set out in [5.8](5)(a) (ie funds with look- through possibility), banks must consider the risks of the fund, and of any associated hedges, as if the fund’s positions were held directly by the bank (taking into account the bank’s share of the equity of the fund, and any leverage in the fund structure). The bank must assign these positions to the trading desk to which the fund is assigned.
(2) For funds that do not meet the criterion set out in [5.8](5)(a), but meet both the criteria set out in [5.8](5)(b) (ie daily prices and knowledge of the mandate of the fund), banks must use the standardised approach to calculate capital requirements for the fund.
40 The convenience yield reflects the benefits from direct ownership of the physical commodity (eg the ability to profit from temporary market shortages). The convenience yield is affected both by market conditions and by factors such as physical storage costs.
Model Eligibility of Risk Factors
11.12 A bank must determine which risk factors within its trading desks that have received approval to use the internal models approach as set out in [12] are eligible to be included in the bank’s internal expected shortfall (ES) model for regulatory capital requirements as set out in [13]. For a risk factor to be classified as modellable by a bank, a necessary condition is that it passes the risk factor eligibility test (RFET). This test requires identification of a sufficient number of real prices that are representative of the risk factor. Collateral reconciliations or valuations cannot be considered real prices to meet the RFET. A price will be considered real if it meets at least one of the following criteria:
(1) It is a price at which the institution has conducted a transaction;
(2) It is a verifiable price for an actual transaction between other arms-length parties;
(3) It is a price obtained from a committed quote made by (i) the bank itself or (ii) another party. The committed quote must be collected and verified through a third-party vendor, a trading platform or an exchange; or
(4) It is a price that is obtained from a third-party vendor, where:
(a) the transaction or committed quote has been processed through the vendor;
(b) the vendor agrees to provide evidence of the transaction or committed quote to SAMA upon request; or
(c) the price meets any of the three criteria immediately listed in [11.12](1) to [11.12](3).
As referenced in [11.12], a committed quote is a price from an arm’s length provider at which the provider of the quote must buy or sell the financial instrument.
Orderly transactions and eligible committed quotes with a non-negligible volume, as compared to usual transaction sizes for the bank, reflective of normal market conditions can be generally accepted as valid.
11.13 To pass the RFET, a risk factor that a bank uses in an internal model must meet either of the following criteria on a quarterly basis. Any real price that is observed for a transaction should be counted as an observation for all of the risk factors for which it is representative.
(1) The bank must identify for the risk factor at least 24 real price observations per year (measured over the period used to calibrate the current ES model, with no more than one real price observation per day to be included in this count).41,42 Moreover, over the previous 12 months there must be no 90-day period in which fewer than four real price observations are identified for the risk factor (with no more than one real price observation per day to be included in this count). The above criteria must be monitored on a monthly basis; or
(2) The bank must identify for the risk factor at least 100 “real” price observations over the previous 12 months (with no more than one “real” price observation per day to be included in this count).
11.14 In order for a risk factor to pass the RFET, a bank may also count real price observations based on information collected from a third-party vendor provided all of the following criteria are met:
(1) The vendor communicates to the bank the number of corresponding real prices observed and the dates at which they have been observed.
(2) The vendor provides, individually, a minimum necessary set of identifier information to enable banks to map real prices observed to risk factors.
(3) The vendor is subject to an audit regarding the validity of its pricing information. The results and reports of this audit must be made available on request to SAMA and to banks as a precondition for the bank to be allowed to use real price observations collected by the third-party vendor. If the audit of a third-party vendor is not satisfactory to SAMA, SAMA may decide to prevent the bank from using data from this vendor.43
11.15 A real price is representative for a risk factor of a bank where the bank is able to extract the value of the risk factor from the value of the real price. The bank must have policies and procedures that describe its mapping of real price observations to risk factors. The bank must provide sufficient information to SAMA in order to determine if the methodologies the bank uses are appropriate.
Bucketing approach for the RFET
11.16 Where a risk factor is a point on a curve or a surface (and other higher dimensional objects such as cubes), in order to count real price observations for the RFET, banks may choose from the following bucketing approaches:
(1) The own bucketing approach. Under this approach, the bank must define the buckets it will use and meet the following requirements:
(a) Each bucket must include only one risk factor, and all risk factors must correspond to the risk factors that are part of the risk-theoretical profit and loss (RTPL) of the bank for the purpose of the profit and loss (P&L) attribution (PLA) test.44
(b) The buckets must be non-overlapping.
(2) The regulatory bucketing approach. Under this approach, the bank must use the following set of standard buckets as set out in Table 1.
(a) For interest rate, foreign exchange and commodity risk factors with one maturity dimension (excluding implied volatilities) (t, where t is measured in years), the buckets in row (A) below must be used.
(b) For interest rate, foreign exchange and commodity risk factors with several maturity dimensions (excluding implied volatilities) (t, where t is measured in years), the buckets in row (B) below must be used.
(c) Credit spread and equity risk factors with one or several maturity dimensions (excluding implied volatilities) (t, where t is measured in years), the buckets in row (C) below must be used.
(d) For any risk factors with one or several strike dimensions (delta, δ; ie the probability that an option is “in the money” at maturity), the buckets in row (D) below must be used.45
(e) For expiry and strike dimensions of implied volatility risk factors (excluding those of interest rate swaptions), only the buckets in rows (C) and (D) below must be used.
(f) For maturity, expiry and strike dimensions of implied volatility risk factors from interest rate swaptions, only the buckets in row (B), (C) and (D) below must be used.
Standard buckets for the regulatory bucketing approach Table 1 Row Bucket 1 2 3 4 5 6 7 8 9 (A) 0≤t<0.75 0.75≤t<1.5 1.5≤t<4 4≤t<7 7≤t<12 12≤t<18 18≤t<25 25≤t<35 35≤t<∞ (B) 0≤t<0.75 0.75≤t<4 4≤t<10 10≤t<18 18≤t<30 30≤t<∞ (C) 0≤t<1.5 1.5≤t<3.5 3.5≤t<7.5 7.5≤t<15 15≤t<∞ (D) 0≤δ<0.05 0.05≤δ<0.3 0.3≤δ<0.7 0.7≤δ<0.95 0.95≤δ<1.00
11.17
Banks may count all real price observations allocated to a bucket to assess whether it passes the RFET for any risk factors that belong to the bucket. A real price Observation must be allocated to a bucket for which it is representative of any risk factors that belong to the bucket.
11.18 As debt instruments mature, real price observations for those products that have been identified within the prior 12 months are usually still counted in the maturity bucket to which they were initially allocated per [11.17]. When banks no longer need to model a credit spread risk factor belonging to a given maturity bucket, banks are allowed to re-allocate the real price observations of this bucket to the adjacent (shorter) maturity bucket.46 A real price observation may only be counted in a single maturity bucket for the purposes of the RFET.
11.19 Where a bank uses a parametric function to represent a curve/surface and defines the function’s parameters as the risk factors in its risk measurement system, the RFET must be passed at the level of the market data used to calibrate the function’s parameters and not be passed directly at the level of these risk factor parameters (due to the fact that real price observations may not exist that are directly representative of these risk factors).
11.20 A bank may use systematic credit or equity risk factors within its models that are designed to capture market-wide movements for a given economy, region or sector, but not the idiosyncratic risk of a specific issuer (the idiosyncratic risk of a specific issuer would be a non-modellable risk factor (NMRF) unless there are sufficient real price observations of that issuer). Real price observations of market indices or instruments of individual issuers may be considered representative for a systematic risk factor as long as they share the same attributes as the systematic risk factor.
11.21 In addition to the approach set out in [11.20], where systematic risk factors of credit or equity risk factors include a maturity dimension (eg a credit spread curve), one of the bucketing approaches set out above must be used for this maturity dimension to count “real” price observations for the RFET.
11.22 Once a risk factor has passed the RFET, the bank should choose the most appropriate data to calibrate its model. The data used for calibration of the model does not need to be the same data used to pass the RFET.
11.23 Once a risk factor has passed the RFET, the bank must demonstrate that the data used to calibrate its ES model are appropriate based on the principles contained in [11.25] to[11.26].Where a bank has not met these principles to the satisfaction of SAMA for a particular risk factor, SAMA may choose to deem the data unsuitable for use to calibrate the model and, in such case, the risk factor must be excluded from the ES model and subject to capital requirements as an NMRF.
11.24 There may, on very rare occasions, be a valid reason why a significant number of modellable risk factors across different banks may become non-modellable due to a widespread reduction in trading activities (for instance, during periods of significant cross-border financial market stress affecting several banks or when financial markets are subjected to a major regime shift). One possible SAMA response in this instance could be to consider as modellable a risk factor that no longer passes the RFET. However, such a response should not facilitate a decrease in capital requirements. SAMA will only pursue such a response under the most extraordinary, systemic circumstances.
Principles for the modellability of risk factors that pass the RFET
11.25 Banks use many different types of models to determine the risks resulting from trading positions. The data requirements for each model may be different. For any given model, banks may use different sources or types of data for the model’s risk factors. Banks must not rely solely on the number of observations of real prices to determine whether a risk factor is modellable. The accuracy of the source of the risk factor real price observation must also be considered.
11.26 In addition to the requirements specified in [11.12] to [11.23], banks must apply the principles below to determine whether a risk factor that passed the RFET can be modelled using the ES model or should be subject to capital requirements as an NMRF. Banks are required to demonstrate to SAMA that these principles are being followed. SAMA may determine risk factors to be non-modellable in the event these principles are not applied.
(1) Principle one. The data used may include combinations of modellable risk factors. Banks often price instruments as a combination of risk factors. Generally, risk factors derived solely from a combination of modellable risk factors are modellable. For example, risk factors derived through multifactor beta models for which inputs and calibrations are based solely on modellable risk factors, can be classified as modellable and can be included within the ES model. A risk factor derived from a combination of modellable risk factors that are mapped to distinct buckets of a given curve/surface is modellable only if this risk factor also passes the RFET.
(a) Interpolation based on combinations of modellable risk factors should be consistent with mappings used for PLA testing (to determine the RTPL) and should not be based on alternative, and potentially broader, bucketing approaches. Likewise, banks may compress risk factors into a smaller dimension of orthogonal risk factors (eg principal components) and/or derive parameters from observations of modellable risk factors, such as in models of stochastic implied volatility, without the parameters being directly observable in the market.
(b) Subject to the approval of SAMA, banks may extrapolate up to a reasonable distance from the closest modellable risk factor. The extrapolation should not rely solely on the closest modellable risk factor but on more than one modellable risk factor. In the event that a bank uses extrapolation, the extrapolation must be considered in the determination of the RTPL.
(2) Principle two. The data used must allow the model to pick up both idiosyncratic and general market risk. General market risk is the tendency of an instrument’s value to change with the change in the value of the broader market, as represented by an appropriate index or indices. Idiosyncratic risk is the risk associated with a particular issuance, including default provisions, maturity and seniority. The data must allow both components of market risk to be captured in any market risk model used to determine capital requirements. If the data used in the model do not reflect either idiosyncratic or general market risk, the bank must apply an NMRF charge for those aspects that are not adequately captured in its model.
(3) Principle three. The data used must allow the model to reflect volatility and correlation of the risk positions. Banks must ensure that they do not understate the volatility of an asset (eg by using inappropriate averaging of data or proxies). Further, banks must ensure that they accurately reflect the correlation of asset prices, rates across yield curves and/or volatilities within volatility surfaces. Different data sources can provide dramatically different volatility and correlation estimates for asset prices. The bank should choose data sources so as to ensure that (i) the data are representative of real price observations; (ii) price volatility is not understated by the choice of data; and (iii)correlations are reasonable approximations of correlations among real price observations. Furthermore, any transformations must not understate the volatility arising from risk factors and must accurately reflect the correlations arising from risk factors used in the bank’s ES model.
(4) Principle four. The data used must be reflective of prices observed and/or quoted in the market. Where data used are not derived from real price observations, the bank must demonstrate that the data used are reasonably representative of real price observations. To that end, the bank must periodically reconcile price data used in a risk model with front office and back office prices. Just as the back office serves to check the validity of the front office price, risk model prices should be included in the comparison. The comparison of front or back office prices with risk prices should consist of comparisons of risk prices with real price observations, but front office and back office prices can be used where real price observations are not widely available. Banks must document their approaches to deriving risk factors from market prices.
(5) Principle five. The data used must be updated at a sufficient frequency. A market risk model may require large amounts of data, and it can be challenging to update such large data sets frequently. Banks should strive to update their model data as often as possible to account for frequent turnover of positions in the trading portfolio and changing market conditions. Banks should update data at a minimum on a monthly basis, but preferably daily. Additionally, banks should have a workflow process for updating the sources of data. Furthermore, where the bank uses regressions to estimate risk factor parameters, these must be re-estimated on a regular basis, generally no less frequently than every two weeks. Calibration of pricing models to current market prices must also be sufficiently frequent, ideally no less frequent than the calibration of front office pricing models. Where appropriate, banks should have clear policies for backfilling and/or gap-filling missing data.
(6) Principle six. The data used to determine stressed expected shortfall (ESR,S) must be reflective of market prices observed and/or quoted in the period of stress. The data for the ESR,S model should be sourced directly from the historical period whenever possible. There are cases where the characteristics of current instruments in the market differ from those in the stress period. Nevertheless, banks must empirically justify any instances where the market prices used for the stress period are different from the market prices actually observed during that period. Further, in cases where instruments that are currently traded did not exist during a period of significant financial stress, banks must demonstrate that the prices used match changes in prices or spreads of similar instruments during the stress period.
(a) In cases where banks do not sufficiently justify the use of current market data for products whose characteristics have changed since the stress period, the bank must omit the risk factor for the stressed period and meet the requirement of [13.5](2)(b) that the reduced set of risk factors explain 75% of the fully specified ES model. Moreover, if name-specific risk factors are used to calculate the ES in the actual period and these names were not available in the stressed period, there is a presumption that the idiosyncratic part of these risk factors are not in the reduced set of risk factors. Exposures for risk factors that are included in the current set but not in the reduced set need to be mapped mapped to the most suitable risk factor of the reduced set for the purposes of calculating ES measures in the stressed period.
(7) Principle seven. The use of proxies must be limited, and proxies must have sufficiently similar characteristics to the transactions they represent. Proxies must be appropriate for the region, quality and type of instrument they are intended to represent. SAMA will assess whether methods for combining risk factors are conceptually and empirically sound.
(a) For example, the use of indices in a multifactor model must capture the correlated risk of the assets represented by the indices, and the remaining idiosyncratic risk must be demonstrably uncorrelated across different issuers. A multifactor model must have significant explanatory power for the price movements of assets and must provide an assessment of the uncertainty in the final outcome due to the use of a proxy. The coefficients (betas) of a multifactor model must be empirically based and must not be determined based on judgment. Instances where coefficients are set by judgment generally should be considered as NMRFs.
(b) If risk factors are represented by proxy data in the current period ES model, the proxy data representation of the risk factor – not the risk factor itself – must be used in the RTPL unless the bank has identified the basis between the proxy and the actual risk factor and properly capitalised the basis either by including the basis in the ES model (if the risk factor is a modellable) or capturing the basis as a NMRF. If the capital requirement for the basis is properly determined, then the bank can choose to include in the RTPL either:
(i) the proxy risk factor and the basis; or
(ii) the actual risk factor itself.
41 When a bank uses data for real price observations from an external source, and those observations are provided with a time lag (eg data provided for a particular day is only made available a number of weeks later), the period used for the RFET may differ from the period used to calibrate the current ES model. The difference in periods used for the RFET and calibration of the ES model should not be greater than one month, ie the banks could use, for each risk factor, a one-year time period finishing up to one month before the RFET assessment instead of the period used to calibrate the current ES model.
42 In particular, a bank may add modellable risk factors, and replace non-modellable risk factors by a basis between these additional modellable risk factors and these non- modellable risk factors. This basis will then be considered a non-modellable risk factor. A combination between modellable and non-modellable risk factors will be a non- modellable risk factor.
43 In this case, the bank may be permitted to use real price observations from this vendor for other risk factors
44 The requirement to use the same buckets or segmentation of risk factors for the PLA test and the RFET recognises that there is a trade-off in determining buckets for an ES model. The use of more granular buckets may facilitate a trading desk’s success in meeting the requirements of the PLA test, but additional granularity may challenge a bank’s ability to source a sufficient number of real observed prices per bucket to satisfy the RFET. Banks should consider this trade-off when designing their ES models.
45 For options markets where alternative definitions of moneyness are standard, banks shall convert the regulatory delta buckets to the market-standard convention using their own approved pricing models.
46 For example, if a bond with an original maturity of four years, had a real price observation on its issuance date eight months ago, banks can opt to allocate the real price observation to the bucket associated with a maturity between 1.5 and 3.5 years instead of to the bucket associated with a maturity between 3.5 and 7.5 years to which it would normally be allocated.12- Internal Models Approach: Backtesting and P&L Attribution Test Requirements
12.1 As set out in [10.4], a bank that intends to use the internal models approach (IMA) to determine market risk capital requirements for a trading desk must conduct and successfully pass backtesting at the bank-wide level and both the backtesting and profit and loss (P&L) attribution (PLA) test at the trading desk level as identified in [10.4](2).
12.2 For a bank to remain eligible to use the IMA to determine market risk capital requirements, a minimum of 10% of the bank’s aggregated market risk capital requirement must be based on positions held in trading desks that qualify for use of the bank’s internal models for market risk capital requirements by satisfying the backtesting and PLA test as set out in this chapter. This 10% criterion must be assessed by the bank on a quarterly basis when calculating the aggregate capital requirement for market risk according to [13.43].
12.3 The implementation of the backtesting programme and the PLA test must begin on the date that the internal models capital requirement becomes effective.
(1) For SAMA approval of a model, the bank must provide a one-year backtesting and PLA test report to confirm the quality of the model.
(2) SAMA may require backtesting and PLA test results prior to that date.
(3) SAMA will determine any necessary response to backtesting results based on the number of exceptions over the course of 12 months (ie 250 trading days) generated by the bank’s model.
(a) Based on the assessment on the significance of exceptions, SAMA may initiate a dialogue with the bank to determine if there is a problem with a bank’s model.
(b) In the most serious cases, SAMA will impose an additional increase in a bank’s capital requirement or disallow use of the model.
Backtesting Requirements
12.4 Backtesting requirements compare the value-at-risk (VaR) measure calibrated to a one-day holding period against each of the actual P&L (APL) and hypothetical P&L (HPL) over the prior 12 months. Specific requirements to be applied at the bank-wide level and trading desk level are set out below.
12.5 Backtesting of the bank-wide risk model must be based on a VaR measure calibrated at a 99th percentile confidence level.
(1) An exception or an outlier occurs when either the actual loss or the hypothetical loss of the bank-wide trading book registered in a day of the backtesting period exceeds the corresponding daily VaR measure given by the model. As per [16.8], exceptions for actual losses are counted separately from exceptions for hypothetical losses; the overall number of exceptions is the greater of these two amounts.
(2) In the event either the P&L or the daily VaR measure is not available or impossible to compute, it will count as an outlier.
12.6 In the event an outlier can be shown by the bank to relate to a non-modellable risk factor, and the capital requirement for that non-modellable risk factor exceeds the actual or hypothetical loss for that day, it may be disregarded for the purpose of the overall backtesting process if SAMA is notified accordingly and does not object to this treatment. In these cases, a bank must document the history of the movement of the value of the relevant non-modellable risk factor and have supporting evidence that the non-modellable risk factor has caused the relevant loss.
If the backtesting exception at a desk-level test is being driven by a non-modellable risk factor that receives an SES capital requirement that is in excess of the maximum of the APL loss or HPL loss for that day, it is permitted to be disregarded for the purposes of the desk-level backtesting. The bank must be able to calculate a non-modellable risk factor capital requirement for the specific desk and not only for the respective risk factor across all desks. For example, if the P&L for a desk is SAR –1.5 million and VaR is SAR 1 million, a non-modellable risk factor capital requirement (at desk level) of EUR 0.8 million would not be sufficient to disregard an exception for the purpose of desk-level backtesting. The non-modellable risk factor capital requirement attributed to the standalone desk level (without VaR) must be greater than the loss of SAR 1.5 million in order to disregard an exception for the purpose of desk-level backtesting.
12.7 The scope of the portfolio subject to bank-wide backtesting should be updated quarterly based on the results of the latest trading desk-level backtesting, risk factor eligibility test and PLA tests.
12.8 The framework for SAMA interpretation of backtesting results for the bank-wide capital model encompasses a range of possible responses, depending on the strength of the signal generated from the backtesting. These responses are classified into three backtesting zones, distinguished by colours into a hierarchy of responses.
(1) Green zone. This corresponds to results that do not themselves suggest a problem with the quality or accuracy of a bank’s model.
(2) Amber zone. This encompasses results that do raise questions in this regard, for which such a conclusion is not definitive.
(3) Red zone. This indicates a result that almost certainly indicates a problem with a bank’s risk model.
12.9 These zones are defined according to the number of exceptions generated in the backtesting programme considering statistical errors as explained in [16.9] to [16.21]. Table 1 sets out boundaries for these zones and the presumptive SAMA response for each backtesting outcome, based on a sample of 250 observations.
Backtesting zones Table 1 Backtesting zone Number of exceptions Backtesting dependent multiplier (to be added to any qualitative add-on per [MAR33.44]) Green 0 1.50 1 1.50 2 1.50 3 1.50 4 1.50 Amber 5 1.70 6 1.76 7 1.83 8 1.88 9 1.92 Red 10 or more 2.00
12.10
The backtesting green zone generally would not initiate a SAMA increase in capital requirements for backtesting (ie no backtesting add-on would apply).
12.11 Outcomes in the backtesting amber zone could result from either accurate or inaccurate models. However, they are generally deemed more likely for inaccurate models than for accurate models. Within the backtesting amber zone, SAMA will impose a higher capital requirement in the form of a backtesting add-on. The number of exceptions should generally inform the size of any backtesting add-on, as set out in Table 1 of [12.9].
12.12 A bank must also document all of the exceptions generated from its ongoing backtesting programme, including an explanation for each exception.
12.13 A bank may also implement backtesting for confidence intervals other than the 99th percentile, or may perform other statistical tests not set out in this standard.
12.14 Besides a higher capital requirement for any outcomes that place the bank in the backtesting amber zone, in the case of severe problems with the basic integrity of the model, SAMA may consider whether to disallow the bank’s use of the model for market risk capital requirement purposes altogether.
12.15 If a bank’s model falls into the backtesting red zone, SAMA will automatically increase the multiplication factor applicable to the bank’s model or may disallow use of the model.
Backtesting at the trading desk level
12.16 The performance of a trading desk’s risk management model will be tested through daily backtesting.
12.17 The backtesting assessment is considered to be complementary to the PLA assessment when determining the eligibility of a trading desk for the IMA.
12.18 At the trading desk level, backtesting must compare each desk’s one-day VaR measure (calibrated to the most recent 12 months’ data, equally weighted) at both the 97.5th percentile and the 99th percentile, using at least one year of current observations of the desk’s one-day P&L.
(1) An exception or an outlier occurs when either the actual or hypothetical loss of the trading desk registered in a day of the backtesting period exceeds the corresponding daily VaR measure determined by the bank’s model. Exceptions for actual losses are counted separately from exceptions for hypothetical losses; the overall number of exceptions is the greater of these two amounts.
(2) In the event either the P&L or the risk measure is not available or impossible to compute, it will count as an outlier.
Volatility scaling of returns for VaR calculation at the discretion of the bank that result in a shorter observation period being used is not allowed. A bank may scale up the volatility of all observations for a selected (group of) risk factor(s) to reflect a recent stress period. The bank may use this scaled data to calculate future VaR and expected shortfall estimates only after ex ante notification of such a scaling to SAMA.
12.19 If any given trading desk experiences either more than 12 exceptions at the 99th percentile or 30 exceptions at the 97.5th percentile in the most recent 12-month period, the capital requirement for all of the positions in the trading desk must be determined using the standardised approach.47
47 Desks with exposure to issuer default risk must pass a two-stage approval process. First, the market risk model must pass backtesting and PLA. Conditional on approval of the market risk model, the desk may then apply for approval to model default risk. Desks that fail either test must be capitalised under the standardised approach.
PLA Test Requirements
12.20 The PLA test compares daily risk-theoretical P&L (RTPL) with the daily HPL for each trading desk. It intends to:
(1) measure the materiality of simplifications in a banks’ internal models used for determining market risk capital requirements driven by missing risk factors and differences in the way positions are valued compared with their front office systems; and
(2) prevent banks from using their internal models for the purposes of capital requirements when such simplifications are considered material.
12.21 The PLA test must be performed on a standalone basis for each trading desk in scope for use of the IMA.
Definition of profits and losses used for the PLA test and backtesting
12.22 The RTPL is the daily trading desk-level P&L that is produced by the valuation engine of the trading desk’s risk management model.
(1) The trading desk’s risk management model must include all risk factors that are included in the bank’s expected shortfall (ES) model with SAMA parameters and any risk factors deemed not modellable by SAMA, and which are therefore not included in the ES model for calculating the respective regulatory capital requirement, but are included in non-modellable risk factors.
(2) The RTPL must not take into account any risk factors that the bank does not include in its trading desk’s risk management model.
12.23 Movements in all risk factors contained in the trading desk’s risk management model should be included, even if the forecasting component of the internal model uses data that incorporates additional residual risk. For example, a bank using a multifactor beta-based index model to capture event risk might include alternative data in the calibration of the residual component to reflect potential events not observed in the name-specific historical time series. The fact that the name is a risk factor in the model, albeit modelled in a multifactor model environment, means that, for the purposes of the PLA test, the bank would include the actual return of the name in the RTPL (and in the HPL) and receive recognition for the risk factor coverage of the model.
12.24 The PLA test compares a trading desk’s RTPL with its HPL. The HPL used for the PLA test should be identical to the HPL used for backtesting purposes. This comparison is performed to determine whether the risk factors included and the valuation engines used in the trading desk’s risk management model capture the material drivers of the bank’s P&L by determining if there is a significant degree of association between the two P&L measures observed over a suitable time period. The RTPL can differ from the HPL for a number of reasons. However, a trading desk risk management model should provide a reasonably accurate assessment of the risks of a trading desk to be deemed eligible for the internal models-based approach.
12.25 The HPL must be calculated by revaluing the positions held at the end of the previous day using the market data of the present day (ie using static positions). As HPL measures changes in portfolio value that would occur when end-of-day positions remain unchanged, it must not take into account intraday trading nor new or modified deals, in contrast to the APL. Both APL and HPL include foreign denominated positions and commodities included in the banking book.
12.26 Fees and commissions must be excluded from both APL and HPL as well as valuation adjustments for which separate regulatory capital approaches have been otherwise specified as part of the rules (eg credit valuation adjustment and its associated eligible hedges) and valuation adjustments that are deducted from Common Equity Tier 1 (eg the impact on the debt valuation adjustment component of the fair value of financial instruments must be excluded from these P&Ls).
12.27 Any other market risk-related valuation adjustments, irrespective of the frequency by which they are updated, must be included in the APL while only valuation adjustments updated daily must be included in the HPL, unless the bank has received specific agreement to exclude them from SAMA. Smoothing of valuation adjustments that are not calculated daily is not allowed. P&L due to the passage of time should be included in the APL and should be treated consistently in both HPL and RTPL.48
12.28 Valuation adjustments that the bank is unable to calculate at the trading desk level (eg because they are assessed in terms of the bank’s overall positions/risks or because of other constraints around the assessment process) are not required to be included in the HPL and APL for backtesting at the trading desk level, but should be included for bank-wide backtesting. To the satisfaction of SAMA, the bank must provide support for valuation adjustments that are not computed at a trading desk level.
12.29 Both APL and HPL must be computed based on the same pricing models (eg same pricing functions, pricing configurations, model parametrisation, market data and systems) as the ones used to produce the reported daily P&L.
PLA test data input alignment
12.30 For the sole purpose of the PLA assessment, banks are allowed to align RTPL input data for its risk factors with the data used in HPL if these alignments are documented, justified to SAMA and the requirements set out below are fulfilled:
(1) Banks must demonstrate that HPL input data can be appropriately used for RTPL purposes, and that no risk factor differences or valuation engine differences are omitted when transforming HPL input data into a format which can be applied to the risk factors used in RTPL calculation.
(2) Any adjustment of RTPL input data must be properly documented, validated and justified to SAMA.
(3) Banks must have procedures in place to identify changes with regard to the adjustments of RTPL input data. Banks must notify SAMA of any such changes.
(4) Banks must provide assessments on the effect these input data alignments would have on the RTPL and the PLA test. To do so, banks must compare RTPL based on HPL-aligned market data with the RTPL based on market data without alignment. This comparison must be performed when designing or changing the input data alignment process and upon the request of SAMA.
12.31 Adjustments to RTPL input data will be allowed when the input data for a given risk factor that is included in both the RTPL and the HPL differs due to different providers of market data sources or time fixing of market data sources, or transformations of market data into input data suitable for the risk factors of the underlying pricing models. These adjustments can be done either:
(1) by direct replacement of the RTPL input data (eg par rate tenor x, provider a) with the HPL input data (eg par rate tenor x, provider b); or
(2) by using the HPL input data (eg par rate tenor x, provider b) as a basis to calculate the risk factor data needed in the RTPL/ES model (eg zero rate tenor x).
In the event trading desks of a bank operate in different time zones compared to the location of the bank’s risk control department, data for risk modelling could be retrieved at different snapshot times compared to the data on which the desks’ front office P&L is based. Banks are permitted to align the snapshot time used for the calculation of the RTPL of a desk to the snapshot time used for the derivation of its HPL.
12.32 If the HPL uses market data in a different manner to RTPL to calculate risk parameters that are essential to the valuation engine, these differences must be reflected in the PLA test and as a result in the calculation of HPL and RTPL. In this regard, HPL and RTPL are allowed to use the same market data only as a basis, but must use their respective methods (which can differ) to calculate the respective valuation engine parameters. This would be the case, for example, where market data are transformed as part of the valuation process used to calculate RTPL. In that instance, banks may align market data between RTPL and HPL pre-transformation but not post- transformation.
12.33 Banks are not permitted to align HPL input data for risk factors with input data used in RTPL. Adjustments to RTPL or HPL to address residual operational noise are not permitted. Residual operational noise arises from computing HPL and RTPL in two different systems at two different points in time. It may originate from transitioning large portions of data across systems, and potential data aggregations may result in minor reconciliation gaps below tolerance levels for intervention; or from small differences in static/reference data and configuration.
PLA test metrics
12.34 The PLA requirements are based on two test metrics:
(1) the Spearman correlation metric to assess the correlation between RTPL and HPL; and
(2) the Kolmogorov-Smirnov (KS) test metric to assess similarity of the distributions of RTPL and HPL.
12.35 To calculate each test metric for a trading desk, the bank must use the time series of the most recent 250 trading days of observations of RTPL and HPL.
Process for determining the Spearman correlation metric
12.36 For a time series of HPL, banks must produce a corresponding time series of ranks based on the size of the P&L (RHPL). That is, the lowest value in the HPL time series receives a rank of 1, the next lowest value receives a rank of 2 and so on.
12.37 Similarly, for a time series of RTPL, banks m0ust produce a corresponding time series of ranks based on size (RRTPL).
12.38 Banks must calculate the Spearman correlation coefficient of the two time series of rank values of RRTPL and RHPL based on size using the following formula, where σRHPL and σRRTPL are the standard deviations of RRTPL and RHPL.
Process for determining Kolmogorov-Smirnov test metrics
12.39 The bank must calculate the empirical cumulative distribution function of RTPL. For any value of RTPL, the empirical cumulative distribution is the product of 0.004 and the number of RTPL observations that are less than or equal to the specified RTPL.
12.40 The bank must calculate the empirical cumulative distribution function of HPL. For any value of HPL, the empirical cumulative distribution is the product of 0.004 and number of HPL observations that are less than or equal to the specified HPL.
12.41 The KS test metric is the largest absolute difference observed between these two empirical cumulative distribution functions at any P&L value.
PLA test metrics evaluation
12.42 Based on the outcome of the metrics, a trading desk is allocated to a PLA test red zone, an amber zone or a green zone as set out in Table 2.
(1) A trading desk is in the PLA test green zone if both
(a) the correlation metric is above 0.80; and
(b) the KS distributional test metric is below 0.09 (p-value = 0.264).
(2) A trading desk is in the PLA test red zone if the correlation metric is less than 0.7 or if the KS distributional test metric is above 0.12 (p-value = 0.055).
(3) A trading desk is in the PLA amber zone if it is allocated neither to the green zone nor to the red zone.
PLA test thresholds Table 2 Zone Spearman correlation KS test Amber zone thresholds 0.80 0.09 (p-value = 0.264) Red zone thresholds 0.70 0.12 (p-value = 0.055)
12.43
If a trading desk is in the PLA test red zone, it is ineligible to use the IMA to determine market risk capital requirements and must be use the standardised approach.
(1) Risk exposures held by these ineligible trading desks must be included with the out-of- scope trading desks for purposes of determining capital requirement per the standardised approach.
(2) A trading desk deemed ineligible to use the IMA must remain out-of-scope to use the IMA until:
(a) the trading desk produces outcomes in the PLA test green zone; and
(b) the trading desk has satisfied the backtesting exceptions requirements over the past 12 months.
12.44 If a trading desk is in the PLA test amber zone, it is not considered an out-of-scope trading desk for use of the IMA.
(1) If a trading desk is in the PLA test amber zone, it cannot return to the PLA test green zone until:
(a) the trading desk produces outcomes in the PLA test green zone; and
(b) the trading desk has satisfied its backtesting exceptions requirements over the prior 12 months.
(2) Trading desks in the PLA test amber zone are subject to a capital surcharge as specified in [13.43]
48 Time effects can include various elements such as: the sensitivity to time, or theta effect (ie using mathematical terminology, the first-order derivative of the price relative to the time) and carry or costs of funding.
Treatment for Exceptional Situations
12.45 There may, on very rare occasions, be a valid reason why a series of accurate trading desk level- models across different banks will produce many backtesting exceptions or inadequately track the P&L produced by the front office pricing model (for instance, during periods of significant cross-border financial market stress affecting several banks or when financial markets are subjected to a major regime shift). One possible SAMA response in this instance would be to permit the relevant trading desks to continue to use the IMA but require each trading desk’s model to take account of the regime shift or significant market stress as quickly as practicable while maintaining the integrity of its procedures for updating the model. SAMA will only pursue such a response under the most extraordinary, systemic circumstances.
13- Internal Models Approach: Capital Requirements Calculation
The internal models approach is based on the use Expected Shortfall (ES) techniques.
Calculation of Expected Shortfall
13.1 Banks will have flexibility in devising the precise nature of their expected shortfall (ES) models, but the following minimum standards will apply for the purpose of calculating market risk capital requirements. Banks subject to SAMA approval can apply stricter standards.
The IMA does not require all products to be simulated on full revaluation. Simplifications (eg sensitivities-based valuation) may be used provided SAMA agrees that the method used is adequate for the instruments covered.
13.2 ES must be computed on a daily basis for the bank-wide internal models to determine market risk capital requirements. ES must also be computed on a daily basis for each trading desk that uses the internal models approach (IMA).
13.3 In calculating ES, a bank must use a 97.5th percentile, one-tailed confidence level.
13.4 In calculating ES, the liquidity horizons described in [13.12] must be reflected by scaling an ES calculated on a base horizon. The ES for a liquidity horizon must be calculated from an ES at a base liquidity horizon of 10 days with scaling applied to this base horizon result as expressed below, where:
(1) ES is the regulatory liquidity-adjusted ES;
(2) T is the length of the base horizon, ie 10 days;
(3) EST(P) is the ES at horizon T of a portfolio with positions P = (pi) with respect to shocks to all risk factors that the positions P are exposed to;
(4) EST(P, j) is the ES at horizon T of a portfolio with positions P = (pi) with respect to shocks for each position pi in the subset of risk factors Q(pi, j), with all other risk factors held constant;
(5) the ES at horizon T, EST(P) must be calculated for changes in the risk factors, and EST(P, j) must be calculated for changes in the relevant subset Q(pi, j) of risk factors, over the time interval T without scaling from a shorter horizon;
(6) Q(pi, j)j is the subset of risk factors for which liquidity horizons, as specified in [13.12], for the desk where pi is booked are at least as long as LHj according to the table below. For example, Q(pi,4) is the set of risk factors with a 60-day horizon and a 120-day liquidity horizon. Note that Q(pi, j) is a subset of Q(pi, j–1);
(7) the time series of changes in risk factors over the base time interval T may be determined by overlapping observations; and
(8) LHj is the liquidity horizon j, with lengths in the following table:
Liquidity horizons, j Table 1 j LHj 1 10 2 20 3 40 4 60 5 120 
13.5 The ES measure must be calibrated to a period of stress.
(1) Specifically, the ES measure must replicate an ES outcome that would be generated on the bank’s current portfolio if the relevant risk factors were experiencing a period of stress. This is a joint assessment across all relevant risk factors, which will capture stressed correlation measures.
(2) This calibration is to be based on an indirect approach using a reduced set of risk factors. Banks must specify a reduced set of risk factors that are relevant for their portfolio and for which there is a sufficiently long history of observations.
(a) This reduced set of risk factors is subject to SAMA approval and must meet the data quality requirements for a modellable risk factor as outlined in [11.12] to [11.24].
(b) The identified reduced set of risk factors must be able to explain a minimum of 75% of the variation of the full ES model (ie the ES of the reduced set of risk factors should be at least equal to 75% of the fully specified ES model on average measured over the preceding 12- week period).
The indicator that must be maximised for the identification of the stressed period is the aggregate capital requirement for modellable risk factors (IMCC) as per [13.15], it has to be maximised for the modellable risk factors, which implies that ESr,s is maximised, as noted in [13.7].
The reduced set of risk factors must be able to explain a minimum of 75% of the variation of the full ES model at the group level for the aggregate of all desks with IMA model approval.
13.6 The ES for market risk capital purposes is therefore expressed as follows, where:
(1) The ES for the portfolio using the above reduced set of risk factors (ESR,S), is calculated based on the most severe 12-month period of stress available over the observation horizon.
(2) ESR,S is then scaled up by the ratio of (i) the current ES using the full set of risk factors to (ii) the current ES measure using the reduced set of factors. For the purpose of this calculation, this ratio is floored at 1.
(a) ESF,C is the ES measure based on the current (most recent) 12-month observation period with the full set of risk factors; and
(b) ESR,C is the ES measure based on the current period with a reduced set of risk factors.
13.7 For measures based on stressed observations (ESR,S), banks must identify the 12-month period of stress over the observation horizon in which the portfolio experiences the largest loss. The observation horizon for determining the most stressful 12 months must, at a minimum, span back to and include 2007. Observations within this period must be equally weighted. Banks must update their 12- month stressed periods at least quarterly, or whenever there are material changes in the risk factors in the portfolio. Whenever a bank updates its 12-month stressed periods it must also update the reduced set of risk factors (as the basis for the calculations of ER,C and ER,S) accordingly.
13.8 For measures based on current observations (ESF,C), banks must update their data sets no less frequently than once every three months and must also reassess data sets whenever market prices are subject to material changes.
(1) This updating process must be flexible enough to allow for more frequent updates.
(2) SAMA may also require a bank to calculate its ES using a shorter observation period if, in SAMA’s judgement; this is justified by a significant upsurge in price volatility. In this case, however, the period should be no shorter than six months.
13.9 No particular type of ES model is prescribed. Provided that each model used captures all the material risks run by the bank, as confirmed through profit and loss (P&L) attribution (PLA) tests and backtesting, and conforms to each of the requirements set out above and below, SAMA may permit banks to use models based on either historical simulation, Monte Carlo simulation, or other appropriate analytical methods.
13.10 Banks will have discretion to recognise empirical correlations within broad regulatory risk factor classes (interest rate risk, equity risk, foreign exchange risk, commodity risk and credit risk, including related options volatilities in each risk factor category). Empirical correlations across broad risk factor categories will be constrained by SAMA aggregation requirements, as described in [13.14] to [13.15], and must be calculated and used in a manner consistent with the applicable liquidity horizons, clearly documented and able to be explained to SAMA on request.
13.11 Banks’ models must accurately capture the risks associated with options within each of the broad risk categories. The following criteria apply to the measurement of options risk:
(1) Banks’ models must capture the non-linear price characteristics of options positions.
(2) Banks’ risk measurement systems must have a set of risk factors that captures the volatilities of the rates and prices underlying option positions, ie vega risk. Banks with relatively large and/or complex options portfolios must have detailed specifications of the relevant volatilities. Banks must model the volatility surface across both strike price and vertex (ie tenor).
13.12 As set out in [13.4], a scaled ES must be calculated based on the liquidity horizon n defined below. n is calculated per the following conditions:
(1) Banks must map each risk factor on to one of the risk factor categories shown below using consistent and clearly documented procedures.
(2) The mapping of risk factors must be:
(a) set out in writing;
(b) validated by the bank’s risk management;
(c) made available to SAMA; and
(d) subject to internal audit.
(3) n is determined for each broad category of risk factor as set out in Table 2. However, on a desk-by-desk basis, n can be increased relative to the values in the table below (ie the liquidity horizon specified below can be treated as a floor). Where n is increased, the increased horizon must be 20, 40, 60 or 120 days and the rationale must be documented and be subject to SAMA approval. Furthermore, liquidity horizons should be capped at the maturity of the related instrument.
Liquidity horizon n by risk factor Table 2 Risk factor category n Risk factor category n Interest rate: specified currencies - EUR, USD, GBP, AUD, JPY, SEK, CAD and domestic currency of a bank 10 Equity price (small cap): volatility 60 Interest rate: unspecified currencies 20 Equity: other types 60 Interest rate: volatility 60 Foreign exchange (FX) rate: specified currency pairs49 10 Interest rate: other types 60 FX rate: currency pairs 20 Credit spread: sovereign (investment grade, or IG) 20 FX: volatility 40 Credit spread: sovereign (high yield, or HY) 40 FX: other types 40 Credit spread: corporate (IG) 40 Energy and carbon emissions trading price 20 Credit spread: corporate (HY) 60 Precious metals and non-ferrous metals price 20 Credit spread: volatility 120 Other commodities price 60 Credit spread: other types 120 Energy and carbon emissions trading price: volatility 60 Precious metals and non-ferrous metals price: volatility 60 Equity price (large cap) 10 Other commodities price: volatility 120 Equity price (small cap) 20 Commodity: other types 120 Equity price (large cap): volatility 20
The liquidity horizon for equity large cap repo and dividend risk factors is 20 days. All other equity repo and dividend risk factors are subject to a liquidity horizon of 60 days.
For mono-currency and cross-currency basis risk, the liquidity horizons of 10 days and 20 days for interest rate-specified currencies and unspecified currencies, respectively, applied
The liquidity horizon for inflation risk factors should be consistent with the liquidity horizons for interest rate risk factors for a given currency.
If the maturity of the instrument is shorter than the respective liquidity horizon of the risk factor as prescribed in [13.12], the next longer liquidity horizon length (out of the lengths of 10, 20, 40, 60 or 120 days as set out in the paragraph) compared with the maturity of the instrument itself must be used. For example, although the liquidity horizon for interest rate volatility is prescribed as 60 days, if an instrument matures in 30 days, a 40-day liquidity horizon would apply for the instrument’s interest rate volatility.
To determine the liquidity horizon of multi-sector credit and equity indices, the respective liquidity horizons of the underlying instruments must be used. A weighted average of liquidity horizons of the instruments contained in the index must be determined by multiplying the liquidity horizon of each individual instrument by its weight in the index (ie the weight used to construct the index) and summing across all instruments. The liquidity horizon of the index is the shortest liquidity horizon (out of 10, 20, 40, 60 and 120 days) that is equal to or longer than the weighted average liquidity horizon. For example, if the weighted average liquidity horizon is 12 days, the liquidity horizon of the index would be 20 days.
49 SAR/USD USD/EUR, USD/JPY, USD/GBP, USD/AUD, USD/CAD, USD/CHF, USD/MXN, USD/CNY, USD/NZD, USD/RUB, USD/HKD, USD/SGD, USD/TRY, USD/KRW, USD/SEK, USD/ZAR, USD/INR, USD/NOK, USD/BRL, EUR/JPY, EUR/GBP, EUR/CHF and JPY/AUD. Currency pairs forming first-order crosses across these specified currency pairs are also subject to the same liquidity horizon.
Calculation of Capital Requirement for Modellable Risk Factors
13.13 For those trading desks that are permitted to use the IMA, all risk factors that are deemed to be modellable must be included in the bank’s internal, bank-wide ES model. The bank must calculate its internally modelled capital requirement at the bank-wide level using this model, with no SAMA constraints on cross-risk class correlations (IMCC(C)).
Banks design their own models for use under the IMA. As a result, they may exclude risk factors from IMA models as long as SAMA does not conclude that the risk factor must be capitalised by either ES or SES. Moreover, at a minimum, the risk factors defined in [11.1] to [11.11] need to be covered in the IMA. If a risk factor is capitalised by neither ES nor SES, it is to be excluded from the calculation of risk-theoretical P&L.
13.14 The bank must calculate a series of partial ES capital requirements (ie all other risk factors must be held constant) for the range of broad regulatory risk classes (interest rate risk, equity risk, foreign exchange risk, commodity risk and credit spread risk). These partial, non-diversifiable (constrained) ES values (IMCC(Ci)) will then be summed to provide an aggregated risk class ES capital requirement.
13.15 The aggregate capital requirement for modellable risk factors (IMCC) is based on the weighted average of the constrained and unconstrained ES capital requirements, where:
(1) The stress period used in the risk class level ESR,S,i should be the same as that used to calculate the portfolio-wide ESR,S.
(2) Rho (ρ) is the relative weight assigned to the firm’s internal model. The value of ρ is 0.5
(3) B stands for broad regulatory risk classes as set out in [13.14].
The formula specified in [13.15], IMCC = (IM(C) + (1 - ρ)(Σ 
IMCC(Ci)), can be rewritten as IMCC = ρ(IMCC(C)) + (1 - ρ) 
(IMCC(C)) with IMCC(C) = 
While ESR,S, ESF,C and ESR,C must be calculated daily, it is generally acceptablethat the ratio of undiversified IMCC(C) to diversified IMCC(C), 
, may be calculated on a weekly basis.
By defining ω as ω = ρ + (1 - ρ). 
the formula for the calculation of IMCC can be rearranged, leading to the following expression of IMCC: IMCC = ω ∙ (IM(C)). Hence, IMCC can be calculated as a multiple of IMCC(C), where IMCC(C) is calculated daily and the multiplier ω is updated weekly.
Banks must have procedures and controls in place to ensure that the weekly calculation of the “undiversified IMCC(C) to diversified IMCC(C)” ratio does not lead to a systematic underestimation of risks relative to daily calculation. Banks must be in a position to switch to daily calculation upon SAMA direction.
Calculation of Capital Requirement for Non-Modellable Risk Factors
13.16 Capital requirements for each non-modellable risk factor (NMRF) are to be determined using a stress scenario that is calibrated to be at least as prudent as the ES calibration used for modelled risks (ie a loss calibrated to a 97.5% confidence threshold over a period of stress). In determining that period of stress, a bank must determine a common 12-month period of stress across all NMRFs in the same risk class. Subject to SAMA approval, a bank may be permitted to calculate stress scenario capital requirements at the bucket level (using the same buckets that the bank uses to disprove modellability, per [11.16]) for risk factors that belong to curves, surfaces or cubes (ie a single stress scenario capital requirement for all the NMRFs that belong to the same bucket).
(1) For each NMRF, the liquidity horizon of the stress scenario must be the greater of the liquidity horizon assigned to the risk factor in [13.12] and 20 days. SAMA may require a higher liquidity horizon.
(2) For NMRFs arising from idiosyncratic credit spread risk, banks may apply a common 12- month stress period. Likewise, for NMRFs arising from idiosyncratic equity risk arising from spot, futures and forward prices, equity repo rates, dividends and volatilities, banks may apply a common 12-month stress scenario. Additionally, a zero correlation assumption may be used when aggregating gains and losses provided the bank conducts analysis to demonstrate to SAMA that this is appropriate.50 Correlation or diversification effects between other non-idiosyncratic NMRFs are recognised through the formula set out in [13.17].
(3) In the event that a bank cannot provide a stress scenario which is acceptable for SAMA, the bank will have to use the maximum possible loss as the stress scenario.
13.17 The aggregate regulatory capital measure for I (non-modellable idiosyncratic credit spread risk factors that have been demonstrated to be appropriate to aggregate with zero correlation), J (non-modellable idiosyncratic equity risk factors that have been demonstrated to be appropriate to aggregate with zero correlation) and the remaining K (risk factors in model-eligible trading desks that are non-modellable (SES)) is calculated as follows, where:
(1) ISESNM,i is the stress scenario capital requirement for idiosyncratic credit spread non- modellable risk i from the I risk factors aggregated with zero correlation;
(2) ISES NM,j is the stress scenario capital requirement for idiosyncratic equity non-modellable risk j from the J risk factors aggregated with zero correlation;
(3) SESNM,k is the stress scenario capital requirement for non-modellable risk k from K risk factors; and
(4) Rho (ρ) is equal to 0.6.
50 The tests are generally done on the residuals of panel regressions where the dependent variable is the change in issuer spread while the independent variables can be either a change in a market factor or a dummy variable for sector and/or region. The assumption is that the data on the names used to estimate the model suitably proxies the names in the portfolio and the idiosyncratic residual component captures the multifactor-name basis. If the model is missing systematic explanatory factors or the data suffers from measurement error, then the residuals would exhibit heteroscedasticity (which can be tested via White, Breuche Pagan tests etc) and/or serial correlation (which can be tested with Durbin Watson, Lagrange multiplier (LM) tests etc) and/or cross-sectional correlation (clustering).
Calculation of Default Risk Capital Requirement
13.18 Banks must have a separate internal model to measure the default risk of trading book positions. The general criteria in [10.1] to [10.4] and the qualitative standards in [10.5] to [10.16] also apply to the default risk model.
13.19 Default risk is the risk of direct loss due to an obligor’s default as well as the potential for indirect losses that may arise from a default event.
13.20 Default risk must be measured using a value-at-risk (VaR) model.
(1) Banks must use a default simulation model with two types of systematic risk factors.
(2) Default correlations must be based on credit spreads or on listed equity prices. Correlations must be based on data covering a period of 10 years that includes a period of stress as defined in [13.5] and based on a one-year liquidity horizon.
(3) Banks must have clear policies and procedures that describe the correlation calibration process, documenting in particular in which cases credit spreads or equity prices are used.
(4) Banks have the discretion to apply a minimum liquidity horizon of 60 days to the determination of default risk capital (DRC) requirement for equity sub-portfolios.
(5) The VaR calculation must be conducted weekly and be based on a one-year time horizon at a one-tail, 99.9 percentile confidence level.
Banks are permitted to calibrate correlations to liquidity horizons of 60 days in the case that a separate calculation is performed for equity sub-portfolios and these desks deal predominately in equity exposures. In the case of a desk with both equity and bond exposures, for which a joint calculation for default risk of equities and bonds needs to be performed, the correlations need to be calibrated to a liquidity horizon of one year. In this case, a bank is permitted to consistently use a 60-day probability of default (PD) for equities and a one-year PD for bonds.
[13.20](2) states: “Default correlations must be based on credit spreads or on listed equity prices.” No additional data sources (eg rating time series) are permitted
[13.20](1) specifies that banks must use a default simulation model with two types of systematic risk factors. To meet this condition, the model always have two random variables that correspond to the systematic risk factors. Systematic risk in a DRC requirement model must be accounted for via multiple systematic factors of two different types. The rando variable that determines whether an obligor defaults must be an obligor-specific function of the systematic factors of both types and of an idiosyncratic factor. For example, in a Merton-type model, obligor i defaults when its asset return X falls below an obligor-specific threshold that determines the obligor’s probability of default. Systematic risk can be described via M systematic regional factors Yjreglon(j = 1, ... , M) and N systematic industry factors Yjindustry (j= 1, ... , N). For each obligor i, region factor loadings Bi,jregionand industry factor loadings Bi,jindustry that describe the sensitivity of the obligor’s asset return to each systematic factor need to be chosen. There must be at least one non-zero factor loading for the region type and at least one non-zero factor loading for the industry type. The asset return of obligor i can be represented as X? =Σ 
Bi,jregion ∙ Yjregion +Σ
Bi,jindustry ∙ Yjindustry+?? ∙??, where εi is the idiosyncratic risk factor and γi is the idiosyncratic factor loading.
Banks are permitted to use a 60-day liquidity horizon for all equity positions but are permitted to use a longer liquidity horizon where appropriate
13.21 All positions subject to market risk capital requirements that have default risk as defined in [13.19], with the exception of those positions subject to the standardised approach, are subject to the DRC requirement model.
(1) Sovereign exposures (including those denominated in the sovereign’s domestic currency), equity positions and defaulted debt positions must be included in the model.
(2) For equity positions, the default of an issuer must be modelled as resulting in the equity price dropping to zero.
13.22 The DRC requirement model capital requirement is the greater of:
(1) the average of the DRC requirement model measures over the previous 12 weeks; or
(2) the most recent DRC requirement model measure.
13.23 A bank must assume constant positions over the one-year horizon, or 60 days in the context of designated equity sub-portfolios.
The concept of constant positions has changed in the market risk framework because the capital horizon is now meant to always be synonymous with the new definition of liquidity horizon and no new positions are added when positions expire during the capital horizon. For securities with a maturity under one year, a constant position can be maintained within the liquidity horizon but, any maturity of a long or short position must be accounted for when the ability to maintain a constant position within the liquidity horizon cannot be contractually assured.
13.24 Default risk must be measured for each obligor.
(1) Probabilities of default (PDs) implied from market prices are not acceptable unless they are corrected to obtain an objective probability of default.51
(2) PDs are subject to a floor of 0.03%.
13.25 A bank’s model may reflect netting of long and short exposures to the same obligor. If such exposures span different instruments with exposure to the same obligor, the effect of the netting must account for different losses in the different instruments (eg differences in seniority).
13.26 The basis risk between long and short exposures of different obligors must be modelled explicitly. The potential for offsetting default risk among long and short exposures across different obligors must be included through the modelling of defaults. The pre-netting of positions before input into the model other than as described in [13.25] is not allowed.
13.27 The DRC requirement model must recognise the impact of correlations between defaults among obligors, including the effect on correlations of periods of stress as described below.
(1) These correlations must be based on objective data and not chosen in an opportunistic way where a higher correlation is used for portfolios with a mix of long and short positions and a low correlation used for portfolios with long only exposures.
(2) A bank must validate that its modelling approach for these correlations is appropriate for its portfolio, including the choice and weights of its systematic risk factors. A bank must document its modelling approach and the period of time used to calibrate the model.
(3) These correlations must be measured over a liquidity horizon of one year.
(4) These correlations must be calibrated over a period of at least 10 years.
(5) Banks must reflect all significant basis risks in recognising these correlations, including, for example, maturity mismatches, internal or external ratings, vintage etc.
13.28 The bank’s model must capture any material mismatch between a position and its hedge. With respect to default risk within the one-year capital horizon, the model must account for the risk in the timing of defaults to capture the relative risk from the maturity mismatch of long and short positions of less than one-year maturity.
13.29 The bank’s model must reflect the effect of issuer and market concentrations, as well as concentrations that can arise within and across product classes during stressed conditions.
13.30 As part of this DRC requirement model, the bank must calculate, for each and every position subjected to the model, an incremental loss amount relative to the current valuation that the bank would incur in the event that the obligor of the position defaults.
13.31 Loss estimates must reflect the economic cycle; for example, the model must incorporate the dependence of the recovery on the systemic risk factors.
13.32 The bank’s model must reflect the non-linear impact of options and other positions with material non-linear behaviour with respect to default. In the case of equity derivatives positions with multiple underlyings, simplified modelling approaches (for example modelling approaches that rely solely on individual jump-to-default sensitivities to estimate losses when multiple underlyings default) may be applied (subject to SAMA approval).
The simplified treatment applies only to equity derivatives.
13.33 Default risk must be assessed from the perspective of the incremental loss from default in excess of the mark-to-market losses already taken into account in the current valuation.
13.34 Owing to the high confidence standard and long capital horizon of the DRC requirement, robust direct validation of the DRC model through standard backtesting methods at the 99.9%/one-year soundness standard will not be possible.
(1) Accordingly, validation of a DRC model necessarily must rely more heavily on indirect methods including but not limited to stress tests, sensitivity analyses and scenario analyses, to assess its qualitative and quantitative reasonableness, particularly with regard to the model’s treatment of concentrations.
(2) Given the nature of the DRC soundness standard, such tests must not be limited to the range of events experienced historically.
(3) The validation of a DRC model represents an ongoing process in which supervisors and firms jointly determine the exact set of validation procedures to be employed.
13.35 Banks should strive to develop relevant internal modelling benchmarks to assess the overall accuracy of their DRC models.
13.36 Due to the unique relationship between credit spread and default risk, banks must seek SAMA approval for each trading desk with exposure to these risks, both for credit spread risk and default risk. Trading desks which do not receive SAMA approval will be deemed ineligible for internal modelling standards and be subject to the standardised capital framework.
13.37 Where a bank has approved PD estimates as part of the internal ratings-based (IRB) approach, this data must be used. Where such estimates do not exist, or SAMA determines that they are not sufficiently robust, PDs must be computed using a methodology consistent with the IRB methodology and satisfy the following conditions.
(1) Risk-neutral PDs should not be used as estimates of observed (historical) PDs.
(2) PDs must be measured based on historical default data including both formal default events and price declines equivalent to default losses. Where possible, this data should be based on publicly traded securities over a complete economic cycle. The minimum historical observation period for calibration purposes is five years.
(3) PDs must be estimated based on historical data of default frequency over a one-year period. The PD may also be calculated on a theoretical basis (eg geometric scaling) provided that the bank is able to demonstrate that such theoretical derivations are in line with historical default experience.
(4) PDs provided by external sources may also be used by banks, provided they can be shown to be relevant for the bank’s portfolio.
13.38 Where a bank has approved loss-given-default (LGD)52 estimates as part of the IRB approach, this data must be used. Where such estimates do not exist, or SAMA determines that they are not sufficiently robust, LGDs must be computed using a methodology consistent with the IRB methodology and satisfy the following conditions.
(1) LGDs must be determined from a market perspective, based on a position’s current market value less the position’s expected market value subsequent to default. The LGD should reflect the type and seniority of the position and cannot be less than zero.
(2) LGDs must be based on an amount of historical data that is sufficient to derive robust, accurate estimates.
(3) LGDs provided by external sources may also be used by institutions, provided they can be shown to be relevant for the bank’s portfolio.
13.39 Banks must establish a hierarchy ranking their preferred sources for PDs and LGDs, in order to avoid the cherry-picking of parameters.
51 Market-implied PDs are not acceptable.
52 LGD should be interpreted in this context as 1 – recovery rate.Calculation of Capital Requirement for Model-Ineligible Trading Desks
13.40 The regulatory capital requirement associated with trading desks that are either out-of-scope for model approval or that have been deemed ineligible to use an internal model (Cu) is to be calculated by aggregating all such risks and applying the standardised approach.
Aggregation of Capital Requirement
13.41 The aggregate (non-DRC) capital requirement for those trading desks approved and eligible for the IMA (ie trading desks that pass the backtesting requirements and that have been assigned to the PLA test green zone or amber zone (CA) in [12.43] to [12.45]) is equal to the maximum of the most recent observation and a weighted average of the previous 60 days scaled by a multiplier and is calculated as follows where SES is the aggregate regulatory capital measure for the risk factors in model-eligible trading desks that are non-modellable.
13.42 The multiplication factor mc is fixed at 1.5 unless it is set at a higher level by SAMA to reflect the addition of a qualitative add-on and/or a backtesting add-on per the following considerations.
(1) Banks must add to this factor a “plus” directly related to the ex-post performance of the model, thereby introducing a built-in positive incentive to maintain the predictive quality of the model.
(2) For the backtesting add-on, the plus will range from 0 to 0.5 based on the outcome of the backtesting of the bank’s daily VaR at the 99th percentile based on current observations on the full set of risk factors (VaRFC).
(3) If the backtesting results are satisfactory and the bank meets all of the qualitative standards set out in [10.5] to [10.16], the plus factor could be zero. [12] presents in detail the approach to be applied for backtesting and the plus factor.
(4) The backtesting add-on factor is determined based on the maximum of the exceptions generated by the backtesting results against actual P&L (APL) and hypothetical P&L (HPL) as described [12].
13.43 The aggregate capital requirement for market risk (ACRtotal) is equal to the aggregate capital requirement for approved and eligible trading desks (IMAG,A = CA + DRC) plus the standardised approach capital requirement for trading desks that are either out-of-scope for model approval or that have been deemed ineligible to use the internal models approach (Cu). If at least one eligible trading desk is in the PLA test amber zone, a capital surcharge is added. The impact of the capital surcharge is limited by the formula:
13.44 For the purposes of calculating the capital requirement, the risk factor eligibility test, the PLA test and the trading desk-level backtesting are applied on a quarterly basis to update the modellability of risk factors and desk classification to the PLA test green zone, amber zone, or red zone. In addition, the stressed period and the reduced set of risk factors (ER,C and ER,S) must be updated on a quarterly basis. The reference dates to perform the tests and to update the stress period and selection of the reduced set of risk factors should be consistent. Banks must reflect updates to the stressed period and to the reduced set of risk factors as well as the test results in calculating capital requirements in a timely manner. The averages of the previous 60 days (IMCC, SES) and or respectively 12 weeks (DRC) have only to be calculated at the end of the quarter for the purpose of calculating the capital requirement.
13.45 The capital surcharge is calculated as the difference between the aggregated standardised capital charges (SAG,A) and the aggregated internal models-based capital charges (IMAG,A = CA + DRC) multiplied by a factor k. To determine the aggregated capital charges, positions in all of the trading desks in the PLA green zone or amber zone are taken into account. The capital surcharge is floored at zero. In the formula below:
(1) k = 0.5× 
;
(2) SAi denotes the standardised capital requirement for all the positions of trading desk “i”;
(3) i ∈ A denotes the indices of all the approved trading desks in the amber zone; and
(4) i ∈ G, A denotes the indices of all the approved trading desks in the green zone or amber zone.
13.46 The risk-weighted assets for market risk under the IMA are determined by multiplying the capital requirements calculated as set out in this chapter by [12.5].
14- Simplified Standardised Approach
Risk-Weighted Assets and Capital Requirements
14.1 The risk-weighted assets for market risk under the simplified standardized approach are determined by multiplying the capital requirements calculated as set out in this chapter by 12.5.
(1) [14.3] to [14.73] deal with interest rate, equity, foreign exchange (FX) and commodities risk.
(2) [14.74] to [14.86] set out a number of possible methods for measuring the price risk in options of all kinds.
(3) The capital requirement under the simplified standardised approach will be the measures of risk obtained from [14.2] to [14.86], summed arithmetically.
14.2 The capital requirement arising from the simplified standardised approach is the simple sum of the recalibrated capital requirements arising from each of the four risk classes – namely interest rate risk, equity risk, FX risk and commodity risk as detailed in the formula below, where:
(1) CRIRR = capital requirement under [14.3] to [14.40] (interest rate risk), plus additional requirements for option risks from debt instruments (non-delta risks) under [14.74] to [14.86] (treatment of options);
(2) CREQ = capital requirement under [14.41] to [14.52] (equity risk), plus additional requirements for option risks from equity instruments (non-delta risks) under [14.74] to [14.86] (treatment of options);
(3) CRFX = capital requirement under [14.53] to [14.62] (FX risk), plus additional requirements for option risks from foreign exchange instruments (non-delta risks) under [14.74] to [14.86] (treatment of options);
(4) CRCOMM = capital requirement under [14.63] to [14.73] (commodities risk), plus additional requirements for option risks from commodities instruments (non-delta risks) under [14.74] to [14.86] (treatment of options);
(5) CFIRR = Scaling factor of 1.30;
(6) CFEQ = Scaling factor of 3.50;
(7) CFCOMM = Scaling factor of 1.90; and
(8) CFFX = Scaling factor of 1.20.
Interest Rate Risk
14.3 This section sets out the simplified standard approach for measuring the risk of holding or taking positions in debt securities and other interest rate related instruments in the trading book. The instruments covered include all fixed-rate and floating-rate debt securities and instruments that behave like them, including non-convertible preference shares.53 Convertible bonds, ie debt issues or preference shares that are convertible, at a stated price, into common shares of the issuer, will be treated as debt securities if they trade like debt securities and as equities if they trade like equities. The basis for dealing with derivative products is considered in [14.31] to [14.40].
14.4 The minimum capital requirement is expressed in terms of two separately calculated amounts, one applying to the “specific risk” of each security, whether it is a short or a long position, and the other to the interest rate risk in the portfolio (termed “general market risk”) where long and short positions in different securities or instruments can be offset.
Specific risk
14.5 The capital requirement for specific risk is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer. In measuring the risk, offsetting will be restricted to matched positions in the identical issue (including positions in derivatives). Even if the issuer is the same, no offsetting will be permitted between different issues since differences in coupon rates, liquidity, call features, etc mean that prices may diverge in the short run.
Netting is only allowed under limited circumstances for interest rate specific risk as explained in [14.5]: “offsetting will be restricted to matched positions in the identical issue (including positions in derivatives). Even if the issuer is the same, no offsetting will be permitted between different issues since differences in coupon rates, liquidity, call features, etc means that prices may diverge in the short run.” In addition, partial offsetting is allowed in two other sets of circumstances. One set of circumstances is described in [14.21] and concerns nth-to-default basked products. The other set of circumstances described in [14.16] to [14.18] pertains to offsetting between a credit derivative (whether total return swap or credit default swap) and the underlying exposure (ie cash position). Although this treatment applies generally in a one-for-one fashion, it is possible that multiple instruments could combine to create a hedge that would be eligible for consideration for partial offsetting. SAMA recognise that, in the case of multiple instruments comprising one side of the position, necessary conditions (ie the value of two legs moving in opposite directions, key contractual features of the credit derivative, identical reference obligations and currency/maturity mismatches) will be extremely difficult to meet, in practice.
14.6 The Specific risk capital requirements for “government” and “other” categories will be as follows:
Specific risk capital requirements for issuer risk Government and "other" categories Table 1 Categories External credit assessment Specific risk capital requirement Government AAA to AA- 0% A+ to BBB- 0.25% (residual term to final maturity 6 months or less)
1.00% (residual term to final maturity greater than 6 and up to and including 24 months)
1.60% (residual term to final maturity exceeding 24 months)BB+ to B- 8.00% Below B- 12.00% Unrated 8.00% Qualifying 0.25% (residual term to final maturity 6 months or less)
1.00% (residual term to final maturity greater than 6 and up to and including 24 months)
1.60% (residual term to final maturity exceeding 24 months)Other BB+ to BB- 8.00% Below BB- 12.00% Unrated 8.00%
14.7
The government category will include all forms of government54 paper including bonds, treasury bills and other short-term instruments, but SAMA will reserve the right to apply a specific risk capital requirement to securities issued by certain foreign governments, especially to securities denominated in a currency other than that of the issuing government.
14.8 When the government paper is denominated in the domestic currency and funded by the bank in the same currency, at SAMA later stage discretion a lower specific risk capital requirement may be applied.
14.9 The qualifying category includes securities issued by public sector entities and multilateral development banks, plus other securities that are:
(1) rated investment grade (IG)55 by at least two credit rating agencies specified by SAMA; or
(2) rated IG by one rating agency and not less than IG by any other rating agency specified by SAMA (subject to SAMA and Capital Market Authority “CMA”); or
(3) subject to SAMA approval, unrated, but deemed to be of comparable investment quality by the reporting bank, and the issuer has securities listed on a recognised stock exchange.
14.10 SAMA will be responsible for monitoring the application of these qualifying criteria, particularly in relation to the last criterion where the initial classification is essentially left to the reporting banks. SAMA will also have discretion to include within the qualifying category debt securities issued by banks in countries which have implemented this framework, subject to the express understanding that SAMA undertake prompt remedial action if a bank fails to meet the capital standards set forth in this framework. Similarly, SAMA will have discretion to include within the qualifying category debt securities issued by securities firms that are subject to equivalent rules.
14.11 Furthermore, the qualifying category shall include securities issued by institutions that are deemed to be equivalent to IG quality and subject to SAMA regulatory arrangements comparable to those under this framework.
14.12 Unrated securities may be included in the qualifying category when they are subject to SAMA approval, unrated, but deemed to be of comparable investment quality by the reporting bank, and the issuer has securities listed on a recognised stock exchange. This will remain unchanged for banks using the simplified standardised approach. For banks using the internal ratings-based (IRB) approach for a portfolio, unrated securities can be included in the qualifying category if both of the following conditions are met:
(1) the securities are rated equivalent56 to IG under the reporting bank’s internal rating system, which SAMA has confirmed complies with the requirements for an IRB approach; and
(2) the issuer has securities listed on a recognised stock exchange.
14.13 However, since this may in certain cases considerably underestimate the specific risk for debt instruments which have a high yield to redemption relative to government debt securities, SAMA will have the discretion:
(1) to apply a higher specific risk charge to such instruments; and/or
(2) to disallow offsetting for the purposes of defining the extent of general market risk between such instruments and any other debt instruments.
14.14 The specific risk capital requirement of securitisation positions as defined in a 18.1 to 18.6 of SAMA Minimum Capital Requirements for Credit Risk that are held in the trading book is to be calculated according to the revised method for such positions in the banking book as set out in revisions to the securitisation framework. A bank shall calculate the specific risk capital requirement applicable to each net securitisation position by dividing the risk weight calculated as if it were held in the banking book by [12.5].
14.15 Banks may limit the capital requirement for an individual position in a credit derivative or securitisation instrument to the maximum possible loss. For a short risk position this limit could be calculated as a change in value due to the underlying names immediately becoming default risk-free. For a long risk position, the maximum possible loss could be calculated as the change in value in the event that all the underlying names were to default with zero recoveries. The maximum possible loss must be calculated for each individual position.
When a bank buys credit protection for an asset-backed security (ABS) tranche and (due to netting rules) the bank is treated as having a net short position, the simplified standardised capital requirement for the net short position is often determined by the max potential loss. This is particularly true when the underlying ABS tranche has been severely downgraded and written down. In particular, banks note that if the underlying ABS continues to deteriorate, the overall capital requirement progressively increases and is dominated by the charge against the short side of the hedged position.
Some examples (without and with off-set) illustrate how the Max Loss principle should apply.
Max loss without offset:
Suppose the bank has net long and net short positions that reference similar, but not the same, underlying assets. In other words the bank hedges an A-rated mezzanine residential mortgage-backed security (RMBS) tranche (notional = USD 100) with a credit default swap (CDS) on a similar but different A-rated mezzanine RMBS (also having notional = USD 100).
Suppose the RMBS tranche owned by the bank is now rated C, and has value of USD 15. Also assume that the value of the CDS on the different RMBS has a current value of USD 80. Further, suppose that the current value of the RMBS underlying this CDS is USD 20 and is also rated C. Finally, suppose that the CDS would be valued at USD –2 if the underlying RMBS tranche were to recover unexpectedly and become risk-free.
The correct treatment is as follows: min (USD 15, USD 15) (long leg) + min (USD 20, USD 82) (short leg) = USD 35.
No off-set would be permissible in this example, because the same underlying asset has not been hedged. The capital requirement should, therefore, be calculated by summing the charges against the long and short legs. The maximum loss principle would apply to each individual position.
Please note that the market value of the underlying has been applied in determining the exposure value of the CDS.
Max loss with offset:
Suppose the bank hedges an A-rated mezzanine RMBS tranche with a CDS referencing the same RMBS having notional of USD 100. Suppose the RMBS tranche is now rated C, and has value USD 15, while the current value of the CDS is USD 85. Suppose that the value of the CDS would equal USD –2 if the RMBS tranche were to recover unexpectedly and become risk-free.
In this example, if the CDS exactly matched the RMBS in tenor, then offsetting could potentially apply. In that instance, the capital requirement should equal 20% of max{min(USD 15, USD 15), min(USD 15, USD 87)} = USD 3.
If the tenors were not matched (ie maturity mismatch), then the capital requirement should equal max{min(USD 15, USD 15), min(USD 15, USD 87)} = USD 15.
Please note that the maximum loss principle cannot be applied on a portfolio basis.
14.16 Full allowance will be recognised for positions hedged by credit derivatives when the values of two legs (ie long and short) always move in the opposite direction and broadly to the same extent. This would be the case in the following situations, in which cases no specific risk capital requirement applies to both sides of the position:
(1) the two legs consist of completely identical instruments; or
(2) a long cash position (or credit derivative) is hedged by a total rate of return swap (or vice versa) and there is an exact match between the reference obligation and the underlying exposure (ie the cash position).57
According to [14.16] to [14.18], the offsetting treatment is applied to a cash position that is hedged by a credit derivative or a credit derivative that is hedged by another credit derivative, assuming there is an exact match in terms of the reference obligations. The illustration of the treatment would be as following:
[14.16] to [14.18], are applicable not only when the underlying position being hedged is a cash position, but also when the position being hedged is a credit default swap (CDS) or other credit derivative. They also apply regardless of whether the cash positions or reference obligations of the credit derivative are single-name or securitisation exposures.
For example, when a long cash position is hedged using a CDS, the 80% offset treatment of [14.17] (the partial allowance treatment of [14.18]) generally applies when the reference obligation of the CDS is the cash instrument being hedged and the currencies and remaining maturities of the two positions are (are not) identical. Similarly, when a purchased CDS is hedged with a sold CDS, the 80% offset treatment (the partial allowance treatment) generally applies when both the long and short CDSs have the same reference obligations and the currencies and remaining maturities of the long and short CDSs are (are not) identical. The full allowance (100% offset) treatment generally applies only when there is zero basis risk between the instrument being hedged and the hedging instrument, such as when a cash position is hedged with a total rate of return swap referencing the same cash instrument and there is no currency mismatch, or when a purchased CDS position is hedged by selling a CDS with identical terms in all respects, including reference obligation, currency, maturity, documentation clauses (eg credit payout events, methods for determining payouts for credit events, etc), and structure of fixed and variable payments over time.
It is worth noting that the conditions under which partial or full offsetting of risk positions that are subject to interest rate specific risk are narrowly defined. In practice, offsets between securitisation positions and credit derivatives are unlikely to be recognised in most cases due to the explicit requirements in [14.16] to [14.18] on reference names etc.
14.17 An 80% offset will be recognised when the value of two legs (ie long and short) always moves in the opposite direction but not broadly to the same extent. This would be the case when a long cash position (or credit derivative) is hedged by a credit default swap (CDS) or a credit-linked note (or vice versa) and there is an exact match in terms of the reference obligation, the maturity of both the reference obligation and the credit derivative, and the currency of the underlying exposure. In addition, key features of the credit derivative contract (eg credit event definitions, settlement mechanisms) should not cause the price movement of the credit derivative to materially deviate from the price movements of the cash position. To the extent that the transaction transfers risk (ie taking account of restrictive payout provisions such as fixed payouts and materiality thresholds), an 80% specific risk offset will be applied to the side of the transaction with the higher capital requirement, while the specific risk requirement on the other side will be zero.
14.18 Partial allowance will be recognised when the value of the two legs (ie long and short) usually moves in the opposite direction. This would be the case in the following situations:
(1) The position is captured in [14.16](2), but there is an asset mismatch between the reference obligation and the underlying exposure. Nonetheless, the position meets the requirements in [CRE22.86].
(2) The position is captured in [14.16](1) or [14.17] but there is a currency or maturity mismatch58 between the credit protection and the underlying asset.
(3) The position is captured in [14.17] but there is an asset mismatch between the cash position (or credit derivative) and the credit derivative hedge. However, the underlying asset is included in the (deliverable) obligations in the credit derivative documentation.
14.19 In each of these cases in [14.16] to [14.18], the following rule applies. Rather than adding the specific risk capital requirements for each side of the transaction (ie the credit protection and the underlying asset) only the higher of the two capital requirements will apply.
14.20 In cases not captured in [14.16] to [14.18], a specific risk capital requirement will be assessed against both sides of the position.
14.21 An nth-to-default credit derivative is a contract where the payoff is based on the nth asset to default in a basket of underlying reference instruments. Once the nth default occurs the transaction terminates and is settled.
(1) The capital requirement for specific risk for a first-to-default credit derivative is the lesser of:
(a) the sum of the specific risk capital requirements for the individual reference credit instruments in the basket; and
(b) the maximum possible credit event payment under the contract.
(2) Where a bank has a risk position in one of the reference credit instruments underlying a first-to-default credit derivative and this credit derivative hedges the bank’s risk position, the bank is allowed to reduce, with respect to the hedged amount, both the capital requirement for specific risk for the reference credit instrument and that part of the capital requirement for specific risk for the credit derivative that relates to this particular reference credit instrument. Where a bank has multiple risk positions in reference credit instruments underlying a first-to-default credit derivative, this offset is allowed only for that underlying reference credit instrument having the lowest specific risk capital requirement.
(3) The capital requirement for specific risk for an nth-to-default credit derivative with n greater than one is the lesser of:
(a) the sum of the specific risk capital requirements for the individual reference credit instruments in the basket but disregarding the (n-1) obligations with the lowest specific risk capital requirements; and
(b) the maximum possible credit event payment under the contract. For nth-to- default credit derivatives with n greater than 1, no offset of the capital requirement for specific risk with any underlying reference credit instrument is allowed.
(4) If a first or other nth-to-default credit derivative is externally rated, then the protection seller must calculate the specific risk capital requirement using the rating of the derivative and apply the respective securitisation risk weights as specified in [14.14], as applicable.
(5) The capital requirement against each net nth-to-default credit derivative position applies irrespective of whether the bank has a long or short position, ie obtains or provides protection.
The framework mentions only tranches and nth-to-default products explicitly, but not nth to n+m-th-to-default products (eg the value depends on the default of the 5th, 6th, 7th and 8th default in a pool; only in specific cases such as the same nominal for all underlyings can this product be represented by, for example, a 5% to 8% tranche). The nth to n+m-th-to- default products are covered in the framework, such products are to be decomposed into individual nth-to-default products and the rules for nth-to-default products in [14.21] apply.
In the example cited above, the capital requirement for a basket default swap covering defaults five to eight would be calculated as the sum of the capital requirements for a 5th- to-default swap, a 6th-to-default swap, a 7th-to-default swap and an 8th-to-default swap.
14.22 A bank must determine the specific risk capital requirement for the correlation trading portfolio (CTP) as follows:
(1) The bank computes:
(a) the total specific risk capital requirements that would apply just to the net long positions from the net long correlation trading exposures combined; and
(b) the total specific risk capital requirements that would apply just to the net short positions from the net short correlation trading exposures combined.
(2) The larger of these total amounts is then the specific risk capital requirement for the CTP.
The approach of taking the larger of the specific risk capital requirements for net long positions and the specific risk capital requirement for net short positions are not applied to leveraged securitisation positions or option products on securitisation positions. Leveraged securitisation positions and option products on securitisation positions are securitisation positions. They are not admissible for the CTP. The capital requirements for specific risk will be determined as the sum of the capital requirements for specific risk against net long and net short positions.
General market risk
14.23 The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest rates. A choice between two principal methods of measuring the risk is permitted – a maturity method and a duration method. In each method, the capital requirement is the sum of four components:
(1) the net short or long position in the whole trading book;
(2) a small proportion of the matched positions in each time band (the “vertical disallowance”);
(3) a larger proportion of the matched positions across different time bands (the “horizontal disallowance”); and
(4) a net charge for positions in options, where appropriate (see [14.84] and [14.85]).
14.24 Separate maturity ladders should be used for each currency and capital requirements should be calculated for each currency separately and then summed with no offsetting between positions of the opposite sign. In the case of those currencies in which business is insignificant, separate maturity ladders for each currency are not required. Rather, the bank may construct a single maturity ladder and slot, within each appropriate time band, the net long or short position for each currency. However, these individual net positions are to be summed within each time band, irrespective of whether they are long or short positions, to produce a gross position figure.
14.25 In the maturity method (see [14.29] for the duration method), long or short positions in debt securities and other sources of interest rate exposures including derivative instruments, are slotted into a maturity ladder comprising 13 time bands (or 15 time bands in the case of low coupon instruments). Fixed rate instruments should be allocated according to the residual term to maturity and floating-rate instruments according to the residual term to the next repricing date. Opposite positions of the same amount in the same issues (but not different issues by the same issuer), whether actual or notional, can be omitted from the interest rate maturity framework, as well as closely matched swaps, forwards, futures and forward rate agreements (FRAs) which meet the conditions set out in [14.35] and [14.36] below.
14.26 The first step in the calculation is to weight the positions in each time band by a factor designed to reflect the price sensitivity of those positions to assumed changes in interest rates. The weights for each time band are set out in Table 4. Zero-coupon bonds and deep-discount bonds (defined as bonds with a coupon of less than 3%) should be slotted according to the time bands set out in the second column of Table 4.
Maturity method: time bands and weights Table 4 Coupon 3% or more Coupon less than 3% Risk weight Assumed changes in yield 1 month or less 1 month or less 0.00% 1.00 1 to 3 months 1 to 3 months 0.20% 1.00 3 to 6 months 3 to 6 months 0.40% 1.00 6 to 12 months 6 to 12 months 0.70% 1.00 1 to 2 years 1.0 to 1.9 years 1.25% 0.90 2 to 3 years 1.9 to 2.8 years 1.75% 0.80 3 to 4 years 2.8 to 3.6 years 2.25% 0.75 4 to 5 years 3.6 to 4.3 years 2.75% 0.75 5 to 7 years 4.3 to 5.7 years 3.25% 0.70 7 to 10 years 5.7 to 7.3 years 3.75% 0.65 10 to 15 years 7.3 to 9.3 years 4.50% 0.60 15 to 20 years 9.3 to 10.6 years 5.25% 0.60 Over 20 years 10.6 to 12 years 6.00% 0.60 12 to 20 years 8.00% 0.60 Over 20 years 12.50% 0.60
14.27
The next step in the calculation is to offset the weighted longs and shorts in each time band, resulting in a single short or long position for each band. Since, however, each band would include different instruments and different maturities, a 10% capital requirement to reflect basis risk and gap risk will be levied on the smaller of the offsetting positions, be it long or short. Thus, if the sum of the weighted longs in a time band is USD 100 million and the sum of the weighted shorts USD 90 million, the so-called vertical disallowance for that time band would be 10% of USD 90 million (ie USD 9 million).
14.28 The result of the above calculations is to produce two sets of weighted positions, the net long or short positions in each time band (USD 10 million long in the example above) and the vertical disallowances, which have no sign.
(1) In addition, however, banks will be allowed to conduct two rounds of horizontal offsetting:
(a) first between the net positions in each of three zones, where zone 1 is set as zero to one year, zone 2 is set as one year to four years, and zone 3 is set as four years and over (however, for coupons less than 3%, zone 2 is set as one year to 3.6 years and zone 3 is set as 3.6 years and over); and
(b) subsequently between the net positions in the three different zones.
(2) The offsetting will be subject to a scale of disallowances expressed as a fraction of the matched positions, as set out in Table 5. The weighted long and short positions in each of three zones may be offset, subject to the matched portion attracting a disallowance factor that is part of the capital requirement. The residual net position in each zone may be carried over and offset against opposite positions in other zones, subject to a second set of disallowance factors.
Horizontal disallowances Table 5 Zones59 Time band57 Within the zone Between adjacent zones Between zones 1 and 3 Zone 1 0-1 month
1-3 months
3-6 months
6-12 months
40% 40% 100% Zone 2 1-2 years
2-3 years
3-4 years
4-5 years
30% 40% Zone 3 5-7 years
7-10 years
10-15 years
15-20 years
Over 20 years30%
14.29
Under the alternative duration method, banks with the necessary capability may, with SAMA’ consent, use a more accurate method of measuring all of their general market risk by calculating the price sensitivity of each position separately. Banks must elect and use the method on a continuous basis (unless a change in method is approved by SAMA) and will be subject to SAMA monitoring of the systems used. The mechanics of this method are as follows:
(1) First calculate the price sensitivity of each instrument in terms of a change in interest rates of between 0.6 and 1.0 percentage points depending on the maturity of the instrument (see Table 6);
(2) Slot the resulting sensitivity measures into a duration-based ladder with the 15 time bands set out in Table 6;
(3) Subject long and short positions in each time band to a 5% vertical disallowance designed to capture basis risk; and
(4) Carry forward the net positions in each time band for horizontal offsetting subject to the disallowances set out in Table 5 above.
Duration method: time bands and assumed changes in yield Table 6 Assumed change in yield Assumed change in yield Zone 1: Zone 3: 1 month or less 1.00 3.6 to 4.3 years 0.75 1 to 3 months 1.00 4.3 to 5.7 years 0.70 3 to 6 months 1.00 5.7 to 7.3 years 0.65 6 to 12 months 1.00 7.3 to 9.3 years 0.60 Zone 2: 9.3 to 10.6 years 0.60 1.0 to 1.9 years 0.90 10.6 to 12 years 0.60 1.9 to 2.8 years 0.80 12 to 20 years 0.60 2.8 to 3.6 years 0.75 Over 20 years 0.60
14.30
In the case of residual currencies (see [14.24] above) the gross positions in each time band will be subject to either the risk weightings set out in [14.26], if positions are reported using the maturity method, or the assumed change in yield set out in [14.29], if positions are reported using the duration method, with no further offsets.
Interest rate derivatives
14.31 The measurement system should include all interest-rate derivatives and off- balance sheet instruments in the trading book which react to changes in interest rates (eg FRAs, other forward contracts, bond futures, interest rate and cross-currency swaps and forward foreign exchange positions). Options can be treated in a variety of ways as described in [14.74] to [14.86]. A summary of the rules for dealing with interest rate derivatives is set out in [14.40].
14.32 The derivatives should be converted into positions in the relevant underlying and become subject to specific and general market risk charges as described above. In order to calculate the standard formula described above, the amounts reported should be the market value of the principal amount of the underlying or of the notional underlying resulting from the Prudent Valuation Guidance.
14.33 Futures and forward contracts (including FRAs) are treated as a combination of a long and a short position in a notional government security. The maturity of a future or an FRA will be the period until delivery or exercise of the contract, plus – where applicable – the life of the underlying instrument. For example, a long position in a June three-month interest rate future (taken in April) is to be reported as a long position in a government security with a five-month maturity and a short position in a government security with a two-month maturity. Where a range of deliverable instruments may be delivered to fulfil the contract, the bank has flexibility to elect which deliverable security goes into the maturity or duration ladder but should take account of any conversion factor defined by the exchange. In the case of a future on a corporate bond index, positions will be included at the market value of the notional underlying portfolio of securities.
14.34 Swaps will be treated as two notional positions in government securities with relevant maturities. For example, an interest rate swap under which a bank is receiving floating rate interest and paying fixed will be treated as a long position in a floating rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed-rate instrument of
14.35 Banks may exclude from the interest rate maturity framework altogether (for both specific and general market risk) long and short positions (both actual and notional) in identical instruments with exactly the same issuer, coupon, currency and maturity. A matched position in a future or forward and its corresponding underlying may also be fully offset60 and thus excluded from the calculation. When the future or the forward comprises a range of deliverable instruments offsetting of positions in the future or forward contract and its underlying is only permissible in cases where there is a readily identifiable underlying security that is most profitable for the trader with a short position to deliver. The price of this security, sometimes called the “cheapest-to- deliver”, and the price of the future or forward contract should, in such cases, move in close alignment. No offsetting will be allowed between positions in different currencies; the separate legs of cross-currency swaps or forward FX deals are to be treated as notional positions in the relevant instruments and included in the appropriate calculation for each currency.
14.36 In addition, opposite positions in the same category of instruments61 can in certain circumstances be regarded as matched and allowed to offset fully. To qualify for this treatment, the positions must relate to the same underlying instruments, be of the same nominal value and be denominated in the same currency.62 In addition:
(1) for futures: offsetting positions in the notional or underlying instruments to which the futures contract relates must be for identical products and mature within seven days of each other;
(2) for swaps and FRAs: the reference rate (for floating rate positions) must be identical and the coupon closely matched (ie within 15 basis points); and
(3) for swaps, FRAs and forwards: the next interest fixing date or, for fixed coupon positions or forwards, the residual maturity must correspond within the following limits:
(a) less than one month hence: same day;
(b) between one month and one year hence: within seven days; and
(c) over one year hence: within 30 days.
14.37 Banks with large swap books may use alternative formulae for these swaps to calculate the positions to be included in the maturity or duration ladder. One method would be to first convert the payments required by the swap into their present values. For that purpose, each payment should be discounted using zero coupon yields, and a single net figure for the present value of the cash flows entered into the appropriate time band using procedures that apply to zero- (or low-) coupon bonds; these figures should be slotted into the general market risk framework as set out above. An alternative method would be to calculate the sensitivity of the net present value implied by the change in yield used in the maturity or duration method and allocate these sensitivities into the time bands set out in [14.26] or [14.29]. Other methods which produce similar results could also be used. Such alternative treatments will, however, only be allowed if:
(1) SAMA is fully satisfied with the accuracy of the systems being used;
(2) the positions calculated fully reflect the sensitivity of the cash flows to interest rate changes and are entered into the appropriate time bands; and
(3) the positions are denominated in the same currency.
14.38 Interest rate and currency swaps, FRAs, forward FX contracts and interest rate futures will not be subject to a specific risk charge. This exemption also applies to futures on an interest rate index (eg London Interbank Offer Rate, or LIBOR). However, in the case of futures contracts where the underlying is a debt security, or an index representing a basket of debt securities, a specific risk charge will apply according to the credit risk of the issuer as set out in [14.5] to [14.21].
14.39 General market risk applies to positions in all derivative products in the same manner as for cash positions, subject only to an exemption for fully or very closely matched positions in identical instruments as defined in [paragraphs 718(xiii) and 718(xiv) / [14.35] and [14.36]. The various categories of instruments should be slotted into the maturity ladder and treated according to the rules identified earlier.
14.40 Table 7 presents a summary of the regulatory treatment for interest rate derivatives, for market risk purposes.
Summary of treatment of interest rate derivatives Table 7 Instrument Specific risk charge63 General market risk charge Exchanged-traded future Government debt security Yes64 Yes, as two positions Corporate debt security Yes Yes, as two positions Index on interest rates (eg LIBOR) No Yes, as two positions Over-the-counter (OTC) forward Government debt security Yes63 Yes, as two positions Corporate debt security Yes Yes, as two positions Index on interest rates No Yes, as two positions FRAs, swaps No Yes, as two positions Forward FX
No Yes, as one position in each currency
Options
Either
Government debt security Yes63 (a) carve out together with the associated hedging positions: simplified approach; scenario analysis; internal models
Corporate debt security Yes (b) general market risk charge according to the delta-plus method (gamma and vega should receive separate capital requirements) Index on interest rates No FRAs, swaps No 53 Traded mortgage securities and mortgage derivative products possess unique characteristics because of the risk of prepayment. Accordingly, for the time being, no common treatment will apply to these securities, which will be dealt with SAMA at aleates stage. A security that is the subject of a repurchase or securities lending agreement will be treated as if it were still owned by the lender of the security, ie it will be treated in the same manner as other securities positions.
54 Including, local and regional governments subject to a zero credit risk weight in the credit risk framework.
55 For example, IG include rated Baa or higher by Moody’s and BBB or higher by Standard and Poor’s.
56 Equivalent means the debt security has a one-year probability of default (PD) equal to or less than the one year PD implied by the long-run average one-year PD of a security rated IG or better by a qualifying rating agency.
57 The maturity of the swap itself may be different from that of the underlying exposure.
58 Currency mismatches should feed into the normal reporting of FX risk.
59 The zones for coupons less than 3% are 0 to 1 year, 1 to 3.6 years, and 3.6 years and over.
60 The leg representing the time to expiry of the future should, however, be reported.
61 This includes the delta-equivalent value of options. The delta equivalent of the legs arising out of the treatment of caps and floors as set out in [14.78] can also be offset against each other under the rules laid down in this paragraph.
62 The separate legs of different swaps may also be matched subject to the same conditions.
63 This is the specific risk charge relating to the issuer of the instrument. Under the credit risk rules, a separate capital requirement for the counterparty credit risk applies.
64 The specific risk capital requirement only applies to government debt securities that are rated below AA– (see [14.6] and [14.7]).Equity Risk
14.41 This section sets out a minimum capital standard to cover the risk of holding or taking positions in equities in the trading book. It applies to long and short positions in all instruments that exhibit market behaviour similar to equities, but not to non-convertible preference shares (which are covered by the interest rate risk requirements described in [14.3] to [14.40]). Long and short positions in the same issue may be reported on a net basis. The instruments covered include common stocks (whether voting or non-voting), convertible securities that behave like equities, and commitments to buy or sell equity securities. The treatment of derivative products, stock indices and index arbitrage is described in [14.44] to [14.52] below.
Specific and general market risks
14.42 As with debt securities, the minimum capital standard for equities is expressed in terms of two separately calculated capital requirements for the specific risk of holding a long or short position in an individual equity and for the general market risk of holding a long or short position in the market as a whole. Specific risk is defined as the bank’s gross equity positions (ie the sum of all long equity positions and of all short equity positions) and general market risk as the difference between the sum of the longs and the sum of the shorts (ie the overall net position in an equity market).The long or short position in the market must be calculated on a market-by-market basis, ie a separate calculation has to be carried out for each national market in which the bank holds equities.
14.43 The capital requirement for specific risk and for general market risk will each be 8%.
Equity derivatives
14.44 Except for options, which are dealt with in [14.74] to [14.86], equity derivatives and off- balance sheet positions that are affected by changes in equity prices should be included in the measurement system.65 This includes futures and swaps on both individual equities and on stock indices. The derivatives are to be converted into positions in the relevant underlying. The treatment of equity derivatives is summarised in [14.52] below.
14.45 In order to calculate the standard formula for specific and general market risk, positions in derivatives should be converted into notional equity positions:
(1) Futures and forward contracts relating to individual equities should in principle be reported at current market prices.
(2) Futures relating to stock indices should be reported as the marked-to-market value of the notional underlying equity portfolio.
(3) Equity swaps are to be treated as two notional positions.66
(4) Equity options and stock index options should be either carved out together with the associated underlyings or be incorporated in the measure of general market risk described in this section according to the delta-plus method.
14.46 Matched positions in each identical equity or stock index in each market may be fully offset, resulting in a single net short or long position to which the specific and general market risk charges will apply. For example, a future in a given equity may be offset against an opposite cash position in the same equity.67
14.47 Besides general market risk, a further capital requirement of 2% will apply to the net long or short position in an index contract comprising a diversified portfolio of equities. This capital requirement is intended to cover factors such as execution risk. SAMA will take care to ensure that this 2% risk weight applies only to well- diversified indices and not, for example, to sectoral indices.
14.48 In the case of the futures-related arbitrage strategies described below, the additional 2% capital requirement described above (set out in [14.47]) may be applied to only one index with the opposite position exempt from a capital requirement. The strategies are:
(1) when the bank takes an opposite position in exactly the same index at different dates or in different market centres; and
(2) When the bank has an opposite position in contracts at the same date in different but similar indices, subject to SAMA oversight that the two indices contain sufficient common components to justify offsetting.
14.49 Where a bank engages in a deliberate arbitrage strategy, in which a futures contract on a broadly based index matches a basket of stocks, it will be allowed to carve out both positions from the simplified standardised approach on condition that:
(1) the trade has been deliberately entered into and separately controlled; and
(2) the composition of the basket of stocks represents at least 90% of the index when broken down into its notional components.
14.50 In such a case as set out in [14.49] the minimum capital requirement will be 4% (ie 2% of the gross value of the positions on each side) to reflect divergence and execution risks. This applies even if all of the stocks comprising the index are held in identical proportions. Any excess value of the stocks comprising the basket over the value of the futures contract or excess value of the futures contract over the value of the basket is to be treated as an open long or short position.
14.51 If a bank takes a position in depository receipts against an opposite position in the underlying equity or identical equities in different markets, it may offset the position (ie bear no capital requirement) but only on condition that any costs on conversion are fully taken into account.68
14.52 Table 8 summarises the regulatory treatment of equity derivatives for market risk purposes.
Summary of treatment of equity derivatives
Table 8
Instrument
Specific risk69
General market risk
Exchanged-traded or OTC future
Individual equity
Yes
Yes, as underlying
Index
2%
Yes, as underlying
Options
Either
Individual equity
Yes
(a) carve out together with the associated hedging positions: simplified approach; scenario analysis; internal models
Index 2% (b) general market risk charge according to the delta-plus method (gamma and vega should receive separate capital requirements) 65 Where equities are part of a forward contract, a future or an option (quantity of equities to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract should be reported as set out in [14.3] to [14.40] and [14.53] to [14.62].
66 For example, an equity swap in which a bank is receiving an amount based on the change in value of one particular equity or stock index and paying a different index will be treated as a long position in the former and a short position in the latter. Where one of the legs involves receiving/paying a fixed or floating interest rate, that exposure should be slotted into the appropriate repricing time band for interest rate related instruments as set out in [14.3] to [14.40]. The stock index should be covered by the equity treatment.
67 The interest rate risk arising out of the future, however, should be reported as set out in [14.3] to [14.40].
68 Any FX risk arising out of these positions has to be reported as set out in [14.53] to [14.67].
69 This is the specific risk charge relating to the issuer of the instrument. Under the credit risk rules], a separate capital requirement for the counterparty credit risk applies.Foreign Exchange Risk
14.53 This section sets out the simplified standardised approach for measuring the risk of holding or taking positions in foreign currencies, including gold.70
14.54 Two processes are needed to calculate the capital requirement for FX risk.
(1) The first is to measure the exposure in a single currency position as set out in [14.55] to [14.58].
(2) The second is to measure the risks inherent in a bank’s mix of long and short positions in different currencies as set out in [14.59] to [14.62].
Measuring the exposure in a single currency
14.55 The bank’s net open position in each currency should be calculated by summing:
(1) the net spot position (ie all asset items less all liability items, including accrued interest, denominated in the currency in question);
(2) the net forward position (ie all amounts to be received less all amounts to be paid under forward FX transactions, including currency futures and the principal on currency swaps not included in the spot position);
(3) guarantees (and similar instruments) that are certain to be called and are likely to be irrecoverable;
(4) net future income/expenses not yet accrued but already fully hedged (at the discretion of the reporting bank);
(5) any other item representing a profit or loss in foreign currencies (depending on particular accounting conventions in different countries); and
(6) the net delta-based equivalent of the total book of foreign currency options.71
14.56 Positions in composite currencies need to be separately reported but, for measuring banks’ open positions, may be either treated as a currency in their own right or split into their component parts on a consistent basis. Positions in gold should be measured in the same manner as described in [14.68].72
14.57 Interest, other income and expenses should be treated as follows. Interest accrued (ie earned but not yet received) should be included as a position. Accrued expenses should also be included. Unearned but expected future interest and anticipated expenses may be excluded unless the amounts are certain and banks have taken the opportunity to hedge them. If banks include future income/expenses they should do so on a consistent basis, and not be permitted to select only those expected future flows which reduce their position.
14.58 Forward currency and gold positions should be measured as follows: Forward currency and gold positions will normally be valued at current spot market exchange rates. Using forward exchange rates would be inappropriate since it would result in the measured positions reflecting current interest rate differentials to some extent. However, banks that base their normal management accounting on net present values are expected to use the net present values of each position, discounted using current interest rates and valued at current spot rates, for measuring their forward currency and gold positions.
Measuring the foreign exchange risk in a portfolio of foreign currency positions and gold
14.59 For measuring the FX risk in a portfolio of foreign currency positions and gold as set out in [14.54](2), a bank that is not approved to use internal models by SAMA must use a shorthand method which treats all currencies equally.
14.60 Under the shorthand method, the nominal amount (or net present value) of the net position in each foreign currency and in gold is converted at spot rates into the reporting currency.73 The overall net open position is measured by aggregating:
(1) the sum of the net short positions or the sum of the net long positions, whichever is the greater;74 plus
(2) the net position (short or long) in gold, regardless of sign.
14.61 The capital requirement will be 8% of the overall net open position (see example in Table 9). In particular, the capital requirement would be 8% of the higher of either the net long currency positions or the net short currency positions (ie 300) and of the net position in gold (35) = 335 x 8% = 26.8.
Example of the shorthand measure of FX risk Table 9 JPY EUR GBP CAD USD Gold Net position per currency +50 + 100 + 150 -20 -180 -35 Net open position +300 -200 35
14.62
A bank of which business in foreign currency is insignificant and which does not take FX positions for its own account may, at the discretion of SAMA, be exempted from capital requirements on these positions provided that:
(1) its foreign currency business, defined as the greater of the sum of its gross long positions and the sum of its gross short positions in all foreign currencies, does not exceed 100% of eligible capital as defined in Regulatory Capital for Basel III in Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments; and
(2) its overall net open position as defined in [14.60] above does not exceed 2% of its eligible capital as defined in Regulatory Capital for Basel III in Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments .
70 Gold is to be dealt with as an FX position rather than a commodity because its volatility is more in line with foreign currencies and banks manage it in a similar manner to foreign currencies.
71 Subject to a separately calculated capital requirement for gamma and vega as described in [14.77] to [14.80]; alternatively, options and their associated underlyings are subject to one of the other methods described in [14.74] to [14.86].
72 Where gold is part of a forward contract (quantity of gold to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract should be reported as set out in [14.3] to [14.40] and 14.55] above.
73 Where the bank is assessing its FX risk on a consolidated basis, it may be technically impractical in the case of some marginal operations to include the currency positions of a foreign branch or subsidiary of the bank. In such cases, the internal limit in each currency may be used as a proxy for the positions. Provided there is adequate ex post monitoring of actual positions against such limits, the limits should be added, without regard to sign, to the net open position in each currency.
74 An alternative calculation, which produces an identical result, is to include the reporting currency as a residual and to take the sum of all the short (or long) positions.Commodities Risk
14.63 This section sets out the simplified standardised approach for measuring the risk of holding or taking positions in commodities, including precious metals, but excluding gold (which is treated as a foreign currency according to the methodology set out in [14.53] to [14.62] above). A commodity is defined as a physical product which is or can be traded on a secondary market, eg agricultural products, minerals (including oil) and precious metals.
14.64 The price risk in commodities is often more complex and volatile than that associated with currencies and interest rates. Commodity markets may also be less liquid than those for interest rates and currencies and, as a result, changes in supply and demand can have a more dramatic effect on price and volatility.75 These market characteristics can make price transparency and the effective hedging of commodities risk more difficult.
14.65 The risks associated with commodities include the following risks:
(1) For spot or physical trading, the directional risk arising from a change in the spot price is the most important risk.
(2) However, banks using portfolio strategies involving forward and derivative contracts are exposed to a variety of additional risks, which may well be larger than the risk of a change in spot prices. These include:
(a) basis risk (the risk that the relationship between the prices of similar commodities alters through time);
(b) interest rate risk (the risk of a change in the cost of carry for forward positions and options); and
(c) forward gap risk (the risk that the forward price may change for reasons other than a change in interest rates).
(3) In addition, banks may face counterparty credit risk on over-the-counter derivatives, but this is captured by one of the methods set out in 5 to 9 and 11 of SAMA Minimum Capital Requirements for Counterparty Credit Risk (CCR) and Credit Valuation Adjustment (CVA)
(4) The funding of commodities positions may well open a bank to interest rate or FX exposure and if that is so the relevant positions should be included in the measures of interest rate and FX risk described in [14.3] to [14.40] and [14.53] to [14.62], respectively.76
14.66 There are two alternatives for measuring commodities position risk under the simplified standardised approach that are described in [14.68] to [14.73] below. Commodities risk can also be measured, using either (i) the maturity ladder approach, which is a measurement system that captures forward gap and interest rate risk separately by basing the methodology on seven time bands as set out in [14.68] to [14.71] below or (ii) the simplified approach, which is a very simple framework as set out in [14.72] and [14.73] below. Both the maturity ladder approach and the simplified approach are appropriate only for banks that, in relative terms, conduct only a limited amount of commodities business.
14.67 For the maturity ladder approach and the simplified approach, long and short positions in each commodity may be reported on a net basis for the purposes of calculating open positions. However, positions in different commodities will, as a general rule, not be offsettable in this fashion. Nevertheless, SAMA will have discretion to permit netting between different subcategories77 of the same commodity in cases where the subcategories are deliverable against each other. They can also be considered as offsettable if they are close substitutes against each other and a minimum correlation of 0.9 between the price movements can be clearly established over a minimum period of one year. However, a bank wishing to base its calculation of capital requirements for commodities on correlations would have to satisfy SAMA of the accuracy of the method that has been chosen and obtain its prior approval.
Maturity ladder approach
14.68 In calculating the capital requirements under the maturity ladder approach, banks will first have to express each commodity position (spot plus forward) in terms of the standard unit of measurement (barrels, kilos, grams etc). The net position in each commodity will then be converted at current spot rates into the national currency.
14.69 Secondly, in order to capture forward gap and interest rate risk within a time band (which, together, are sometimes referred to as curvature/spread risk), matched long and short positions in each time band will carry a capital requirement. The methodology is similar to that used for interest rate related instruments as set out in [14.3] to [14.40]. Positions in the separate commodities (expressed in terms of the standard unit of measurement) will first be entered into a maturity ladder while physical stocks should be allocated to the first time band. A separate maturity ladder will be used for each commodity as defined in [14.67] above.78 For each time band as set out in Table 10, the sum of short and long positions that are matched will be multiplied first by the spot price for the commodity, and then by the spread rate of 1.5%.
Time bands and spread rates Table 10 Time band Spread rate 0-1 month 1.5% 1-3 months 1.5% 3-6 months 1.5% 6-12 months 1.5% 1-2 years 1.5% 2-3 years 1.5% over 3 years 1.5%
14.70
The residual net positions from nearer time bands may then be carried forward to offset exposures in time bands that are further out. However, recognising that such hedging of positions among different time bands is imprecise, a surcharge equal to 0.6% of the net position carried forward will be added in respect of each time band that the net position is carried forward. The capital requirement for each matched amount created by carrying net positions forward will be calculated as in [14.69] above. At the end of this process, a bank will have either only long or only short positions, to which a capital requirement of 15% will apply.
14.71 All commodity derivatives and off-balance sheet positions that are affected by changes in commodity prices should be included in this measurement framework. This includes commodity futures, commodity swaps, and options where the “delta-plus” method79 is used (see [14.77] to [14.80] below). In order to calculate the risk, commodity derivatives should be converted into notional commodities positions and assigned to maturities as follows:
(1) Futures and forward contracts relating to individual commodities should be incorporated as notional amounts of the standard unit of measurement (barrels, kilos, grams etc) and should be assigned a maturity with reference to expiry date.
(2) Commodity swaps where one leg is a fixed price and the other the current market price should be incorporated as a series of positions equal to the notional amount of the contract, with one position corresponding with each payment on the swap and slotted into the maturity ladder accordingly. The positions would be long positions if the bank is paying fixed and receiving floating, and short positions if the bank is receiving fixed and paying floating.80
(3) Commodity swaps where the legs are in different commodities are to be incorporated in the relevant maturity ladder. No offsetting will be allowed in this regard except where the commodities belong to the same subcategory as defined in [14.67] above.
Simplified approach
14.72 In calculating the capital requirement for directional risk under the simplified approach, the same procedure will be adopted as in the maturity ladder approach described above (see [14.68] and [14.71]. Once again, all commodity derivatives and off-balance sheet positions that are affected by changes in commodity prices should be included. The capital requirement will equal 15% of the net position, long or short, in each commodity.
14.73 In order to protect the bank against basis risk, interest rate risk and forward gap risk under the simplified approach, the capital requirement for each commodity as described in [14.68] and [14.71] above will be subject to an additional capital requirement equivalent to 3% of the bank’s gross positions, long plus short, in that particular commodity. In valuing the gross positions in commodity derivatives for this purpose, banks should use the current spot price.
75 Banks need also to guard against the risk that arises when the short position falls due before the long position. Owing to a shortage of liquidity in some markets, it might be difficult to close the short position and the bank might be squeezed by the market.
76 Where a commodity is part of a forward contract (quantity of commodities to be received or to be delivered), any interest rate or foreign currency exposure from the other leg of the contract should be reported as set out in [14.3] to 14.40] and [14.53] to [14.62]. Positions which are purely stock financing (ie a physical stock has been sold forward and the cost of funding has been locked in until the date of the forward sale) may be omitted from the commodities risk calculation although they will be subject to interest rate and counterparty risk requirements.
77 Commodities can be grouped into clans, families, subgroups and individual commodities. For example, a clan might be Energy Commodities, within which Hydro-Carbons are a family with Crude Oil being a subgroup and West Texas Intermediate, Arabian Light and Brent being individual commodities.
78 For markets that have daily delivery dates, any contracts maturing within 10 days of one another may be offset.
79 For banks using other approaches to measure options risk, all options and the associated underlyings should be excluded from both the maturity ladder approach and the simplified approach.
80 If one of the legs involves receiving/paying a fixed or floating interest rate, that exposure should be slotted into the appropriate repricing maturity band in the maturity ladder covering interest rate related instruments.Treatment of Options
14.74 In recognition of the wide diversity of banks’ activities in options and the difficulties of measuring price risk for options, two alternative approaches will be permissible at the discretion of SAMA under the simplified standardised approach.
(1) Those banks which solely use purchased options81 can use the simplified approach described in [14.76] below];
(2) Those banks which also write options are expected to use the delta-plus method or scenario approach which are the intermediate approaches as set out in [14.77] to [14.86]. The more significant its trading activity is, the more the bank will be expected to use a sophisticated approach, and a bank with highly significant trading activity is expected to use the standardised approach or the internal models approach as set out in [6] to [9] or [10] to [13].
14.75 In the simplified approach for options, the positions for the options and the associated underlying, cash or forward, are not subject to the standardised methodology but rather are carved-out and subject to separately calculated capital requirements that incorporate both general market risk and specific risk. The risk numbers thus generated are then added to the capital requirements for the relevant category, ie interest rate related instruments, equities, FX and commodities as described in [14.3] to [14.73]. The delta-plus method uses the sensitivity parameters or Greek letters associated with options to measure their market risk and capital requirements. Under this method, the delta-equivalent position of each option becomes part of the simplified standardised approach set out in [14.3] to [14.73] with the delta- equivalent amount subject to the applicable general market risk charges. Separate capital requirements are then applied to the gamma and vega risks of the option positions. The scenario approach uses simulation techniques to calculate changes in the value of an options portfolio for changes in the level and volatility of its associated underlyings. Under this approach, the general market risk charge is determined by the scenario grid (ie the specified combination of underlying and volatility changes) that produces the largest loss. For the delta-plus method and the scenario approach, the specific risk capital requirements are determined separately by multiplying the delta-equivalent of each option by the specific risk weights set out in [14.3] to [14.52].
Simplified approach
14.76 Banks that handle a limited range of purchased options can use the simplified approach set out in Table 11 for particular trades. As an example of how the calculation would work, if a holder of 100 shares currently valued at USD 10 each holds an equivalent put option with a strike price of USD 11, the capital requirement would be: USD 1,000 x 16% (ie 8% specific plus 8% general market risk) = USD 160, less the amount the option is in the money (USD 11 - USD 10) x 100 = USD 100, ie the capital requirement would be USD 60. A similar methodology applies for options whose underlying is a foreign currency, an interest rate related instrument or a commodity.
Simplified approach: capital requirements
Table 11
Position
Treatment
Long cash and long put or short cash and long call
The capital requirement will be the market value of the underlying security82 multiplied by the sum of specific and general market risk charges83 for the underlying less the amount the option is in the money (if any) bounded at zero84
Long call or long put The capital requirement will be the lesser of: (i) the market value of the underlying security multiplied by the sum of specific and general market risk charges82 for the underlying and (ii) the market value of the option85
Delta-plus method
14.77 Banks that write options will be allowed to include delta-weighted options positions within the simplified standardised approach set out in [14.3] to [14.73]. Such options should be reported as a position equal to the market value of the underlying multiplied by the delta. However, since delta does not sufficiently cover the risks associated with options positions, banks will also be required to measure gamma (which measures the rate of change of delta) and vega (which measures the sensitivity of the value of an option with respect to a change in volatility) sensitivities in order to calculate the total capital requirement. These sensitivities will be calculated according to an approved exchange model or to the bank’s proprietary options pricing model subject to oversight by SAMA.86
14.78 Delta-weighted positions with debt securities or interest rates as the underlying will be slotted into the interest rate time bands, as set out in [14.3] to [14.40], under the following procedure. A two-legged approach should be used as for other derivatives, requiring one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures. For instance, a bought call option on a June three-month interest-rate future will in April be considered, on the basis of its delta-equivalent value, to be a long position with a five-month maturity and a short position with a two-month maturity.87 The written option will be similarly slotted as a long position with a two-month maturity and a short position with a five-month maturity. Floating rate instruments with caps or floors will be treated as a combination of floating rate securities and a series of European-style options. For example, the holder of a three-year floating rate bond indexed to six month LIBOR with a cap of 15% will treat it as:
(1) a debt security that reprices in six months; and
(2) a series of five written call options on an FRA with a reference rate of 15%, each with a negative sign at the time the underlying FRA takes effect and a positive sign at the time the underlying FRA matures.88
14.79 The capital requirement for options with equities as the underlying will also be based on the delta-weighted positions that will be incorporated in the measure of equity risk described in [14.41] to [14.52]. For purposes of this calculation each national market is to be treated as a separate underlying. The capital requirement for options on FX and gold positions will be based on the method for FX rate risk as set out in [14.53] to [14.62]. For delta risk, the net delta-based equivalent of the foreign currency and gold options will be incorporated into the measurement of the exposure for the respective currency (or gold) position. The capital requirement for options on commodities will be based on the simplified or the maturity ladder approach for commodities risk as set out in [14.63] to [14.73]. The delta-weighted positions will be incorporated in one of the measures described in that section.
14.80 In addition to the above capital requirements arising from delta risk, there are further capital requirements for gamma and vega risk. Banks using the delta-plus method will be required to calculate the gamma and vega for each option position (including hedge positions) separately. The capital requirements should be calculated in the following way:
(1) For each individual option a gamma impact should be calculated according to a Taylor series expansion as follows, where VU is the variation of the underlying of the option.
(2) VU is calculated as follows:
(a) For interest rate options if the underlying is a bond, the market value of the underlying should be multiplied by the risk weights set out in [14.26]. An equivalent calculation should be carried out where the underlying is an interest rate, again based on the assumed changes in the corresponding yield in [14.26].
(b) For options on equities and equity indices: the market value of the underlying should be multiplied by 8%.89
(c) For FX and gold options: the market value of the underlying should be multiplied by 8%.
(d) For options on commodities: the market value of the underlying should be multiplied by 15%.
(3) For the purpose of this calculation the following positions should be treated as the same underlying:
(a) for interest rates,90 each time band as set out in [paragraph 718(iv) / [14.26];91
(b) for equities and stock indices, each national market;
(c) for foreign currencies and gold, each currency pair and gold; and
(d) for commodities, each individual commodity as defined in [14.67].
(4) Each option on the same underlying will have a gamma impact that is either positive or negative. These individual gamma impacts will be summed, resulting in a net gamma impact for each underlying that is either positive or negative. Only those net gamma impacts that are negative will be included in the capital requirement calculation.
(5) The total gamma risk capital requirement will be the sum of the absolute value of the net negative gamma impacts as calculated above.
(6) For volatility risk, banks will be required to calculate the capital requirements by multiplying the sum of the vega risks for all options on the same underlying, as defined above, by a proportional shift in volatility of ± 25%.
(7) The total capital requirement for vega risk will be the sum of the absolute value of the individual capital requirements that have been calculated for vega risk.
Scenario approach
14.81 More sophisticated banks may opt to base the market risk capital requirement for options portfolios and associated hedging positions on scenario matrix analysis. This will be accomplished by specifying a fixed range of changes in the option portfolio’s risk factors and calculating changes in the value of the option portfolio at various points along this grid. For the purpose of calculating the capital requirement, the bank will revalue the option portfolio using matrices for simultaneous changes in the option’s underlying rate or price and in the volatility of that rate or price. A different matrix will be set up for each individual underlying as defined in [14.80] above. As an alternative, at the discretion of SAMA, banks that are significant traders in options will for interest rate options be permitted to base the calculation on a minimum of six sets of time bands. When using this method, not more than three of the time bands as defined in [14.26] and [14.29] should be combined into any one set.
14.82 The options and related hedging positions will be evaluated over a specified range above and below the current value of the underlying. The range for interest rates is consistent with the assumed changes in yield in [14.26]. Those banks using the alternative method for interest rate options set out in [14.81] above should use, for each set of time bands, the highest of the assumed changes in yield applicable to the group to which the time bands belong.92 The other ranges are ± 8% for equities,93 ± 8% for FX and gold, and ± 15% for commodities. For all risk categories, at least seven observations (including the current observation) should be used to divide the range into equally spaced intervals.
14.83 The second dimension of the matrix entails a change in the volatility of the underlying rate or price. A single change in the volatility of the underlying rate or price equal to a shift in volatility of + 25% and - 25% is expected to be sufficient in most cases. As circumstances warrant, however, SAMA may choose to require that a different change in volatility be used and/or that intermediate points on the grid be calculated.
14.84 After calculating the matrix, each cell contains the net profit or loss of the option and the underlying hedge instrument. The capital requirement for each underlying will then be calculated as the largest loss contained in the matrix.
14.85 The application of the scenario analysis by any specific bank will be subject to SAMA consent, particularly as regards the precise way that the analysis is constructed. Banks’ use of scenario analysis as part of the simplified standardised approach will also be subject to validation by SAMA, and to those of the qualitative standards for internal models as set out in [10].
14.86 Besides the options risks mentioned above, SAMA is conscious of the other risks also associated with options, eg rho (rate of change of the value of the option with respect to the interest rate) and theta (rate of change of the value of the option with respect to time). While not proposing a measurement system for those risks at present, it expects banks undertaking significant options business at the very least to monitor such risks closely. Additionally, banks will be permitted to incorporate rho into their capital calculations for interest rate risk, if they wish to do so.
81 Unless all their written option positions are hedged by perfectly matched long positions in exactly the same options, in which case no capital requirement for market risk is required.
82 In some cases such as FX, it may be unclear which side is the underlying security; this should be taken to be the asset that would be received if the option were exercised. In addition, the nominal value should be used for items where the market value of the underlying instrument could be zero, eg caps and floors, swaptions etc.
83 Some options (eg where the underlying is an interest rate, a currency or a commodity) bear no specific risk but specific risk will be present in the case of options on certain interest rate related instruments (eg options on a corporate debt security or corporate bond index; see [14.3] to [14.40] for the relevant capital requirements) and for options on equities and stock indices (see [14.41] to [14.52]). The charge under this measure for currency options will be 8% and for options on commodities 15%.
84 For options with a residual maturity of more than six months, the strike price should be compared with the forward, not current, price. A bank unable to do this must take the in the money amount to be zero.
85 Where the position does not fall within the trading book (ie options on certain FX or commodities positions not belonging to the trading book), it may be acceptable to use the book value instead.
86 SAMA may wish to require banks doing business in certain classes of exotic options (eg barriers, digitals) or in options at the money that are close to expiry to use either the scenario approach or the internal models alternative, both of which can accommodate more detailed revaluation approaches.
87 A two-month call option on a bond future where delivery of the bond takes place in September would be considered in April as being long the bond and short a five-month deposit, both positions being delta-weighted.
88 The rules applying to closely matched positions set out in [14.36] will also apply in this respect.
89 The basic rules set out here for interest rate and equity options do not attempt to capture specific risk when calculating gamma capital requirements. Hoever, SAMA may wish to require specific banks to do so.
90 Positions have to be slotted into separate maturity ladders by currency.
91 Banks using the duration method should use the time bands as set out in [14.29].
92 If, for example, the time bands 3 to 4 years, 4 to 5 years and 5 to 7 years are combined the highest assumed change in yield of these three bands would be 0.75.
93 The basic rules set out here for interest rate and equity options do not attempt to capture specific risk when calculating gamma capital requirements. However, SAMA may wish to require specific banks to do so.15- Transitional Arrangements for Profit and Loss (P&L) Attribution (PLA)
15.1 Banks are required to conduct the profit and loss (P&L) attribution (PLA) test beginning 1 January 2023 as set out in [12.3]. The outcomes of the PLA test will be used for Pillar 2 purposes beginning 1 January 2023. The Pillar 1 capital requirement consequences of assignment to the PLA test amber zone or PLA test red zone, as set out in [12.43], [12.44] and [13.43], will apply beginning 1 January 2023.
16- Guidance on Use of the Internal Models Approach
Trading Desk-Level Backtesting
16.1 An additional consideration in specifying the appropriate risk measures and trading outcomes for profit and loss (P&L) attribution test and backtesting arises because the internally modelled risk measurement is generally based on the sensitivity of a static portfolio to instantaneous price shocks. That is, end-of-day trading positions are input into the risk measurement model, which assesses the possible change in the value of this static portfolio due to price and rate movements over the assumed holding period.
16.2 While this is straightforward in theory, in practice it complicates the issue of backtesting. For instance, it is often argued that neither expected shortfall nor value-at-risk measures can be compared against actual trading outcomes, since the actual outcomes will reflect changes in portfolio composition during the holding period. According to this view, the inclusion of fee income together with trading gains and losses resulting from changes in the composition of the portfolio should not be included in the definition of the trading outcome because they do not relate to the risk inherent in the static portfolio that was assumed in constructing the value-at- risk measure.
16.3 This argument is persuasive with regard to the use of risk measures based on price shocks calibrated to longer holding periods. That is, comparing the liquidity- adjusted time horizon 99th percentile risk measures from the internal models capital requirement with actual liquidity- adjusted time horizon trading outcomes would probably not be a meaningful exercise. In particular, in any given multiday period, significant changes in portfolio composition relative to the initial positions are common at major trading institutions. For this reason, the backtesting framework described here involves the use of risk measures calibrated to a one- day holding period. Other than the restrictions mentioned in this paper, the test would be based on how banks model risk internally.
16.4 Given the use of one-day risk measures, it is appropriate to employ one-day trading outcomes as the benchmark to use in the backtesting programme. The same concerns about “contamination” of the trading outcomes discussed above continue to be relevant, however, even for one-day trading outcomes. That is, there is a concern that the overall one-day trading outcome is not a suitable point of comparison, because it reflects the effects of intraday trading, possibly including fee income that is booked in connection with the sale of new products.
16.5 On the one hand, intraday trading will tend to increase the volatility of trading outcomes and may result in cases where the overall trading outcome exceeds the risk measure. This event clearly does not imply a problem with the methods used to calculate the risk measure; rather, it is simply outside the scope of what the measure is intended to capture. On the other hand, including fee income may similarly distort the backtest, but in the other direction, since fee income often has annuity-like characteristics. Since this fee income is not typically included in the calculation of the risk measure, problems with the risk measurement model could be masked by including fee income in the definition of the trading outcome used for backtesting purposes.
16.6 To the extent that backtesting programmes are viewed purely as a statistical test of the integrity of the calculation of the risk measures, it is appropriate to employ a definition of daily trading outcome that allows for an uncontaminated test. To meet this standard, banks must have the capability to perform the tests based on the hypothetical changes in portfolio value that would occur were end-of-day positions to remain unchanged.
16.7 Backtesting using actual daily P&Ls is also a useful exercise since it can uncover cases where the risk measures are not accurately capturing trading volatility in spite of being calculated with integrity.
16.8 For these reasons, the Committee requires banks to develop the capability to perform these tests using both hypothetical and actual trading outcomes. In combination, the two approaches are likely to provide a strong understanding of the relation between calculated risk measures and trading outcomes. The total number of backtesting exceptions for the purpose of the thresholds in [12.9] must be calculated as the maximum of the exceptions generated under hypothetical or actual trading outcomes.
Bank-Wide Backtesting
Statistical considerations in defining the backtesting zones
16.9 To place the definitions of three zones of the bank-wide backtesting in proper perspective, however, it is useful to examine the probabilities of obtaining various numbers of exceptions under different assumptions about the accuracy of a bank’s risk measurement model.
16.10 Three zones have been delineated and their boundaries chosen in order to balance two types of statistical error:
(1) the possibility that an accurate risk model would be classified as inaccurate on the basis of its backtesting result, and
(2) the possibility that an inaccurate model would not be classified that way based on its backtesting result.
16.11 Table 1 reports the probabilities of obtaining a particular number of exceptions from a sample of 250 independent observations under several assumptions about the actual percentage of outcomes that the model captures (ie these are binomial probabilities). For example, the left- hand portion of Table 1 sets out probabilities associated with an accurate model (that is, a true coverage level of 99%). Under these assumptions, the column labelled “exact” reports that exactly five exceptions can be expected in 6.7% of the samples.
Probabilities of exceptions from 250 independent observations Table 1 Model is accurate Model is inaccurate: possible alternative levels of coverage Coverage = 99% Coverage = 98% Coverage = 97% Coverage = 96% Coverage = 95% Exact Type 1 Exact Type 2 Exact Type 2 Exact Type 2 Exact Type 2 0 8.1% 100.0% 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1 20.5% 91.9% 3.3% 0.6% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 2 25.7% 71.4% 8.3% 3.9% 1.5% 0.4% 0.2% 0.0% 0.0% 0.0% 3 21.5% 45.7% 14.0% 12.2% 3.8% 1.9% 0.7% 0.2% 0.1% 0.0% 4 13.4% 24.2% 17.7% 26.2% 7.2% 5.7% 1.8% 0.9% 0.3% 0.1% 5 6.7% 10.8% 17.7% 43.9% 10.9% 12.8% 3.6% 2.7% 0.9% 0.5% 6 2.7% 4.1% 14.8% 61.6% 13.8% 23.7% 6.2% 6.3% 1.8% 1.3% 7 1.0% 1.4% 10.5% 76.4% 14.9% 37.5% 9.0% 12.5% 3.4% 3.1% 8 0.3% 0.4% 6.5% 86.9% 14.0% 52.4% 11.3% 21.5% 5.4% 6.5% 9 0.1% 0.1% 3.6% 93.4% 11.6% 66.3% 12.7% 32.8% 7.6% 11.9% 10 0.0% 0.0% 1.8% 97.0% 8.6% 77.9% 12.8% 45.5% 9.6% 19.5% 11 0.0% 0.0% 0.8% 98.7% 5.8% 86.6% 11.6% 58.3% 11.1% 29.1% 12 0.0% 0.0% 0.3% 99.5% 3.6% 92.4% 9.6% 69.9% 11.6% 40.2% 13 0.0% 0.0% 0.1% 99.8% 2.0% 96.0% 7.3% 79.5% 11.2% 51.8% 14 0.0% 0.0% 0.0% 99.9% 1.1% 98.0% 5.2% 86.9% 10.0% 62.9% 15 0.0% 0.0% 0.0% 100.0% 0.5% 99.1% 3.4% 92.1% 8.2% 72.9%
Notes to Table 1:The table reports both exact probabilities of obtaining a certain number of exceptions from a sample of 250 independent observations under several assumptions about the true level of coverage, as well as type 1 or type 2 error probabilities derived from these exact probabilities.
The left-hand portion of the table pertains to the case where the model is accurate and its true level of coverage is 99%. Thus, the probability of any given observation being an exception is 1% (100% – 99% = 1%). The column labelled "exact" reports the probability of obtaining exactly the number of exceptions shown under this assumption in a sample of 250 independent observations. The column labelled "type 1" reports the probability that using a given number of exceptions as the cut-off for rejecting a model will imply erroneous rejection of an accurate model using a sample of 250 independent observations. For example, if the cut-off level is set at five or more exceptions, the type 1 column reports the probability of falsely rejecting an accurate model with 250 independent observations is 10.8%.
The right-hand portion of the table pertains to models that are inaccurate. In particular, the table concentrates of four specific inaccurate models, namely models whose true levels of coverage are 98%, 97%, 96% and 95% respectively. For each inaccurate model, the exact column reports the probability of obtaining exactly the number of exceptions shown under this assumption in a sample of 250 independent observations. The type 2 columns report the probability that using a given number of exceptions as the cut-off for rejecting a model will imply erroneous acceptance of an inaccurate model with the assumed level of coverage using a sample of 250 independent observations. For example, if the cut-off level is set at five or more exceptions, the type 2 column for an assumed coverage level of 97% reports the probability of falsely accepting a model with only 97% coverage with 250 independent observations is 12.8%.
16.12 The right-hand portion of the table reports probabilities associated with several possible inaccurate models, namely models whose true levels of coverage are 98%, 97%, 96%, and 95%, respectively. Thus, the column labelled “exact” under an assumed coverage level of 97% shows that five exceptions would then be expected in 10.9% of the samples.
16.13 Table 1 also reports several important error probabilities. For the assumption that the model covers 99% of outcomes (the desired level of coverage), the table reports the probability that selecting a given number of exceptions as a threshold for rejecting the accuracy of the model will result in an erroneous rejection of an accurate model (type 1 error). For example, if the threshold is set as low as one exception, then accurate models will be rejected fully 91.9% of the time, because they will escape rejection only in the 8.1% of cases where they generate zero exceptions. As the threshold number of exceptions is increased, the probability of making this type of error declines.
16.14 Under the assumptions that the model’s true level of coverage is not 99%, the table reports the probability that selecting a given number of exceptions as a threshold for rejecting the accuracy of the model will result in an erroneous acceptance of a model with the assumed (inaccurate) level of coverage (type 2 error). For example, if the model’s actual level of coverage is 97%, and the threshold for rejection is set at seven or more exceptions, the table indicates that this model would be erroneously accepted 37.5% of the time.
16.15 The results in Table 1 also demonstrate some of the statistical limitations of backtesting. In particular, there is no threshold number of exceptions that yields both a low probability of erroneously rejecting an accurate model and a low probability of erroneously accepting all of the relevant inaccurate models. It is for this reason that the Committee has rejected an approach that contains only a single threshold.
16.16 Given these limitations, the Committee has classified outcomes for the backtesting of the bank- wide model into three categories. In the first category, the test results are consistent with an accurate model, and the possibility of erroneously accepting an inaccurate model is low (ie backtesting ”green zone”). At the other extreme, the test results are extremely unlikely to have resulted from an accurate model, and the probability of erroneously rejecting an accurate model on this basis is remote (ie backtesting ”red zone”). In between these two cases, however, is a zone where the backtesting results could be consistent with either accurate or inaccurate models, and SAMA encourage a bank to present additional information about its model before taking action (ie backtesting ”amber zone”).
16.17 Table 2 sets out the Committee’s agreed boundaries for these zones and the presumptive SAMA response for each backtesting outcome, based on a sample of 250 observations. For other sample sizes, the boundaries should be deduced by calculating the binomial probabilities associated with true coverage of 99%, as in Table 1. The backtesting amber zone begins at the point such that the probability of obtaining that number or fewer exceptions equals or exceeds 95%. Table 2 reports these cumulative probabilities for each number of exceptions. For 250 observations, it can be seen that five or fewer exceptions will be obtained 95.88% of the time when the true level of coverage is 99%. Thus, the backtesting amber zone begins at five exceptions. Similarly, the beginning of the backtesting red zone is defined as the point such that the probability of obtaining that number or fewer exceptions equals or exceeds 99.99%. Table 2 shows that for a sample of 250 observations and a true coverage level of 99%, this occurs with 10 exceptions.
Backtesting zone boundaries Table 2 Backtesting zone Number of exceptions Backtesting-dependent multiplier (to be added to any qualitative add- on per [MAR 33.44]) Cumulative probability Green 0 1.50 8.11% 1 1.50 28.58% 2 1.50 54.32% 3 1.50 75.81% 4 1.50 89.22% Amber 5 1.70 95.88% 6 1.76 98.63% 7 1.83 99.60% 8 1.88 99.89% 9 1.92 99.97% Red 10 or more 2.00 99.99%
Notes to Table 2: The table defines the backtesting green, amber and red zones that SAMA will use to assess backtesting results in conjunction with the internal models approach to market risk capital requirements. The boundaries shown in the table are based on a sample of 250 observations. For other sample sizes, the amber zone begins at the point where the cumulative probability equals or exceeds 95%, and the red zone begins at the point where the cumulative probability equals or exceeds 99.99%.
The cumulative probability is simply the probability of obtaining a given number or fewer exceptions in a sample of 250 observations when the true coverage level is 99%. For example, the cumulative probability shown for four exceptions is the probability of obtaining between zero and four exceptions.
Note that these cumulative probabilities and the type 1 error probabilities reported in Table 1 do not sum to one because the cumulative probability for a given number of exceptions includes the possibility of obtaining exactly that number of exceptions, as does the type 1 error probability. Thus, the sum of these two probabilities exceeds one by the amount of the probability of obtaining exactly that number of exceptions.
16.18 The backtesting green zone needs little explanation. Since a model that truly provides 99% coverage would be quite likely to produce as many as four exceptions in a sample of 250 outcomes, there is little reason for concern raised by backtesting results that fall in this range. This is reinforced by the results in Table 1, which indicate that accepting outcomes in this range leads to only a small chance of erroneously accepting an inaccurate model.
16.19 The range from five to nine exceptions constitutes the backtesting amber zone. Outcomes in this range are plausible for both accurate and inaccurate models, although Table 1 suggests that they are generally more likely for inaccurate models than for accurate models. Moreover, the results in Table 1 indicate that the presumption that the model is inaccurate should grow as the number of exceptions increases in the range from five to nine.
16.20 Table 2 sets out the Committee’s agreed guidelines for increases in the multiplication factor applicable to the internal models capital requirement, resulting from backtesting results in the backtesting amber zone.
16.21 These particular values reflect the general idea that the increase in the multiplication factor should be sufficient to return the model to a 99th percentile standard. For example, five exceptions in a sample of 250 imply only 98% coverage. Thus, the increase in the multiplication factor should be sufficient to transform a model with 98% coverage into one with 99% coverage. Needless to say, precise calculations of this sort require additional statistical assumptions that are not likely to hold in all cases. For example, if the distribution of trading outcomes is assumed to be normal, then the ratio of the 99th percentile to the 98th percentile is approximately 1.14, and the increase needed in the multiplication factor is therefore approximately 1.13 for a multiplier of 1. If the actual distribution is not normal, but instead has “fat tails”, then larger increases may be required to reach the 99th percentile standard. The concern about fat tails was also an important factor in the choice of the specific increments set out in Table 2.
Examples of the Application of the Principles for Risk Factor Modellability
16.22 Although SAMA may use discretion regarding the types of evidence required of banks to provide risk factor modellability, the following are examples of the types of evidence that banks may be required to provide.
(1) Regression diagnostics for multi-factor beta models. In addition to showing that indices or other regressors are appropriate for the region, asset class and credit quality (if applicable) of an instrument, banks must be prepared to demonstrate that the coefficients used in multi-factor models are adequate to capture both general market risk and idiosyncratic risk. If the bank assumes that the residuals from the multi-factor model are uncorrelated with each other, the bank should be prepared to demonstrate that the modellable residuals are uncorrelated. Further, the factors in the multi-factor model must be appropriate for the region and asset class of the instrument and must explain the general market risk of the instrument. This must be demonstrated through goodness-of-fit statistics (eg an adjusted-R2 coefficient) and other diagnostics on the coefficients. Most importantly, where the estimated coefficients are not used (ie the parameters are judgment-based), the bank must describe how the coefficients are chosen and why they cannot be estimated, and demonstrate that the choice does not underestimate risk. In general, risk factors are not considered modellable in cases where parameters are set by judgment.
(2) Recovery of price from risk factors. The bank must periodically demonstrate and document that the risk factors used in its risk model can be fed into front office pricing models and recover the actual prices of the assets. If the recovered prices substantially deviate from the actual prices, this can indicate a problem with prices used to derive the risk factors and call into question the validity of data inputs for risk purposes. In such cases, SAMA may determine that the risk factor is non-modellable.
(3) Risk pricing is periodically reconciled with front office and back office prices. While banks are free to use price data from external sources, these external prices should periodically be reconciled with internal prices (from both front office and back office) to ensure they do not deviate substantially, and that they are not consistently biased in any fashion. Results of these reconciliations should be made available to SAMA, including statistics on the differences of the risk price from front office and back office prices. It is standard practice for banks to conduct reconciliation of front office and back office prices; the risk prices must be included as part of the reconciliation of the front office and whenever there is a potential for discrepancy. If the discrepancy is large, SAMA may determine that the risk factor is non-modellable.
(4) Risk factor backtesting. Banks must periodically demonstrate the appropriateness of their modelling methodology by comparing the risk factor returns forecast produced by the risk management model with actual returns produced by front office prices. Alternatively, a bank could backtest hypothetical portfolios that are substantively dependent on key risk factors (or combinations thereof). This risk factor backtesting is intended to confirm that risk factors accurately reflect the volatility and correlations of the instruments in the risk model. Hypothetical backtesting can be effective in identifying whether risk factors in question adequately reflect volatility and correlations when the portfolio of instruments is chosen to highlight specific products.
(5) Risk factors generated from parameterised models. For options, implied volatility surfaces are often built using a parameterised model based on single-name underlyings and/or option index RPOs and/or market quotes. Liquid options at moneyness, tenor and option expiry points may be used to calibrate level, volatility, drift and correlation parameters for a single-name or benchmark volatility surface. Once these parameters are set, they are derived risk factors in their own right that must be updated and recalibrated periodically as new data arrive and trades occur. In the event that these risk factors are used to proxy for other single-name option surface points, there must be an additional- basis non-modellable risk factor overlay for any potential deviations.
17- SAMA Reporting Requirements
17.1 Banks are required to report the RWAs for Market Risk and capital charge on a quarterly basis using SAMA’s Q17 reporting template. The report must be submitted to SAMA within 30 days after the end of each quarter.
17.2 SAMA would expect banks with significant trading book exposures to have the ability to calculate and report the RWA and capital requirement on a more frequent basis such as on a daily or monthly basis, as needed.
18- Implementation Timeline
18.1 This requirements will be effective on 01 January 2023.
Minimum Capital Requirements for Operational Risk
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force 1. Introduction
Basel Committee on Banking Supervision issued a document on Basel III: Finalizing post-crisis reforms in December 2017. Which includes the revised standardized approach as the sole approach for calculating operational risk capital requirements. A key objective of the revisions is to reduce excessive variability of risk-weighted assets (RWAs) whereby enhancing the resilience and soundness of Saudi Arabia’s banking system.
This updated framework is issued by SAMA in exercise of the authority vested in SAMA under the Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued 01/01/1386H.
This Framework supersedes any conflicting requirements in previous circulars in this regard; (SAMA Detailed Guidance Document regarding the Basel II framework issued via circular no. BCS290 dated 12 June 2006).
2. Scope of Application
2.1 This framework applies to all domestic banks both on a consolidated basis, which include all branches and subsidiaries, and on a standalone basis.
2.2 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.
3. Definitions
The following terms and phrases used in this document shall have the corresponding meanings unless otherwise stated:
Operational risk the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk but excludes strategic and reputational risk.
Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.
The standardized approach methodology components
(1) the Business Indicator (BI)
a financial-statement-based proxy for operational risk;
(2) the Business Indicator Component (BIC)
calculated by multiplying the BI by a set of regulatory determined marginal coefficients or percentages; and
(3) the Internal Loss Multiplier (ILM)
a scaling factor that is based on a bank’s average historical losses and the BIC.
Gross loss a loss before recoveries of any type.
Net loss the loss after taking into account the impact of recoveries.
Recovery an independent occurrence, related to the original loss event, separate in time, in which funds or inflows of economic benefits are received from a third party1.
1 Examples of recoveries are payments received from insurers, repayments received from perpetrators of fraud, and recoveries of misdirected transfers.
4. Implementation Timeline
This framework will be effective on 01 January 2023.
5. SAMA Reporting Requirements
SAMA expects all Banks to report the operational risk weighted assets (RWAs) and capital charge, using SAMA’s Q17 reporting template, within 30 days after the end of each quarter.
6. Disclosure
In addition to the disclosure requirements under Pillar 3, all banks with a BI greater than SAR 4.46 billion, or which use internal loss data in the calculation of Operational Risk Capital (ORC), are required to disclose their annual loss data for each of the ten years in the ILM calculation window. Loss data is required to be reported on both a gross basis and after recoveries and loss exclusions. All banks are required to disclose each of the BI sub-items for each of the three years of the BI component calculation window.
7. Policy Requirements
7.1 The Standardized Approach
The Banks must calculate minimum ORC requirements based on the Standardized Approach by multiplying the BIC and the ILM:
ORC = BIC x ILM
Where-
(a) Business Indicator Component (BIC) is calculated as the sum of:
(i) 12% of the Bank’s BI;
(ii) if the Bank’s BI exceeds SAR 4.46 billion, 3% of the amount by which the BI exceeds SAR 4.46 billion; and
(iii) if the Bank’s BI exceeds SAR 133.8 billion, 3% of the amount by which the BI exceeds SAR 133.8 billion;2
BI is elaborated in section 7.2
(b) Internal Loss Multiplier (ILM) is calculated as follow:
The explanation of ILM is given in section 7.3
Risk-weighted assets (RWA) for operational risk are equal to 12.5 times ORC.
2 For example, given a BI of SAR 140 billion, BIC = (SAR 140 billion x 12%) + [(SAR 140 billion – SAR 4.46 billion) x 3%] + [(SAR 140 billion – SAR 133.8 billion) x 3%] = (SAR 140 billion x 12%) + (135.54 billion x 3%) + (6.2) x 3%) = SAR 21.05 billion.
7.2 The Business Indicator
The Business Indicator (BI) comprises of three components: the interest, leases and dividend component (ILDC); the services component (SC), and the financial component (FC). The BI is calculated as follow:
BI = ILDC + SC + FC
ILDC, SC and FC are calculated by the following formula:
Where:
A bar above a term indicates that it is calculated as the average over three years: t, t-1 and t-2.
(Abs) is the absolute value of the terms within the brackets. The absolute value of net items must be calculated first for each financial year, and the average of the past three consecutive financial years must be calculated based on the absolute value of net items for each financial year.
The definitions for each of the components of the BI are provided in Annexure 1.7.3 The Internal Loss Multiplier
7.3.1 A bank’s internal operational risk loss experience affects the calculation of operational risk capital through the Internal Loss Multiplier (ILM). The ILM is defined as below, where the Loss Component (LC) is equal to 15 times average annual operational risk losses incurred over the previous 10 years:
7.3.2 The ILM is equal to one where the Loss Component (LC) and Business Indicator Component (BIC) are equal. Where the LC is greater than the BIC, the ILM is greater than one. That is, a bank with losses that are high relative to its BIC is required to hold higher capital due to the incorporation of internal losses into the calculation methodology. Conversely, where the LC is lower than the BIC, the ILM is less than one. That is, a bank with losses that are low relative to its BIC is required to hold lower capital due to the incorporation of internal losses into the calculation methodology.
7.3.3 The calculation of average losses in the Loss Component must be based on 10 years of high-quality annual loss data. As part of the transition to the standardized approach, banks that do not have 10 years of high-quality loss data may use a minimum of five years of data to calculate the Loss Component, however, the term for transition will require SAMA’s approval. Banks that do not have five years of high-quality loss data must calculate the capital requirement based solely on the BI Component. Further, those Banks that do not have high-quality annual loss data for 5 years are required to approach SAMA to seek approval either to use loss data for the period less than five years or use ILM greater than 1 or as advised by SAMA.
7.3.4 The Banks with a BI less than or equal to SAR 4.46 billion must set the ILM equal to 1 in the calculation of ORC requirement (that is, calculate ORC based solely on the BIC), unless the Bank has obtained the SAMA’s written approval to calculate the ILM in accordance with paragraph 7.3.1 for the calculation of ORC. SAMA will not grant such approval unless the Bank meets all the criteria set out in sections 8 to 12.
7.4 Minimum Standards for the Use of Loss Data Under the Standardized Approach
7.4.1 The Banks with a BI greater than SAR 4.46 billion are required to use loss data as a direct input into the operational risk capital calculations. Banks, which do not meet the loss data standards, as mentioned in section 6 to 10 of this document, are required to hold capital that is at a minimum equal to 100% of the BIC. In such cases, SAMA may require the bank to apply an ILM which is greater than 1. The exclusion of internal loss data due to non-compliance with the loss data standards, and the application of any resulting multipliers, must be publicly disclosed in Pillar 3.
7.4.2 The soundness of data collection and the quality and integrity of the data are crucial to generating capital outcomes aligned with the bank’s operational loss exposure. The qualitative requirements for loss data collection are outlined in sections 8 and 9.
8. General Criteria on Loss Data Identification, Collection and Treatment
The proper identification, collection and treatment of internal loss data are essential prerequisites to capital calculation under the standardized approach. The general criteria for the use of the LC are as follows:
a) Internally generated loss data calculations used for regulatory capital purposes must be based on a 10-year observation period. When the bank first moves to the standardized approach, a five-year observation period is acceptable on an exceptional basis when good-quality data are unavailable for more than five years.
b) Internal loss data are most relevant when clearly linked to a bank’s current business activities, technological processes and risk management procedures. Therefore, a bank must have documented procedures and processes for the identification, collection and treatment of internal loss data. Such procedures and processes must be subject to validation before the use of the loss data within the operational risk capital requirement measurement methodology, and to regular independent reviews by internal and/or external audit functions.
c) For risk management purposes, and to assist in supervisory validation and/or review, SAMA will request a bank to map its historical internal loss data into the relevant Level 1 supervisory categories as defined in annexure 2 and to provide this data to SAMA. The bank must document criteria for allocating losses to the specified event types.
d) A bank’s internal loss data must be comprehensive and capture all material activities and exposures from all appropriate subsystems and geographic locations. The minimum threshold for including a loss event in the data collection and calculation of average annual losses is set at SAR 44,600 for the purpose of the calculation of average annual losses, SAMA may increase the threshold to SAR 446,000 for the banks where the BI is greater than SAR 4.46 billion).
e) A side from information on gross loss amounts, the bank must collect information about the reference dates of operational risk events, including the date when the event happened or first began (“date of occurrence”), where available; the date on which the bank became aware of the event (“date of discovery”); and the date (or dates) when a loss event results in a loss, reserve or provision against a loss being recognized in the bank’s profit and loss (P&L) accounts (“date of accounting”). In addition, the bank must collect information on recoveries of gross loss amounts as well as descriptive information about the drivers or causes of the loss event.3 The level of detail of any descriptive information should be commensurate with the size of the gross loss amount.
f) Operational loss events related to credit risk and that are accounted for in credit risk RWAs should not be included in the loss data set. Operational loss events that relate to credit risk, but are not accounted for in credit risk RWAs should be included in the loss data set.
g) Operational risk losses related to market risk are treated as operational risk for the purposes of calculating minimum regulatory capital under this framework and will therefore be subject to the standardized approach for operational risk.
h) Banks’ Internal Audit function must conduct independently review of the comprehensiveness and accuracy of the loss data at least on annul basis and submit the report to the Audit Committee.
3 Tax effects (eg reductions in corporate income tax liability due to operational losses) are not recoveries for purposes of the standardized approach for operational risk.
9. Specific Criteria on Loss Data Identification, Collection and Treatment
9.1 Building of the Standardized Approach Loss Data Set
In order to build an acceptable loss data set from the available internal data, a bank must develop policies and procedures to address several features, including gross loss definition, reference date and grouped losses.
9.2 Gross Loss, Net Loss, and Recovery Definitions
9.2.1 Banks must be able to identify the gross loss amounts, non-insurance recoveries, and insurance recoveries for all operational loss events. Banks should use losses net of recoveries (including insurance recoveries) in the loss dataset. However, recoveries can be used to reduce losses only after the bank receives payment. Receivables do not count as recoveries. Verification of payments received to net losses must be provided to SAMA upon request.
9.2.2 The following items must be included in the gross loss computation of the loss data set:
a) Direct charges, including impairments and settlements, to the bank’s P&L accounts and write-downs due to the operational risk event;
b) Costs incurred as a consequence of the event including external expenses with a direct link to the operational risk event (e.g. legal expenses directly related to the event and fees paid to advisors, attorneys or suppliers) and costs of repair or replacement, incurred to restore the position that was prevailing before the operational risk event;
c) Provisions or reserves accounted for in the P&L against the potential operational loss impact;
d) Losses stemming from operational risk events with a definitive financial impact, which are temporarily booked in transitory and/or suspense accounts and are not yet reflected in the P&L (“pending losses”).4 Material pending losses should be included in the loss data set within a time period commensurate with the size and age of the pending item; and
e) Negative economic impacts booked in a financial accounting period, due to operational risk events impacting the cash flows or financial statements of previous financial accounting periods (timing losses”).5 Material “timing losses” should be included in the loss data set when they are due to operational risk events that span more than one financial accounting period and give rise to legal risk.
9.2.3 The following items should be excluded from the gross loss computation of the loss data set:
a) Costs of general maintenance contracts on property, plant or equipment;
b) Internal or external expenditures to enhance the business after the operational risk losses: upgrades, improvements, risk assessment initiatives and enhancements; and
c) Insurance premiums.
9.2.4 Banks must use the date of accounting for building the loss data set. The bank must use a date no later than the date of accounting for including losses related to legal events in the loss data set. For legal loss events, the date of accounting is the date when a legal reserve is established for the probable estimated loss in the P&L.
9.2.5 Losses caused by a common operational risk event or by related operational risk events over time, but posted to the accounts over several years, should be allocated to the corresponding years of the loss database, in line with their accounting treatment.
4 For instance, the impact of some events (e.g. legal events, damage to physical assets) may be known and clearly identifiable before these events are recognized through the establishment of a reserve. Moreover, the way this reserve is established (e.g. the date of discovery) can vary across banks.
5 Timing impacts typically relate to the occurrence of operational risk events that result in the temporary distortion of an institution’s financial accounts (e.g. revenue overstatement, accounting errors and mark-to- market errors). While these events do not represent a true financial impact on the institution (net impact over time is zero), if the error continues across more than one financial accounting period, it may represent a material misrepresentation of the institution’s financial statements.10. Exclusion of Losses from the Loss Component
10.1 Banks must obtain SAMA’s approval to exclude certain operational loss events when they are no longer relevant to the bank’s operational risk profile. The exclusion of internal loss events should be rare and supported by strong justification. In evaluating the relevance of operational loss events to the bank’s risk profile, SAMA will consider whether the cause of the loss event could occur in other areas of the bank’s operations. Taking settled legal exposures and divested businesses as examples, SAMA expects the bank’s analysis to demonstrate that there is no similar or residual legal exposure and that the excluded loss experience has no relevance to other continuing activities or products.
10.2 The total loss amount and number of exclusions must be disclosed under Pillar 3 with appropriate narratives, including total loss amount and number of exclusions.
10.3 The Banks will exclude losses where a loss event should be greater than 5% of the bank’s average losses. In addition, losses can only be excluded after being included in a bank’s operational risk loss database for a minimum period of three years. Losses related to divested activities will not be subject to a minimum operational risk loss database retention period.
11. Exclusions of Divested Activities from the Business Indicator
Banks must obtain SAMA’s approval to exclude divested activities from the calculation of the BI. Such exclusions must be disclosed under Pillar 3.
12. Inclusion of Losses and BI Items Related to Mergers and Acquisitions
12.1 The scope of losses and BI items used to calculate the operational risk capital requirements must include acquired businesses and merged entities over the period prior to the acquisition/merger that is relevant to the calculation of the standardized approach (ten years for losses and three years for BI).
12.2 Losses and BI items from merged entities or acquired businesses should be included in the calculation of ORC immediately after the merger/acquisition, and should be reported in the first update of the bank’s total risk-weighted assets that comes after the merger/acquisition.
13. Application of the Standardized Approach Within a Group
13.1 At the consolidated level, the standardized approach calculations use fully consolidated BI figures, which net all the intragroup income and expenses. The calculations at a sub-consolidated level use BI figures for the banks consolidated at that particular sub-level. The calculations at the subsidiary level use the BI figures from the subsidiary.
13.2 Similar to bank holding companies, when BI figures for sub-consolidated or subsidiary banks where BI is more than SAR4.46 billion, these banks are required to use loss experience in the standardized approach calculations. A sub-consolidated bank or a subsidiary bank uses only the losses it has incurred in the standardized approach calculations (and does not include losses incurred by other parts of the bank holding company).
13.3 In case, a subsidiary of a bank have BI more than SAR 4.46 billion does not meet the qualitative standards for the use of the Loss Component, this subsidiary must calculate the standardized approach capital requirements by applying 100% of the BI Component. In such cases SAMA may require the bank to apply an ILM which is greater than 1.
Annexure 1: Definition of Business Indicator Components
Business Indicator definitions BI Component Profit and loss or balance sheet items Description Typical sub-items Interest, lease and dividend Interest income Interest income from all financial assets and other interest income (includes interest income from financial and operating leases and profits from leased assets) • Interest income from loans and advances, assets available for sale, assets held to maturity, trading assets, financial leases and operational leases
• Interest income from hedge accounting derivatives
• Other interest income
• Profits from leased assets
Interest expenses Interest expenses from all financial liabilities and other interest expenses (includes interest expense from financial and operating leases, losses, depreciation and impairment of operating leased assets)
• Interest expenses from deposits, debt securities issued, financial leases, and operating leases
• Interest expenses from hedge accounting derivatives
• Other interest expenses
• Losses from leased assets
• Depreciation and impairment of operating leased assets
Interest earning assets (balance sheet item) Total gross outstanding loans, advances, interest bearing securities (including government bonds), and lease assets measured at the end of each financial year
Dividend income Dividend income from investments in stocks and funds not consolidated in the bank's financial statements, including dividend income from non-consolidated subsidiaries, associates and joint ventures.
Services Fee and commission income Income received from providing advice and services. Includes income received by the bank as an outsourcer of financial services. Fee and commission income from:
• Securities (issuance, origination, reception, transmission, execution of orders on behalf of customers)
• Clearing and settlement; Asset management; Custody; Fiduciary transactions; Payment services; Structured finance; Servicing of securitizations; Loan commitments and guarantees given; and foreign transactions
Fee and commission expenses Expenses paid for receiving advice and services. Includes outsourcing fees paid by the bank for the supply of financial services, but not outsourcing fees paid for the supply of non- financial services (eg logistical, IT, human resources)
Fee and commission expenses from:
• Clearing and settlement; Custody; Servicing of securitizations; Loan commitments and guarantees received; and Foreign transactionsOther operating income Income from ordinary banking operations not included in other BI items but of similar nature (income from operating leases should be excluded)
• Rental income from investment properties
• Gains from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations (IFRS 5.37)
Other operating expenses Expenses and losses from ordinary banking operations not included in other BI items but of similar nature and from operational loss events (expenses from operating leases should be excluded) • Losses from non-current assets and disposal groups classified as held for sale not qualifying as discontinued operations (IFRS 5.37)
• Losses incurred as a consequence of operational loss events (eg fines, penalties, settlements, replacement cost of damaged assets), which have not been provisioned/reserved for in previous years
• Expenses related to establishing provisions/reserves for operational loss events
Financial Net profit (loss) on the trading book • Net profit/loss on trading assets and trading liabilities (derivatives, debt securities, equity securities, loans and advances, short positions, other assets and liabilities)
• Net profit/loss from hedge accounting
• Net profit/loss from exchange differences
Net profit (loss) on the banking book • Net profit/loss on financial assets and liabilities measured at fair value through profit and loss
• Realized gains/losses on financial assets and liabilities not measured at fair value through profit and loss (loans and advances, assets available for sale, assets held to maturity, financial liabilities measured at amortized cost)
• Net profit/loss from hedge accounting
• Net profit/loss from exchange differences
The following Profit and loss items do not contribute to any of the items of the BI:
• Income and expenses from insurance or reinsurance businesses
• Premiums paid and reimbursements/payments received from insurance or reinsurance policies purchased
• Administrative expenses, including staff expenses, outsourcing fees paid for the supply of non-financial services (e.g. logistical, IT, human resources), and other administrative expenses (e.g. IT, utilities, telephone, travel, office supplies, postage)
• Recovery of administrative expenses including recovery of payments on behalf of customers (e.g. taxes debited to customers)
• Expenses of premises and fixed assets (except when these expenses result from operational loss events)
• Depreciation/amortization of tangible and intangible assets (except depreciation related to operating lease assets, which should be included in financial and operating lease expenses)
• Provisions/reversal of provisions (e.g. on pensions, commitments and guarantees given) except for provisions related to operational loss events
• Expenses due to share capital repayable on demand
• Impairment/reversal of impairment (e.g. on financial assets, non-financial assets, investments in subsidiaries, joint ventures and associates)
• Changes in goodwill recognized in profit or loss
• Corporate income tax (tax based on profits including current tax and deferred).
Annexure 2: Detailed Loss Event Type Classification
Detailed loss event type classification Event-type category (Level 1) Definition Categories (Level 2) Activity examples (Level 3) Internal Fraud. Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/ discrimination events, which involves at least one internal party. Unauthorized Activity Transactions not reported (intentional). Trans type unauthorized (with monetary loss). Mismarking of position (intentional). Theft and Fraud Fraud / credit fraud / worthless deposits. Theft / extortion / embezzlement / robbery. Misappropriation of assets. Malicious destruction of assets. Forgery. Check kiting. Smuggling. Account take-over / impersonation. Tax non-compliance / evasion (willful). Bribes / kickbacks. Insider trading (not on firm's account). External Fraud. Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law by a third party. Theft and Fraud Theft/ Robbery. Forgery. Check kiting. Systems Security Hacking damage. Theft of information (with monetary loss). Employment Practices and Workplace Safety. Losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims, or from diversity / discrimination events. Employee Relations Compensation, benefit, termination issues. Organized labor activity. Safe Environment General liability (slips and falls, etc.). Employee health & safety rules events. Workers compensation. Diversity and Discrimination All discrimination types. Clients, Products and Business Practices. Losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product. Suitability, Disclosure, and Fiduciary Fiduciary breaches / guideline violations. Suitability / disclosure issues (know-your-customer, etc.). Retail consumer disclosure violations. Breach of privacy. Aggressive sales. Account churning. Misuse of confidential information. Lender Liability. Improper Business or Market Practices Antitrust. Improper trade / market practices. Market manipulation. Insider trading (on firm's account). Unlicensed activity. Money laundering. Product Flaws Product defects (unauthorized, etc.). Model Error. Selection, Sponsorship, and Exposure Failure to investigate client per guidelines. Exceeding client exposure limits. Advisory Activity Disputes over performance of advisory activities. Damage to Physical Assets. Losses arising from loss or damage to physical assets from natural disaster or other events. Disasters and Other Events Natural disaster losses. Human losses from external sources (terrorism, vandalism). Business Disruption and System Failures. Losses arising from disruption of business or system failures. Systems Hardware. Software. Telecommunications. Utility outage / disruptions. Execution, Delivery, and Process Management. Losses from failed transaction processing or process management, from relations with trade counterparties and vendors. Transaction Capture, Execution, and Maintenance Miscommunication. Data entry, maintenance or loading error. Missed deadline or responsibility. Model / system miss-operation. Accounting error / entity attribution error. Other task miss-performance. Delivery failure. Collateral management failure. Reference Data Maintenance. Monitoring and Reporting Failed mandatory reporting obligation. Inaccurate external report (loss incurred). Customer Intake and Documentation Client permissions / disclaimers missing. Legal documents missing / incomplete. Customer/Client Account Management Unapproved access given to accounts. Incorrect client records (loss incurred). Negligent loss or damage of client assets. Trade Counterparties Non-client counterparty miss-performance. Miscellaneous non-client counterparty disputes. Vendors and Suppliers Outsourcing. Vendor disputes. Minimum Capital Requirements for Counterparty Credit Risk (CCR) and Credit Valuation Adjustment (CVA)
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force 1. Introduction
The Basel III framework on Counterparty Credit Risk includes a comprehensive, non-modelled approach for measuring counterparty credit risk arising from derivative contracts, Securities Financing transaction (SFT) and cash transactions in securities, foreign exchange and commodities. With the continued growth of the derivative market and banks’ increasing use of financial instruments and structured products for yield enhancement and/or risk management purposes, it is essential for them to have the necessary systems and expertise for managing any CCR associated with those activities.
This Framework covers both Counterparty Default Risk as well as the Credit Valuation Adjustment (CVA) to calculate the risk of losses arising from the changes in the value of the CVA in response to the changes in the counterparty credit spreads and market risk factors that drive prices of derivative transactions and SFTs. Banks that are below the CVA materiality threshold may opt not to calculate its CVA capital requirements. A bank must regularly review and update its materiality assessment to reflect any significant changes in materiality.
This framework is issued by SAMA in exercise of the authority vested in SAMA under the Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued 01/01/1386H.
This Framework supersedes any conflicting requirements in previous circulars in this regard (GDBC-371000101120, GDBC-410382700000, and GDBC-361000021954).
2. Scope of Application
2.1. This framework applies to all domestic banks both on a consolidated basis, which include all branches and subsidiaries, and on a standalone basis.
2.2. 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.
3. Definitions
General Terms
Counterparty credit risk (CCR) The risk that the counterparty to a transaction could default before the final settlement of the transaction's cash flows. An economic loss would occur if the transactions or portfolio of transactions with the counterparty has a positive economic value at the time of default. Unlike a firm's exposure to credit risk through a loan, where the exposure to credit risk is unilateral and only the lending bank faces the risk of loss, CCR creates a bilateral risk of loss: the market value of the transaction can be positive or negative to either counterparty to the transaction. The market value is uncertain and can vary over time with the movement of underlying market factors.
A central counterparty (CCP) A clearing house 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. For the purposes of the capital framework, a CCP is a financial institution.
A qualifying central counterparty (QCCP) 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 Capital Market Authority (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 Principles for Financial Market Infrastructures issued by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions.
1) Where the CCP is in a jurisdiction that does not have a CCP regulator applying the Principles to the CCP, then SAMA may make the determination of whether the CCP meets this definition.
2) In addition, for a CCP to be considered a QCCP, the requirements of 8.37 must be met to permit each clearing member bank to calculate its capital requirement for its default fund exposures.
A clearing member A member of, or a direct participant in, a CCP that is entitled to enter into a transaction with the CCP, regardless of whether it enters into trades with a CCP for its own hedging, investment or speculative purposes or whether it also enters into trades as a financial intermediary between the CCP and other market participants.
For the purposes of the CCR standard, where a CCP has a link to a second CCP, that second CCP is to be treated as a clearing member of the first CCP. Whether the second CCP's collateral contribution to the first CCP is treated as initial margin or a default fund contribution will depend upon the legal arrangement between the CCPs. SAMA should be consulted to determine the treatment of this initial margin and default fund contributions.
A client is a party to a transaction with a CCP through either a clearing member acting as a financial intermediary, or a clearing member guaranteeing the performance of the client to the CCP.
A multi-level Client structure One in which banks can centrally clear as indirect clients; that is, when clearing services are provided to the bank by an institution which is not a direct clearing member, but is itself a client of a clearing member or another clearing client. For exposures between clients and clients of clients, we use the term higher level client for the institution providing clearing services; and the term lower level client for the institution clearing through that client.
Initial margin A clearing member's or client's funded collateral posted to the CCP to mitigate the potential future exposure (PFE) of the CCP to the clearing member arising from the possible future change in the value of their transactions. For the purposes of the calculation of counterparty credit risk capital requirements, initial margin does not include contributions to a CCP for mutualized loss sharing arrangements (i.e. in case a CCP uses initial margin to mutualize losses among the clearing members, it will be treated as a default fund exposure). Initial margin includes collateral deposited by a clearing member or client in excess of the minimum amount required, provided the CCP or clearing member may, in appropriate cases, prevent the clearing member or client from withdrawing such excess collateral.
Variation margin A clearing member's or client's funded collateral posted on a daily or intraday basis to a CCP based upon price movements of their transactions.
Trade exposures As (in Chapter 8 of this framework), includes the current and potential future exposure of a clearing member or a client to a CCP arising from over-the-counter derivatives, exchange traded derivatives transactions or securities financing transactions, as well as initial margin. For the purposes of this definition, the current exposure of a clearing member includes the variation margin due to the clearing member but not yet received.
Default funds Also known as clearing deposits or guaranty fund contributions (or any other names), are clearing members' funded or unfunded contributions towards, or underwriting of, a CCP's mutualized loss sharing arrangements. The description given by a CCP to its mutualized loss sharing arrangements is not determinative of their status as a default fund; rather, the substance of such arrangements will govern their status.
Offsetting transaction The transaction leg between the clearing member and the CCP when the clearing member acts on behalf of a client (e.g. when a clearing member clears or novates a client's trade).
Transaction types
Long settlement transactions Transactions where a counterparty undertakes to deliver a security, a commodity, or a foreign exchange amount against cash, other financial instruments, or commodities, or vice versa, at a settlement or delivery date that is contractually specified as more than the lower of the market standard for this particular instrument and five business days after the date on which the bank enters into the transaction.
Securities financing transactions (SFTs) Transactions such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions, where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements.
Margin lending transactions Transactions in which a bank extends credit in connection with the purchase, sale, carrying or trading of securities. Margin lending transactions do not include other loans that happen to be secured by securities collateral. Generally, in margin lending transactions, the loan amount is collateralized by securities whose value is greater than the amount of the loan.
Netting sets, hedging sets, and related terms
Netting set A group of transactions with a single counterparty that are subject to a legally enforceable bilateral netting arrangement and for which netting is recognized for regulatory capital purposes under the provisions of 6.9 and 6.10 that are applicable to the group of transactions, this framework text on credit risk mitigation techniques in credit risk mitigation techniques for exposures risk-weighted under the standardized approach of Basel III: Finalizing post-crisis reforms, or the cross product netting rules set out in 7.61 to 7.71. Each transaction that is not subject to a legally enforceable bilateral netting arrangement that is recognized for regulatory capital purposes should be interpreted as its own netting set for the purpose of these rules.
Hedging set A set of transactions within a single netting set within which full or partial offsetting is recognized for the purpose of calculating the PFE add-on of the Standardized Approach for counterparty credit risk.
Margin agreement A contractual agreement or provisions to an agreement under which one counterparty must supply variation margin to a second counterparty when an exposure of that second counterparty to the first counterparty exceeds a specified level.
Margin period of risk The largest amount of an exposure that remains outstanding until one party has the right to call for variation margin. The time period from the last exchange of collateral covering a netting set of transactions with a defaulting counterparty until that counterparty is closed out and the resulting market risk is re-hedged.
Effective maturity Under the Internal Models Method for a netting set with maturity greater than one year is the ratio of the sum of expected exposure over the life of the transactions in a netting set discounted at the risk-free rate of return divided by the sum of expected exposure over one year in a netting set discounted at the risk-free rate. This effective maturity may be adjusted to reflect rollover risk by replacing expected exposure with effective expected exposure for forecasting horizons under one year. The formula is given in 7.20.
Cross-product netting Refers to the inclusion of transactions of different product categories within the same netting set pursuant to the cross product netting rules set out in in Chapter 7 of this framework.
Distributions
Distribution of market values The forecast of the probability distribution of net market values of transactions within a netting set for some future date (the forecasting horizon) given the realized market value of those transactions up to the present time.
Distribution of exposures The forecast of the probability distribution of market values that is generated by setting forecast instances of negative net market values equal to zero (this takes account of the fact that, when the bank owes the counterparty money, the bank does not have an exposure to the counterparty).
Risk-neutral distribution A distribution of market values or exposures at a future time period where the distribution is calculated using market implied values such as implied volatilities.
Actual distribution A distribution of market values or exposures at a future time period where the distribution is calculated using historic or realized values such as volatilities calculated using past price or rate changes.
Exposure measures and adjustments
Current exposure The larger of zero, or the current market value of a transaction or portfolio of transactions within a netting set with a counterparty that would be lost upon the immediate default of the counterparty, assuming no recovery on the value of those transactions in bankruptcy. Current exposure is often also called Replacement Cost.
Peak exposure A high percentile (typically 95% or 99%) of the distribution of exposures at any particular future date before the maturity date of the longest transaction in the netting set. A peak exposure value is typically generated for many future dates up until the longest maturity date of transactions in the netting set.
Expected exposure The mean (average) of the distribution of exposures at any particular future date before the longest-maturity transaction in the netting set matures. An expected exposure value is typically generated for many future dates up until the longest maturity date of transactions in the netting set.
Effective expected exposure At a specific date is the maximum expected exposure that occurs at that date or any prior date. Alternatively, it may be defined for a specific date as the greater of the expected exposure at that date, or the effective exposure at the previous date. In effect, the Effective Expected Exposure is the Expected Exposure that is constrained to be non-decreasing over time.
Expected positive exposure(EPE) The weighted average over time of expected exposure where the weights are the proportion that an individual expected exposure represents of the entire time interval. When calculating the minimum capital requirement, the average is taken over the first year or, if all the contracts in the netting set mature before one year, over the time period of the longest-maturity contract in the netting set.
Effective expected positive exposure (Effective EPE) The weighted average over time of effective expected exposure over the first year, or, if all the contracts in the netting set mature before one year, over the time period of the longest maturity contract in the netting set where the weights are the proportion that an individual expected exposure represents of the entire time interval.
Credit valuation adjustment An adjustment to the mid-market valuation of the portfolio of trades with a counterparty. This adjustment reflects the market value of the credit risk due to any failure to perform on contractual agreements with a counterparty. This adjustment may reflect the market value of the credit risk of the counterparty or the market value of the credit risk of both the bank and the counterparty.
One-sided credit valuation adjustment A credit valuation adjustment that reflects the market value of the credit risk of the counterparty to the firm, but does not reflect the market value of the credit risk of the bank to the counterparty.
CVA Materiality Threshold The materiality threshold for CVA is where aggregate notional amount of non-centrally cleared derivatives is less than or equal to 446 billion SAR may opt not to calculate its CVA capital requirements using the SA-CVA or BA- CVA and instead choose an alternative treatment.
CCR-related risks
Rollover risk The amount by which expected positive exposure is understated when future transactions with a counterparty are expected to be conducted on an ongoing basis, but the additional exposure generated by those future transactions is not included in calculation of expected positive exposure.
General wrong-way risk Arises when the probability of default of counterparties is positively correlated with general market risk factors.
Specific wrong-way risk Arises when the exposure to a particular counterparty is positively correlated with the probability of default of the counterparty due to the nature of the transactions with the counterparty.
4. Implementation Timeline and SAMA Reporting Requirements
4.1. This framework will be effective on 01 January 2023.
4.2. SAMA expects all Banks to report the Counterparty credit risk (CCR) and Credit Valuation Adjustment (CVA) Risk-Weighted Assets (RWA) and capital charge using SAMA’s Q17 reporting template within 30 days after the end of each quarter.
Minimum Capital Requirements for Counterparty Credit Risk (CCR)
5. Counterparty Credit Risk Overview
Counterparty Credit Risk Explanation
5.1. Counterparty credit risk is defined in Chapter 3 of this framework. It is the risk that the counterparty to a transaction could default before the final settlement of the transaction in cases where there is a bilateral risk of loss. The bilateral risk of loss is the key concept on which the definition of counterparty credit risk is based and is explained further below.
5.2. When a bank makes a loan to a borrower the credit risk exposure is unilateral. That is, the bank is exposed to the risk of loss arising from the default of the borrower, but the transaction does not expose the borrower to a risk of loss from the default of the bank. By contrast, some transactions give rise to a bilateral risk of loss and therefore give rise to a counterparty credit risk charge. For example:
(1) A bank makes a loan to a borrower and receives collateral from the borrower.1
(a) The bank is exposed to the risk that the borrower defaults and the sale of the collateral is insufficient to cover the loss on the loan.
(b) The borrower is exposed to the risk that the bank defaults and does not return the collateral. Even in cases where the customer has the legal right to offset the amount it owes on the loan in compensation for the lost collateral, the customer is still exposed to the risk of loss at the outset of the loan because the value of the loan may be less than the value of the collateral the time of default of the bank.
(2) A bank borrows cash from a counterparty and posts collateral to the counterparty (or undertakes a transaction that is economically equivalent, such as the sale and repurchase (repo) of a security).
(a) The bank is exposed to the risk that its counterparty defaults and does not return the collateral that the bank posted.
(b) The counterparty is exposed to the risk that the bank defaults and the amount the counterparty raises from the sale of the collateral that the bank posted is insufficient to cover the loss on the counterparty’s loan to the bank.
(1) A bank borrows a security from a counterparty and posts cash to the counterparty as collateral (or undertakes a transaction that is economically equivalent, such as a reverse repo).
(a) The bank is exposed to the risk that its counterparty defaults and does not return the cash that the bank posted as collateral.
(b) The counterparty is exposed to the risk that the bank defaults and the cash that the bank posted as collateral is insufficient to cover the loss of the security that the bank borrowed.
(2) A bank enters a derivatives transaction with a counterparty (e.g. it enters a swap transaction or purchases an option). The value of the transaction can vary over time with the movement of underlying market factors.2
(a) The bank is exposed to the risk that the counterparty defaults when the derivative has a positive value for the bank.
(b) The counterparty is exposed to the risk that the bank defaults when the derivative has a positive value for the counterparty.
1 The bilateral risk of loss in this example arises because the bank receives, i.e. takes possession of, the collateral as part of the transaction. By contrast, collateralized loans where the collateral is not exchanged prior to default, do not give rise to a bilateral risk of loss; for example a corporate or retail loan secured on a property of the borrower where the bank may only take possession of the property when the borrower defaults does not give rise to counterparty credit risk.
2 The counterparty credit risk rules capture the risk of loss to the bank from the default of the derivative counterparty. The risk of gains or losses on the changing market value of the derivative is captured by the market risk framework. The market risk framework captures the risk that the bank will suffer a loss as a result of market movements in underlying risk factors referenced by the derivative (e.g. interest rates for an interest rate swap); however, it also captures the risk of losses that can result from the derivative declining in value due to a deterioration in the creditworthiness of the derivative counterparty. The latter risk is the credit valuation adjustment risk set out in Chapter 11 of this Framework.Scope of Counterparty Credit Risk Charge
5.3. Banks must calculate a counterparty credit risk charge for all exposures that give rise to counterparty credit risk, with the exception of those transactions listed in 5.15 below. The categories of transaction that give rise to counterparty credit risk are:
(1) Over-the-counter (OTC) derivatives
(2) Exchange-traded derivatives
(3) Long settlement transactions
(4) Securities financing transactions
5.4. The transactions listed in 5.3 above generally exhibit the following abstract characteristics:
(1) The transactions generate a current exposure or market value.
(2) The transactions have an associated random future market value based on market variables.
(3) The transactions generate an exchange of payments or an exchange of a financial instrument (including commodities) against payment.
(4) The transactions are undertaken with an identified counterparty against which a unique probability of default can be determined.
5.5. Other common characteristics of the transactions listed in 5.3 include the following:
(1) Collateral may be used to mitigate risk exposure and is inherent in the nature of some transactions.
(2) Short-term financing may be a primary objective in that the transactions mostly consist of an exchange of one asset for another (cash or securities) for a relatively short period of time, usually for the business purpose of financing. The two sides of the transactions are not the result of separate decisions but form an indivisible whole to accomplish a defined objective.
(1) Netting may be used to mitigate the risk.
(2) Positions are frequently valued (most commonly on a daily basis), according to market variables.
(3) Remargining may be employed.
Methods to Calculate Counterparty Credit Risk Exposure
5.6. For the transaction types listed in 5.3 above, banks must calculate their counterparty credit risk exposure, or exposure at default (EAD),3 using one of the methods set out in 5.7 to 5.8 below. The methods vary according to the type of the transaction, the counterparty to the transaction, and whether the bank has received SAMA approval to use the method (if such approval is required).
5.7. For exposures that are not cleared through a central counterparty (CCP) the following methods must be used to calculate the counterparty credit risk exposure:
(1) Standardized approach for measuring counterparty credit risk exposures (SACCR), which is set out in Chapter 6 of this framework. This method is to be used for exposures arising from OTC derivatives, exchange-traded derivatives and long settlement transactions. This method must be used if the bank does not have approval to use the internal models method (IMM).
(2) The simple approach or comprehensive approach to the recognition of collateral, which are both set out in the credit risk mitigation chapter of the standardized approach to credit risk (see Chapter 9 on the mitigation techniques for exposures risk-weighted under the standardized approach of the Minimum Capital Requirements for Credit Risk). These methods are to be used for securities financing transactions (SFTs) and must be used if the bank does not have approval to use the IMM.
(3) The value-at-risk (VaR) models approach, which is set out in paragraphs 73-76 of Chapter 9 of the Minimum Capital Requirements for Credit Risk. For banks applying the IRB approach to credit risk, the VaR models approach may be used to calculate EAD for SFTs, subject to SAMA approval, as an alternative to the method set out in (2) above.
(4) The IMM, which is set out in Chapter 7 of this framework. This method may be used, subject to SAMA approval, as an alternative to the methods to calculate counterparty credit risk exposures set out in (1) and (2) above (for all of the exposures referenced in those bullets).
5.8. For exposures that are cleared through a CCP, banks must apply the method set out Chapter 8 of this framework. This method covers:
(1) the exposures of a bank to a CCPs when the bank is a clearing member of the CCP;
(2) the exposures of a bank to its clients, when the bank is a clearing members and act as an intermediary between the client and the CCP; and
(3) the exposures of a bank to a clearing member of a CCP, when the bank is a client of the clearing member and the clearing member is acting as an intermediary between the bank and the CCP.
5.9. Exposures to central counterparties arising from the settlement of cash transactions (equities, fixed income, spot foreign exchange and spot commodities), are excluded from the requirements of Chapter 8 of this framework. They are instead subject to the requirements of chapter 25 of the Minimum Capital Requirements for Credit Risk.
5.10. Under the methods outlined above, the exposure amount or EAD for a given counterparty is equal to the sum of the exposure amounts or EADs calculated for each netting set with that counterparty, subject to the exception outlined in 5.11 below.
5.11. The exposure or EAD for a given OTC derivative counterparty is defined as the greater of zero and the difference between the sum of EADs across all netting sets with the counterparty and the credit valuation adjustment (CVA) for that counterparty which has already been recognized by the bank as an incurred write down (i.e. a CVA loss). This CVA loss is calculated without taking into account any offsetting debit valuation adjustments, which have been deducted from capital under the Regulatory Adjustments or “Filter” chapter of Section A of SAMA's Final Guidance Document Concerning Implementation of Capital Reforms Under Basel III Framework4. This reduction of EAD by incurred CVA losses does not apply to the determination of the CVA risk capital requirement.
3 The terms “exposure” and “EAD” are used interchangeable in the counterparty credit risk chapters of the credit risk standard. This reflects the fact that the amounts calculated under the counterparty credit risk rules must typically be used as either the “exposure” within the standardized approach to credit risk, or the EAD within the internal ratings-based (IRB) approach to credit risk, as described in 5.12.
4 SAMA circulars would be Circular No.: 341000015689, which I will be referencing in CCR Framework. Section A: Final Guidance DocumentMethods to Calculate CCR Risk-Weighted Assets
5.12. After banks have calculated their counterparty credit risk exposures, or EAD, according to the methods outlined above, they must apply the standardized approach to credit risk, the IRB approach to credit risk, or, in the case of the exposures to CCPs, the capital requirements set out in Chapter 8 of this framework. For counterparties to which the bank applies the standardized approach, the counterparty credit risk exposure amount will be risk weighted according to the relevant risk weight of the counterparty. For counterparties to which the bank applies the IRB approach, the counterparty credit risk exposure amount defines the EAD that is used within the IRB approach to determine risk- weighted assets (RWA) and expected loss amounts.
5.13. For IRB exposures, the risk weights applied to OTC derivative exposures should be calculated with the full maturity adjustment (as defined in paragraph 6 of chapter 11 of the Minimum Capital Requirements for Credit Risk) capped at 1 for each netting set for which the bank calculates CVA capital under either the basic approach (BA-CVA) or the standardized approach (SA-CVA), as provided in 11.12.
5.14. For banks that have SAMA approval to use IMM, RWA for credit risk must be calculated as the higher of:
(1) the sum of RWA calculated using Internal Models Method (IMM) with current parameter calibrations; and
(2) the sum of RWA calculated using IMM with stressed parameter calibrations.
Exemptions
5.15. As an exception to the requirements of 5.3 above, banks are not required to calculate a counterparty credit risk charge for the following types of transactions (i.e. the exposure amount or EAD for counterparty credit risk for the transaction will be zero):
(1) Credit derivative protection purchased by the bank against a banking book exposure, or against a counterparty credit risk exposure. In such cases, the bank will determine its capital requirement for the hedged exposure according to the criteria and general rules for the recognition of credit derivatives within the standardized approach or IRB approach to credit risk (i.e. substitution approach).
(2) Sold credit default swaps in the banking book where they are treated in the framework as a guarantee provided by the bank and subject to a credit risk charge for the full notional amount.
Minimum Haircut Floors for Securities Financing Transactions (SFTs)
5.16. Chapter 10 of this framework specifies the treatment of certain non-centrally cleared SFTs with certain counterparties (in-scope SFTs). The requirements are applicable to banks in jurisdictions that are permitted to conduct in-scope SFTs below the minimum haircut floors specified within Chapter 10 of this framework.
6. Standardized Approach to Counterparty Credit Risk
Overview and Scope
6.1. The Standardized Approach for Counterparty Credit Risk (SA-CCR) applies to over the-counter (OTC) derivatives, exchange-traded derivatives and long settlement transactions.5 Banks that do not have approval to apply the internal model method (IMM) for the relevant transactions must use SA-CCR, as set out in this chapter.
6.2. EAD is to be calculated separately for each netting set (as set out in 4.14 , each transaction that is not subject to a legally enforceable bilateral netting arrangement that is recognized for regulatory capital purposes should be interpreted as its own netting set).6 It is determined using the following formula, where:
(1) alpha = 1.4
(2) RC = the replacement cost calculated according to 6.5 to 6.21
(3) PFE = the amount for potential future exposure calculated according to 6.22 to 6.79
EAD = alpha * (RC + PFE)
6.3. For credit derivatives where the bank is the protection seller and that are outside netting and margin agreements, the EAD may be capped to the amount of unpaid premia. Banks have the option to remove such credit derivatives from their legal netting sets and treat them as individual unmargined transactions in order to apply the cap.
6.4. The replacement cost (RC) and the potential future exposure (PFE) components are calculated differently for margined and unmargined netting sets. Margined netting sets are netting sets covered by a margin agreement under which the bank’s counterparty has to post variation margin; all other netting sets, including those covered by a one-way margin agreement where only the bank posts variation margin, are treated as unmargined for the purposes of the SA-CCR. The EAD for a margined netting set is capped at the EAD of the same netting set calculated on an unmargined basis.
5 See chapter 12 and Chapter 13 of this framework for illustrative examples of the application of the SA-CCR to sample portfolios
6 The EAD can be set to zero only for sold options that are outside netting and margin agreements.Replacement Cost and Net Independent Collateral Amount
6.5. For unmargined transactions, the RC intends to capture the loss that would occur if a counterparty were to default and were closed out of its transactions immediately. The PFE add-on represents a potential conservative increase in exposure over a one-year time horizon from the present date (i.e. the calculation date).
6.6. For margined trades, the RC intends to capture the loss that would occur if a counterparty were to default at the present or at a future time, assuming that the closeout and replacement of transactions occur instantaneously. However, there may be a period (the margin period of risk) between the last exchange of collateral before default and replacement of the trades in the market. The PFE add-on represents the potential change in value of the trades during this time period.
6.7. In both cases, the haircut applicable to noncash collateral in the replacement cost formulation represents the potential change in value of the collateral during the appropriate time period (one year for unmargined trades and the margin period of risk for margined trades).
6.8. Replacement cost is calculated at the netting set level, whereas PFE add-ons are calculated for each asset class within a given netting set and then aggregated (see 6.26 to 6.79 below).
6.9. For capital adequacy purposes, banks may net transactions (e.g. when determining the RC component of a netting set) subject to novation under which any obligation between a bank and its counterparty to deliver a given currency on a given value date is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations. Banks may also net transactions subject to any legally valid form of bilateral netting not covered in the preceding sentence, including other forms of novation. In every such case where netting is applied, a bank must satisfy SAMA that it has:
(1) A netting contract with the counterparty or other agreement which creates a single legal obligation, covering all included transactions, such that the bank would have either a claim to receive or obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions in the event a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstances.7
(2) Written and reasoned legal reviews that, in the event of a legal challenge, the relevant courts and administrative authorities would find the bank’s exposure to be such a net amount under:
(3) The law of the jurisdiction in which the counterparty is chartered and, if the foreign branch of a counterparty is involved, then also under the law of the jurisdiction in which the branch is located;
(a) The law that governs the individual transactions; and
(b) The law that governs any contract or agreement necessary to effect the netting.
(4) Procedures in place to ensure that the legal characteristics of netting arrangements are kept under review in light of the possible changes in relevant law.
6.10. SAMA, after consultation when necessary with other relevant supervisors, must be satisfied that the netting is enforceable under the laws of each of the relevant jurisdictions. Thus, if any of these supervisors is dissatisfied about enforceability under its laws, the netting contract or agreement will not meet this condition and neither counterparty could obtain supervisory benefit.
6.11. There are two formulations of replacement cost depending on whether the trades with a counterparty are margined or unmargined. The margined formulation could apply both to bilateral transactions and to central clearing relationships. The formulation also addresses the various arrangements that a bank may have to post and/or receive collateral that may be referred to as initial margin.
Formulation for unmargined transactions
6.12. For unmargined transactions, RC is defined as the greater of:
(i) the current market value of the derivative contracts less net haircut collateral held by the bank (if any), and
(ii) zero. This is consistent with the use of replacement cost as the measure of current exposure, meaning that when the bank owes the counterparty money it has no exposure to the counterparty if it can instantly replace its trades and sell collateral at current market prices.8
The formula for RC is as follows, where:
(1) V is the value of the derivative transactions in the netting set
(2) C is the haircut value of net collateral held, which is calculated in accordance with the net independent collateral amount (NICA) methodology defined in 6.19.9
RC = max{V - C; 0}
6.13. For the purpose of 6.12 above, the value of non-cash collateral posted by the bank to its counterparty is increased and the value of the non-cash collateral received by the bank from its counterparty is decreased using haircuts (which are the same as those that apply to repo-style transactions) for the time periods described in 6.7above.
6.14. The formulation set out in 6.12 above, does not permit the replacement cost, which represents today’s exposure to the counterparty, to be less than zero. However, banks sometimes hold excess collateral (even in the absence of a margin agreement) or have out-of-the-money trades which can further protect the bank from the increase of the exposure. As discussed in 6.23 to 6.25 below, the SA-CCR allows such over-collateralization and negative mark-to market value to reduce PFE, but they are not permitted to reduce replacement cost.
Formulation for margined transactions
6.15. The RC formula for margined transactions builds on the RC formula for unmargined transactions. It also employs concepts used in standard margining agreements, as discussed more fully below.
6.16. The RC for margined transactions in the SA-CCR is defined as the greatest exposure that would not trigger a call for VM, taking into account the mechanics of collateral exchanges in margining agreements.10 Such mechanics include, for example, “Threshold”, “Minimum Transfer Amount” and “Independent Amount” in the standard industry documentation,11 which are factored into a call for VM.12 A defined, generic formulation has been created to reflect the variety of margining approaches used and those being considered by supervisors internationally.
Incorporating NICA into replacement cost
6.17. One objective of the SA-CCR is to reflect the effect of margining agreements and the associated exchange of collateral in the calculation of CCR exposures. The following paragraphs address how the exchange of collateral is incorporated into the SA-CCR.
6.18. To avoid confusion surrounding the use of terms initial margin and independent amount which are used in various contexts and sometimes interchangeably, the term independent collateral amount (ICA) is introduced. ICA represents:
(i) collateral (other than VM) posted by the counterparty that the bank may seize upon default of the counterparty, the amount of which does not change in response to the value of the transactions it secures and/or
(ii) the Independent Amount (IA) parameter as defined in standard industry documentation. ICA can change in response to factors such as the value of the collateral or a change in the number of transactions in the netting set.
6.19. Because both a bank and its counterparty may be required to post ICA, it is necessary to introduce a companion term, net independent collateral amount (NICA), to describe the amount of collateral that a bank may use to offset its exposure on the default of the counterparty. NICA does not include collateral that a bank has posted to a segregated, bankruptcy remote account, which presumably would be returned upon the bankruptcy of the counterparty. That is, NICA represents any collateral (segregated or unsegregated) posted by the counterparty less the unsegregated collateral posted by the bank. With respect to IA, NICA takes into account the differential of IA required for the bank minus IA required for the counterparty.
6.20. For margined trades, the replacement cost is calculated using the following formula, where:
(1) V and C are defined as in the unmargined formulation, except that C now includes the net variation margin amount, where the amount received by the bank is accounted with a positive sign and the amount posted by the bank is accounted with a negative sign
(2) TH is the positive threshold before the counterparty must send the bank collateral
(3) MTA is the minimum transfer amount applicable to the counterparty
RC = max{V - C; TH + MTA - NICA; 0}
6.21. TH + MTA – NICA represents the largest exposure that would not trigger a VM call and it contains levels of collateral that need always to be maintained. For example, without initial margin or IA, the greatest exposure that would not trigger a variation margin call is the threshold plus any minimum transfer amount. In the adapted formulation, NICA is subtracted from TH + MTA. This makes the calculation more accurate by fully reflecting both the actual level of exposure that would not trigger a margin call and the effect of collateral held and /or posted by a bank. The calculation is floored at zero, recognizing that the bank may hold NICA in excess of TH + MTA, which could otherwise result in a negative replacement cost.
PFE add-on for each netting set
6.22. The PFE add-on consists of:
(i) an aggregate add-on component; and
(ii) a multiplier that allows for the recognition of excess collateral or negative mark-to-market value for the transactions within the netting set. The formula for PFE is as follows, where:
(1) AddOnaggregate is the aggregate add-on component (see 6.27 below)
(2) multiplier is defined as a function of three inputs: V, C and AddOnaggregate
PFE = multiplier * AddOnaggregate
7 The netting contract must not contain any clause which, in the event of default of a counterparty, permits a non-defaulting counterparty to make limited payments only, or no payments at all, to the estate of the defaulting party, even if the defaulting party is a net creditor.
8 The haircut applicable in the replacement cost calculation for unmargined trades should follow the formula in paragraphs 62 of chapter 9 of the Minimum Capital Requirements for Credit Risk. In applying the formula, banks must use the maturity of the longest transaction in the netting set as the value for N , capped at 250 days, in order to R scale haircuts for unmargined trades, which is capped at 100%.
9 As set out in 6.4, netting sets that include a one-way margin agreement in favor of the bank’s counterparty (i.e. the bank posts, but does not receive variation margin) are treated as unmargined for the purposes of SA-CCR. For such netting sets, C also includes, with a negative sign, the variation margin amount posted by the bank to the counterparty.
10 See chapter 12 and Chapter 13 of this framework for illustrative examples of the effect of standard margin agreements on the SA-CCR formulation.
11 For example, the 1992 (Multicurrency-Cross Border) Master Agreement and the 2002 Master Agreement published by the International Swaps & Derivatives Association, Inc. (ISDA Master Agreement). The ISDA Master Agreement includes the ISDA Credit Support Annexes: the 1994 Credit Support Annex (Security Interest – New York Law), or, as applicable, the 1995 Credit Support Annex (Transfer – English Law) and the 1995 Credit Support Deed (Security Interest – English Law).
12 For example, in the ISDA Master Agreement, the term “Credit Support Amount”, or the overall amount of collateral that must be delivered between the parties, is defined as the greater of the Secured Party’s Exposure plus the aggregate of all Independent Amounts applicable to the Pledgor minus all Independent Amounts applicable to the Secured Party, minus the Pledgor’s Threshold and zero.Multiplier (Recognition of Excess Collateral and Negative Mark-to-Market)
6.23. As a general principle, over-collateralization should reduce capital requirements for counterparty credit risk. In fact, many banks hold excess collateral (i.e. collateral greater than the net market value of the derivatives contracts) precisely to offset potential increases in exposure represented by the add-on. As discussed in 6.12 and 6.20, collateral may reduce the replacement cost component of the exposure under the SA-CCR. The PFE component also reflects the risk-reducing property of excess collateral.
6.24. Banks should apply a multiplier to the PFE component that decreases as excess collateral increases, without reaching zero (the multiplier is floored at 5% of the PFE add-on). When the collateral held is less than the net market value of the derivative contracts (“under-collateralization”), the current replacement cost is positive and the multiplier is equal to one (i.e. the PFE component is equal to the full value of the aggregate add-on). Where the collateral held is greater than the net market value of the derivative contracts (“over-collateralization”), the current replacement cost is zero and the multiplier is less than one (i.e. the PFE component is less than the full value of the aggregate add-on).
6.25. This multiplier will also be activated when the current value of the derivative transactions is negative. This is because out-of-the-money transactions do not currently represent an exposure and have less chance to go in-the-money. The formula for the multiplier is as follows, where:
(1) exp(…) is the exponential function
(2) Floor is 5%
(3) V is the value of the derivative transactions in the netting set
(4) C is the haircut value of net collateral held
Aggregate add-on and asset classes
6.26. To calculate the aggregate add-on, banks must calculate add-ons for each asset class within the netting set. The SA-CCR uses the following five asset classes:
(1) Interest rate derivatives
(2) Foreign exchange derivatives
(3) Credit derivatives
(4) Equity derivatives.
(5) Commodity derivatives
6.27. Diversification benefits across asset classes are not recognized. Instead, the respective add-ons for each asset class are simply aggregated using the following formula (where the sum is across the asset classes):
Allocation of derivative transactions to one or more asset classes
6.28. The designation of a derivative transaction to an asset class is to be made on the basis of its primary risk driver. Most derivative transactions have one primary risk driver, defined by its reference underlying instrument (e.g. an interest rate curve for an interest rate swap, a reference entity for a credit default swap, a foreign exchange rate for a foreign exchange (FX) call option, etc.). When this primary risk driver is clearly identifiable, the transaction will fall into one of the asset classes described above.
6.29. For more complex trades that may have more than one risk driver (e.g. multi-asset or hybrid derivatives), banks must take sensitivities and volatility of the underlying into account for determining the primary risk driver
6.30. SAMA may also require more complex trades to be allocated to more than one asset class, resulting in the same position being included in multiple classes. In this case, for each asset class to which the position is allocated, banks must determine appropriately the sign and delta adjustment of the relevant risk driver (the role of delta adjustments in SA-CCR is outlined further in 6.32 below).
General steps for calculating the PFE add-on for each asset class
6.31. For each transaction, the primary risk factor or factors need to be determined and attributed to one or more of the five asset classes: interest rate, foreign exchange, credit, equity or commodity. The add-on for each asset class is calculated using asset-class-specific formulas.13
6.32. Although the formulas for the asset class add-ons vary between asset classes, they all use the following general steps:
(6) The effective notional (D) must be calculated for each derivative (i.e. each individual trade) in the netting set. The effective notional is a measure of the sensitivity of the trade to movements in underlying risk factors (i.e. interest rates, exchange rates, credit spreads, equity prices and commodity prices). The effective notional is calculated as the product of the following parameters (i.e. D = d * MF * δ):
(a) The adjusted notional (d). The adjusted notional is a measure of the size of the trade. For derivatives in the foreign exchange asset class this is simply the notional value of the foreign currency leg of the derivative contract, converted to the Saudi Riyal (SAR). For derivatives in the equity and commodity asset classes, it is simply the current price of the relevant share or unit of commodity multiplied by the number of shares /units that the derivative references. For derivatives in the interest rate and credit asset classes, the notional amount is adjusted by a measure of the duration of the instrument to account for the fact that the value of instruments with longer durations are more sensitive to movements in underlying risk factors (i.e. interest rates and credit spreads).
(b) The maturity factor (MF). The maturity factor is a parameter that takes account of the time period over which the potential future exposure is calculated. The calculation of the maturity factor varies depending on whether the netting set is margined or unmargined.
(c) The supervisory delta (δ). The supervisory delta is used to ensure that the effective notional take into account the direction of the trade, i.e. whether the trade is long or short, by having a positive or negative sign. It is also takes into account whether the trade has a non-linear relationship with the underlying risk factor (which is the case for options and collateralized debt obligation tranches).
(7) A supervisory factor (SF) is identified for each individual trade in the netting set. The supervisory factor is the supervisory specified change in value of the underlying risk factor on which the potential future exposure calculation is based, which has been calibrated to take into account the volatility of underlying risk factors.
(8) The trades within each asset class are separated into supervisory specified hedging sets. The purpose of the hedging sets is to group together trades within the netting set where long and short positions should be permitted to offset each other in the calculation of potential future exposure.
(9) Aggregation formulas are applied to aggregate the effective notionals and supervisory factors across all trades within each hedging set and finally at the asset-class level to give the asset class level add-on. The method of aggregation varies between asset classes and for credit, equity and commodity derivatives it also involves the application of supervisory correlation parameters to capture diversification of trades and basis risk.
Time period parameters: Mi, Ei, Si and Ti
6.33. There are four time period parameters that are used in the SA-CCR (all expressed in years):
(1) For all asset classes, the maturity Mi of a contract is the time period (starting today) until the latest day when the contract may still be active. This time period appears in the maturity factor defined in 6.51 to 6.56 that scales down the adjusted notionals for unmargined trades for all asset classes. If a derivative contract has another derivative contract as its underlying (for example, a swaption) and may be physically exercised into the underlying contract (i.e. a bank would assume a position in the underlying contract in the event of exercise), then maturity of the contract is the time period until the final settlement date of the underlying derivative contract.
(2) For interest rate and credit derivatives, Siis the period of time (starting today) until start of the time period referenced by an interest rate or credit contract. If the derivative references the value of another interest rate or credit instrument (e.g. swaption or bond option), the time period must be determined on the basis of the underlying instrument. Si appears in the definition of supervisory duration defined in 6.36.
(3) For interest rate and credit derivatives, Ei is the period of time (starting today) until the end of the time period referenced by an interest rate or credit contract. If the derivative references the value of another interest rate or credit instrument (e.g. swaption or bond option), the time period must be determined on the basis of the underlying instrument. Ei appears in the definition of supervisory duration defined in 6.36. In addition, Ei is used for allocating derivatives in the interest rate asset class to maturity buckets, which are used in the calculation of the asset class add-on (see 6.60(3)).
(4) For options in all asset classes, Ti is the time period (starting today) until the latest contractual exercise date as referenced by the contract. This period shall be used for the determination of the option’s supervisory delta in 6.40 to 6.43.
6.34. Table 1 includes example transactions and provides each transaction’s related maturity Mi, start date Si and end date Ei. In addition, the option delta in 6.40 to 6.43 depends on the latest contractual exercise date Ti (not separately shown in the table).
Table 1: Example transactions and related (maturity Mi, start date Si and end date Ei) Instrument Mi Si Ei Interest rate or credit default swap maturing in 10 years 10 years 0 10 years 10-year interest rate swap, forward starting in 5 years 15 years 5 years 15 years Forward rate agreement for time period starting in 6 months and ending in 12 months 1 year 0.5 year 1 years Cash-settled European swaption referencing 5-year interest rate swap with exercise date in 6 months 0.5 year 0.5 year 5.5 year Physically-settled European swaption referencing 5-year interest rate swap with exercise date in 6 months 5.5 years 0.5 year 5.5 years 10-year Bermudan swaption with annual exercise dates 10 years 1 year 10 years Interest rate cap or floor specified for semiannual interest rate with maturity 5 years 5 years 0 5 years Option on a bond maturing in 5 years with the latest exercise date in 1 year 1 year 1 year 5 years 3-month Eurodollar futures that matures in 1 year 1 year 1 year 1.25 years Futures on 20-year treasury bond that matures in 2 years 2 years 2 years 22 years 6-month option on 2-year futures on 20-year treasury bond 2 years 2 years 22 years Trade-level adjusted notional (for trade i): di
6.35. The adjusted notionals are defined at the trade level and take into account both the size of a position and its maturity dependency, if any.
6.36. For interest rate and credit derivatives, the trade-level adjusted notional is the product of the trade notional amount, converted to the Saudi Riyal (SAR), and the supervisory duration SD, which is given by the formula below (i.e.di = notional * SDi). The calculated value of SDi is floored at ten business days.14 If the start date has occurred (e.g. an ongoing interest rate swap), Si must be set to zero.
6.37. For foreign exchange derivatives, the adjusted notional is defined as the notional of the foreign currency leg of the contract, converted to the Saudi Riyal (SAR). If both legs of a foreign exchange derivative are denominated in currencies other than the Saudi Riyal (SAR), the notional amount of each leg is converted to the Saudi Riyal (SAR) and the leg with the larger Saudi Riyal (SAR) value is the adjusted notional amount.
6.38. For equity and commodity derivatives, the adjusted notional is defined as the product of the current price of one unit of the stock or commodity (e.g. a share of equity or barrel of oil) and the number of units referenced by the trade.
6.39. In many cases the trade notional amount is stated clearly and fixed until maturity. When this is not the case, banks must use the following rules to determine the trade notional amount.
(1) Where the notional is a formula of market values, the bank must enter the current market values to determine the trade notional amount.
(2) For all interest rate and credit derivatives with variable notional amounts specified in the contract (such as amortizing and accreting swaps), banks must use the average notional over the remaining life of the derivative as the trade notional amount. The average should be calculated as “time weighted”. The averaging described in this paragraph does not cover transactions where the notional varies due to price changes (typically, FX, equity and commodity derivatives).
(3) Leveraged swaps must be converted to the notional of the equivalent unleveraged swap, that is, where all rates in a swap are multiplied by a factor, the stated notional must be multiplied by the factor on the interest rates to determine the trade notional amount.
(4) For a derivative contract with multiple exchanges of principal, the notional is multiplied by the number of exchanges of principal in the derivative contract to determine the trade notional amount.
(5) For a derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of the contract is zero, the remaining maturity equals the time until the next reset date.
Supervisory delta adjustment
6.40. The supervisory delta adjustment (δi) parameters are also defined at the trade i level and are applied to the adjusted notional amounts to reflect the direction of the transaction and its non-linearity.15
6.41. The delta adjustments for all instruments that are not options and are not collateralized debt obligation (CDO) tranches are as set out in the table below:16
δi Long in the primary risk factor Short in the primary risk factor Instruments that are not options or CDO tranches +1 -1 6.42. The delta adjustments for options are set out in the table below, where:
(1) The following are parameters that banks must determine appropriately:
(a) Pi: Underlying price (spot, forward, average, etc.)
(b) Ki: Strike price
(c) Ti: Latest contractual exercise date of the option
(2) The supervisory volatility σi an option is specified on the basis of supervisory factor applicable to the trade (see Table 2 in 6.75).
(3) The symbol Φ represents the standard normal cumulative distribution function.
δi Bought Sold Call Option 
Put Option 
Delta (δ) Bought Sold Call Option 
Put Option 
6.43. The delta adjustments for CDO tranches17 are set out in the table below, where the following are parameters that banks must determine appropriately:
(1) Ai: Attachment point of the CDO tranche
(2) Di: Detachment point of the CDO tranche
δi Purchased (long protection) Sold (Short protection) CDO tranche s 
Effective notional for options
6.44. For single-payment options the effective notional (i.e. D = d * MF * δ) is calculated using the following specifications:
(1) For European, Asian, American and Bermudan put and call options, the supervisory delta must be calculated using the simplified Black-Scholes formula referenced in 6.42. In the case of Asian options, the underlying price must be set equal to the current value of the average used in the payoff. In the case of American and Bermudan options, the latest allowed exercise date must be used as the exercise date Ti in the formula.
(2) For Bermudan swaptions, the start date Si must be equal to the earliest allowed exercise date, while the end date Ei must be equal to the end date of the underlying swap.
(3) For digital options, the payoff of each digital option (bought or sold) with strike Ki must be approximated via the “collar” combination of bought and sold European options of the same type (call or put), with the strikes set equal to 0.95.Ki and 1.05.Ki. The size of the position in the collar components must be such that the digital payoff is reproduced exactly outside the region between the two strikes. The effective notional is then computed for the bought and sold European components of the collar separately, using the option formulae for the supervisory delta referenced in 6.42 (the exercise date Tiand the current value of the underlying Pi of the digital option must be used). The absolute value of the digital-option effective notional must be capped by the ratio of the digital payoff to the relevant supervisory factor.
(4) If a trade’s payoff can be represented as a combination of European option payoffs (e.g. collar, butterfly/calendar spread, straddle, strangle), each European option component must be treated as a separate trade.
6.45. For the purposes of effective notional calculations, multiple-payment options may be represented as a combination of single-payment options. In particular, interest rate caps/floors may be represented as the portfolio of individual caplets /floorlets, each of which is a European option on the floating interest rate over a specific coupon period. For each caplet/floorlet, Si and Tiare the time periods starting from the current date to the start of the coupon period, while Ei is the time period starting from the current date to the end of the coupon period.
6.46. In the case of options (e.g. interest rate caps/floors that may be represented as the portfolio of individual caplets/floorlets), banks may decompose those products in a manner consistent with 6.45. Banks may not decompose linear products (e.g. ordinary interest rate swaps).
Supervisory factors: SFi
6.47. Supervisory factors (SFi) are used, together with aggregation formulas, to convert effective notional amounts into the add-on for each hedging set.18 The way in which supervisory factors are used within the aggregation formulas varies between asset classes. The supervisory factors are listed in Table 2 under 6.75.
Hedging sets
6.48. The hedging sets in the different asset classes are defined as follows, except for those described in 6.49 and 6.50:
(1) Interest rate derivatives consist of a separate hedging set for each currency.
(2) FX derivatives consist of a separate hedging set for each currency pair.
(3) Credit derivatives consist of a single hedging set.
(4) Equity derivatives consist of a single hedging set.
(5) Commodity derivatives consist of four hedging sets defined for broad categories of commodity derivatives: energy, metals, agricultural and other commodities.
6.49. Derivatives that reference the basis between two risk factors and are denominated in a single currency19 (basis transactions) must be treated within separate hedging sets within the corresponding asset class. There is a separate hedging set20 for each pair of risk factors (i.e. for each specific basis). Examples of specific bases include three-month Libor versus six-month Libor, three-month Libor versus three-month T-Bill, one-month Libor versus overnight indexed swap rate, Brent Crude oil versus Henry Hub gas. For hedging sets consisting of basis transactions, the supervisory factor applicable to a given asset class must be multiplied by one-half.
6.50. Derivatives that reference the volatility of a risk factor (volatility transactions) must be treated within separate hedging sets within the corresponding asset class. Volatility hedging sets must follow the same hedging set construction outlined in 6.48 (for example, all equity volatility transactions form a single hedging set). Examples of volatility transactions include variance and volatility swaps, options on realized or implied volatility. For hedging sets consisting of volatility transactions, the supervisory factor applicable to a given asset class must be multiplied by a factor of five.21
Maturity factors
6.51. The minimum time risk horizon for an unmargined transaction is the lesser of one year and the remaining maturity of the derivative contract, floored at ten business days.22 Therefore, the calculation of the effective notional for an unmargined transaction includes the following maturity factor, where Mi is the remaining maturity of transaction i, floored at 10 business days:
6.52. The maturity parameter (Mi) is expressed in years but is subject to a floor of 10 business days. Banks should use standard market convention to convert business days into years, and vice versa. For example, 250 business days in a year, which results in a floor of 10/250 years for Mi.
6.53. For margined transactions, the maturity factor is calculated using the margin period of risk (MPOR), subject to specified floors. That is, banks must first estimate the margin period of risk (as defined in 4.17) for each of their netting sets. They must then use the higher of their estimated margin period of risk and the relevant floor in the calculation of the maturity factor (6.55). The floors for the margin period of risk are as follows:
(1) Ten business days for non-centrally-cleared transactions subject to daily margin agreements.
(2) The sum of nine business days plus the re-margining period for non-centrally cleared transactions that are not subject daily margin agreements.
(3) The relevant floors for centrally cleared transactions are prescribed in the capital requirements for bank exposures to central counterparties (see in Chapter 8 of this framework).
6.54. The following are exceptions to the floors on the minimum margin period of risk set out in 6.53 above:
(1) For netting sets consisting of more than 5000 transactions that are not with a central counterparty the floor on the margin period of risk is 20 business days.
(2) For netting sets containing one or more trades involving either illiquid collateral, or an OTC derivative that cannot be easily replaced, the floor on the margin period of risk is 20 business days. For these purposes, "Illiquid collateral" and "OTC derivatives that cannot be easily replaced" must be determined in the context of stressed market conditions and will be characterized by the absence of continuously active markets where a counterparty would, within two or fewer days, obtain multiple price quotations that would not move the market or represent a price reflecting a market discount (in the case of collateral) or premium (in the case of an OTC derivative). Examples of situations where trades are deemed illiquid for this purpose include, but are not limited to, trades that are not marked daily and trades that are subject to specific accounting treatment for valuation purposes (e.g. OTC derivatives transactions referencing securities whose fair value is determined by models with inputs that are not observed in the market).
(3) If a bank has experienced more than two margin call disputes on a particular netting set over the previous two quarters that have lasted longer than the applicable margin period of risk (before consideration of this provision), then the bank must reflect this history appropriately by doubling the applicable supervisory floor on the margin period of risk for that netting set for the subsequent two quarters.
(4) In the case of non-centrally cleared derivatives that are subject to the requirements under Margin requirements, 6.55(3) applies only to variation margin call disputes.
6.55. The calculation of the effective notional for a margined transaction includes the following maturity factor, where MPORi is the margin period of risk appropriate for the margin agreement containing the transaction i (subject to the floors set out in 6.53 and 6.54 above).
6.56. The margin period of risk (MPORi) is often expressed in days, but the calculation of the maturity factor for margined netting sets references 1 year in the denominator. Banks should use standard market convention to convert business days into years, and vice versa. For example, 1 year can be converted into 250 business days in the denominator of the MF formula if MPOR is expressed in business days. Alternatively, the MPOR expressed in business days can be converted into years by dividing it by 250.
Supervisory correlation parameters
6.57. The supervisory correlation parameters (ρi) only apply to the PFE add-on calculation for equity, credit and commodity derivatives, and are set out in Table 2 under 6.75. For these asset classes, the supervisory correlation parameters are derived from a single-factor model and specify the weight between systematic and idiosyncratic components. This weight determines the degree of offset between individual trades, recognizing that imperfect hedges provide some, but not perfect, offset. Supervisory correlation parameters do not apply to interest rate and foreign exchange derivatives.
Asset class level add-ons
6.58. As set out in 6.27, the aggregate add-on for a netting set (AddOnaggregate) is calculated as the sum of the add-ons calculated for each asset class within the netting set. The sections that follow set out the calculation of the add-on for each asset class.
Add-on for interest rate derivatives
6.59. The calculation of the add-on for the interest rate derivative asset class captures the risk of interest rate derivatives of different maturities being imperfectly correlated. It does this by allocating trades to maturity buckets, in which full offsetting of long and short positions is permitted, and by using an aggregation formula that only permits limited offsetting between maturity buckets. This allocation of derivatives to maturity buckets and the process of aggregation (steps 3 to 5 below) are only used in the interest rate derivative asset class.
6.60. The add-on for the interest rate derivative asset class (AddOnIR) within a netting set is calculated using the following steps:
(1) Step 1: Calculate the effective notional for each trade in the netting set that is in the interest rate derivative asset class. This is calculated as the product of the following three terms:
(i) the adjusted notional of the trade (d);
(ii) the supervisory delta adjustment of the trade (S); and
(iii) the maturity factor (MF). That is, for each trade i, the effective notional Di is calculated as Di= di* MFi* δi, where each term is as defined in 6.35 to 6.56.
(2) Step 2: Allocate the trades in the interest rate derivative [including inflation derivatives] asset class to hedging sets. In the interest rate derivative asset class the hedging sets consist of all the derivatives that reference the same currency.
(3) Step 3: Within each hedging set allocate each of the trades to the following three maturity buckets: less than one year (bucket 1), between one and five years (bucket 2) and more than five years (bucket 3).
(4) Step 4: Calculate the effective notional of each maturity bucket by adding together all the trade level effective notionals calculated in step 1 of the trades within the maturity bucket. Let DB1, DB1 and DB1 be the effective notionals of buckets 1, 2 and 3 respectively.
(5) Step 5: Calculate the effective notional of the hedging set (ENHS ) by using either of the two following aggregation formulas (the latter is to be used if the bank chooses not to recognize offsets between long and short positions across maturity buckets):
(6) Step 6: Calculate the hedging set level add-on (AddOnHS) by multiplying the effective notional of the hedging set (ENHS) by the prescribed supervisory factor (SFHS). The prescribed supervisory factor in the interest rate asset class is set at 0.5%, which means that AddOnHS= ENHS * 0.005.
(7) Step 7: Calculate the asset class level add-on (AddOnIR) by adding together all of the hedging set level add-ons calculated in step 6:
Add-on for foreign exchange derivatives
6.61. The steps to calculate the add-on for the foreign exchange derivative asset class are similar to the steps for the interest rate derivative asset class, except that there is no allocation of trades to maturity buckets (which means that there is full offsetting of long and short positions within the hedging sets of the foreign exchange derivative asset class).
6.62. The add-on for the foreign exchange derivative asset class (AddOnFX) within a netting set is calculated using the following steps:
(1) Step 1: Calculate the effective notional for each trade in the netting set that is in the foreign exchange derivative asset class. This is calculated as the product of the following three terms: (i) the adjusted notional of the trade (d); (ii) the supervisory delta adjustment of the trade (δ); and (iii) the maturity factor (MF). That is, for each trade i, the effective notional Di is calculated as Di = di* MFi * δi, where each term is as defined in 6.35 to 6.56.
(2) Step 2: Allocate the trades in the foreign exchange derivative asset class to hedging sets. In the foreign exchange derivative asset class the hedging sets consist of all the derivatives that reference the same currency pair.
(3) Step 3: Calculate the effective notional of each hedging set (ENHS) by adding together the trade level effective notionals calculated in step 1.
(4) Step 4: Calculate the hedging set level add-on (AddOnHS) by multiplying the HS absolute value of the effective notional of the hedging set (ENHS) by the HS prescribed supervisory factor (SFHS). The prescribed supervisory factor in the HS foreign exchange derivative asset class is set at 4%, which means that AddOnHS= |ENHS| * 0.04.
(5) Step 5: Calculate the asset class level add-on (AddOnFX) by adding together all of the hedging set level add-ons calculated in step 5:
Add-on for credit derivatives
6.63. The calculation of the add-on for the credit derivative asset class only gives full recognition of the offsetting of long and short positions for derivatives that reference the same entity (e.g. the same corporate issuer of bonds). Partial offsetting is recognized between derivatives that reference different entities in step 4 below. The formula used in step 4 is explained further in 6.65 to 6.67.
6.64. The add-on for the credit derivative asset class (AddOnCredlt ) within a netting set is calculated using the following steps:
(1) Step 1: Calculate the effective notional for each trade in the netting set that is in the credit derivative asset class. This is calculated as the product of the following three terms:
(i) the adjusted notional of the trade (d);
(ii) the supervisory delta adjustment of the trade (δ); and
(iii) the maturity factor (MF). That is, for each trade i, the effective notional Di is calculated as Di= di* MFi * δi, where each term is as defined in 6.35 to 6.56.
(2) Step 2: Calculate the combined effective notional for all derivatives that reference the same entity. Each separate credit index that is referenced by derivatives in the credit derivative asset class should be treated as a separate entity. The combined effective notional of the entity (ENentity) is calculated by adding together the trade level effective notionals calculated in step 1 that reference that entity.
(3) Step 3: Calculate the add-on for each entity (AddOnentity) by multiplying the entity combined effective notional for that entity calculated in step 2 by the supervisory factor that is specified for that entity (SFentity). The supervisory entity factors vary according to the credit rating of the entity in the case of single name derivatives, and whether the index is considered investment grade or non-investment grade in the case of derivatives that reference an index. The supervisory factors are set out in Table 2 in 6.75.
(4) Step 4: Calculate the asset class level add-on (AddOnCredlt) by using the formula that follows. In the formula the summations are across all entities referenced by the derivatives, AddOnentity is the add-on amount calculated entity in step 3 for each entity referenced by the derivatives and ρ is the entity supervisory prescribed correlation factor corresponding to the entity. As set out in Table 2 in 6.75, the correlation factor is 50% for single entities and 80% for indices.
6.65. The formula to recognize partial offsetting in 6.64(4) above, is a single-factor model, which divides the risk of the credit derivative asset class into a systematic component and an idiosyncratic component. The entity-level add-ons are allowed to offset each other fully in the systematic component; whereas, there is no offsetting benefit in the idiosyncratic component. These two components are weighted by a correlation factor which determines the degree of offsetting / hedging benefit within the credit derivatives asset class. The higher the correlation factor, the higher the importance of the systematic component, hence the higher the degree of offsetting benefits.
6.66. It should be noted that a higher or lower correlation does not necessarily mean a higher or lower capital requirement. For portfolios consisting of long and short credit positions, a high correlation factor would reduce the charge. For portfolios consisting exclusively of long positions (or short positions), a higher correlation factor would increase the charge. If most of the risk consists of systematic risk, then individual reference entities would be highly correlated and long and short positions should offset each other. If, however, most of the risk is idiosyncratic to a reference entity, then individual long and short positions would not be effective hedges for each other.
6.67. The use of a single hedging set for credit derivatives implies that credit derivatives from different industries and regions are equally able to offset the systematic component of an exposure, although they would not be able to offset the idiosyncratic portion. This approach recognizes that meaningful distinctions between industries and/or regions are complex and difficult to analyze for global conglomerates.
Add-on for equity derivatives
6.68. The calculation of the add-on for the equity derivative asset class is very similar to the calculation of the add-on for the credit derivative asset class. It only gives full recognition of the offsetting of long and short positions for derivatives that reference the same entity (e.g. the same corporate issuer of shares). Partial offsetting is recognized between derivatives that reference different entities in step 4 below.
6.69. The add-on for the equity derivative asset class (AddOnEquity) within a netting set is calculated using the following steps:
(1) Step 1: Calculate the effective notional for each trade in the netting set that is in the equity derivative asset class. This is calculated as the product of the following three terms:
(i) the adjusted notional of the trade (d);
(ii) the supervisory delta adjustment of the trade (δ); and
(iii) the maturity factor (MF). That is, for each trade i, the effective notional Di is calculated as Di= di* MFi* δi, where each term is as defined in 6.35 to 6.56.
(2) Step 2: Calculate the combined effective notional for all derivatives that reference the same entity. Each separate equity index that is referenced by derivatives in the equity derivative asset class should be treated as a separate entity. The combined effective notional of the entity (ENentity) is calculated entity by adding together the trade level effective notionals calculated in step 1 that reference that entity.
(3) Step 3: Calculate the add-on for each entity (AddOnentity) by multiplying the entity combined effective notional for that entity calculated in step 2 by the supervisory factor that is specified for that entity (SFentity). The supervisory entity factors are set out in Table 2 in 6.75 and vary according to whether the entity is a single name (SFentity = 32%) or an index (SFentity = 20%).
(4) Step 4: Calculate the asset class level add-on (AddOnEquity) by using the formula that follows. In the formula the summations are across all entities referenced by the derivatives, AddOnentity is the add-on amount calculated entity in step 3 for each entity referenced by the derivatives and ρentity is the entity supervisory prescribed correlation factor corresponding to the entity. As set out in Table 2 in 6.75, the correlation factor is 50% for single entities and 80% for indices.
6.70. The supervisory factors for equity derivatives were calibrated based on estimates of the market volatility of equity indices, with the application of a conservative beta factor23 to translate this estimate into an estimate of individual volatilities.
6.71. Banks are not permitted to make any modelling assumptions in the calculation of the PFE add-ons, including estimating individual volatilities or taking publicly available estimates of beta. This is a pragmatic approach to ensure a consistent implementation across jurisdictions but also to keep the add-on calculation relatively simple and prudent. Therefore, bank must only use the two values of supervisory factors that are defined for equity derivatives, one for single entities and one for indices.
Add-on for commodity derivatives
6.72. The calculation of the add-on for the commodity derivative asset class is similar to the calculation of the add-on for the credit and equity derivative asset classes. It recognizes the full offsetting of long and short positions for derivatives that reference the same type of underlying commodity. It also allows partial offsetting between derivatives that reference different types of commodity, however, this partial offsetting is only permitted within each of the four hedging sets of the commodity derivative asset class, where the different commodity types are more likely to demonstrate some stable, meaningful joint dynamics. Offsetting between hedging sets is not recognized (e.g., a forward contract on crude oil cannot hedge a forward contract on corn).
6.73. The add-on for the commodity derivative asset class (AddOnCommodlty) within a netting set is calculated using the following steps:
(1) Step 1: Calculate the effective notional for each trade in the netting set that is in the commodity derivative asset class. This is calculated as the product of the following three terms:
(i) the adjusted notional of the trade (d);
(ii) the supervisory delta adjustment of the trade (δ); and
(iii) the maturity factor (MF). That is, for each trade i, the effective notional Di is calculated as Di— di * MFi * δi, where each term is as defined in 6.35 to 6.56.
(2) Step 2: Allocate the trades in commodity derivative asset class to hedging sets. In the commodity derivative asset class there are four hedging sets consisting of derivatives that reference: energy, metals, agriculture and other commodities.
(3) Step 3: Calculate the combined effective notional for all derivatives with each hedging set that reference the same commodity type (e.g. all derivative that reference copper within the metals hedging set). The combined effective notional of the commodity type (ENComTyoe) is calculated by adding ComType together the trade level effective notionals calculated in step 1 that reference that commodity type.
(4) Step 4: Calculate the add-on for each commodity type (AddOnComType) within each hedging set by multiplying the combined effective notional for that commodity calculated in step 3 by the supervisory factor that is specified for that commodity type (SFComType). The supervisory factors are ComType set out in Table 2 in 6.75 and are set at 40% for electricity derivatives and 18% for derivatives that reference all other types of commodities.
(5) Step 5: Calculate the add-on for each of the four commodity hedging sets (AddOnHS) by using the formula that follows. In the formula the summations are across all commodity types within the hedging set, AddOnComType is the add-on amount ComType calculated in step 4 for each commodity type and ρComTyoe is the supervisory ComType prescribed correlation factor corresponding to the commodity type. As set out in Table 2 in 6.75, the correlation factor is set at 40% for all commodity types.
(6) Step 6: Calculate the asset class level add-on (AddOnCommodlty) by adding together all of the hedging set level add-ons calculated in step 5:
6.74. Regarding the calculation steps above, defining individual commodity types is operationally difficult. In fact, it is impossible to fully specify all relevant distinctions between commodity types so that all basis risk is captured. For example crude oil could be a commodity type within the energy hedging set, but in certain cases this definition could omit a substantial basis risk between different types of crude oil (West Texas Intermediate, Brent, Saudi Light, etc.) Also, the four commodity type hedging sets have been defined without regard to characteristics such as location and quality. For example, the energy hedging set contains commodity types such as crude oil, electricity, natural gas and coal. SAMA may require banks to use more refined definitions of commodities when they are significantly exposed to the basis risk of different products within those commodity types.
Supervisory specified parameters
6.75. Table 2 includes the supervisory factors, correlations and supervisory option volatility add-ons for each asset class and subclass.
Table 2: Summary table of supervisory parameters Asset Class Subclass Supervisory factor Correlation Supervisory option volatility Interest rate 0.50% N/A 50% Foreign exchange 4.0% N/A 15% Credit, Single Name AAA 0.38% 50% 100% AA 0.38% 50% 100% A 0.42% 50% 100% BBB 0.54% 50% 100% BB 1.06% 50% 100% B 1,6% 50% 100% CCC 6.0% 50% 100% Credit, Index IG 0.38% 80% 80% SG 1.06% 80% 80% Equity, Single Name 32% 50% 120% Equity, Index 20% 80% 75% Commodity Electricity 40% 40% 150% Oil/Gas 18% 40% 70% Metals 18% 40% 70% Agricultural 18% 40% 70% Other 18% 40% 70% 6.76. For a hedging set consisting of basis transactions, the supervisory factor applicable to its relevant asset class must be multiplied by one-half. For a hedging set consisting of volatility transactions, the supervisory factor applicable to its relevant asset class must be multiplied by a factor of five.
Treatment of multiple margin agreements and multiple netting sets
6.77. If multiple margin agreements apply to a single netting set, the netting set must be divided into sub-netting sets that align with their respective margin agreement. This treatment applies to both RC and PFE components.
6.78. If a single margin agreement applies to several netting sets, special treatment is necessary because it is problematic to allocate the common collateral to individual netting sets. The replacement cost at any given time is determined by the sum of two terms. The first term is equal to the unmargined current exposure of the bank to the counterparty aggregated across all netting sets within the margin agreement reduced by the positive current net collateral (i.e. collateral is subtracted only when the bank is a net holder of collateral). The second term is non-zero only when the bank is a net poster of collateral: it is equal to the current net posted collateral (if there is any) reduced by the unmargined current exposure of the counterparty to the bank aggregated across all netting sets within the margin agreement. Net collateral available to the bank should include both VM and NICA. Mathematically, RC for the entire margin agreement is calculated as follows, where:
(1) where the summation NS ϵ MA is across the netting sets covered by the margin agreement (hence the notation)
(2) V is the current mark-to-market value of the netting set NS and CMA is the cash equivalent value of all currently available collateral under the margin agreement
6.79. Where a single margin agreement applies to several netting sets as described in 6.78 above, collateral will be exchanged based on mark-to-market values that are netted across all transactions covered under the margin agreement, irrespective of netting sets. That is, collateral exchanged on a net basis may not be sufficient to cover PFE. In this situation, therefore, the PFE add-on must be calculated according to the unmargined methodology. Netting set-level PFEs are then aggregated using the following formula, where is the 
addon for the netting set NS calculated according to the unmargined requirements:
Treatment of collateral taken outside of netting sets
6.80. Eligible collateral which is taken outside a netting set, but is available to a bank to offset losses due to counterparty default on one netting set only, should be treated as an independent collateral amount associated with the netting set and used within the calculation of replacement cost under 6.12 when the netting set is unmargined and under 6.20 when the netting set is margined. Eligible collateral which is taken outside a netting set, and is available to a bank to offset losses due to counterparty default on more than one netting set, should be treated as collateral taken under a margin agreement applicable to multiple netting sets, in which case the treatment under 6.78 and 6.79 applies. If eligible collateral is available to offset losses on non-derivatives exposures as well as exposures determined using the SA-CCR, only that portion of the collateral assigned to the derivatives may be used to reduce the derivatives exposure.
13 The formulas for calculating the asset class add-ons represent stylized Effective EPE calculations under the assumption that all trades in the asset class have zero current mark-to-market value (i.e. they are at-the-money).
14 Note there is a distinction between the time period of the underlying transaction and the remaining maturity of the derivative contract. For example, a European interest rate swaption with expiry of 1 year and the term of the underlying swap of 5 years has S = 1 year and E = 6 i years.
15 Whenever appropriate, the forward (rather than spot) value of the underlying in the supervisory delta adjustments formula should be used in order to account for the risk-free rate as well as for possible cash flows prior to the option expiry (such as dividends).
16 “Long in the primary risk factor” means that the market value of the instrument increases when the value of the primary risk factor increases. “Short in the primary risk factor” means that the market value of the instrument decreases when the value of the primary risk factor increases.
17 First-to-default, second-to-default and subsequent-to-default credit derivative transactions should be treated as CDO tranches under SACCR. For an nth-to-default transaction on a pool of m reference names, banks must use an attachment point of A=(n–1)/m and a detachment point of D=n/m in order to calculate the supervisory delta formula set out 6.43.
18 Each factor has been calibrated to result in an add-on that reflects the Effective EPE of a single at- the-money linear trade of unit notional and one-year maturity. This includes the estimate of realized volatilities assumed by supervisors for each underlying asset class.
19 Derivatives with two floating legs that are denominated in different currencies (such as cross-currency swaps) are not subject to this treatment; rather, they should be treated as non-basis foreign exchange contracts.
20 Within this hedging set, long and short positions are determined with respect to the basis.
21 For equity and commodity volatility transactions, the underlying volatility or variance referenced by the transaction should replace the unit price and contractual notional should replace the number of units.
22 For example, remaining maturity for a one-month option on a 10-year Treasury bond is the one-month to expiration date of the derivative contract. However, the end date of the transaction is the 10- year remaining maturity on the Treasury bond.
23 The beta of an individual equity measures the volatility of the stock relative to a broad market index. A value of beta greater than one means the individual equity is more volatile than the index. The greater the beta is, the more volatile the stock. The beta is calculated by running a linear regression of the stock on the broad index.7. Internal Models Method for Counterparty Credit Risk
Approval to Adopt an Internal Models Method to Estimate EAD
7.1. A bank that wishes to adopt an internal models method to measure exposure or exposure at default (EAD) for regulatory capital purposes must seek SAMA approval. The internal models method is available both for banks that adopt the internal ratings-based approach to credit risk and for banks for which the standardized approach to credit risk applies to all of their credit risk exposures. The bank must meet all of the requirements given in 7.6 to 7.60 and must apply the method to all of its exposures that are subject to counterparty credit risk, except for long settlement transactions.
7.2. A bank may also choose to adopt an internal models method to measure counterparty credit risk (CCR) for regulatory capital purposes for its exposures or EAD to only over-the-counter (OTC) derivatives, to only securities financing transactions (SFTs), or to both, subject to the appropriate recognition of netting specified in 7.61 to 7.71. The bank must apply the method to all relevant exposures within that category, except for those that are immaterial in size and risk. During the initial implementation of the internal models method, a bank may use the Standardized Approach for counterparty credit risk for a portion of its business. The bank must submit a plan to SAMA to bring all material exposures for that category of transactions under the internal models method.
7.3. For all OTC derivative transactions and for all long settlement transactions for which a bank has not received approval from SAMA to use the internal models method, the bank must use the standardized approach to counterparty credit risk (SA-CCR, in Chapter 6 of this framework).
7.4. Exposures or EAD arising from long settlement transactions can be determined using either of the methods identified in this framework regardless of the methods chosen for treating OTC derivatives and SFTs. In computing capital requirements for long settlement transactions banks that hold permission to use the internal ratings-based approach may opt to apply the risk weights under this Framework’s standardized approach for credit risk on a permanent basis and irrespective to the materiality of such positions.
7.5. After adoption of the internal models method, the bank must comply with the above requirements on a permanent basis. Only under exceptional circumstances or for immaterial exposures can a bank revert to the standardized approach for counterparty credit risk for all or part of its exposure. The bank must demonstrate that reversion to a less sophisticated method does not lead to an arbitrage of the regulatory capital rules.
Exposure Amount or EAD Under the Internal Models Method
7.6. CCR exposure or EAD is measured at the level of the netting set as defined in Chapter 4 of this framework and 7.61 to 7.71 of this framework. A qualifying internal model for measuring counterparty credit exposure must specify the forecasting distribution for changes in the market value of the netting set attributable to changes in market variables, such as interest rates, foreign exchange rates, etc. The model then computes the bank’s CCR exposure for the netting set at each future date given the changes in the market variables. For margined counterparties, the model may also capture future collateral movements. Banks may include eligible financial collateral as defined in 9.37 of the Minimum Capital Requirements for Credit Risk and 9.2 of this framework in their forecasting distributions for changes in the market value of the netting set, if the quantitative, qualitative and data requirements for internal models method are met for the collateral.
7.7. Banks that use the internal models method must calculate credit RWA as the higher of two amounts, one based on current parameter estimates and one based on stressed parameter estimates. Specifically, to determine the default risk capital requirement for counterparty credit risk, banks must use the greater of the portfolio-level capital requirement (not including the credit valuation adjustment, or CVA, charge in Chapter 11 of this Framework) based on Effective expected positive exposure (EPE) using current market data and the portfolio level capital requirement based on Effective EPE using a stress calibration.24 The stress calibration should be a single consistent stress calibration for the whole portfolio of counterparties. The greater of Effective EPE using current market data and the stress calibration should not be applied on a counterparty by counterparty basis, but on a total portfolio level.
7.8. To the extent that a bank recognizes collateral in EAD via current exposure, a bank would not be permitted to recognize the benefits in its estimates of loss given-default (LGD). As a result, the bank would be required to use an LGD of an otherwise similar uncollateralized facility. In other words, the bank would be required to use an LGD that does not include collateral that is already included in EAD.
7.9. Under the internal models method, the bank need not employ a single model. Although the following text describes an internal model as a simulation model, no particular form of model is required. Analytical models are acceptable so long as they are subject to supervisory review, meet all of the requirements set forth in this section and are applied to all material exposures subject to a CCR-related capital requirement as noted above, with the exception of long settlement transactions, which are treated separately, and with the exception of those exposures that are immaterial in size and risk.
7.10. Expected exposure or peak exposure measures should be calculated based on a distribution of exposures that accounts for the possible non-normality of the distribution of exposures, including the existence of leptokurtosis (“fat tails”), where appropriate.
7.11. When using an internal model, exposure amount or EAD is calculated as the product of alpha times Effective EPE, as specified below (except for counterparties that have been identified as having explicit specific wrong way risk – see 7.48):
EAD = α × EffectiveEPE (Equation 1)
7.12. Effective EPE is computed by estimating expected exposure (EEt) as the average t exposure at future date t, where the average is taken across possible future values of relevant market risk factors, such as interest rates, foreign exchange rates, etc. The internal model estimates EE at a series of future dates t1, t2, t3 ...25 Specifically, “Effective EE” is computed recursively using the following formula, where the current date is denoted as t0 and Effective EEt0 equals current exposure:
EffectiveEEtk = max(EffectiveEEtk-1, EEtk (Equation 2)
7.13. In this regard, “Effective EPE” is the average Effective EE during the first year of future exposure. If all contracts in the netting set mature before one year, EPE is the average of expected exposure until all contracts in the netting set mature. Effective EPE is computed as a weighted average of Effective EE, using the following formula where the weights Δtk= tk - tk-1 allows for the case when future exposure is calculated at dates that are not equally spaced over time:
7.14. Alpha (α) is set equal to 1.4.
7.15. SAMA may require a higher alpha based on a bank’s CCR exposures. Factors that may require a higher alpha include the low granularity of counterparties; particularly high exposures to general wrong-way risk; particularly high correlation of market values across counterparties; and other institution specific characteristics of CCR exposures.
Own estimates for alpha
7.16. Banks should seek approval from SAMA to compute internal estimates of alpha subject to a floor of 1.2, where alpha equals the ratio of economic capital from a full simulation of counterparty exposure across counterparties (numerator) and economic capital based on EPE (denominator), assuming they meet certain operating requirements. Eligible banks must meet all the operating requirements for internal estimates of EPE and must demonstrate that their internal estimates of alpha capture in the numerator the material sources of stochastic dependency of distributions of market values of transactions or of portfolios of transactions across counterparties (e.g. the correlation of defaults across counterparties and between market risk and default).
7.17. In the denominator, EPE must be used as if it were a fixed outstanding loan amount.
7.18. To this end, banks must ensure that the numerator and denominator of alpha are computed in a consistent fashion with respect to the modelling methodology, parameter specifications and portfolio composition. The approach used must be based on the bank's internal economic capital approach, be well-documented and be subject to independent validation. In addition, banks must review their estimates on at least a quarterly basis, and more frequently when the composition of the portfolio varies over time. Banks must assess the model risk and inform SAMA of any significant variation in estimates of alpha that arises from the possibility for mis-specification in the models used for the numerator, especially where convexity is present.
7.19. Where appropriate, volatilities and correlations of market risk factors used in the joint simulation of market and credit risk should be conditioned on the credit risk factor to reflect potential increases in volatility or correlation in an economic downturn. Internal estimates of alpha should take account of the granularity of exposures.
24 Effective expected positive exposure (EPE) using current market data to be compared with Effective EPE using a stress calibration on annual basis during ICAAP
25 In theory, the expectations should be taken with respect to the actual probability distribution of future exposure and not the risk-neutral one. Supervisors recognize that practical considerations may make it more feasible to use the risk-neutral one. As a result, supervisors will not mandate which kind of forecasting distribution to employ.Maturity
7.20. If the original maturity of the longest-dated contract contained in the set is greater than one year, the formula for effective maturity (M) in 12.42 of the Minimum Capital Requirements for Credit Risk is replaced with formula that follows, where dfK is the risk-free discount factor for future time period tK and the remaining symbols are defined above. Similar to the treatment under corporate exposures, M has a cap of five years.26
7.21. For netting sets in which all contracts have an original maturity of less than one year, the formula for effective maturity (M) i in 12.42 of the Minimum Capital Requirements for Credit Risk is unchanged and a floor of one year applies, with the exception of short-term exposures as described in paragraphs in 12.45 to 12.48 of the Minimum Capital Requirements for Credit Risk.
26 Conceptually, M equals the effective credit duration of the counterparty exposure. A bank that uses an internal model to calculate a one-sided credit valuation adjustment (CVA) can use the effective credit duration estimated by such a model in place of the above formula with prior approval of SAMA.
Margin Agreements
7.22. If the netting set is subject to a margin agreement and the internal model captures the effects of margining when estimating EE, the model's EE measure may be used directly in (Equation 2) in 7.12. Such models are noticeably more complicated than models of EPE for unmargined counterparties.
7.23. An EPE model must also include transaction-specific information in order to capture the effects of margining. It must take into account both the current amount of margin and margin that would be passed between counterparties in the future. Such a model must account for the nature of margin agreements (unilateral or bilateral), the frequency of margin calls, the margin period of risk, the thresholds of unmargined exposure the bank is willing to accept, and the minimum transfer amount. Such a model must either model the mark-to-market change in the value of collateral posted or apply this Framework's rules for collateral.
7.24. For transactions subject to daily re-margining and mark-to-market valuation, a supervisory floor of five business days for netting sets consisting only of repo style transactions, and 10 business days for all other netting sets is imposed on the margin period of risk used for the purpose of modelling EAD with margin agreements. In the following cases a higher supervisory floor is imposed:
(1) For all netting sets where the number of trades exceeds 5000 at any point during a quarter, a supervisory floor of 20 business days is imposed for the margin period of risk for the following quarter.
(2) For netting sets containing one or more trades involving either illiquid collateral, or an OTC derivative that cannot be easily replaced, a supervisory floor of 20 business days is imposed for the margin period of risk. For these purposes, "Illiquid collateral" and "OTC derivatives that cannot be easily replaced" must be determined in the context of stressed market conditions and will be characterized by the absence of continuously active markets where a counterparty would, within two or fewer days, obtain multiple price quotations that would not move the market or represent a price reflecting a market discount (in the case of collateral) or premium (in the case of an OTC derivative). Examples of situations where trades are deemed illiquid for this purpose include, but are not limited to, trades that are not marked daily and trades that are subject to specific accounting treatment for valuation purposes (e.g. OTC derivatives or repo-style transactions referencing securities whose fair value is determined by models with inputs that are not observed in the market).
(3) In addition, a bank must consider whether trades or securities it holds as collateral are concentrated in a particular counterparty and if that counterparty exited the market precipitously whether the bank would be able to replace its trades.
7.25. If a bank has experienced more than two margin call disputes on a particular netting set over the previous two quarters that have lasted longer than the applicable margin period of risk (before consideration of this provision), then the bank must reflect this history appropriately by using a margin period of risk that is at least double the supervisory floor for that netting set for the subsequent two quarters.
7.26. For re-margining with a periodicity of N-days the margin period of risk should be at least equal to the supervisory floor, F, plus the N days minus one day. That is:
Margin Period of Risk = F + N — 1
7.27. Banks using the internal models method must not capture the effect of a reduction of EAD due to any clause in a collateral agreement that requires receipt of collateral when counterparty credit quality deteriorates.
Model validation
7.28. The extent to which banks meet the qualitative criteria may influence the level at which SAMA will set the multiplication factor referred to in 7.14 (Alpha) above. Only those banks in full compliance with the qualitative criteria will be eligible for application of the minimum multiplication factor. The qualitative criteria include:
(1) The bank must conduct a regular program of backtesting, i.e. an ex-post comparison of the risk measures generated by the model against realized risk measures, as well as comparing hypothetical changes based on static positions with realized measures. “Risk measures” in this context, refers not only to Effective EPE, the risk measure used to derive regulatory capital, but also to the other risk measures used in the calculation of Effective EPE such as the exposure distribution at a series of future dates, the positive exposure distribution at a series of future dates, the market risk factors used to derive those exposures and the values of the constituent trades of a portfolio.
(2) The bank must carry out an initial validation and an on-going periodic review of its IMM model and the risk measures generated by it. The validation and review must be independent of the model developers.
(3) The board of directors and senior management should be actively involved in the risk control process and must regard credit and counterparty credit risk control as an essential aspect of the business to which significant resources need to be devoted. In this regard, the daily reports prepared by the independent risk control unit must be reviewed by a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual traders and reductions in the bank’s overall risk exposure.
(4) The bank’s internal risk measurement exposure model must be closely integrated into the day-to-day risk management process of the bank. Its output should accordingly be an integral part of the process of planning, monitoring and controlling the bank’s counterparty credit risk profile.
(5) The risk measurement system should be used in conjunction with internal trading and exposure limits. In this regard, exposure limits should be related to the bank’s risk measurement model in a manner that is consistent over time and that is well understood by traders, the credit function and senior management.
(6) Banks should have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operation of the risk measurement system. The bank’s risk measurement system must be well documented, for example, through a risk management manual that describes the basic principles of the risk management system and that provides an explanation of the empirical techniques used to measure counterparty credit risk.
(7) An independent review of the risk measurement system should be carried out regularly in the bank’s own internal auditing process. This review should include both the activities of the business trading units and of the independent risk control unit. A review of the overall risk management process should take place at regular intervals (ideally no less than once a year) and should specifically address, at a minimum:
(a) The adequacy of the documentation of the risk management system and process;
(b) The organization of the risk control unit;
(c) The integration of counterparty credit risk measures into daily risk management;
(d) The approval process for counterparty credit risk models used in the calculation of counterparty credit risk used by front office and back office personnel;
(e) The validation of any significant change in the risk measurement process;
(f) The scope of counterparty credit risks captured by the risk measurement model;
(g) The integrity of the management information system;
(h) The accuracy and completeness of position data;
(i) The verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;
(j) The accuracy and appropriateness of volatility and correlation assumptions;
(k) The accuracy of valuation and risk transformation calculations; and
(l) The verification of the model’s accuracy as described below in 7.29 to 7.33.
(8) The on-going validation of counterparty credit risk models, including backtesting, must be reviewed periodically by a level of management with sufficient authority to decide the course of action that will be taken to address weaknesses in the models.
7.29. Banks must document the process for initial and on-going validation of their IMM model to a level of detail that would enable a third party to recreate the analysis. Banks must also document the calculation of the risk measures generated by the models to a level of detail that would allow a third party to recreate the risk measures. This documentation must set out the frequency with which backtesting analysis and any other on-going validation will be conducted, how the validation is conducted with respect to dataflows and portfolios and the analyses that are used.
7.30. Banks must define criteria with which to assess their EPE models and the models that input into the calculation of EPE and have a written policy in place that describes the process by which unacceptable performance will be determined and remedied.
7.31. Banks must define how representative counterparty portfolios are constructed for the purposes of validating an EPE model and its risk measures.
7.32. When validating EPE models and its risk measures that produce forecast distributions, validation must assess more than a single statistic of the model distribution.
7.33. As part of the initial and on-going validation of an IMM model and its risk measures, the following requirements must be met:
(1) A bank must carry out backtesting using historical data on movements in market risk factors prior to SAMA approval. Backtesting must consider a number of distinct prediction time horizons out to at least one year, over a range of various start (initialization) dates and covering a wide range of market conditions.
(2) Banks must backtest the performance of their EPE model and the model’s relevant risk measures as well as the market risk factor predictions that support EPE. For collateralized trades, the prediction time horizons considered must include those reflecting typical margin periods of risk applied in collateralized/margined trading, and must include long time horizons of at least 1 year.
(3) The pricing models used to calculate counterparty credit risk exposure for a given scenario of future shocks to market risk factors must be tested as part of the initial and on-going model validation process. These pricing models may be different from those used to calculate Market Risk over a short horizon. Pricing models for options must account for the nonlinearity of option value with respect to market risk factors.
(4) An EPE model must capture transaction specific information in order to aggregate exposures at the level of the netting set. Banks must verify that transactions are assigned to the appropriate netting set within the model.
(5) Static, historical backtesting on representative counterparty portfolios must be a part of the validation process. At regular intervals as directed by SAMA, a bank must conduct such backtesting on a number of representative counterparty portfolios. The representative portfolios must be chosen based on their sensitivity to the material risk factors and correlations to which the bank is exposed. In addition, IMM banks need to conduct backtesting that is designed to test the key assumptions of the EPE model and the relevant risk measures, e.g. the modelled relationship between tenors of the same risk factor, and the modelled relationships between risk factors.
(6) Significant differences between realized exposures and the forecast distribution could indicate a problem with the model or the underlying data that SAMA would require the bank to correct. Under such circumstances, SAMA may require additional capital to be held while the problem is being solved.
(7) The performance of EPE models and its risk measures must be subject to good backtesting practice. The backtesting program must be capable of identifying poor performance in an EPE model’s risk measures.
(8) Banks must validate their EPE models and all relevant risk measures out to time horizons commensurate with the maturity of trades for which exposure is calculated using an internal models method.
(9) The pricing models used to calculate counterparty exposure must be regularly tested against appropriate independent benchmarks as part of the on-going model validation process.
(10) The on-going validation of a bank’s EPE model and the relevant risk measures include an assessment of recent performance.
(11) The frequency with which the parameters of an EPE model are updated needs to be assessed as part of the validation process.
(12) Under the IMM, a measure that is more conservative than the metric used to calculate regulatory EAD for every counterparty, may be used in place of alpha times Effective EPE with the prior approval of SAMA. The degree of relative conservatism will be assessed upon initial SAMA approval and at the regular supervisory reviews of the EPE models. The bank must validate the conservatism regularly.
(13) The on-going assessment of model performance needs to cover all counterparties for which the models are used.
(14) The validation of IMM models must assess whether or not the bank level and netting set exposure calculations of EPE are appropriate.
Operational requirements for EPE models
7.34. In order to be eligible to adopt an internal model for estimating EPE arising from CCR for regulatory capital purposes, a bank must meet the following operational requirements. These include meeting the requirements related to the qualifying standards on CCR Management, a use test, stress testing, identification of wrong way risk, and internal controls.
Qualifying standards on CCR Management
7.35. The bank must satisfy SAMA that, in addition to meeting the operational requirements identified in 7.36 to 7.60 below, it adheres to sound practices for CCR management, including those specified in Counterparty credit risks section of the Credit Risk chapter of the Supervisory Review Process in the Basel Framework.
Use test
7.36. The distribution of exposures generated by the internal model used to calculate effective EPE must be closely integrated into the day-to-day CCR management process of the bank. For example, the bank could use the peak exposure from the distributions for counterparty credit limits or expected positive exposure for its internal allocation of capital. The internal model’s output must accordingly play an essential role in the credit approval, counterparty credit risk management, internal capital allocations, and corporate governance of banks that seek approval to apply such models for capital adequacy purposes. Models and estimates designed and implemented exclusively to qualify for the internal models method (IMM) are not acceptable.
7.37. A bank must have a credible track record in the use of internal models that generate a distribution of exposures to CCR. Thus, the bank must demonstrate that it has been using an internal model to calculate the distributions of exposures upon which the EPE calculation is based that meets broadly the minimum requirements for at least one year prior to SAMA approval.
7.38. Banks employing the internal models method must have an independent control unit that is responsible for the design and implementation of the bank’s CCR management system, including the initial and on-going validation of the internal model. This unit must control input data integrity and produce and analyze daily reports on the output of the bank’s risk measurement model, including an evaluation of the relationship between measures of CCR risk exposure and credit and trading limits. This unit must be independent from business credit and trading units; it must be adequately staffed; it must report directly to senior management of the bank. The work of this unit should be closely integrated into the day-to-day credit risk management process of the bank. Its output should accordingly be an integral part of the process of planning, monitoring and controlling the bank’s credit and overall risk profile.
7.39. Banks applying the internal models method must have a collateral management unit that is responsible for calculating and making margin calls, managing margin call disputes and reporting levels of independent amounts, initial margins and variation margins accurately on a daily basis. This unit must control the integrity of the data used to make margin calls, and ensure that it is consistent and reconciled regularly with all relevant sources of data within the bank. This unit must also track the extent of reuse of collateral (both cash and non-cash) and the rights that the bank gives away to its respective counterparties for the collateral that it posts. These internal reports must indicate the categories of collateral assets that are reused, and the terms of such reuse including instrument, credit quality and maturity. The unit must also track concentration to individual collateral asset classes accepted by the banks. Senior management must allocate sufficient resources to this unit for its systems to have an appropriate level of operational performance, as measured by the timeliness and accuracy of outgoing calls and response time to incoming calls. Senior management must ensure that this unit is adequately staffed to process calls and disputes in a timely manner even under severe market crisis, and to enable the bank to limit its number of large disputes caused by trade volumes.
7.40. The bank's collateral management unit must produce and maintain appropriate collateral management information that is reported on a regular basis to senior management. Such internal reporting should include information on the type of collateral (both cash and non-cash) received and posted, as well as the size, aging and cause for margin call disputes. This internal reporting should also reflect trends in these figures.
7.41. A bank employing the internal models method must ensure that its cash management policies account simultaneously for the liquidity risks of potential incoming margin calls in the context of exchanges of variation margin or other margin types, such as initial or independent margin, under adverse market shocks, potential incoming calls for the return of excess collateral posted by counterparties, and calls resulting from a potential downgrade of its own public rating. The bank must ensure that the nature and horizon of collateral reuse is consistent with its liquidity needs and does not jeopardize its ability to post or return collateral in a timely manner.
7.42. The internal model used to generate the distribution of exposures must be part of a counterparty risk management framework that includes the identification, measurement, management, approval and internal reporting of counterparty risk.27 This Framework must include the measurement of usage of credit lines (aggregating counterparty exposures with other credit exposures) and economic capital allocation. In addition to EPE (a measure of future exposure), a bank must measure and manage current exposures. Where appropriate, the bank must measure current exposure gross and net of collateral held. The use test is satisfied if a bank uses other counterparty risk measures, such as peak exposure or potential future exposure (PFE), based on the distribution of exposures generated by the same model to compute EPE.
7.43. A bank is not required to estimate or report EE daily, but to meet the use test it must have the systems capability to estimate EE daily, if necessary, unless it demonstrates to SAMA that its exposures to CCR warrant some less frequent calculation. It must choose a time profile of forecasting horizons that adequately reflects the time structure of future cash flows and maturity of the contracts. For example, a bank may compute EE on a daily basis for the first ten days, once a week out to one month, once a month out to eighteen months, once a quarter out to five years and beyond five years in a manner that is consistent with the materiality and composition of the exposure.
7.44. Exposure must be measured out to the life of all contracts in the netting set (not just to the one year horizon), monitored and controlled. The bank must have procedures in place to identify and control the risks for counterparties where exposure rises beyond the one-year horizon. Moreover, the forecasted increase in exposure must be an input into the bank’s internal economic capital model.
Stress testing
7.45. A bank must have in place sound stress testing processes for use in the assessment of capital adequacy. These stress measures must be compared against the measure of EPE and considered by the bank as part of its internal capital adequacy assessment process. Stress testing must also involve identifying possible events or future changes in economic conditions that could have unfavorable effects on a bank’s credit exposures and assessment of the bank’s ability to withstand such changes. Examples of scenarios that could be used are;
(i) economic or industry downturns,
(ii) market-place events, or
(iii) decreased liquidity conditions.
7.46. Banks must have a comprehensive stress testing program for counterparty credit risk. The stress testing program must include the following elements:
(1) Banks must ensure complete trade capture and exposure aggregation across all forms of counterparty credit risk (not just OTC derivatives) at the counterparty-specific level in a sufficient time frame to conduct regular stress testing.
(2) For all counterparties, banks should produce, at least monthly, exposure stress testing of principal market risk factors (e.g. interest rates, FX, equities, credit spreads, and commodity prices) in order to proactively identify, and when necessary, reduce outsized concentrations to specific directional sensitivities.
(3) Banks should apply multifactor stress testing scenarios and assess material non-directional risks (i.e. yield curve exposure, basis risks, etc.) at least quarterly. Multiple-factor stress tests should, at a minimum, aim to address scenarios in which a) severe economic or market events have occurred; b) broad market liquidity has decreased significantly; and c) the market impact of liquidating positions of a large financial intermediary. These stress tests may be part of bank-wide stress testing.
(4) Stressed market movements have an impact not only on counterparty exposures, but also on the credit quality of counterparties. At least quarterly, banks should conduct stress testing applying stressed conditions to the joint movement of exposures and counterparty creditworthiness.
(5) Exposure stress testing (including single factor, multifactor and material non-directional risks) and joint stressing of exposure and creditworthiness should be performed at the counterparty-specific, counterparty group (e.g. industry and region), and aggregate bank-wide CCR levels.
(6) Stress tests results should be integrated into regular reporting to senior management. The analysis should capture the largest counterparty-level impacts across the portfolio, material concentrations within segments of the portfolio (within the same industry or region), and relevant portfolio and counterparty specific trends.
(7) The severity of factor shocks should be consistent with the purpose of the stress test. When evaluating solvency under stress, factor shocks should be severe enough to capture historical extreme market environments and/or extreme but plausible stressed market conditions. The impact of such shocks on capital resources should be evaluated, as well as the impact on capital requirements and earnings. For the purpose of day-to-day portfolio monitoring, hedging, and management of concentrations, banks should also consider scenarios of lesser severity and higher probability.
(8) Banks should consider reverse stress tests to identify extreme, but plausible, scenarios that could result in significant adverse outcomes.
(9) Senior management must take a lead role in the integration of stress testing into the risk management framework and risk culture of the bank and ensure that the results are meaningful and proactively used to manage counterparty credit risk. At a minimum, the results of stress testing for significant exposures should be compared to guidelines that express the bank’s risk appetite and elevated for discussion and action when excessive or concentrated risks are present.
Wrong-way risk
7.47. Banks must identify exposures that give rise to a greater degree of general wrong-way risk. Stress testing and scenario analyses must be designed to identify risk factors that are positively correlated with counterparty credit worthiness. Such testing needs to address the possibility of severe shocks occurring when relationships between risk factors have changed. Banks should monitor general wrong way risk by product, by region, by industry, or by other categories that are germane to the business. Reports should be provided to senior management, the appropriate committee of the Board, or the delegated authority of the board on a regular basis that communicate wrong way risks and the steps that are being taken to manage that risk.
7.48. A bank is exposed to “specific wrong-way risk” if future exposure to a specific counterparty is highly correlated with the counterparty’s probability of default. For example, a company writing put options on its own stock creates wrong-way exposures for the buyer that is specific to the counterparty. A bank must have procedures in place to identify, monitor and control cases of specific wrong way risk, beginning at the inception of a trade and continuing through the life of the trade. To calculate the CCR capital requirement, the instruments for which there exists a legal connection between the counterparty and the underlying issuer, and for which specific wrong way risk has been identified, are not considered to be in the same netting set as other transactions with the counterparty. Furthermore, for single-name credit default swaps where there exists a legal connection between the counterparty and the underlying issuer, and where specific wrong way risk has been identified, EAD in respect of such swap counterparty exposure equals the full expected loss in the remaining fair value of the underlying instruments assuming the underlying issuer is in liquidation. The use of the full expected loss in remaining fair value of the underlying instrument allows the bank to recognize, in respect of such swap, the market value that has been lost already and any expected recoveries. Accordingly LGD for advanced or foundation IRB banks must be set to 100% for such swap transactions.28 For banks using the Standardized Approach, the risk weight to use is that of an unsecured transaction. For equity derivatives, bond options, securities financing transactions etc. referencing a single company where there exists a legal connection between the counterparty and the underlying company, and where specific wrong way risk has been identified, EAD equals the value of the transaction under the assumption of a jump-to-default of the underlying security. Inasmuch this makes re-use of possibly existing (market risk) calculations (for incremental risk charge) that already contain an LGD assumption, the LGD must be set to 100%.
Integrity of modelling process
7.49. Other operational requirements focus on the internal controls needed to ensure the integrity of model inputs; specifically, the requirements address the transaction data, historical market data, frequency of calculation, and valuation models used in measuring EPE.
7.50. The internal model must reflect transaction terms and specifications in a timely, complete, and conservative fashion. Such terms include, but are not limited to, contract notional amounts, maturity, reference assets, collateral thresholds, margining arrangements, netting arrangements, etc. The terms and specifications must reside in a secure database that is subject to formal and periodic audit. The process for recognizing netting arrangements must require signoff by legal staff to verify the legal enforceability of netting and be input into the database by an independent unit. The transmission of transaction terms and specifications data to the internal model must also be subject to internal audit and formal reconciliation processes must be in place between the internal model and source data systems to verify on an ongoing basis that transaction terms and specifications are being reflected in EPE correctly or at least conservatively.
7.51. When the Effective EPE model is calibrated using historic market data, the bank must employ current market data to compute current exposures and at least three years of historical data must be used to estimate parameters of the model. Alternatively, market implied data may be used to estimate parameters of the model. In all cases, the data must be updated quarterly or more frequently if market conditions warrant. To calculate the Effective EPE using a stress calibration, the bank must also calibrate Effective EPE using three years of data that include a period of stress to the credit default spreads of a bank’s counterparties or calibrate Effective EPE using market implied data from a suitable period of stress. The following process will be used to assess the adequacy of the stress calibration:
(1) The bank must demonstrate, at least quarterly, that the stress period coincides with a period of increased credit default swaps (CDS)or other credit spreads - such as loan or corporate bond spreads - for a representative selection of the bank’s counterparties with traded credit spreads. In situations where the bank does not have adequate credit spread data for a counterparty, the bank should map each counterparty to specific credit spread data based on region, internal rating and business types.
(2) The exposure model for all counterparties must use data, either historic or implied, that include the data from the stressed credit period, and must use such data in a manner consistent with the method used for the calibration of the Effective EPE model to current data.
(3) To evaluate the effectiveness of its stress calibration for Effective EPE, the bank must create several benchmark portfolios that are vulnerable to the same main risk factors to which the bank is exposed. The exposure to these benchmark portfolios shall be calculated using:
(a) current positions at current market prices, stressed volatilities, stressed correlations and other relevant stressed exposure model inputs from the 3-year stress period and
(b) current positions at end of stress period market prices, stressed volatilities, stressed correlations and other relevant stressed exposure model inputs from the 3-year stress period. SAMA may adjust the stress calibration if the exposures of these benchmark portfolios deviate substantially.
7.52. For a bank to recognize in its EAD calculations for OTC derivatives the effect of collateral other than cash of the same currency as the exposure itself, if it is not able to model collateral jointly with the exposure then it must use the standard supervisory haircuts of the comprehensive approach.
7.53. If the internal model includes the effect of collateral on changes in the market value of the netting set, the bank must model collateral other than cash of the same currency as the exposure itself jointly with the exposure in its EAD calculations for securities-financing transactions.
7.54. The EPE model (and modifications made to it) must be subject to an internal model validation process. The process must be clearly articulated in banks’ policies and procedures. The validation process must specify the kind of testing needed to ensure model integrity and identify conditions under which assumptions are violated and may result in an understatement of EPE. The validation process must include a review of the comprehensiveness of the EPE model, for example such as whether the EPE model covers all products that have a material contribution to counterparty risk exposures.
7.55. The use of an internal model to estimate EPE, and hence the exposure amount or EAD, of positions subject to a CCR capital requirement will be conditional upon the explicit approval of SAMA. SAMA and relevant supervisory authorities of banks that carry out material trading activities in multiple jurisdictions will work co-operatively to ensure an efficient approval process.
7.56. SAMA will require that banks seeking to make use of internal models to estimate EPE meet the requirements regarding, for example, the integrity of the risk management system, the skills of staff that will rely on such measures in operational areas and in control functions, the accuracy of models, and the rigour of internal controls over relevant internal processes. As an example, banks seeking to make use of an internal model to estimate EPE must demonstrate that they meet the general criteria for banks seeking to make use of internal models to assess market risk exposures, but in the context of assessing counterparty credit risk.29
7.57. The supervisory review process (SRP) standard of this framework provides general background and specific guidance to cover counterparty credit risks that may not be fully covered by the Pillar 1 process.
7.58. No particular form of model is required to qualify to make use of an internal model. Although this text describes an internal model as a simulation model, other forms of models, including analytic models, are acceptable subject to SAMA approval and review. Banks that seek recognition for the use of an internal model that is not based on simulations must demonstrate to SAMA that the model meets all operational requirements.
7.59. For a bank that qualifies to net transactions,
(1) The bank must have internal procedures to verify that, prior to including a transaction in a netting set,
(2) The transaction is covered by a legally enforceable netting contract that meets the applicable requirements of the standardized approach to counterparty credit risk (in Chapter 6 of this framework), chapter 9 of the Minimum Capital Requirements for Credit Risk, or the Cross Product Netting Rules set forth 7.61 to 7.71 below in this framework.
7.60. For a bank that makes use of collateral to mitigate its CCR, the bank must have internal procedures to verify that, prior to recognizing the effect of collateral in its calculations, the collateral meets the appropriate legal certainty standards as set out in chapter 9 of the Minimum Capital Requirements for Credit Risk.
Cross-product netting rules
7.61. The Cross-Product Netting Rules apply specifically to netting across SFTs, or to netting across both SFTs and OTC derivatives, for purposes of regulatory capital computation under IMM.
7.62. Banks that receive approval to estimate their exposures to CCR using the internal models method may include within a netting set SFTs, or both SFTs and OTC derivatives subject to a legally valid form of bilateral netting that satisfies the following legal and operational criteria for a Cross-Product Netting Arrangement (as defined below). The bank must also have satisfied any prior approval or other procedural requirements that SAMA determines to implement for purposes of recognizing a Cross-Product Netting Arrangement.
Legal Criteria
7.63. The bank has executed a written, bilateral netting agreement with the counterparty that creates a single legal obligation, covering all included bilateral master agreements and transactions (“Cross-Product Netting Arrangement”), such that the bank would have either a claim to receive or obligation to pay only the net sum of the positive and negative
(i) close-out values of any included individual master agreements and
(ii) mark-to-market values of any included individual transactions (the “Cross-Product Net Amount”), in the event a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstances.
7.64. The bank has written and reasoned legal opinions that conclude with a high degree of certainty that, in the event of a legal challenge, relevant courts or administrative authorities would find the bank’s exposure under the Cross Product Netting Arrangement to be the Cross-Product Net Amount under the laws of all relevant jurisdictions. In reaching this conclusion, legal opinions must address the validity and enforceability of the entire Cross-Product Netting Arrangement under its terms and the impact of the Cross-Product Netting Arrangement on the material provisions of any included bilateral master agreement.
(1) The laws of “all relevant jurisdictions” are: (i) the law of the jurisdiction in which the counterparty is chartered and, if the foreign branch of a counterparty is involved, then also under the law of the jurisdiction in which the branch is located, (ii) the law that governs the individual transactions, and (iii) the law that governs any contract or agreement necessary to effect the netting.
(2) A legal opinion must be generally recognized as such by the legal community in the bank’s home country or a memorandum of law that addresses all relevant issues in a reasoned manner.
7.65. The bank has internal procedures to verify that, prior to including a transaction in a netting set, the transaction is covered by legal opinions that meet the above criteria.
7.66. The bank undertakes to update legal opinions as necessary to ensure continuing enforceability of the Cross-Product Netting Arrangement in light of possible changes in relevant law.
7.67. The Cross-Product Netting Arrangement does not include a walkaway clause. A walkaway clause is a provision which permits a non-defaulting counterparty to make only limited payments, or no payment at all, to the estate of the defaulter, even if the defaulter is a net creditor.
7.68. Each included bilateral master agreement and transaction included in the Cross Product Netting Arrangement satisfies applicable legal requirements for recognition of credit risk mitigation techniques in credit risk mitigation techniques in chapter 9 of the Minimum Capital Requirements for Credit Risk.
7.69. The bank maintains all required documentation in its files.
Operational Criteria
7.70. SAMA is satisfied that the effects of a Cross-Product Netting Arrangement are factored into the bank’s measurement of a counterparty’s aggregate credit risk exposure and that the bank manages its counterparty credit risk on such basis.
7.71. Credit risk to each counterparty is aggregated to arrive at a single legal exposure across products covered by the Cross-Product Netting Arrangement. This aggregation must be factored into credit limit and economic capital processes.
27 This section draws heavily on the Counterparty Risk Management Policy Group's paper, Improving Counterparty Risk Management Practices (June 1999).
28 Note that the recoveries may also be possible on the underlying instrument beneath such swap. The capital requirements for such underlying exposure are to be calculated without reduction for the swap which introduces wrong way risk. Generally this means that such underlying exposure will receive the risk weight and capital treatment associated with an unsecured transaction (i.e. assuming such underlying exposure is an unsecured credit exposure).
29 See Chapter 10.1 to Chapter 10.4 of the Minimum Capital Requirements for Market Risk.8. Capital Requirements for Bank Exposures to Central Counterparties
Scope of Application
8.1. This chapter applies to exposures to central counterparties arising from over-the counter (OTC) derivatives, exchange-traded derivatives transactions, securities financing transactions (SFTs) and long settlement transactions. Exposures arising from the settlement of cash transactions (equities, fixed income, spot foreign exchange and spot commodities) are not subject to this treatment.30 The settlement of cash transactions remains subject to the treatment described in chapter 25 of the Minimum Capital Requirements for Credit Risk.
8.2. When the clearing member-to-client leg of an exchange-traded derivatives transaction is conducted under a bilateral agreement, both the client bank and the clearing member are to capitalize that transaction as an OTC derivative.31 This treatment also applies to transactions between lower-level clients and higher level clients in a multi-level client structure.
30 For contributions to prepaid default funds covering settlement-risk only products, the applicable risk weight is 0%.
31 For this purpose, the treatment in 8.12 would also apply.Central Counterparties
8.3. Regardless of whether a central counterparty (CCP) is classified as a qualifying CCP (QCCP), a bank retains the responsibility to ensure that it maintains adequate capital for its exposures. Under Pillar 2, a bank should consider whether it might need to hold capital in excess of the minimum capital requirements if, for example:
(1) its dealings with a CCP give rise to more risky exposures;
(2) where, given the context of that bank’s dealings, it is unclear that the CCP meets the definition of a QCCP; or
(3) an external assessment such as an International Monetary Fund Financial Sector Assessment Program (FSAP) has found material shortcomings in the CCP or the regulation of CCPs, and the CCP and/or the CCP regulator have not since publicly addressed the issues identified.
8.4. Where the bank is acting as a clearing member, the bank should assess through appropriate scenario analysis and stress testing whether the level of capital held against exposures to a CCP adequately addresses the inherent risks of those transactions. This assessment will include potential future or contingent exposures resulting from future drawings on default fund commitments, and/or from secondary commitments to take over or replace offsetting transactions from clients of another clearing member in case of this clearing member defaulting or becoming insolvent.
8.5. A bank must monitor and report to senior management, the appropriate committee of the Board, or the delegated authority of the board on a regular basis all of its exposures to CCPs, including exposures arising from trading through a CCP and exposures arising from CCP membership obligations such as default fund contributions.
8.6. Where a bank is clearing derivative, SFT and/or long settlement transactions through a QCCP as defined in Chapter 3 of this framework, then paragraphs 8.7 to 8.40 will apply. In the case of non-qualifying CCPs, paragraphs 8.41 and 8.42 will apply. Within three months of a CCP ceasing to qualify as a QCCP, unless SAMA requires otherwise, the trades with a former QCCP may continue to be capitalized as though they are with a QCCP. After that time, the bank’s exposures with such a CCP must be capitalized according to paragraphs 8.41 and 8.42.
Exposures to Qualifying CCPs: Trade Exposures
Clearing member exposures to CCPs
8.7. 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 OTC derivatives, exchange-traded derivative transactions, SFTs and long settlement transactions. Where the 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. The risk weight applied to collateral posted to the CCP by the bank must be determined in accordance with paragraphs 8.18 to 8.23.
8.8. The exposure amount for a bank’s trade exposure is to be calculated in accordance with methods set out in the counterparty credit risk overview chapters of this framework (see paragraph 5.7), as consistently applied by the bank in the ordinary course of its business.32 In applying these methods:
(1) Provided that the netting set does not contain illiquid collateral or exotic trades and provided there are no disputed trades, the 20-day floor for the margin period of risk (MPOR) established for netting sets where the number of trades exceeds 5000 does not apply. This floor is set out in 6.54(1) of the standardized approach for counterparty credit risk (SA- CCR), 9.60 of the Minimum Capital Requirements for Credit Risk of comprehensive approach within the standardized approach to credit risk and 7.24(1) of the internal models method (IMM).
(2) In all cases, a minimum MPOR of 10 days must be used for the calculation of trade exposures to CCPs for OTC derivatives.
(3) Where CCPs retain variation margin against certain trades (e.g. where CCPs collect and hold variation margin against positions in exchange-traded or OTC forwards), and the member collateral is not protected against the insolvency of the CCP, the minimum time risk horizon applied to banks' trade exposures on those trades must be the lesser of one year and the remaining maturity of the transaction, with a floor of 10 business days.
8.9. The methods for calculating counterparty credit risk exposures (see 5.7), when applied to bilateral trading exposures (i.e. non-CCP counterparties), require banks to calculate exposures for each individual netting set. However, netting arrangements for CCPs are not as standardized as those for OTC netting agreements in the context of bilateral trading. As a consequence, paragraph 8.10 below makes certain adjustments to the methods for calculating counterparty credit risk exposure to permit netting under certain conditions for exposures to CCPs.
8.10 Where settlement is legally enforceable on a net basis in an event of default and regardless of whether the counterparty is insolvent or bankrupt, the total replacement cost of all contracts relevant to the trade exposure determination can be calculated as a net replacement cost if the applicable close-out netting sets meet the requirements set out in:
(1) 9.68 of the Minimum Capital Requirements for Credit Risk and, where applicable, also 9.69 of the Minimum Capital Requirements for Credit Risk.
(2) 6.9 and 6.10 of the SA-CCR in this framework in the case of derivative transactions.
(3) 7.61 to 7.71 of IMM in the case of cross-product netting.
8.11 To the extent that the rules referenced in 8.10 above include the term “master agreement” or the phrase “a netting contract with a counterparty or other agreement”, this terminology must be read as including any enforceable arrangement that provides legally enforceable rights of set-off. If the bank cannot demonstrate that netting agreements meet these requirements, each single transaction will be regarded as a netting set of its own for the calculation of trade exposure.
Clearing member exposures to clients
8.12 The clearing member will always capitalize its exposure (including potential credit valuation adjustment, or CVA, risk exposure) to clients as bilateral trades, irrespective of whether the clearing member guarantees the trade or acts as an intermediary between the client and the CCP. However, to recognize the shorter close-out period for cleared client transactions, clearing members can capitalize the exposure to their clients applying a margin period of risk of at least five days in IMM or SA-CCR. The reduced exposure at default (EAD) should also be used for the calculation of the CVA capital requirement.
8.13 If a clearing member collects collateral from a client for client cleared trades and this collateral is passed on to the CCP, the clearing member may recognize this collateral for both the CCP-clearing member leg and the clearing member-client leg of the client-cleared trade. Therefore, initial margin posted by clients to their clearing member mitigates the exposure the clearing member has against these clients. The same treatment applies, in an analogous fashion, to multi-level client structures (between a higher-level client and a lower-level client).
Client exposures
8.14 Subject to the two conditions set out in 8.15 below being met, the treatment set out in 8.7 to 8.11 (i.e. the treatment of clearing member exposures to CCPs) also applies to the following:
(1) A bank's exposure to a clearing member where:
(a) the bank is a client of the clearing member; and
(b) the transactions arise as a result of the clearing member acting as a financial intermediary (i.e. the clearing member completes an offsetting transaction with a CCP).
(2) A bank's exposure to a CCP resulting from a transaction with the CCP where:
(a) the bank is a client of a clearing member; and
(b) the clearing member guarantees the performance the bank's exposure to the CCP.
(3) Exposures of lower-level clients to higher-level clients in a multi-level client structure, provided that for all client levels in-between the two conditions in 8.15 below are met.
8.15 The two conditions referenced in 8.14 above are:
(1) The offsetting transactions are identified by the CCP as client transactions and collateral to support them is held by the CCP and/or the clearing member, as applicable, under arrangements that prevent any losses to the client due to: (a) the default or insolvency of the clearing member; (b) the default or insolvency of the clearing member's other clients; and (c) the joint default or insolvency of the clearing member and any of its other clients. Regarding the condition set out in this paragraph:
(a) Upon the insolvency of the clearing member, there must be no legal impediment (other than the need to obtain a court order to which the client is entitled) to the transfer of the collateral belonging to clients of a defaulting clearing member to the CCP, to one or more other surviving clearing members or to the client or the client's nominee. SAMA should be consulted to determine whether this is achieved based on particular facts and SAMA will consult and communicate with other supervisors.
(b) The client must have conducted a sufficient legal review (and undertake such further review as necessary to ensure continuing enforceability) and have a well founded basis to conclude that, in the event of legal challenge, the relevant courts and administrative authorities would find that such arrangements mentioned above would be legal, valid, binding and enforceable under the relevant laws of the relevant jurisdiction(s).
(2) Relevant laws, regulation, rules, contractual, or administrative arrangements provide that the offsetting transactions with the defaulted or insolvent clearing member are highly likely to continue to be indirectly transacted through the CCP, or by the CCP, if the clearing member defaults or becomes insolvent. In such circumstances, the client positions and collateral with the CCP will be transferred at market value unless the client requests to close out the position at market value. Regarding the condition set out in this paragraph, if there is a clear precedent for transactions being ported at a CCP and industry intent for this practice to continue, then these factors must be considered when assessing if trades are highly likely to be ported. The fact that CCP documentation does not prohibit client trades from being ported is not sufficient to say they are highly likely to be ported.
8.16 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 in the preceding paragraph 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.
8.17 Where the bank is a client of the clearing member and the requirements in 8.14 to 8.16 above are not met, the bank will capitalize its exposure (including potential CVA risk exposure) to the clearing member as a bilateral trade.
Treatment of posted collateral
8.18 In all cases, any assets or collateral posted must, from the perspective of the bank posting such collateral, receive the risk weights that otherwise applies to such assets or collateral under the capital adequacy framework, regardless of the fact that such assets have been posted as collateral. That is, collateral posted must receive the banking book or trading book treatment it would receive if it had not been posted to the CCP.
8.19 In addition to the requirements of 8.18 above, the posted assets or collateral are subject to the counterparty credit risk requirements, regardless of whether they are in the banking or trading book. This includes the increase in the counterparty credit risk exposure due to the application of haircuts. The counterparty credit risk requirements arise where assets or collateral of a clearing member or client are posted with a CCP or a clearing member and are not held in a bankruptcy remote manner. In such cases, the bank posting such assets or collateral must recognize credit risk based upon the assets or collateral being exposed to risk of loss based on the creditworthiness of the entity holding such assets or collateral, as described further below.
8.20 Where such collateral is included in the definition of trade exposures (see Chapter 3of this framework) and the entity holding the collateral is the CCP, the following risk weights apply where the assets or collateral is not held on a bankruptcy- remote basis:
(1) For banks that are clearing members a risk weight of 2% applies.
(2) For banks that are clients of clearing members:
(a) a 2% risk weight applies if the conditions established in 8.14 and 8.15 are met; or
(b) a 4% risk weight applies if the conditions in 8.16 are met.
8.21 Where such collateral is included in the definition of trade exposures (see Chapter 3 of this framework), there is no capital requirement for counterparty credit risk exposure (i.e. the related risk weight or EAD is equal to zero) if the collateral is: (a) held by a custodian; and (b) bankruptcy remote from the CCP. Regarding this paragraph:
(1) All forms of collateral are included, such as: cash, securities, other pledged assets, and excess initial or variation margin, also called overcollateralization.
(2) The word “custodian” may include a trustee, agent, pledgee, secured creditor or any other person that holds property in a way that does not give such person a beneficial interest in such property and will not result in such property being subject to legally-enforceable claims by such persons creditors, or to a court- ordered stay of the return of such property, if such person becomes insolvent or bankrupt.
8.22 The relevant risk weight of the CCP will apply to assets or collateral posted by a bank that do not meet the definition of trade exposures (for example treating the exposure as a financial institution under standardized approach or internal ratings-based approach to credit risk).
8.23 Regarding the calculation of the exposure, or EAD, where banks use the SA-CCR to calculate exposures, collateral posted which is not held in a bankruptcy remote manner must be accounted for in the net independent collateral amount term in accordance with 6.17 to 6.21. For banks using IMM models, the alpha multiplier must be applied to the exposure on posted collateral.
Default fund exposures
8.24 Where a default fund is shared between products or types of business with settlement risk only (e.g. equities and bonds) and products or types of business which give rise to counterparty credit risk i.e. OTC derivatives, exchange-traded derivatives, SFTs or long settlement transactions, all of the default fund contributions will receive the risk weight determined according to the formula and methodology set forth below, without apportioning to different classes or types of business or products. However, where the default fund contributions from clearing members are segregated by product types and only accessible for specific product types, the capital requirements for those default fund exposures determined according to the formulae and methodology set forth below must be calculated for each specific product giving rise to counterparty credit risk. In case the CCP's prefunded own resources are shared among product types, the CCP will have to allocate those funds to each of the calculations, in proportion to the respective product specific EAD.
8.25 Whenever a bank is required to capitalize for exposures arising from default fund contributions to a QCCP, clearing member banks will apply the following approach.
8.26 Clearing member banks will apply a risk weight to their default fund contributions determined according to a risk sensitive formula that considers
(i) the size and quality of a qualifying CCP's financial resources,
(ii) the counterparty credit risk exposures of such CCP, and
(iii) the application of such financial resources via the CCP's loss-bearing waterfall, in the case of one or more clearing member defaults. The clearing member bank's risk sensitive capital requirement for its default fund contribution (KCMi) must be calculated using the formulae and methodology set forth below.
8.27 The clearing member bank's risk-sensitive capital requirement for its default fund contribution (KCMi) is calculated in two steps:
(1) Calculate the hypothetical capital requirement of the CCP due to its counterparty credit risk exposures to all of its clearing members and their clients.
(2) Calculate the capital requirement for the clearing member bank.
Hypothetical capital requirement of the CCP
8.28 The first step in calculating the clearing member bank's capital requirement for its default fund contribution (KCMi) is to calculate the hypothetical capital requirement of the CCP (KCMi) due to its counterparty credit risk exposures to all of its clearing members and their clients. KCCP is a hypothetical capital requirement for a CCP, calculated on a consistent basis for the sole purpose of determining the capitalization of clearing member default fund contributions; it does not represent the actual capital requirements for a CCP which may be determined by a CCP and its supervisor.
8.29 K is calculated using the following formula, where: CCP
(1) RW is a risk weight of 20%33
(2) capital ratio is 8%
(3) CM is the clearing member
(4) EAD is the exposure amount of the CCP to clearing member ‘i', relating to I the valuation at the end of the regulatory reporting date before the margin called on the final margin call of that day is exchanged. The exposure includes both:
(a) the clearing member's own transactions and client transactions guaranteed by the clearing member; and
(b) all values of collateral held by the CCP (including the clearing member's prefunded default fund contribution) against the transactions in (a).
(5) The sum is over all clearing member accounts.
8.30 Where clearing members provide client clearing services, and client transactions and collateral are held in separate (individual or omnibus) sub-accounts to the clearing member's proprietary business, each such client sub-account should enter the sum in 8.29 above separately, i.e. the member EAD in the formula above is then the sum of the client sub-account EADs and any house sub-account EAD. This will ensure that client collateral cannot be used to offset the CCP's exposures to clearing members' proprietary activity in the calculation of KCCP. If any of these sub-accounts contains both derivatives and SFTs, the EAD of that sub-account is the sum of the derivative EAD and the SFT EAD.
8.31 In the case that collateral is held against an account containing both SFTs and derivatives, the prefunded initial margin provided by the member or client must be allocated to the SFT and derivatives exposures in proportion to the respective product-specific EADs, calculated according to:
(1) Chapter 9.67 to 9.71 of the Minimum Capital Requirements for Credit Risk; and
(2) SA-CCR (see Chapter 6 of this framework) for derivatives, without including the effects of collateral.
8.32 If the default fund contributions of the member (DFi) are not split with regard to i client and house sub-accounts, they must be allocated per sub-account according to the respective fraction the initial margin of that sub-account has in relation to the total initial margin posted by or for the account of the clearing member.
8.33 For derivatives, EADi is calculated as the bilateral trade exposure the CCP has i against the clearing member using the SA-CCR. In applying the SA-CCR:
(1) A MPOR of 10 business days must be used to calculate the CCP's potential future exposure to its clearing members on derivatives transactions (the 20 day floor on the MPOR for netting sets with more than 5000 trades does not apply).
(2) All collateral held by a CCP to which that CCP has a legal claim in the event of the default of the member or client, including default fund contributions of that member (DFi), is used to offset the CCP's exposure to that member or i client, through inclusion in the PFE multiplier in accordance with 6.23 to 6.25.
8.34 For SFTs, EADi is equal to max(EBRMi- IMi- DFi;0), where:
(1) EBRMi denotes the exposure value to clearing member ‘i' before risk mitigation under 9.68 to 9.72 of the Minimum Capital Requirements for Credit Risk; where, for the purposes of this calculation, variation margin that has been exchanged (before the margin called on the final margin call of that day) enters into the mark-to-market value of the transactions.
(2) IMi; is the initial margin collateral posted by the clearing member with the CCP.
(3) DFi is the prefunded default fund contribution by the clearing member that will be applied upon such clearing member's default, either along with or immediately following such member's initial margin, to reduce the CCP loss.
8.35 As regards the calculation in this first step (i.e. 8.28 to 8.34):
(1) Any haircuts to be applied for SFTs must be the standard supervisory haircuts set out in 9.44 of the Minimum Capital Requirements for Credit Risk.
(2) The holding periods for SFT calculations in 9.60 to 9.63 of the Minimum Capital Requirements for Credit Risk.
(3) The netting sets that are applicable to regulated clearing members are the same as those referred to in 8.10 and 8.11. For all other clearing members, they need to follow the netting rules as laid out by the CCP based upon notification of each of its clearing members. SAMA may demand more granular netting sets than laid out by the CCP.
Capital requirement for each clearing member
8.36. The second step in calculating the clearing member bank's capital requirement for its default fund contribution (KCMi) is to apply the following formula,34 where:
(1) KCMi is the capital requirement on the default fund contribution of clearing member bank i
(2) DFCMPref is the total prefunded default fund contributions from clearing members
(3) DRCCP is the CCP's prefunded own resources (e.g. contributed capital, retained earnings, etc.), which are contributed to the default waterfall, where these are junior or pari passu to prefunded member contributions
(4) DFiprefis the prefunded default fund contributions provided by clearing member bank i
8.37. The CCP, bank, CCP supervisor or other body with access to the required data, must make a calculation of KCCP, DFCMpref, DFCCP, in such a way to permit the supervisor of the CCP to oversee those calculations, and it must share sufficient information of the calculation results to permit each clearing member to calculate their capital requirement for the default fund and for SAMA to review and confirm such calculations.
8.38. KCCP must be calculated on a quarterly basis at a minimum; although SAMA may require more frequent calculations in case of material changes (such as the CCP clearing a new product). The CCP, bank, CCP supervisor or other body that did the calculations must make available to SAMA the sufficient aggregate information about the composition of the CCP's exposures to clearing members and information provided to the clearing member for the purposes of the calculation of KCCP, DFCMpref, DFCCP. Such information must be provided no less frequently than the SAMA would require for monitoring the risk of the clearing member.
8.39. KCCP and KCMi must be recalculated at least quarterly, and should also be recalculated when there are material changes to the number or exposure of cleared transactions or material changes to the financial resources of the CCP.
Cap with regard to QCCPs
8.40. Where the sum of a bank's capital requirements for exposures to a QCCP due to its trade exposure and default fund contribution is higher than the total capital requirement that would be applied to those same exposures if the CCP were for a non-qualifying CCP, as outlined in 8.41 and 8.42 below, the latter total capital requirement shall be applied.
32 Where the firm’s internal model permission does not specifically cover centrally cleared products, the IMM scope would have to be extended to cover these products (even where the non-centrally cleared versions are included in the permission). Usually, national supervisors have a well-defined model approval/change process by which IMM firms can extend the products covered within their IMM scope. The introduction of a centrally cleared version of a product within the existing IMM scope must be considered as part of such a model change process, as opposed to a natural extension.
33 The 20% risk weight is a minimum requirement. As with other parts of the capital adequacy framework, the national supervisor of a bank may increase the risk weight. An increase in such risk weight would be appropriate if, for example, the clearing members in a CCP are not highly rated. Any such increase in risk weight is to be communicated by the affected banks to the person completing this calculation.
34 The formula puts a floor on the default fund exposure risk weight of 2%.Exposures to Non-Qualifying CCPs
8.41. Banks must apply the standardized approach for credit risk, according to the category of the counterparty, to their trade exposure to a non-qualifying CCP.
8.42. Banks must apply a risk weight of 1250% to their default fund contributions to a non-qualifying CCP. 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 if the CCP so requires. Where there is a liability for unfunded contributions (i.e. unlimited binding commitments), the risk weight shall also be 1250%. Banks may, however, seek SAMA's approval to apply a different risk weight for the unfunded contributions.
9. Counterparty Credit Risk in the Trading Book
9.1 Banks must calculate the counterparty credit risk charge for over-the-counter (OTC) derivatives, repo-style and other transactions booked in the trading book, separate from the capital requirement for market risk.35 The risk weights to be used in this calculation must be consistent with those used for calculating the capital requirements in the banking book. Thus, banks using the standardized approach in the banking book will use the standardized approach risk weights in the trading book and banks using the internal ratings-based (IRB) approach in the banking book will use the IRB risk weights in the trading book in a manner consistent with the IRB roll-out situation in the banking book as described in 10.44 to 10.50 of the Minimum Capital Requirements for Credit Risk. For counterparties included in portfolios where the IRB approach is being used the IRB risk weights will have to be applied.
9.2 In the trading book, for repo-style transactions, all instruments, which are included in the trading book, may be used as eligible collateral. Those instruments which fall outside the banking book definition of eligible collateral shall be subject to a haircut at the level applicable to non-main index equities listed on recognized exchanges (as noted in 9.44 of the Minimum Capital Requirements for Credit Risk). Where banks are using a value-at-risk approach to measuring exposure for securities financing transactions, they also may apply this approach in the trading book in accordance with h 9.48 to 9.49 of the Minimum Capital Requirements for Credit Risk and Chapter 5 of this framework.
9.3 The calculation of the counterparty credit risk charge for collateralized OTC derivative transactions is the same as the rules prescribed for such transactions booked in the banking book (see Chapter 5 of this framework).
9.4 The calculation of the counterparty charge for repo-style transactions will be conducted using the rules in Chapter 5 of this framework spelt out for such transactions booked in the banking book. The firm-size adjustment for small or medium-sized entities as set out in chapter 11.9 of the Minimum Capital requirements for Credit Risk shall also be applicable in the trading book.
35 The treatment for unsettled foreign exchange and securities trades is set forth in the Risk weight multiplier to certain exposures with currency mismatch of the individual exposures under standardized approach for credit risk of Basel III: Finalizing post-crisis reforms.
10. Minimum Haircut Floors for Securities Financing Transactions
Scope
10.1 This chapter specifies the treatment of certain non-centrally cleared securities financing transactions (SFTs) with certain counterparties. The requirements are not applicable to banks in jurisdictions that are prohibited from conducting such transactions below the minimum haircut floors specified in 10.6 below.
10.2 The haircut floors found in 10.6 below apply to the following transactions:
(1) Non-centrally cleared SFTs in which the financing (i.e. the lending of cash) against collateral other than government securities is provided to counterparties who are not supervised by a regulator that imposes prudential requirements consistent with international norms.
(2) Collateral upgrade transactions with these same counterparties. A collateral upgrade transaction is when a bank lends a security to its counterparty and the counterparty pledges a lower-quality security as collateral, thus allowing the counterparty to exchange a lower-quality security for a higher quality security. For these transactions, the floors must be calculated according to the formula set out in 10.9 below.
10.3 SFTs with central banks are not subject to the haircut floors.
10.4 Cash-collateralized securities lending transactions are exempted from the haircut floors where:
(1) Securities are lent (to the bank) at long maturities and the lender of securities reinvests or employs the cash at the same or shorter maturity, therefore not giving rise to material maturity or liquidity mismatch.
(2) Securities are lent (to the bank) at call or at short maturities, giving rise to liquidity risk, only if the lender of the securities reinvests the cash collateral into a reinvestment fund or account subject to regulations or regulatory guidance meeting the minimum standards for reinvestment of cash collateral by securities lenders set out in Section 3.1 of the Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos.36 For this purpose, banks may rely on representations by securities lenders that their reinvestment of cash collateral meets the minimum standards.
10.5 Banks that borrow (or lend) securities are exempted from the haircut floors on collateral upgrade transactions if the recipient of the securities that the bank has delivered as collateral (or lent) is either: (i) unable to re-use the securities (for example, because the securities have been provided under a pledge arrangement); or (ii) provides representations to the bank that they do not and will not re-use the securities.
36 Financial Stability Board, Strengthening oversight and regulation of shadow banking, Policy Framework for addressing shadow banking risks in securities lending and repos, 29 August 2013, fsb.org/wpcontent/uploads/r_130829b.
Haircut Floors
10.6 These are the haircut floors for SFTs referred to above (herein referred to as “in-scope SFTs”), expressed as percentages:
Residual maturity of collateral Haircut Level Corporate and other issuers Securitized products ≤ 1 year debt securities, and floating rate notes 0.5% 1% >1year, ≤ 5 years debt securities 1.5% 4% >5years, ≤ 10 years debt securities 3% 6% >10 years debt securities 4% 7% Main index equities 6% Other assets within the scope of the framework 10% 10.7. In-scope SFTs which do not meet the haircut floors must be treated as unsecured loans to the counterparties.
10.8. To determine whether the treatment in 10.7 applies to an in-scope SFT (or a netting set of SFTs in the case of portfolio-level haircuts), we must compare the collateral haircut H (real or calculated as per the rules below) and a haircut floor f (from 10.6 above or calculated as per the below rules).
Single in-scope SFTs
10.9. For a single in-scope SFT not included in a netting set, the values of H and f are computed as:
(1) For a single cash-lent-for-collateral SFT, H and f are known since H is simply defined by the amount of collateral received and f is given in 10.6.37 For the purposes of this calculation, collateral that is called by either counterparty can be treated collateral received from the moment that it is called (i.e. the treatment is independent of the settlement period).
(2) For a single collateral-for-collateral SFT, lending collateral A and receiving collateral B, the H is still be defined by the amount of collateral received but the effective floor of the transaction must integrate the floor of the two types of collateral and can be computed using the following formula, which will be compared to the effective haircut of the transaction, i.e. (CB/CA)-1.38
Netting set of SFTs
10.10. For a netting set of SFTs an effective "portfolio" floor of the transaction must be computed using the following formula,39 where:
(1) ES is the net position in each security (or cash) s that is net lent;
(2) Ct the net position that is net borrowed; and
(3) fs and ft are the haircut floors for the securities that are net lent and net s t borrowed respectively.
10.11. For a netting of SFTs, the portfolio does not breach the floor where:
10.12. If the portfolio haircut does breach the floor, then the netting set of SFTs is subject to the treatment in 10.7. This treatment should be applied to all trades for which the security received appears in the table in 10.6 and for which, within the netting set, the bank is also a net receiver in that security. For the purposes of this calculation, collateral that is called by either counterparty can be treated collateral received from the moment that it is called (i.e. the treatment is independent of the settlement period).
10.13. The following portfolio of trades gives an example of how this methodology works (it shows a portfolio that does not breach the floor):
Actual trades Cash Sovereign debt Collateral A Collateral B Floor (fs) 0% 0% 6% 10% Portfolio of trades 50 100 -400 250 Es 50 100 0 250 Ct 0 0 400 0 fportfolio -0.00023 
0 Minimum Capital Requirements for Credit Valuation Adjustment (CVA)
37 For example, consider an in-scope SFT where 100 cash is lent against 101 of a corporate debt security with a 12-year maturity, H is 1% [(101- 100)/100] and f is 4% (per 10.6). Therefore, the SFT in question would be subject to the treatment in 10.7.
38 For example, consider an in-scope SFT where 102 of a corporate debt security with a 10-year maturity is exchanged against 104 of equity, the effective haircut H of the transaction is 104/102 - 1 = 1.96% which has to be compared with the effective floor f of 1.06/1.03 - 1 =2.91%. Therefore, the SFT in question would be subject to the treatment in 10.7.
39 The formula calculates a weighted average floor of the portfolio.11. Credit Valuation Adjustment (CVA) Framework
Credit Valuation Adjustment (CVA) Overview
11.1. The risk-weighted assets for Credit Value Adjustment risk are determined by multiplying the capital requirements calculated as set out in Chapter 11 of this Framework by 12.5.
11.2. In the context of this framework, CVA stands for Credit Valuation Adjustment specified at a counterparty level. CVA reflects the adjustment of default risk-free prices of derivatives and Securities Financing Transactions (SFTs) due to a potential default of the counterparty.
11.3. Unless explicitly specified otherwise, the term CVA in this framework means regulatory CVA. Regulatory CVA may differ from CVA used for accounting purposes as follows:
(1) regulatory CVA excludes the effect of the bank's own default; and
(2) several constraints reflecting best practice in accounting CVA are imposed on calculations of regulatory CVA.
11.4. CVA risk is defined as the risk of losses arising from changing CVA values in response to changes in counterparty credit spreads and market risk factors that drive prices of derivative transactions and SFTs.
11.5. The capital requirement for CVA risk must be calculated by all banks involved in covered transactions in both banking book and trading book. Covered transactions include:
(1) all derivatives except those transacted directly with a qualified central counterparty and except those transactions meeting the conditions of 8.14 to 8.16 of this framework; and.
(2) SFTs that are fair-valued by a bank for accounting purposes, if SAMA determines that the bank's CVA loss exposures arising from SFT transactions are material. In case the bank deems the exposures immaterial, the bank must justify its assessment to SAMA by providing relevant supporting documentation.
(3) SFTs that are fair-valued for accounting purposes and for which a bank records zero for CVA reserves for accounting purposes are included in the scope of covered transactions.
11.6. The CVA risk capital requirement is calculated for a bank's “CVA portfolio” on a standalone basis. The CVA portfolio includes CVA for a bank's entire portfolio of covered transactions and eligible CVA hedges.
11.7. Two approaches are available for calculating CVA capital: the standardized approach (SA-CVA) and the basic approach (BA-CVA). Banks must use the BA- CVA unless they receive approval from Saudi Central Bank (SAMA) to use the SA-CVA.40
11.8. Banks that have received approval of Saudi Central Bank (SAMA) to use the SA- CVA may carve out from the SA-CVA calculations any number of netting sets. CVA capital for all carved out netting sets must be calculated using the BA-CVA. When applying the carve-out, a legal netting set may also be split into two synthetic netting sets, one containing the carved-out transactions subject to the BA-CVA and the other subject to the SA-CVA, subject to one or both of the following conditions:
(1) the split is consistent with the treatment of the legal netting set used by the bank for calculating accounting CVA (e.g. where certain transactions are not processed by the front office/accounting exposure model); or
(2) SAMA approval to use the SA-CVA is limited and does not cover all transactions within a legal netting set.
11.9. For banks that are below the materiality threshold where aggregate notional amount of non-centrally cleared derivatives is less than or equal to 446 billion SAR may opt not to calculate its CVA capital requirements using the SA-CVA or BA-CVA and instead choose an alternative treatment.
(1) Subject to the above conditions and treatment,
a. Banks may choose to set its CVA capital equal to 100% of the bank's capital requirement for counterparty credit risk (CCR);
b. Banks CVA hedges will not be recognized; and
c. Banks must apply this treatment to the bank's entire portfolio instead of the BA-CVA or the SA-CVA.
(2) SAMA, however, may not allow banks to apply the above treatment if it determines that CVA risk resulting from the bank's derivative positions materially contributes to the bank's overall risk.
11.10. Eligibility criteria for CVA hedges are specified in11.17 to 11.19 for the BA-CVA and in 11.37 to 11.39 for the SA-CVA.
11.11. CVA hedging instruments can be external (i.e. with an external counterparty) or internal (i.e. with one of the bank's trading desks).
(1) All external CVA hedges (including both eligible and ineligible external CVA hedges) that are covered transactions must be included in the CVA calculation for the counterparty to the hedge.
(2) All eligible external CVA hedges must be excluded from a bank's market risk capital requirement calculations under Chapter 2 through Chapter 14 of the Minimum Capital Requirements for Market Risk.
(3) Ineligible external CVA hedges are treated as trading book instruments and are capitalized under Chapter 2 through Chapter 14 of the Minimum Capital Requirements for Market Risk.
(4) An internal CVA hedge involves two perfectly offsetting positions: one of the CVA desk and the opposite position of the trading desk.
a) If an internal CVA hedge is ineligible, both positions belong to the trading book where they cancel each other, so there is no impact on either CVA portfolio or the trading book.
b) If an internal CVA hedge is eligible, the CVA desk's position is part of the CVA portfolio where it is capitalized as set out in this chapter, while the trading desk's position is part of the trading book where it is capitalized as set out in Chapter 2 through Chapter 14 of the Minimum Capital Requirements for Market Risk.
(5) If an internal CVA hedge involves an instrument that is subject to curvature risk, default risk charge or the residual risk add-on under the standardized approach as set out in Chapter 6 to Chapter 9 of the Minimum Capital Requirements for Market Risk, it can be eligible only if the trading desk that is the CVA desk's internal counterparty executes a transaction with an external counterparty that exactly offsets the trading desk's position with the CVA desk.
11.12. Banks that use the BA-CVA or the SA-CVA for calculating CVA capital requirements may cap the maturity adjustment factor at 1 for all netting sets contributing to CVA capital when they calculate CCR capital requirements under the Internal Ratings Based (IRB) approach.
40 Note that this is in contrast to the application of the market risk approaches set out in Chapter 3 of the Minimum Capital Requirements for Market Risk, where banks do not need SAMA approval to use the standardized approach.
Basic Approach for Credit Valuation Adjustment Risk
11.13. The BA-CVA calculations may be performed either via the reduced version or the full version. A bank under the BA-CVA approach can choose whether to implement the full version or the reduced version at its discretion. However, all banks using the BA-CVA must calculate the reduced version of BA-CVA capital requirements as the reduced BA-CVA is also part of the full BA-CVA capital calculations as a conservative means to limit hedging recognition.
(1) The full version recognizes counterparty spread hedges and is intended for banks that hedge CVA risk.
(2) The reduced version eliminates the element of hedging recognition from the full version. The reduced version is designed to simplify BA-CVA implementation for less sophisticated banks that do not hedge CVA.
Reduced version of the BA-CVA (hedges are not recognized)
11.14. The capital requirement for CVA risk under the reduced version of the BA-CVA (DSBA-CVA × Kreduced, where the discount scalar DSBA-CVA = 0.65) is calculated as follows (where the summations are taken over all counterparties that are within scope of the CVA charge), where:
(1) SCVAC is the CVA capital requirement that counterparty c would receive if considered on a stand-alone basis (referred to as “stand-alone CVA capital” below). See 11.15 for its calculation;
(2) ρ= 50%. It is supervisory correlation parameter. Its square, ρ2 = 25% represents the correlation between credit spreads of any two counterparties.41 In the formula below, the effect of p is to recognize the fact that the CVA risk to which a bank is exposed is less than the sum of the CVA risk for each counterparty, given that the credit spreads of counterparties are typically not perfectly correlated; and
(3) The first term under the square root in the formula below aggregates the systematic components of CVA risk, and the second term under the square root aggregates the idiosyncratic components of CVA risk.
11.15. The stand-alone CVA capital requirements for counterparty c that are used in the formula in 11.14 (SCVAc) is calculated as follows (where the summation is across all netting sets with the counterparty), where:
(1) RWc is the risk weight for counterparty c that reflects the volatility of its credit spread. These risk weights are based on a combination of sector and credit quality of the counterparty as prescribed in 11.16.
(2) MNS is the effective maturity for the netting set NS. For banks that have SAMA’s approval to use IMM, NNS is calculated as per 7.20 and 7.21 of this framework, with the exception that the five year cap in 7.20 is not applied. For banks that do not have SAMA’s approval to use IMM, MNS is calculated according to chapter 12.46 to 12.54 of the Minimum Capital Requirements for Credit Risk, with the exception that the five-year cap in chapter 12.46 of the Minimum Capital Requirements for Credit Risk is not applied.
(3) EADNS is the exposure at default (EAD) of the netting set NS, calculated in the same way as the bank calculates it for minimum capital requirements for CCR.
(4) DFNS is a supervisory discount factor. It is 1 for banks using the IMM to calculate EAD, and is 
for banks not using IMM.42
(5) ∝ = 1.4.43
11.16. The supervisory risk weights (RWc) are given in Table 1. Credit quality is specified as either investment grade (IG), high yield (HY), or not rated (NR). Where there are no external ratings or where external ratings are not recognized within a jurisdiction, banks may, subject to SAMA's approval, map the internal rating to an external rating and assign a risk weight corresponding to either IG or HY. Otherwise, the risk weights corresponding to NR is to be applied.
Table 1: Supervisory risk weights, RWc Sector of counterparty Credit quality of counterparty IG HY and NR Sovereigns including central banks, multilateral development banks 0.5% 2.0% Local government, government-backed nonfinancials, education and public administration 1.0% 4.0% Financials including government-backed financials 5.0% 12.0% Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 3.0% 7.0% Consumer goods and services, transportation and storage, administrative and support service activities 3.0% 8.5% Technology, telecommunications 2.0% 5.5% Health care, utilities, professional and technical activities 1.5% 5.0% Other sector 5.0% 12.0% Full version of the BA-CVA (hedges are recognized)
11.17. As set out in 11.13(1) the full version of the BA-CVA recognizes the effect of counterparty credit spread hedges. Only transactions used for the purpose of mitigating the counterparty credit spread component of CVA risk, and managed as such, can be eligible hedges.
11.18. Only single-name credit default swaps (CDS), single-name contingent CDS and index CDS can be eligible CVA hedges.
11.19. Eligible single-name credit instruments must:
(1) reference the counterparty directly; or
(2) reference an entity legally related to the counterparty; where legally related refers to cases where the reference name and the counterparty are either a parent and its subsidiary or two subsidiaries of a common parent; or
(3) reference an entity that belongs to the same sector and region as the counterparty.
11.20. Banks that intend to use the full version of BA-CVA must calculate the reduced version (Kreduced) as well. Under the full version, capital requirement for CVA risk DSBA-CVA × Kfull is calculated as follows, where DSBA-CVA = 0.65, and β= 0.25 is the SAMA supervisory parameter that is used to provide a floor that limits the extent to which hedging can reduce the capital requirements for CVA risk:
Kfull = β ∙ Kreduced + (1 - β) ∙ Khedged
11.21. The part of capital requirements that recognizes eligible hedges (Khedged) is calculated formulas follows (where the summations are taken over all counterparties c that are within scope of the CVA charge), where:
(1) Both the stand-alone CVA capital (SCVAc) and the correlation parameter (ρ) are defined in exactly the same way as for the reduced form calculation BA-CVA.
(2) SNHc is a quantity that gives recognition to the reduction in CVA risk of the counterparty c arising from the bank's use of single-name hedges of credit spread risk. See 11.23 for its calculation.
(3) IH is a quantity that gives recognition to the reduction in CVA risk across all counterparties arising from the bank's use of index hedges. See 11.24 for its calculation.
(4) HMAc is a quantity characterizing hedging misalignment, which is designed to limit the extent to which indirect hedges can reduce capital requirements given that they will not fully offset movements in a counterparty's credit spread. That is, with indirect hedges present Khedged cannot reach zero. See 11.25 for its calculation.
11.22. The formula for Khedged in 11.21 comprises three main terms as below:
(1) The first term (ρ • ∑c(SCVAc - SNHc) - IH)2 aggregates the systematic components of CVA risk arising from the bank's counterparties, the single name hedges and the index hedges.
(2) The second term (1- ρ2) • ∑c(SCVAc - SNHc)2 aggregates the idiosyncratic components of CVA risk arising from the bank's counterparties and the single-name hedges.
(3) The third term ∑cHMAc aggregates the components of indirect hedges that are not aligned with counterparties' credit spreads.
11.23. The quantity SNHc is calculated as follows (where the summation is across all single name hedges h that the bank has taken out to hedge the CVA risk of counterparty c), where:
(1) rhc is the supervisory prescribed correlation between the credit spread of counterparty c and the credit spread of a single-name hedge h of counterparty c. The value of rhc is set out the table 2 of 11.26. It is set at 100% if the hedge directly reference the counterparty c, and set at lower values if it does not.
(2) MhSN is the remaining maturity of single-name hedge h.
(3) BhSN is the notional of single-name hedge h. For single-name contingent credit default swaps (CDS), the notional is determined by the current market value of the reference portfolio or instrument.
(4) DFhSN is the supervisory discount factor calculated as 
.
(5) RWh is the supervisory risk weight of single-name hedge h that reflects the volatility of the credit spread of the reference name of the hedging instrument. These risk weights are based on a combination of sector and credit quality of the reference name of the hedging instrument as prescribed in Table 1 of 11.16.
11.24. The quantity IH is calculated as follows (where the summation is across all index hedges i that the bank has taken out to hedge CVA risk), where:
(1) Miind is the remaining maturity of index hedge i.
(2) Biind is the notional of the index hedge i.
(3) DFiind is the supervisory discount factor calculated as 
(4) RWi is the supervisory risk weight of the index hedge i. RWi is taken from the Table 1 of 11.16 based on the sector and credit quality of the index constituents and adjusted as follows:
(a) For an index where all index constituents belong to the same sector and are of the same credit quality, the relevant value in the Table 1 of 11.16 is multiplied by 0.7 to account for diversification of idiosyncratic risk within the index.
(b) For an index spanning multiple sectors or with a mixture of investment grade constituents and other constituents, the name-weighted average of the risk weights from the Table 1 of 11.16 should be calculated and then multiplied by 0.7.
11.25. The quantity HMAc is calculated as follows(where the summation is across all single name hedges h that have been taken out to hedge the CVA risk of counterparty c), where rhc, MhSN, BhSN, DFhSN and RWh have the same definitions as set out in 11.23.
11.26. The supervisory prescribed correlations rhc between the credit spread of counterparty c and the credit spread of its single-name hedge h are set in Table 2 as follows:
Table 2: Correlations between credit spread of counterparty and single-name hedge Single-name hedge h of counterparty c Value of rhc references counterparty c directly 100% has legal relation with counterparty c 80% shares sector and region with counterparty c 50% 41 One of the basic assumptions underlying the BA-CVA is that systematic credit spread risk is driven by a single factor. Under this assumption, ρ can be interpreted as the correlation between the credit spread of a counterparty and the single credit spread systematic factor.
42 DF is SAMA discount factor averaged over time between today and the netting set's effective maturity date. The interest rate used for discounting is set at 5%, hence 0.05 in the formula. The product of EAD and effective maturity in the BA-CVA formula is a proxy for the area under the discounted expected exposure profile of the netting set. The IMM definition of effective maturity already includes this discount factor, hence DF is set to 1 for IMM banks. Outside IMM, netting set effective maturity is defined as an average of actual trade maturities. This definition lacks discounting, so SAMA discount factor is added to compensate for this.
43 ∝ is the multiplier used to convert Effective Expected Positive Exposure (EEPE) to EAD in both SACCR and IMM. Its role in the calculation, therefore, is to convert the EAD of the netting set (EADNS) back to EEPE.Standardized Approach for Credit Valuation Adjustment Risk
11.27. The SA-CVA is an adaptation of the standardized approach for market risk set out in Chapter 6 to Chapter 9 of the Minimum Capital Requirements for Market Risk. The primary differences of the SA-CVA from the standardized approach for market risk are:
(1) The SA-CVA features a reduced granularity of market risk factors; and
(2) The SA-CVA does not include default risk and curvature risk.
11.28. Under the SA-CVA, capital requirements must be calculated and reported to SAMA at the same frequency as for the market risk standardized approach. In addition, banks using the SA-CVA must have the ability to produce SA-CVA capital requirement calculations at the request of SAMA and must accordingly provide the calculations.
11.29. The SA-CVA uses as inputs the sensitivities of regulatory CVA to counterparty credit spreads and market risk factors driving the values of covered transactions. Sensitivities must be computed by banks in accordance with the prudent valuation guidance set out in Basel Framework.
11.30. For a bank to be considered eligible for the use of SA-CVA by SAMA as set out in 11.7 of this framework, the bank must meet the following criteria at the minimum.
(1) A bank must be able to model exposure and calculate, on at least a monthly basis, CVA and CVA sensitivities to the market risk factors specified in 11.54 to 11.77 in this framework.
(2) A bank must have a CVA desk (or a similar dedicated function) responsible for risk management and hedging of CVA.
Regulatory CVA Calculations
11.31. A bank must calculate regulatory CVA for each counterparty with which it has at least one covered position for the purpose of the CVA risk capital requirements.
11.32. Regulatory CVA at a counterparty level must be calculated according to the following principles. A bank must demonstrate its compliance to the principles to SAMA.
(1) Regulatory CVA must be calculated as the expectation of future losses resulting from default of the counterparty under the assumption that the bank itself is free from the default risk. In expressing the regulatory CVA, non-zero losses must have a positive sign. This is reflected in 11.52 where WSkhdg must be subtracted from WSkCVA.
(2) The calculation must be based on at least the following three sets of inputs:
a) term structure of market-implied probability of default (PD);
b) market-consensus expected loss given default (ELGD);
c) simulated paths of discounted future exposure.
(3) The term structure of market-implied PD must be estimated from credit spreads observed in the markets. For counterparties whose credit is not actively traded (i.e. illiquid counterparties), the market-implied PD must be estimated from proxy credit spreads estimated for these counterparties according to the following requirements:
a) A bank must estimate the credit spread curves of illiquid counterparties from credit spreads observed in the markets of the counterparty's liquid peers via an algorithm that discriminates on at least the following three variables: a measure of credit quality (e.g. rating), industry, and region.
b) In certain cases, mapping an illiquid counterparty to a single liquid reference name can be allowed. A typical example would be mapping a municipality to its home country (i.e. setting the municipality credit spread equal to the sovereign credit spread plus a premium). A bank must justify to SAMA each case of mapping an illiquid counterparty to a single liquid reference name
c) When no credit spreads of any of the counterparty's peers is available due to the counterparty's specific type (e.g. project finance, funds), a bank is allowed to use a more fundamental analysis of credit risk to proxy the spread of an illiquid counterparty. However, where historical PDs are used as part of this assessment, the resulting spread cannot be based on historical PD only - it must relate to credit markets.
(4) The market-consensus ELGD value must be the same as the one used to calculate the risk-neutral PD from credit spreads unless the bank can demonstrate that the seniority of the exposure resulting from covered positions differs from the seniority of senior unsecured bonds. Collateral provided by the counterparty does not change the seniority of the exposure.
(5) The simulated paths of discounted future exposure are produced by pricing all derivative transactions with the counterparty along simulated paths of relevant market risk factors and discounting the prices to today using risk-free interest rates along the path.
(6) All market risk factors material for the transactions with a counterparty must be simulated as stochastic processes for an appropriate number of paths defined on an appropriate set of future time points extending to the maturity of the longest transaction.
(7) For transactions with a significant level of dependence between exposure and the counterparty's credit quality, this dependence should be taken into account.
(8) For margined counterparties, collateral is permitted to be recognized as a risk mitigant under the following conditions:
a) Collateral management requirements outlined in7.39 and 7.40 in this framework are satisfied.
b) All documentation used in collateralized transactions must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.
(9) For margined counterparties, the simulated paths of discounted future exposure must capture the effects of margining collateral that is recognized as a risk mitigant along each exposure path. All the relevant contractual features such as the nature of the margin agreement (unilateral vs bilateral), the frequency of margin calls, the type of collateral, thresholds, independent amounts, initial margins and minimum transfer amounts must be appropriately captured by the exposure model. To determine collateral available to a bank at a given exposure measurement time point, the exposure model must assume that the counterparty will not post or return any collateral within a certain time period immediately prior to that time point. The assumed value of this time period, known as the margin period of risk (MPoR), cannot be less than SAMA's supervisory floor. For SFTs and client cleared transactions as specified in 8.12 in this framework, the supervisory floor for the MPoR is equal to 4+N business days, where N is the re-margining period specified in the margin agreement (in particular, for margin agreements with daily or intra-daily exchange of margin, the minimum MPoR is 5 business days). For all other transactions, the supervisory floor for the MPoR is equal to 9+N business days.
11.33. The simulated paths of discounted future exposure are obtained via the exposure models used by a bank for calculating front office/accounting CVA, adjusted (if needed) to meet the requirements imposed for regulatory CVA calculation. Model calibration process (with the exception of the MPoR), market and transaction data used for regulatory CVA calculation must be the same as the ones used for accounting CVA calculation.
11.34. The generation of market risk factor paths underlying the exposure models must satisfy and a bank must demonstrate to SAMA its compliance to the following requirements:
(1) Drifts of risk factors must be consistent with a risk-neutral probability measure. Historical calibration of drifts is not allowed.
(2) The volatilities and correlations of market risk factors must be calibrated to market data whenever sufficient data exist in a given market. Otherwise, historical calibration is permissible.
(3) The distribution of modelled risk factors must account for the possible non-normality of the distribution of exposures, including the existence of leptokurtosis (“fat tails”), where appropriate.
11.35. Netting recognition is the same as in the accounting CVA calculations. In particular, netting uncertainty can be modelled.
11.36. A bank must satisfy and demonstrate to SAMA its compliance to the following requirements:
(1) Exposure models used for calculating regulatory CVA must be part of a CVA risk management framework that includes the identification, measurement, management, approval and internal reporting of CVA risk. A bank must have a credible track record in using these exposure models for calculating CVA and CVA sensitivities to market risk factors.
(2) Senior management should be actively involved in the risk control process and must regard CVA risk control as an essential aspect of the business to which significant resources need to be devoted.
(3) A bank must have a process in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operation of the exposure system used for accounting CVA calculations.
(4) A bank must have an independent control unit that is responsible for the effective initial and ongoing validation of the exposure models. This unit must be independent from business credit and trading units (including the CVA desk), must be adequately staffed and must report directly to senior management of the bank.
(5) A bank must document the process for initial and ongoing validation of its exposure models to a level of detail that would enable a third party to understand how the models operate, their limitations, and their key assumptions; and recreate the analysis. This documentation must set out the minimum frequency with which ongoing validation will be conducted as well as other circumstances (such as a sudden change in market behavior) under which additional validation should be conducted. In addition, the documentation must describe how the validation is conducted with respect to data flows and portfolios, what analyses are used and how representative counterparty portfolios are constructed.
(6) The pricing models used to calculate exposure for a given path of market risk factors must be tested against appropriate independent benchmarks for a wide range of market states as part of the initial and ongoing model validation process. Pricing models for options must account for the nonlinearity of option value with respect to market risk factors.
(7) An independent review of the overall CVA risk management process should be carried out regularly in the bank's own internal auditing process. This review should include both the activities of the CVA desk and of the independent risk control unit.
(8) A bank must define criteria on which to assess the exposure models and their inputs and have a written policy in place to describe the process to assess the performance of exposure models and remedy unacceptable performance.
(9) Exposure models must capture transaction-specific information in order to aggregate exposures at the level of the netting set. A bank must verify that transactions are assigned to the appropriate netting set within the model.
(10) Exposure models must reflect transaction terms and specifications in a timely, complete, and conservative fashion. The terms and specifications must reside in a secure database that is subject to formal and periodic audit. The transmission of transaction terms and specifications data to the exposure model must also be subject to internal audit, and formal reconciliation processes must be in place between the internal model and source data systems to verify on an ongoing basis that transaction terms and specifications are being reflected in the exposure system correctly or at least conservatively.
(11) The current and historical market data must be acquired independently of the lines of business and be compliant with accounting. They must be fed into the exposure models in a timely and complete fashion, and maintained in a secure database subject to formal and periodic audit. A bank must also have a well-developed data integrity process to handle the data of erroneous and/or anomalous observations. In the case where an exposure model relies on proxy market data, a bank must set internal policies to identify suitable proxies and the bank must demonstrate empirically on an ongoing basis that the proxy provides a conservative representation of the underlying risk under adverse market conditions.
Eligible hedges
11.37. Only whole transactions that are used for the purpose of mitigating CVA risk, and managed as such, can be eligible hedges. Transactions cannot be split into several effective transactions.
11.38. Eligible hedges can include:
(1) instruments that hedge variability of the counterparty credit spread; and
(2) instruments that hedge variability of the exposure component of CVA risk.
11.39. Instruments that are not eligible for the internal models approach for market risk under Chapter 10 to Chapter 13 of the Minimum Capital Requirements for Market Risk (e.g. tranched credit derivatives) cannot be eligible CVA hedges.
Multiplier
11.40. Aggregated capital requirements can be scaled up by the multiplier mCVA.
11.41. The multiplier mCVA is set at 1. SAMA may require a bank to use a higher value of mCVA if SAMA determines that the bank’s CVA model risk warrants it (e.g. if the level of model risk for the calculation of CVA sensitivities is too high or the dependence between the bank’s exposure to a counterparty and the counterparty’s credit quality is not appropriately taken into account in its CVA calculations).
Calculations
11.42. The SA-CVA capital requirements are calculated as the sum of the capital requirements for delta and vega risks calculated for the entire CVA portfolio (including eligible hedges).
11.43. The capital requirements for delta risk are calculated as the simple sum of delta capital requirements calculated independently for the following six risk classes:
(1) interest rate risk;
(2) foreign exchange (FX) risk;
(3) counterparty credit spread risk;
(4) reference credit spread risk (i.e. credit spreads that drive the CVA exposure component);
(5) equity risk; and
(6) commodity risk.
11.44. If an instrument is deemed as an eligible hedge for credit spread delta risk, it must be assigned in its entirety (see 11.37 of this framework) either to the counterparty credit spread or to the reference credit spread risk class. Instruments must not be split between the two risk classes.
11.45. The capital requirements for vega risk are calculated as the simple sum of vega capital requirements calculated independently for the following five risk classes. There is no vega capital requirements for counterparty credit spread risk.
(1) interest rate risk; (IR);
(2) FX risk;
(3) reference credit spread risk;
(4) equity risk; and
(5) commodity risk
11.46. Delta and vega capital requirements are calculated in the same manner using the same procedures set out in 11.47 to 11.53 of this framework.
11.47. For each risk class, (i) the sensitivity of the aggregate CVA, skCVA, and (ii) the sensitivity of the market value of all eligible hedging instruments in the CVA portfolio, skHdg, to each risk factor k in the risk class are calculated. The sensitivities are defined as the ratio of the change of the value in question (i.e. (i) aggregate CVA or (ii) market value of all CVA hedges) caused by a small change of the risk factor’s current value to the size of the change. Specific definitions for each risk class are set out in 11.54 to 11.77of this framework. These definitions include specific values of changes or shifts in risk factors. However, a bank may use smaller values of risk factor shifts if doing so is consistent with internal risk management calculations. A bank may use AAD and similar computational techniques to calculate CVA sensitivities under the SA-CVA if doing so is consistent with the bank’s internal risk management calculations and the relevant validation standards described in the SA-CVA framework.
11.48. CVA sensitivities for vega risk are always material and must be calculated regardless of whether or not the portfolio includes options. When CVA sensitivities for vega risk are calculated, the volatility shift must apply to both types of volatilities that appear in exposure models:
(1) volatilities used for generating risk factor paths; and
(2) volatilities used for pricing options.
11.49. If a hedging instrument is an index, its sensitivities to all risk factors upon which the value of the index depends must be calculated. The index sensitivity to risk factor k must be calculated by applying the shift of risk factor k to all index constituents that depend on this risk factor and recalculating the changed value of the index. For example, to calculate delta sensitivity of S&P500 to large financial companies, a bank must apply the relevant shift to equity prices of all large financial companies that are constituents of S&P500 and re-compute the index.
11.50. For the following risk classes, a bank may choose to introduce a set of additional risk factors that directly correspond to qualified credit and equity indices. For delta risks, a credit or equity index is qualified if it satisfies liquidity and diversification conditions specified in Chapter 7.31 of the Minimum Capital Requirements for Market Risk; for vega risks, any credit or equity index is qualified. Under this option, a bank must calculate sensitivities of CVA and the eligible CVA hedges to the qualified index risk factors in addition to sensitivities to the non-index risk factors. Under this option, for a covered transaction or an eligible hedging instrument whose underlying is a qualified index, its contribution to sensitivities to the index constituents is replaced with its contribution to a single sensitivity to the underlying index. For example, for a portfolio consisting only of equity derivatives referencing only qualified equity indices, no calculation of CVA sensitivities to non-index equity risk factors is necessary. If more than 75% of constituents of a qualified index (taking into account the weightings of the constituents) are mapped to the same sector, the entire index must be mapped to that sector and treated as a single-name sensitivity in that bucket. In all other cases, the sensitivity must be mapped to the applicable index bucket.
(1) counterparty credit spread risk;
(2) reference credit spread risk; and
(3) equity risk.
11.51. The weighted sensitivities WSkCVA and WSkHdg for each risk factor k are calculated by multiplying the net sensitivities SkCVA and SkHdg, respectively, by the corresponding risk weight RWk (the risk weights applicable to each risk class are specified in 11.54 to 11.77 of this framework).
WSkCVA = RWkskCVA
WSkHdg = RWkskHdg
11.52. The net weighted sensitivity of the CVA portfolio Sk to risk factor k is obtained by44:
11.53. For each risk class, the net sensitivities are aggregated as follows:
(1) The weighted sensitivities must be aggregated into a capital requirement Kb within each bucket b (the buckets and correlation parameters ρKl applicable to each risk class are specified in 11.54 to 11.77 of this framework), where R is the hedging disallowance parameter, set at 0.01, that prevents the possibility of recognizing perfect hedging of CVA risk.
(2) Bucket-level capital requirements must then be aggregated across buckets within each risk class (the correlation parameters γbc applicable to each risk class are specified in 11.54 to 11.77 of this framework). Note that this equation differs from the corresponding aggregation equation for market risk capital requirements in Chapter 7.4 of the Minimum Capital Requirements for Market Risk, including the multiplier mCVA.
(3) In calculating K in above (2), S is defined as the sum of the weighted b sensitivities WS for all risk factors k within bucket b, floored by -K and k b capped by K, and the S is defined in the same way for all risk factors k in b c bucket c:
Interest rates buckets, risk factors, sensitivities, risk weights and correlations
11.54. For interest rate delta and vega risks, buckets must be set per individual currencies.
11.55. For interest rate delta and vega risks, cross-bucket correlation γbc is set at 0.5 for all currency pairs.
11.56. The interest rate delta risk factors for a bank’s reporting currency and for the following currencies USD, EUR, GBP, AUD, CAD, SEK or JPY:
(1) The interest rate delta risk factors are the absolute changes of the inflation rate and of the risk-free yields for the following five tenors: 1 year, 2 years, 5 years, 10 years and 30 years.
(2) The sensitivities to the abovementioned risk-free yields are measured by changing the risk-free yield for a given tenor for all curves in a given currency by 1 basis point (0.0001 in absolute terms) and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.0001. The sensitivity to the inflation rate is obtained by changing the inflation rate by 1 basis point (0.0001 in absolute terms) and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.0001.
(3) The risk weights RWk are set as follows:
Table 3: Risk weight for interest rate risk (specified currencies) Risk factor 1 year 2 years 5 years 10 years 30 years Inflation Risk weight 1.11% 0.93% 0.74% 0.74% 0.74% 1.11% (4) The correlations between pairs of risk factors ρkl are set as follows:
Table 4: Correlations for interest rate risk factors (specified currencies) 1 year 2 years 5 years 10 years 30 years Inflation 1 year 100% 91% 72% 55% 31% 40% 2 years 100% 87% 72% 45% 40% 5 years 100% 91% 68% 40% 10 years 100% 83% 40% 30 years 100% 40% Inflation 100% 11.57. The interest rate delta risk factors for other currencies not specified in 11.56 of this framework:
(1) The interest rate risk factors are the absolute change of the inflation rate and the parallel shift of the entire risk-free yield curve for a given currency.
(2) The sensitivity to the yield curve is measured by applying a parallel shift to all risk-free yield curves in a given currency by 1 basis point (0.0001 in absolute terms) and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.0001. The sensitivity to the inflation rate is obtained by changing the inflation rate by 1 basis point (0.0001 in absolute terms) and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.0001.
(3) The risk weights for both the risk-free yield curve and the inflation rate RWk are set at 1.85%.
(4) The correlations between the risk-free yield curve and the inflation rate ρKl are set at 40%.
11.58. The interest rate vega risk factors for all currencies:
(1) The interest rate vega risk factors are a simultaneous relative change of all volatilities for the inflation rate and a simultaneous relative change of all interest rate volatilities for a given currency.
(2) The sensitivity to (i) the interest rate volatilities or (ii) inflation rate volatilities is measured by respectively applying a simultaneous shift to (i) all interest rate volatilities or (ii) inflation rate volatilities by 1% relative to their current values and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.01.
(3) The risk weights for both the interest rate volatilities and the inflation rate volatilities RWk are set to 100%.
(4) Correlations between the interest rate volatilities and the inflation rate volatilities ρKl are set at 40%.
Foreign exchange buckets, risk factors, sensitivities, risk weights and correlations
11.59. For FX delta and vega risks, buckets must be set per individual currencies except for a bank’s own reporting currency.
11.60. For FX delta and vega risks, the cross-bucket correlation γbc is set at 06. for all currency pairs.
11.61. The FX delta risk factors for all currencies:
(1) The single FX delta risk factor is defined as the relative change of the FX spot rate between a given currency and a bank’s reporting currency, where the FX spot rate is the current market price of one unit of another currency expressed in the units of the bank’s reporting currency.
(2) Sensitivities to FX spot rates are measured by shifting the exchange rate between the bank’s reporting currency and another currency (i.e. the value of one unit of another currency expressed in units of the reporting currency) by 1% relative to its current value and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.01. For transactions that reference an exchange rate between a pair of non-reporting currencies, the sensitivities to the FX spot rates between the bank’s reporting currency and each of the referenced non-reporting currencies must be measured.45
(3) The risk weights for all exchange rates between the bank’s reporting currency and another currency are set at 11%.
11.62. The FX vega risk factors for all currency:
(1) The single FX vega risk factor is a simultaneous relative change of all volatilities for an exchange rate between a bank’s reporting currency and another given currency.
(2) The sensitivities to the FX volatilities are measured by simultaneously shifting all volatilities for a given exchange rate between the bank’s reporting currency and another currency by 1% relative to their current values and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.01. For transactions that reference an exchange rate between a pair of non-reporting currencies, the volatilities of the FX spot rates between the bank’s reporting currency and each of the referenced non-reporting currencies must be measured.
(3) The risk weights for FX volatilities RWk are set to 100%.
Counterparty credit spread buckets, risk factors, sensitivities, risk weights and correlations
11.63. Counterparty credit spread risk is not subject to vega risk capital requirements. Buckets for delta risk are set as follows:
(1) Buckets 1 to 7 are defined for factors that are not qualified indices as set out in 11.50 of this framework;
(2) Bucket 8 is set for the optional treatment of qualified indices. Under the optional treatment, only instruments that reference qualified indices can be assigned to bucket 8, while all single-name and all non-qualified index hedges must be assigned to buckets 1 to 7 for calculations of CVA sensitivities and sensitivities. For any instrument referencing an index assigned to buckets 1 to 7, the look-through approach must be used (i.e., sensitivity of the hedge to each index constituent must be calculated).
Table 5: Buckets for counterparty credit spread delta risk Bucket number Sector 1 a) Sovereigns including central banks, multilateral development banks b) Local government, government-backed non-financials, education and public administration 2 Financials including government-backed financials 3 Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 4 Consumer goods and services, transportation and storage, administrative and support service activities 5 Technology, telecommunications 6 Health care, utilities, professional and technical activities 7 Other sector 8 Qualified Indices 11.64. For counterparty credit spread delta risk, cross-bucket correlations γbc are set as follows:
Table 6: Cross-bucket correlations for counterparty credit spread delta risk Bucket 1 2 3 4 5 6 7 8 1 100% 10% 20% 25% 20% 15% 0% 45% 2 100% 5% 15% 20% 5% 0% 45% 3 100% 20% 25% 5% 0% 45% 4 100% 25% 5% 0% 45% 5 100% 5% 0% 45% 6 100% 0% 45% 7 100% 0% 8 100% 11.65. The counterparty credit spread delta risk factors for a given bucket:
(1) The counterparty credit spread delta risk factors are absolute shifts of credit spreads of individual entities (counterparties and reference names for counterparty credit spread hedges) and qualified indices (if the optional treatment is chosen) for the following tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.
(2) For each entity and each tenor point, the sensitivities are measured by shifting the relevant credit spread by 1 basis point (0.0001 in absolute terms) and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.0001.
(3) The risk weights RWk are set as follows the depending on the entity's bucket, where IG, HY, and NR represent “investment grade”, “high yield” and “not rated” as specified for the BA-CVA in 11.16 of this framework. The same risk weight for a given bucket and given credit quality applies to all tenors.
Table 7: Risk weights for counterparty credit spread delta risk Bucket 1 a) 1 b) 2 3 4 5 6 7 8 IG names 0.5% 1.0% 5.0% 3.0% 3.0% 2.0% 1.5% 5.0% 1.5% HY and NR names 2.0% 4.0% 12.0% 7.0% 8.5% 5.5% 5.0% 12.0% 5.0% (4) For buckets 1 to 7, the correlation parameter ρkl between two weighted sensitivities WSk and WSi is calculated as follows, where:
a) ρtenor is equal to 100% if the two tenors are the same and 90% otherwise;
b) ρname is equal to 100% if the two names are the same, 90% if the two names are distinct, but legally related and 50% otherwise;
c) ρquality is equal to 100% if the credit quality of the two names is the same (i.e. IG and IG or HY/NR and HY/NR) and 80% otherwise.
ρkl = ρtenor ∙ ρname ∙ ρquality
(5) For bucket 8, the correlation parameter ρkl between two weighted sensitivities WSk and WSi is calculated as follows, where
a) ρtenor is equal to 100% if the two tenors are the same and 90% otherwise;
b) ρname is equal to 100% if the two indices are the same and of the same series, 90% if the two indices are the same, but of distinct series, and 80% otherwise;
c) ρquality is equal to 100% if the credit quality of the two indices is the same (ie IG and IG or HY and HY) and 80% otherwise.
ρkl = ρtenor ∙ ρname ∙ ρquality
Reference credit spread buckets, risk factors, sensitivities, risk weights and correlations
11.66. Reference credit spread risk is subject to both delta and vega risk capital requirements. Buckets for delta and vega risks are set as follows, where IG, HY and NR represent “investment grade”, “high yield” and “not rated” as specified for the BA-CVA in 11.16 of this framework:
Table 8: Buckets for reference credit spread risk Bucket number Credit quality Sector 1 IG Sovereigns including central banks, multilateral development banks 2 Local government, government-backed non-financials, education and public administration 3 Financials including government-backed financials 4 Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 5 Consumer goods and services, transportation and storage, administrative and support service activities 6 Technology, telecommunications 7 Health care, utilities, professional and technical activities 8 (HY) and NR Sovereigns including central banks, multilateral development banks 9 Local government, government-backed non-financials, education and public administration 10 Financials including government-backed financials 11 Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 12 Consumer goods and services, transportation and storage, administrative and support service activities 13 Technology, telecommunications 14 Health care, utilities, professional and technical activities 15 (Not applicable) Other sector 16 IG Qualified Indices 17 HY Qualified Indices 11.67. For reference credit spread delta and Vega risks, cross-bucket correlations γbc are set as follows:
(1) The cross-bucket correlations γbc between buckets of the same credit quality (ie either IG or HY/NR) are set as follows:
Table 9: Cross-bucket correlations for reference credit spread risk Bucket 1/8 2/9 3/10 4/11 5/12 6/13 7/14 15 16 17 1/8 100% 75% 10% 20% 25% 20% 15% 0% 45% 45% 2/9 100% 5% 15% 20% 15% 10% 0% 45% 45% 3/10 100% 5% 15% 20% 5% 0% 45% 45% 4/11 100% 20% 25% 5% 0% 45% 45% 5/12 100% 25% 5% 0% 45% 45% 6/13 100% 5% 0% 45% 45% 7/14 100% 0% 45% 45% 15 100% 0% 0% 16 100% 75% 17 100% (2) For cross-bucket correlations γbc between buckets 1 to 14 of different credit quality (i.e. IG and HY/NR), the correlations γbc specified in 11.67 of this framework (1) are divided by 2.
11.68. Reference credit spread delta risk factors for a given bucket:
(1) The single reference credit spread delta risk factor is a simultaneous absolute shift of the credit spreads of all tenors for all reference names in the bucket.
(2) The sensitivity to reference credit spread delta risk is measured by simultaneously shifting the credit spreads of all tenors for all reference names in the bucket by 1 basis point (0.0001 in absolute terms) and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.0001.
(3) The risk weights RWk are set as follows depending on the reference name's bucket:
Table 10: Risk weights for reference credit spread delta risk IG bucket 1 2 3 4 5 6 7 8 9 Risk weigh 0.5% 1.0% 5.0% 3.0% 3.0% 2.0% 1.5% 2.0% 4.0% HY/NR bucket 10 11 12 13 14 15 16 17 Risk weight 12.0% 7.0% 8.5% 5.5% 5.0% 12.0% 1.5% 5.0% 11.69. Reference credit spread vega risk factors for a given bucket:
(1) The single reference credit spread Vega risk factor is a simultaneous relative shift of the volatilities of credit spreads of all tenors for all reference names in the bucket.
(2) The sensitivity to the reference credit spread vega risk factor is measured by simultaneously shifting the volatilities of credit spreads of all tenors for all reference names in the bucket by 1% relative to their current values and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.01.
(3) Risk weights for reference credit spread volatilities ??? are set to 100%.
Equity buckets, risk factors, sensitivities, risk weights and correlations
11.70. For equity delta and vega risks, buckets are set as follow, where:
(1) Market capitalization (“market cap”) is defined as the sum of the market capitalizations of the same legal entity or group of legal entities across all stock markets globally. The reference to “group of legal entities” covers cases where the listed entity is a parent company of a group of legal entities. Under no circumstances should the sum of the market capitalizations of multiple related listed entities be used to determine whether a listed entity is “large market cap” or “small market cap”.
(2) “Large market cap” is defined as a market capitalization equal to or greater than USD 2 billion and “small market cap” is defined as a market capitalization of less than USD 2 billion.
(3) The advanced economies are Canada, the United States, Mexico, the euro area, the non-euro area western European countries (the United Kingdom, Norway, Sweden, Denmark and Switzerland), Japan, Oceania (Australia and New Zealand), Singapore and Hong Kong SAR.
(4) To assign a risk exposure to a sector, banks must rely on a classification that is commonly used in the market for grouping issuers by industry sector. The bank must assign each issuer to one of the sector buckets in the table above and it must assign all issuers from the same industry to the same sector. Risk positions from any issuer that a bank cannot assign to a sector in this fashion must be assigned to the “other sector” (i.e. bucket 11). For multinational multi-sector equity issuers, the allocation to a particular bucket must be done according to the most material region and sector in which the issuer operates.
Table 11: Buckets for equity risk Bucket number Size Region Sector 1 Large Emerging market economies Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities 2 Telecommunications, industrials 3 Basic materials, energy, agriculture, manufacturing, mining and quarrying 4 Financials including government-backed financials, real estate activities, technology 5 Advanced economies Consumer goods and services, transportation and storage, administrative and support service activities, healthcare, utilities 6 Telecommunications, industrials 7 Basic materials, energy, agriculture, manufacturing, mining and quarrying 8 Financials including government-backed financials, real estate activities, technology 9 Small Emerging market economies All sectors described under bucket numbers 1, 2, 3, and 4 10 Advanced economies All sectors described under bucket numbers 5, 6, 7, and 8 11 (Not applicable) Other sector 12 Large cap, advanced economies Qualified Indices 13 Other Qualified Indices 11.71. For equity delta and vega risks, cross-bucket correlation γbc is set at 15% for all cross-bucket pairs that fall within bucket numbers 1 to 10. The cross-bucket correlation between buckets 12 and 13 is set at 75% and the cross bucket correlation between buckets 12 or 13 and any of the buckets 1-10 is 45%. γbc is set at 0% for all cross-bucket pairs that include bucket 11.
11.72. Equity delta risk factors for a given bucket:
(1) The single equity delta risk factor is a simultaneous relative shift of equity spot prices for all reference names in the bucket.
(2) The sensitivity to the equity delta risk factors is measured by simultaneously shifting the equity spot prices for all reference names in the bucket by 1% relative to their current values and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.01.
(3) Risk weights RWk are set as follows depending on the reference name's bucket:
Table 12: Risk weights for equity delta risk Bucket number Risk weight 1 55% 2 60% 3 45% 4 55% 5 30% 6 35% 7 40% 8 50% 9 70% 10 50% 11 70% 12 15% 13 25% 11.73. Equity Vega risk factors for a given bucket:
(1) The single equity vega risk factor is a simultaneous relative shift of the volatilities for all reference names in the bucket.
(2) The sensitivity to equity vega risk factors are measured by simultaneously shifting the volatilities for all reference names in the bucket by 1% relative to their current values and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.01.
(3) The risk weights for equity volatilities RWk are set to 78% for large market capitalization buckets and to 100% for other buckets.
Commodity buckets, risk factors, sensitivities, risk weights and correlations
11.74. For commodity delta and vega risks, buckets are set as follows:
Table 13: Buckets for commodity risk Bucket number Commodity group Examples 1 Energy – Solid combustibles coal, charcoal, wood pellets, nuclear fuel (such as uranium) 2 Energy – Liquid combustibles crude oil (such as Light-sweet, heavy, WTI and Brent); biofuels (such as bioethanol and biodiesel); petrochemicals (such as propane, ethane, gasoline, methanol and butane); refined fuels (such as jet fuel, kerosene, gasoil, fuel oil, naptha, heating oil and diesel) 3 Energy – Electricity and carbon trading electricity (such as spot, day-ahead, peak and off-peak); carbon emissions trading (such as certified emissions reductions, in delivery month EUA, RGGI CO2 allowance and renewable energy certificates) 4 Freight dry-bulk route (such as capesize, panamex, handysize and supramax); liquid-bulk/gas shipping route (such as suezmax, aframax and very large crude carriers) 5 Metals – nonprecious base metal (such as aluminum, copper, lead, nickel, tin and zinc); steel raw materials (such as steel billet, steel wire, steel coil, steel scrap and steel rebar, iron ore, tungsten, vanadium, titanium and tantalum); minor metals (such as cobalt, manganese, molybdenum) 6 Gaseous combustibles natural gas; liquefied natural gas 7 Precious metals (including gold) gold; silver; platinum; palladium 8 Grains & oilseed corn; wheat; soybean (such as soybean seed, soybean oil and soybean meal); oats; palm oil; canola; barley; rapeseed (such as rapeseed seed, rapeseed oil, and rapeseed meal); red bean, sorghum; coconut oil; olive oil; peanut oil; sunflower oil; rice 9 Livestock & dairy cattle (such live and feeder); poultry; lamb; fish; shrimp; dairy (such as milk, whey, eggs, butter and cheese) 10 Softs and other agriculturals cocoa; coffee (such as arabica and robusta); tea; citrus and orange juice; potatoes; sugar; cotton; wool; lumber and pulp; rubber 11 Other commodity industrial minerals (such as potash, fertilizer and phosphate rocks), rare earths; terephthalic acid; flat glass 11.75. For commodity delta and vega risks, cross-bucket correlation γbc is set at 20% for all cross-bucket pairs that fall within bucket numbers 1 to 10. γbc is set at 0% for all cross-bucket pairs that include bucket 11.
11.76. Commodity delta risk factors for a given bucket:
(1) The single commodity delta risk factor is a simultaneous relative shift of commodity spot prices for all commodities in the bucket.
(2) The sensitivities to commodity delta risk factors are measured by shifting the spot prices of all commodities in the bucket by 1% relative to their current values and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.01.
(3) The risk weights RWk are set as follows depending on the reference name's bucket:
Table 14: Risk weights for commodity delta risk Bucket 1 2 3 4 5 6 7 8 9 10 11 RW 30% 35% 60% 80% 40% 45% 20% 35% 25% 35% 50% 11.77. Commodity vega risk factors for a given bucket:
(1) The single commodity vega risk factor is a simultaneous relative shift of the volatilities for all commodities in the bucket.
(2) The sensitivity to commodity vega risk factors is measured by simultaneously shifting the volatilities for all commodities in the bucket by 1% relative to their current values and dividing the resulting change in the aggregate CVA (or the value of CVA hedges) by 0.01.
(3) Risk weights for commodity volatilities RWk are set to 100%.
44 Note that the formula in 11.52 is set out under the convention that the CVA is positive as specified in 11.32 (1). It intends to recognize the risk reducing effect of hedging. For example, when hedging the counterparty credit spread component of CVA risk for a specific counterparty by buying credit protection on the counterparty: if the counterparty’s credit spread widens, the CVA (expressed as a positive value) increases resulting in the positive CVA sensitivity to the counterparty credit spread. At the same time, as the value of the hedge from the bank’s perspective increases as well (as credit protection becomes more valuable), the sensitivity of the hedge is also positive. The positive weighted sensitivities of the CVA and its hedge offset each other using the formula with the minus sign. If CVA loss had been expressed as a negative value, the minus sign in 11.52 would have been replaced by a plus sign.
45 For example, if a SAR-reporting bank holds an instrument that references the USD-GBP exchange rate, the bank must measure CVA sensitivity both to the SAR-GBP exchange rate and to the SAR- USD exchange rate.Application Guidance/ Illustrative Examples
12. The Application of the (SA-CCR) to Sample Portfolios
12.1. This section sets out the calculation of exposure at default (EAD) for five sample portfolios using SA-CCR. The calculations for the sample portfolios assume that intermediate values are not rounded (i.e. the actual results are carried through in sequential order). However, for ease of presentation, these intermediate values as well as the final EAD are rounded.
12.2. The EAD for all netting sets in SA-CCR is given by the following formula, where alpha is assigned a value of 1.4:
EAD = alpha * (RC + multiplier * AddOnaggregate
Example 1: Interest rate derivatives (unmargined netting set)
12.3. Netting set 1 consists of three interest rates derivatives: two fixed versus floating interest rate swaps and one purchased physically-settled European swaption. The table below summarizes the relevant contractual terms of the three derivatives. All notional amounts and market values in the table are given in USD thousands.
Trade # Nature Residual maturity Base currency Notional (USD thousands) Pay Leg (*) Receive Leg (*) Market value (USD thousands) 1 Interest Rate Swap 10 years USD 10,000 Fixed Floating 30 2 Interest Rate Swap 4 years USD 10,000 Floating Fixed -20 3 European Swaption 1 into 10 years EUR 5,000 Floating Fixed 50 (*) For the swaption, the legs are those of the underlying swap 12.4. The netting set is not subject to a margin agreement and there is no exchange of collateral (independent amount/initial margin) at inception. For unmargined netting sets, the replacement cost is calculated using the following formula, where:
(1) V is a simple algebraic sum of the derivatives' market values at the reference date
(2) C is the haircut value of the initial margin, which is zero in this example
RC = max{V - C; 0}
12.5. Thus, using the market values indicated in the table (expressed in USD thousands):
RC = max{30 — 20 + 50 — 0; 0} = 60
12.6. Since V-C is positive (i.e. USD 60,000), the value of the multiplier is 1, as explained in 6.24.
12.7. The remaining term to be calculated in the calculation EAD is the aggregate add-on (AddOnaggregate). All the transactions in the netting set belong to the interest rate asset class. The AddOnaggregate for the interest rate asset class can be calculated using the seven steps set out in 6.60.
12.8. Step 1: Calculate the effective notional for each trade in the netting set. This is calculated as the product of the following three terms:
(i) the adjusted notional of the trade (d);
(ii) the supervisory delta adjustment of the trade (δ); and
(iii) the maturity factor (MF). That is, for each trade i, the effective notional Di is calculated as Di = di * MFi * δ.
12.9. For interest rate derivatives, the trade-level adjusted notional (di) is the product of the trade notional amount and the supervisory duration (SDi), i.e. di = notional * SDi. The supervisory duration is calculated using the following formula, where:
(1) Si and Ei are the start and end dates, respectively, of the time period referenced by the interest rate derivative (or, where such a derivative references the value of another interest rate instrument, the time period determined on the basis of the underlying instrument). If the start date has occurred (e.g. an ongoing interest rate swap), Si must be set to zero.
(2) The calculated value of SDi is floored at 10 business days (which expressed in years, using an assumed market convention of 250 business days a year is 10/250 years
12.10. Using the formula for supervisory duration above, the trade-level adjusted notional amounts for each of the trades in Example 1 are as follows:
Trade # Notional (USD thousand) Si Ei SDi Adjusted notional, di (USD thousands) 1 10,000 0 10 7.87 78,694 2 10,000 0 4 3.63 36,254 3 5,000 1 11 7.49 37,428 12.11. 6.51 sets out the calculation of the maturity factor (MFi) for unmargined trades. For trades that have a remaining maturity in excess of one year, which is the case for all trades in this example, the formula gives a maturity factor of 1.
12.12. As set out in 6.40 to 6.43, a supervisory delta is assigned to each trade. In particular:
(1) Trade 1 is long in the primary risk factor (the reference floating rate) and is not an option so the supervisory delta is equal to 1.
(2) Trade 2 is short in the primary risk factor and is not an option; thus, the supervisory delta is equal to -1.
(3) Trade 3 is an option to enter into an interest rate swap that is short in the primary risk factor and therefore is treated as a bought put option. As such, the supervisory delta is determined by applying the relevant formula in 6.42, using 50% as the supervisory option volatility and 1 (year) as the option exercise date. In particular, assuming that the underlying price (the appropriate forward swap rate) is 6% and the strike price (the swaption's fixed rate) is 5%, the supervisory delta is:
12.13. The effective notional for each trade in the netting set (Di) is calculated using the formula Di = di * MFi * δi and values for each term noted above. The results of applying the formula are as follows:
Trade # Notional (USD thousands) Adjusted notional, di (USD, thousands) Maturity Factor, MFi Delta, δi Effective notional, Di (USD, thousands) 1 10,000 78,694 1 1 78,694 2 10,000 36,254 1 -1 -36,254 3 5,000 37,428 1 -0.2694 -10,083 12.14. Step 2: Allocate the trades to hedging sets. In the interest rate asset class the hedging sets consist of all the derivatives that reference the same currency. In this example, the netting set is comprised of two hedging sets, since the trades refer to interest rates denominated in two different currencies (USD and EUR).
12.15. Step 3: Within each hedging set allocate each of the trades to the following three maturity buckets: less than one year (bucket 1), between one and five years (bucket 2) and more than five years (bucket 3). For this example, within the hedging set “USD”, trade 1 falls into the third maturity bucket (more than 5 years) and trade 2 falls into the second maturity bucket (between one and five years). Trade 3 falls into the third maturity bucket (more than 5 years) of the hedging set “EUR”. The results of steps 1 to 3 are summarized in the table below:
Trade # Effective notional, Di (USD, thousands) Hedging set Maturity bucket 1 78,694 USD 3 2 -36,254 USD 2 3 -10,083 EUR 3 12.16. Step 4: Calculate the effective notional of each maturity bucket (DB1, DB2 and DB3) within each hedging set (USD and EUR) by adding together all the trade level effective notionals within each maturity bucket in the hedging set. In this example, there are no maturity buckets within a hedging set with more than one trade, and so this case the effective notional of each maturity bucket is simply equal to the effective notional of the single trade in each bucket. Specifically:
(1) For the USD hedging set: DB1 is zero, DB2 is -36,254 (thousand USD) and DB3 is 78,694 (thousand USD)
(2) For the EUR hedging set: DB1 and DB2 are zero and DB3 is -10,083 (thousand USD).
12.17. Step 5: Calculate the effective notional of the hedging set (ENHS) by using either of the two following aggregation formulas (the latter is to be used if the bank chooses not to recognize offsets between long and short positions across maturity buckets):
12.18. In this example, the first of the two aggregation formulas is used. Therefore, the effective notionals for the USD hedging set (ENUSD) and the EUR hedging (ENEUR) are, respectively (expressed in USD thousands):
12.19. Step 6: Calculate the hedging set level add-on (AddOnhs) by multiplying the effective notional of the hedging set (ENhs) by the prescribed supervisory factor (SFhs). The prescribed supervisory factor in the interest rate asset class is set at 0.5%. Therefore, the add-on for the USD and EUR hedging sets are, respectively (expressed in USD thousands):
AddOnUSD = 59,270 ∗ 0.005 = 296.35
AddOnEUR = 10,083 ∗ 0.005 = 50.415
12.20. Step 7: Calculate the asset class level add-on (AddOnIR) by adding together all of the hedging set level add-ons calculated in step 6. Therefore, the add-on for the interest rate asset class is (expressed in USD thousands):
AddOnIR = 296.35 + 50.415 = 347
12.21. For this netting set the interest rate add-on is also the aggregate add-on because there are no derivatives belonging to other asset classes. The EAD for the netting set can now be calculated using the formula set out in 12.2 (expressed in USD thousands):
EAD = alpha * (RC + multip; ier * AddOnaggregate) = 1.4 * (60 + 1 * 347) = 569
Example 2: Credit derivatives (unmargined netting set)
12.22. Netting set 2 consists of three credit derivatives: one long single-name credit default swap (CDS) written on Firm A (rated AA), one short single-name CDS written on Firm B (rated BBB), and one long CDS index (investment grade). The table below summarizes the relevant contractual terms of the three derivatives. All notional amounts and market values in the table are in USD thousands.
Trade # Nature Reference entity/index name Rating reference entity Residual maturity Base currency Notional (USD thousands) Position Market value (USD thousands) 1 Single name CDS Firm A AA 3 years USD 10,000 Protection buyer 20 2 Single-name CDS Firm B BBB 6 years EUR 10,000 Protection seller -40 3 CDS CDX.IG 5y Investment grade 5 years USD 10,000 Protection buyer 0 12.23. As in the previous example, the netting set is not subject to a margin agreement and there is no exchange of collateral (independent amount/IM) at inception. For unmargined netting sets, the replacement cost is calculated using the following formula, where:
(1) V is a simple algebraic sum of the derivatives' market values at the reference date
(2) C is the haircut value of the IM, which is zero in this example
RC = max{V - C; 0}
12.24. Thus, using the market values indicated in the table (expressed in USD thousands):
RC = max{20 - 40 + 0 - 0; 0} = 0
12.25. Since in this example V-C is negative (equal to V, i.e. -20,000), the multiplier will be activated (i.e. it will be less than 1). Before calculating its value, the aggregate add-on (AddOnaggregate) needs to be determined.
12.26. All the transactions in the netting set belong to the credit derivatives asset class. The AddOnaggregate for the credit derivatives asset class can be calculated using the four steps set out in 6.64.
12.27. Step 1: Calculate the effective notional for each trade in the netting set. This is calculated as the product of the following three terms: (i) the adjusted notional of the trade (d); (ii) the supervisory delta adjustment of the trade (δ); and (iii) the maturity factor (MF). That is, for each trade i, the effective notional Di is calculated as Di = di * MFi * δi.
12.28. For credit derivatives, like interest rate derivatives, the trade-level adjusted notional (di) is the product of the trade notional amount and the supervisory duration (SDi), i.e. di = notional * SDi. The trade-level adjusted notional amounts for each of the trades in Example 2 are as follows:
Trade # Notional (USD thousand) Si Ei SDi Adjusted notional, di (USD thousands) 1 10,000 0 3 2.79 27,858 2 10,000 0 6 5.18 51,836 3 5,000 0 5 4.42 44,240 12.29. 6.51 sets out the calculation of the maturity factor (MFi) for unmargined trades. For trades that have a remaining maturity in excess of one year, which is the case for all trades in this example, the formula gives a maturity factor of 1.
12.30. As set out in 6.40 to 6.43, a supervisory delta is assigned to each trade. In particular:
(1) Trade 1 and Trade 3 are long in the primary risk factors (CDS spread) and are not options so the supervisory delta is equal to 1 for each trade.
(2) Trade 2 is short in the primary risk factor and is not an option; thus, the supervisory delta is equal to -1.
12.31. The effective notional for each trade in the netting set (Di) is calculated using the formula Di = di * MFi * δi and values for each term noted above. The results of applying the formula are as follows:
Trade # Notional (USD thousands) Adjusted notional, di (USD, thousands) Maturity Factor,MFi Delta, δi Effective notional, Di (USD, thousands) 1 10,000 27,858 1 1 27,858 2 10,000 51,836 1 -1 -51,836 3 10,000 44,240 1 1 44,240 12.32. Step 2: Calculate the combined effective notional for all derivatives that reference the same entity. The combined effective notional of the entity (ENentity) is calculated by adding together the trade level effective notionals calculated in step 1 that reference that entity. However, since all the derivatives refer to different entities (single names/indices), the effective notional of the entity is simply equal to the trade level effective notional (Di) for each trade.
12.33. Step 3: Calculate the add-on for each entity (AddOnentity) by multiplying the entity level effective notional in step 2 by the supervisory factor that is specified for that entity (SFentity). The supervisory factors are set out in table 2 in 6.75. A supervisory factor is assigned to each single-name entity based on the rating of the reference entity (0.38% for AA-rated firms and 0.54% for BBB-rated firms). For CDS indices, the SF is assigned according to whether the index is investment or speculative grade; in this example, its value is 0.38% since the index is investment grade. Thus, the entity level add-ons are the following (USD thousands):
Reference Entity Effective notional, Di (USD, thousands) Supervisory factor, SFentity Entity-level add-on,
AddOnentity (= Di ∗ SFentity)
Firm A 27,858 0.38% 106 Firm B -51,836 0.54% -280 CDX.IG 44,240 0.38% 168 12.34. Step 4: Calculate the asset class level add-on (AddOncredit) by using the formula that follows, where:
(1) The summations are across all entities referenced by the derivatives.
(2) AddOnentity is the add-on amount calculated in step 3 for each entity referenced by the derivatives.
(3) ρentity is the supervisory prescribed correlation factor corresponding to the entity. As set out in Table 2 in 6.75, the correlation factor is 50% for single entities (Firm A and Firm B) and 80% for indexes (CDX.IG).
12.35. The following table shows a simple way to calculate of the systematic and idiosyncratic components in the formula:
Reference Entity Pentity AddOnentity Pentity∗ AddOnentity 1 − (Pentity)2 (AddOnentity )2 (1 − (Pentity )2 ∗ (AddOnentity )2 Firm A 0.5 106 52.9 0.75 11,207 8,405 Firm B 0.5 -280 -140 0.75 78,353 58,765 CDX.IG 0.8 168 134.5 0.36 28,261 101,174 Sum= 47.5 77,344 (Sum)2= 2,253 12.36. According to the calculations in the table, the systematic component is 2,253, while the idiosyncratic component is 77,344. Thus, the add-on for the credit asset class is calculated as follows:
12.37. For this netting set the credit add-on (AddOncredit) is also the aggregate add-on (AddOnaggregate) because there are no derivatives belonging to other asset classes.
12.38. The value of the multiplier can now be calculated as follows, using the formula set out in 6.25:
12.39. Finally, aggregating the replacement cost and the potential future exposure (PFE) component and multiplying the result by the alpha factor of 1.4, the EAD is as follows (USD thousands):
EAD = 1.4 ∗ (0 + 0.965 ∗ 282) = 381
Example 3: Commodity derivatives (unmargined netting set)
12.40. Netting set 3 consists of three commodity forward contracts. The table below summarizes the relevant contractual terms of the three derivatives. All notional amounts and market values in the table are in USD thousands.
Trade # Notional Nature Underlying Direction Residual maturity Market value 1 10,000 Forward (West Texas Intermediate, or WTI) Crude Oil Long 9 months -50 2 20,000 Forward (Brent) Crude Oil Short 2 years -30 3 10,000 Forward Silver Long 5 years -100 12.41. As in the previous two examples, the netting set is not subject to a margin agreement and there is no exchange of collateral (independent amount/IM) at inception. Thus, the replacement cost is given by:
RC = max{V — C; 0} = max{100 — 30 — 50 — 0; 0} = 20
12.42. Since V-C is positive (i.e. USD 20,000), the value of the multiplier is 1, as explained in 6.24.
12.43. All the transactions in the netting set belong to the commodities derivatives asset class. The AddOnaggregate for the commodities derivatives asset class can be calculated using the six steps set out in 6.72.
12.44. Step 1: Calculate the effective notional for each trade in the netting set. This is calculated as the product of the following three terms: (i) the adjusted notional of the trade (d); (ii) the supervisory delta adjustment of the trade (S); and (iii) the maturity factor (MF). That is, for each trade i, the effective notional DiD is calculated as Di = di * MFi * δi
12.45. For commodity derivatives, the adjusted notional is defined as the product of the current price of one unit of the commodity (e.g. barrel of oil) and the number of units referenced by the derivative. In this example, for the sake of simplicity, it is assumed that the adjusted notional (di) is equal to the notional value.
12.46. 6.51 sets out the calculation of the maturity factor (MFi) for unmargined trades. For trades that have a remaining maturity in excess of one year (trades 2 and 3 in this example), the formula gives a maturity factor of 1. For trade 1 the formula gives the following maturity factor:
12.47. As set out in 6.40 to 6.43, a supervisory delta is assigned to each trade. In particular:
(1) Trade 1 and Trade 3 are long in the primary risk factors (WTI Crude Oil and Silver respectively) and are not options so the supervisory delta is equal to 1 for each trade.
(2) Trade 2 is short in the primary risk factor (Brent Crude Oil) and is not an option; thus, the supervisory delta is equal to -1.
Trade # Notional (USD thousands) Adjusted notional, di (USD, thousands) Maturity Factor, MFi Delta, δi Effective notional, Di (USD, thousands) 1 10,000 10,000 (9/12)0.5 1 8,660 2 20,000 20,000 1 -1 -20,000 3 10,000 10,000 1 1 10,000 12.48. Step 2: Allocate the trades in commodities asset class to hedging sets. In the commodities asset class there are four hedging sets consisting of derivatives that reference: energy (trades 1 and 2 in this example), metals (trade 3 in this example), agriculture and other commodities.
Hedging set Commodity type Trades Energy Crude oil 1 and 2 Natural gas None Coal None Electricity None Metals Silver 3 Gold None ... ... Agriculture ... ... ... ... Other ... ... Trade # Effective notional, Di (USD thousands) Hedging set Commodity type 1 8,660 Energy Crude oil 2 -20,000 Energy Crude Oil 3 10,000 Metal Silver 12.49. Step 3: Calculate the combined effective notional for all derivatives with each hedging set that reference the same commodity type. The combined effective notional of the commodity type (ENcomType) is calculated by adding together the trade level effective notionals calculated in step 1 that reference that commodity type. For purposes of this calculation, the bank can ignore the basis difference between the WTI and Brent forward contracts since they belong to the same commodity type, “Crude Oil” (unless the national supervisor requires the bank to use a more refined definition of commodity types). This step gives the following:
(1) ENCrudeOil = 8,660 + (—20,000) = —11,340
(2) ENSilver = 10,000
12.50. Step 4: Calculate the add-on for each commodity type (AddOncomType) within each hedging set by multiplying the combined effective notional for that commodity calculated in step 3 by the supervisory factor that is specified for that commodity type (SFcomType). The supervisory factors are set out in table 2 in 6.75 and are set at 40% for electricity derivatives and 18% for derivatives that reference all other types of commodities. Therefore:
(1) AddOnCrudeOil = -11,340 * 0.18 = -2,041
(2) AddOnSilver = 10,000 * 0.18 = 1,800
12.51. Step 5: Calculate the add-on for each of the four commodity hedging sets (AddOnHS) by using the formula that follows. In the formula:
(1) The summations are across all commodity types within the hedging set.
(2) AddOnComType is the add-on amount calculated in step 4 for each commodity type.
(3) ρComType is the supervisory prescribed correlation factor corresponding to the commodity type. As set out in Table 2 in 6.75, the correlation factor is set at 40% for all commodity types.
12.52. In this example, however, there is only one commodity type within the “Energy” hedging set (ie Crude Oil). All other commodity types within the energy hedging set (eg coal, natural gas etc) have a zero add-on. Therefore, the add-on for the energy hedging set is calculated as follows:
12.53. The calculation above shows that, when there is only one commodity type within a hedging set, the hedging-set add-on is equal (in absolute value) to the commodity-type add-on.
12.54. Similarly, “Silver” is the only commodity type in the “Metals” hedging set, and so the add-on for the metals hedging set is:
AddOnMetals = |AddOnSilver| = 1,800
12.55. Step 6: Calculate the asset class level add-on (AddOnCommodity) by adding together all of the hedging set level add-ons calculated in step 5:
12.56. For this netting set the commodity add-on (AddOnCommodity) is also the aggregate add-on (AddOnaggregate) because there are no derivatives belonging to other asset classes.
12.57. Finally, aggregating the replacement cost and the PFE component and multiplying the result by the alpha factor of 1.4, the EAD is as follows (USD thousands):
EAD = 1.4 * (20 + 1 ∗ 3,841) = 5,406
Example 4: Interest rate and credit derivatives (unmargined netting set)
12.58. Netting set 4 consists of the combined trades of Examples 1 and 2. There is no margin agreement and no collateral. The replacement cost of the combined netting set is:
RC = max{V - C;0} = max{30 − 20 + 50 + 20 − 40 + 0; 0} = 40
12.59. The aggregate add-on for the combined netting set is the sum of add-ons for each asset class. In this case, there are two asset classes, interest rates and credit, and the add-ons for these asset classes have been copied from Examples 1 and 2:
AddOnaggregate = AddOnIR + AddOncredit = 347 + 282 = 629
12.60. Because V-C is positive, the multiplier is equal to 1. Finally, the EAD can be calculated as:
EAD = 1.4 * (40 + 1 * 629) = 936
Example 5: Interest rate and commodities derivatives (unmargined netting set)
12.61. Netting set 5 consists of the combined trades of Examples 1 and 3. However, instead of being unmargined (as assumed in those examples), the trades are subject to a margin agreement with the following specifications:
Margin frequency Threshold, TH Minimum Transfer Amount, MTA Independent Amount, IA Total net collateral held by bank (USD thousands) (USD thousands) (USD thousands) Weekly 0 5 150 200 12.62. The above table depicts a situation in which the bank received from the counterparty a net independent amount of 150 (taking into account the net amount of initial margin posted by the counterparty and any unsegregated initial margin posted by the bank). The total net collateral (after the application of haircuts) currently held by the bank is 200, which includes 50 for variation margin (VM) received and 150 for the net independent amount.
12.63. First, we determine the replacement cost. The net collateral currently held is 200 and the net independent collateral amount (NICA) is equal to the independent amount (that is, 150). The current market value of the trades in the netting set (V) is 80, it is calculated as the sum of the market value of the trades, i.e. 30 - 20 + 50 - 50 - 30 + 100 = 80. The replacement cost for margined netting sets is calculated using the formula set out in 6.20. Using this formula the replacement cost for the netting set in this example is:
RC = max{V — C; TH +MTA — NICA; 0} = max{80 — 200; 0 + 5 — 150; 0} = 0
12.64. Second, it is necessary to recalculate the interest rate and commodity add-ons, based on the value of the maturity factor for margined transactions, which depends on the margin period of risk. For daily re-margining, the margin period of risk (MPOR) would be 10 days. In accordance with 6.53, for netting sets that are not subject daily margin agreements the MPOR is the sum of nine business days plus the re-margining period (which is five business days in this example). Thus the MPOR is 14 (= 9 + 5) in this example.
12.65. The re-scaled maturity factor for the trades in the netting set is calculated using the formula set out in 6.55. Using the MPOR calculated above, the maturity factor for all trades in the netting set in this example it is calculated as follows (a market convention of 250 business days in the financial year is used):
12.66. For the interest rate add-on, the effective notional for each trade (Di = di ∗ MFi ∗ Ꟙi) calculated in 12.13 must be recalculated using the maturity factor for the margined netting set calculated above. That is:
IR Trade # Notional (USD thousands) Base currency (hedging set) Maturity bucket Adjusted notional, di (USD, thousands) Maturity Factor, MFi Delta, Ꟙi Effective notional, Di (USD, thousands) 1 10,000 USD 3 78,694 
1 27,934 2 10,000 USD 2 36,254 -1 -12,869 3 5,000 EUR 3 37,428 -0.2694 -3,579 12.67. Next, the effective notional of each of the three maturity buckets within each hedging set must now be calculated. However, as set out in 12.16, given that in this example there are no maturity buckets within a hedging set with more than a single trade, the effective maturity of each maturity bucket is simply equal to the effective notional of the single trade in each bucket. Specifically:
(1) For the USD hedging set: DB1 is zero, DB2 is -12,869 (thousand USD) and DB3 is 27,934 (thousand USD).
(2) For the EUR hedging set: DB1 and DB2 are zero and DB3 is -3,579 (thousand USD).
12.68. Next, the effective notional of each of the two hedging sets (USD and EUR) must be recalculated using formula set out in 12.18 and the updated values of the effective notionals of each maturity bucket. The calculation is as follows:
ENUSD = [(—12,869)2 + (27,934)2 + 1.4 * (—12,869) * 27,934]½ = 21,934
ENEUR = [(—3,579)2] ½ = 3,579
12.69. Next, the hedging set level add-ons (AddOnns) must be recalculated by multiplying the recalculated effective notionals of each hedging set (ENns) by the prescribed supervisory factor of the hedging set (SFUSD). As set out in 12.16, the prescribed supervisory factor in this case is 0.5%. Therefore, the add-on for the USD and EUR hedging sets are, respectively (expressed in USD thousands):
AddOnUSD = 21,039 * 0.005 = 105
AddOnEUR = 3,579 * 0.005 = 18
12.70. Finally, the interest rate asset class level add-on (AddOnIR) can be recalculated by adding together the USD and EUR hedging set level add-ons as follows (expressed in USD thousands):
AddOnIR = 105 + 18 = 123
12.71. The add-on for the commodity asset class must also be recalculated using the maturity factor for the margined netting. The effective notional for each trade Di = di ∗ MFi ∗ Ꟙi is set out in the table below:
IR Trade # Notional (USD thousands) Hedging
setCommodity
typeAdjusted notional, di (USD, thousands) Maturity Factor, MFi Delta, Ꟙi Effective notional, Di (USD, thousands) 1 10,000 Energy Crude Oil 10,000 1 3,550 2 20,000 Energy Crude Oil 20,000 -1 -7,100 3 10,000 Metals Silver 10,000 1 3,550 12.72. The combined effective notional for all derivatives with each hedging set that reference the same commodity type (ENComrype) must be recalculated by adding together the trade-level effective notionals above for each commodity type. This gives the following:
(1) ENCrudeOil = 3,550 + (-7,100) = 3,550
(2) ENSilver = 3,550
12.73. The add-on for each commodity type (AddOnCrudeOil and AddOnSilver) within each hedging set calculated in 12.50 must now be recalculated by multiplying the recalculated combined effective notional for that commodity by the relevant supervisory factor (i.e. 18%). Therefore:
(1) AddOnCrudeOil = −3,550 * 0.18 = −639
(2) AddOnSilver = 3,550 * 0.18 = −639
12.74. Next, recalculate the add-on for energy and metals hedging sets using the recalculated add-ons for each commodity type above. As noted in 12.53, given that there is only one commodity type with each hedging set, the hedging set level add on is simply equal to the absolute value of the commodity type add-on. That is:
AddOnEnergy = |AddOnCrudeOil| = 639
AddOnMetal = |AddOnSilver| = 639
12.75. Finally, calculate the commodity asset class level add-on (AddOnCommodity) by adding together the hedging set level add-ons:
12.76. The aggregate netting set level add-on can now be calculated. As set out in 6.27, it is calculated as the sum of the asset class level add-ons. That is for this example:
12.77. As can be seen from 12.63, the value of V-C is negative (i.e. -120) and so the multiplier will be less than 1. The multiplier is calculated using the formula set out in 6.25, which for this example gives:
12.78. Finally, aggregating the replacement cost and the PFE component and multiplying the result by the alpha factor of 1.4, the EAD is as follows (USD thousands):
EAD = 1.4 * (0 + 0.958 * 1,401) = 1,879
13. The Effect of Standard Margin Agreements on the Calculation of Replacement Cost with SA-CCR
13.1. In this section (13.1 to 13.18), five examples are used to illustrate the operation of the SA-CCR in the context of standard margin agreements. In particular, they relate to the formulation of replacement cost for margined trades, as set out in 6.20:
RC = max{V — C; TH + MTA — NICA; 0}
Example 1
13.2. The bank currently has met all past VM calls so that the value of trades with its counterparty (€80 million) is offset by cumulative VM in the form of cash collateral received. There is a small “Minimum Transfer Amount” (MTA) of €1 million and a €0 ”Threshold” (TH). Furthermore, an “Independent Amount” (IA) of €10 million is agreed in favor of the bank and none in favor of its counterparty (i.e. the NICA is €10 million. This leads to a credit support amount of €90 million, which is assumed to have been fully received as of the reporting date.
13.3. In this example, the three terms in the replacement cost formula are:
(1) V - C =€80 million - €90 million = negative €10 million.
(2) TH + MTA - NICA = €0 + €1 million - €10 million = negative €9 million.
(3) The third term in the RC formula is always zero, which ensures that replacement cost is not negative.
13.4. The highest of the three terms (-€10 million, -€9 million, 0) is zero, so the replacement cost is zero. This is due to the large amount of collateral posted by the bank's counterparty.
Example 2
13.5. The counterparty has met all VM calls but the bank has some residual exposure due to the MTA of €1 million in its master agreement, and has a €0 TH. The value of the bank's trades with the counterparty is €80 million and the bank holds €79.5 million in VM in the form of cash collateral. In addition, the bank holds €10 million in independent collateral (here being an initial margin independent of VM, the latter of which is driven by mark-to-market (MTM) changes) from the counterparty. The counterparty holds €10 million in independent collateral from the bank, which is held by the counterparty in a non-segregated manner. The NICA is therefore €0 (= €10 million independent collateral held less €10 million independent collateral posted).
13.6. In this example, the three terms in the replacement formula are:
(1) V - C = €80 million - (€79.5 million + €10 million - €10 million)= €0.5 million.
(2) TH + MTA - NICA = €0 + €1 million - €0 = €1 million.
(3) The third term is zero.
13.7. The replacement cost is the highest of the three terms (€0.5 million, €1 million, 0) which is €1 million. This represents the largest exposure before collateral must be exchanged.
Bank as a clearing member
13.8. The case of central clearing can be viewed from a number of perspectives. One example in which the replacement cost formula for margined trades can be applied is when the bank is a clearing member and is calculating replacement cost for its own trades with a central counterparty (CCP). In this case, the MTA and TH are generally zero. VM is usually exchanged at least daily and the independent collateral amount (ICA) in the form of a performance bond or IM is held by the CCP.
Example 3
13.9. The bank, in its capacity as clearing member of a CCP, has posted VM to the CCP in an amount equal to the value of the trades it has with the CCP. The bank has posted cash as initial margin and the CCP holds the IM in a bankruptcy- remote fashion. Assume that the value of trades with the CCP are negative €50 million, the bank has posted €50 million in VM and €10 million in IM to the CCP.
13.10. Given that the IM is held by the CCP in a bankruptcy remote fashion, 6.19 permits this amount to be excluded in the calculation NICA. Therefore, the NICA is €0 because the bankruptcy-remote IM posted to the CCP can be exclude and the bank has not received any IM from the CCP. The value of C is calculated as the value of NICA plus any VM received less any VM posted. The value of C is thus negative €50 million (= €0 million + €0 million - €50 million).
13.11. In this example, the three terms in the replacement formula are:
(1) V - C = (-€50 million) - (-€50 million) = €0. That is, the negative value of the trades has been fully offset by the VM posted by the bank.
(2) TH + MTA - NICA = €0 + €0 - €0 = €0.
(3) The third term is zero.
13.12. The replacement cost is therefore €0.
Example 4
13.13. Example 4 is the same as Example 3, except that the IM posted to the CCP is not bankruptcy-remote. As a consequence, the €10 million of IM must be included in the calculation of NICA. Thus, NICA is negative €10 million (= ICA received of €0 minus unsegregated ICA posted of €10 million). Also, the value of C is negative €60 million (=NICA + VM received - VM posted = -€10 million + €0 - €50 million).
13.14. In this example, the three terms in the replacement formula are:
(1) V - C = (-€50 million) - (-€60 million) = €10 million. That is, the negative value of the trades is more than fully offset by collateral posted by the bank.
(2) TH + MTA - NICA = €0 + €0 - (-€10 million) = €10 million.
(3) The third term is zero.
13.15. The replacement cost is therefore €10 million. This represents the IM posted to the CCP which risks being lost upon default and bankruptcy of the CCP.
Example 5: Maintenance Margin Agreement
13.16. Some margin agreements specify that a counterparty (in this case, a bank) must maintain a level of collateral that is a fixed percentage of the MTM of the transactions in a netting set. For this type of margining agreement, ICA is the amount of collateral that the counterparty must maintain above the net MTM of the transactions.
13.17. For example, suppose the agreement states that a counterparty must maintain a collateral balance of at least 140% of the MTM of its transactions and that the MtM of the derivatives transactions is €50 in the bank's favor. ICA in this case is €20 (= 140% * €50 - €50). Further, suppose there is no TH, no MTA, the bank has posted no collateral and the counterparty has posted €80 in cash collateral. In this example, the three terms of the replacement cost formula are:
(1) V - C = €50 - €80 = -€30.
(2) MTA + TH - NICA = €0 + €0 - €20 = -€20.
(3) The third term is zero.
13.18. Thus, the replacement cost is zero in this example.
Output Floor Requirements
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force 1. Introduction
1.1 The Basel Committee on Banking Supervision issued the Basel III: Finalizing post-crisis reforms in December 2017, which includes among others, the requirements for output floor, which aims to reduce excessive variability of Risk- Weighted Assets “RWA” and to enhance the comparability of risk-weighted capital ratios. Under these requirements, banks using internal models to derive RWAs will be subject to a floor requirement that is applied to RWAs. The output floor will ensure that banks' capital requirements do not fall below a certain percentage of capital requirements derived under standardized approaches.
1.2 The output floor requirements are issued by SAMA in exercise of the authority vested in SAMA under the Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued 01/01/1386H.
2. Scope of Application
2.1 These requirements apply to all domestic banks both on a consolidated basis, which include all branches and subsidiaries, and on a standalone basis.
2.2 These requirements are 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.
3. Implementation Timeline
3.1 These requirements will be effective on 1 January 2023, subject to the transitional arrangements in paragraph 5.10.
4. SAMA Reporting Requirements
4.1 To the extent that output floor is applicable, SAMA expects banks to report their regulatory capital and RWA calculated based on the Output Floor Requirements based on SAMA's reporting template within 30 days after the end of each quarter starting from 1 January 2023.
5. Minimum Risk-Based Capital Requirements
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force 5.1 Minimum capital requirements and the components of capital are as per the definitions in SAMA's Enhanced Finalized Guidance Document Concerning the Implementation of Basel III circular No. 351000123076 issued in 2014, and subject to the transitional arrangements in Paragraph 5.10. Calculation of RWA shall be in accordance with the requirements as mentioned in paragraphs 5.2 and 5.3.
Risk-Weighted Assets and Output Floor Requirements
5.2 There are different approaches to calculate RWA for market risk, credit risk including counterparty credit risk; some of these approaches require SAMA's prior approval. The nominated approaches of a bank refer to all the approaches that the bank is using or may use with SAMA's approval, to calculate regulatory capital requirements, other than those approaches used solely for the purpose of the output floor calculation outlined below.
5.3 The RWA that banks must use to determine compliance with the requirements referred in paragraph 5.2 above and capital buffers requirements in accordance with SAMA Circular No. 351000123076, dated 21 July 2014, entitled “Enhanced Finalized Guidance Document Concerning the Implementation of Basel III, Section A”, SAMA Circular No. 371000034973, dated 4 January 2016, entitled “Applicability of Countercyclical Capital Buffer (CCyB) in Saudi Arabia”, and SAMA Circular No. 351000138356, dated 7 September 2014, entitled “Domestic Systemically Important Banks (D-SIBs) Framework”, is the higher of:
(1) The sum of the following three elements, calculated using the bank's nominated approaches:
(a) RWA for credit risk (as calculated in paragraphs 5.4);
(b) RWA for market risk (as calculated in paragraph 5.5);
(c) RWA for operational risk (as calculated in paragraph 5.6);
(2) 72.5% of the sum of the elements listed in point (1) above, calculated using only the standardized approaches listed in paragraph 5.7. This requirement is referred to as the output floor, and the RWA amount that is multiplied by 72.5% is referred to as the base of the output floor. This requirement is subject to transitional set out in5.10.
RWA for Credit Risk
5.4 RWA for credit risk and counterparty credit risk is calculated as the sum of the following:
(1) Credit RWA for banking book exposures, except the RWA listed in (2) to (6) below, calculated using:
(a) The standardized approach, set out in SAMA Minimum Capital Requirements for Credit Risk chapters 7 to 9; or
(b) The internal ratings-based (IRB) approach, set out in SAMA Minimum Capital Requirements for Credit Risk chapters 10 to 16.
(2) RWA for counterparty credit risk arising from banking book exposures and from trading book instruments (as specified in SAMA Minimum Capital Requirements for Counterparty Credit Risk (CCR) and Credit Valuation Adjustment (CVA)), except the exposures listed in (3) to (6) below.
(3) Credit RWA for equity investments in funds that are held in the banking book calculated using one or more of the approaches set out in chapter 24 of SAMA Minimum Capital Requirements for Credit Risk:
(a) The look-through approach.
(b) The mandate-based approach.
(c) The fall-back approach.
(4) RWA for securitization exposures held in the banking book, calculated using one or more of the approaches set out in chapters 18 to 23 of SAMA Minimum Capital Requirements for Credit Risk:
(a) Securitization Standardized Approach (SEC-SA).
(b) Securitization External Ratings-Based Approach (SEC-ERBA).
(c) Internal Assessment Approach (IAA).
(d) Securitization Internal Ratings-Based Approach (SEC-IRBA).
(e) A risk weight of 1250% in cases where the bank cannot use (a) to (d) above.
(5) RWA for exposures to central counterparties in the banking book and trading book, calculated using the approach set out in chapter 8 of SAMA Minimum Capital Requirements for CCR and CVA.
(6) RWA for the risk posed by unsettled transactions and failed trades, where these transactions are in the banking book or trading book and are within scope of the rules set out in chapter 25 of SAMA Minimum Capital Requirements for Credit Risk.
RWA for Market Risk
5.5 RWA for market risk is calculated as the sum of the following:
(1) RWA for market risk for instruments in the trading book and for foreign exchange risk and commodities risk for exposures in the banking book, calculated using one or more of the following approaches:
(a) The standardized approach for market risk, set out in chapters 6 to 9 of SAMA Minimum Capital Requirements for Market Risk;
(b) The internal models approach (IMA) for market risk, set out in chapters 10 to 13 of SAMA Minimum Capital Requirements for Market Risk; or
(c) The simplified standardized approach for market risk, set out in chapter 14 of SAMA Minimum Capital Requirements for Market Risk.
(2) RWA for credit valuation adjustment (CVA) risk in the banking and trading book, calculated using one of the following methods set out in chapter 11 of SAMA CCR and CVA Framework:
(a) The basic approach to CVA risk (BA-CVA).
(b) The standardized approach to CVA risk (SA-CVA).
(c) 100% of the bank's RWA for counterparty credit risk, for banks that have exposures below a materiality threshold (see paragraph 9 of chapter 11 in SAMA CCR and CVA Framework).
RWA for Operational Risk
5.6 RWA for operational risk is calculated using the standardized approach for operational risk, set out in paragraph 7.1 of SAMA Minimum Capital Requirements for Operational Risk.
Calculation of the Output Floor
5.7 The standardized approaches to be used to calculate the base of the output floor referenced in paragraph 5.3 (2) are as follows:
(1) The standardized approach for credit risk.
(2) The bank's nominated approach for equity investments in funds.
(3) For securitization exposures in the banking book and when determining the default risk charge component for securitization exposures in the trading book:
(a) if a bank does not use SEC-IRBA or SEC-IAA, its nominated approach; or
(b) if a bank does use SEC-IRBA or SEC-IAA, then the SEC-ERBA, SEC- SA or a risk-weight of 1250% as determined per the hierarchy of approaches.
(4) For counterparty credit risk exposure measurement:
(a) if a bank does not use IMM or the VaR models approach, then its nominated approach; or
(b) if a bank does use IMM or the VaR models approach, then the SA-CCR or the comprehensive approach.
(5) For market risk:
(a) If a bank uses the IMA for market risk, then the standardized approach for market risk; or
(b) If a bank does not use the IMA for market risk, then its nominated approach.
(6) The bank's nominated approach for CVA risk.
(7) The standardized approach for operational risk.
5.8 As per paragraph 5.7 above, the following approaches are not permitted to be used, directly or by cross reference,1 in the calculation of the base of the output floor:
(1) IRB approach to credit risk;
(2) SEC-IRBA;
(3) IMA for market risk;
(4) VaR models approach to counterparty credit risk; and
(5) IMM for counterparty credit risk.
5.9 SAMA may review the level of the incremental increase for all banks. In addition, SAMA may also apply a cap on the incremental increase during the phase-in period on case-by-case basis. In this regard, banks must submit an application to SAMA with supporting justification for applying the cap on the incremental increase.
5.10 The output floor will be implemented as of 1 January 2023, the required calibration percentage will gradually increase as following:
Phase-in arrangements for output floor Table 1 Date Calibration 1 January 2023 50% 1 January 2024 55% 1 January 2025 60% 1 January 2026 65% 1 January 2027 70% 1 January 2028 72.5% 1 As examples:
- Although the requirements for calculating exposures to central counterparties (chapter 8 of SAMA CCR and CVA framework) cross-refer to IMM as a possible method for calculating exposure values, IMM may not be used when these rules are applied for calculating the base of the output floor.
- For the look-through and mandate-based approaches for equity investments in funds, banks must use the standardized approach for credit risk when calculating the RWA of the underlying assets of the funds for the base of the output floor.
- Although there is a cross reference in the standardized approach for market risk to the securitization chapters of the credit risk standard (chapter 18 to 23 of SAMA Minimum Capital Requirements for Credit Risk), SEC-IRBA may not be used when the standardized approach for market risk is calculated for the base of the output floor.Additional Requirements on Capital Adequacy for Shari’ah Compliant Banking
No: 45021335 Date(g): 14/10/2023 | Date(h): 30/3/1445 Status: In-Force Based on the powers vested to SAMA under its law issued by Royal Decree No. (M/36) dated 11/04/1442H, and the relevant laws. And referring to ongoing efforts to establish a supervisory framework for banks conducting Shari’ah compliance banking, SAMA is committed to strengthening the current prudential capital adequacy requirements.
Therefore, Attached are the Additional Requirements on Capital Adequacy for Shari’ah Compliance Banking. These requirements address the risks associated with products and contracts that comply with Shari’ah principles, with the aim of reinforcing the existing current prudential capital adequacy requirements for credit and market risks, in addition to SAMA's Basel standards framework.
For your information, and action accordingly as of 01/01/2024.
1. Introduction
In exercise of the powers vested upon the Saudi Central Bank (SAMA) under the charter issued by the Royal Decree No. M/36 on 11/04/1442H (26 November 2020G) and the Banking Control Law issued by Royal Decree No. M/5 dated 22/2/1386H (11 June 1966G). SAMA is hereby issuing the enclosed Additional Requirements on Capital Adequacy for domestic banks conducting Shari’ah compliant banking.
2. Objective
The objective of this document is to introduce additional set of prudential requirements on the Capital Requirements for Credit Risk and Market Risk for Shari’ah Compliant banking, which are to be read alongside the applicable SAMA’s Basel framework issued via circular no. 44047144 dated 04/06/1444H (28 December 2022) and any subsequent updates. These additional requirements are issued to ensure risks associated with Islamic banking products and contracts are appropriately captured through the capital adequacy framework.
3. Scope of Application
These additional requirements are applicable to all domestic banks that conduct Shari’ah compliant banking licensed by SAMA under the Banking Control Law. Where a locally incorporated bank has a majority owned subsidiary(ies) licensed and operating outside Saudi Arabia and/or has branch operations in any foreign jurisdiction that conduct Shari’ah compliant banking shall follow these requirements.
4. Definitions
The following words and phrases, wherever mentioned in these requirements will have the meanings assigned to them unless the context implies otherwise:
SAMA: The Saudi Central Bank
Bank: Any domestic bank that is licensed to carry out banking business in Saudi Arabia in accordance with the provisions of the Banking Control Law and that conduct Shari’ah compliant banking either as a full-fledged Islamic bank or through an Islamic Window.
Islamic Window: That part of a conventional bank (which may be a branch or a dedicated unit of that bank) that conducts Shari’ah compliant banking, finance and investment activities.
Murabahah: A sale contract whereby the bank sells to a customer a specified asset, whereby the selling price is the sum of the cost price and an agreed profit margin. The Murabahah contract can be preceded by a promise to purchase from the customer.
Murabahah for Purchase Orderer (MPO): a murabahah with an agreement to purchase that is binding where the bank acquires and receives an asset expecting that the obligor will purchase it. The contract will, therefore, include terms for the obligor to pay the price to the bank after taking delivery of the asset.
Tawarruq or Commodity Murabahah Transaction (CMT): A murabahah transaction based on the purchase of a commodity from a seller or a broker and its resale to the customer on the basis of deferred murabahah, followed by the sale of the commodity by the customer for a spot price to a third party for the purpose of obtaining liquidity, provided that there are no links between the two contracts.
Salam: The sale of a specified commodity that is of a known type, quantity and attributes for a known price paid at the time of signing the contract for its delivery in the future in one or several batches.
Parallel Salam: A second Salam contract with a third party to acquire for a specified price a commodity of known type, quantity and attributes, which corresponds to the specifications of the commodity in the first Salam contract without the presence of any links between the two contracts.
Istisna: The sale of a specified asset, with an obligation on the part of the seller to manufacture/construct it using seller’s own materials and to deliver it on a specific date in return for a specific price to be paid in one lump sum or instalments.
Parallel Istisna: A second Istisna contract whereby a third party commits to manufacture/construct a specified asset, which corresponds to the specifications of the asset in the first Istisna contract without the presence of any links between the two contracts.
Ijarah: A contract made to lease the usufruct of a specified asset for an agreed period against a specified rental. It could be preceded by a unilateral binding promise from one of the contracting parties. As for the Ijarah contract, it is binding on both contracting parties.
Ijarah Muntahia Bi Al Tamlik: A lease contract combined with a separate promise from the lessor giving the lessee a binding promise to own the asset at the end of the lease period either by purchase of the asset through a token consideration, or by the payment of an agreed-upon price or the payment of its market value. This can be done through a promise to sell, a promise to donate, or a contract of conditional donation.
Musharakah: A partnership contract in which the partners agree to contribute capital to an enterprise, whether existing or new. Profits generated by that enterprise are shared in accordance with the percentage specified in the Musharakah contract, while losses are shared in proportion to each partner’s share of capital.
Musharakah with Ijarah: Partners that jointly own an asset or real estate may lease it to a third party or to one of the partners under an ijarah contract and thus generate rental income for the partnership.
Musharakah with Murabahah: As a joint owner of the underlying asset, a bank is entitled to a share of the revenue generated from the sale of the asset under a Murabahah contract.
Mudarabah: A partnership contract between the capital provider (rabb al-mal) and an entrepreneur (Mudarib) whereby the capital provider would contribute capital to an enterprise or activity that is to be managed by the entrepreneur. Profits generated by that enterprise or activity are shared in accordance with the percentage specified in the contract, while losses are to be borne solely by the capital provider unless the losses are due to misconduct, negligence or breach of contracted terms.
Qard Hassan: A loan for a fixed period for which no profit rate is charged.
Wakalah: An agency contract where the customer (principal) appoints an institution as agent (wakil) to carry out the business on his/her behalf. The contract can be for a fee or without a fee.
5. Prudential Treatment (Credit Risk & Market Risk)
Calculations for risk weighted assets (RWAs) related to credit and market risks for banks conducting Shari’ah compliant banking are to follow the prudential treatment as per the applicable SAMA’s Basel framework. This section provides additional requirements for mapping Shari’ah compliant assets to SAMA’s Basel framework, given their structure and operationalisation, through the various stages of the contract.
Table 5A: Murabahah and non-binding purchase order
Applicable stage of contract Credit risk-weight Market risk-weight Asset available for sale (asset on balance sheet) N/A Refer to Minimum Capital Requirements for Market Risk Asset is sold and title is transferred to a customer, and the selling price (accounts receivable) is due from the customer Refer to Minimum Capital Requirements for Credit Risk N/A
Table 5B: Murabahah and binding purchase orderApplicable stage of contract Credit risk-weight Market risk-weight Asset available for sale (asset on balance sheet) Refer to Minimum Capital Requirements for Credit Risk N/A Asset is sold and delivered to a customer (accounts receivable is due from a customer) N/A
Table 5C: CMTsApplicable stage of contract Credit risk-weight Market risk-weight Commodities on bank balance sheet for sale N/A In the presence of a binding promise from the counterparty to purchase, and legally enforceable contract documentation, there will be no capital charge for market risk
In the absence of a binding promise from the counterparty to purchase; Please refer to Minimum Capital Requirements for Market Risk
Commodities sold and delivered to customer Refer to Minimum Capital Requirements for Credit Risk N/A
Table 5D: Salam with Parallel SalamApplicable stage of contract Credit risk-weight Market risk-weight Payment of purchase price by the bank to a Salam customer/seller Refer to Minimum Capital Requirements for Credit Risk Refer to Minimum Capital Requirements for Market Risk Receipt of the purchased commodity by the bank N/A
Table 5E: Salam without Parallel SalamApplicable stage of contract Credit risk-weight Market risk-weight Payment of purchase price by the bank to a Salam customer/seller Refer to Minimum Capital Requirements for Credit Risk Refer to Minimum Capital Requirements for Market Risk Receipt of the purchased commodity by the bank N/A
Table 5F: Istisna’ with Parallel Istisna’Applicable stage of contract Credit risk-weight Market risk-weight Unbilled work-in-process inventory Refer to Minimum Capital Requirements for Credit Risk Refer to Minimum Capital Requirements for Market Risk Amounts receivable after contract billings
Table 5G: Istisna’ without Parallel Istisna’Applicable stage of contract Credit risk-weight Market risk-weight Unbilled work-in-process inventory Refer to Minimum Capital Requirements for Credit Risk Refer to Minimum Capital Requirements for Market Risk Amounts receivable after contract billings N/A
Table 5H: Istisna’ with Parallel Istisna’ (For Project Finance)Applicable stage of contract Credit risk-weight Market risk-weight Unbilled work-in-process inventory Refer to Minimum Capital Requirements for Credit Risk N/A Amounts receivable after contract billings Applicable stage of contract Credit risk-weight Market risk-weight Maturity of contract term and full settlement of the purchase price by an istisna’ buyer N/A N/A
Table 5I: Istisna’ without Parallel Istisna’ (For Project Finance)Applicable stage of contract Credit risk-weight Market risk-weight Amounts of progress payments to the manufacturer work-inprocess inventory None (no ultimate istisna` customer) Refer to Minimum Capital Requirements for Market Risk
Table 5J: Operating IjarahApplicable stage of contract Credit risk-weight Market risk-weight Asset available for lease (prior to signing a lease contract) without binding lease agreement N/A Refer to Minimum Capital Requirements for Market Risk Asset available for lease (prior to signing a lease contract) with binding lease agreement Refer to Minimum Capital Requirements for Credit Risk N/A Upon signing a lease contract and the lease rental payments are due from the lessee Refer to Minimum Capital Requirements for Credit Risk Refer to Minimum Capital Requirements for Market Risk Maturity of contract term and the leased asset is returned to the bank N/A Refer to Minimum Capital Requirements for Market Risk
Table 5K: Ijarah Muntahia Bi Al Tamlik (1)Applicable stage of contract Credit risk-weight Market risk-weight Asset available for lease (prior to signing a lease contract) without binding lease agreement N/A Refer to Minimum Capital Requirements for Market Risk Asset available for lease (prior to signing a lease contract) with binding lease agreement Refer to Minimum Capital Requirements for Credit Risk N/A Upon signing a lease contract and the lease rental payments are due from the lessee Refer to Minimum Capital Requirements for Credit Risk N/A
(1) Table 5K does not apply to real estate finance exposures. All ijarah structured real estate finance exposures shall continue using the methodology for risk weighting as prescribed in the existing SAMA Basel framework.Table 5O: Lending on the basis of Qard Hassan
Exposure Credit risk-weight Market risk-weight Accounts receivable from customer Please refer to Minimum Capital Requirements for Credit Risk N/A 6. Equity Exposures
Banks are required to calculate risk weights assets for equity exposure (i.e. Musharakah/Mudarabah/Wakalah) in accordance to the treatment of equity and transition arrangements in SAMA’s Basel framework.
7. Effective Date
These additional requirements shall be effective on 01 January 2024.
Leverage
Leverage Ratio Framework
No: 44047144 Date(g): 27/12/2022 | Date(h): 4/6/1444 Status: In-Force 1. Introduction
In line with SAMA's continuous efforts to maintain the quality and soundness of Leverage Ratio Framework and due to the issuance of Basel III: Finalizing post-crisis reforms on December 2017, SAMA has decided to issue this updated Leverage Ratio Framework to act as a credible supplementary measure to the risk-based capital requirements to restrict the build-up of leverage in the banking sector and to reinforce the risk-based requirements with a simple, transparent, non-risk-based “backstop” measure.
This updated framework is issued by SAMA in exercise of the authority vested in SAMA under the Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued 01/01/1386H.
The Leverage Ratio Framework issued by this circular supersedes the previous Guidance Document and Prudential Returns concerning the Implementation of Basel III Leverage Ratio Framework issued via SAMA circular 351000133367 dated 25 August 2014.
2. Scope of Application
2.1 This framework applies to all domestic banks both on a consolidated basis, which include all branches and subsidiaries, and on a standalone basis.
2.2 Leverage ratio framework follows the same scope of regulatory consolidation as is used for the risk-based capital. The treatment of investments in the capital of banking, financial, insurance and commercial entities which are outside the regulatory scope of consolidation should be as following:
(i) Investments in capital of such entities (i.e. only the carrying value of the investment, as opposed to the underlying assets and other exposures of the investee) is to be included in the Leverage ratio exposure measure.
(ii) Investments in capital of such entities that have been deducted from Tier 1 capital as set out in paragraph 6.2 below should be excluded from the Leverage ratio exposure measure.
2.3 This framework is not applicable to Foreign Banks Branches operating in the kingdom of Saudi Arabia, and the branches shall comply with the regulatory requirements stipulated by their respective home regulators.
3. Implementation Timeline
This framework will be effective on 01 January 2023.
4. SAMA Reporting Requirements
SAMA expects all Banks to report the Leveraged Ratio, using SAMA's Q17 reporting template, within 30 days after the end of each quarter.
5. Policy Requirements
5.1 The Leverage ratio is defined as the capital measure (the numerator) divided by the exposure measure (the denominator). This ratio should be expressed as a percentage.
5.2 Capital measure for Leverage ratio is Tier 1 regulatory capital1, which include common equity Tier 1 and Additional Tier 1 Capital as defined in in the Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA circular No. 341000015689 Dated 19 December 2012 and any subsequent adjustments.
5.3 The exposure measure for the Leverage ratio should generally follow gross accounting value unless different treatment is specifically mentioned in this framework.
5.4 Exposure measure should include the following exposures:
(i) On-balance sheet exposures (excluding on-balance sheet derivative and securities financing transaction exposures);
(ii) Derivative exposures;
(iii) Securities financing transaction (SFT) exposures; and
(iv) Off-balance sheet (OBS) items.
5.5 The leverage ratio (Capital measure and Exposure measure) must be calculated and reported to SAMA on a quarter-end basis.
5.6 Banks' Leverage ratio must be at least 3% at all time.
1 In other words, the capital measure used for the Leverage ratio at any particular point in time is the Tier 1 capital measure applicable at that time taking into consideration all regulatory adjustments allowed by SAMA from time to time.
6. Exposure Measure
6.1 Banks must not use physical or financial collateral, guarantees or other credit risk mitigation techniques to reduce the Leverage ratio exposure measure, nor may banks net assets and liabilities, unless specified differently by SAMA.
6.2 Any item deducted from Tier 1 capital, according to the Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments, other than those related to liabilities can be deducted from the Leverage ratio exposure measure. Three examples follow:
(i) Where a banking, financial or insurance entity is not included in the regulatory scope of consolidation as set out in paragraph 2.2, the amount of any investment in the capital of that entity that is totally or partially deducted from Common Equity Tier 1 (CET1) capital or from Additional Tier 1 capital of the bank follow the corresponding deduction approach in the Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments, may also be deducted from the Leverage ratio exposure measure;
(ii) For banks using the internal ratings-based (IRB) approach to determining capital requirements for credit risk, the Excess of total eligible provisions under IRB section in the Finalized Guidance Document Concerning the Implementation of Basel III issued by SAMA in 19 December 2012 and any subsequent regulatory adjustments requires any shortfall in the stock of eligible provisions relating to expected loss amounts to be deducted from CET1 capital. The same amount may be deducted from the Leverage ratio exposure measure; and
(iii) Prudent valuation adjustments (PVAs) for exposures to less liquid positions, other than those related to liabilities, that are deducted from Tier 1 capital as per Prudent valuation guidance set out in the Basel framework, should be deducted from the Leverage ratio exposure measure.
6.3 Deducting Liability items from the Leverage ratio exposure measure is not allowed. For example, gains/losses on fair valued liabilities or accounting value adjustments on derivative liabilities due to changes in the bank's own credit risk as described in the Cumulative gains and losses due to changes in own credit risk on fair valued financial liabilities section in of the Finalized Guidance Document Concerning the Implementation of Basel III circular No. 341000015689 issued by SAMA dated 19 December in 2012 and any subsequent adjustments, must not be deducted from the Leverage ratio exposure measure.
6.4 With regard to traditional securitizations, the originating bank may exclude securitized exposures from its leverage ratio exposure measure if the securitization meets the operational requirements for the recognition of risk transference2. Banks meeting these conditions must include any retained securitization exposures in their leverage ratio exposure measure. In all other cases, traditional securitizations exposures that do not meet the operational requirements for the recognition of risk transference or synthetic securitizations, the securitized exposure must be included in the Leverage ratio exposure measure.
6.5 Banks should be particularly cautious to transactions and structures that have the result of inadequately capturing banks' sources of Leverage. Examples of concerns that might arise in such Leverage ratio exposure measure minimizing transactions and structures include the following:
(i) Securities financing transactions where exposure to the counterparty increases as the counterparty's credit quality decreases, or securities financing transactions in which the credit quality of the counterparty is positively correlated with the value of the securities received in the transaction (i.e. the credit quality of the counterparty falls when the value of the securities falls);
(ii) Banks that normally act as principal but adopt an agency model to transact in derivatives and SFTs in order to benefit from the more favorable treatment permitted for agency transactions under the Leverage ratio framework;
(iii) Collateral swap trades structured to mitigate inclusion in the leverage ratio exposure measure; or use of structures to move assets off the balance sheet.
The above list of examples is by no means exhaustive.
6.6 SAMA reserves should be included in the Leverage exposure measure. SAMA may temporarily exempt central bank reserves from the Leverage ratio exposure measure in exceptional cases and when it deems necessary.
2 As per paragraph 18.24 in the Minimum Capital Requirements for Credit Risk issued by SAMA
7. Treatment of Exposure Measures Items
7.1 On-Balance Sheet Exposures
7.1.1 All balance sheet assets including on-balance sheet derivatives collateral and collateral for secured financing transactions (SFTs) should be included in the Leverage ratio exposure measure except for the following:
(i) On-balance sheet derivative and SFT assets that are covered in Derivatives and 7.3 Security Financing Transactions below.
(ii) fiduciary assets: Where a bank according to its operative accounting framework recognizes fiduciary assets on the balance sheet, these assets can be excluded from the Leverage ratio exposure measure provided that the assets meet the IFRS 9 criteria for de-recognition and, where applicable, IFRS 10 for deconsolidation.
7.1.2 On-balance sheet non-derivative assets are included in the Leverage ratio exposure measure at their accounting values less deductions for associated specific provisions.
7.1.3 General provisions or general loan loss reserves that reduce the regulatory capital should be deducted from the Leverage ratio exposure measure. For the purposes of the leverage ratio exposure measure, the definition of general provisions/general loan-loss reserves applies to all banks regardless of whether they use the standardized approach or the IRB approach for credit risk for their risk based capital calculations.
7.1.4 The accounting for regular-way purchases or sales3 of financial assets that have not been settled (hereafter “unsettled trades”) differs across and within accounting frameworks. Unsettled trades can be accounted on the trade date (trade date accounting) or on the settlement date (settlement date accounting). For the purpose of the Leverage ratio exposure measure, treatment should be as below:
(i) Banks using trade date accounting: must reverse out any offsetting between cash receivables for unsettled sales and payables for unsettled purchases of financial assets that may be recognized under the applicable accounting framework, but may offset between those cash receivables and cash payables (regardless of whether such offsetting is recognized under the applicable accounting framework) if the following conditions are met:
a. The financial assets bought and sold that are associated with cash payables and receivables are fair valued through income and included in the bank's regulatory trading book as specified in Boundary between the banking book and the trading book in the Minimum Capital Requirement for Market Risk issued by SAMA.
b. The transactions of the financial assets are settled on a delivery- versus-payment (DVP) basis.
(ii) Banks using settlement date: accounting will be subject to the treatment set out in paragraph 7.4 off-balance sheet items below.
7.1.5 Cash pooling refers to arrangements involving treasury products whereby a bank combines the credit and/or debit balances of several individual participating customer accounts into a single account balance to facilitate cash and/or liquidity management. For the purposes of Leverage ratio exposure measure, the treatment of cash pooling should be as follow:
(i) where a cash pooling arrangement entails a transfer at least on a daily basis of the credit and /or debit balances of the individual participating customer accounts into a single account balance, the individual participating customer accounts are deemed to be extinguished and transformed into a single account balance upon the transfer provided the bank is not liable for the balances on an individual basis upon the transfer. Thus, the basis of the leverage ratio exposure measure for such a cash pooling arrangement is the single account balance and not the individual participating customer accounts
(ii) If the transfer of credit and/or debit balances of the individual participating customer accounts does not occur daily, extinguishment and transformation into a single account balance is deemed to occur and this single account balance may serve as the basis of the Leverage ratio exposure measure provided all of the following conditions are met:
a. In addition to providing for the several individual participating customer accounts, the cash pooling arrangement provides for a single account, into which the balances of all individual participating customer accounts can be transferred and thus extinguished;
b. The bank first has a legally enforceable right to transfer the balances of the individual participating customer accounts into a single account so that the bank is not liable for the balances on an individual basis and second at any point in time, the bank must have the discretion and be in a position to exercise this right;
c. There are no maturity mismatches among the balances of the individual participating customer accounts included in the cash pooling arrangement or all balances are either overnight or on demand; and
d. The bank charges or pays interest and/or fees based on the combined balance of the individual participating customer accounts included in the cash pooling arrangement.
e. SAMA does not deem as inadequate the frequency by which the balances of individual participating customer accounts are transferred to a single account.
In the event the abovementioned conditions are not met, the individual balances of the participating customer accounts must be reflected separately in the Leverage ratio exposure measure.
3 “regular-way purchases or sales” are purchases or sales of financial assets under contracts for which the terms require delivery of the assets within the time frame established generally by regulation or convention in the marketplace concerned.
7.2 Derivative Exposures
7.2.1 Treatment of derivatives:
Exposures to derivatives includes the following components under the Leverage ratio exposure measure:
(i) Replacement cost (RC)
(ii) Potential future exposure (PFE)
7.2.2 Calculation of Derivatives
(i) Banks must calculate their exposures associated with all derivative transactions, including where a bank sells protection using a credit derivative as per subparagraph (iv) below
(ii) If the derivative exposure covered by an eligible bilateral netting contract as specified in subparagraphs (v) and (vi) below, a specific treatment may be applied.
(iii) Written credit derivatives are subject to an additional treatment, as set out in paragraphs 7.2.8 to 7.2.15 below.
(iv) Derivative transactions not covered by an eligible bilateral netting contract as specified in subparagraphs (v) and (vi) below, the amount included in the Leverage ratio exposure measure will be determined for each transaction separately, as follows:
Exposure measure = Alpha * (RC + PFE)
Where:
a. Alpha = 1.4;
b. RC = the replacement cost measured as follows:
Where:
■ V is the market value of the individual derivative transaction or of the derivative transactions in a netting set;
■ CVMr is the cash variation margin received that meets the conditions set out in paragraph 7.2.4 and for which the amount has not already reduced the market value of the derivative transaction V under the bank’s operative accounting standard; and
■ CVMp is the cash variation margin provided by the bank and that meets the same conditions.
■ If there is no accounting measure of exposure for certain derivative instruments because they are held (completely) off balance sheet, the bank must use the sum of positive fair values of these derivatives as the replacement cost.
c. PFE = The potential future exposure (PFE) for derivative exposures must be calculated in accordance with the Minimum Capital Requirement for Counterparty Credit Risk and Credit Valuation Adjustment paragraph 6.22 to 6.79. Mathematically:
Where:
■ Multiplier fixed at one.
■ When calculating the aggregate Add-on component, for all margined transactions the maturity factor set out in the Minimum Capital Requirement for Counterparty Credit Risk and Credit Valuation Adjustment issued by SAMA paragraph 6.51 to 6.56 may be used. Further, as written options create an exposure to the underlying, they must be included in the Leverage ratio exposure measure by applying the required treatment, even if certain written options are permitted the zero exposure at default (EAD) treatment allowed in the risk-based framework.
(v) Bilateral netting: when an eligible bilateral netting contract is in place the following will apply:
a. Banks may net transactions subject to novation under which any obligation between a bank and its counterparty to deliver a given currency on a given value date is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations.
b. Banks may also net transactions subject to any legally valid form of bilateral netting not covered in point (a) above, including other forms of novation.
c. In both cases (a) and (b) above, a bank will need to prove that it has:
■ A netting contract or agreement with the counterparty that creates a single legal obligation, covering al included transactions, such that the bank would have either a claim to receive or obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions in the event that a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstances;
■ Written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and authorities would find the bank's exposure to be such a net amount under:
- The law of the jurisdiction in which the counterparty is chartered and, if the foreign branch of a counterparty is involved, then also under the law of jurisdiction in which the branch is located;
- The law that governs the individual transactions; and
- The law that governs any contract or agreement necessary to effect the netting.
■ Procedures in place to ensure that the legal characteristics of netting arrangements are kept under review in the light of possible changes in relevant law.
■ Netting agreements are not allowed in Saudi Arabia however, if netting is enforceable in any jurisdiction, positive and negative mark to market exposures in that jurisdiction will be allowed to net;4
(vi) Contracts containing walkaway clauses will not be eligible for netting for the purpose of calculating the Leverage ratio exposure measure pursuant to this framework. A walkaway clause is a provision that permits a non-defaulting counterparty to make only limited payments or no payment at all, to the estate of a defaulter, even if the defaulter is a net creditor.
7.2.3 Treatment of related collateral
(i) Collateral received
a. Collateral received in connection with derivative contracts has two countervailing effects on Leverage:
■ Reduces counterparty exposure
■ Increases the economic resources at the disposal of the bank, as the bank can use the collateral to Leverage itself.
b. Collateral received in connection with derivative contracts does not necessarily reduce the Leverage inherent in a bank's derivative position, which is generally the case if the settlement exposure arising from the underlying derivative contract is not reduced.
c. Collateral received should not be netted against derivative exposures whether or not netting is permitted under the bank's operative accounting or risk-based framework. By applying 7.2.2 (derivative calculation) above, banks must not reduce the Leverage ratio exposure measure amount by any collateral received from the counterparty. This implies that replacement cost cannot be reduced by collateral received and the multiplier referenced in paragraph 7.2.2 is fixed at one for the purpose of the PFE calculation. However, the maturity factor in the PFE add-on calculation can recognize the PFE-reducing effect from the regular exchange of variation margin as specified above in paragraph 7.2.2.
(ii) Collateral provided
Banks must gross up their Leverage ratio exposure measure by the amount of any derivatives collateral provided where the provision of that collateral has reduced the value of their balance sheet assets under their operative accounting framework.
7.2.4 Treatment of cash variation margin:
(i) Treatment of derivative exposures for the purpose of the Leverage ratio exposure measure, the cash portion of variation margin exchanged between counterparties may be viewed as a form of pre-settlement payment if the following conditions are met:
a. Trades not cleared through a qualifying central counterparty (QCCP)5 the cash received by the recipient counterparty is not segregated. Cash variation margin would satisfy the non-segregation criterion if the recipient counterparty has no restrictions by law, regulation, or any agreement with the counterparty on the ability to use the cash received (i.e. the cash variation margin received used as its own cash).
b. Variation margin is calculated and exchanged on at least a daily basis based on mark-to-market valuation of derivative positions. To meet this criterion, derivative positions must be valued daily and cash variation margin must be transferred at least daily to the counterparty or to the counterparty's account, as appropriate. Cash variation margin exchanged on the morning of the subsequent trading day based on the previous, end-of-day market values would meet this criterion.
c. The variation margin is received in a currency specified in the derivative contract, governing master netting agreement (MNA), credit support annex (CSA) to the qualifying MNA or as defined by any netting agreement with a CCP.
d. Variation margin exchanged is the full amount that would be necessary to extinguish the mark to-market exposure of the derivative subject to the threshold and minimum transfer amounts applicable to the counterparty. If a margin dispute arises, the amount of non-disputed variation margin that has been exchanged can be recognized.
e. Derivative transactions and variation margins are covered by a single MNA between the legal entities that are the counterparties in the derivative transaction. The MNA must explicitly stipulate that the counterparties agree to settle net any payment obligations covered by such a netting agreement, taking into account any variation margin received or provided if a credit event occurs involving either counterparty. The MNA must be legally enforceable and effective (i.e. it satisfies the conditions in point (c) in subparagraph (v) and subparagraph (vi) in paragraph 7.2.2 Calculation of Derivatives above) in all relevant jurisdictions, including in the event of default and bankruptcy or insolvency.6
(ii) If the conditions above are met, the cash portion of variation margin received may be used to reduce the replacement cost portion of the Leverage ratio exposure measure, and the receivables assets from cash variation margin provided may be deducted from the Leverage ratio exposure measure as follows:
a. In the case of cash variation margin received, the receiving bank may reduce the replacement cost (but not the PFE component) of the exposure amount of the derivative asset as specified 7.2.2 above.
b. In the case of cash variation margin provided to a counterparty, the posting bank may deduct the resulting receivable from its Leverage ratio exposure measure. Where the cash variation margin has been recognized as an asset under the bank’s operative accounting framework, and instead include the cash variation margin provided in the calculation of the derivative replacement cost as specified 7.2.2 above.
7.2.5 Treatment of clearing services:
(i) If a bank acting as clearing member (CM)7 offers clearing services to clients.
a. The CM's trade exposures to the central counterparty (CCP) that arise when the CM 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 must be captured by applying the same treatment that applies to any other type of derivative transaction.
b. If the clearing member CM, based on the contractual arrangements with the client, is not obligated to reimburse the client for any losses suffered in the event that a QCCP defaults, the CM does not need to recognize the resulting trade exposures to the QCCP in the Leverage ratio exposure measure.
(ii) Bank provides clearing services as a “higher level client” within a multi-level client structure8, the bank should not recognize in its Leverage ratio exposure measure the resulting trade exposures to the CM or to an entity that serves as a higher level client to the bank in the Leverage ratio exposure measure if it meets all of the following conditions:
a. The offsetting transactions are identified by the QCCP as higher level client transactions and collateral to support them is held by the QCCP and/or the CM, as applicable, under arrangements that prevent any losses to the higher level client due to:
■ The default or insolvency of the CM,
■ The default or insolvency of the CM's other clients, and
■ The joint default or insolvency of the CM and any of its other clients9
b. The bank must have conducted a sufficient legal review (and undertake such further review as necessary to ensure continuing enforceability) and have a well-founded basis to conclude that, in the event of legal challenge,-the relevant courts and administrative authorities would find that such arrangements mentioned above would be legal, valid, binding and enforceable under relevant laws of the relevant jurisdiction(s);
c. Relevant laws, regulation, rules, contractual or administrative arrangements provide that the offsetting transactions with the defaulted or insolvent CM are highly likely to continue to be indirectly transacted through the QCCP, or by the QCCP, if the CM defaults or becomes insolvent10. In such circumstances, the higher level client positions and collateral with the QCCP will be transferred at market value unless the higher level client requests to close out the position at market value;
d. The bank is not obligated to reimburse its client for any losses suffered in the event of default of either the CM or the QCCP.
(iii) Derivative exposures associated with the bank's offering of client clearing services, the RC and the PFE of the exposure to the client (or the exposure to the “lower level client” in the case of a multi-level client structure) may be calculated according to the Minimum Capital Requirement for Counterparty Credit Risk and Credit Valuation Adjustment issued by SAMA paragraph 6.15 to 6.80.11 For the determination of RC and PFE, the amount of initial margin received by the bank from its client that may be included in the haircut value of net collateral held (C) and net independent collateral amount (NICA) should be limited to the amount that is subject to appropriate segregation by the bank as defined in the relevant jurisdiction.
7.2.6 If a client enters into a derivative transaction with the CCP directly, and the CM guarantees the performance of its client's derivative trade exposures to the CCP. The bank who's acting as CM for the client to the CCP, must calculate its related Leverage ratio exposure resulting from the guarantee as a derivative exposure as set out in paragraphs 7.2.2 to 7.2.4 above, as if it had entered directly into the transaction with the client, including with regard to the receipt or provision of cash variation margin.
7.2.7 Affiliated entities to the bank acting as a CM may be considered a client if it is outside the relevant scope of regulatory consolidation at the level at which the Leverage ratio is applied. In contrast, if an affiliate entity falls within the regulatory scope of consolidation, the trade between the affiliate entity and the CM is eliminated in the course of consolidation but the CM still has a trade exposure to the CCP. In this case, the transaction with the CCP will be considered proprietary and the exemption in paragraph 7.2.5 above will not apply.
7.2.8 In addition to the CCR exposure arising from the fair value of the contracts, written credit derivatives create a notional credit exposure arising from the credit worthiness of the entity. Banks should treat written credit derivatives consistently with cash instruments (e.g. loans, bonds) for the purposes of the Leverage ratio exposure measure.
7.2.9 To capture the credit exposure of a certain entity, taking into consideration the treatment of derivatives and related collateral above, the effective notional amount referenced by a written credit derivative must be included in the Leverage ratio exposure measure. Unless the written credit derivative is included in a transaction cleared on behalf of a client of the bank acting as a CM (or acting as a clearing services provider in a multi-level client structure as referenced in paragraph 7.2.5 and the transaction meets the requirements of paragraph 7.2.5 for the exclusion of trade exposures to the QCCP (or, in the case of a multilevel client structure, the requirements of paragraph 7.2.5 for the exclusion of trade exposures to the CM or the QCCP).
7.2.10 The “effective notional amount” obtained by adjusting the notional amount to reflect the true exposure of contracts that are Leveraged or otherwise enhanced by the structure of the transaction. Further, the effective notional amount of a written credit derivative may be reduced by any negative change in fair value amount that has been incorporated into the calculation of Tier 1 capital with respect to the written credit derivative12,13. The resulting amount may be further reduced by the effective notional amount of a purchased credit derivative on the same reference name, provided that:
(i) The credit protection purchased through credit derivatives is otherwise subject to the same or more conservative material terms as those in the corresponding written credit derivative. This ensures that if a bank provides written protection via some type of credit derivative, the bank may only recognize offsetting from another purchased credit derivative to the extent that the purchased protection is certain to deliver a payment in all potential future states. Material terms include the level of subordination, optionality, credit events, reference and any other characteristics relevant to the valuation of the derivative For example, the application of the same material terms condition would result in the following treatments:
a. in the case of single name credit derivatives, the credit protection purchased through credit derivatives is on a reference obligation which ranks pari passu with or is junior to the underlying reference obligation of the written credit derivative. Credit protection purchased through credit derivatives that references a subordinated position may offset written credit derivatives on a more senior position of the same reference entity as long as a credit event on the senior reference asset would result in a credit event on the subordinated reference asset;
b. for tranche products, the credit protection purchased through credit derivatives must be on a reference obligation with the same level of seniority.
(ii) The remaining maturity of the credit protection purchased through credit derivatives is equal to or greater than the remaining maturity of the written credit derivative;
(iii) The credit protection purchased through credit derivatives is not purchased from a counterparty whose credit quality is highly correlated with the value of the reference obligation in the sense specified in the Minimum Capital Requirement for Counterparty Credit Risk and Credit Valuation Adjustment issued by SAMA paragraph 7.48. The credit quality of the counterparty must not be positively correlated with the value of the reference obligation (ie the credit quality of the counterparty falls when the value of the reference obligation falls and the value of the purchased credit derivative increases). In making this determination, there does not need to exist a legal connection between the counterparty and the underlying reference entity.
(iv) In the event that the effective notional amount of a written credit derivative is reduced by any negative change in fair value reflected in the bank's Tier 1 capital, the effective notional amount of the offsetting credit protection purchased through credit derivatives must also be reduced by any resulting positive change in fair value reflected in Tier 1 capital; and
(v) The credit protection purchased through credit derivatives is not included in a transaction that has been cleared on behalf of a client (or that has been cleared by the bank in its role as a clearing services provider in a multi-level client services structure as referenced in paragraph 7.2.5) and for which the effective notional amount referenced by the corresponding written credit derivative is excluded from the Leverage ratio exposure measure according to this paragraph.
7.2.11 Written credit derivative refers to a broad range of credit derivatives through which a bank effectively provides credit protection and is not limited solely to credit default swaps and total return swaps. For example, all options where the bank has the obligation to provide credit protection under certain conditions qualify as “written credit derivatives”. The effective notional amount of Such options sold by the bank may be offset by the effective notional amount of options by which the bank has the right to purchase credit protection which fulfils the conditions of paragraph 7.2.9 and 7.2.10 above. Also, the condition of same or more conservative material terms as those in the corresponding written credit derivatives as referenced in paragraph 7.2.9 and 7.2.10 above can be considered met only when the strike price of the underlying purchased credit protection is equal to or lower than the strike price of the underlying sold credit protection.
7.2.12 For the purposes of paragraph 7.2.9 and 7.2.10 above, two reference names are considered identical only if they refer to the same legal entity. Credit protection on a pool of reference names purchased through credit derivatives may offset credit protection sold on individual reference names, if the credit protection purchased is economically equivalent to purchasing credit protection separately on each of the individual names in the pool (this would, for example, be the case if a bank were to purchase credit protection on an entire securitization structure).
7.2.13 If a bank purchases credit protection on a pool of reference names through credit derivatives but the credit protection purchase does not cover the entire pool (i.e. the protection covers only a subset of the pool, as in the case of an nth-to-default credit derivative or a securitization tranche), then the written credit derivatives on the individual reference names should not be offset. However, such purchased credit protection may offset written credit derivatives on a pool provided that the credit protection purchased through credit derivatives covers the entirety of the subset of the pool on which the credit protection has been sold.14
7.2.14 Where a bank purchases credit protection through a total return swap (TRS) and records the net payments received as net income, but does not record offsetting deterioration in the value of the written credit derivative (either through reductions in fair value or by an addition to reserves) in Tier 1 capital, the credit protection will not be recognized for the purpose of offsetting the effective notional amounts related to written credit derivatives.
7.2.15 Since written credit derivatives are included in the Leverage ratio exposure measure at their effective notional amounts, and are also subject to amounts for PFE, the Leverage ratio exposure measure for written credit derivatives may be overstated. Banks may therefore choose to exclude from the netting set for the PFE calculation the portion of a written credit derivative which is not offset according to paragraph 7.2.9 and 7.2.1015 and for which the effective notional amount is included in the Leverage ratio exposure measure.
4 Paragraph 14 in SAMA Margin Requirements for Non-centrally Cleared Derivatives circular No42008998 dated 18/02/1442H
5 QCCP is defined in the Minimum Capital Requirement for Counterparty Credit Risk and Credit Valuation Adjustment issued by SAMA under paragraph 3 “Definitions”.
6 For the purposes of this paragraph, the term “MNA” includes any netting agreement that provides legally enforceable rights of offset (taking into account the fact that, for netting agreements employed by CCPs, no standardization has currently emerged that would be comparable with respect to over-the counter netting agreements for bilateral trading) and Master MNA may be deemed to be a single MNA.
7 The terms “clearing member”, “trade exposure”, “central counterparty” and “qualifying central counterparty” are defined in the Minimum Capital Requirement for Counterparty Credit Risk and Credit Valuation Adjustment issued by SAMA under paragraph 3 “Definitions”. In addition, for the purposes of this paragraph, the term “trade exposures“ includes initial margin irrespective of whether or not it is posted in a manner that makes it remote from the insolvency of the CCP.
8 A multi-level client structure is one in which banks can centrally clear as indirect clients; that is, when clearing services are provided to the bank by an institution which is not a direct clearing member, but is itself a client of a CM or another clearing client. The term “higher-level client” refers to the institution that provides clearing services.
9 upon the insolvency of the clearing member, there is no legal impediment (other than the need to obtain a court order to which the client is entitled) to the transfer of the collateral belonging to clients of a defaulting clearing member to the QCCP, to one of more other surviving clearing members or to the client or the client’s nominee.
10 If there is a clear precedent for transactions being ported at a QCCP and industry intent for this practice to continue, then these factors must be considered when assessing if trades are highly likely to be ported. The fact that QCCP documentation does not prohibit client trades from being ported is not sufficient to say they are highly likely to be ported.
11 The term “lower level client” refers to the institution that clears through that client.
12 For example, if a written credit derivative had a positive fair value of 20 on one date and has a negative fair value of 10 on a subsequent reporting date, the effective notional amount of the credit derivative may be reduced by 10. The effective notional amount cannot be reduced by 30. However, if on the subsequent reporting date the credit derivative has a positive fair value of five, the effective notional amount cannot be reduced at all.
13 This treatment is consistent with the rationale that the effective notional amounts included in the exposure measure may be capped at the level of the maximum potential loss, which means that the maximum potential loss at the reporting date is the notional amount of the credit derivative minus any negative fair value that has already reduced Tier 1 capital.
14 In other words, offsetting may only be recognized when the pool of reference entities and the level of subordination in both transactions are identical.
15 the removal of a PFE add-on associated with a written credit derivative from the leverage ratio exposure measure refers only to the offset by credit protection purchased through a credit derivative according to paragraph 7.2.9 and 7.2.10 and not to the reduction of the effective notional amount as a result of the negative change in fair value that has reduced Tier 1 capital.7.3 Securities Financing Transaction Exposures
7.3.1 SFTs such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin-lending transactions where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements, are included in the Leverage ratio exposure measure.
7.3.2 The treatment recognizes that secured lending and borrowing in the form of SFTs is an important source of Leverage, and ensures consistent international implementation by providing a common measure for dealing with the main differences in the operative accounting frameworks.
Treatment of Securities financing transaction exposures:
7.3.3 Bank acting as principal (General treatment): the sum of the amounts below must be included in the Leverage ratio exposure measure:
(i) Gross SFT assets16 recognized for accounting purposes (i.e. with no recognition of accounting netting)17 will be adjusted as follows:
a. Excluding from the Leverage ratio exposure measure the value of any securities received under an SFT, where the bank has recognized the securities as an asset on its balance sheet.
b. Cash payables and cash receivables in SFTs with the same counterparty may be measured net if all the following criteria are met:
■ Transactions have the same explicit final settlement date; in particular, transactions with no explicit end date but which can be unwound at any time by either party to the transaction are not eligible;
■ The right to set off the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable both currently in the normal course of business and in the event of the counterparty's default; insolvency; or bankruptcy;
■ The counterparties intend to settle net, settle simultaneously, or the transactions are subject to a settlement mechanism that results in the functional equivalent of net settlement - that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date. To achieve such equivalence both transactions are settled through the same settlement system and the settlement arrangements are supported by cash and/or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day and any issues arising from the securities legs of the SFTs do not interfere with the completion of the net settlement of the cash receivables and payables. In particular, this latter condition means that the failure of any single securities transaction in the settlement mechanism may delay settlement of only the matching cash leg or create an obligation to the settlement mechanism, supported by an associated credit facility. If there is a failure of the securities leg of a transaction in such a mechanism at the end of the window for settlement in the settlement mechanism, then this transaction and its matching cash leg must be split out from the netting set and treated gross.18
(ii) A measure of CCR calculated as the current exposure without an add-on for PFE, should be calculated as follows:
a. Where a qualifying MNA19 is in place, the current exposure (E*) is the greater of zero and the total fair value of securities and cash lent to a counterparty for all transactions included in the qualifying MNA (∑Ei), less the total fair value of cash and securities received from the counterparty for those transactions (∑Ci). This is illustrated in the following formula:
E* = max {0, [∑Ei -∑ Ci]}
b. Where no qualifying MNA is in place, the current exposure for transactions with a counterparty must be calculated on a transaction-by-transaction basis - that is, each transaction i is treated as its own netting set, as shown in the following formula:
Ei* = max {0, [Ei - Ci]}
Where Ei* may be set to zero if:
■ Ei is the cash lent to a counterparty.
■ This transaction is treated as its own netting set and
■ The associated cash receivable is not eligible for the netting treatment in paragraph 7.3.3 (i).
For the purposes of the above subparagraph, the term “counterparty” includes not only the counterparty of the bilateral repo transactions but also triparty repo agents that receive collateral in deposit and manage the collateral in the case of triparty repo transactions. Therefore, securities deposited at triparty repo agents are included in “total value of securities and cash lent to a counterparty” (E) up to the amount effectively lent to the counterparty in a repo transaction. However, excess collateral that has been deposited at triparty agents but that has not been lent out may be exclude.
7.3.4 Securities financing transaction exposures calculation:
(i) The effects of bilateral netting agreements20 for covering SFTs will be recognized on a counterparty-by-counterparty basis if the agreements are legally enforceable in each relevant jurisdiction upon the occurrence of an event of default and regardless of whether the counterparty is insolvent or bankrupt. In addition, netting agreements must:
a. Provide the non-defaulting party with the right to terminate and close out in a timely manner all transactions under the agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;
b. Provide for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it so that a single net amount is owed by one party to the other;
c. Allow for the prompt liquidation or setoff of collateral upon the event of default; and
d. Be together with the rights arising from provisions required in (a) and (c) above, legally enforceable in each relevant jurisdiction upon the occurrence of an event of default regardless of the counterparty's insolvency or bankruptcy.
(ii) Netting across positions held in the banking book and trading book will only be recognized when the netted transactions fulfil the following conditions:
a. All transactions are marked to market daily; and
b. The collateral instruments used in the transactions are recognized as eligible financial collateral in the banking book
7.3.5 Sale accounting transactions: Leverage may remain with the lender of the security in an SFT whether or not sale accounting is achieved under the operative accounting framework. If the sale accounting is achieved for an SFT under the bank's operative accounting framework, the bank must reverse all sales-related accounting entries, and then calculate its exposure as if the SFT had been treated as a financing transaction under the operative accounting framework. I.e. the bank must include the sum of amounts in subparagraphs (i) and (ii) of paragraph 7.3.3 for such an SFT) for the purpose of determining its Leverage ratio exposure measure.
7.3.6 Bank acting as agent:
(i) A bank acting as agent in an SFT provides Indemnity or guarantee to only one of the two parties involved, and only for the difference between the value of the security or cash its customer has lent and the value of collateral the borrower has provided. In this situation, the bank is exposed to the counterparty of its customer for the difference in values rather than to the full exposure to the underlying security or cash of the transaction (as is the case where the bank is one of the principals in the transaction).
(ii) A bank acting as agent in an SFT provides Indemnity or guarantee to a customer or counterparty for any difference between the value of the security or cash the customer has lent and the value of collateral the borrower has provided and the bank does not own or control the underlying cash or security resource, then the bank will be required to calculate its Leverage ratio exposure measure by applying only measure of CCR calculated as the current exposure without an add-on for PFE (subparagraph (ii) of paragraph 7.3.3). In addition to the conditions mentioned from paragraph 7.3.3 to 7.3.6 bank acting as an agent in an SFT does not provide an indemnity or guarantee to any of the involved parties, the bank is not exposed to the SFT and therefore need not recognize those SFTs in its Leverage ratio exposure measure.
(iii) A bank acting as agent in an SFT provides Indemnity or guarantee to a customer or counterparty will be considered eligible for the exceptional treatment above only if the bank's exposure to the transaction is limited to the guaranteed difference between the values of the security or cash its customer has lent and the value of the collateral the borrower has provided. In situations where the bank is further economically exposed (i.e. beyond the guarantee for the difference) to the underlying security or cash in the transaction, a further exposure equal to the full amount of the security or cash must be included in the Leverage ratio exposure measure. For example, due to the bank managing collateral received in the bank's name or on its own account rather than on the customer's or borrower's account (eg by on-lending or managing unsegregated collateral, cash or securities). However, this does not apply to client omnibus accounts that are used by agent lenders to hold and manage client collateral provided that client collateral is segregated from the bank's proprietary assets and the bank calculates the exposure on a client-by-client basis.
(iv) A bank acting as agent in an SFT provides Indemnity or guarantee to both parties involved in an SFT (i.e. securities lender and securities borrower), the bank will be required to calculate its Leverage ratio exposure measure in accordance with paragraph 7.3.3 to 7.3.6 separately for each party involved in the transaction.
16 For SFT assets subject to novation and cleared through QCCPs, “gross SFT assets recognized for accounting purposes” are replaced by the final contractual exposure, i.e. the exposure to the QCCP after the process of novation has been applied, given that pre-existing contracts have been replaced by new legal obligations through the novation process. However, banks can only net cash receivables and cash payables with a QCCP if the criteria in paragraph 7.3.3 (i) are met. Any other netting permitted by the QCCP is not permitted for the purposes of the Leverage ratio.
17 Gross SFT assets recognized for accounting purposes must not recognize any accounting netting of cash payables against cash receivables (eg as currently permitted under the IFRS). This regulatory treatment has the benefit of avoiding inconsistencies from netting which may arise across different accounting regimes
18 the criteria in this paragraph are not intended to preclude a DVP settlement mechanism or other type of settlement mechanism, provided that the settlement mechanism meets the functional requirements. For example, a settlement mechanism may meet these functional requirements if any failed transactions (ie the securities that failed to transfer and the related cash receivable or payable) can be re-entered in the settlement mechanism until they are settled.
19 A “qualifying” MNA is one that meets the requirements under paragraphs 7.3.4 in this document.
20 The provisions related to qualifying master netting agreements for SFTs are intended for the calculation of the counterparty credit risk measure of SFTs as set out in paragraph 7.3.3 (ii) only.7.4 Off-Balance Sheet (OBS) Items
7.4.1 OBS items include commitments (including liquidity facilities), whether or not unconditionally cancellable, direct credit substitutes, acceptances, standby letters of credit and trade letters of credit.
7.4.2 Treatment of OBS items for inclusion in the Leverage ratio exposure measure should be as follows:
(i) The standardized approach for credit risk as it applies to individual claims and the standardized approach for counterparty credit risk (SA-CCR) as well as treatments unique to the Leverage ratio framework.
(ii) If the OBS item is treated as a derivative exposure per the bank's relevant accounting standard, then the item must be measured as a derivative exposure for the purpose of the Leverage ratio exposure measure. In this case, the bank does not need to apply the OBS item treatment to the exposure.
(iii) OBS items are converted under the standardized approach for credit risk into credit exposure equivalents through the use of credit conversion factors (CCFs) as mentioned in the latest risk-based capital framework adopted by SAMA. For the purpose of determining the exposure amount of OBS items for the Leverage ratio, the CCFs set out in Paragraph 7.4.3 from (iv) to (x) must be applied to the notional amount.
(iv) Specific and general provisions set aside against OBS exposures that have decreased regulatory capital may be deducted from the credit exposure equivalent amount of those exposures (ie the exposure amount after the application of the relevant CCF). However, the resulting total off-balance sheet equivalent amount for OBS exposures cannot be less than zero.
7.4.3 Calculation of off balance sheet items should be as follows:
(i) For the purposes of the Leverage ratio, OBS items will be converted into credit exposures by multiplying the committed but undrawn amount by a credit conversion factor (CCF).
(ii) Commitment means any contractual arrangement that has been offered by the bank and accepted by the client to extend credit, purchase assets or issue credit substitutes. It includes the following:
a. Any arrangement that can be unconditionally cancelled by the bank at any time without prior notice to the obligor.
b. Any arrangement that can be cancelled by the bank if the obligor fails to meet conditions set out in the facility document, including conditions that must be met by the obligor prior to any initial or subsequent drawdown arrangement.
(iii) Certain arrangements that meets the following requirements can be exempted from the definition of commitments after obtaining SAMA prior approval:
a. The bank receives no fees or commissions to establish or maintain the arrangements;
b. The client is required to apply to the bank for the initial and each subsequent drawdown;
c. The bank has full authority, regardless of the fulfilment by the client of the conditions set out in the facility documentation, over the execution of each drawdown; and
d. The bank's decision on the execution of each drawdown is only made after assessing the creditworthiness of the client immediately prior to drawdown. Exempted arrangements that meet the above criteria are confined to certain arrangements for corporates and SMEs21, where counterparties are closely monitored on an ongoing basis).
(iv) A 100% CCF will be applied to the following items:
a. Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances).
b. Forward asset purchases, forward forward deposits and partly paid shares and securities, which represent commitments with certain drawdown.
c. The exposure amount associated with unsettled financial asset purchases (i.e. the commitment to pay) where regular-way unsettled trades are accounted for at settlement date. Banks may offset commitments to pay for unsettled purchases and cash to be received for unsettled sales provided that the following conditions are met:
■ the financial assets bought and sold that are associated with cash payables and receivables are fair valued through income and included in the bank's regulatory trading book as specified in Boundary between the banking book and the trading book in the Minimum Capital Requirement for Market Risk issued by SAMA paragraph 5.1 to 5.13; and
■ The transactions of the financial assets are settled on a DVP basis.
d. Off-balance sheet items that are credit substitutes not explicitly included in any other category.
(v) A 50% CCF will be applied to the following :
a. Note issuance facilities (NIFs) and revolving underwriting facilities (RUFs) regardless of the maturity of the underlying facility.
b. To certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions).
(vi) A 40% CCF will be applied to commitments, regardless of the maturity of the underlying facility, unless they qualify for a lower CCF.
(vii) A 20% CCF will be applied to both the issuing and confirming banks of short-term(Less than a year) self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralized by the underlying shipment).
(viii) A 10% CCF will be applied to commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness.
(ix) Where there is an undertaking to provide a commitment on an off-balance sheet item, banks are to apply the lower of the two applicable CCFs. For example, if a bank has a commitment to open short-term self-liquidating trade letters of credit arising from the movement of goods, a 20% CCF will be applied (instead of a 40% CCF); and if a bank has an unconditionally cancellable commitment described in 7.92 in the Minimum Capital Requirements for Credit Risk issued by SAMA to issue direct credit substitutes, a 10% CCF will be applied (instead of a 100% CCF).
(x) OBS securitization exposures must be treated as per paragraph 18.20 in the Minimum Capital Requirements for Credit Risk issued by SAMA.
21 As defined in SAMA circular No.381000064902 dated 16/06/1438 or any subsequent definition by SAMA.
Large Exposures
Large Exposure (LEX) Rules for Banks
No: 1651/67 Date(g): 8/9/2019 | Date(h): 9/1/1441 Status: In-Force 1. General Requirements
1.1. Introduction
These Rules are issued by Saudi Central Bank* (SAMA) in exercise of the powers vested upon it under its Charter issued by the Royal Decree No.23 on 23-05-1377H (15 December 1957G) and the Banking Control Law issued by the Royal Decree No. M/5 on 22-02-1386H (11 June 1966G) and the rules for Enforcing its Provisions issued by Ministerial Decision No 3/2149 on 14/10/1406AH.
These Rules set out the minimum requirements on large exposures including the limits on a bank’s exposures to a single counterparty, and groups of connected counterparties as well as the types of exposures to be included in or excluded from those limits, and the regulatory reporting requirements for large and connected exposures.
These Rules shall supersede the existing SAMA rules on Large Exposures of Banks issued vide SAMA circular no. 45201/41 dated 14/10/1439AH. The changes from the previous version are underlined.
* The Saudi Arabian Monetary Agency was replaced By the name of Saudi Central Bank accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding in 26/11/2020AD.
1.2. Objectives of the Rules
The main objectives of these Rules are to enable banks:
i. To contain the maximum loss a bank could face in the event of a sudden default or failure of a counterparty;
ii. To manage credit concentration risk emanating from concentrated exposures to single counterparties or groups of connected counterparties, through diversification of credit portfolio;
iii. To put in place a large exposures framework which complements and serves as a backstop to the risk-based capital requirements;
iv. To deal effectively with large exposures so as to contribute to the stability of the financial system; and
v. To ensure broader access to credit for the economic development of the Kingdom.
1.3. Definitions
The following terms and phrases, where used in these Rules, shall have the corresponding meanings, unless the context requires otherwise:
i. SAMA: the Saudi Central Bank*.
ii. Rules: Large Exposure (LEX) Rules for Banks.
iii. Subsidiary: include a subsidiary where a bank owns more than 50% of its shareholding.
iv. Exposure: include both on and off-balance sheet exposures included in either the banking or trading books, and instruments with counterparty credit risk under the Basel risk-based capital framework. Banking and trading books have the same meaning as under the Basel risk-based capital framework.
v. Large Exposure: if the sum of all exposures values of a bank to a single counterparty or to a Group of Connected Counterparties is equal to or above 10% of the bank's eligible capital base. The exposures values have to be measured and eligible capital base calculated as per requirements set out under these Rules.
vi. Eligible Capital Base: is the effective amount of Tier 1 capital fulfilling the criteria defined in the Basel III framework.
vii. Control Relationship: control relationship will be deemed to exist automatically if one entity owns more than 50% of the voting rights of another entity. In addition, banks must assess connectedness between counterparties based on control, using the following criteria:
a. Voting agreements (e.g. control of a majority of voting rights pursuant to an agreement with other shareholders);
b. Significant influence on the appointment or dismissal of an entity’s administrative, management or governing body, such as the right to appoint or remove a majority of members in those bodies, or a majority of members have been appointed solely as a result of the exercise of an individual entity's voting rights;
c. Significant influence on senior management, e.g. an entity has the power, pursuant to a contract or otherwise, to exercise a controlling influence over the management or policies of another entity (e.g. through consent rights over key decisions);
Banks are also expected to refer to criteria specified in appropriate internationally recognized accounting standards (The International Financial Reporting Standards - IFRS are applied to all banks in KSA) for further qualitatively based guidance when determining control.
Where control has been established based on any of these criteria, a bank may still demonstrate to SAMA in exceptional cases, e.g. due to the existence of corporate governance safeguards, that such control does not necessarily result in the entities concerned constituting a group of connected counterparties.
viii. Economic Interdependence: In establishing connectedness based on economic interdependence, banks must consider, at a minimum, the following qualitative criteria:
a. Where 50% or more of one counterparty's gross receipts or gross expenditures (on an annual basis) is derived from transactions with the other counterparty (eg the owner of a residential/commercial property and the tenant who pays a significant part of the rent);
b. Where one counterparty has fully or partly guaranteed the exposure of the other counterparty, or is liable by other means, and the exposure is so significant that the guarantor is likely to default if a claim occurs;
c. Where a significant part of one counterparty's production/output is sold to another counterparty, which cannot easily be replaced by other customers;
d. When the expected source of funds to repay each loan of both counterparties is the same and neither counterparty has another independent source of income from which the loan may be serviced and fully repaid.1
e. Where it is likely that the financial problems of one counterparty would cause difficulties for the other counterparties in terms of full and timely repayment of liabilities;
f. Where the insolvency or default of one counterparty is likely to be associated with the insolvency or default of the other(s);
g. When two or more counterparties rely on the same source for the majority of their funding and, in the event of the common provider's default, an alternate provider cannot be found. In this case, the funding problems of one counterparty are likely to spread to another due to a one-way or two-way dependence on the same main funding source.
Where a bank can demonstrate to SAMA that a counterparty who is economically closely related to another counterparty may overcome financial difficulties or even the second counterparty's default by finding alternative business partners or funding sources within an appropriate time period, the bank is not required to combine these counterparties to form a group of connected counterparties despite meeting some of the above criteria.
There are cases where a thorough investigation of economic interdependencies will not be proportionate to the size of the exposures. Therefore, banks are expected to identify possible connected counterparties on the basis of economic interdependence in all cases where the sum of all exposures (including guarantors) to one individual counterparty or a group of connected counterparties exceeds 5% of the eligible capital base.
ix. Group of Connected Counterparties:
In some cases, a bank may have exposures to a group of counterparties with specific relationships or dependencies such that, where one of the counterparties were to fail, all of the counterparties would very' likely fail. A group of this sort, referred to in these rules as a group of connected counterparties, must be treated as a single counterparty. In this case, the sum of the bank's exposures to all the individual entities included within a group of connected counterparties is subject to the large exposure limit and to the regulatory reporting requirements.2
Two or more natural or legal persons shall be deemed a group of connected counterparties if at least one of the following criteria is satisfied:
a. The existence of a control relationship; or
b. The existence of Economic interdependence.
c. Other connections or relationships which, according to a bank’s assessment, identify the counterparties as constituting a single risk.
The bank shall assess the relationship amongst counterparties with reference to (a),(b) and (c) above in order to properly assess the existence and the extent of a group of connected counterparties.
Where control has been established based on any of these criteria, a bank may still demonstrate to SAMA in exceptional cases, e.g. due to the existence of specific circumstances and corporate governance safeguards, that such control does not necessarily result in the entities concerned constituting a group of connected counterparties.
x. Entities Connected with Saudi Government: means public sector entities treated as sovereigns under the Basel risk-based capital framework including Sovereign Wealth Funds (SWFs). However, any commercial undertakings majority owned by Saudi Government will be treated as normal commercial entities and therefore be subject to the exposure limits under these Rules.
xi. Commercial Undertakings Majority Owned by Saudi Government: commercial entities in which the Saudi Government or Entities Connected with Saudi Government owns (directly or indirectly ) 50% or more of shareholdings.
1 As amended by BCBS via its FAQ issued on September 29, 2016
2 See section '7. Regulatory Reporting' of this circular* The Saudi Arabian Monetary Agency was replaced By the name of Saudi Central Bank accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding in 26/11/2020AD.
2. Scope and Level of Application
2.1. Level of Application
These rules shall be applicable to the following institutions:
i. All locally incorporated banks licensed and operating in the Kingdom of Saudi Arabia
ii. All foreign branches and subsidiaries of locally incorporated banks operating outside the Kingdom of Saudi Arabia.
iii. All foreign banks operating in the Kingdom of Saudi Arabia.
While applying the rules to their subsidiaries and branches, the banks shall also take into account the legal and regulatory requirements of the concerned regulatory authorities.
These rules do not apply to Foreign Bank Branches that are subject to consolidated supervision by their home country supervisors in respect of credit concentrations and large exposure limits unless specifically stated. However, all foreign bank branches must detail their large exposure and risk concentration policies as well as the relevant high-level controls, and report their 50 largest exposures as per reporting requirements under Section 7 of these Rules. As part of its prudential oversight of the Kingdom of Saudi Arabia operations of a foreign bank branch, SAMA may discuss with the foreign bank branch's parent and home supervisor any undue credit risk concentrations associated with the foreign bank branch's Kingdom of Saudi Arabia operations.
These rules shall be applicable on a consolidated as well as standalone basis. They apply at the same level as the risk-based capital requirements are required to be applied as per SAMA's Detailed Guidance Document relating to Pillar 1, June 2006,3 i.e. at every tier within a banking group. While applying the rules at a consolidated level, a bank must consider all exposures to third parties across the relevant regulatory consolidation group and compare the aggregate of those exposures with the group's eligible capital base.
3 See "Basel II - SAMA’s Detailed Guidance Document relating to Pillar 1, June 2006"
2.2. Scope of Counterparties
A bank must consider exposures to any counterparty to comply with the exposure limits unless a specific exemption to any exposure is granted under these Rules.
3. Governance and Risk Management
i. The Board of Directors of a bank is ultimately responsible for the oversight of the bank's large exposures and risk concentrations and for approving policies governing large exposures and risk concentrations of the bank.
ii. A bank is required to have policies and procedures on large exposures and risk concentrations.
iii. A bank is required to conduct stress testing and scenario analysis of its large exposures and risk concentrations to assess the impact of changes in market conditions and key risk factors (e.g. economic cycles, interest rates, liquidity conditions or other market movements) on its risk profile, capital and earnings.
iv. A bank is required to have adequate systems and controls in place to identify, measure, monitor and report large exposures and risk concentrations of the bank on a timely basis and large exposures and risk concentrations of the bank are reviewed at least quarterly.
v. For exposures and counterparties that are excluded from the large exposure limits, a bank must have adequate processes and controls in place to monitor these excluded exposures. The bank is required to consider how the risks arising from these types of exposures are incorporated into its risk management framework, including establishing internal limits and triggers commensurate with its risk appetite.
4. Maximum Exposure Limits
4.1. Exposure Limits
All banks are required to ensure compliance of the following exposure limits:
i. Single Counterparty: The sum of all exposures values a bank has to a single nonbank counterparty (excluding individuals, sole proprietorships and commercial undertakings majority owned by Saudi government) must not be higher than 15% of the banks available eligible capital base at all times.
ii. Group of Connected Counterparties: The sum of all exposures values a bank has to a group of connected non-bank counterparties must not be higher than 15% of the bank's available eligible capital base at all times. Subject to the following:
a. Where an individual/sole proprietorship/partnership is included within a Group of Connected Counterparties, the exposure limit specified under Section 4.1 ,iii below shall also be applicable, in addition to the overall group exposure limit,
b. The sum of all exposures values a bank has to the group of connected counterparties where a commercial undertakings majority owned by Saudi government is included can be higher than 15% of the bank's eligible capital base subject to the limit specified in 4.1 .v.
Furthermore, the sum of a bank’s exposures to the entities included within a group of connected counterparties will also be subject to the regulatory reporting requirements as specified under Section 7 of these Rules.
iii. Individual/Sole proprietor: The sum of all the exposures values a bank has to an individual or a sole proprietorship or a partnership must not be higher than 5% of the banks available eligible capital base at all times.
iv. Banks: The sum of all the exposures values a bank has to another bank must not be higher than 25% of the lending bank's available eligible capital base at all times. However. If the lending bank and/or the counterparty bank are/is Domestically - Systemically Important Banks (D-SIBs), or Globally - Systemically Important Banks (G-SIBs) as defined in Appendix VI, then the sum of all exposures of the lending Bank to its counterparty bank cannot exceed 15% of the lending bank’s available eligible capital base at all times.
v. Commercial Undertakings Majority Owned by Saudi Government: The sum of all exposures values a bank has to a commercial undertakings majority owned by Saudi Government must not be higher than 25% of the bank’s available eligible capital base at all times;
vi. Aggregate Large Exposures: The aggregate of all Large Exposures shall not exceed 6 times of the bank’s eligible capital.
4.2. Measurement of Exposures and Capital Base
The exposures must be measured as specified in Section 5 of these Rules. The eligible capital base is the effective amount of Tier 1 capital fulfilling the criteria defined in Section A of the "Finalized Guidance Document Concerning the Implementation of Basel III”.
4.3. Breaches of Limits
Any breaches of the exposure limits, must be communicated immediately to SAMA. The communication to SAMA must also include the bank's action plan to bring the exposure to within the breached limit. Furthermore, any such breaches may attract punitive supervisory action depending upon their materiality.
In exceptional circumstances where a bank’s proposed exposure to a counterpart) is likely to exceed any specific limits in these rules, the bank must obtain approval from SAMA prior to undertaking that exposure. In such cases, the bank must provide SAMA with the assessment of the following:
a. The concentration risks involved with exceeding the large exposure limits and why the proposed exposures will not unreasonably expose the bank to excessive risk; and
b. How the proposed exposure is consistent with its large exposures and risk concentration policies.
SAMA may impose additional concentration risk capital requirements on exposure amounts that exceeds any specific limits in these rules.
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.
6. Additional Requirements
While ensuring compliance with the exposure limits under these Rules, the banks shall also meet the following additional requirements:
i. The exposure limits under these Rules shall be calculated based on the eligible capital base as disclosed in the latest published quarterly financial statements of the bank;
ii. For the purpose of compliance with exposure limits under these Rules, banks shall measure, monitor, and report all exposures net of amounts reduced by eligible CRM techniques.
7. Regulatory Reporting
Banks are required to submit to SAMA the following information on their exposures before and after application of the credit risk mitigation techniques, on a quarterly basis:
i. All Large Exposures (before application of the credit risk mitigation techniques) along- with the ratio of the aggregate of all such large exposures with the banks eligible capital, on the prescribed format attached as Appendix-I;
ii. All Large Exposures (after application of the credit risk mitigation techniques) along- with the ratio of the aggregate of all such large exposures with the banks eligible capital, on the prescribed format attached as Appendix-II;
iii. All the exempted exposures with values equal to or above 10% of the banks eligible capital, on the prescribed format attached as per Appendix-I & II;
iv. The largest 50 exposures to counterparties, irrespective of the values of these exposures relative to the banks eligible capital base, on the prescribed format attached as per Appendix-III;
v. All exposures that exceeded the exposure limits specified under these Rules during the reporting quarter even if regularized subsequently, on the prescribed format attached as per Appendix-IV;
The above information shall be submitted to SAMA each calendar quarter within 30 calendar days of the end of each quarter.
8. Implementation
All banks are required to institute necessary policies and procedures to ensure compliance of these Rules. SAMA will monitor compliance of these Rules through its off-site monitoring and on-site inspection process.
9. Effective Date
These revised Rules shall come into force with effect from the 1st of October 2019. Banks are required to ensure compliance with these Rules while taking any new exposure or renewing existing exposures after the effective date.
Bank are required to submit to SAMA a list of all exposures (if any) that would be in breach of any new limits prescribed in these Rules, and a plan to reduce these exposures until they are fully compliant with the revised Rules.
Appendix-I
Name of the Bank: _______
Statement for the Month ended _______
Q27-1
Statement Showing Large Exposures to Single and Group of Connected Counterparties (before application of the credit risk mitigation techniques)
(All amounts are in SR thousands)
SR. No. Name and Location of Borrow Total value of Gross Exposure Ratio of Gross Exposure to Bank's Eligible Capital Whether exempted from Exposure Limits (Yes or No) In Case of Exempted Exposures, State Reasons for Exemption Remarks (if any) On Bal. Sheet Off Bal. Sheet Total 1 2 3 4 5(=3+4) 6 7 8 9 A. Aggregate of all Large Exposures B. Aggregate of Exempted Large Exposures C. Net Large Exposures (A - B) D. Ratio of Net Large Exposures to Bank's Eligible Capital Appendix-II
Name of the Bank: _______
Statement for the Month ended _______
Q27-2
Statement Showing Large Exposures to Single and Group of Connected Counterparties (after application of the credit risk mitigation techniques)
(All amounts are in SR thousands)
SR. No. Name and Location of Borrower Total value of Gross Exposure Value of Eligible Credit Risk Mitigates(CRM) Net Value of Exposure Ratio of Net Exposure to Bank's Eligible Capital Whether exempted from Exposure Limits (Yes or No) In Case of Exempted Exposures, State Reasons for Exemption Remarks (if any) Cash Margins Other Eligible CRM Total 1 2 3 4 5 6(=4+5) 7 8 9 10 A. Aggregate of all Net Large Exposures B. Aggregate of Exempted Net Large Exposures C. Aggregate of Large Exposures Net of CRM (A - B) D. Ratio of Aggregate Large Exposures net of CRM to Bank's Eligible Capital Appendix-III
Name of the Bank: _______
Statement for the Month ended _______
Q27-3
Statement Showing Largest 50 Exposures to Counterparties
(All amounts are in SR thousands)
SR. No. Name and Location of Borrower Total Amount of Gross Exposure Value of Eligible Credit Risk Mitigates(CRM) Net Exposure Ratio of Net Exposure to Bank's Eligible Capital In Case of Exempted Exposures, State Reasons for Exemption On Bal. Sheet Off Bal. Sheet Total 1 2 3 4 5(=3+4) 6 7=(5+6) 8 9 Total A. Aggregate of all Largest 50 Exposures B. Ratio of Aggregate Largest 50 Exposures to Bank's Eligible Capital Appendix-IV
Name of the Bank: _______
Statement for the Month ended _______
Q27-4
Statement Showing Exposures that Exceeded the Specified Exposure Limits during the Reporting Month
(All amounts are in SR thousands)
SR. No. Name and Location of Borrower Total Value of Gross Exposure On Reporting Date Total Value of Exposure on Date of Breach Original Date of Breach Date of Regularization Reasons for Breach Remarks (if any) On Bal. Sheet Off Bal. Sheet Total 1 2 3 4 5(=3+4) 6 7 8 9 10 Total Appendix V
The Financial Stability Board (FSB) defines Systemically Important Financial Institutions (SIFTs) as “financial institutions whose distress or disorderly failure because of their size, complexity and systematic interconnectedness, would cause significant disruption to the wider financial system and economic activity”
At the international level, the Basel Committee on Banking Supervision has developed a methodology for identifying G-SIB's, and a set of principles to guide national authorities in the identification of domestic systematically important banks (D-SIB's). G-SIB status is determined using five main criteria: cross-jurisdictional activity; interconnectedness; size; substitutability and complexity. The methodology (issued via SAMA circular no. 107018 dated 10 July 2013) is also used to rank a G-SIB’s level of systemic importance relative to other G-SIB's. The list of G-SIB's is reviewed annually, and banks can move in or out of G-SIB classification or be re-classified at a different level of systemic importance.
The 2018 list of G-SIBs are available on FSB website
Updated G-SIB list should be received from the website
Domestic Systematically Important Bank (D-SIB):
A D-SIB is a bank whose distress or disorderly failure could have a serious detrimental impact on either the financial system or the real economy within the country in which the bank operates. The BCBS has published a framework for developing a D-SIB assessment methodology (issued via SAMA circular no. 351000138356 dated 7 September 2014 and circular no. 371000091395 dated 24/05/2016). In connection with identifying and notifying banks with respect to the D-SIB designation, SAMA is required to:
• Take into consideration size; interconnectedness; substitutability; and complexity (including additional complexities caused by cross-border activity) within the domestic economy;
• Produce a D-SIB list (issued via SAMA circulars no. 56165/67 dated 14/05/2019, 391000089191 dated 03/05/2018, 381000082448 dated 02/05/2017 and 371000091395 dated 24/05/2016), and review it on an annual basis; and
• Publicly disclose D-SIB assessment methodology (issued via SAMA circular no. 371000091395 dated 24/05/2016)
Updated D-SIB list should be received from the SAMA website.
The relationship between G-SIB's and D-SIB’s:
• Banks can be classified as D-SIB at the consolidated group level or subsidiary or a branch level by the bank's supervisory authorities.
• A bank identified as a G-SIB can also be classified as a D-SIB in any of the countries depending on the nature of operations.
• A bank with large global operations identified as G-SIB that does not have significant operations in any individual country can also be classified as a G-SIB
Appendix VI
Definition of exposure value13
Banking book on-balance sheet non-derivative assets:
The exposure value must be defined as the accounting value of the exposure i.e. Net of specific provisions and value adjustments. As an alternative, a bank may consider the exposure value gross of specific provisions and value adjustments.
Banking book and trading book OTC derivatives (and any other instrument with counterparty credit risk):
The exposure value for instruments that give rise to counterparty credit risk and are not securities financing transactions must be the exposure at default according to the standardised approach for counterparty credit risk (SA-CCR - (See SAMA Circular No 351000095021,21 May 2014 and circular no. 371000101120 dated 20 June 2016. Basel Committee on Banking Supervision Document of March 2014 regarding the Standardized Approach for Measuring Counterparty Credit Risk Exposures).
Securities financing transactions:
BCBS has revised Standardized approach for measuring counterparty credit risk in March 2014 implemented by SAMA via. Circular no. 371000101120 dated 20 June 2016. In addition, BCBS has revised the comprehensive approach used for the measurement of Securities Financing Transaction (SFT) exposures in December 2017 which SAMA will apply in future. All banks must use the revised comprehensive approach with supervisory haircuts or equivalent non-internal model method for large exposure purposes. However, until SAMA issues these revised rules, banks would be allowed to use the method they currently use for calculating their risk-based capital requirements against SFTs (i.e. GN 2, Page 14, of Basle 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)
Banking book “traditional” off-balance sheet commitments:
For the purpose of the large exposures framework, off-balance sheet items will be converted into credit exposure equivalents through the use of credit conversion factors (CCFs) by applying the CCFs set out for the standardised approach for credit risk for risk-based capital requirements, with a floor of 10%.
13 Paragraphs 32-35 of BCBS “Supervisory framework for measuring and controlling large exposures' April 2014
Appendix VII
Calculation of exposure value for trading book positions14
A bank must add any exposures to a single counterparty arising in the trading book to any other exposures to that counterparty that lie in the banking book to calculate its total exposure to that counterparty.
Scope of large exposure limits in the trading book:
The exposures considered in this section correspond to concentration risk associated with the default of a single counterparty for exposures included in the trading book (See note below). Therefore, positions in financial instruments such as bonds and equities must be constrained by the large exposure limit, but concentrations in a particular commodity or currency need not be.
Note (SAMA recognizes that the risk from large exposures to single counterparties or groups of connected counterparties is not the only type of concentration risk that could undermine a bank's resilience. Other types include both sectoral and geographical concentrations of asset exposures; reliance on concentrated funding sources; and also a significant net short position in securities, because the bank may incur severe losses if the price of these securities increases. SAMA has decided to focus this framework on losses incurred due to default of a single counterparty or a group of connected counterparties and not to take into account any other type of concentration risk.)
Calculation of exposure value for trading book positions:
The exposure value of straight debt instruments and equities must be defined as the accounting value of the exposure (i.e. the market value of the respective instruments).
Instruments such as swaps, futures, forwards and credit derivatives must be converted into positions following the risk-based capital requirements/ See paragraph 718 (x - xii), Page 89, Basel II.5 SAMA's Guidance Document Concerning Implementation, 2012). These instruments are decomposed into their individual legs. Only transaction legs representing exposures in the scope of the large exposures framework need be considered (see note below)
Note: A future on stock X, for example, is decomposed into a long position in stock X and a short position in a risk-free interest rate exposure in the respective funding currency, or a typical interest rate swap is represented by a long position in a fixed and a short position in a floating interest rate exposure or vice versa.
In the case of credit derivatives that represent sold protection, the exposure to the referenced name must be the amount due in the case that the respective referenced name triggers the instrument, minus the absolute value of the credit protection, (see note below) For credit-linked notes, the protection seller needs to consider positions both in the bond of the note issuer and in the underlying referenced by the note. For positions hedged by credit derivatives, refer to “Offsetting long and short positions in the trading book" section below (paragraphs 3 to 6).
Note: In the case that the market value of the credit derivative is positive from the perspective of the protection seller, such a positive market value would also have to be added to the exposure of the protection seller to the protection buyer (counterparty credit risk; refer to "Banking book and trading book OTC derivatives section in Appendix VI above). Such a situation could typically occur if the present value of already agreed but not yet paid periodic premiums exceeds the absolute market value of the credit protection.
The measures of exposure values of options under this framework differ from the exposure value used for risk-based capital requirements. The exposure value must be based on the change(s) in option prices that would result from a default of the respective underlying instrument. The exposure value for a simple long call option would therefore be its market value and for a short put option would be equal to the strike price of the option minus its market value. In the case of short call or long put options, a default of the underlying would lead to a profit (i.e. a negative exposure) instead of a loss, resulting in an exposure of the option's market value in the former case and equal the strike price of the option minus its market value in the latter case. The resulting positions will in all cases be aggregated with those from other exposures. After aggregation, negative net exposures must be set to zero.
Exposure values of banks' investments in transactions (i.e index positions, securitizations, hedge funds or investment funds) must be calculated applying the same rules as for similar instruments in the banking book (refer to Appendix X). Hence, the amount invested in a particular structure may be assigned to the structure itself, defined as a distinct counterparty, to the counterparties corresponding to the underlying assets, or to the unknown client, following the rules described in Appendix X paragraphs 1 to 5).
Offsetting long and short positions in the trading book
Offsetting between long and short positions in the same issue:
Banks may offset long and short positions in the same issue (two issues are defined as the same if the issuer, coupon, currency and maturity are identical). Consequently, banks may consider a net position in a specific issue for the purpose of calculating a bank's exposure to a particular counterparty.
Offsetting between long and short positions in different issues:
Positions in different issues from the same counterparty may be offset only when the short position is junior to the long position, or if the positions are of the same seniority.
Similarly, for positions hedged by credit derivatives, the hedge may be recognised provided the underlying of the hedge and the position hedged fulfil the provision mentioned in the pervious paragraph (the short position is junior or of equivalent security to the long position).
In order to determine the relative seniority of positions, securities may be allocated into broad buckets of degrees of seniority (for example. “Equity”, “Subordinated Debt" and “Senior Debt”).
For those banks that find it excessively burdensome to allocate securities to different buckets based on relative seniority, they may recognise no offsetting of long and short positions in different issues relating to the same counterparty in calculating exposures.
In addition, in the case of positions hedged by credit derivatives, any reduction in exposure to the original counterparty will correspond to a new exposure to the credit protection provider, following the principles underlying the substitution approach stated in section 5.4 “Recognition of exposures to CRM providers”, except in the case described in the next paragraph.
When the 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. (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) For the purposes of this paragraph, financial entities comprise:
■ 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, broker/dealers, banks, thrifts and futures commission merchants; and
■ unregulated financial institutions, defined as legal entities whose main business includes: the management of financial assets, lending, factoring, leasing, provision of credit enhancements, securitisation, investments, financial custody, central counterparty services, proprietary trading and other financial services activities identified by supervisors
Offsetting short positions in the trading book against long positions in the banking book:
Netting across the banking and trading books is not permitted.
Net short positions after offsetting:
When the result of the offsetting is a net short position with a single counterparty, this net exposure need not be considered as an exposure for large exposure purposes (refer to “Scope of large exposure limits in the trading book" section in this Appendix).
14 Paragraphs 44-59 of BCBS "Supervisory framework for measuring and controlling large exposures" April 2014
Appendix VIII
Covered bonds15
Covered bonds are bonds issued by a bank or mortgage institution and are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.
A covered bond satisfying the conditions set out in the next paragraph may be assigned an exposure value of no less than 20% of the nominal value of the bank’s covered bond holding. Other covered bonds must be assigned an exposure value equal to 100% of the nominal value of the bank's covered bond holding. The counterparty to which the exposure value is assigned is the issuing bank.
To be eligible to be assigned an exposure value of less than 100%, a covered bond must satisfy all the following conditions:
- It must meet the general definition set out in the first paragraph of this appendix;
- The pool of underlying assets must exclusively consist of:
• claims on, or guaranteed by, sovereigns, their central banks, public sector entities or multilateral development banks;
• claims secured by mortgages on residential real estate that would qualify for a 35% or lower risk weight under the Basel II Standardised Approach (SAMAs local guidelines in connection there with are Basel II Package of Bank Prudential Returns and Guidance Notes Concerning Standardized Approach, 2007 and Basel II - SAMA's Detailed Guidance Document, 2006) for credit risk and have a loan-to-value ratio of 80% or lower (Note: Currently SAMA does not utilize 35% or lower RWA for mortgages on residential real estate); and/or
• claims secured by commercial real estate that would qualify for the 100% or lower risk-weight under the Basel II Standardised Approach for credit risk (SAMAs local guidelines in connection therewith are Basel II Package of Bank Prudential Returns and Guidance Notes Concerning Standardized Approach, 2007 and Basel II - SAMA’s Detailed Guidance Document, 2006 )and with a loan-to-value of 60% or lower;
- The nominal value of the pool of assets assigned to the covered bond instrument(s) by its issuer should exceed its nominal outstanding value by at least 10%. The value of the pool of assets for this purpose does not need to be that required by the legislative framework. However, if the legislative framework does not stipulate a requirement of at least 10%, the issuing bank needs to publicly disclose on a regular basis that their cover pool meets the 10% requirement in practice. In addition to the primary assets listed in the previous paragraph, the additional collateral may include substitution assets (cash or short term liquid and secure assets held in substitution of the primary assets to top up the cover pool for management purposes) and derivatives entered into for the purposes of hedging the risks arising in the covered bond program.
In order to calculate the required maximum loan-to-value for residential real estate (RRE) and commercial real estate (CRE) referred to in the third of this appendix, the operational requirements regarding the objective market value of collateral and the frequent revaluation in the BCBS Basel II framework included in the next paragraph of must be used. The conditions set out in the third paragraph of this appendix must be satisfied at the inception of the covered bond and throughout its remaining maturity.
Operational requirements for eligible CRE/RRE16
CRE and RRE will be eligible for recognition as collateral for corporate claims only if all of the following operational requirements are met:
• Legal enforceability: any claim on a collateral taken must be legally enforceable in all relevant jurisdictions, and any claim on collateral must be properly filed on a timely basis. Collateral interests must reflect a perfected lien (ie all legal requirements for establishing the claim have been fulfilled). Furthermore, the collateral agreement and the legal process underpinning it must be such that they provide for the bank to realise the value of the collateral within a reasonable timeframe.
• Objective market value of collateral: the collateral must be valued at or less than the current fair value under which the property could be sold under private contract between a willing seller and an arm’s-length buyer on the date of valuation.
• Frequent revaluation: the bank is expected to monitor the value of the collateral on a frequent basis and at a minimum once every year. More frequent monitoring is suggested where the market is subject to significant changes in conditions and it is required for shares collateral. Statistical methods of evaluation (e.g. reference to house price indices, sampling) may be used to update estimates or to identify collateral that may have declined in value and that may need re-appraisal. A qualified professional must evaluate the property when information indicates that the value of the collateral may have declined materially relative to general market prices or when a credit event, such as default, occurs.
• Junior liens may be taken into account where there is no doubt that the claim for collateral is legally enforceable and constitutes an efficient credit risk mitigant.
15 Paragraphs 68-71 of BCBS "Supervisory framework for measuring and controlling large exposures" April 2014
16 Paragraphs 509 of BCBS Basel II FrameworkAppendix IX
Collective investment undertakings, securitization vehicles and other structures17
Banks must consider exposures even when a structure lies between the bank and the exposures, that is, even when the bank invests in structures through an entity which itself has exposures to assets (hereafter referred to as the “underlying assets”). Banks must assign the exposure amount, ie the amount invested in a particular structure, to specific counterparties following the approach described below. Such structures include funds, securitizations and other structures with underlying assets.
Determination of the relevant counterparties to be considered:
A bank may assign the exposure amount to the structure itself, defined as a distinct counterparty, if it can demonstrate that the bank's exposure amount to each underlying asset of the structure is smaller than 0.25% of its eligible capital base, considering only those exposures to underlying assets that result from the investment in the structure itself and using the exposure value calculated according to sections titled “Any structure where all investors rank pari passu" and “Any structure with different seniority levels among investors" below in this appendix. (By definition, this required test will be passed if the bank's whole investment in a structure is below 0.25% of its eligible capital base.) In this case, a bank is not required to look through the structure to identify the underlying assets.
A bank must look through the structure to identify those underlying assets for which the underlying exposure value is equal to or above 0.25% of its eligible capital base. In this case, the counterparty corresponding to each of the underlying assets must be identified so that these underlying exposures can be added to any other direct or indirect exposure to the same counterparty. The bank’s exposure amount to the underlying assets that are below 0.25% of the bank's eligible capital base may be assigned to the structure itself (ie partial look-through is permitted).
If a bank is unable to identify the underlying assets of a structure:
• Where the total amount of its exposure does not exceed 0.25% of its eligible capital base, the bank must assign the total exposure amount of its investment to the structure;
• Otherwise, it must assign this total exposure amount to the unknown client.
The bank must aggregate all unknown exposures as if they related to a single counterparty (the unknown client), to which the large exposure limit would apply.
When the look-through approach (LTA) is not required according to the criteria mentioned in the second paragraph of this appendix, a bank must nevertheless be able to demonstrate that regulatory arbitrage considerations have not influenced the decision whether to look through or not - eg that the bank has not circumvented the large exposure limit by investing in several individually immaterial transactions with identical underlying assets.
Calculation of underlying exposures - bank’s exposure amount to underlying assets:
If the LTA need not be applied, a bank's exposure to the structure must be the nominal amount it invests in the structure.
Any structure where all investors rank pari passu (eg CIU):
When the LTA is required according to the paragraphs above, the exposure value assigned to a counterparty is equal to the pro rata share that the bank holds in the structure multiplied by the value of the underlying asset in the structure. Thus, a bank holding a 1% share of a structure that invests in 20 assets each with a value of 5 must assign an exposure of 0.05 to each of the counterparties. An exposure to a counterparty must be added to any other direct or indirect exposures the bank has to that counterparty.
Any structure with different seniority levels among investors (eg securitization vehicles) When the LTA is required according to the paragraphs above, the exposure value to a counterparty is measured for each tranche within the structure, assuming a pro rata distribution of losses amongst investors in a single tranche. To compute the exposure value to the underlying asset, a bank must:
• First, consider the lower of the value of the tranche in which the bank invests and the nominal value of each underlying asset included in the underlying portfolio of assets
• Second, apply the pro rata share of the bank's investment in the tranche to the value determined in the first step above.
Identification of additional risks:
Banks must identify third parties that may constitute an additional risk factor inherent in a structure itself rather than in the underlying assets. Such a third party could be a risk factor for more than one structure that a bank invests in. Examples of roles played by third parties include originator, fund manager, liquidity provider and credit protection provider.
The identification of an additional risk factor has two implications:
• The first implication is that banks must connect their investments in those structures with a common risk factor to form a group of connected counterparties. In such cases, the manager would be regarded as a distinct counterparty so that the sum of a bank's investments in all of the funds managed by this manager would be subject to the large exposure limit, with the exposure value being the total value of the different investments. But in other cases, the identity of the manager may not comprise an additional risk factor - for example, if the legal framework governing the regulation of particular funds requires separation between the legal entity that manages the fund and the legal entity that has custody of the fund's assets. In the case of structured finance products, the liquidity provider or sponsor of short-term programs (asset- backed commercial paper - ABCP - conduits and structured investment vehicles - SIVs) may warrant consideration as an additional risk factor (with the exposure value being the amount invested). Similarly, in synthetic deals, the protection providers (sellers of protection by means of CDS/guarantees) may be an additional source of risk and a common factor for interconnecting different structures (in this case, the exposure value would correspond to the percentage value of the underlying portfolio).
• The second implication is that banks may add their investments in a set of structures associated with a third party that constitutes a common risk factor to other exposures (such as a loan) it has to that third party. Whether the exposures to such structures must be added to any other exposures to the third party would again depend on a case- by-case consideration of the specific features of the structure and on the role of the third party. In the example of the fund manager, adding together the exposures may not be necessary because potentially fraudulent behavior may not necessarily affect the repayment of a loan. I he assessment may be different where the risk to the value of investments underlying the structures arises in the event of a third-party default. For example, in the case of a credit protection provider, the source of the additional risk for the bank investing in a structure is the default of the credit protection provider. The bank must add the investment in the structure to the direct exposures to the credit protection provider since both exposures might crystallize into losses in the event that the protection provider defaults (ignoring the covered part of the exposures may lead to the undesirable situation of a high concentration risk exposure to issuers of collateral or providers of credit protection).
It is conceivable that a bank may consider multiple third parties to be potential drivers of additional risk. In this case, the bank must assign the exposure resulting from the investment in the relevant structures to each of the third parties.
The requirement set out in section “Calculation of underlying exposures - bank’s exposure amount to underlying assets" in this appendix to recognise a structural risk inherent in the structure instead of the risk stemming from the underlying exposures is independent of whatever the general assessment of additional risks concludes.
17 Paragraphs 72-83 of BCBS "Supervisory framework for measuring and controlling large exposures" April 2014
Appendix X
Exposures to central counterparties18
Banks’ exposures to qualifying central counterparties (QCCPs - see note below) related to clearing activities are exempted from the large exposures limits. However, these exposures will be subject to the regulatory reporting requirements as defined in the table below, and the SAMA will monitor the need for this exemption
Note: The definition of QCCP for large exposures purposes is the same as that used for risk-based capital requirement purposes. A qualifying central counterparty (QCCP) is 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 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, and publicly indicated that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the CPSS- IOSCO Principles for Financial Market Infrastructures.
In the case of non-QCCPs, banks must measure their exposure as a sum of both the clearing exposures described in sections titled “Calculation of exposures related to clearing activities” and "Other exposures” below', and must respect the general large exposure limit of 25% of the eligible capital base.
The concept of connected counterparties as described in Section 1.3, of these Rules, does not apply in the context of exposures to CCPs that are specifically related to clearing activities.
Calculation of exposures related to clearing activities:
Banks must identify exposures to a CCP related to clearing activities and sum together these exposures. Exposures related to clearing activities are listed in the table below together with the exposure value to be used:
Trade exposures The exposure value of trade exposures must be calculated using the exposure measures prescribed in other parts of this framework for the respective type of exposures (eg using the SA-CCR for derivative exposures as per SAMA circular no 351000095021 dated 21 May 2014 and circular no. 371000101120 dated 20 June 2016). Segregated initial margin The exposure value is 0.- Note A Non-segregated initial margin The exposure value is the nominal amount of initial margin posted. Pre-funded default fund contributions Nominal amount of the funded contribution. Note B Unfunded default fund contributions The exposure value is 0. Equity stakes The exposure value is the nominal amount. Note C Note A: When the initial margin (IM) posted is bankruptcy-remote from the CCP — in the sense that it is segregated from the CCP’s own accounts, eg when the IM is held by a third-party custodian — this amount cannot be lost by the bank if the CCP defaults; therefore, the IM posted by the bank can be exempted from the large exposure limit.
Note B: The exposure value for pre-funded default fund contributions may need to be revised if applied to QCCPs and not only to non QCCPs.
Note C: If equity stakes are deducted from the level of capital on which the large exposure limit is based, such exposures must be excluded from the definition of an exposure to a CCP
Regarding exposures subject to clearing services (the bank acting as a clearing member or being a client of a clearing member), the bank must determine the counterparty to which exposures must be assigned by applying the provisions of the risk-based capital requirements. (Refer to circular no. 351000095018 dated 21 May 2014, Basel Committee on Banking Supervision Document regarding Capital Requirements for bank exposures to central counterparties of April 2014)
Other exposures:
Other types of exposures that are not directly related to clearing services provided by the CCP, such as funding facilities, credit facilities, guarantees etc., must be measured according to the requirements set out in Section 5 of these rules , as for any other type of counterparty. These exposures will be added together and be subjected to the large exposure limit.
18 Paragraphs 84-89 of BCBS "Supervisory framework for measuring and controlling large exposures" April 2014, and FAQs issued in September 2016.
Risk Management
Supervisory Review
ICAAP
SAMA'S Guideline Document on the Internal Capital Adequacy Assessment Plan (ICAAP)
No: 291000000581 Date(g): 22/9/2008 | Date(h): 23/9/1429 Status: Modified This document should be read in conjunction with SAMA's Circular No. 321000027835 entitled "Enhancements to the ICAAP", dated 10/11/2011 G.I. Process of Constructing an ICAAP
1. Introduction and Overview
Basel II's structure is built upon three pillars. Under Pillar 1, minimum capital requirements are calculated based on explicit calculation rules in respect of credit, market and operational risks. However, in Pillar 2, other risks are to be identified and risk management processes and mitigation assessed from a wider perspective, to supplement the capital requirements calculated within the scope of Pillar 1. Pillar 2 involves a proactive assessment of unexpected losses and a methodology to set aside sufficient capital. Effectively, Pillar 2 is the creation of a wider, flexible and risk-sensitive system, and this imposes a major challenge on banks in meeting such requirements. In many respects it involves a new approach to risk assessment and risk management.
One of the cornerstones of the Basel II framework, which very specifically and tangibly affect banks, is the requirement that, within the scope of Pillar 2, they develop their own Internal Credit Adequacy Assessment Plan – ICAAP. This is a tool which ensures that the banks must possess risk capital which is commensurate with their selected risk profile and risk appetite, as well as appropriate governance and control functions, and business strategies. Essentially, an ICAAP is derived from a formal internal process whereby a bank estimates its capital requirements in relation to its risk profile, strategy, business plans, governance structures, internal risk management systems, dividend policies, etc. Consequently, the ICAAP process includes a strategic review of a bank's capital needs and as to how these capital requirements are to be funded, i.e. through internal profits, IPOS, Sukuks, right issues, other debt issues, etc.
It is essential that the ICAAP process involves an assessment of a bank capital needs beyond its minimum capital requirements. Accordingly, it assesses risk beyond the Pillar I risks and, therefore, addresses both additional Pillar I and Pillar II risks. Pillar 2 risks include financial and nonfinancial risks such as strategic, reputational, liquidity, concentrations, interest rate, etc. Consequently, ICAAP allows a bank to attribute and measure capital to cover the economic effects of all risk taking activities by aggregating Pillar 1 and Pillar 2 risks.
While SAMA has formulated these guidelines with which banks must comply within the scope of their internal capital adequacy assessment process, it is the banks themselves that are to select and design the manner in which these requirements are met. Consequently, SAMA will not prescribe any standard methodology but a set of minimum requirements with respect to the process and disclosure requirements.
2. Objective
The main purpose of the ICAAP is for the Bank's senior managers to proactively make a strategic assessment of its capital requirements considering its strategies, business plans, all risks, acquisitions, dividend policies. Further, the ICAAP also establishes the capital required for economic, regulatory and accounting purposes and helps identify planned sources of capital to meet these objectives. Also, an ICAAP benefits include greater corporate governance and improved risk assessment in banks, and thereby increases the stability of the financial system. It also help to maintain regulatory capital levels in accordance with its strategy, economic capital, risk profile, governance structures and internal risk management systems.
Another important purpose of the ICAAP document is for senior management to inform the Board of Directors and subsequently SAMA on the ongoing assessment of the bank's risk profile, risk appetite, strategic plan and capital adequacy. It also includes the documentation as to how the bank intends to manage these risks, and how much current and future capital is necessary for its future plan.
3. Major Building Blocs of the ICAAP
3.1 Bank's Role and Responsibility for the ICAAP
Banks have to convince SAMA that their ICAAP process is comprehensive, rigorous and includes capital commensurate with their risk profile as well as strategic and operational planning. The banks must compose and assemble the specific ICAAP process and methodology based on the objective and requirements imposed by SAMA and on the specific strategic and operational plans set by their Board of Directors. Consequently, banks must have a clear understanding on SAMA's expectations in terms of the definitions, concepts and benchmarks in order for an effective assessment and follow-up by it. An important and obvious example is the manner in which both the risks and the capital are defined.
3.2 SAMA's Role and Responsibility in the ICAAP Process
SAMA is responsible for establishing the frequency and nature of the review, while the Banks are to establish their actual implementation processes and methodology as per SAMA's guidelines.
Thus, while the two processes involved are closely integrated through the Supervisory Review Process, at the same time there is an express division of responsibilities. SAMA's role has the final word in this process as it makes its risk assessment of the banks and, where reason exists, imposes additional requirements on the banks or requires enhanced risk management systems, additional stress testing, etc.
One of the alternative courses of action available to SAMA is to establish a higher capital requirement than that calculated by the bank itself. The level of capital needed is based on the calculation of the capital requirement with respect to credit, market and operational risks based on the explicitly established calculation rules which are laid down within the scope of Pillar 1. However, a supplement could be required as additional capital which, in light of other types of risks (Pillar 2), which may arise within the scope of the internal capital adequacy assessment process. Consequently, this is not the only tool (to set a higher capital requirement) and it will not necessarily be the first choice, in that capital should not be a substitute for adequate risk management. On the other hand, a demand for more capital may be justified even for those banks with high, but well-managed risk exposures.
3.3 ICAAP as a Part of Pillar 2
The basic idea is that banks shall, within the framework of Pillar 2, identify all of the risks to which they are exposed. This involves a wider spectrum of risks than those that form the basis for the minimum capital adequacy calculation within Pillar 1, i.e. These include any additional Pillar 1 risks, i.e. credit risks, market risks and operational risks. It involves, among other things, at least the following*:
■ Strategic risk - arising from a bank's strategies and changes in fundamental market conditions which may occur;
■ Reputational risk - the risk of adverse perception of image in the market or the media, etc.
■ Liquidity risk - the risks of difficulties in raising liquidity or capital in certain situations;
■ Concentration risk - exposures concentrated on a limited number of customers, industries, certain sectors or geographic area, etc. entailing vulnerability; and
■ Macro Economic and Business cycle risk - through lending or otherwise a bank may be vulnerable to business cycle risks or environmental changes
■ Interest Rate risk - relevant to the banking book.
These risks, as well as the risks that are addressed within the scope of Pillar 1 are, of course, to a certain degree inter-dependent and to a certain extent, capture various aspects of the same risk classification. For example, a bank, which incurs major credit losses, is probably more exposed to the risk of damage to its reputation and, can be also more easily affected by problems in raising capital.
Consequently, there can be no doubt that Pillar 2 is one of the most important new features in Basel II, and within its scope, banks and SAMA must work together to achieve a comprehensive assessment of risks, risk management, and capital requirements.
Interest rate risk in the banking book:
The measurement process should include all material interest rate positions of the bank and consider all relevant repricing and maturity data. Such information will generally include current balance and contractual rate of interest associated with the instruments and portfolios, principal payments, interest reset dates, maturities, the rate index used for repricing, and contractual interest rate ceilings or floors for adjustable-rate items. The system should also have well-documented assumptions and techniques.
Regardless of the type and level of complexity of the measurement system used, bank management should ensure the adequacy and completeness of the system. Because the quality and reliability of the measurement system is largely dependent on the quality of the data and various assumptions used in the model, management should give particular attention to these items.
Liquidity risk: Liquidity is crucial to the ongoing viability of any banking organization. Banks’ capital positions can have an effect on their ability to obtain liquidity, especially in a crisis. Each bank must have adequate systems for measuring, monitoring and controlling liquidity risk. Banks should evaluate the adequacy of capital given their own liquidity profile and the liquidity of the markets in which they operate.
(Refer to Paragraph 741 of International Convergence of Capital Measurement and Capital Standards – June 2006)
* Other risks not specifically covered here are described in component 2 of the Document under item #4.3.
4. Major Challenges in Building an ICAAP
The major challenge in the internal capital adequacy assessment is to identify and accurately assess the significance of all of the risks faced by a bank and which may have consequences as regards to its financial situation. Subsequently, the risks identified, must be quantified by translating these into a capital requirement.
In all of these stages there are both conceptual difficulties and measurement problems. These include:
1. What constitutes a relevant risk?
2. What is the reasonable possibility that such a risk will actually happen?
3. If such a risk occurs, how large is the damage that it might lead to?
4. Do various risks arise independently or are they co-related with each other?
5. How is the assessed risk to be priced in terms of capital requirements?
While there have been developments for analyzing and measuring risks, assessment and risk management are not an exact science in which models and systems automatically provide quantified answers. Analysis, assumptions, methods and models are important tools in order to obtain reasonable answers. However, ultimately, a comprehensive and prudent assessment is required which includes experiences, expert judgment and views other than those that can be formulated in figures. Sound common sense can never be replaced by statistics and model calculations.
There is also a strong linkage between the degree of sophistication with respect to risk measurement and management and the scope and nature of the bank's operations. For example, an international banking group with a large number of business areas and thus a complex risk structure has a need and the resources for a more advanced risk measurement methodology. However, for a small bank this may not be the case. Also, from a systemic risk perspective, more stringent requirements are obviously imposed on a large financial group since deficient risk management in such a bank may have detrimental impact on the entire financial system.
Given that banks are different is an important reason why SAMA will not prescribe any standard arrangement as to how the internal capital adequacy assessment process is to be carried out. It is up to each bank, based on its own operations, its scope of business and risks to formulate an internal capital adequacy assessment process which is suitably adapted and which meets the requirements of SAMA. This means also that the size of the operations is not the sole criterion; rather, it is the complexity and risk level of the operations which should be the main driver.
5. The ICAAP Process
5.1 Board Responsibility in the ICAAP Process
It is important that an internal capital adequacy assessment process, as an activity, remains the responsibility of senior management and the Board.
In this regard, the board of directors and senior management must be clearly involved in its development, the process itself, and its integration into the ongoing operations and planning. The Board should ensure that the ICAAP is embedded in the bank's business and organizational processes. The Board's responsibility in the ICAAP process must be documented and clarified throughout the organisation.
5.2 Strategic and Capital Planning in the ICAAP Process
As a part of the ICAAP process, the board of directors and senior management must also establish clear goals with respect to the long-term level and composition of capital and integrate it as an element in the bank's strategic planning. There must also be a preparedness to handle unforeseen events that may detrimentally affect the capital adequacy situation.
Consequently, bank's senior management as a significant responsibility must have a process for assessing its capital adequacy relative to its risk profile. In this regard, the ICAAP’s design should be in congruence with a bank's capital policy and strategy. Further, it should be fully documented.
The initial point for a bank's capital requirement and strategic plans must be to identify all of the risks to which it is exposed and which may be of significance. Also, the object is that a well thought-out and a clear decision emerges as to how these risks are to be managed. This requires an approach which includes an assessment of the following:
■ The various markets in which the bank operates;
■ The products it offers;
■ The organizational structure;
■ Its financial position;
■ Its experience from various disruptions and problems previously experienced, and assessments of what might happen to the banks if risk materializes;
■ Strategies, plans and ideas about entering new markets or product areas must also be considered.
■ Reviews and analyses of data as well as qualitative assessments.
■ For the complex banks, this entails extensive reviews of the risks to which it is exposed on a continuing basis. Stress tests/sensitivity analyses are required in order to be able to measure the effects of a particular disruption. Regular analysis and assessments are required of the manner in which risks are managed, controlled and quantified and how they should be managed in the future. It is also important to identify the connections and links such as co-relations, which may exist between various types of risks. This should lead to a bank's capital requirements including any additional control measures.
■ For a bank with more straight forward operations, the analysis work is obviously simpler as there are fewer and less significant factors. On the other hand, this does not mean that a more limited operation with respect to breadth or range or the total turnover of the business is automatically less risky.
A complex operation with many branches of business may involve difficulties in achieving a comprehensive grasp of the total risk structure, as well as of all the factors that affect it. In a more limited operation, the negative aspect is the risks arise from being more dependent on one or a small number of products, perhaps on a limited number of customers and perhaps within a limited geographical area. For such operations, it may also be more difficult to raise capital rapidly at a reasonable cost.
5.3 Documentation and Corporate Governance in the ICAAP Process
The requirement regarding documentation is very significant. This is because in order to be able to evaluate the process it must be verifiable and it is possible for both the banks and SAMA to do a follow-up. Further, the manner in which the process is conducted as well as the decisions to which it leads to must be set forth in business plans, the board's rules of procedure, the minutes, as well as in various strategy and policy documents.
5.4 Frequency of ICAAP Review
The ICAAP should form an integral part of the management process and of a decision-making culture, and it should be reviewed regularly by a bank's board or the board's executive committee. SAMA requires that this must take place at least once a year. Additionally, the internal capital adequacy assessment process must be reviewed and a document submitted when significant changes have taken place, whether in relation to the bank's own decisions or external changes. The fist formal ICAAP should be for the year 31.12.2008 and should be submitted to SAMA by 31 January 2009.
Also, in this regard, for a bank which operates in a number of financial sectors and perhaps also in various national markets, it may require a review of the ICAAP more frequently than once a year. SAMA will inform these Banks where a submission other than the annual submission is required. Consequently, for banks that operate within a single and simpler market segments, and where no dramatic changes take place in the market structure, a yearly review may represent an acceptable frequency.
5.5 Risk Based and Comprehensive
The ICAAP should be risk based, comprehensive, forward-looking and take into consideration a bank's strategic plans and external changes. Further, it should also be based on an adequate measurement and assessment processes.
The basis of the internal capital adequacy assessment process lies in the measurement of a bank's minimum capital requirements which is the product of the calculated assessment of credit risks, market risks and operational risks which take place within the scope of Pillar 1 and all relevant Pillar 2 risks. Additional capital may also be required as a result of stress testing results, additional infrastructure expenditures and human resource, i.e. hiring of senior level executives. The internal capital adequacy assessment process challenges banks that they must take a broader approach and perspective of assessing other risks. Also, included are circumstances which affect the bank's total risk profile and which the management must analyze and form conclusions on their effects on the total capital requirements.
In this respect materiality is an aspect, i.e. large risk exposure - large risk management requirement - large capital requirement, and vice versa. However, it is important to understand that all banks - large as well as small, complex and non-complex - must comply with SAMA requirements.
5.6 Models and Stress Testing
Assessments of risks may be made both by using very sophisticated methods, models and also using perhaps simpler measures, and methods. What is appropriate and relevant is determined by the banks operations in question. In case of a large bank, it might be natural to use extensive stress tests which provide quantitative measurements of the impact due to a specified disruption. Generally, larger banks have external analyses with respect to economic and business cycles and financial market trends, including the use of economic capital models and measurements. This type of approach can constitute an important element of the internal capital adequacy assessment process. However, it is limited by the fact that generally it only deals with risks that are quantifiable.
It follows, therefore, it is not necessary for a bank with less complex operations to employ complicated model involving advanced analysis leading to economic capital requirements. However, for a small bank, the most important issue is to assess the effect of, for example, loosing its three largest customers, or an economic sector where the bank has considerable exposure having major problems, as well as consequence of the closure of a large customer.
Should a Bank utilize models relevant and appropriate disclosure of the model such as its generic name, application or use within the risk management process, validation results, internal logic, should be provided.
5.7 Reasonable Results
The ICAAP should produce a reasonable outcome vis-à-vis capital requirements. The process involves weighing together the importance of the risks which a bank encounters, the extent to which it exposes itself to these risks, and how it organizes itself and works in order to address them. This "bottom line" can crystallize into a minimum amount of capital after discussion with SAMA, as well as additional control systems necessary to cover the risks the bank is exposed to.
While capital requirements constitute a minimum requirement, banks in their interest operate above this minimum level as a consequence of their strategic objectives. The reason for this includes higher rating and thereby lower funding costs. It also provides a freedom of action in connection with corporate acquisitions, as well as in the event of losses which may arise due to a rapid and serious downturn in the economy. Consequently, banks, as well as SAMA, expect that bank capital stays above the minimum level.
Generally, if a bank's internal capital adequacy assessment process result in an assessed level of required capital which is the same, or below, the minimum as determined under the Pillar 1, this is an indication that the internal capital adequacy assessment process has not functioned in a satisfactory manner.
II. Reporting Format and Contents
1. Overview of the Reporting Format and Contents
The ultimate end product of the ICAAP process is the ICAAP document. This section on reporting format and contents is to provide guidance to banks to describe in a logical format the main assumptions and results of the ICAAP process. Consequently, the ICAAP document should bring into one place an assessment of the capital requirements in relation to a bank's risk profile, strategies, business plans, major risks, acquisitions, governance and internal risk management systems, etc. It also must establish the capital required for economic, regulatory and accounting purposes and help identify planned sources of capital to meet its objectives. Further, all relevant assessments and information should be covered and documented in the ICAAP.
Specifically, the objectives of the ICAAP and the related entities of the bank that are included by it should be specified. The main results of the ICAAP effort may be presented in a tabular format indicating the major components of capital requirements, capital available, capital buffers and proposed funding plans. Furthermore, the adequacy of the governance and bank's internal control and risk management processes should be included.
It is also important to document the strategic position of the bank, its balance sheet strength, planned growth in the major assets based on its Business plans for the next 12 to 18 months indicating the likely consumption in capital for this growth by major category.
Further, the results of major stress tests on capital requirements and capital supply for additional risks deterioration in the economic environment, recessionary periods, or other economic/political downturns are important aspects to be covered.
2. Executive Summary
The major purpose of the Executive Summary is to describe in a summary form the main results of the ICAAP effort which is to bring into one place objectives of the ICAAP, the assessment of the capital requirements for strategies, business plans, all risks, acquisitions, etc. Also presented and described should be the capital required for economic, regulatory and accounting purposes and identification of planned sources of capital to meet these objectives. The following information should be briefly described and where appropriate, relevant amounts are quantified and presented in a tabular format:
A. 1. Capital Required
■ Pillar 1 Capital Requirements
■ Pillar 2 Capital Requirements
■ Business Plans (Summarized)
■ Growth Rate and amounts by business lines
■ Capital requirements by business lines
■ Strategic Initiatives
■ Capital Expenses
■ Stress testing
■ Other capital requirements
■ Total capital requirements
2. Capital Available
■ Current Availability
■ IPOS
■ Qualifying Sukuks
■ Qualifying Debt issues
■ Rights issue
■ Other capital sources
■ Total capital sources
3. Buffer Available (1-2)
B. Dividends Proposed
C. Funding plans over the Time Horizon
D. Capital requirement for each subsidiary or affiliate
Other information that may be included in the Executive Summary are comments on significant matters on any of the items above.
3. Objective of an ICAAP
A description of the bank's specific objectives is desirable. In this regard, the differing purposes that capital serves: shareholder returns, rating objectives for the bank as a whole or for certain securities being issued, avoidance of regulatory intervention, protection against uncertain events, depositor protection, working capital, capital held for strategic acquisitions, etc.
4. Summary of Bank's Strategies Including its Current and Projected Financial and Capital Positions
This section would be the major elements of a bank's strategic and operational plans. It would include the present financial position of the bank and expected changes to the current business profile, the environment in which it expects to operate, its projected business plans (by appropriate lines of business), projected financial position, and future planned sources of capital.
Major aspects to be considered is formulating a business plan and the bank's strategies and initiative including aspects such as the political, economic, legal, components, etc. of the environment their likely profile and impact over the planning period of the Bank. This may consider aspects such as oil prices, legislation related to the Bank, i.e. foreign investments, consumer banking, capital markets, mortgages, leasing and installment companies, etc.
The starting balance sheet and the date over which the assessment is carried out should be disclosed.
The projected balance sheet should clearly indicate the major lines of business which are going to be inspected by the Bank's strategic initiatives, environmental changes and assumption over the planning period and the impact on capital requirements by major lines of business.
Also included would be the projected financial position, the projected capital available and projected capital resource requirements based on expected plans. These might then provide a baseline against which adverse scenarios might be compared.
5. Capital Adequacy and ICAAP
This section should include the following:
Disclosure of various types of Capital
An ICAAP establishes a framework for economic, legal, regulatory and accounting capital purposes and helps identify planned sources of capital to meet these needs. Consequently, this section should provide a distinction from the bank's perspective of the following capital classification indicating their purpose, minimum requirements and other attributes.
1. Regulatory Capital
2. Accounting Capital
3. Legal Capital
4. Economic Capital (if relevant)
Additionally, a bank will need to describe its position with respect to its definition, assimilation and usage within the bank's risk and performance assessment framework.
Consequently, this section should elaborate on the bank's view of the amount of capital it requires to meet its minimum regulatory needs and disclosure requirements under International Accounting Standards, or whether what is being presented is the amount of capital that a bank believes it needs to meet its strategic business objectives, external ratings, and a support for a dividend policy from a shareholders perspective, etc. For example, whether the capital required is based on a particular desired credit rating or includes buffers for strategic purposes or to minimize the charge for breaching regulatory requirements. Where economic capital models are used this would include the time horizon, economic description, scenario analyses, etc. including a description of how the severity of scenarios have been chosen.
Timing of the ICAAP
Generally, the ICAAP is prepared on an annual basis as at the end of each calendar year, i.e. 31 December 2008 (and is due in SAMA as at 31 January of the following year). However, should there be any variation to this timing, additional details will need to be provided. This will include the reasons for the effective date of the ICAAP. Other information to be provided will also include an analysis and consideration for any events between the effective date and the date of submission which could materially impact the ICAAP and the rationale for the time period over which ICAAP has been assessed.
Risk Covered in the ICAAP
An identification and appropriate description of the major risks faced in each of the following categories:
■ Credit Risk (Additional to Pillar 1)
■ Market Risk (Additional to Pillar 1)
■ Operational Risk (Additional to Pillar 1)
■ Liquidity Risk
■ Concentration Risk
■ Securitization Risk
■ Strategic Risk
■ Interest Rate Risk
SAMA recognizes banks’ internal systems as the principal tool for the measurement of interest rate risk in the banking book and the supervisory response. To facilitate SAMA’s monitoring of interest rate risk exposures across institutions, banks would have to provide the results of their internal measurement systems, expressed in terms of economic value relative to capital, using a standardized interest rate shock.
Further to the above, as per SAMA circular dated 10 November 2011, banks need to provide the following details:
- Provisions: The Bank should enhance the section on this topic by providing the following end of year information, for the past five years (including the current year).
- Specific, general and total provisions
- Provision expense charged to the income statement (net of recoveries)
- Default rates by major portfolios (Retail, Credit Card, Corporate, SME's, etc.)
- Total Non-performing Loans
- Coverage Ratio
2. Concentration Risk: The Banks should under the section on concentration risk include the following information for the past 3 years (including the current year).
- On and Off Balance Sheet Credit exposure to top ten customers as a percentage of total on and off balance sheet credit.
- On and Off Balance Sheet Credit exposure to top ten customers as a percentage of Bank's regulatory capital.
- Number of loans extended to connected parties and the total value of such loans as a percentage of total credit.
- Total value of loans to connected parties as a percentage of total regulatory capital.
- The banks could add comments on the concentration risk and how it affects their assessment of additional capital requirements, if any.
3. Liquidity Risk: The Banks should provide the following information as at the end of year.
- Liquidity Coverage Ratio
- Net Stable Funding Ratio
- In addition, the following information should be provided for the past three years (as at end of the year):
- Deposits from top (10) ten customer as a percentage of total customer deposits.
- Deposits from Wholesale markets (interbank, others) as a percentage of total liabilities.
4. Off Balance Sheet Activities: The following year-end information on Derivatives Activity should be provided for past 3 years with breakdown in Saudi Riyal, USD and other currencies.
- Interest rate Derivatives
- FX Derivatives
5.Capital Leverage Ratio: Banks should include information on the following:
- Basle Capital Leverage Ratio (current year)
- Legal Leverage Ratio under the Banking Control Law (for past 3 years)
(Refer to Paragraph 763 of International Convergence of Capital Measurement and Capital Standards – June 2006)
■ Macro Economic and Business Cycle Risk
■ Reputational Risk
■ Global Risk
■ Any other Risks identified
■ An explanation of how each of the risk has been identified, assessed, measured and the methodology and or models currently or to be employed in the future, and the quantitative results of that assessment;
■ where relevant, a comparison of that assessment with the results of the pillar 1 calculations;
■ a clear articulation of the bank's risk appetite by risk category; and
■ where relevant, an explanation of method used to mitigate these risks.
6. Approach and Methodology
Current Methodology
A description of how models and assessments for each of the major risks have been approached and the main assumptions made.
For instance, banks may choose to base their ICAAP on the results of Pillar 1 risks calculation with additional risks (e.g. concentration risk, interest rate risk in the banking book, etc.) assessed separately and added to Pillar 1. Alternatively, a bank may decide to base their ICAAP on internal models for all risks, including those covered under Pillar 1 (i.e. Credit, Market and Operational Risks) as additional risks.
The description would make clear which risks are covered by which modeling calculation or approach. This would include details of the models, methodology and process used to calculate risks in each of the categories identified and reason for choosing the models and method used in each case.
Future Approach and Methodology
Banks may provide a summary on the future models and methodologies being considered and developed including their strengths and weaknesses.
Internal Models: Pillar 1 and ICAAP comparisons
Should the internal models vary from any regulatory models approved for pillar 1 purposes, this section would provide a detailed comparison explaining both the methodological and parameterization differences between the internal models and the regulatory models and how those affect the capital measures for ICAAP purposes.
7. Details on Models Employed
A list of models utilized in the formulation of the ICAAP should be provided giving relevant and appropriate details as given below:
■ The key assumptions and parameters within the capital modeling work and background information on the derivation of any key assumptions.
■ How parameters have been chosen including the historical period used and the calibration process.
■ The limitations of the model.
■ The sensitivity of the model to changes in the key assumptions or parameters chosen.
■ The validation work undertaken to ensure the continuing adequacy of the model.
■ Whether the model is internally or externally developed. If externally acquired its generic name and details on the model developer.
■ Details should also be provided as to the extent of its acceptance by other regulatory bodies, users in the international financial community, overall reputation and market acceptance.
■ Specific details on the applications within the Bank, i.e. measurement of risks such as credit, liquidity, market, concentration, etc. or for the purpose of establishing internal credit risk classification ratings, risk estimates, PDs, LGDs, EADs, etc.
■ Major merits and demerits of the chosen models.
■ Results of the model validation obtained through
■ Back testing / Scenario testing
■ Analysis of the internal logic
■ Major methodologies or statistical technique used, i.e. value at risk models employing methods such as variance/co-variance; historical simulation, Monte Carlo method, etc.
■ Confidence levels embedded for regulatory capital, economic capital, or for external rating purposes.
Further, the explanation of the differences between results of the internal model for Pillar 1 would be set out at the level at which the ICAAP is applied. Therefore, if the firm's ICAAP document breaks downs the calculation by major legal regulated entities, an explanation for each of those individual entities would be appropriate.
SAMA would expect the explanation to be sufficiently granular to show the differences at the level of each of the Pillar 1 risks.
Data definition, i.e. whether the source is external or internal and if any data, manipulation of external data has been done for it to conform with internal data.
8. Stress and Scenario Tests Applied
Where stress tests or scenario analyses have been used to validate the results of modeling approaches, the following should be provided:
■ information on the quantitative results of stress tests and scenario analyses the bank carried out and the confidence levels and key assumptions behind those analyses, including, the distribution of outcomes;
■ information on the range of adverse scenarios which have been applied, how these were derived and the resulting capital requirements; and
■ where applicable, details of any additional business-unit specific or business plan specific stress tests selected.
Details on Stress and Scenario Testing:
This section should explain how a bank would be affected by an economic recession or downswings in the business or market relevant to its activities. SAMA is interested in how a bank would manage its business and capital so as to survive for example a recession whilst meeting minimum regulatory standards. The analysis would include financial projections for two to three years based on business plans and solvency calculations.
The severity of recession may typically be one that occurs only once in a 15 year period. The time horizon would be from the present day to at least the deepest part of the recession.
Typical scenarios would include:
■ how an economic downturn would affect
■ the bank's capital resources and future earnings; and
■ the bank's strategy takes into account future changes in its projected balance sheet, income statement, cash flow statement, impact on its financial assets, etc.
■ In both cases, it would be helpful if these projections showed separately the effects of management actions to changes in a bank's business strategy and the implementation of any contingency plans.
■ an assessment by the bank of any other capital planning actions to enable it to continue to meet its regulatory capital requirements through a recession. These actions may include new capital injections from related companies, new share issues through existing shareholders, IPO's, floatation of long term debt, Sukuks, etc.
■ For further details, refer to Attachment 1.
9. Capital Transferability Between Legal Entities
Details of any restrictions on the management's ability to transfer capital during stressed conditions into or out of the business(es) covered. These restrictions, for example, may include contractual, commercial, regulatory or statutory nature. A statutory restriction could be, for example, a restriction on the maximum dividend that could be declared and paid. A regulatory restriction could be the minimum regulatory capital ratio acceptable to SAMA.
10. Aggregation and Diversification
This section would describe how the results of the various risk assessments are brought together and an overall view taken on capital adequacy. This requires an acceptable methodology to combine risks using quantitative techniques. At the general level, the overall reasonableness or the detailed quantification approaches might be compared with the results of an analysis of capital planning and a view taken by senior management as to the overall level of capital that is appropriate.
■ Dealing with the technical aggregation, the following may be described:
i. any allowance made for diversification, including any assumed correlations within risks and between risks and how such correlations have been assessed including in stressed conditions;
ii. the justification for diversification benefits between and within legal entities, and the justification for the free movement of capital between legal entities in times of financial stress.
11. Challenge and Adoption of the ICAAP
This section would describe the extent of challenge and testing of the ICAAP. Accordingly, it would include the testing and control processes applied to the ICAAP models or calculations, and the senior management or board review and sign off procedures.
In making an overall assessment of a bank's capital needs, matters described below should be addressed:
i. the inherent uncertainty in any modeling approach;
ii. weaknesses in bank's risk management procedures, systems or controls;
iii. the differences between regulatory capital and available capital;
iv. the reliance placed on external consultants.
v. An assessment made by an external reviewer or internal audit.
Internal control review
The bank should conduct periodic reviews of its risk management process to ensure its integrity, accuracy, and reasonableness. Areas that should be reviewed include:
• Appropriateness of the bank’s capital assessment process given the nature, scope and complexity of its activities;
• Identification of large exposures and risk concentrations;
• Accuracy and completeness of data inputs into the bank’s assessment process;
• Reasonableness and validity of scenarios used in the assessment process; and
• Stress testing and analysis of assumptions and inputs.
• (Refer to Paragraph 745 of International Convergence of Capital Measurement and Capital Standards – June 2006)
12. Use of the ICAAP within the Bank
This area should demonstrate the extent to which capital management is embedded within the bank's operational and strategic planning. This would include the extent and use of ICAAP results and recommendation in the strategic, operational and capital planning process. Important elements of ICAAP including growth and profitability targets, scenario analysis, and stress testing may be used in setting of business plans, management policy, dividend policy and in pricing decisions.
This could also include a statement of the actual operating philosophy and strategy on capital management and how this links to the ICAAP submitted.
13. Future Refinements of ICAAP
A bank should detail any anticipated future refinements within the ICAAP (highlighting those aspects which are work-in-progress) and provide any other information that will help SAMA review a bank's ICAAP.
Attachment 1 Details on Stress Testing
Please Refer to SAMA's Rules on stress testing for the updated requirements on stress testing.Stress Testing is a generic term for the assessment of vulnerability of individual financial institutions and the financial system to internal and external shocks. Typically, it applies ‘What if’ scenarios and attempts to estimate expected losses from shocks, including capturing the impact of ‘large, but plausible events’. Stress testing methods include scenario tests based on historical events and information on hypothetical future events. They may also include sensitivity tests. A good stress test should have attributes of plausibility and consistency and ease of reporting for managerial decisions.
*Stress Testing Under Pillar 1:
*The Basel II document has several references for banks to develop and use stress testing methodology to support their work on credit, market and operational risks. There are several reference to stress testing under Pillar 1 which are summarized hereunder:
Para 434 An IRB Bank must have in place sound stress testing processes for use in the assessment of capital adequacy. Examples of scenarios that could be used are (i) economic or industry downturn (b) market-risk events (c) liquidity conditions.** Para 435 The bank must perform a credit risk stress test to assess the effect of certain specific conditions on its IRB regulatory capital requirements. The bank’s stress test in this context should consider at least the effect of a mild recession scenario e.g. two consecutive quarters of zero growth to assess the impact on its PD’s, LGD’s and EAD’s.** Para 436 The bank’s method should consider the following sources of information: bank’s own data should allow estimation of the ratings migration; impact of a small deterioration in credit environment on a bank’s rating; evaluate evidence of rating migration in external ratings.** Para 437 National discretion with supervisors to issue guidance on design of stress tests.** Additional Pillar 1 Guidance on Stress Testing:
Para 527(j) For calculation of capital charge for equity exposures where internal models are used there are some minimum quantitative standards to be applied. One of these standards requires that a rigorous and comprehensive stress testing program must be in place.** In addition, under *the Basel Market Risk Amendment document of 1996 there are stress testing requirements for banks using the internal models. These are contained in Section B.5 of the (1996) Amendment and are as follows:
■ Among more qualitative criteria that banks would have to meet before they are permitted to use a models based approach are the following:
■ Rigorous and comprehensive stress testing program should be in place.
■ Cover a range of factors that can create extraordinary losses or gains in trading portfolios.
■ Major goals of stress testing are to evaluate the capacity of the bank’s capital to absorb potential large losses and to identify steps the bank can take to reduce its risk and conserve capital.
■ Results of stress testing should be routinely communicated to senior management and periodically, to the bank’s board of directors.
■ Results of stress tests should be reflected in the policies and limits set by the management.
■ Prompt steps are expected for managing revealed risks appropriately, e.g.
■ Hedging
■ Reducing size of exposures
■ Scenarios to be employed:
■ Historical without simulation (largest losses experienced)
■ Historical with simulation (assessing effects of crisis scenarios or changes in underlying parameters on current portfolios)
■ Mostly for adverse events, based on individual portfolio characteristics of institutions
Stress testing under Pillar 2:
Under the Supervisory Review Process SAMA will initially review the Pillar 1 stress testing requirement for credit and market risks. How-ever, the Basle II document also covers stress testing under Pillar 2 and the relevant references are included in the following paragraphs:.
Para 726 In assessing capital adequacy, bank management needs to be mindful of the particular stage of the business cycle in which the bank is operating. Rigorous, forward looking stress testing that identifies possible events or changes in market conditions that could adversely impact the bank should be performed. Bank management clearly bears primary responsibility for ensuring that the bank has adequate capital to support its risks.** Para 738 For market risk this assessment is based largely on the bank’s own measure of value-at-risk or the standardised approach for market risk. Emphasis should also be placed on the institution performing stress testing in evaluating the adequacy of capital to support the trading function.** Para 775 For credit concentration risk a bank’s management should conduct periodic stress tests of its major credit risk concentrations and review the results of those tests to identify and respond to potential changes in market conditions that could adversely impact the bank’s performance.** Para 777 In the course of their activities, supervisors should assess the extent of a bank’s credit risk concentrations, how they are managed, and the extent to which the bank considers them in its internal assessment of capital adequacy under Pillar 2. Such assessments should include reviews of the results of a bank’s stress tests.** Para 804 Under Securitization banks should use techniques such as static pool cash collections analyses and stress tests to better understand pool performance. These techniques can highlight adverse trends or potential adverse impacts. Banks should have policies in place to respond promptly to adverse or unanticipated changes. Supervisors will take appropriate action where they do not consider these policies adequate. Such action may include, but is not limited to, directing a bank to obtain a dedicated liquidity line or raising the early amortisation credit conversion factor, thus, increasing the bank’s capital requirements.** Other aspects related to stress testing:
■ There are no specific or explicit requirements in the Basel II document on stress testing for liquidity risk although some banks may wish to develop ‘What if’ scenarios for liquidity under stress conditions.
■ SAMA expects all banks to closely review the above Basel III recommendations on stress testing and develop specific strategies and methodologies to implement those that are relevant and appropriate for their operations. SAMA in its evaluation of banks method and systems under Pillar I will examine the implementation of these stress test requirements. It will also review the stress test methodologies and systems as part of its Supervisory Review Process.
■ As a minimum bank should carryout stress tests at least on an annual basis.
*SAMA 3 reforms supersedes any conflicting requirements in that section. Refer to the following sections to read the last updated requirements:
1- Credit Risk Capital Requirements - 16.50 until 16.52 (Stress tests used in assessment of capital adequacy)
2- Market Risk Capital Requirements - 10.19 until 10.23 (Stress Testing)
3- Capital Requirements for CCR and CVA - 7.45 until 7.46 (Stress Testing)
Enhancements to the ICAAP Document
This refers to the ICAAP document issued by Saudi Central Bank on 22 September 2008 which documents the ICAAP Process and provides guidance to the Banks on the form and contents of the ICAAP Report to be submitted to SAMA.
In the past years, the ICAAP submissions by the Banks have continued to improve both in terms of contents and form and as a result they have become an increasingly important supervisory tool for meaningful discussions related to Banks' risk profiles, their business plans and their projected levels of capital adequacy.
The Saudi Central Bank would like the 2011 ICAAP document to be further strengthened in the following areas:
1. Provisions: The Bank should enhance the section on this topic by providing the following end of year information, for the past five years (including the current year).
■ Specific, general and total provisions ■ Provision expense charged to the income statement (net of recoveries) ■ Default rates by major portfolios (Retail, Credit Card, Corporate, SME's, etc.) ■ Total Non-performing Loans ■ Coverage Ratio
2. Concentration Risk: The Banks should under the section on concentration risk include the following information for the past 3 years (including the current year).
■ On and Off Balance Sheet Credit exposure to top ten customers as a percentage of total on and off balance sheet credit. ■ On and Off Balance Sheet Credit exposure to top ten customers as a percentage of Bank's regulatory capital. ■ Number of loans extended to connected parties and the total value of such loans as a percentage of total credit. ■ Total value of loans to connected parties as a percentage of total regulatory capital. ■ The banks could add comments on the concentration risk and how it affects their assessment of additional capital requirements, if any.
3. Liquidity Risk: The Banks should provide the following information as at the end of year 2011.
■ Liquidity Coverage Ratio ■ Net Stable Funding Ratio
In addition, the following information should be provided for the past three years (as at end of the year):
■ Deposits from top (10) ten customer as a percentage of total customer deposits. ■ Deposits from Wholesale markets (interbank, others) as a percentage of total liabilities.
4. Off Balance Sheet Activities: The following year-end information on Derivatives Activity should be provided for past 3 years with breakdown in Saudi Riyal, USD and other currencies.
■ Interest rate Derivatives ■ FX Derivatives ■ Total
5. Capital Leverage Ratio: Banks should include information on the following:
■ Basle Capital Leverage Ratio (current year) ■ Legal Leverage Ratio under the Banking Control Law (for past 3 years)
The Saudi Central Bank will continue to enhance the ICAAP process to make it more comprehensive and meaningful.
Suggest removing this whole section and incorporate it within ICAAP. ILAAP
Guidelines on the Internal Liquidity Adequacy Assessment Plan (ILAAP)
No: 42012157 Date(g): 17/10/2020 | Date(h): 1/3/1442 Status: In-Force A. Introduction
These guidelines shall supersede the existing SAMA Guidelines on the Internal Liquidity Adequacy Assessment Plan (ILAAP) issued vide SAMA circular no. 381000120488 dated 3/12/1438H.
The updated guidelines “these guidelines” shall be effective starting from the ILAAP submission for 2021G.
B. ILAAP Construction
1. General Definition of the ILAAP
The Internal Liquidity Adequacy Assessment Process (ILAAP) is defined as “the processes for the identification, measurement, management and monitoring of liquidity implemented by the bank pursuant to SAMA liquidity risk management regulations”. It thus contains all the qualitative and quantitative information necessary to underpin the risk appetite, including the description of the systems, processes and methodology to measure and manage liquidity and funding risks.
These ILAAP guidelines shall only serve as a starting point in supervisory dialogues with banks. Therefore, they should not be understood as comprehensively covering all aspects necessary to implement a sound, effective and comprehensive ILAAP. It is the responsibility of the bank to ensure that its ILAAP is sound, effective and comprehensive duly taking into account the nature, scale and complexity of its activities.
2. Objectives of the ILAAP
The main objectives of the ILAAP are as follows:
i. Enhances corporate governance and risk management processes in banks and the financial system in general.
ii. Establishes the minimum liquidity required for regulatory purposes and helps identify planned sources of liquidity to meet these objectives.
iii. For a bank's Board of Directors to proactively assess its liquidity requirements in line with its strategies, business plans and risks.
In additions, the ILAAP document should be for Senior Management to inform the Board of Directors and SAMA on the ongoing assessment of the bank's liquidity risk profile, liquidity risk appetite, strategic plan and liquidity adequacy. It also documents how the bank intends to manage these risks, and how much liquidity is necessary for its future plans.
3. Scope and Proportionality
i. These guidelines shall be applicable to all locally incorporated banks licensed and operating in the Kingdom of Saudi Arabia.
ii. The ILAAP is, above all, an internal process, and it remains the responsibility of individual banks to implement it in a proportionate and credible manner. The bank’s ILAAPs has to be proportionate to the nature, scale and complexity of the activities of the bank.
4. Major Building Blocks of the ILAAP
4.1 Banks’ Roles and Responsibilities for the ILAAP
i. A Bank should produce, at least once per year, an ILAAP approved and signed by the Board of Directors.
ii. A bank is required to demonstrate to SAMA that its ILAAP processes are comprehensive, rigorous and ensures that it has liquidity that is commensurate with its risk profile.
iii. A bank is required to put in place ILAAP processes and methodologies based on SAMA requirements and on its strategic and operational plans as set by its Board of Directors.
4.2 ILAAP as Part of Pillar 2
The Pillar 2 liquidity framework should focus on liquidity risks not captured, or not fully captured, under Pillar 1 requirements. It is incumbent on banks to undertake their own assessment of liquidity risks, including Pillar 2 risks, and take appropriate measures to reduce or manage these risks.
5. The ILAAP Process
5.1 ILAAP Governance
The ILAAP process should remain the responsibility of the Board of Directors and Senior Management of the bank. The ILAAP should be well integrated into the bank’s processes and decision-making culture. In this regard, banks are required to ensure the following:
i. The Board of Directors has the ultimate responsibility for the implementation of the ILAAP, and the Board of Directors or its delegated authority is required to approve an ILAAP governance framework with a clear and transparent assignment of responsibilities, adhering to the segregation of functions. The governance framework should include a clear approach to the regular internal review and validation of the ILAAP.
ii. All of the key elements of the ILAAP should be approved by the Board of Directors or its delegated authority, and be consistent with the risk appetite set by the Board of Directors, and with the bank’s approach for measuring and managing liquidity and funding risks.
iii. The Board of Directors or its delegated authority, Senior Management and relevant committees are required to discuss and challenge the ILAAP effectively.
iv. Each year, the Board of Directors or its delegated authority is required to provide its assessment of the liquidity adequacy of the bank, supported by ILAAP outcomes and any other relevant information, by reviewing and approving the bank’s ILAAP.
5.2 Strategic and Liquidity Planning
i. The ILAAP should support strategic decision-making and, at the same time, be operationally aimed at ensuring that the bank maintains adequate liquidity on an ongoing basis, thereby promoting an appropriate relationship between risks and rewards. All methods and processes used by the bank to steer its liquidity as part of the strategic or operational liquidity management process are expected to be approved, thoroughly reviewed, and properly included in the ILAAP and its documentation. The quantitative and qualitative aspects of the ILAAP should be consistent with each other and with the bank’s business strategy and risk appetite.
ii. The ILAAP should be aligned with the business, decision-making and risk management processes of the bank. It should also be consistent and coherent throughout the group.
5.3 Documentation
Banks are required to maintain sound and effective overall ILAAP architecture and documentation of the interplay between the ILAAP elements and the integration of the ILAAP into the bank’s overall governance and management framework.
5.4 Comprehensive Risk Quantification
The ILAAP should ensure that risks, that a bank is or may be exposed to, are adequately quantified. The bank is required to do the following:
i. Implement risk quantification methodologies that are tailored to its individual circumstances, i.e. they are expected to be in line with the bank’s risk appetite, market expectations, business model, risk profile, size and complexity.
ii. Determine sufficiently conservative risk figures, taking into consideration all relevant information.
iii. Ensure adequacy and consistency in its choice of risk quantification methodologies.
iv. Ensure that key parameters and assumptions cover, among other things, confidence levels and scenario generation assumptions.
5.5 Stress-Testing
Banks should conduct a comprehensive, robust stress-testing that is consistent with SAMA Stress-testing Rules, taking into consideration the following:
i. The impact of a range of severe but plausible stress scenarios on the bank’s cash flows, liquidity resources, profitability, solvency, asset encumbrance and survival horizon.
ii. Selecting stress scenarios that reveal the vulnerabilities of the bank’s funding. In addition to performing a tailored and in-depth review of the bank’s vulnerabilities, capturing all material risks on an institution-wide basis that result from the bank’s business model and operating environment in the context of stressed macroeconomic and financial conditions. The review should be conducted on a yearly basis and more frequently, when necessary, depending on individual circumstances. On the basis of this review, the bank is required to define an adequate stress-testing programme for both normative and economic perspectives. As part of the stress-testing programme, the bank is required to determine adverse scenarios to be used under both perspectives, taking into account other stress-tests it conducts.
iii. Conducting reverse stress-testing in a proportionate manner.
iv. Continuously monitoring and identifying new threats, vulnerabilities and changes in its environment to assess whether its stress-testing scenarios remain appropriate and, if not, adapt them to the new circumstances.
v. Regularly updating the impact of the scenarios. In the case of material changes, the bank should assess its potential impact on its liquidity adequacy.
The degree of conservatism of the stress-testing scenarios adopted and assumptions made by the bank should be discussed in the ILAAP document.
5.6 Review and Independent Validations
The ILAAP shall be subject to a regular internal review, at least once a year, taking into consideration the following:
i. Both qualitative and quantitative aspects, including, for example the use of ILAAP outcomes, the stress-testing framework, risk capture, and the data aggregation process.
ii. Establishing a defined process to ensure proactive adjustment of the ILAAP to any material changes that occur, such as entering new markets, providing new services, offering new products, or changes in the structure of the bank.
iii. Adequately back-testing and measuring the performance of the ILAAP outcomes and assumptions, covering, for example, liquidity planning, scenarios, and risk quantification.
iv. Conducting a regular independent validation of the ILAAP risk quantification methodologies, taking into account the materiality of the risks quantified and the complexity of the risk quantification methodology. The overall conclusions of the validation process should be reported to Senior Management and the Board of Directors, used in the regular review and adjustment of the quantification methodologies, and taken into account when assessing liquidity adequacy.
5.7 ILAAP Reporting to SAMA
i. The ILAAP shall be submitted to SAMA by 31st of August each year using 30th of June as a reference date.
ii. Banks are required to provide, at minimum, details on all items mentioned in these guidelines or explain why any item is not relevant for their respective banks, taking into account the size, complexity and business model of the bank.
C. Reporting Format and Content
The ILAAP document should include, at minimum, the following sections:
1. Background
This section is for introductory text describing the following:
i. Business model, Bank/Group structure, balance sheet risks, relevant financial data, the reach and systemic presence of the bank. ii. Internal and external changes since the last ILAAP. iii. Changes in the scope of the document since the last review by the Board of Directors. iv. Justifications of the comprehensiveness and proportionality of the bank’s process. 2. Executive Summary
This section should present an overview of the ILAAP methodology and results. This overview should include:
i. The purpose and coverage of the ILAAP.
ii. The main findings of the ILAAP analysis:
- How much and what composition of liquidity the bank considers it should hold as compared with the liquidity resource requirement ‘pillar 1’ calculation.
- The adequacy of the bank’s liquidity risk management processes.
iii. A summary of the financial projections, including the strategic position of the bank, its balance sheet strength, and future profitability.
iv. Brief descriptions of liquidity plans; how the bank intends to manage liquidity going forward and for what purposes.
v. Commentary on the most material liquidity risks, why the level of risk is acceptable or, if it is not, what mitigating actions are planned.
vi. Commentary on major issues where further analysis and decisions are required.
vii. Who has carried out the assessment, how it has been challenged, and who approved it.
3. Objectives of an ILAAP
This section should present a description of the bank's specific objectives relating to liquidity, such as shareholder returns, rating objectives for the bank as a whole or for certain securities being issued, avoidance of regulatory intervention, protection against uncertain events, depositor protection, working liquidity and liquidity held for strategic acquisitions etc., along with sufficient liquidity resources to cover the nature and level of the liquidity risk to which it is or might be exposed, the risk that the bank cannot meet its liabilities as they fall due, and the risk that its liquidity resources might in the future fall below the level, or differ from the quality and funding profile from those considered as appropriate by SAMA.
4. Governance and Risk Management
This section should describe the governance and management arrangements around the ILAAP including the involvement of the Board of Director, in addition to the risk management framework. At least the following areas should be covered:
i. Description of the process for the preparation and updating of the ILAAP.
ii. Description of the process for reviewing the ILAAP.
iii. Definition of the role and functions assigned to the Board of Directors and Senior Management for the purposes of the ILAAP.
iv. Definition of the role and functions assigned to various corporate functions for the purposes of the ILAAP (for example, internal audit, compliance, finance, risk management, branches and other units).
v. Indication of internal regulations relevant to the ILAAP.
vi. The overall risk management framework and how it pertains to liquidity and funding risks.
vii. Bank’s internal limits and control framework, including the limits and controls around liquid asset buffers, and the appropriateness of the limit structure to the risk appetite.
5. Summary of Bank's Strategies
This section would be a major component of a bank's strategic and operational plans. It should include the following:
i. The present financial position of the bank and expected changes to the current business profile, the environment in which it expects to operate, its projected business plans (by appropriate lines of business), projected financial position and cash flow positions, projected liquidity available and projected liquidity resource required based on future plans.
ii. The starting balance sheet, cash flow statement and the date over which the assessment was carried out.
iii. The projected balance sheet and cash flow statement (for at least one year horizon), which should clearly indicate the major lines of business which are going to be attested by the bank's strategic initiatives, environmental changes and assumption over the planning period and the impact on liquidity requirements by major lines of business.
6. Liquidity Adequacy and ILAAP
This section should, at minimum, cover the following:
6.1 Liquidity Risk Appetite
In this section, banks should describe their liquidity risk appetite, how it was devised, approved, monitored and reported, and how it is communicated throughout the bank. Banks should, at a minimum, cover the following key areas:
i. A full and clear articulation of the bank’s liquidity risk appetite and a discussion of why the risk appetite is appropriate.
ii. A discussion on how the bank’s liquidity risk appetite is used to define and assess liquidity levels and limits, including, at minimum, the following:
- An outline of all relevant liquidity risk management limits as derived from the risk appetite and a discussion of how the limits support the risk appetite.
- Limits for each of the liquidity risk drivers the bank assesses. Given that not all limits will necessarily be quantitative; some may be qualitative and describe subjective risk metrics.
- A brief outlining the bank’s risk appetite and liquidity risk limits, I.e. monitoring limits on periodic dates used for reporting of the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), Loan to Deposit Ratio (LDR) and SAMA Liquidity Ratio and a demonstration of how the liquidity limits are reflected in SAMA’s returns.
- A brief outlining the limits and positions against limits under “normal” and “stressed” liquidity environments, with a full and complete discussion of positions against limits.
6.2 Disclosure of Liquidity Requirements
This section should provide a distinction from the bank's perspective of the following liquidity measures indicating their purpose, minimum requirements and other attributes:
i. Regulatory Liquidity requirements under LCR, NSFR, LDR, and SAMA Liquidity Ratio.
ii. Liquidity requirements internally specified by Treasurer based on limits.
6.3 Funding Strategy
This section should provide full details of a bank’s three-year funding strategy, with more detail on the first 12-18 months of the funding strategy. The following requirements should be met:
i. The strategy should be approved by the Board Directors or its delegated authority.
ii. The strategy should demonstrate how it will support the projected business activities in both business as usual and stress, implementing any required improvements in the funding profile and evidencing that the risk appetite and key metrics will not be breached by the planned changes.
iii. Risks to the plan should be discussed.
iv. Where a funding strategy is new, implementation procedures should be detailed.
v. The funding risk strategy and appetite, and the profile, both the sources and uses should be described.
Banks should analyse the stability of the liabilities within the funding profile and the circumstances in which they could become unstable. This could include market shifts such as changes in collateral values, excessive maturity mismatch, inappropriate levels of asset encumbrance, concentrations (including single or connected counterparties, or currencies).
Banks are also required to analyse market access and current or future threats to this access, including the impact of any short-term liquidity stresses or negative news.
6.4 Risks Covered and Assessed in the ILAAP
In this section, banks are required to identify, measure and provide mitigation strategies for the most significant liquidity risks they are exposed to. At a minimum, the ILAAP should describe, assess and analyse the following pillar 2 liquidity risk drivers:
i. Wholesale secured and unsecured funding risk
a. Identification of risk, and behavior under normal and stress conditions
b. Deposit concentration risk – exposures concentrated on a limited number of customers, industries, certain sectors or geographic area, etc. entailing vulnerability.
ii. Retail funding risk
a. Gross retail outflows under liquidity stresses.
b. Higher than average likelihood of withdrawal.
iii. Intra-day liquidity risk
c. Net amount of collateral and cash requirement under stresses.
iv. Intra-group liquidity risk
d. Access to other groups, Central Bank funding, Parent Company and other commitments.
v. Cross-currency liquidity risk
e. Significant outflows and inflows with respect to maturities under stress.
f. Foreign Exchange (FX) mismatch risks – banks typically assume that currencies are fungible given the depth of liquidity in the spot FX and FX swap markets, particularly in reserve currencies. However, a bank may not be able to access FX markets as normal in times of stress
vi. Off-balance sheet liquidity risk.
g. Impact on cash flows arising from derivatives, contingent liabilities, commitments and liquidity facilities.
vii. Franchise-viability risk.
h. Stresses where the bank does not have sufficient liquidity resources to maintain its core business and reputation.
viii. Marketable assets risk (under normal and stressed forced sale conditions).
a. High Quality Liquid Assets (HQLA) monetisation risk – a bank may not be able to monetise sufficient non-cash HQLA to cover cumulative net outflows under the LCR stress on a daily basis, because of limitations to the speed with which cash can be raised in the repo market or through outright sales.
ix. Non-marketable assets risk (under normal and stressed forced sale conditions).
x. Funding concentration risk e.g. Flexible funding strategy according to instrument type, currency, counterparty, liability term structure and market for their realization.
xi. Other risks e.g.
a. Liquidity correlation factors associated with other risks i.e. reputational risk, asset concentration risk, Profit Rate Risk in the Banking Book (PRRBB), strategic risks etc. which have a bearing on Bank’s overall liquidity position.
b. Balance sheet mismatch risk - assess whether a bank would have sufficient cash from the monetisation of liquid assets and other inflows to cover outflows on a daily basis, under a defined stress scenario.
c. Macroeconomic and Business cycle risks – risks relating to changes in macroeconomic country specific variables such as oil prices, government spending and GDP.
d. Initial margin on derivatives contracts, where during a period of stress counterparties may, for a number of reasons, increase a bank’s initial margin requirements.
e. Securities margin financing liquidity risks.
The quantification of liquidity risk should fully incorporate the following:
i. Product pricing – it should include significant business activities and both on and off balance sheet products.
ii. Performance measurement and pricing incentives.
iii. Clear and transparent attribution to business lines.
iv. Management of collateral – clearly distinguishing between pledged and unencumbered assets.
v. Management of liquidity risks between intra-day, overnight keeping in view uncertainty or potential disruption.
vi. Managing liquidity across legal entities, business lines and currencies.
vii. Funding diversification and market access keeping in view:
- Business planning process.
- Correlations between market conditions and ability to access funds.
- Adequate diversification keeping in view limits according to maturity, nature of depositor, level of secured and unsecured funding, instrument type, currency and geographic market.
viii. Regular testing the capacity to raise funds quickly from choosing funding sources to provide short, medium and long term liquidity.
ix. An explanation of how each of the above risks have been identified, assessed, measured and the methodology and models currently or to be employed in the future, and the quantitative results of that assessment.
x. Where relevant, a comparison of that assessment with the results of the LCR and NSFR calculations.
xi. A clear articulation of the bank's risk appetite by risk category.
xii. Where relevant, an explanation of method used to mitigate these risks
6.5 Intraday Liquidity Risk
In this section, banks should describe the following:
i. How intraday risk is created within their business, whether part of the payments system or not, their appetite for and approach to managing intraday liquidity risk of both cash and securities accounts and in both business as usual and stress conditions.
ii. Details of how the bank assesses the adequacy of the process of measuring intraday liquidity risks, especially that resulting from the participation in the payment, settlement and clearing systems.
iii. Details of how the bank adequately monitors measures to control cash flows and liquid resources available to meet intraday requirements and forecasts when cash flows will occur during the day.
iv. How the bank carries out adequate specific stress-testing for intraday operations.
7. Approach and Methodology
7.1 Current Methodology
In this section, banks should describe the framework and IT systems for identifying, measuring, managing and monitoring and both internal and external reporting of liquidity and funding risks, including intraday risk. The assumptions and methodologies adopted should be described, key indicators should be evidenced, and the internal information flows described.
7.2 Future Approach and Methodology
Banks may provide a summary on the future models and methodologies being considered and developed including their strengths and weaknesses.
7.3 Internal Models: Pillar 1 and ILAAP Comparisons
Should the internal models vary from any regulatory methodologies approved for LCR and NSFR purposes, this section would provide a detailed comparison explaining both the methodological and parameterization differences between the internal models and the regulatory models and how those affect the liquidity measures for ILAAP purposes.
Further, the explanation of the differences between results of the internal models for LCR, NSFR would be set out at the level at which the ILAAP is applied. SAMA would expect the explanation to be sufficiently granular to show the differences at the level of each of the Pillar 1 risks.
8. Details on Models Employed
In this section, banks should present the list of models utilized in the formulation of the ILAAP, giving relevant and appropriate details as given below:
i. The key assumptions and parameters within the liquidity modeling work and background information on the derivation of any key assumptions.
ii. How parameters have been chosen including the historical period used and the calibration process.
iii. The limitations of the model.
iv. The sensitivity of the model to changes in the key assumptions or parameters chosen.
v. The validation work undertaken to ensure the continuing adequacy of the model.
vi. Whether the model is internally or externally developed. If externally acquired, its generic name and details on the model developer.
vii. The extent of its acceptance by other regulatory bodies, users in the international treasurers’ community, overall reputation and market acceptance.
viii. Specific details on the applications within the bank.
ix. Major merits and demerits of the chosen models.
x. Results of the model validation obtained through:
- Back testing / Scenario testing.
- Analysis of the internal logic.
xi. Major methodologies or statistical technique used, i.e. Value at risk models, employing methods such as variance/co-variance, historical simulation and Monte Carlo method.
xii. Confidence levels embedded for regulatory liquidity or economic liquidity purposes.
xiii. Data definition, i.e. whether the source is external or internal and if any data, manipulation of external data has been done for it to conform to the internal data.
9. Liquidity Specific Stress-Testing
In this section, banks should undertake, at least, the following:
i. Analyse the internal liquidity risk stress-testing framework, including the process and governance of and challenge to scenario design, derivation of assumptions and design of sensitivity analysis, and the process of review and challenge and relevance to the risk appetite.
ii. Scrutinise the process by which the stress results are produced, and incorporated into the risk framework and strategic planning, and the liquidity recovery process.
iii. Analyse the results and conclusions, with breakdown by each relevant risk driver.
Details of further stress-testing requirements are in Annexure (1).
10. Liquidity Transferability Between Legal Entities
In this section, banks should provide details of any restrictions on the management's ability to transfer liquidity during stressed conditions into or out of the businesses covered. These restrictions, for example, may include contractual, commercial, regulatory or statutory nature. A regulatory restriction could be the minimum liquidity ratio acceptable to SAMA.
11. Aggregation and Diversification
This section should describe how the results of the various risk assessments are brought together and an overall view taken on liquidity adequacy. At the general level, the overall reasonableness or the detailed quantification approaches might be compared with the results of an analysis of liquidity planning and a view taken by senior management as to the overall level of liquidity that is appropriate.
In aggregating the risks, the following aspects of the aggregation process should be described:
i. Any allowance made for diversification, including any assumed correlations within risks and between risks and how such correlations have been assessed including in stressed conditions.
ii. The justification for diversification benefits between and within legal entities , and the justification for the free movement of liquidity between legal entities in times of financial stress.
12. Challenge and Adoption of the ILAAP
This section should describe the extent of challenge and testing of the ILAAP. Accordingly, it would include the testing and control processes applied to the ILAAP models or calculations, and the senior management and Board of Directors review and sign off procedures.
In making an overall assessment of a bank's liquidity needs, matters described below should be addressed:
i. The inherent uncertainty in any modeling approach.
ii. Weaknesses in bank's risk management procedures, systems or controls.
iii. The differences between regulatory liquidity and available liquidity.
iv. The reliance placed on external consultants.
v. An assessment made by an external reviewer or internal audit.
13. Use of the ILAAP within the Bank
In this section, banks should demonstrate the extent to which liquidity management is embedded within the bank's operational and strategic planning. This would include the extent and use of ILAAP results and recommendations in the ongoing reviews and assessment of liquidity, day to day decision making, Contingency Funding Plan (CFP) and overall strategic, operational and liquidity planning process.
Important elements of ILAAP including growth and profitability targets, scenario analysis, and stress-testing may be used in setting of business plans, management policy and in pricing decisions. This could also include a statement of the actual operating philosophy and strategy on liquidity management and how this links to the ILAAP submitted.
14. Future Refinements of ILAAP
A bank should detail any anticipated future refinements within the ILAAP, highlighting those aspects which are work-in-progress, and provide any other information that will help SAMA review a bank's ILAAP.
Annexure (1): Stress-Testing and Contingency Funding Plan (CFP)
A. Stress-Testing
Stress-testing is a generic term for the assessment of vulnerability of individual financial institutions and the financial system to internal and external shocks. Typically, it applies ‘What if’ scenarios and attempts to estimate expected losses from shocks, including capturing the impact of ‘large, but plausible events’. Stresstesting methods include scenario tests based on historical events and information on hypothetical future events. They may also include sensitivity tests. A good stress-test should have attributes of plausibility and consistency and ease of reporting for managerial decisions.
1. Stress-Testing Under Pillar 1
i. A Bank must conduct on a regular basis appropriate stress-tests so as to:
a) Identify sources of potential liquidity strain:
- Loss of confidence – justified/unjustified.
- Contagion – financial sector weakness, corporate failures, etc.
- External factors – market disruption, risk aversion, flight to quality, etc.
- Uncorrelated events – operational disruptions, natural disasters, terrorist attacks, etc.
b) Ensure that current liquidity exposures continue to conform to the liquidity risk tolerance established by that bank's governing body.
c) Identify the effects on that bank's assumptions about pricing.
d) Analyse the separate and combined impact of possible future liquidity stresses on its:
- Cash flows.
- Liquidity position.
- Profitability.
- Solvency.
ii. A bank must consider the potential impact of institution-specific, market-wide and combined alternative scenarios.
iii. In conducting its stress-testing, a bank should also, where relevant, consider the impact of its chosen stresses on the appropriateness of its assumptions relating to:
- Correlations between funding markets.
- The effectiveness of diversification across its chosen sources of funding.
- Additional margin calls and collateral requirements.
- Contingent claims, including potential draws on committed lines extended to third parties or to other entities in that bank's group.
- Liquidity absorbed by off-balance sheet activities.
- The transferability of liquidity resources.
- Access to central bank market operations and liquidity facilities.
- Estimates of future balance sheet growth.
- The continued availability of market liquidity in a number of currently highly liquid markets.
- Ability to access secured and unsecured funding (including retail deposits).
- Currency convertibility.
- Access to payment or settlement systems on which the bank relies.
iv. A Bank should ensure that the results of its stress-tests are:
- Reviewed by its senior management.
- Reported to the bank's Board of Directors or its deleted authority, specifically highlighting any vulnerabilities identified and proposing appropriate remedial action.
- Reflected in the processes, strategies and systems.
- Used to develop effective contingency funding plans.
- Integrated into that bank's business planning process and day-today risk management.
- Taken into account when setting internal limits for the management of that bank's liquidity risk exposure.
v. Among more qualitative criteria that banks would have to meet before they are permitted to use a models based approach are the followings:
- Rigorous and comprehensive stress-testing program should be in place.
- Cover a range of factors that can create extraordinary losses or gains in trading portfolios.
- Major goals of stress-testing are to evaluate the capacity of the bank’s liquidity to absorb potential large losses and to identify steps the bank can take to reduce its risk and conserve liquidity.
- Results of stress-testing should be routinely communicated to senior management and periodically, to the bank’s board of directors.
vi. Results of stress-tests should be reflected in the policies and limits set by the management.
vii. Scenarios to be employed:
- Historical without simulation.
- Historical with simulation – this means relating to specific profile and idiosyncratic nature of the bank. e.g. if deposits are highly concentrated with top three customers, if one customer goes for an early withdrawal or partial withdrawal, how this simulation would affect historical analysis?
- Adverse events, based on individual portfolio characteristics of institutions.
2. Stress-Testing Under Pillar 2
Under the Supervisory Review Process, SAMA will initially review the Pillar 1 stress-testing requirement for LCR and NSFR. SAMA will also assess stress-testing under Pillar 2 with specific reference to detailed Contingency Funding Plan (CFP). Some of the scenarios which can be used are:
i. Example of First Liquidity Stress
An unforeseen, name-specific, liquidity stress in which:
- Financial market participants and retail depositors consider that in the short-term the bank will be or is likely to be unable to meet its liabilities as they fall due.
- The bank's counterparties reduce the amount of intra-day credit which they are willing to extend to it.
- The bank ceases to have access to foreign currency spot and swap markets.
- Over the longer-term, the bank's obligations linked to its credit rating crystallize as a result of a reduction in that credit rating. For the purpose, a bank must assume that the initial, short-term, period of stress lasts for at least two weeks.
ii. Example of Second Liquidity Stress
An unforeseen, market-wide liquidity stress of three months duration. A bank must assume that the second liquidity stress is characterised by:
- Uncertainty as to the accuracy of the valuation attributed to that bank's assets and those of its counterparties.
- Inability to realise, or ability to realise only at excessive cost, particular classes of assets, including those which represent claims on other participants in the financial markets or which were originated by them.
- Uncertainty as to the ability of a significant number of banks to ensure that they can meet their liabilities as they fall due.
- Risk aversion among participants in the markets on which the bank relies for funding.
3. Other Aspects Related to Stress-Testing
i. SAMA expects all banks to closely review the above recommendations on stress-testing and develop specific strategies and methodologies to implement those that are relevant and appropriate for their operations.
ii. SAMA in its evaluation of banks method and systems under Pillar 1 and Pillar 2 will examine the implementation of these stress-test requirements. It will also review the stress-test methodologies and systems as part of its Supervisory Review Process.
iii. As a minimum, a bank should carryout stress-tests at least on an annual basis.
B. Early Warning Indicators
An important component of liquidity risk management and the contingency funding plan is the early warning indicators including:
- Growing concentrations in assets or liabilities.
- Increases in currency mismatches.
- Repeated incidents of positions approaching or breaching internal or regulatory limits.
- Decrease of weighted average maturity of liabilities.
- Significant deterioration in the bank’s earnings, asset quality, and overall financial condition.
- Credit rating downgrade.
- Widening debt or credit-default-swap spreads.
- Rising wholesale or retail funding costs compared to other banks.
- Counterparties requesting or increasing request for collateral for credit exposures or resisting to enter into new transactions.
- Increasing retail deposit outflows.
- Difficulty accessing longer-term funding.
C. Contingency Funding Plan (CFP)
i. Banks should detail the policies, procedures and action plans for responding to severe disruptions in the bank's ability to fund itself. The plan should be that which is contained within their Contingency Funding Plan (CFP) and it should be prepared as a standalone document and attached to the ILAAP document.
ii. At a minimum, a bank should ensure that its Contingency Funding Plan (CFP) meets the followings:
a) Outlines strategies, policies and plans to manage a range of stresses.
b) Establishes a clear allocation of roles and clear lines of management responsibility.
c) Formally documented.
d) Includes clear invocation and escalation procedures.
e) Regularly tested and updated to ensure that it remains operationally robust; this testing is mainly qualitative in nature which tests process, procedures, and appropriate governance to undertaken action on timely basis. This should test the following:
- Composition of liquidity crisis management team (LCMT).
- Roles and responsibilities of LCMT.
- Early warning signals using benchmark indicators i.e. Availability of credit lines, collection efficiency, positive cumulative outflow. These signals should have triggers based on 30% or 50% decline in collections for continuous three months.
- Liquidity stress-test consisting of four early warning signals.
- Minimum logistics and contact information.
- Communication strategy with SAMA.
- Undertaking only two transactions in interbank market or with SAMA to demonstrate it is working effectively.
f) Outlines how the bank will meet time-critical payments on an intraday basis in circumstances where intra-day liquidity resources become scarce.
g) Outlines the bank's operational arrangements for managing a retail funding run-off.
h) In relation to each of the sources of funding identified for use in emergency situations, is based on a sufficiently accurate assessment of the amount of funding that can be raised from that source; and the time needed to raise funding from that source.
i) Sufficiently robust to withstand simultaneous disruptions in a range of payment and settlement systems.
j) Outlines how the bank will manage both internal communications and those with its external stakeholders.
k) Establishes mechanisms to ensure that the bank's Board of Directors and senior management receive information that is both relevant and timely.
l) Clear escalation/prioritization procedures detailing when and how each of the actions can and should be activated.
m) Lead time needed to tap additional funds from each of the contingency sources.
iii. In designing a contingency funding plan, a bank should ensure that it takes into account:
- The impact of stressed market conditions on its ability to sell or securities assets.
- The impact of extensive or complete loss of typically available market funding options.
- The financial, reputational and any other additional consequences for that bank arising from the execution of the contingency funding plan itself.
- Its ability to transfer liquid assets having regard to any legal, regulatory or operational constraints.
- Its ability to raise additional funding from central bank market operations and liquidity facilities.
IRRBB
Interest Rate Risk in the Banking Book (IRRBB)
No: 381000040243 Date(g): 10/1/2017 | Date(h): 12/4/1438 Status: In-Force Background
These standards revise the Basel Committee's 2004 Principles for the management and supervision of interest rate risk, which set out supervisory expectations for banks' identification, measurement, monitoring and control of IRRBB as well as guidance for its supervision. The key enhancements to the 2004 Principles include:
• More extensive guidance on the expectations for a bank's IRRBB management process in areas such as the development of interest rate shock scenarios, as well as key behavioural and modelling assumptions; • Enhanced disclosure requirements to promote greater consistency, transparency and comparability in the measurement and management of IRRBB. This includes quantitative disclosure requirements based on common interest rate shock scenarios, • An updated standardised framework; and • A stricter threshold for identifying outlier banks, which has been reduced from 20% of a bank's total capital to 15% of a bank's Tier 1 capital.
The standard reflects changes in market and supervisory practices, which are particularly pertinent in light of the current exceptionally low interest rates in many jurisdictions.
SAMA has conducted a consultation process with the Saudi Banks in the development of this regulation and that has resulted in preparation of the following documents:
• Annexure 1: Regulatory returns based on Table A and Table B of the Basel document. • Annexure 2: Frequently Asked Questions (FAQs) and answers including National Discretions.
Implementation date
These rules are applicable from 1 January 2018 as specified in the Basel document. However, in 2018, the disclosures should be based on information as of 31 December 2017. The Banks should also send pro forma disclosures to SAMA based on 30 September 2017 data by 31 October 2017.
Basel paper is available at bis.org/bcbs/publ/d368.pdf
Annexure 1: Regulatory Returns Based on Table A and Table B of the Basel Document
This section has been updated by section 25 "Interest Rate Risk in the Banking Book" under Pillar 3 Disclosure Requirements Framework, issued by SAMA circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G.• No changes in Q17 template has been made. • Table A and Table B in Basel document (as shown below) should be used as a regulatory return to be reported to SAMA on a half yearly basis
Table A
Purpose: To provide a description of the risk management objectives and policies concerning IRRBB. Scope of application: Mandatory for all banks within the scope of application set out in Section III. Content: Qualitative and quantitative information. Quantitative information is based on the daily or monthly average of the year or on the data as of the reporting date. Format: Flexible. Qualitative disclosure a A description of how the bank defines IRRBB for purposes of risk control and measurement. b A description of the bank's overall IRRBB management and mitigation strategies, Examples are: monitoring of EVE and NII in relation to established limits, hedging practices, conduct of stress testing, outcomes analysis, the role of independent audit, the role and practices of the ALCO, the bank's practices to ensure appropriate model validation, and timely updates in response to changing market conditions. c The periodicity of the calculation of the bank's IRRBB measures, and a description of the specific measures that the bank uses to gauge its sensitivity to IRRBB. d A description of the interest rate shock and stress scenarios that the bank uses to estimate changes in the economic value and in earnings, e Where significant modelling assumptions used in the bank's IMS (ie the EVE metric generated by the bank for purposes other than disclosure, eg for internal assessment of capital adequacy) are different from the modelling assumptions prescribed for the disclosure in Table B, the bank should provide a description of those assumptions and of their directional implications and explain its rationale for making those assumptions (eg historical data, published research, management judgment and analysis). f A high-level description of how the bank hedges its IRRBB, as well as the associated accounting treatment g A high-level description of key modelling and parametric assumptions used in calculating △EVE and △NII in Table B, which includes:
For △EVE, whether commercial margins and other spread components have been included in the cash flows used in the computation and discount rate used.
How the average repricing maturity of non-maturity deposits in (1) has been determined (including any unique product characteristics that affect assessment of repricing behaviour).
The methodology used to estimate the prepayment rates of customer loans, and/or the early withdrawal rates for time deposits, and other significant assumptions.
Any other assumptions (including for instruments with behavioural optionalities that have been excluded) that have a material impact on the disclosed △EVE and △NII in Table B, including an explanation of why these are material.
Any methods of aggregation across currencies and any significant interest rate correlations between different currencies.
h (Optional) Any other information which the bank wishes to disclose regarding its interpretation of the significance and sensitivity of the IRRBB measures disclosed and/or an explanation of any significant variations in the level of the reported IRRBB since previous disclosures. Quantitative disclosures 1 Average repricing maturity assigned to NMDs, 2 Longest repricing maturity assigned to NMDs, Table B
Scope of application: Mandatory for all banks within the scope of application set out in Section III. Content: Quantitative information. Format: Fixed. Accompanying narrative: Commentary on the significance of the reported values and an explanation of any material changes since the previous reporting period. In reporting currency △EVE △NII Period T T-1 T T-1 Parallel up Parallel down Steepener Flattener Short rate up Short rate down Maximum Period T T-1 Tier 1 capital
DefinitionsFor each of the supervisory prescribed interest rate shock scenarios, the bank must report for the current period and for the previous period:
(i) the change in the economic value of equity based on its IMS, using a run-off balance sheet and an instantaneous shock or based on the result of the standardised framework as set out in Section IV if the bank has chosen to adopt the framework or has been mandated by its supervisor to follow the framework; and (ii) the change in projected NII over a forward-looking roiling 12-month period compared with the bank's own best estimate 12- month projections, using a constant balance sheet assumption and an instantaneous shock.
•
For Pillar 3 purposes, annual disclosure should be made using Table A and Table B following Pillar 3 timelines in one consolidated Pillar 3 document.Annexure 2: Frequently Asked Questions (FAQs) and Answers including National Discretions
Log Ref # Challenges / Issues SAMA's response 1 Prepayment - page 30, paragraph 132
Where the IRRBB documentation suggests setting a suitable cap for determining the materiality of “prepayment” and “early redemptions”, the Working group recommends using 5% of a bank's banking book assets or liabilities, as a conservative cap, to allow for comparability between Saudi Banks. In the absence of any materiality criteria for the aforementioned, this analogy has been carried forward from the Basel document, where it defines material currencies as, “those accounting for more than 5% of either banking book assets or liabilities”
SAMA agrees with this proposal to use a cap of 5% of a bank's banking book assets or liabilities. 2 Prepayment - It has been widely agreed within the Working Group that early-redemptions and prepayments are immaterial in the Saudi Retail Sector. This assertion is built on the Working Group's members’ knowledge of their customers’ behavior.
Prepayment modeling of Corporate portfolio would be a challenge as these prepayments are more specific deal by deal in nature driven by specific customer business needs. Additionally, Banks will have greater ability to charge the replacement cost, which eliminates the prepayment risk. ARB is of the view that prepayment analysis of Corporate loans should not be mandatory.
Banks should submit prepayment analysis for both retail and corporate sector to SAMA by 31 March 2017 to determine the next steps.
3 Capital Charges - Several banks have raised questions regarding ICAAP. The Working Group would like to clarify that the standardized framework, as described in section IV, is not mandatory for ICAAP purposes (i.e. the section IV framework specifically relates to public disclosures of IRRBB) Banks have to write to SAMA to indicate their preferred approach, which ideally should be consistent for both ICAAP and Pillar 3 disclosures. However, the banks have a choice to use internal models if they wish so. However, SAMA, based on bilateral ICAAP discussions in 2017/2018 could mandate few banks on a case-by-case basis to follow standardized framework. Please note that the treatment of equity in internal models is subject to discussion with SAMA on a case-by-case basis. 4 Capital Charges - Principle 9, page 18, paragraph 72
The Working Group understands that as the IRRBB capital charge remains under pillar 2, it remains subject to the bank's own assessment methodology and assumptions (as per ICAAP) and as such does not necessarily have to follow Section IV assumptions.
This is correct. Same response as above. 5 Capital Charges - Principle 9, page 18, paragraph 74 and Annex 1, S4.2.ii
From the relevant documentation, the Working Group agrees that under the economic value approach, the ICAAP capital charge for IRRBB can be assessed based on the change in the economic value of the whole banking book including equity, thereby making an assessment based on a "going concern" basis.
This is correct. However, in the Pillar 2 forecast, banks should consider sufficient buffers for IRRBB. 6 Shock scenarios - page 30, paragraph 132
Shock scenarios are to be applied to IRRBB exposures in each currency for which the bank has material positions. The Technical Working Group refers to the pertinent documentation, which sets anything above 5% of a bank's balance sheet assets or liabilities as the criteria for determining the materiality of currency exposures.
SAMA agree with this threshold. 7 Shock scenarios - In relation to questions raised about shock scenarios in different currencies, the Working Group would like to highlight that the pertinent documentation clearly sets out different scenarios for each currency, which are to be used by all banks to allow for comparability of banks’ disclosures. This is correct. 8 Shock scenarios - Annex 2, page 45
In relation to shock scenarios, the pertinent documentation allows for the regulator to set a floor for interest rate shocks, provided it is less than or equal to zero. The Working Group suggests, given banks’ consumer pricing methods and the current economic environment in KSA, zero would be a suitable floor for SAMA to set for shock scenarios
Based on current economic environment, SAMA would like zero as a suitable floor for shock scenarios. However, if circumstances change in future, this Will be adjusted accordingly. 9 Conditional Prepayment rate - page 27, paragraph 121
In the event that SAMA does not prescribe any CPRs, SAMA is requested to facilitate the calculation of a set of standardized CPRs based on KSA / bank-wide data, that is available to it through SIMAH and for these CPRs to be made available to all banks as a fallback position due to lack of available good quality data.
SAMA will look into this and will communicate accordingly. In the meantime, all domestic banks should send weighted average CPRs to SAMA by 31 March 2017. 10 Disclosures -
Regarding the disclosure of the results from the standardized framework, the Working Group finds that this is sufficiently outlined within the IRRBB documentation, where any deviations from the standardized approach must be approved by SAMA.
This is correct. All banks should send proforma disclosures to SAMA based on 30 September 2017 data by 31 October 2017. SAMA will review this information and if needed, form a smaller sub group (reporting to CFO Committee) to ensure minimum consistency across the banking sector. 11 Disclosures - The medium for disclosures should be in line with all other Basel disclosures The medium for disclosure should be Pillar 3 document. Also, banks should make sure that this is in line with other Basel disclosures. 12 Outliers - page 21 paragraph 89
Regarding "additional outlier/materiality tests", the Working Group recommends that no additional materiality tests be applied at this time so as to allow banks and SAMA to become familiar and confident with the mechanics and output of the standardized framework.
SAMA agrees with the proposition during the transitional period next year and banks should communicate their potential charge by September 2017. During this time, SAMA will assess if additional outlier/materiality tests could be used based on Common Equity Tier 1 (CET1) capital or the bank's IRRBB relative to earnings. However, this will not exceed Basel requirements of at least 15% of Tier 1 capital. 13 Timeline
Setting a timeline for implementation of the prescribed IRRBB documentation is an area implicitly requiring guidance from SAMA. Considering the culmination of the transitional implementation period on 30th September 2017, the Working Group recommends to make the first submission of IRRBB disclosures to SAMA within one month of this reporting date (i.e. first submission by 31st October 2017, based on 30th September 2017 positions)
SAMA agrees with this proposal. All banks should send pro forma disclosures to SAMA based on 30 September 2017 data by 31 October 2017. However, in terms of final timelines, SAMA would stick to Basel timeline of using 31 December 2017 year-end for Pillar 3 disclosures in 2018. 14 Executive Summary
Page 2, Para 4 : Supervisor must publish their criteria for identifying outliers banks under Principle 12.
The threshold for the identification of an “outlier bank” has been tightened, where the outlier/material tests applied by supervisors should at least include one which compares the bank's change EVE with 15% of its Tier Capital, under the prescribed interest rate shock
• Unclear criteria for outliers bank.
• Unclear minimum to be required by SAMA and the deadline to comply with this regulatory minimum threshold.
• Unclear whether this will be compulsory requirements?
• Any regulatory punishment if the minimum requirement is not complied?
• The frequency for reporting the minimum compliance with SAMA?Same response as 12 above. During transitional period, SAMA will observe the impact and will give deadline to meet minimum threshold. Once announced by SAMA, this will become compulsory requirement for the banking sector. This will not be published each year. However, if circumstances change, this threshold will be revisited as and when needed. 15 The standard template for submission is proposed be finalized (Table A). Any changes of current Q17 Reports arising from this new requirement need to be communicated to banking industry as soon as possible so the necessary action plans could be initiated to comply with this new reporting requirements. A new template based on Table A and Table B will be used in Q17 reports. i. What is the frequency of reporting to SAMA?
ii. What is templates for the reporting to SAMA/external party?
i. Quarterly through Q17 returns
ii. Annually in Pillar 3 table format as specified in the Basel document
16 Page 6, Principle 3: The bank risk appetite for IRRBB should be articulated in terms of risk to both economic value and earnings. Bank must implement policy limits that target maintaining IRRBB exposures consistent with their risk appetite.
Unclear regulatory requirement whether the risk appetite from earning perspective will be mandatory for the bank
Banks should decide the risk appetite themselves suitable to their balance sheets keeping in view regulatory minimum thresholds. 17 Interest Rate shock and Stress Scenarios
Page 8, Para 35 - Banks's IMS for IRRBB should be able to accommodate the calculation of the impact on economic value and earnings of multiple scenarios based on the six prescribed interest rate shock scenarios set-up in Annex 2
In the Annex 2, the standardized interest rate shock scenario, SAR Yield Curve is not included by the Basel Committee.
Banks should use USD to get indication about SAR yield curve. 18 Page 9, Para 40 - Bank should determine by currency, a range of potential movements against which they will measure IRRBB exposure
i. Unclear guidance on the minimum threshold for the currency to be measured and reported to regulator.
ii. Unclear guidance on whether the requirement is to be monitored at the Bank or Group level.
iii. Any threshold for the subsidiary to be excluded for the Group Level?
i. Already elaborated in 6 above.
ii. This will be applied at both Solo and Consolidated levels of all domestic banks
iii. Not at this stage.
19 Page 10, Para 43 - Qualitative of reverse stress testing
In order to identify interest rate scenarios that could severely threaten a bank's capital and earnings.
As IRRBB is a pillar 2 charge, target CAR should; be used as minimum capital threshold for each bank • How this scenario of interest rate to be implemented in practice? Are we assuming other factors are constant? Any increase of interest rate may affect the default rate of loan portfolio.
• Are we assuming the increase of interest rate until the RWCR is lower than minimum requirement of 8% or minimum capital ratio to be maintained by SAMA with the assumption the other factors are constant?
The unclear guideline in the Basel's document 20 Paragraph 4: Treatment of positions with behavior options other than NMDs
Page 27, Para 118 - Under standardized framework, the optionality in these products is estimated using two step approach. Firstly, baseline estimates of loan pre-payment and early withdrawal of fixed term deposits are calculated given the prevailing term structure of interest rate.
Note: These baseline parameters may be determined by bank subject to supervisor review and approval, or prescribed by supervisor.
Banks should do the calculations themselves and this will be assessed by SAMA for each bank on a case- by-case basis. • What is the standard methodology being accepted by SAMA to estimate the loan pre-payment and early withdrawal of the fixed deposits given the prevailing term structure of interest rate.
• Is baseline may be estimated by bank and subject to the approval by the SAMA?
• What is the prescribed baseline for the bank in Saudi by SAMA in the case on the baseline parameters is not approved by SAMA or the bank is not able to calculate the baseline parameters due to lack of historical data?
• In the case of lacking of the historical data to perform the analysis by the bank
• Will SAMA prescribe the baseline parameters?21 Whilst the Basel principles state that Credit Spread Risk in the Banking Book must be addressed, the document has little detail as to how this should be approached, in contrast to the more specific requirements for IRRBB.
Does SAMA anticipate issuing guidance in this regard or should all banks address individually?
The working group members should provide recommendations to SAMA whether central approach would work for them.
Some members suggested to include the full margin, which includes the customer's credit spread, but definitely exclude the Bank's own credit spread when discounting. However, each bank should consider this suggestion based on their internal needs and requirements.
22 Para 115 Table 2 provides caps on core deposits and average maturity by category. In case 10 years data history identifies higher core deposits than the CAP provided in this table.
As per treatment of Non-maturing deposits(NMDs), suggested in the standardized framework detailed in PRRBB circular dated April’16 (para 115), the cap on the core portion of corporate deposits is provided as 50%.
ARB is of the view that the minimum core threshold should be increased for the deposits which have operational relationship with the bank
Banks should determine an appropriate cash flow slotting procedure for each category of core deposits, up to the maximum average maturity per category and caps as specified in the Basel document. 23 Data availability is a big challenge, as NMD, Redemption Risk & Prepayment risk modeling require more than past 10 years of data which currently we don't have very matured data.
The duration of data should be based from what is only available since the Bank's inception
This requirement of 10 years will be waived on a case-by-case basis keeping in view newly incorporated banks not having sufficient history. However, the banks should specifically write to SAMA in this regard. Stress Testing
Rules on Stress Testing
No: 60697.BCS. 28747 Date(g): 23/11/2011 | Date(h): 27/12/1432 Status: In-Force *This circular should be read in conjunction with the following circulars addressing additional requirements on stress testing:
1) In terms of its Charter issued by **the Royal Decree No. 23 dated 23-5-1377 H (15 December 1957 G), Saudi Arabian Monetary Agency(SAMA) is empowered to regulate the commercial banks. In exercise of these powers, SAMA has been setting regulatory requirements for banks from time to time. With regard to stress testing, SAMA has earlier circulated to banks the “BCBS Principles for Sound Stress Testing Practices and Supervision” vide its Circular No. B.C.S/ 775 dated 02 August 2009. In addition, SAMA has provided some guidance on stress testing through its circulars on Basel-II implementation.
2) In order to further strengthen and converge the stress testing practices in banks, SAMA has decided to issue the enclosed “Rules on Stress Testing”. The objective of these Rules is to require banks to adopt robust stress testing techniques and use stress tests as a tool of risk management. These Rules set out the minimum requirements on stress testing and banks can adopt more sophisticated techniques and scenarios beyond the minimum specified thresholds.
3) These Rules have been finalized after taking into account the comments provided by banks. Some of the general queries/questions raised by banks in their comments have been responded in the enclosed Frequently Asked Questions(FAQs) for their guidance.
4) The enclosed Rules shall come into force with immediate effect and banks are required to fully realign their existing stress testing frameworks with these Rules by 30 June 2012. Furthermore, they are required to submit the information specified under the Rules to SAMA starting from the half-year ending 30 June 2012.
*ICAAP Circular should be added
**Should we replace this with SAMA new Law?
1. General Requirements
1.1. Introduction
Stress testing has become a standard risk management tool for financial institutions. It is being increasingly used as a component of their risk identification and risk management processes. The recent global financial crisis and their impact on financial institutions in many jurisdictions have also highlighted the importance of rigorous stress testing .
SAMA’s review of the Internal Capital Adequacy Assessment Plans(ICAAPs) of Saudi banks has indicated that they have started conducting stress tests but the choice of scenarios and their severity vary from bank to bank. SAMA expects banks to adopt robust techniques and scenarios in line with the best practices to further strengthen their stress testing programs. These Rules are being issued to guide banks in this direction.
1.2. Concept of Stress Testing
Stress tests are conducted by using a set of quantitative techniques to assess the vulnerability of individual financial institutions as well as the financial systems to exceptional but plausible events. The exceptional but plausible events can be defined either against a specific historical scenario or against a hypothetical scenario based on the analysis of past volatility and correlations or by use of other methods. The impact of such events on the profitability and capital adequacy of a financial institution is estimated to assess its capacity to absorb potential losses. The ultimate objective of stress testing is to enable a bank or financial institution to adopt countermeasures that reduce either the probability or the impact of a plausible event to preserve its solvency.
1.3. Objective of the Rules
The objective of these Rules is to require banks to adopt robust stress testing techniques and use stress tests as a tool of risk management. The results of stress tests should facilitate the management in making well-informed and timely decisions on strategic planning, risk management and capital planning.
1.4. Scope of Application
The Rules shall be applicable to all locally incorporated banks licensed and operating in Saudi Arabia. Banks may include their subsidiaries and associates in the scope of stress tests conducted by them if the risks faced by such subsidiaries/associates are material and have bearing on the solvency of the bank. Furthermore, the branches of foreign banks operating in Saudi Arabia are also required to adopt these Rules for conducting stress tests if the size of their total assets is more than 0.5% of total assets of the Saudi Banking System. However, such branches of foreign banks may apply these Rules with such modifications as may be considered expedient keeping in view the size and complexity of their business activities.
SAMA may extend the application of these Rules to any other institution or category of institutions, which are under its supervisory jurisdiction, as may be deemed fit by it from time to time.
These Rules sets out the minimum thresholds to be complied with by banks. However, banks can adopt more sophisticated techniques and scenarios beyond the minimum thresholds specified in these Rules. *In addition, banks would continue to take into account the guidance on stress testing provided by SAMA through its circulars on Basel-II implementation.
*Suggest to provide the circulars on Basel-II implementation. We need to ensure if this is relevant?
1.5. Effective Date
These Rules shall come into force with immediate effect. Banks are expected to create appropriate organizational structure and deploy required resources for designing and developing their stress testing frameworks in line with these Rules. Banks are also required to put in place a robust stress testing framework, which fully meets the requirements of these Rules, by 30 June 2012. Furthermore, the information required under Section 10 of these Rules shall be submitted to SAMA starting from the half-year ending 30 June 2012 and for each calendar half- year thereafter, within three months of the end of each half-year.
1.6. BCBS Stress Testing Principles
The Basel Committee on Banking Supervision (BCBS) has issued “Principles for Sound Stress Testing Practices and Supervision” in May 2009. SAMA has circulated these Principles to banks for compliance vide its Circular of 2nd August 2009. In addition to the requirements of these Rules, banks are also required to take into account the guidance provided in the aforesaid Principles and any other related documents of BCBS in designing, developing and implementing their stress testing programs. In case of any inconsistency in the requirements of these Rules and the BCBS Principles, they should approach SAMA for further guidance.
2. Conducting Stress Tests
2.1. Types of Stress Tests
The nature of stress tests would depend on the objective(s) of conducting such tests. For the purposes of these Rules, the stress tests would either be conducted by the banks themselves or by SAMA, and would fall in any of the following categories:
i. Regular Stress Tests: Such stress tests would be conducted by the banks either at their own initiative as part of their risk management framework (in which case the nature and frequency of tests is determined by the banks themselves) or to meet the regulatory requirements of SAMA. Such Regular Stress Tests, to be conducted by banks on regular basis, are also called Bottom-up Stress Tests;
ii. Ad-hoc Stress Tests: Such tests may be conducted by the banks at irregular intervals to assess the resilience of their overall portfolio or exposure to a specific business area in the backdrop of adverse market developments or abrupt changes in the external operating environment. SAMA may also require banks to conduct ad-hoc tests from time to time and report the results thereof to SAMA in the prescribed manner;
iii. Reverse Stress Tests: Such tests may be conducted by the banks to identify the vulnerabilities and assess the resilience of their business plan. The nature of such tests is further elaborated under Section 5.4 of these Rules;
iv. Macro Stress Tests: Such tests may be conducted by SAMA from time to time to assess the resilience of the Saudi Banking System to withstand adverse shocks. These tests are also called TopDown stress tests;
2.2. Stress Testing a Mandatory Requirement
Stress Testing would henceforth be a mandatory regulatory requirement for all locally incorporated banks and those branches of foreign banks having total assets of more than 0.5% of total assets of the Saudi Banking system.. In order to meet this requirement, banks are required to conduct stress tests on regular basis. For this purpose, they should design, develop and implement their own stress testing programs in line with the nature, size and complexity of their businesses and risk profiles. The stress testing framework to be developed for this purpose should, inter alia, provide for the following:
i. State objective(s) of the stress testing exercise;
ii. Types of stress tests to be conducted;
iii. Frequency of conducting stress tests;
iv. Methodologies and techniques to be used including the defined scenarios and assumptions;
v. Broad format for compiling the results of stress tests;
vi. Strategy to deal with potential risks highlighted by the stress testing exercise;
vii. Process for monitoring implementation of the remedial action plan.
2.3. Stress Testing Parameters
The banks shall observe the following parameters in the context of doing stress testing:
i. Stress tests should be designed in such a way that banks should be able to identify potential risks in their portfolios by application of exceptional but plausible shocks;
ii. Stress tests should not be treated as substitutes of statistical models rather they complement them in identification and measurement of business risks. Thus the use of statistical models such as value-at-risk models may be continued to predict the maximum loss in normal business conditions;
iii. The stress testing methodology should be comprehensive enough to cover all material risks faced by the bank. It should also provide flexibility to capture new risks emanating from diversification in business activities and changing operating environment;
iv. The use of stress testing is also encouraged for assessing risks in portfolios that lack historical data. The lack of sufficient data may hinder the development of statistical models for such portfolios or the insufficient information / data may compromise the robustness of such models even if developed. Thus the stress testing of such portfolios may provide useful information to the management;
v. Stress tests should enable the bank to better understand its risk profile, evaluate major risks (both internal and external) and take proactive measures to mitigate those risks. They should also enable the bank to assess the adequacy of its capital;
2.4. Frequency of Stress Tests
The frequency of stress testing would generally depend on the nature and composition of the bank’s portfolio and the risks associated therewith. It would also depend on the nature of stress tests being conducted. The frequency of Regular or Ad-hoc stress tests conducted by banks at their own initiative may be determined by them in line with their stress testing frameworks and the objective(s) of conducting such tests. However, banks should take into account the latest market developments and their risk profiles in determining the frequency of such stress tests. The market sensitive portfolios e.g. equity investments and other marketable securities, foreign exchange exposures, etc. should be stressed more frequently as against the non-trading portfolios e.g. credit exposures which may be stressed at relatively longer intervals.
The frequency of stress tests to be conducted by banks to meet the requirements of SAMA under these Rules would be as under:
i. Banks shall conduct stress testing of their portfolio on regular basis at the end of every calendar half-year and report the results thereof to SAMA in the specified manner as required under these Rules;
ii. Banks shall conduct Ad-hoc stress tests for regulatory purposes on specific business areas or the overall portfolio on such frequency and within such timeline as may be specified by SAMA from time to time.
3. Role of Board and Management
The board of directors and the senior management of the bank are required to play an important role in putting in place a robust stress testing framework. Specifically, they are expected to do, inter alia, the following:
3.1. Board of Directors
i. The board shall have the overall responsibility for the stress testing framework. For this purpose, it will provide the necessary oversight to ensure that the bank has a sound and robust stress testing program in place;
ii. The board (or a relevant committee of the board) shall approve the stress testing policy of the bank and any subsequent revision/updating thereof. Such a policy should broadly define the approach, structure and roles for conducting stress tests. It should also appropriately articulate the stress testing framework adopted by the bank which should be in line with its size, complexity of operations, nature of business activities and risk appetite, and also fully captures its risk profile;
iii. The board shall ensure that the management has devoted adequate resources and created necessary infrastructure for conducting stress tests in an effective manner;
iv. The board shall also ensure that the management has adopted appropriate processes and procedures for making effective use of stress testing as a risk management tool;
v. The Board shall review the major findings of the stress tests and ensure that appropriate remedial actions are being taken by the management to mitigate the identified risks;
vi. The board shall require the management to apprise it from time to time on the effectiveness of the bank’s stress testing framework. If deemed appropriate, the board may also require the management to get the stress testing program independently evaluated by the bank’s internal audit function or by a third-party consultant to be engaged for this purpose.
3.2. Senior Management
i. Senior management shall have the responsibility for designing, developing and implementing an effective stress testing framework. In this regard, it will establish an appropriate organizational structure, deploy qualified human resources, and adopt well-defined processes and procedures for conducting stress tests;
ii. Senior management should put in place necessary infrastructure and IT systems to support the conduct of stress tests. The infrastructure so provided should be adequate to support compilation and processing of data required for conducting stress tests in an effective manner;
iii. Senior management should provide oversight in defining the relevant stress scenarios, selection of methodologies and conduct of the stress tests;
iv. Senior management shall ensure that the results of the stress tests are compiled in a clear and concise manner, and communicated to the board of directors, relevant board and management committees, senior management, relevant business areas and SAMA;
v. Senior management shall prepare adequate action plans for dealing with the findings of the stress tests;
vi. Senior management should periodically assess the effectiveness of the stress testing policy, procedures and framework, and make necessary adjustments there in line with the market developments and changing business environment, and where-ever required seek approval of the board to the proposed changes. ,The ultimate objective should be to ensure the robustness and effectiveness of the bank’s stress testing program;
4. Stress Testing Framework
Banks are required to design, develop and implement a sound and robust stress testing frameworks. They are expected to ensure compliance of the following minimum requirements in this regard:
4.1. Approach to Stress Testing
i. Banks must adopt a holistic approach to stress testing, which means that all material risks (whether internal or external) to which the bank is or can be exposed to, should be covered in the stress testing process;
ii. The magnitude of the shock should be large enough to stress exposure of the bank to various risks;
iii. Banks should aim to capture all exceptional but plausible events in the scenario selection process;
iv. The stress tests should take into account the recent developments in domestic, regional and global financial markets as well as all other relevant developments;
v. The time horizon for capturing historical events for stress testing should be long enough to cover a period relevant to the portfolio of the bank;
4.2. Stress Testing Process
Banks should document the entire process of stress testing for the guidance of the concerned staff. This may become part of the bank’s policy on stress testing or included in its standard operating procedures. The process to be laid down by the banks should, inter alia, cover the following points:
i. Assigning the responsibility for conducting stress tests. This responsibility may be assigned to the Chief Risk Officer who should be supported by a team (which may be an inter-departmental team or a dedicated unit created for this purpose);
ii. Defining the responsibilities of the team members or individuals involved in stress testing;
iii. Determining the frequency of regular stress tests in line with the regulatory requirements and also defining the parameters which should lead the bank to conduct ad-hoc stress tests;
iv. Reviewing the composition and nature of the bank’s portfolio as well as the external factors affecting the quality of this portfolio in order to identify the major risks to which the bank is exposed to and which should be tested under its stress testing program;
v. Reviewing the historical data to identify the past events relevant to the bank’s portfolio, which can be used in designing the appropriate stress tests. Banks are expected to compile a time series of relevant data covering at least one business cycle;
vi. Determining the magnitude of shocks based on the identified historical events, future outlook and expert judgment;
vii. Deciding on the type of stress tests to be conducted. This would involve a choice to either use a sensitivity analysis or a scenario analysis or a combination of both;
viii. Listing the assumptions to be used in stress testing and articulating the basis of such assumptions;
ix. Documenting the procedures for conducting stress tests and compiling the results thereof;
x. Determining the procedure to be adopted for communicating results of stress tests to the board of directors, relevant board and management committees, senior management, relevant business areas and SAMA;
xi. Determining the procedure to be adopted for taking remedial actions to mitigate the potential risks highlighted by the stress tests;
xii. Laying down the criteria and factors which should lead the bank to review the effectiveness of its stress testing program. This may include, for instance, significant changes in bank’s activities or portfolio characteristics or operating environment.
4.3. Designing Stress Tests
Banks are expected to take into account the following factors in designing their stress testing programs:
i. The overall stress testing process should be managed/coordinated by the Chief Risk Officer of the bank;
ii. Stress testing process should identify and stress all relevant risks faced by the bank. This should cover all risks prevalent in the entire portfolio of the bank including both on-balance sheet and off-balance sheet positions;
iii. The frequency of stress tests should be determined in line with the requirements set out under Section 2.4;
iv. The stress scenarios should be developed by using both quantitative and qualitative factors and can be based on historical events and/or expert judgment;
v. The adequacy of IT system and availability of required data for conducting robust stress tests. The IT system should be capable of producing aggregate data at portfolio level as well as granular data at the level of business units;
vi. The effectiveness of the bank’s stress testing framework. The stress testing program may be independently evaluated by the bank’s internal audit function or by a third-party consultant engaged for this purpose.
4.4. Other Requirements
As part of their stress testing frameworks, banks shall also specify the methodologies and techniques to be used, choice of scenarios, coverage of risks, procedures for compiling and communicating results, thresholds and options for taking remedial actions, and the process for compliance of regulatory reporting requirements. Detailed requirements in this regard are set out in the ensuing parts of these Rules.
5. Methodologies and Techniques
Banks should use appropriate methodologies and techniques for conducting stress tests keeping in view the nature of business activities, size and complexity of operations, and their risk profiles. They may adopt a combination of methodologies and techniques in line with their stress testing frameworks. The methodologies generally employed in this regard are described hereunder:
5.1. Sensitivity Analysis
Sensitivity Analysis measures the change in the value of portfolio for shocks of various degrees to a single risk factor or a small number of closely related risk factors while the underlying relationships among the risk factors are not evaluated For example, the shock might be a parallel shift in the yield curve. In sensitivity analysis, the impact of the shock on the dependent variable i.e. capital is generally estimated.
5.2. Scenario Analysis
Scenario Analysis measures the change in value of portfolio due to simultaneous moves in a number of risk factors. Scenarios can be designed to encompass both movements in a group of risk factors and the changes in the underlying relationships between these variables (for example correlations and volatilities). Banks may use either the historical scenarios (a backward looking approach) or the hypothetical scenarios (a forward-looking approach) as part of their stress testing frameworks. However, they should be aware of the limitations of each of these scenarios. For example, the historical scenario may become less relevant over time due to the rapid changes in market conditions and external operating environment. On the other hand, the hypothetical scenario may be more relevant and flexible but involves more judgment and may not be backed by empirical evidence.
5.3. Financial Models
Banks may also use financial models in analyzing the relationships between different risk factors. However, they should exercise due care in selection of the financial or statistical models. The choice of model should take into account, inter alia, the availability of data, nature and composition of the bank’s portfolio, and its risk profile.
5.4. Reverse Stress Testing
Reverse stress testing is used to identify and assess the stress scenarios most likely to cause a bank’s current business plan to become unviable. A reverse stress test starts with a specified outcome that challenges the viability of the bank. The analysis would then work backward (reverse engineered) to identify a scenario or combination of scenarios that could bring about such a specified outcome. The ultimate objective of reverse stress testing is to enable the banks to fully explore the vulnerabilities of their current business plan, take decisions that better integrate business and capital planning, and improve their contingency planning.
Banks are required to reverse stress test their business plan to failure i.e. the point at which the bank becomes unable to carry out its business activities due to the lack of market confidence. While doing this, they must identify a range of adverse circumstances which would cause their business plan to become unviable and assess the likelihood that such events could crystallize. In case the reverse stress testing reveal a risk of business failure that is inconsistent with the bank’s risk appetite or tolerance, it must take effective remedial measures to prevent or mitigate that risk. Banks should also document the entire process of reverse stress testing as a part of their stress testing framework.
6. Selection of Scenarios
Banks should use a range of scenarios for stress testing. The level and severity of scenarios may be varied to identify potential risks and their interactions. The decision of scenarios selection should be taken carefully after taking into account all the relevant factors. In this regard, the following broad parameters are being laid down to ensure consistency in stress testing practices across the banking industry:
6.1. Identification of Risk Factors
As part of their stress testing process, banks should identify the potential risk factors that have implications for their business activities and can adversely affect the quality of their portfolios. After careful analysis and studying the inter-relationship of various risks to which their business is exposed to, banks are expected to draw a list of the major risk factors that need to be stressed. Few examples of the risk factors are listed below:
i. Macro-economic factors such as changes in oil price, GDP growth, inflation rate, etc. which may adversely affect the bank’s business and the quality of its portfolio;
ii. Concentration risk which may be due to the concentration of a bank’s exposure to few borrowers or a few groups of borrowers or to a particular industrial sector or to a geographic region or country, etc;
iii. Counterparty credit risk which may be reflected in the relatively high Probability of Default(PD) or high Loss Given Default(LGD) of individual counterparties or of group of counterparties or at the overall bank level;
iv. Equity price risk arising from volatility in stock market index or major movements in prices of shares to which the bank has significant exposure;
v. Operational risk which may be due to the internal events such as the IT systems failure, internal frauds, disruption of services, etc. or due to the external events such as disruption of communication network, external frauds, etc;
vi. Liquidity risk arising from narrow depositors base, adverse cash flows, negative market perceptions or major rating downgrades, etc.
The above examples are for illustration only and the banks are expected to develop their own list of risk factors taking into account the nature of their business activities, the characteristics of their portfolios and their overall risk profiles.
6.2. Levels of Shocks
Banks may use the following levels of shocks to the individual risk factors taking into account the historical as well as hypothetical movement in the underlying risk factors:
i. Mild Level Shocks: These represent small shocks to the risk factors, which may vary for different risk factors;
ii. Moderate Level Shocks: These represent medium level shocks, the level of which may be defined for each risk factor separately;
iii. Severe Level Shocks: These represent severe shocks to all the risk factors and their level may also be defined separately for each risk factor. Such scenarios may reflect an extreme economic downturn or severe market conditions;
Banks are required to invariably choose and apply the three levels of shocks listed at points (i) to (iii) above to each of the identified risk factors. Furthermore, they are also required to conduct Reverse Stress Testing in line with Para 5.4 of these Rules.
6.3. Magnitude of Shocks
Banks are required to define the magnitude of the shock to be given to each of the identified risk factors separately for the above levels of shocks. They should take into account the following factors in defining the magnitude of the shock:
i. While determining the magnitude of shock, banks should review the historical pattern of worst events at portfolio level or at the level of specific business segment but this should not be the sole determinant of shock. Other qualitative factors and expert judgment should also guide this process;
ii. The time horizon for analyzing historical events should cover at-least one business cycle relevant to the underlying portfolio;
iii. The magnitude of the shock could be more than the worst historical movement in market value of the relevant portfolio but should not be so large or so small to render the stress testing exercise a hypothetical one;
iv. The magnitude of the shock should also take into account the prevailing market conditions, current operating environment and future perspectives;
v. The magnitude of the shock should be adequately varied for different levels of shock to assess the vulnerability of the bank under different scenarios;
vi. The magnitude of the shocks to be applied to the stress scenarios should be determined with reference to the “baseline” scenario and the magnitude for each level of shock should reflect an increasing level of stress when compared with the “baseline” position.
6.4. Scenario Assumptions
The results of stress tests and their interpretation is influenced by the underlying assumptions of stress testing. Therefore, banks should clearly outline the assumption made in drawing-up the list of relevant risk factors, determining the magnitude of shocks and the development of scenarios.
6.5. Development of Scenarios
Banks should develop a set of stress scenarios reflecting increasing levels of severity in line with the levels defined in Para 6.2 above. While developing the stress scenarios, banks should pay due regard to the following factors:
i. The selected stress scenarios should fully reflect the business environment and risk profile of individual banks;
ii. The scenarios may be based on historical events reflecting the actual experience of the bank or the banking industry in worst situations with appropriate adjustments, or non-historical/hypothetical ones based on a combination of factors including past experiences, prevailing market trends, future outlook and exercise of judgment;
iii. All material and significant risk factors having the potential to adversely affect the assets quality and profitability of the bank should be taken into account in scenario development;
iv. The scenarios should be comprehensive to cover the overall portfolio of the bank as well as its major business areas. Moreover, they should cover both on-balance sheet and off-balance sheet/contingent exposures;
v. Stress tests should include scenario(s) that could threaten the viability of the institution (reverse stress testing). Further guidance on selection of such scenario(s) has been provided in Section 5.4.
7. Risk Coverage and Scenarios
Banks should cover all material and significant risks under their stress testing program. For this purpose , they should identify the major risk factors based on the assessment of their portfolios and its inherent vulnerabilities. The possible risk factors may include those related to credit, market, operational, liquidity and other risks. Banks should also capture the effect of reputational risk as well as integrate risks arising from off-balance sheet vehicles and other related entities in their stress testing program.
Some possible stress scenarios for stressing various risk factors are described in the following paragraphs. The scenarios listed hereunder are only for the reference of banks and should not be construed as an exhaustive list. Banks are expected to develop their own risk factors taking into account the nature of their business activities and the risks associated therewith. They should also determine the methodologies and techniques to be used for stressing the identified risk factors in line with the requirements of these Rules and the prevailing best practices.
7.1. Credit Risk
Credit risk is historically the most significant risk faced by the banks. It is measured by estimating the actual or potential losses arising from the inability or unwillingness of the obligors to meet their credit obligations on time. Banks may choose to conduct stress tests either under Standardized Approach or Internal Rating Based (IRB) Approach of *Basel-II. Furthermore, they may use a combination of risk parameters including Exposure at Default (EAD), Probability of Default (PD), Loss Given Default (LGD) and Maturity (M) to measure the credit risk.
Banks should conduct the stress tests on credit risk to estimate the impact of defined scenarios on their asset quality, profitability and capital. For this purpose, both on-balance sheet and off-balance sheet credit exposures should be covered. Some possible scenarios for conducting stress tests on credit risk are listed below:
i. Decrease in Oil Prices: Significant decrease in oil prices in the international market may affect the economic indicators of the country and possibly the credit portfolio of banks. The impact of significant reduction in oil prices on the asset quality, profitability and capital adequacy may be assessed;
ii. Economic Downturn: The adverse changes in major macro-economic variables may have implications for the quality of credit portfolio of banks. Banks may develop stress scenarios to assess the impact of adverse changes in economic variables like GDP, inflation, unemployment rate, etc. on their asset quality, profitability and capital adequacy. The unemployment rate and inflation may have direct impact on the quality of credit cards and personal loans.;
iii. Changes in LGDs and other Risk Parameters: Significant changes in LGDs, PDs, EAD, credit ratings, etc. of the obligors may heighten the credit risk of the bank. Banks may develop scenarios based on adverse changes in these credit risk parameters and assess the impact on their profitability and capital adequacy;
iv. Significant Increase in NPLs: Significant increase in non-performing loans (NPLs) due to multiple factors would adversely affect the asset quality and require additional provisioning. Such a scenario may involve increase in aggregate NPLs as well as downgrading all or part of the classified loans falling in various categories of classification by one notch. Banks may develop scenarios based on significant changes in the level of NPLs and their classification categories to assess the resultant impact on their provisioning requirements;
v. Slowdown in Credit Growth: Significant reduction in credit growth may adversely affect the income level and profitability. Banks may assess impact of marginal or negative growth in lending on their profitability and capital adequacy;
vi. Failure of Counterparties: Banks may have significant exposure to few counterparties or groups of related counterparties. Furthermore they might have significant exposure to few industrial sectors or geographic areas. Banks may develop scenarios to assess the impact of failure of their major counterparties or of increased default risk in a particular industry or geographic area on their profitability and capital adequacy.
Banks would develop their own scenarios taking into account the nature, size and mix of their credit portfolio. Furthermore, they should take into account the following factors while conducting stress tests on credit risk:
i. Stress tests may be conducted to cover the entire credit portfolio or selected credit areas like corporate lending, retail lending, consumer lending, etc. or a combination of both;
ii. Stress testing of corporate loans portfolio may involve the assessment of creditworthiness of individual borrowers and then aggregating the impact of risk factors on the portfolio level;
iii. Banks may use financial models to calculate the revised PDs and LGDs based on the selected scenarios and assess the impact thereof on the profitability and capital adequacy of the bank;
iv. Stress tests on consumer and retail loans may be conducted on portfolio level given the relatively large number and small value of such loans;
v. Banks having established internal credit rating systems may develop scenarios involving downgrading of the credit ratings of borrowers to assess the impact of identified risk factors on the quality of credit portfolio;
vi. The extreme but plausible events occurred over a business cycle may be taken into account in developing the relevant scenarios.
* This should be replaced with Basel III, Based on SAMA Circular on Basel III Reforms. 7.2. Market Risk
Market risk arises when the value of on- and off-balance sheet positions of a bank is adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity prices, credit spreads and/or commodity prices resulting m a loss to earnings and capital of the bank. Banks should conduct stress tests to test the resilience of their on- and off-balance sheet positions that are vulnerable to changes in market rates or prices in stressed situations. The stress tests for market risk may be conducted for the following risk factors:
7.2.1. Interest Rate Risk
Interest rate risk arises when there is a mismatch between positions, which are subject to interest rate adjustment within a specified period. The vulnerability of an towards the adverse movements of the interest rate can be gauged by using duration GAP analysis or similar other interest rate risk models, Interest rate risk may arise due to (i) differences between the timing of rate changes and the timing of cash flows (re-Pricing risk); (ii) changing rate relationships among different yield curves effecting bank’s activities (basis risk); (iii) changing rate relationships across the range of maturities (yield curve risk); and (iv) interest- related options embedded in bank products (options risk). Banks should conduct stress tests for interest rate risk keeping in view the nature and composition of their portfolios. Some plausible scenarios relating to interest rate risk may include the following:
i. Re-pricing Risk: Banks may develop stress scenarios to assess the impact on their profitability of the timing differences in interest rate changes and cash flows in respect of fixed and floating rate positions on both assets and liabilities side including off-balance sheet exposures;
ii. Basis Risk: This scenario would involve assessing the impact on profitability due to unfavorable differential changes in key market rates;
iii. Yield Curve Risk: This scenario may assess the impact on profitability due to parallel shifts in the yield curve (both up and down shifts) and non-parallel shifts in the yield curve (steeping or flattening of the yield curve);
iv. Option Risk: Banks may develop this scenario if they have significant exposure to option instruments. This would involve assessing the impact on profitability due to changes in the value of both stand-alone option instruments (e.g. bond options) and embedded options (e.g. bonds with call or put provisions and loans providing the right of prepayment to the borrowers) due to adverse interest rate movements.
7.2.2. Foreign Exchange Risk
Foreign Exchange risk is the current or prospective risk to earnings and capital arising from adverse movements in foreign exchange rates. It refers to the impact of adverse movement in exchange rates on the value of open foreign exchange positions. The overall net open position is measured by aggregating the sum of net short positions or the sum of net long positions; whichever is greater regardless of sign.
The stress test for foreign exchange risk assesses the impact of change in exchange rates on the profitability. Such stress test may focus on the overall net open position of the bank including the on-balance sheet and off-balance sheet exposures. Some plausible scenarios relating to foreign exchange risk may include the following:
i. Appreciation in Exchange Rates: Banks may develop stress scenarios to assess the impact of certain assumed levels of appreciation in the relevant exchange rates in case they have significant cross currency exposures;
ii. Depreciation in Exchange Rates: Banks may develop stress scenarios to assess the impact of certain assumed levels of depreciation in the relevant exchange rates on their open foreign exchange positions;
Banks may develop such scenarios based on the significance and level of their open foreign exchange positions.
7.2.3. Equity Price Risk
Equity price risk is the risk to the earnings or capital of the bank that results from adverse changes in the value of its equity related portfolios. The equity price risk may arise from changes in the value of a bank’s equity investment portfolio either due to the adverse movements in the overall level of equity prices/stock markets indices or as a result of the price volatility in shares forming part of the bank’s portfolio. Some plausible stress scenarios relating to equity price risk may include the following:
i. Fall in stock market Indices: Banks may develop stress scenarios to assess the impact of certain assumed levels of decline in the stock market indices on their earnings and capital;
ii. Drop in value of portfolio: If the bank holds an equity portfolio highly concentrated in few sectors or few companies, it may conduct stress tests based on the assumed changes in the related sectoral stock indices or prices of shares forming major part of its portfolio;
iii. Drop in Collateral Coverage: Banks active in margin lending may conduct stress tests to assess the impact of decline in stock prices/indices on the collateral coverage level of their margin loans and the resulting impact on their earnings and capital.
While conducting stress tests for equity price risk, banks should cover both the on- balance sheet as well as off-balance sheet equity portfolios.
7.2.4. Commodity Price Risk
Commodity price risk is the risk to the earnings or capital of the banks, particularly those engaged in Sharia’h compliant banking, that results from the current and future volatility of market values of specific commodities. If a bank is exposed to commodity price fluctuations, it should develop appropriate scenarios to conduct stress test for commodity price risk. The bank should assesses the impact of changes in commodity prices on its profitability and capital adequacy.
7.3. Liquidity Risk
Liquidity risk is the risk of potential loss to a bank due to either its inability to meet its obligations in a timely manner or its inability to fund increases in assets /conduct a transaction at the prevailing market prices. The liquidity risk may arise from various sources including the significant mismatches in maturity structure of assets and liabilities, changes in interest rates which may encourage depositors to withdraw their deposits to seek better returns elsewhere, downgrading of credit rating and adverse market reputation which may pose challenges in accessing fresh liquidity, etc. Furthermore, derivatives and other off-balance sheet exposures may also become a source of liquidity risk and, therefore, banks should take into account the impact of off-balance sheet items and commitments in undertaking stress testing. Banks should analyze their liquidity position to assess their resilience to cope with stress situations. Some plausible stress scenarios relating to liquidity risk may include the following:
i. Deposits Withdrawals: Banks may develop scenarios of significant deposits withdrawals or major shifts in different categories of deposits e.g. from current deposits to term deposits, and analyze their impact on their liquidity and funding costs. The banks may assume different levels of withdrawals for current, savings and term deposits, and for local and foreign currency deposits;
ii. Tightening of Credit Lines: The banks which are heavily reliant on inter-bank borrowing should develop scenarios involving tightening or withdrawal of available inter-bank credit lines, identify alternate sources of funding and estimate the impact of such changes on the funding cost and profitability of the bank;
iii. Significant Maturity Mismatches: Such scenarios may be involved assumed widening of gaps in the overall and individual maturity buckets of total assets and liabilities as well as in the rate sensitive assets and liabilities, and assessing their implications for the liquidity management;
iv. Repayment Behavior of Borrowers: Banks may develop scenarios linking the level of projected cash flows with different assumed patterns of loan repayments. For instance, a stress scenario may assume delayed payment or prepayment of loans by some large borrowers and assess the impact thereof on liquidity position and earnings of the bank.
Banks may assess the resilience of their liquidity position by calculating the ratio of liquid assets to liquid liabilities” before and after the application of shocks. For this purpose, the liquid assets are the assets that can be easily and cheaply turned into cash and includes cash, balances with other banks and SAMA, inter-bank lending/placements, lending under repo and investment in government securities. The liquid liabilities includes the short-term deposits and borrowings. The ratio of liquid assets to liquid liabilities may be recalculated under each scenario to analyze the changes in liquidity position.
7.4. Operational Risk
Operational risk is the risk of loss resulting from both internal and external operational events including e.g. technology failures, business disruption and system failures, breaches in internal controls, frauds, or other operational problems that may result in unexpected losses for the bank. The banks should systematically track and record frequency, severity and other information on operational loss events to provide a meaningful information for assessing the bank’s exposure to operational risk and developing a policy to mitigate / control that risk.
Banks should develop stress scenarios for operational risk stress tests based on the data of their past operational loss events and using professional judgment. The assumptions for operational risk stress tests would be different from those used in credit and market risk stress tests, and should be based on historical and plausible hypothetical operational loss events. A plausible stress scenario may assume a major business disruption or system failure (e.g. due to hardware or software failure or telecommunication problems) and assesses the effects of such disruptions /failures on the earnings and capital of the bank. Any additional capital requirements emanating from the outcome of operational risk stress tests should be taken into account in the capital planning process.
7.5. Other Risks
The risks and scenarios mentioned above are for the guidance of banks and this list may not be exhaustive. Banks are encouraged to identify any other risks and vulnerabilities related to their business and develop appropriate scenarios to stress those risks. They should identify the sources of risks using the guidance provided in these Rules and their own experiences, and then narrow down the list to significant risks potentially having material impact on their business and financial condition. Focusing on the material risks would enable banks to conduct the stress testing exercise in a meaningful way.
8. Compilation and Communication of Results
Banks should compile and communicate the stress testing results in a clear and concise manner. The stress testing exercise should provide an estimate of the expected losses under defined scenarios by using the appropriate methodologies and techniques. The impact of the stress tests should be measured on the following indicators of the bank:
i. assets quality - increase/decrease in classified assets particularly loans and the infection ratio thereof (i.e. classified assets to total assets and classified loans to total loans);
ii. profitability - increase/decrease in the accounting profit/loss;
iii. capital adequacy - measured in terms of the changes in total amount of capital and the Capital Adequacy Ratio (CAR);
iv. liquidity position - measured in terms of changes in key liquidity indicators and any funding gaps.
Banks should communicate the results of stress tests to both internal stakeholders and SAMA. The internal stakeholders for this purpose should include, inter alia, the board of directors, relevant board and management committees, senior management, and relevant business areas. The communication of results to SAMA will be made as part of the regulatory reporting on stress testing as specified under Section 10 of these Rules.
While communicating the results of stress tests to the above internal stakeholders and SAMA, banks should clearly specify the following:
i. The bank’s approach to stress testing;
ii. Scenarios used;
iii. Underlying assumptions;
iv. Methodologies and techniques used;
v. Any limitations of the stress testing process.
Banks should also exercise due care in interpreting the results of stress tests. They should be fully aware of the limitations of the stress testing exercise. The stress testing involves a significant amount of judgment and its effectiveness would largely depend on the expertise of the conductors of stress tests, the quality of data, and choice of right scenarios. Therefore, the designing of remedial actions for redressing the issues highlighted by the stress tests should take into account these factors.
Banks would also suitably reflect the results of stress tests conducted under these Rules in their Internal Capital Adequacy Assessment Plan (ICAAP) document to be submitted to SAMA on annual basis. This requirement would not be applicable to branches of foreign banks as they are not required to prepare ICAAP.
9. Remedial Actions
Banks are required to take appropriate remedial action(s) to address potential risks and vulnerabilities identified by the stress testing results. They should lay down well-defined procedures to determine the nature and timing of the possible remedial actions. Furthermore, they should take into account the following factors in devising their remedial action plans:
i. The remedial actions identified to mitigate the adverse effects of stress tests should be realistic and implementable within the defined timeline. All relevant factors which may affect the usefulness of identified actions should be taken into account and, if needed, back-up plans are prepared to counter their adverse effects;
ii. The adequacy of existing capital buffers and possible sources of raising capital, if needed, should be assessed. This should be compared with any additional capital requirements under stressed conditions;
iii. The practicality of remedial actions under stressed conditions should be evaluated.This should be done carefully as some of the actions available in normal situations may not be workable in a period of stress;
iv. The possible remedial actions to be taken may vary depending on the nature and significance of the identified risks/vulnerabilities. These may include, for example, tightening of credit policy to reduce credit risk, revisiting of business growth plans or growth plans in a particular business area, raising additional capital to absorb potential losses, identifying alternate funding sources to mitigate potential liquidity risk, etc.;
v. The decision to take or not to take a remedial action should be duly justified and the mechanism adopted to arrive at such decision be properly documented;
vi. Banks should estimate the impact of identified actions on their profitability and solvency as well as on the overall financial condition to understand the implications of such actions. In case of significant divergence from the planned results, they may resort to alternate options to achieve the desired results;
vii. The results of stress tests should be reflected in the policies and risk tolerance limits set by the management;
viii. Banks may also set out the minimum thresholds or triggers (e.g. the impact on profitability or capital) for initiating the identified remedial actions. The process to be adopted and the level of authority for taking such actions should also be clearly defined;
All the identified risks and vulnerabilities may not necessarily require a remedial action particularly if the impact thereof on the bank is not significant. If the bank decides not to take an immediate action to address a potential risk, it should closely monitor the position and the post stress tests developments to ensure that the emerging position would not adversely affect its business. Furthermore, banks should have contingency plans in place to cope with any unexpected developments.
10. Regulatory Reporting
All banks including branches of foreign banks covered under these Rules are required to submit the following information to SAMA:
i. Statement providing Data for conducting Top-Down stress tests by SAMA as per the prescribed format (the format to be separately communicated electronically);
ii. Statement providing results of the Bottom-up stress tests conducted by banks on the format attached as Annexure-I to these Rules;
iii. Half-yearly / yearly financial statements prepared by banks on their standard formats.
The above information will be submitted to the Director, Banking Supervision Department on calendar half-yearly basis i.e. half-year ending 30th June /31st December, within three months of the end of every half-year. The first such return for the half year ending 30 June 2012 shall be submitted by 30 September 2012
11. Top-Down or Macro Stress Testing
SAMA views stress testing as an important tool for not only strengthening the risk management frameworks in individual banks but also for assessing the resilience of the overall banking system under stressful conditions. Therefore, in addition to the bottom-up stress testing by banks, SAMA would also conduct Top-Down stress tests. For this purpose, it has adopted a holistic approach comprising of following three key components:
i. Use of Bottom-up Stress Testing Results: Banks are required to submit their bottom-up stress testing results to SAMA which will be used by it in identifying and analyzing the potential vulnerabilities in the banking system and their systemic implications;
ii. Requiring Banks to Run Specified Scenarios: SAMA may require banks to run the specified scenarios on their portfolios to assess the plausibility of certain events. In this regard, SAMA may require banks from time to time to conduct specified sensitivity tests for individual businesses/portfolio segments or scenario tests on the overall portfolio. Banks are required to submit the results of such tests to SAMA in the prescribed manner. These results may be used by SAMA to assess vulnerabilities in the banking system;
iii. System-wide Stress Testing: SAMA may conduct its own stress tests based on the macro-economic data available with it and the banking data collected from banks.
Based on the findings of its Top-Down stress tests and supervisory reviews SAMA may provide additional guidance to banks on their stress testing programs during bilateral meetings on their ICAAPs or through separate communications.
12. Implementation and Monitoring
SAMA will assess the effectiveness of the banks’ stress testing programs as part of its supervisory review process and during bilateral meetings on their ICAAP documents. SAMA may also review the stress testing frameworks of banks during their on-site examinations. In conducting such a review, SAMA shall assess the efforts made by banks in embedding the requirements of these Rules into their risk management frameworks. Furthermore, the review may also cover the following aspects of the banks’ stress testing programs:
i. The nature and complexity of business activities and the overall risk profile of the bank;
ii. Evaluation of the organizational structure and resources deployed for conducting stress tests;
iii. The adequacy of stress scenarios and methodologies adopted by the bank for its stress testing program;
iv. The relevance and appropriateness of the assumptions made for stress testing;
v. The adequacy of the frequency and timing of stress testing to support timely remedial actions;
vi. The effectiveness of the policy, procedures and processes for conducting stress tests, compiling results and making use of the findings thereof;
vii. The level of involvement of the board and the senior management in the stress testing program;
viii. Assessment of the degree of compliance with these Rules;
ix. Any other matters related to stress testing program and risk management framework of the bank.
SAMA would determine the timing and frequency of conducting stress testing reviews for individual banks keeping in view the progress made in implementation of these Rules and the robustness of stress testing program of each bank.
Annexure-I
Name of the Bank: ------------------------- Stress Testing Results: Half-yearly Reporting to SAMA As of 30 June / 31 December ----------- I. Stress testing Framework
Salient features of the stress testing framework adopted by the bank should be described in this section. This would include, inter alia, a description of the organizational structure for conducting stress tests, composition of the stress testing team and their responsibilities, nature and frequency of stress tests, coverage of the portfolio, etc.
II. Stress Testing Methodologies
A description of the methodologies and techniques used for conducting stress tests should be provided in this section. This should be done in the light of guidance provided under Section 5 of the Rules.
III. Scenarios and Assumptions
A description of the stress testing scenarios and the underlying assumptions made by the bank for conducting stress tests should be provided in this section. This should be done, inter alia, in the light of guidance provided under Section 6 of the Rules.
IV. Risk Factors
The major risk factors identified by the bank based on the assessment of its portfolio and the inherent vulnerabilities should be described in this section. It may also be elaborated as to why the identified risks are considered relevant for the bank and why the other significant risks generally faced by banks are not considered relevant by the bank. This should be done, inter alia, in the light of guidance provided under Section 6 & 7 of the Rules.
V. Stress Testing Results
A summary of the results of stress tests should be provided in this section. This would include, inter alia, the following:
i. Listing of the levels of shocks used and the magnitude of shock applied for each level. This should be provided separately for each of the stressed risk factored;
ii. The estimated impact of the stress testing results on asset quality, liquidity, profitability and capital of the bank. The impact may be estimated based on the financial statements of the relevant reporting date i.e. as of 30th June or 31st December, based on which the half- yearly report would be submitted to SAMA;
iii. The results should contain both absolute amounts and key financial ratios e.g. NPLs to loans, liquid assets to liabilities, statutory liquidity ratio, return on assets, capital to risk weighted assets, etc. The results should provide both pre-stressed as well as stressed positions. They should also be in line with the regulatory requirements of SAMA;
iv. Listing of any violation of the SAMA’s regulatory ratios or any other requirements based on the stressed positions;
v. Any other information based on the stress testing results which the bank considers significant and would like to share with SAMA.
VI. Communication of Results
A confirmation to the effect that the results of the stress tests have been communicated to the board of directors, relevant board and management committees, senior management, and relevant business areas of the bank should be provided.
VII. Remedial Actions
Remedial action(s), if any, already taken by the bank to address potential risks and vulnerabilities identified by the stress testing results may be described in this section. Any planned remedial action(s) along with the expected timeline for their completion may also be described.
Rules on Stress Testing-Frequently Asked Questions(FAQs)
While providing comments on the Draft Rules on Stress Testing, banks have sought certain clarifications on these Rules. In addition, they have asked certain interpretation questions. Many such queries/questions have been responded in the final Rules being issued to banks. However, in order to ensure a consistent implementation of these rules, few general questions are answered in the following FAQs.
Q.1: Will SAMA provide standard risk factors and stress scenarios for ensuring consistency in stress testing by banks?
Ans.: The composition and characteristics of portfolios vary from bank to bank and, therefore, every bank is expected to identify risk factors and develop stress scenarios based on the peculiarities of its portfolio. It is not the intention of SAMA Rules to provide standard scenarios to banks for conducting regular stress tests by them. However, as provided under Para 2.1(ii) of the Rules, SAMA may require banks to conduct ad-hoc stress tests from time to time and for this purpose, may specify standard scenarios for conducting such tests to ensure comparability across all banks. The results of such stress tests will also be used as an input for conducting macro stress tests by SAMA.
Q.2: Can banks choose to stress only the main portfolio segments of credit risk (e.g. Corporate and Project Finance) and disregard smaller components (e.g. Retail)?
Ans.: Banks are required to stress test their credit exposures taking into account the nature, size and mix of their portfolio. The ultimate objective is to identify all major risk factors relating to credit portfolio. However, the approach to be adopted for stress testing corporate portfolio may be different from that of consumer and retail portfolio. The stress testing of corporate loans portfolio may involve the assessment of creditworthiness of individual borrowers and then aggregating the impact of risk factors on the portfolio level. The stress tests on consumer and retail loans on the other hand may be conducted on portfolio level given the relatively large number and small value of such loans.
Q.3: Will SAMA provide a covariance matrix of the risk factors and methodologies for multifactor stress testing for use as a common reference by all banks?
Ans.: The methodologies and techniques provided under Para 5 of the Rules are for the guidance of banks and they can adopt any of these and other appropriate techniques in line with their stress testing frameworks. The said Para 5 states that “banks should use appropriate methodologies and techniques for conducting stress tests keeping in view the nature of business activities, size and complexity of operations, and their risk profiles. They may adopt a combination of methodologies and techniques in line with their stress testing frameworks.” The methodologies generally employed in this regard are described under the Rules which include, inter alia, the Scenario Analysis. It is up to the banks to choose appropriate methodologies and techniques in line with their risk profiles and stress testing frameworks. It is not the intention of SAMA Rules to identify relevant risk factors on behalf of the banks. However, SAMA may separately require banks to stress any identified risk factors based on the standard scenarios to be communicated to them as and when deemed appropriate.
Q.4: Do banks need to consider the stress testing effects as at the reporting date, or should they also be applied to the projected figures (as presented in the ICAAP document)?
Ans.: Banks should consider stress testing effects as at the reporting date. The stress scenarios will be applied to the financial statements as of the cut-off dates for reporting of results. However, banks will take into account, inter alia, historical events, prevailing market trends and future outlook in developing the stress scenarios.
Q.5: Given the requirement that banks have to submit the results of their stress testing in the ICAAP, should the template provided in Appendix 1 be separately submitted for the stress test conducted as at 31 December (as the due dates for the ICAAP and this report are the same).
Ans.: Under Para 8 of the Rules, banks are required to reflect the results of stress testing in their ICAAP document. Furthermore, under Para 10 (Regulatory Reporting), banks have to separately submit the results of their stress tests to SAMA on half-yearly basis as per the format attached with the Rules. The reporting under ICAAP is for capital planning purposes whereas the one under Stress Testing Rules is aimed at assessing the effectiveness of stressing testing frameworks developed by banks. Given the differing objectives and scope of both these regulatory reporting, banks are required to ensure compliance of the separate reporting requirements.
Q.6: Is the format for the Statement providing Data for conducting Top- down stress tests the same as the template which is currently provided on a semi-annual basis, or will a new format be prescribed?
Ans.: The format for providing data under Para 10(i) of the Rules will largely be in line with the existing template on which banks are currently providing data on half-yearly basis. However, certain additional data may be requested from time to time given the dynamic nature of the stress testing process. Any future revisions to the data collection template will be communicated by SAMA to banks well in advance.
Q.7: Will SAMA provide banks with the results of any ad-hoc/top-down/macro stress tests conducted by it?
Ans.: SAMA will not formally provide banks with the results of any stress tests conducted by it. However, it may share high level relevant findings with them during bilateral supervisory review meetings, as deemed appropriate.
Q.8: Whether the reverse Stress Testing a mandatory requirement under the Rules or whether this form of test remains optional?
Ans.: Reverse stress testing is a technique widely used to assess the robustness of business plan of a bank. The BCBS “Principles for Sound Stress Testing Practices and Supervision” also require that the stress testing program should include some extreme scenarios which would cause the bank to become insolvent. Thus, conducting reverse stress tests is a mandatory requirement for banks.
Q.9: Can the branches of foreign banks rely on their Group's organizational structure and expertise where the required resources have already been deployed to carry out local stress testing?
Ans.: The concerned branches of foreign banks can seek guidance from their Head Office and rely on their Group’s organizational structure and resources for conducting stress tests locally provided the confidentiality of data and records is duly ensured. Furthermore, they have to maintain proper records of the stress tests so conducted locally and produce them for verification by SAMA as and when required.
Q.10: Can the branches of foreign banks use their Head Office/ Group's stress testing policies/ framework and procedures for conducting stress tests locally?
Ans.: The branches of foreign banks may use their Head Office/ Group's stress testing policies/ framework and procedures for conducting stress tests locally provided such policies and procedures meets all the requirements of SAMA Rules. Furthermore, they should be prepared to provide copies of such policies and procedures to SAMA as and when required by it.
Credit Risk Management
Prudential Treatment of Problem Assets
The global financial crisis highlighted the difficulties in identifying and comparing banking data, particularly regarding the quality and types of bank assets and how they are monitored in supervisory reports and disclosures. The Basel Committee on Banking Supervision recognized significant differences in practices among countries.
Therefore, the Committee issued guidelines for managing non-performing assets, particularly non-performing loans and loans subject to forbearance, concerning the scope of evaluation standards and the level of application by banks within the current accounting and regulatory framework. These guidelines will be applied to several topics, including:
- Monitoring and supervision of asset quality to ensure more consistent comparability across countries.
- Internal Rating-Based (IRB) credit classification systems for banks for credit risk management purposes.
- Pillar 3 disclosure regarding asset quality.
- Published data related to asset quality indicators.
Based on the above, SAMA emphasizes the importance of banks adhering to the guidelines for managing non-performing assets issued by the Basel Committee on Banking Supervision.
Rules on Management of Problem Loans
No: 41033343 Date(g): 6/1/2020 | Date(h): 11/5/1441 Status: In-Force In line with SAMA responsibilities to maintain financial stability and contribute to economic development in the Kingdom, and its commitment to fairness in banking transactions,
We would like to inform you that Rules and Guidelines have been issued for the management of Problem Loans granted to Juristic Persons. These Rules and Guidelines aim to support banks in monitoring loans showing signs of distress, organizing procedures for restructuring such loans, and enhancing fair treatment of customers by providing appropriate solutions. Please find attached the following:
- Rules on Management of Problem Loans, which SAMA emphasizes must be adhered to by all banks.
- Guidelines on Management of Problem Loans, to provide guidance on best practices to help banks comply with the aforementioned Rules.
For your information and action accordingly as of 01/07/2020G.
- Rules on Management of Problem Loans, which SAMA emphasizes must be adhered to by all banks.
1. General Requirements
1.1 Introduction
In exercise of the powers vested upon Saudi central Bank* (SAMA) under the charter issued by the Royal Decree no. 23 on 23-05-1377AH (15 December 1957G) and the Banking Control Law promulgated by Royal Decree no. M/5 dated 22/2/1386AH. SAMA is hereby issuing the enclosed Rules on the Management of Problem Loans aimed to develop the practices followed by banks while dealing with loans showing signs of stress along with the loans already specified as non-performing.
These rules should be read in conjunction with SAMA rules on Credit Risk Classification and Provisioning.
Also, SAMA issued the Guidelines on Management of Problem Loans as good practices to support banks in implementing these Rules.
* The "Saudi Arabian Monetary Agency" was replaced By the "Saudi Central Bank" in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding to 26/11/2020G.
1.2 Objective of the Rules
The objectives of these rules are as follows:
i. To ensure banks put in place a conceptual framework which would facilitate rehabilitation of viable borrower, thereby supporting economic activity.
ii. To ensure banks look into aspects of customer conduct and fair treatment whilst dealing with problem loans, especially in instances involving the MSMEs.
iii. To ensure banks have adequate controls over non-performing and problem loan management and restructuring processes, including documented policies and procedures.
1.3 Scope of Implementation
These rules are applicable for all banks licensed under Banking Control Law.
1.4 Definitions
The following terms and phrases, where used in these Rules, should have the corresponding meanings, unless the context requires otherwise:
Problem loans:
Loans that display well-defined weaknesses or signs of potential problems. Problem loans should be classified by the banks in accordance with accounting standards, and consistent with relevant regulations, as one or more of:
a) non-performing;
b) subject to restructuring on account of inability to service contractual payments;
c) IFRS 9 Stages 2; and exhibiting signs of significant credit deterioration or Stage 3;
d) under watch-list, early warning or enhanced monitoring measures; or
e) where concerns exist over the future stability of the borrower or on its ability to meet its financial obligations as they fall due.
Non-performing loans:
As stipulated in BCBS 403 “Guidelines –Prudential treatment of problem assets – definitions of non-performing exposures and forbearance” endorsed by SAMA through circular no. 381000099757 dated 23/09/1438AH.
Watch-list:
Loans that have displayed characteristics of a recent increase in credit risk, and are subject to enhanced monitoring and review by the bank.
Early Warning Signals:
Quantitative or qualitative indicators, based on liquidity, profitability, market, collateral and macroeconomic metrics.
Cooperating borrower:
A borrower which is actively working with a bank to resolve their problem loan.
Viable borrower:
Is that, wherein the loss of any concessions as a result of restructuring, is considered to be lower than the loss borne due to foreclosure.
Viability Assessment:
An assessment of borrower’s ability to generate adequate cash flow in order to service outstanding loans.
Covenant:
A Borrower’s commitment that certain activities will or will not be carried out.
Key performance indicators:
Indicators through which bank management or supervisor can assess the institution’s performance.
Collateral:
Are those, whose value can be considered whilst computing the recoverable amount for workout cases or foreclosed cases, on account of meeting the stipulated conditions laid out in these rules, as would be applicable based on the nature of the collateral.
Failed restructuring:
Any restructuring case where the borrower failed to repay the revised contractual cash flows as agreed upon with the bank and has transitioned into default.
Further to the above, Banks should adopt all requirements relating to i) Restructuring, ii) Identification of forbearance; iii) Identification of financial difficulty; iv) Identification of concession; and v) Stage allocation for forborne loans, as stipulated under SAMA Rules on Credit Risk Classification and Provisioning.
2. Problem Loan Prevention and Identification
2.1 Early Warning Signals
Banks should develop a clear, robust and demonstrable set of policies, procedures, tools, and governance around the establishment of Early Warning Signals (EWS) which are fully integrated into the bank’s risk management system.
The established EWS should be comprehensive and relevant to the specific portfolios of the Banks, and should enable Banks to proactively identify potential difficulties, investigate the drivers of the borrowers stress, and act before the borrower’s financial condition deteriorates to the point of default.
Banks should organize their EWS process in the following three stages:
i. Identification of EWS:
Banks’ EWS should, at a minimum, take into account indicators that point to potential payment difficulties. Individual banks should undertake an internal assessment as to which EWS are suitable for each of their lending portfolios taking into account a combination of the following:
a. Economic environment: Banks should monitor indicators of the overall economic environment, which are relevant for determining the future direction of loan quality, and not only the individual borrower’s ability to pay their obligations but also collateral valuations.
Examples of economic indicators, based on the nature of the respective portfolios, can include GDP growth, Inflation/deflation, and unemployment, as well as indicators that may be specific to certain sectors/portfolios, e.g. commodity or real estate.
b. Financial indicators: Banks should establish a process in order to get frequent interim financial reports (or cash-flow/ turnover details for MSME) from their borrowers (e.g., quarterly for material loans to listed entities and semi-annual for all others), to ensure that EWS are generated in a timely manner.
Examples of financial indicators, based on the nature of the respective portfolios, can include Debt/EBITDA, Capital adequacy, Interest coverage - EBITDA/ interest and principal expenses, Cash flow, Turnover (applicable for MSME).
c. Behavioral indicators: Banks should institute behavioral warning signals to assess the integrity and competency of key stakeholders of the borrower. These indicators will help in the assessment of how a borrower behaves in different situations.
Examples of these indicators are: regular and consistent attempts at delaying financial reporting requirements; reluctance or unwillingness to respond to various communications, any attempt at deception or misrepresentation of facts, excessive delays in responding to a request for no valid reason.
d. Third-party indicators: Banks should organize a reliable screening process for information provided by third parties (e.g. rating agencies, General Authority of Zakat and Tax, press, and courts) to identify signs that could lead to a borrower’s inability to service its outstanding liabilities.
Example of these indicators are: Default at other financial institutions / any negative information, insolvency proceedings for major supplier or customer, downgrade in external rating assigned and trends with respect to external ratings.
e. Operational indicators: Banks should establish a process where any changes in the borrower’s operations are flagged as soon as they occur.
Examples of these indicators, based on the nature of the portfolio can include, frequent changes of suppliers, frequent changes of senior management, qualified audit reports, change of the ownership, major organizational change, management and shareholder contentiousness.
Banks should establish a comprehensive set of EWS that provide banks with an opportunity to act before the borrower’s financial condition deteriorates to the point of default, and enable them to proactively identify and flag other loans that have similar characteristics, i.e. multiple loan facilities extended to the same borrower, or borrowers in same sector that may be affected by the overall economic environment, or loans with similar type of collateral.
ii. Corrective action:
Banks should have a proper written procedures to be followed in case any of the established EWS is triggered. The response procedure should clearly identify the roles and responsibilities of all the sections responsible for taking action on the triggered EWS, specific timelines for actions along with, identification of the cause and severity of the EWS.
iii. Monitoring:
Banks should have a robust monitoring mechanism for following up on the triggered EWS, in order to ensure that the corrective action plan has been executed to pre-empt potential payment difficulties of the borrowers. The level and timing of the monitoring process should reflect the risk level of the borrower.
3. Non-performing loans (NPL) Strategy
3.1 Developing the NPL Strategy
i. Banks should develop and implement an NPL strategy that is approved by the Board of Directors or its delegated authority.
ii. The NPL strategy should layout in a clear, concise manner the bank’s approach and objectives, and establish annual quantitative targets over a realistic but sufficiently ambitious timeframe, divided into short, medium and long-term horizons. It should serve as a roadmap for guiding the allocation of internal resources (human capital, information systems, and funding) and the design of proper controls (policies and procedures) to monitor interim performance and take corrective actions to ensure that the overall goals are met.
iii. The NPL strategy should consider all available options to deal with problem loans, where banks review the feasibility of such options and their respective financial impact. These include hold/restructuring strategies, active portfolio reductions through either sales and/or writing off provisioned NPLs that are deemed unrecoverable, taking collateral onto the balance sheet, legal options and out-of-court options.
iv. Banks should follow the principle of proportionality and materiality, while designing the NPL strategy, where adequate resources should be exhausted on specific segments of NPLs during the resolution process, including MSME’s.
3.2 Implementing the NPL Strategy
i. Banks should ensure that the components of the NPL strategy are communicated to relevant stakeholders across the bank, and proper monitoring protocols are established, together with performance indicators.
ii. The NPL strategy should be backed by an operational plan detailing how the NPL strategy will be implemented. This should include clearly defining and documenting the roles, responsibilities, formal reporting lines and individual (or team) goals and incentives geared towards reaching the targets in the NPL strategy.
iii. Banks should put in place mechanisms for a regular review of the strategy and monitoring of its operational plan effectiveness and its integration into the bank’s risk management framework.
4. Structuring the Workout Unit
i. Banks should establish a dedicated Workout Department/Section/or Unit to manage all workout related cases in order to effectively manage NPL resolution process. The Workout Department/Section/or Unit should be independent of the Business/Loan Originating Units to avoid any potential conflicts of interest.
ii. Banks should ensure that. Workout Unit is properly staffed with resources having the required skill sets to manage workout situations, strong analytical, legal, financial analysis skills, and proper understanding of the workout process.
4.1 Performance Management
i. Banks should establish proper and well-defined performance matrices for Workout Unit staff that should not be based solely on the reduction in the volume of nonperforming loans; An appraisal system and compensation structures tailored for the NPL Workout Unit should be implemented and in alignment with the overall NPL strategy, operational plan and the bank’s code of conduct.
ii. In addition to quantitative elements linked to the bank’s NPL targets and milestones (with a strong focus on the effectiveness of workout activities), the appraisal system should include qualitative measurements such as; level of negotiations competency, technical abilities relating to the analysis of the financial information and data received, structuring of proposals, quality of recommendations, and monitoring of restructured cases.
iii. The importance of the respective weight given to indicators within the overall performance measurement framework should be proportionate to the severity of the NPL issues faced by the bank.
5. Approaching Restructuring Cases
5.1 Viability of Restructuring
Banks should implement a well-defined restructuring policy aligned with the concept of viability that recognizes in a timely manner those borrowers who are non-viable. The policy should ensure that only viable restructuring solutions are considered, which should contribute to reducing the borrower’s balance of credit facilities.
Long-term restructuring measures should only be considered viable where the following conditions are met:
i. The bank can demonstrate, based on reasonable documented financial information, that the borrower can realistically afford the restructuring solution.
ii. Outstanding arrears are addressed as part of the restructured terms. That does not necessarily mean full repayment, and should not conflict with the potential reduction in the borrower’s balance in the medium to long-term that could be required to align with the borrower’s loan service capacity.
iii. In cases, where there have been previous restructuring solutions granted in respect of a loan, the bank should ensure that additional internal controls and early warning signals are implemented, so that the subsequent restructuring treatment meets the viability criteria. These controls should include, at a minimum, approval of a designated Senior Management Committee.
Short-term restructuring measures should only be considered viable where the following conditions are met:
i. The bank can demonstrate, based on reasonable documented financial information, that the borrower can realistically afford the restructuring solution.
ii. Short-term measures are to be applied temporarily where the bank has satisfied itself and is able to attest, based on reasonable financial information, that the borrower demonstrates the ability to repay the original or agreed modified amount on a full principal and interest basis commencing from the end of the short-term temporary arrangement.
iii. The solution approved is not perceived to lead to multiple consecutive restructuring measures in the future.
The bank’s assessment of viability should be based on the financial characteristics of the borrower and the restructuring measure to be granted at that time.
Whilst evaluating borrower’s viability, due consideration need be made, that any increase in pricing (for instance, over and above driven by risk-based pricing principles) with respect to the borrower’s outstanding facilities, does not make the resultant installments, unserviceable.
Banks should undertake the viability assessment irrespective of the source of restructuring, for instance, borrowers using restructuring clauses embedded in a contract, bilateral negotiation of restructuring between a borrower and the banks, public restructuring scheme extended to all borrowers in a specific situation.
5.2 Code of Conduct
Banks should develop a written Code of Conduct for managing problem loans, the Code of Conduct should define a robust problem loan resolution process to ensure that viable borrowers are provided a chance for reaching a workout solution, rather than invoking outright enforcement actions.
The Code of Conduct should be based broadly on but not limited to following:
i. Communication with the borrower: Banks should establish a written procedure around initiating communication with the borrowers along with the content, format, and medium of communication that is aligned with relevant Laws and Regulations, in the event that a borrower fails to pay in part or in full the installments as per the agreed repayment schedule.
ii. Information-gathering: Banks should establish a written procedure with proper timelines to collect adequate, complete and accurate information on the borrower’s financial condition from all available sources, in addition to standardized submissions such as quarterly/year-end financial statements, business/ operating plans obtained/submitted by the borrowers.
iii. Financial assessment of the borrower: Banks should ensure that proper analysis is performed on the information gathered relating to the borrower, in order to assess the borrower’s current repayment capacity, the borrower’s credit record, and the borrower’s future repayment capacity over the proposed workout period. Banks should ensure that reasonable efforts are made to cooperate with the borrower throughout the assessment process with the objective of reaching a mutual agreement on an appropriate workout solution.
iv. Proposal of resolution/solutions: Based on the assessment performed for the borrowers, banks should provide borrowers who are classified as cooperating a proposal for one or more alternative restructuring solutions, or if none of such solutions is agreed upon, one or more resolution and closure solutions, without this being considered as a new service to the borrower.
In presenting the proposed solution or alternative solutions, banks should be open to comments and queries on the part of borrowers, providing them with standardized - to the extent possible - and comprehensive information to help them understand the proposed solution or, in the case where there is more than one proposed solution, the differences across the proposed alternatives.
v. An objection-handling process: Banks should establish a clear and objective process for handling objections raised by the borrowers, and the process should be communicated to the borrowers. The process should highlight the appropriate forums for appeals and the timeframe for their closure.
Banks should develop standardized forms to be used by borrowers in case they want to raise an appeal. The forms should specify the list of information and required documents necessary to review the appeal, along with timelines for the submission and review of appeals.
vi. Workout fee: Banks should establish clear policy and procedure relating to charging fee for workout solution reached with borrowers. Banks should ensure that the policy and practice provide for impact analysis of the fee on borrower cash-flows, i.e. that increased cost is not going to further deteriorate the financial condition of the borrower. The rationale for charged fees should be clearly documented and transparency must be ensured through proper and clear communication with the borrower on fees charged by the banks.
The Code of Conduct should be reflected in all pertinent internal documentation with reference to problem loan resolution and be effectively implemented.
6. Workout Plan
i. Banks should develop a workout plan agreed between the viable borrower and the bank in order to return the non-performing borrower to a fully performing status in the shortest feasible time-frame, matching the borrower’s sustainable repayment capacity with the correct restructuring option(s).
ii. The workout plan needs to be approved by a designated Management Committee based upon the bank’s delegation of authority matrix.
iii. Banks should establish and document a policy with clear and objective time-bound criteria for the mandatory transfer of loans from Loan Originating Units to the Workout Unit along with the specification of relevant approvals required for such transfers.
iv. The policy should include details on areas where proper collaboration is required between the Workout Unit and Loan Originating Units especially in scenarios where the borrowers are showing signs of stress but still being managed by the Loan Originating Units.
6.1 Negotiating and Documenting Workout Plan
Banks should develop a process for negotiating and documenting the workout plan with a viable borrower. The process should cover the following components:
i. Developing the negotiating strategy:
Banks should have a proper process to manage the negotiations with viable borrowers on the potential workout solutions, the process should cover the following:
a) Identify minimum information required to objectively assess the borrower’s capacity to repay the proposed restructured solution.
b) Assess the strengths and weaknesses of both the bank’s and the borrower’s positions and then develop a negotiating strategy to obtain objectives of a successful restructuring for a viable borrower.
c) Where deemed essential, encourage less sophisticated borrowers to seek the advice of counsel or financial advisor to ensure they fully understand the terms and conditions of the proposed restructured solution.
d) Develop covenants appropriate to the level of complexity and size of the transaction, and comprehensiveness of the information available.
ii. Communicating with the borrower during the workout process:
Communication with borrowers should be as per the procedures outlined in the bank’s code of conduct. This should include; timelines for responding to borrower’s requests/complaints, identify who within the bank is responsible/authorized to issue various types of communications to the borrowers, documenting process for all communications to/from the borrowers, signing/acknowledgement protocols with timelines, approval requirements for all workout proposals, templates to be used for communication with the borrowers.
iii. Resolution of disputes:
Banks should follow the objection handling process for managing disputes with the borrowers in cases where the bank and the borrower fail to reach an agreement. This should include providing the borrower with prompt and easy access to filing an appeal, along with all necessary information to review the appeal, and a timeline for its closure, it should also be ensured that the dispute is being reviewed independently of the individual or team against whom the appeal has been filled.
6.2 Monitoring the Workout Plan
i. Banks should develop proper policies and procedures for establishing a monitoring mechanism over restructured loans in order to ensure the borrowers continued ability to meet their obligations. Banks monitoring mechanism should analyze the cause of any failed restructuring, and the analysis should be used for improving the workout solutions provided to borrowers.
ii. Banks should define proper and adequate key performance indicators (including workout effectiveness) comparable with their portfolios and should be monitored on a periodic basis along-with regular detailed reporting to the executive management.
7. Collateral
Banks should ensure proper collateral management and apply the following requirements throughout the credit process irrespective of the performance on the loan.
7.1 Governance
i. Banks should develop policies and procedures in order to ensure proper management of collateral obtained to mitigate the risk of loss associated with the potential default of the borrowers. Collateral policies and procedures should be approved by the Board of Directors or its delegated authority and should be reviewed at least every three years or more frequently if the bank deems is necessary based on the changes in the relevant regulatory requirements or business practices. Collateral policies and procedures should be fully aligned with the bank’s risk appetite statement (RAS).
ii. Consistent with SAMA’s requirements on valuation of real-estate collateral, banks should institute an appropriate governance process with respect to valuers and their performance standards. Banks should monitor and review the valuations performed by internal or external valuers on a regular basis, as well as develop and implement a robust internal quality assurance of such valuations.
iii. The internal audit function of banks should regularly review the consistency and quality of the collateral policies and procedures, the independence of the valuers selection process and the appropriateness of the valuations carried out by valuers.
7.2 Types of Collateral and Guarantees
Banks should clearly document in collateral policies and procedures the types of collateral they accept and the process in respect of the appropriate amount of each type of collateral relative to the loan amount. Banks should classify the collaterals they accept as follows:
i. Financial collateral - cash (money in bank accounts), securities (both debt and equity) and credit claims (sums owed to banks).
ii. Immovable collateral - immovable object, an item of property that cannot be moved without destroying or altering it - a property that is fixed to the earth, such as land or a house.
iii. Receivables - also referred to as accounts receivable, are debts owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.
iv. Other physical collateral - physical collateral other than immovable property.
v. Treating lease exposures as collateral - exposure arising from leasing transactions as collateralized by the type of property leased.
vi. Other funded credit Protection - cash on deposit with, or cash assimilated instruments held by, a third party bank should come under this category.
vii. Guarantee- is a promise from a bank, corporate, any other entity or individual, that the liabilities of a borrower will be met in the event of failure to fulfil contractual obligations.
7.3 General Requirements for Collateral
Banks should ensure that the following requirements are incorporated with respect to the management of collaterals accepted by them:
i. Banks should properly document the collateral arrangements and have in place clear and robust procedures that ensure that any legal conditions required for declaring the default of a borrower and timely collection/ liquidation of collateral are observed.
ii. Banks should fulfil any contractual and statutory requirements in respect of, and take all steps necessary to ensure, the enforceability of the collateral arrangements under the law applicable to their interest in the collateral. In connection therewith, banks should conduct sufficient legal review confirming the enforceability of the collateral arrangements in all areas of operations, for example, foreign branches and subsidiaries. They should re-conduct such review as necessary to ensure continuing enforceability.
iii. The collateral policies and procedures should ensure mitigation of risks arising from the use of collateral, including risks of failed or reduced credit protection, valuation risks, risks associated with the termination of the credit protection, concentration risk arising from the use of collateral and the interaction with the bank's overall risk profile.
iv. The financing agreements should include detailed descriptions of the collateral as well as detailed specifications of the manner and frequency of revaluation.
v. Banks should calculate the market and the forced sale values (incorporating haircuts) of the collateral at a minimum frequency to enable it to form an objective view of borrower or workout viability; such valuations should incorporate the cost and time to realise, maintain and sell the collateral in the event of foreclosure.
vi. Where the collateral is held by a third party, banks should take reasonable steps to ensure that the third party segregates the collateral from its own assets.
vii. While conducting valuation and revaluation, banks should take into account any deterioration or obsolescence of the collateral.
viii. Banks should have the right to physically inspect the collateral. They should also have in place policies and procedures addressing their exercise of the right to physical inspection.
ix. When applicable, the collateral taken as protection should be adequately insured against the risk of damage the risk of damage.
7.4 Specific Requirements for Each Type of Collateral and Guarantees
A) Financial collateral
Under all approaches and methods, financial collateral should qualify as eligible collateral where all the following requirements are met:
i. The credit quality of the borrower and the value of the collateral should not have a material positive correlation. Where the value of the collateral is reduced significantly, this should not alone imply a significant deterioration of the credit quality of the borrower. Where the credit quality of the borrower becomes critical, this should not alone imply a significant reduction in the value of the collateral.
Securities issued by the borrower, or any related group entity, should not qualify as eligible collateral. Notwithstanding the aforementioned, a borrower's own issues of covered bonds qualify as eligible collateral, when they are posted as collateral for a repurchase transaction, provided that they comply with the condition set out in this paragraph.
ii. Banks should ensure that sufficient resources are devoted to the orderly operation of margin agreements with OTC derivatives and securities-financing counterparties, as measured by the timeliness and accuracy of their outgoing margin calls and response time to incoming margin calls.
B) Immovable property
i. Banks should clearly document the types of residential and commercial immovable property they accept in their lending policies.
ii. Immovable collateral should be classified in the following categories based on the underlying nature and behaviour:
a) Investment properties;
b) Owner-occupied properties;
c) Development properties;
d) Properties normally valued on the basis of trading potential.
C) Receivables
Receivables should qualify as eligible collateral, where all the following requirements are met:
i. Banks should have in place a sound process for determining the credit risk associated with the receivables, such a process should include analyses of a borrower's business and industry and the types of customers with whom that borrower does business. Where the bank relies on its borrowers to ascertain the credit risk of the customers, the bank should review the borrowers' credit practices to ascertain their soundness and credibility;
ii. The difference between the amount of the loan and the value of the receivables should reflect all appropriate factors, including the cost of collection, concentration within the receivables pool pledged by an individual borrower, and potential concentration risk within the bank's total loans beyond that controlled by the bank's general methodology.
iii. Banks should maintain a continuous monitoring process appropriate to the receivables. They should also review, on a regular basis, compliance with loan covenants, environmental restrictions, and other legal requirements;
iv. Receivables pledged by a borrower should be diversified and not be unduly correlated with that borrower. Where there is a material positive correlation, banks should take into account the attendant risks in the setting of margins for the collateral pool as a whole;
v. Banks should not use receivables from subsidiaries and affiliates of a borrower, including employees, as eligible credit protection:
vi. Banks should have in place a documented process for collecting receivable payments in distressed situations. Banks should have in place the requisite facilities for collection even when they normally rely on their borrowers for collections.
D) Other physical collateral
Physical collateral other than immovable property should qualify as eligible collateral, when the conditions specified as general requirements for collateral are met.
E) Treating lease exposures as collateralized
Banks should treat exposures arising from leasing transactions as collateralized by the type of property leased, where all the following conditions are met:
i. The conditions set out for the type of asset/property leased to qualify as eligible collateral are met;
ii. The lessor has in place robust risk management with respect to the use to which the leased asset is put, its location, its age and the planned duration of its use, including appropriate monitoring of its value;
iii. Where this has not already been ascertained in calculating the Loss Given Default level, the difference between the value of the unamortized amount and the market value of the security is not so large as to overstate the credit risk mitigation attributed to the leased assets.
F) Other funded credit protection
Cash on deposit with, or cash assimilated instruments held by, a third-party institution should be eligible, where all the following conditions are met:
i. The borrower's claim against the third party institution is openly pledged or assigned to the lending bank and such pledge or assignment is legally effective and enforceable and is unconditional and irrevocable;
ii. The third party institution is notified of the pledge or assignment;
iii. As a result of the notification, the third party institution is able to make payments solely to the lending bank, or to other parties only with the lending bank's prior consent.
G) Guarantees
Credit protection deriving from a guarantee should qualify as eligible unfunded credit protection where all the following conditions are met:
i. The credit protection is direct and explicitly document the obligation assumed by the protection provider;
ii. The extent of the credit protection is clearly defined and incontrovertible;
iii. The credit protection contract does not contain any clause, the fulfillment of which is outside the direct control of the bank, that would:
a) allow the protection provider to cancel the protection unilaterally;
b) increase the effective cost of protection as a result of a deterioration in the credit quality of the protected loan;
c) prevent the protection provider from being obliged to pay out in a timely manner in the event that the original borrower fails to make any payments due, or when the leasing contract has expired for the purposes of recognizing the guaranteed residual value;
d) allow the maturity of the credit protection to be reduced by the protection provider.
iv. The credit protection contract is legally effective and enforceable, at the time of the conclusion of the credit agreement and thereafter i.e. over the life of the exposure;
v. The credit protection covers all types of payments the borrower is expected to make in respect of the claim. Where certain types of payment are excluded from the credit protection, the lending bank has to adjust, the value of credit protection to reflect the limited coverage;
vi. On the qualifying default of or non-payment by the borrower, the lending bank has the right to pursue, in a timely manner, the protection provider for any monies due under the claim in respect of which the protection is provided and the payment by the protection provider should not be subject to the lending bank first having to pursue the borrower. 7.5 Valuation Frequency
i. Banks should clearly document in collateral policies and procedures the frequency of collateral valuations. The policies and procedures should also provide for the following:
a) Banks monitor the value of each type of collateral on a defined frequent basis.
b) More frequent valuations where the market is subject to significant negative changes and/or where there are signs of a significant decline in the value of an individual collateral.
c) Defined criteria for determining that a significant decline in collateral value has taken place. These will include quantitative thresholds for each type of collateral established, based on the observed empirical data and qualitative bank experience, taking into consideration relevant factors such as market price trends or the opinion of independent valuers.
d) Revaluation of collateral for restructuring cases should be done only where necessary, and should be done in accordance with the requirements of these rules.
ii. Banks should have appropriate IT processes and systems in place to flag outdated valuations and to trigger valuation reports.
7.6 Specific Requirements for Valuers
Banks valuation process should be carried out by valuers who possess the necessary qualifications, ability and experience to execute a valuation and who are independent of the credit decision process.
Banks should ensure compliance with SAMA circular no. 371000061185 dated 28/05/1437AH on "Obligations of Real Estate Appraisal Clients Subject to SAMA Supervision" and the revision made to the said circular through circular no. 65768/99 dated 25/10/1439AH along with all relevant regulatory requirements in that regard.
8. Regulatory Reporting Requirements
Banks are required to submit to SAMA on a quarterly basis all Restructuring Cases (Responses should only cover restructuring cases of “Problem loans” as defined in section 1.4 of these Rules) and Associated Fees as per the templates provided by SAMA. The reports should be submitted within 30 days of quarter end.
9. Effective Date
These Rules should come into force with effect from the 1st of July 2020.
Guidelines on Management of Problem Loans
No: 41033343 Date(g): 6/1/2020 | Date(h): 11/5/1441 Status: In-Force 1. Introduction
1.1 Purpose of Document
The purpose of this document is to support the Saudi banking sector in their ongoing efforts to accelerate the resolution of non-performing loans (NPLs) associated with large corporates, micro, small and medium-sized enterprise sector. This document seeks to reflect the local and international best practices on dealing with problem loans, these guidelines also seek to take into account the specifics of Kingdom of Saudi Arabia's (KSA) economic and banking sector structure and the extensive experience accumulated by KSA banks in dealing with their corporate borrowers, as well as KSA's existing legal, regulatory and institutional framework for resolution and does not identify the possible obstacles to efficient and timely problem loan management that might still exist in this broader framework, or to propose potential improvements which would be outside the banks’ sphere of control.
Bank loans can become “problem loan" because of problems with the borrower’s financial health, or inadequate processes within banks to restructure viable borrowers, or both. In ascertaining how to deal with a problem loan, it is important to distinguish between a borrower's “ability to pay” and “willingness to pay,” Making this distinction is not always easy and requires effort. These guidelines should guide banks staff in dealing with problem loans including non-performing loans (NPLs) extended to corporate and Micro, Small and Medium Enterprises (MSMEs). It deals with both ad-hoc and systemic financial distress and delves into how borrower problems may have arisen in the first place. It provides guidance to banks staff responsible for handling individual problem loans and to senior managers responsible for organizing portfolio-wide asset resolution.
1.2 Scope of Implementation
These guidelines are applicable as better practices for all banks licensed under Banking Control Law, including Foreign Bank Branches. These guidelines should be read in conjunction with Mandatory Rules on the Management of Problem Loans and Rules on Credit Risk Classification and Provisioning issued by Saudi Central Bank* (SAMA).
Whenever the requirements specified under these guidelines differ from existing laws, regulations and circulars issued by SAMA or other government organizations, the later shall take precedence over these guidelines
* The "Saudi Arabian Monetary Agency" was replaced By the "Saudi Central Bank" in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding to 26/11/2020G.
2. Problem Loan Prevention & Identification
2.1 Early Warning Signals as a Tool for Preventing NPLs
One of the keys to maintaining acceptable levels of Non-Performing Loans lies in the ability to identify potential payment difficulties of a borrower as early as possible. SAMA views instituting an effective framework within regulated entities as a mandatory requirement. The sooner the problem is identified, the easier it will be to remedy it. Early warning signals (EWS), fully integrated into the bank's risk management system, is a crucial tool to identify and manage upcoming problems with a borrower’s ability to service his loan.
The purpose of the EWS is therefore twofold:
i. To produce an early signal of potential payment difficulties of the borrower; and
ii. To allow the opportunity to develop a corrective action plan at a very early stage.
iii. When the borrower exhibits early warning signs, the bank should proactively identify the driver and assess whether the borrower’ case should continue to be handled by the business / commercial unit or if the Workout Unit (whether involved in a shadow capacity at first or have full control of the case) should be involved.
Banks should ensure that proper training is provided to the business units on how to manage accounts with early signs of stress.
2.2 Scope of EWS Process
The EWS process is organized in three stages: identification, action, and monitoring. Each of these stages is described in detail in the following sections. The timeline for implementing actions included in each of these stages is explained in section 2.3.
# Area Description 1 Signal Identification • Responsibility for establishing parameters for signals and monitoring resides in a separate unit or function within risk management, middle or back office. • Upon identification of a signal, notification is sent to the respective relationship manager and his team leader that action is required to close the EWS breach. 2 Action
• Relationship Manager contacts the borrower and identifies the source and magnitude of a potential payment difficulty. • After analysis and in consultation with risk management, a corrective action plan is put in place. • A loan is added to the watch list prepared on the basis of EWS for the purposes of further monitoring. 3 Monitoring • Risk management approval required to remove the loan from watch list prepared on the basis of EWS. • A loan can remain on watch list for a time period specified by the bank. After that period, loan must be either returned to originating unit or transferred to Workout Unit. • While on the watch list, a loan should be classified with a lower risk rating compared to the one prior to moving to the watch list. 2.3 Stages of EWS Process
1. Identification:
Early warning signs are indicators that point to potential payment difficulties. These indicators could be alienated into five broad categories:
i. Economic environment,
ii. Financial indicators,
iii. Behavioral indicators,
iv. Third-party indicators, and
v. Operational indicators.
The main aim of this list is to produce a comprehensive set of signals that provides the bank an opportunity to act before the borrower’s financial condition deteriorates to the point of default. Each of these categories has been explained below from sections “i to v”.
It is the responsibility of the unit/section assigned for managing EWS process to interpret the signals received from a borrower and determine whether that borrower should be included in the watch list (prepared on the basis of EWS) for further corrective action.
In most cases, such a decision will involve the identification of groups of signals that validate one another. Taken alone, individual indicators can be too ambiguous/inconclusive to predict financial distress, but when a holistic approach is adopted the unit/ section responsible for managing EWS, may decide that the combination of certain signs anticipates serious financial distress.
Determining what combination of signs, that will trigger the scenario to classify the borrower as watch list, requires adequate knowledge of the industry and will involve some subjective judgment as well. In most cases, the specialized unit will have to identify very subtle warning signs that reinforce others in arriving at a judgment. These subtle signs might be based also on personal contacts between the bank and the borrower, especially in the context of medium-size enterprises.
For example, a trigger for the transfer to the watch list could be a signal received from only one substantial indicator, such as Debt/ Earnings before interest, taxes, depreciation and amortization (EBITDA) to be above 5 (the aforementioned example has been included for clarity purposes only and; should not be viewed as SAMA’s interpretation of the given financial ratio). However, the transfer may also be triggered by the combination of less significant indicators, e.g., an increase in the general unemployment rate, increase in days of receivables outstanding, or frequent changes of suppliers. In addition, signals received from at least two less significant indicators could trigger a deeper review of the borrower’s financial health.
The bank may expand the list of substantial indicators based on the findings from the analysis of the historical data and backtesting results. For the purpose of simple EWS approach (using one or multiple indicators with specific thresholds), the bank should define trigger points for creating signals based on good practice and analysis of historical data. In case of availability, a differentiation between the thresholds for different economic sectors would be a good practice. The bank should apply a prudent approach when selecting specific thresholds for particular indicators.
Criteria for the inclusion in the watch list should be applied at the individual level or at a portfolio level. For example, if real estate prices fall by more than 5 percent on an annual basis, for the group of loans that have real estate as collateral a review should be performed to determine if the collateral value is adequate in the light of price adjustment or not. Collateral evaluation should be done in accordance with SAMA Guidelines. In cases the collateral is no longer sufficient, a bank should take corrective action to improve collateral coverage.
An additional factor that should be considered in managing EWS is the concept of materiality. For this reason, a bank may define a level of average loan size in the NPL portfolio, determine that all loans above this indicator are material, and require more attention from the bank. The main principle behind this concept is to give a higher level of attention, scrutiny, and resources to specified cases.
i. Economic environment:
Indicators of the overall economic environment are very important for the early identification of potential deterioration of the loan portfolio. Their importance stems from the fact that they can point to the likely economic downturn. As such, they are a powerful determinant of the future direction of loan quality (as per international practices, real gross domestic product (GDP) growth is the main driver of nonperforming loan ratios) influencing not only the individual borrower's ability to pay his obligations but also collateral valuations.
Table 1 below provides major indicators that should be monitored to identify potential loan servicing difficulties early on. Data sources for these indicators should be a combination of the bank’s internal economic forecasts and (particularly, in case of smaller banks) forecasts of respected forecasting banks in the country or abroad. Indicators of economic environment are especially relevant for predicting the future payment ability of individual entrepreneurs and family business owners. Given the broad nature of these indicators, they should be monitored continuously using information collected on a monthly or quarterly basis. When a downturn is signaled, a more thorough review of those segments of the portfolio that are most likely to be affected should be undertaken.
Table 1: List of Potential Economic Environment Indicators
Indicator Description Economic sentiment indicators (early indicator on monthly basis) or GDP growth Economic growth directly influences borrowers’ (company and individuals) ability to generate cash flows and service their loans. Major changes in economic sentiment indicators and consequently growth forecasts should serve as a key flag for certain loan groups (retail, real estate, agriculture, hospitality sector, etc.). In most cases, oil prices, government spending, and inflation along with GDP growth has a good correlation with the prices of real estate. In a forecasted economic contraction, horizontal adjustments to real estate valuations (all assets classes) should be made. Inflation/deflation Above-average inflation or deflation may change consumer behavior and collateral values. Unemployment For MSME, an increased unemployment rate indicates a potential adjustment in the purchasing power of households, thus influencing businesses’ ability to generate cash flows to service their outstanding liabilities. Non-elastic consumption components (e.g., food, medicine) will be less sensitive to this indicator than elastic ones (e.g., hotels, restaurants, purchase of secondary residence and vacationing).
Note: The above has been outlined for illustrative purposes only,
ii. Financial indicators:
Financial indicators (Table 2) are a good source of information about the companies that issue financial reports. However, it is not sufficient to rely only on annual financial reports. To ensure that warning signals are generated in a timely manner, the bank may require more frequent interim financial reporting (e.g., quarterly for material loans and semi-annual for all others).
Data sources for financial indicators may be either company financial statements received directly from the borrower. For example, an increase in debt/EBITDA ratio could be due to (i) an increasing loan level, or (ii) a decrease of EBITDA. In the first case, appropriate corrective action could be the pledge of additional collateral. In the second case, it could be a short term or permanent phenomena and corrective actions could range from light restructuring to a more comprehensive restructuring of the obligations as part of the workout process. Financial indicators should be monitored continuously based on quarterly financial statements for material loans and on a semi-annual basis for others.
Table 2: List of Potential Financial Indicators
Indicator Description Debt/EBITDA The prudent ratio should be used for most companies with somewhat higher threshold possible for sectors with historically higher ratios. Capital adequacy Negative equity, insufficient proportion of equity, or rapid decline over a certain period of time. Interest coverage - EBITDA/ interest and principal expenses This ratio should be above a defined threshold. Cash flow Large decline during reporting period, or negative EBITDA. Turnover (applicable for MSME) A decrease in turnover, loss of substantial customer, expiry of patent. Changes in working capital Lengthening of days in sales outstanding and days in inventory. Increase in credit loan to customers Lengthening of days in receivables outstanding. Sales can be increased at the expense of deteriorating quality of customers.
Note: The above has been outlined for illustrative purposes only.
For the MSME portfolio, wherein the quality of financial statements is weak it may be feasible to develop financial ratios based on cash flow statements, Banks are therefore advised to require the respective borrower to disclose details of all its bank accounts maintained, so as to enable capturing the state of liquidity. However, the privacy of the borrowers has to be ensured and written consent needs to be taken in order to access their personal information.
iii. Behavioral indicators:
This group of indicators (Table 3) includes signals about potential problems with collateral adequacy or behavioral problems. Most of these signals should be monitored at a minimum on a quarterly basis with more frequent monitoring of occupancy rates and real estate indexes during downturns.
Table 3: List of potential behavioral indicators:
Indicator Description Loan to value (LTV) LTV > 100 % indicates that the value of the collateral is less than the loan amount outstanding. Reasons for this could be that collateral has become obsolescent or economic conditions have caused a rapid decrease in value. To be prudent, the ratio should be below 80 %, to provide adequate cushion to cover the substantial cost associated with collateral enforcement. Downgrade in internal credit risk category An annual review of borrower's credit profile reveals shortcomings. Breaches of contractual commitments Breach of covenants (financial or non-financial) in the loan agreement with bank or other financial institutions. Real estate indexes The bank should monitor real estate indexes in adequate-granularity. Depending on the collateral type (commercial or individual real estate) the bank needs to establish reliable, timely, and accurate tracking of changes in respective values. Decline larger than 5 percent on annual basis (y/y) should create a flag for all loans that have similar collateral. At this stage, the bank should review if LTV with the new collateral value is adequate. Credit card loans Delay in settling credit card loans or increasing reliance on provided credit line (particularly for partnerships and individual entrepreneurs).
Note: The above has been outlined for illustrative purposes only.
iv. Third-party indicators:
The bank should organize a reliable screening process for information provided by third parties (e.g. rating agencies, tax authorities, press, and courts) to identify signs that could lead to a borrower’s inability to service its outstanding liabilities. These should be monitored on a daily basis so that they can be acted on immediately upon receipt of the information.
Table 4: List of potential third party information indicators
Indicator Description Default / any negative information SIMAH Report / Negative press coverage, reputational problems, doubtful ownership. and involvement in financial scandals. SIMAH Report / Media Insolvency proceedings for major supplier or customer May have a negative impact on the borrower Information from courts and other judicial institutions. External rating assigned and trends Any rating downgrade would have been an indicator deteriorating in the borrower profile Rating Agencies
Note: The above has been outlined for illustrative purposes only.
v. Operational indicators:
In order to capture potential changes in the company’s operations, close monitoring of frequent changes in management and suppliers should be arranged.
Indicator Description Frequent changes in senior management Often rotation of senior management, particularly Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Risk Officer (CRO), could indicate internal problems in the company. Annual report and discussion with the company. Qualified audit reports At times, auditors raise concerns about the quality of financial statements by providing modified opinions such as qualification, adverse and even some times disclaimer. Annual report Change of the ownership Changes in ownership or major shareholders (stakeholders or shareholders). Public registries and media. Major organizational change Restructuring of organizational structure (e.g., subsidiaries, branches, new entities, etc.). Public registries and media. Management and shareholder contentiousness Issues arising from the management and from the shareholders which would result in serious disputes. Public registries and media.
It is important to note that the proposed categories and indicators presented above are not exhaustive. Each bank should work to create a solid internal database of these and other indicators, which should be, utilized for EWS purposes. The indicators from the database should be backtested in order to find out the indicators with the highest signaling power. For this purpose, indicators should be tested at different stages of an economic cycle.
Note: The above has been outlined for illustrative purposes only.
2. Corrective Action:
Once an early warning signal is identified, based on the criteria explained above, the unit responsible for managing EWS, needs to flag the potentially problematic loan to the relationship officer / respective portfolio manager in charge of the borrower's relationship.
The cause and severity of the EWS is assessed and based on the assessment the borrowers can be categorized as ‘watch list'. Following are the two potential scenarios:
• Loans remain performing while on the watch list and will be brought back to regular loans after some time, and
• The credit quality of the loan continues to deteriorate and it is transferred to the bank’s Workout Unit (Remedial / Restructuring etc.).
Once the borrower is classified as watch list, the bank should decide, document and implement appropriate corrective actions (within the specified timeframe) in order to mitigate further worsening of loan's credit quality.
Corrective action might include:
i. Securing additional collateral or guarantee (if considered necessary).
ii. Performing more regular site visits.
iii. More frequent updates to the credit committee.
iv. Assessment of financial projections and forecast loan service capacity.
3. Monitoring:
Once increased credit risk is identified, it is crucial for the bank to follow up on the signal received as soon as possible, and develop a corrective action plan to pre-empt potential payment difficulties. The intensification of communication with the borrower is of utmost importance. The action plan may be as simple as collecting missing information such as an insurance policy or as complex as initiating discussions on a multi-bank restructuring of the borrower's obligations.
While the borrower remains on the watch list, bank’s primary contact with the borrower remains the business officer/portfolio manager, although the head of business as well as risk management, are expected to take a more active involvement in the decision and action process for larger, more complex loans. While on the watch list, the borrower should be classified in a lower rating than “ordinary” borrowers.
All loans in the bank's portfolio should be subject to the EWS described above. This applies to performing loans that never defaulted, but to restructured loans as well.
A. Timeline
For EWS to be effective, clear deadlines for actions should be in place, and consistently enforced (see an indicative timeline in Table below). The level and timing of the monitoring process should reflect the risk level of the loan. Large loans should be monitored closely and by the Risk department and respective Credit committees or any higher management committees.
Banks should also establish the criteria to monitor large corporate loans and at the same time importance to be provided to smaller loans, and the same should be followed by designated staff within the bank, with the results reported to the management.
Indicator Responsibility Workout (once the trigger identified) Description Any triggers identified / or any Signal received Relationship Manager (RM) / Portfolio Manager (PM). Max 1 working day. RM / PM starts analyzing the borrower details to investigate further. Follow up with the borrower and report with analysis Relationship Officer / Portfolio Manager. Max 3 working days for a material loan and 5 working days for others. RM / PM contacts borrower determines reasons, and provide analysis. Decision on further actions Relationship Manager & Head of Business; EWS manager. Max 6 working days for material loan and 10 working days for others. Decision for a loan to be: (i) put on watch list and potential request for corrective action; (ii) left without action or mitigating measures; and (iii) transferred to Workout Unit. Review of watch list Relationship Manager & Head of Business, EWS manager and Credit Committee. Every fortnightly for material loans and 1 month for others, the list is reviewed and amended, if needed. Risk manager/EWS manager (in consultation with Head of Business) monitors the performance of the borrower and agreed mitigation measures. If needed, based on the recommendation of Credit Committee or any other delegated committee takes decision to transfer to Workout Unit. Final decision Head of Business /Risk manager, EWS manager. Banks as per their internal policy can specify the maximum time a borrower can remain on watch list. Borrower can be on watch list only on a temporary basis. Banks should assess as how much time should be specified for which the borrower remains in watch list, once the specified time is completed a final decision should be taken, i.e., loan either removed from watch list (if problems are resolved), or transferred to Workout Unit. B. Establishing criteria for transfer to Workout Unit:
Banks shall establish and document a policy with clear and objective time-bound criteria for the mandatory transfer of loans from Loan Originating Units to the Workout Unit along with the specification of relevant approvals required for such transfers. The policy should include details on areas where proper collaboration is required between the Workout Unit and Loan Originating Units especially in scenarios where the borrowers are showing signs of stress but still being managed by the Loan Originating Units.
While corrective actions should be taken as soon as a problem is identified, if the problem cannot be solved within a reasonably short period, the loan should be transferred to the Workout Unit (WU) for more intensive oversight and resolution. Allowing past-due loans to remain within the originating unit for a long time perpetuates the problem, leads to increased NPL levels within the bank, and ultimately results in a lower collection/recovery rate.
C. Following are generally the key indicators for transferring to Workout Unit (not all-inclusive):
i. Days past due (DPD) based on internal thresholds and considering the nature of the borrower should be included as a mandatory trigger (For further guidance on this refer to SAMA rules on Credit Risk Classification and Provisioning).
ii. Debt to EBITDA ≥ Internally set threshold dependent on the nature and industry of the borrower (not applicable to an MSME, in cases wherein reliable financial information is not available),
iii. Net loss during any consecutive twelve-month period ≥Internally set threshold dependent on the nature and industry of the borrower,
iv. A loan classification of “Watch list ” if syndication is involved and/or reputational/legal issues are at stake;
v. Length of time on watch list (e.g., more than twelve months), or at least two unsuccessful prior restructurings;
vi. An indication of an imminent major default or materially adverse event, including government intervention or nationalization, notice of termination of operating license or concession, significant external rating downgrade of borrower or guarantor, sudden plant closure, etc.;
vii. Litigation, arbitration, mediation, or other dispute resolution mechanism involving or affecting the banks; or
viii. Evidence or strong suspicion of corruption or illegal activity involving the borrower or the borrower's other stakeholders.
Note: Banks are encouraged to develop customized indicators for the MSME sector.
The decision to transfer a loan to the Workout Unit should be based on a refined judgment that the loan will not be repaid in time, in full and urgent action is needed in view of the borrower’s deteriorating situation. The above-mentioned criteria can give a clear signal that: (i) loan-level is unsustainable; (ii) equity of a company has been severely depleted; or (iii) previous restructurings were not successful, and more drastic measures should be applied.
Exceptions to this policy should be rare, well documented in writing, and require the approval of the Board of Directors or any other bank's board designated committee.
Note: Banks should define clear and objective criteria in its internal documentation, for handing over a borrower to the workout and legal support unit, as well as the criteria for returning the borrower back to the commercial unit for regular management. The commercial unit and the workout and legal support unit must he completely separated in terms of functional, organizational and personnel issues.
The work out unit should seek to restructure the loan and maximize banks recovery for borrowers considered as viable. Borrower's viability needs to be evaluated in light of comparing the losses that may transpire in case of restructuring versus foreclosure.
However, on the other hand, foreclosure proceedings may be initiated, if the bank after due process concludes that the case is ineligible for restructuring consideration either because of financial or qualitative issues.
2.4 EWS Structure and Institutional Arrangements
Structure of EWS within the Bank
To ensure the independence of the process, and achieve a holistic approach to credit risk monitoring, and prevent conflicts of interest, the unit responsible for managing EWS should operate outside of the loan originating unit. Best practice indicates that the responsibilities to manage the EWS process should be assigned within the credit risk management department and fully incorporated into the bank's regular risk management processes.
Since an effective EWS requires an operational IT system that draws all information available about a particular borrower, EWS benefit from being part of the bank's internal credit rating system that already contains information about the borrower, the bank should allocate enough staff and financial resources to keep the system operational and effective.
The operation of the EWS should be governed by written policies and procedures, including time thresholds for required actions, approved by the Board of Directors of the bank. They should be subject to annual review and reapproved by the Senior Management Committee to incorporate:
i. Required changes identified during previous operational periods;
ii. Regulatory amendments; and
iii. Additionally, independent quality assurance (e.g., review of the process by an external expert or the Internal Audit function) should be considered.
Reporting:
All actions during the EWS process should be recorded in the IT system to provide a written record of decisions and actions taken. At a minimum, the system should record:
i. Time the action was taken;
ii. Name and department of those participating/approving the actions;
iii. The reasons for actions taken; and
iv. The decision of the appropriate approval authority, if applicable.
The watch list should include, at a minimum, the following information:
i. Details of the loan;
ii. Is it part of a group or related party;
iii. Material or non-material loan;
iv. Date added to the list;
v. Reviews taken (including timestamps) and outcomes,
vi. Mitigation measures; and
vii. Reasons for inclusion in the watch list.
The watch list (or at least material loans on it) should be presented monthly to a designated management committee (Executive Committee or Risk Committee) only or in parallel with the credit committee for information purposes and potential action. For major cases, the bank's Management Board must be included in the decision-making process. The Board should also receive monthly:
a) A detailed list of material loans for information: and
b) Aggregate figures for the loans on the watch list. Information about the borrower/group in potential payment difficulties must be disseminated widely and promptly within the banking group, including branches and subsidiaries. (For details on samples of EWS refer to Appendix 1).
3. Non-performing Loans (NPLs) Strategy
The bank's goal in the resolution process should be to reduce non-performing assets as early as possible, in order to:
i. Free up coinage and capital for new lending;
ii. Reduce the bank's losses, and return assets to earning status, if possible;
iii. Generate good habits and a payment culture among borrowers; and
iv. Help maintain a commercial relationship with the borrower by conducting a responsible resolution process. To ensure that the goal is met, each bank should have a comprehensive, written strategy for management of the overall NPL portfolio, supported by time-bound action plans for each significant asset class. The bank must also put in place and maintain adequate institutional arrangements for implementing the strategy.
3.1 Developing the NPL Strategy
The NPL reduction strategy should layout in a clear, concise manner the bank's approach and objectives (i.e., maximizing recoveries, minimizing losses) as well as establish, at a minimum, annual NPL reduction targets over a realistic but sufficiently ambitious timeframe (minimum 3 years). It also serves as a roadmap for guiding the internal organizational structure, the allocation of internal resources (human capital, information systems, and funding) and the design of proper controls (policies and procedures) to monitor interim performance and take corrective actions to ensure that the overall reduction goals are met.
The strategy development process is divided into the following two components:
1. Assessment; and
2. Design.
1. Assessment
In order to prepare the NPL strategy, Banks should conduct a comprehensive assessment of their internal operating environment, external climate for resolution, and the impact of various resolution strategies on the bank's capital structure.
i. Internal Self-Assessment
The purpose of this self-assessment is to provide management with a full understanding of the severity of the problems together with the steps that are to be taken into consideration to correct the situation. Specific details are noted below:
a) Internal Operating Assessment:
A thorough and realistic self-assessment should be required and performed to determine the severity of the situation and the paces that need to be taken internally to address it, there are a number of key internal aspects that influence the bank's need and ability to optimize its management of, and thus reduce, NPLs and foreclosed assets (where relevant).
b) Scale and drivers of the NPL issue:
- Size and evolution of its NPL portfolios on an appropriate level of granularity, which requires appropriate portfolio segmentation:
- The drivers of NPL in-flows and outflows, by portfolio where relevant;
- Other potential correlations and causations.
c) Outcomes of NPL actions taken in the past:
- Types and nature of actions implemented, including restructuring measures;
- The success of the implementation of those activities and related drivers, including the effectiveness of restructuring treatments.
d) Operational capacities:
Processes, tools, data quality, IT/automation, staff/expertise, decision-making, internal policies, and any other relevant area for the implementation of the strategy) for the different process steps involved, including but not limited to:
- early warning and detection/recognition of NPLs;
- restructuring;
- provisioning;
- collateral valuations;
- recovery/legal process/foreclosure;
- management of foreclosed assets (if relevant);
- reporting and monitoring of NPLs and the effectiveness of NPL workout solutions.
For each of the process steps involved, including those listed above, banks should perform a thorough self-assessment to determine strengths, significant gaps and any areas of improvement required for them to reach their NPL reduction targets. The resulting internal report should be prepared and the same to be maintained for the record purpose.
Banks should monitor and reassess or update relevant aspects of the self-assessment at least annually and regularly seek independent expert views on these aspects, if necessary.
ii. Portfolio Segmentation
Purpose and principles of portfolio segmentation
Segmentation is the process of dividing a large heterogeneous group of Nonperforming loans into smaller more homogeneous parts. It is the essential first step in developing a cost-effective and efficient approach to NPL resolution. Grouping borrowers with similar characteristics allow the bank to develop more focused resolution strategies for each group. Using basic indicators of viability and collateral values, the portfolio can be broken down at an early stage by proposed broad resolution strategies (hold/restructure, dispose, or legal enforcement). Identifying broad asset classes at an early stage of workout is also helpful for efficient set up of Workout Unit, including allocation of staffing and specialized expertise for a more in-depth analysis of borrower’s viability and design of final workout plan.
The segmentation, including initial viability assessment, should be done immediately after the non-performing loan is transferred to the Workout Unit, and before the loan is assigned to a specific workout officer. The exercise is normally performed by a dedicated team in the Workout Unit.
In order to deal with the stock of NPLs, the bank should follow the principles of proportionality and materiality. Proportionality means that adequate resources should be spent on specific segments of NPLs during the resolution process, taking into account the substantial internal costs of the workout process borne by the bank. Materiality means that more attention should be allocated to larger loans compared to smaller loans during the resolution process. These principles should guide the allocation of financial, time and human (in terms of numbers and seniority) resources in WU.
A well-developed management information system containing accurate data is an essential pre-condition for conducting effective segmentation. The exercise is expected to be performed on the basis of information already contained in the loan file when it is transferred from the originating unit to the WU.
Two-Stage segmentation process
It is recommended that the basic segmentation of the bank's NPL portfolio is done in the following two stages. The main objective is to select a smaller pool of loans relating to potentially viable borrowers, which warrant the additional (substantial in case of material loans) follow-up effort from WU, including in-depth viability analysis and re-evaluation of collateral, in order to design an appropriate workout plan.
Stage one - Segmentation by nature of business, past-due buckets, loan balance, and status of legal procedure
The bank's portfolio, segmentation can be conducted by taking multiple borrowers’ characteristics into consideration. Segmentations should have a useful purpose, meaning that different segments should generally trigger different treatments by the NPL WUs or dedicated teams within those units. Following is the list of potential segmentation criteria that can be utilized by banks:
i. Nature of the business: Micro, Small and medium-sized enterprises (MSMEs), including sole traders/ partnerships and Corporates: (by asset class or sector).
ii. Legal status: for existing loans already in legal proceedings or legal action has already been taken.
iii. Arrears bucket/days past due (the higher the level of arrears the narrower the range of possible solutions)
a) Early arrears (>1 dpd and ≤90 dpd)
b) Late arrears of (>90 dpd)
c) Loan Recovery Cases >90 dpd or 180dpd)
iv. Loan balance: Banks may decide the threshold for segmentation based on the size of the outstanding loan and cases with multiple loans;
Stage two - initial viability assessment
Following the initial segmentation, NPLs which are currently not in legal procedure should be further screened according to two criteria: (i) financial ratios (or Cash flows based ratios in case of MSME); and (ii) loan-to-value (LTV) ratio. These ratios are generally available to the bank from the borrower's latest financial statements (or bank statements) in the loan file, and should ideally not require any additional information from the borrower.
LTV ratio provides a good indication of the level of collateral against the outstanding loan. It is seen as a readily available indicator that captures quantitative aspect of collateralization of the loan, which should be an integral part of initial viability assessment. However, banks should consider stressed value of collateral (i.e. forced sale value in case of liquidation) for computation of these ratios. The quality of the collateral should also be considered for further assessment during later stages of restructuring process.
Banks are expected to set up internal LTV ratios depending on the size segment (Corporate / MSME) and the nature of the industry in which it operates and annual refine/ assess parameters, with an aim to be able to compare the cost of restructuring vs the cost of foreclosure/ legal proceeding. Segmentation according to LTV at this early stage is helpful for starting to consider various workout strategies described in Chapter 6.
Banks may consider below indicative broad benchmarks for the viability parameters as a part of initial assessment, these are intended to be indicative rather than prescriptive (i.e. determining viable, marginally-viable and non- viable borrowers):
• Debt/EBITDA ratio is used as a proxy for initial viability assessment of the borrower and reflects how leveraged the company is. The company is considered highly leveraged post breaching a certain threshold and the risk of loan repayment in full and in time could be excessive.
• The loan service coverage ratio should be comparable to the sector average within the restructuring period in which the unit should become viable.
• Trends of the company based on historical data and future projections should be comparable with the industry. Thus, the behavior of past and future EBIDTA should be studied and compared with industry average.
• For project finance and other multi-year loans, Loan life coverage ratio (LLCR), as defined below should be 1.4, which would give a cushion of 40% to the amount of loan to be serviced. For the details on the computation of LLCR , refer to Appendix 2.
Present value of total available cash flow (ACF) during the loan life period (including interest and principal) + Cash Reserves LLCR = ----------------------------------------------------------------------------------- Outstanding amount of loan The selection of thresholds for these indicators used in the initial viability assessment should be based on general market indicators.
SAMA is cognizant that acceptable thresholds with regards to key financial and collateral coverage ratio would vary depending on the nature of the industry, its economic outlook over the life of the loan, and size of the loans, hence does not lay down prescriptive limits. However, Banks are expected to assess document the above, as part of its NPL portfolio segmentation exercise. No particular ratio should be considered in Isolation, whilst segmenting the borrower and banks are advised to develop (either expert-based or statistical) rationale.
The following has been illustrated to provide indicative guidelines as to how a segmentation could be undertaken:
Figure 1: Stage two of segmentation based on LTV and EBITDA (the below ratios are indicative only)
Borrower Segmentation Loan-to-Value (LTV) Ratio Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) Ratio Viable borrower ≤ 80 or ≥ 80 Debt/EBITDA ≤ 5 Marginally viable borrower ≤ 80 or ≥ 80 Debt/EBITDA ≤ 8 ≥ 5 Non-viable borrower ≤ 80 or ≥ 80 Debt/EBITDA ≥ 8 Banks should identify loans that may be non-viable as a result of primary viability assessment at this stage of the segmentation. Segregating these loans at this stage would enable banks to save time and financial resources. Identified non-viable loans should be promptly referred to legal unit under Workout Unit or considered for foreclosures.
The remaining pool of loans, recognized as viable and marginally viable after the initial assessment, should be assigned to the Workout Unit for an in-depth viability assessment based on additional information to be collected from the borrower and collateral re-evaluation. The differentiation on the grounds of collateral value reflected in the LTV ratio at this early stage allows the Workout Unit to receive a workout file with more granular information. Following this analysis, a customized workout plan is selected based on comparison of Net Present Value (NPVs - is the difference between the present value of cash inflows and the present value of cash outflows over a period of time) of expected recoveries under various alternative options.
Potential additional segmentation criteria:
In addition to basic segmentation using loan size, financial or collateral-based loan ratios, banks may choose to further segment the NPL portfolio using additional borrower characteristics. These include:
i. Industry and subsector of industry (e.g., real estate can be treated as a separate category with office buildings, apartments, land development, construction as sub-categories);
ii. Number of days past due. Higher payment interruption period could indicate a higher predisposition to legal actions;
iii. Loan purpose (e.g., working capital, purchase of the real estate, or tangible assets);
iv. Type of collateral (e.g., commercial or residential real estate, land plot, financial assets);
v. Location of collateral;
vi. Country of residence/incorporation ((a) residents, (b) non-residents); and
vii. Interest coverage ratio (low ratio indicates problem with free cash flows).
If however, further segmentation into small groups is unlikely to lead to better results and may result in lost focus, banks are advised to document the rationale for SAMA’s comfort.
iii. External conditions and operational environment
Understanding the current and possible future external operating conditions/environment is fundamental to the establishment of an NPL strategy and associated NPL reduction targets, related developments should be closely followed by banks, which should update their NPL strategies as needed.
The following list of external factors should be taken into account by banks when setting their strategy, however, it should not be seen as exhaustive as other factors not listed below might play an important role in specific circumstances.
a) Macroeconomic conditions:
Macroeconomic conditions will play a key role in setting the NPL strategy. This also includes the dynamics of the real estate market and its specific relevant sub-segments. For banks with specific sector concentrations in their NPL portfolios (e.g. Building & Construction, Manufacturing, Wholesale and Retail Trade), a thorough and constant analysis of the sector dynamics should be performed, to inform the NPL strategy.
b) Market expectations:
Assessing the expectations of external stakeholders (including but not limited to rating agencies, market analysts, researchers, and borrowers) with regard to acceptable NPL levels and coverage will help to determine how far and how fast banks should reduce their portfolios. These stakeholders will often use national or international benchmarks and peer analysis.
c) NPL investor demand:
Trends and dynamics of the domestic and international NPL market for portfolio sales will help banks make informed strategic decisions regarding projections on the likelihood and possible pricing of portfolio sales. However, investors ultimately price on a case-by-case basis and one of the determinants of pricing is the quality of documentation and loan data that banks can provide on their NPL portfolios.
d) NPL servicing:
Another factor that might influence the NPL strategy is the maturity of the NPL servicing industry. Specialized services can significantly reduce NPL maintenance and workout costs. However, such servicing agreements need to be well steered and well managed by the bank.
iv. Capital implications of the NPL strategy
Capital levels and their projected trends are important inputs to determining the scope of NPL reduction actions available to banks. Banks should be able to dynamically model the capital implications of the different elements to their NPL strategy, ideally, under different economic scenarios, those implications should also be considered in conjunction with the risk appetite framework (RAF) as well as the internal capital adequacy assessment process (ICAAP).
Where capital buffers are slim and profitability low, banks should include suitable actions in their capital planning which will enable a sustainable clean-up of NPLs from the balance sheet.
2. Design
The design phase should identify options to be used to resolve NPLs, establish specific targets for NPL reduction, together with performance indicators detailing how the NPL reduction strategy will be implemented over short, medium and long term periods. Following are key components of the design phase:
i. Strategy implementation options
Banks should review the range of NPL strategy implementation options available and their respective financial impact. Examples of implementation options, not being mutually exclusive, are:
• Hold/restructuring strategy: A hold strategy (A hold strategy is not to terminate the relationship with the troubled borrower) option is strongly linked to the operating model, restructuring and borrower assessment expertise, operational NPL management capabilities, outsourcing of servicing and write-off policies.
• Active portfolio reductions: These can be achieved through either sales and/or writing off provisioned NPL loans that are deemed unrecoverable. This option is to be linked to provision adequacy, collateral valuations, quality loan data, and NPL investor demand.
• Change of loan type: This includes foreclosure, loan to equity swapping, loan to asset swapping, or collateral substitution.
• Legal options: This includes insolvency proceedings and foreclosure proceedings
• Out-of-court solutions: Out-of-court debt restructuring involves changing the composition and/or structure of assets and liabilities of borrowers in financial difficulty, without resorting to a full judicial intervention, and with the objective of promoting efficiency, restoring growth, and minimizing the costs associated with the borrower’s financial difficulties (for details on out of court solutions please refer to section 5.2.2.)
Banks should ensure that their NPL strategy includes not just a single strategic option but rather combinations of strategies/options to best achieve their objectives over the short, medium and long term and explore which options are advantageous for different portfolios or segments and under different conditions.
Banks should also identify medium and long-term strategic options for NPL reductions which might not be achievable immediately, e.g. a lack of immediate NPL investor demand might change in the medium to long term. Operational plans might need to foresee such changes, e.g. the need for enhancing the quality of NPL loan data in order to be ready for future investor transactions.
Where banks assess that the above-listed implementation options do not provide an efficient NPL reduction in the medium to long-term horizon for certain portfolios, segments or individual loans, this should be clearly reflected in an appropriate and timely provisioning approach. The bank should write off loans that are deemed to be uncollectable in a timely manner.
ii. Targets
Before commencing the short to medium-term target-setting process, banks should establish a clear view of what reasonable long-term NPL levels are, both on an overall basis but also on a portfolio-level basis. In spite of uncertainty around the time frame required to achieve these long-term goals, however, they are an important input to setting adequate short and medium-term targets.
Banks should include, at a minimum, clearly defined quantitative targets in their NPL strategy (where relevant including foreclosed assets), which should be approved by the senior management committee. The combination of these targets should lead to a concrete reduction, gross and net (of provisions), of NPLs, at least in the medium term. While expectations about changes in macroeconomic conditions can play a role in determining target levels (if based on solid external forecasts), they should not be the sole driver for the established NPL reduction targets.
In determining, the targets banks should establish at least the following dimensions:
• by time horizons, i.e. short-term (indicative 1 year), medium-term (indicative 3 years) and possibly long-term;
• by main portfolios (e.g. retail mortgage, retail consumer, retail small businesses and professionals, MSME corporate, large corporate, commercial real estate);
• by implementation option chosen to drive the projected reduction, e.g. cash recoveries from hold strategy, collateral repossessions, recoveries from legal proceedings, revenues from the sale of NPLs or write-offs.
The NPL targets should at least include a projected absolute or percentage NPL reduction, both gross and net of provisions, not only on an overall basis but also for the main NPL portfolios.
Where foreclosed assets are material, a dedicated foreclosed assets strategy should be defined or, at least, foreclosed assets reduction targets should be included in the NPL strategy. It is acknowledged that a reduction in NPLs might involve an increase in foreclosed assets for the short term, pending the sale of these assets. However, this timeframe should be clearly limited as the aim of foreclosures is a timely sale of the assets concerned.
Targets shall be initially defined for all main portfolios on a quarterly basis for the first year. Each of these high-level targets is to be accompanied by a standard set of more granular monitoring items, e.g. non-performing loan ratio and coverage ratio, etc.
Below shows high-level quantitative targets as per better international practices.
Sustainable solutions-oriented operational target:
• Loans with long term modifications / NPL plus performing forborne loans with Long term Modifications.
Action-oriented operational targets:
• Active NPL MSMEs for which a viability analysis has been conducted in the last 12 months / Active NPL MSMEs.
• MSME and Corporate NPL common borrowers for which a common restructuring solution has been implemented.
• Corporate NPLs for which the bank(s) have engaged a specialist for the implementation of a company restructuring plan.
Banks running the NPL strategy process for the first time should not solely focus on the short-term horizon. The aim here is to address the deficiencies identified during the self-assessment process and thus establish an effective and timely NPL management framework, which allows the successful implementation of the quantitative NPL targets approved for the medium to long-term horizon.
Note 1:
As an illustration. Banks which have internally calibrated (through the cycle) TTC PD’s against a validated rating system, should not aim to foreclose accounts, against which a viable restructuring could lead to an ECL output which is less than the internal (if the same has been internally computed) or regulatory loss given default, if legal proceeding were to be initiated against the borrower.
Hence, for instance, by forgiving 20% of the outstanding amount would lead to a risk classification into a grade, which has 16% PD, (ignoring the 12 month period, for which the restructured loan would be classified as NPL. provided performance is satisfactory) and assuming that the internally computed LGD is 36%, the ECL % expected to arise from such a transaction would be around 24.6%, (20 % concession and ((100% -20 % concession) *.16 PD * 36% LGD) = 4.6%))) vs an expected LGD for foreclosure of say 43%.
The above is a simplified illustration, SAMA is cognizant that:
• Obligors granted a material concession in course of foreclosures are classified as NPL for provisioning purposes for at least a year, which should be taken into account whilst computing the cost of foreclosure to the bank and;
• Expert Level Judgement or rating system override with respect to grade classification may be warranted whilst making the above assessment
However, the purpose of outlining the above is to endorse a long term vision in terms of making a balanced decision with respect to restructuring a distressed borrower ( i.e. determining the viability of a borrower) rather than seeking outright enforcement proceeding.
3.2 Implementing the NPL Strategy
Banks should ensure that significant emphasis is placed on communication of the components of the approved strategy to relevant stakeholders across the bank and proper monitoring protocols are established. Following are key components of implementing an NPL strategy:
i. Monitoring of Results
a. Banks should establish a proper monitoring mechanism for NPL strategy to ensure it is delivering the expected results. Where any variances are identified prompt corrective action is to be taken to ensure goals/targets are met.
b. The strategy to be reviewed at a minimum on an annual basis. Where collection targets and budgets will require substantial annual revisions, policies and procedures should be revised as necessary.
ii. Embedding the NPL strategy
As execution and delivery of the NPL strategy involve and depends on many different areas within the bank, it should be embedded in processes at all levels of an organization, including strategic, tactical and operational.
All banks should clearly define and document the roles, responsibilities and formal reporting lines for the implementation of the NPL strategy, including the operational plan.
Staff and management involved in NPL workout activities should be provided with clear individual (or team) goals and incentives geared towards reaching the targets agreed in the NPL strategy, including the operational plan.
All relevant components of the NPL strategy should be fully aligned with and integrated into the business plan and budget. This includes, for example, the costs associated with the implementation of the operational plan (e.g. resources, IT, etc.) but also potential losses stemming from NPL workout activities. NPL strategy should be closely monitored to ensure it is delivering the expected results, variances should be identified and prompt corrective action taken to ensure longer-term goals and targets are met.
iii. Operational plan
The NPL strategy of banks should be back by an operational plan (which is to be approved by the senior management committee). The operational plan should clearly define how the bank would operationally implement its NPL strategy over a time horizon of at least 1 to 3 years (depending on the type of operational measures required).
The NPL operational plan should contain at a minimum:
• Clear time-bound objectives and goals;
• Activities to be delivered on a segmented portfolio basis;
• Governance arrangements including responsibilities and reporting mechanisms for defined activities and outcomes;
• Quality standards to ensure successful outcomes;
• Staffing and resource requirements;
• Required technical infrastructure enhancement plan;
• Granular and consolidated budget requirements for the implementation of the NPL strategy;
• Interaction and communication plan with internal and external stakeholders (e.g. for sales, servicing, efficiency initiatives, etc.).
• The operational plan should put a specific focus on internal factors that could present impediments to successful delivery of the NPL strategy.
Implementing the operational plan
The implementation of the NPL operational plans should rely on suitable policies and procedures, clear ownership and suitable governance structures (including escalation procedures). Any deviations from the plan should be highlighted and reported to the management
4. Structuring the Workout Unit
Effective management of NPL resolution requires that the bank establish a dedicated unit to handle workout cases. Such Workout Unit (WU) should be established as a permanent unit within the bank's organizational structure reporting directly to the Risk Management function rather than the Business / Loan Originating Units.
The rationale for creating an independent unit for dealing with NPLs includes the elimination of potential conflicts of interest between the originating officer and the troubled borrower. The segregation of duties includes not only relationship management (negotiation of the restructuring plan, legal enforcement, etc.) but also the decision-making process along with support services (loan administration, loan and collateral files, appraisers, etc.) and technical IT resources.
The appropriate organizational structure of the Workout Unit varies greatly depending upon the circumstances each individual bank faces. Larger banks dealing with a significant number of NPLs are likely to establish separate Working Units or create sub-divisions within a single WU to handle different asset classes such as Large Corporates, Medium Corporates, Small and Micro loans. Smaller banks may have to follow a simpler structure where a single work unit may handle a wide variety of borrowers.
4.1 Staffing the Workout Unit
Skills Required
Banks should ensure that the managers of the WU, their team leaders and workout officers are highly qualified professionals, who would be able to discharge their functions effectively and in connection therewith, training needs should be assessed and proper training plans are to be prepared accordingly. Within the individual NPL WUs, more specialization is often useful based on the different NPL workout approaches required per relevant borrower segment.
Such workout officers should have strong analytical and financial analysis skills, understand the depth of the restructuring process and have the ability to work well under pressure.
Remuneration
Compensation structures for workout staff need to be aligned with long term strategy of the bank. If compensation is based on cash recoveries, officers may choose to optimize their own short-term income at the expense of longer-term profit maximization for the bank. Conversely, basing compensation on a reduction in the volume of non- performing loans may lead to improper restructuring or the bankruptcy of otherwise viable companies as officers seek to reduce the numbers by the quickest means possible. The staff may also be reluctant to employ the full range of restructuring options (particularly with respect to loan forgiveness) without provisions to indemnify them for costs and provide legal counsel to defend them in case legal charges are brought against them.
Assigning workload
Banks should establish policies specifying timelines for assigning stressed accounts to Work Officers, once the account is marked to be stressed.
4.2 Incorporating Legal and Support Functions Into Workout Unit
Banks require legal advice on a variety of matters related to the origination, management, and restructuring of loans. This includes not only documenting loan and restructuring transactions but also overseeing the collection process for those defaulted loans. It is highly recommended that Banks should maintain a dedicated legal team (or legal experts) within the Workout Unit to:
i. Assist in the negotiation of the restructuring of those loans that need to be addressed; and
ii. To be responsible for those loans that require legal solutions to be collected (bankruptcy or foreclosure).
4.3 Performance Management
For Workout Unit (WU) staff involved in the management of Nonperforming Loans (NPLs), proper performance metrics should be established which should cater not only to the individual’s performance but also assess the performance of the team as a whole. Further, the performance of the Workout Unit should be monitored and measured on a regular basis. For this purpose, an appraisal system tailored to the requirements of the NPL Workout Unit should be implemented in alignment with the overall NPL strategy and operational plan.
Further to quantitative elements linked to the bank's NPL targets and milestones (probably with a strong focus on the effectiveness of workout activities), the appraisal system may include qualitative measurements such as level of negotiations competency, technical abilities relating to the analysis of the financial information and data received, structuring of proposals, quality of recommendations, or monitoring of restructured cases.
It should also ensure that the higher degree of commitment, usually required of NPL WU staff is inculcated in the agreed working conditions, remuneration policies, incentives, and performance management framework.
As part of the performance measurement framework, it is recommended that banks' management should include specific indicators linked to the targets defined in the NPL strategy and operational plan. The importance of the respective weight given to these indicators within the overall performance measurement frameworks should be proportionate to the severity of the NPL issues faced by the bank.
Finally, given that the important role of efficient addressing of pre-arrears is a key driver for the reduction of NPL inflows, a strong commitment of relevant staff regarding the addressing of early warnings should also be fostered through the remuneration policy and incentives framework.
Technical resources
One of the key success factors for the successful implementation of any NPL strategy option is an adequate technical infrastructure. In this context, it is important that all NPL-related data is centrally stored in robust and secured IT systems. Data should be complete and up-to-date throughout the NPL workout process.
An adequate technical infrastructure should enable NPL WUs to:
i. Easily access all relevant data and documentation including:
a) current NPL and early arrears borrower information including automated notifications in the case of updates;
b) loan and collateral/guarantee information linked to the borrower; or connected borrowers;
c) monitoring/documentation tools with the IT capabilities to track restructuring performance and effectiveness;
d) status of workout activities and borrower interaction, as well as details on restructuring measures, agreed, etc.;
e) foreclosed (foreclosure is the repayment of the outstanding loans to the extent possible through, legal enforcement by a bank) assets (where relevant); and
f) tracked cash flows of the loan and collateral.
ii. Efficiently process and monitor NPL workout activities including:
a) automated workflows throughout the entire NPL life cycle;
b) automated monitoring process ("tracking system”) for the loan status ensuring a correct flagging of non-performing and forborne loans;
c) industrialized borrower communication approaches, e.g. through call centers (including integrated card payment system software on all agent desktops) or internet (e.g. file sharing system);
d) incorporated early warning signals (see also EWS section);
e) automated reporting throughout the NPL workout lifecycle for NPL WU management, senior management, and other relevant managers as well as the regulator;
f) performance analysis of workout activities by NPL WU, sub-team and expert (e.g. cure/success rate, rollover information, effectiveness of restructuring options offered, cash collection rate, vintage analysis of cure rates, promises kept rate at call center, etc.); and
g) evolution monitoring of portfolio(s) / sub-portfolio(s) / cohorts / individual borrowers.
iii. Define, analyze and measure NPLs and related borrowers:
a) recognize NPLs and measure impairments;
b) perform suitable NPL segmentation analysis and store outcomes for each borrower;
c) support the assessment of the borrower's personal data, financial position and repayment ability (borrower affordability assessment), at least for non-complex borrowers; and
d) conduct calculations of (i) the net present value (NPV) and (ii) the impact on the capital position of the bank for each restructuring option and/or any likely restructuring plan under any relevant legislation (e.g. foreclosures law, insolvency laws) for each borrower.
The adequacy of technical infrastructure, including data quality, should be assessed by an independent function on a regular basis (for instance internal or external audit).
4.4 Developing a Written Policy Manual
All the banks should have a documented Policy Manual, which evidently mentioned a clear standard timeline for NPL management and resolution. The longer a borrower remains past due, the less likely that the borrower is to repay the loan. A successful resolution, therefore, requires that the bank recognizes the problem early on and adheres to a tight but realistic timetable to ensure that the loan is restructured, sold to a third party, or collected through legal proceedings - in the case of non-viable borrowers) in a timely manner.
5. Workout Plan
5.1 Preparing for the Workout Process
As the first step after receiving a new NPL, the workout team should ensure collection of all relevant and necessary information on the borrower’s loan and financial details to enable the selection of an appropriate workout plan. The Corporate/MSME team should ensure that the file is transferred with all necessary documentation and a case update summary is attached. In the best-case scenario, the bank should aim at achieving a consensual solution that satisfies the interests of both parties and results in a successful restructuring. Adopting such perspective implies not only a self-assessment of the bank’s options and legal position but also an analysis of the existing options and situation for the borrower. A comprehensive approach requires a thorough preparation process on both sides, which, if done properly, will maximize the chances of achieving a successful and mutually beneficial solution. All workout exercises should adhere to principles of restructuring outlined in Appendix 3 of this document and abide by Section 5 of the “Rules on the Management of Problem Loans”.
On the bank’s side, a thorough preparation includes:
i. Gathering all relevant information available on the borrower;
ii. Perform a thorough review of the borrower’s historical financials, business viability, business plan and forecast loan service capacity.
iii. Accurately assessing the value of the collateral securing the loan; and
iv. Conducting a detailed analysis of the bank’s legal position.
These aspects are further explained in the sections below.
5.1.1 Gathering of Information About the Borrower
All borrowers and guarantors should be informed promptly (within 5 business days) that responsibility for their relationship has been transferred to the Workout Unit. This notification should be in writing and contain a complete and accurate description of all legal obligations outstanding with the bank, the amounts and dates of all past due amounts together with any fees or penalties which have been assessed. The Workout Unit should intimate the borrower with any violations and loan covenants or agreements observed at the time of information collection.
The borrower should be requested to submit the following information, preferably in electronic format:
i. Information on all loans and other obligations (including guarantees) outstanding.
ii. Detailed contact information (mail, telephone, e-mail), including representatives, if applicable.
iii. Detailed latest financial statements of the company (balance sheet, income statement, cash flow statement, explanatory notes). MSME’s and financially less-sophisticated enterprises may submit only aggregate financial figures.
iv. Updated business plan and the proposal for repayment/restructuring of loan obligations.
v. Individual entrepreneurs (for example sole proprietors), should also submit information about the household. The two additional parameters for determining the loan servicing ability of such borrowers are: (i) the borrower’s family composition (number of children, number of earners in the family) to determine justified expenses; and (ii) total net earnings.
Updated financial information, together with a detailed listing of all guarantees outstanding, if any, should be also collected from the guarantors (natural or legal persons) of loans. In addition, the bank should exercise all legal efforts to acquire additional information from other sources to form an accurate, adequate, and complete view of the borrower’s loan servicing capability.
During the file review, the Workout Unit should pay close attention to identifying any other significant creditors. These may include other banks and financial institutions, Zakat/Tax authority, utilities, trade creditors and loans to shareholders, related parties, or employees.
For any missing key information identified during the file review, the Workout Unit should develop a corrective action plan to ensure collection of these documents with the help of the business team. Some of this information should be requested promptly from the borrower or third party sources such as Credit Bureaus.
5.1.2 Identifying Non-cooperative Borrowers:
The Workout Unit should define non-cooperative borrowers and carefully document their non-compliance. Useful criteria to be used to identify these borrowers are:
i. Borrowers who default on their loans while having the ability to pay (“strategic defaulters") in hopes of receiving unwarranted concessions from the bank.
ii. Failure to respond either orally or in writing to two consecutive requests from the bank for a meeting or financial information within 15 calendar days of each request.
iii. Borrowers who deny access to their premises and/or books and records.
iv. Borrowers who do not engage constructively with the bank, including those that are generally unresponsive, consistently fail to keep promises, and/or reject restructuring proposals out of hand.
Non-cooperative borrowers are more likely to be transferred to the legal team as it would be difficult to reach a consensual restructuring solution if the Borrowers are not willing to cooperate with the Banks.
However, banks would have to maintain an appropriate audit trail, documenting the rationale for classifying a borrower as “non-cooperative"
5.1.3 Determining the Bank’s Legal Rights and Remedies
The banks having reviewed and understood the borrower’s business plan, but before initiating restructuring negotiations with a borrower, must prepare for these negotiations and have a very clear understanding of its bargaining position from a legal standpoint.
The Workout Unit should perform a thorough review of all documents relating to the borrower, with special emphasis on the loan agreement and the security package that was formalized when the transaction took place. An accurate assessment of the bank's rights will have a critical impact on determining the resolution strategy to be adopted.
The following are general indicators that a Workout Unit could pay attention to when reviewing the documentation:
i. Whether the parties to the loan were adequately described in the loan documentation;
ii. Whether all key documents were signed by the duly authorized persons under Saudi governing law;
iii. Whether the bank is in possession of all original documents;
iv. Whether the collateral has been duly perfected, including registration at the applicable registry
v. Whether the loan documentation included non-compliance with certain financial indicators as ‘events of default’, and whether these indicators have been breached;
vi. Historical financial position, driver of historical underperformance and to what extent this is expected to drive forecast performance:
a) Current market challenges and outlook: The Banks should form a view on how this has impacted the borrower’s historically and how is it expected to impact its forecast performance and ability to repay the loan;
b) The capabilities of the borrower’s Management team and whether they are capable of turning around the business;
c) Strategy and turnaround initiatives: Does the borrower have a clear strategy or plan to turnaround the business? Has this plan been clearly documented and communicated to banks?
d) Business plan and financial projections: How is the borrower expected to perform of the medium to long-term? What are the borrower's cash flow projections, which should provide an indication of his loan service capacity going forward? What is the level of sustainable versus unsustainable loan;
e) Alignment with credit terms: To what extent are all of the above aligned with existing credit terms and repayment plan;
vii. Whether the loan documentation included a cross-default clause and whether there are other loans that may be considered breached and/or accelerated as a result of the breach of one single loan;
viii. Whether there was an obligation on the bank to notify the borrower or potential guarantors of major changes in the documentation or the terms of the loan, like changes in legislation, currency, interest rates, etc.
If the borrower is not fully equipped to provide such information or if the banks would like to independently review such information, they can seek to appoint a financial advisor to perform an independent business review and clarify the above.
Once the Banks have formed a good understanding of the above, it is expected to assist them in identifying sustainable and commercial restructuring options that could align the banks' interest with that of the borrower and maximize recovery. Such options should be continuously evaluated as the WU engage in restructuring discussions and gather further information.
5.1.4 Ensuring Collateral’s Validity
The workout team should ensure that the collateral taken at the time of loan agreement/origination was formalized and is still valid and enforceable. The banks should complete timely validation of legal documents to evade probable disputes or delay at the time of negotiating restructuring proposal. Furthermore, the banks should establish procedures around periodic (e.g. yearly basis) valuation and monitoring of acquired collateral
The Bank is required to perform detailed collateral analysis for all the accounts referred to WU. The workout team should perform this analysis as detailed out in section 7 of the “Rules on Management of Problem Loans"
5.1.5 Financial Viability Analysis
Banks need to conduct a thorough financial and business viability analysis of its borrowers especially MSME NPL borrowers to determine their ability to repay their obligations. In addition, it is important to obtain sufficient insight into the business plan and projected cash flows available with the borrower for loan service. This will entail determining the borrower’s forecasted loan service capacity and assessment needs to be performed by the banks to align this with the restructured credit terms.
This analysis serves as the foundation for making an informed decision on the appropriate resolution approach – restructuring, sale to a third party, change of loan type (loan-to-asset or loan-to-equity swap) or legal proceedings. This analysis is required to be conducted by WU not previously involved in the loan approval process.
A. Analysis of key financial ratios
Financial ratios, calculated from data provided in the balance sheet and income statement, provide an insight into a firm’s operations and are among the most readily available and easy to use indicators for determining the borrower’s viability. In case of MSME borrowers, in the absence of availability of audited and reliable financial information banks should focus on cash-flow based analysis and should also assess the reasonableness of financial information (where this information is available).
Below are four categories of financial ratios that banks may consider for their initial financial analysis (being illustrated below for indicative purposes and should not be considered prescriptive):
i. Liquidity ratios measure how easily a company can meet its short-term obligations within a short timeframe.
a. Current ratio (total current assets/total current liabilities) measures a company’s ability to pay current liabilities by using current assets. It must be recognized that the distressed borrower’s ratios will be considerably lower. The Workout Unit should assess how the borrower can achieve a more normal ratio within a reasonable time frame.
b. Quick ratio, which includes only liquid assets (cash, readily marketable securities and accounts receivable) in the numerator, is a measure of the firm’s ability to meet its obligations without relying on inventory.
ii. Solvency or leverage ratios measure the company’s reliance on loan rather than equity to finance its operations as well as its ability to meet all its obligations and liabilities.
iii. Profitability ratios measure the company’s growth and ability to generate profits or produce sufficient cash flow to survive, rate of sales growth, gross profit margin, and net profit margin are some of the key ratios to be considered.
iv. Efficiency ratios measure management’s ability to effectively employ the company’s resources and assets. These include receivable turnover, inventory turnover, payable turnover and return on equity.
Detailed financial analysis of the borrower needs is to be performed in order to ensure completeness and avoid ignoring important underlying trends. Banks should undertake detailed analysis to understand the interrelation of these financial ratios, which can enable identification of borrower’s real problems as well as probable corrective actions to restore the company’s financial health.
The workout team should exercise prudence in his analysis and utilize reasonable caps and floors for certain ratios, as these ratios vary across borrower segments and sectors as well as economic conditions.
B. Balance sheet analysis
In addition to computing and analyzing the key ratios, the workout team should carefully review the balance sheet to develop a basic understanding of the composition of the borrower’s assets and liabilities. Primary emphasis should be placed on developing a complete understanding of all obligations outstanding to the bank and other creditors, including the purpose of the credits, their repayment terms, and current status, to determine the total debt burden of the borrower and the amount of loan that needs to be restructured.
The composition of liabilities, particularly “other liabilities" and accrued expense items should be addressed. Wages payable and taxes are two particularly problematic accounts. Both represent priority claims against the borrower's assets and must be settled if a successful restructuring or bankruptcy is to take place.
C. Cash flow analysis - defining financial viability
When financial statements are prepared on an accrual basis, cash flow analysis ties together the income statement and the balance sheet to provide a more complete picture of how cash (both sources and uses) flows through the company. Cash is the ultimate source of loan repayment.
The less cash is generated by operations, the less likely the borrower will be able to repay the loan, making it more likely that the bank will need to rely on its collateral (asset liquidation or bankruptcy) for repayment. Thus, the primary emphasis when conducting the financial analysis of the borrower should be on its forecasted cash generation capabilities. The proper analysis of cash flow involves the use of both the balance sheet and the income statement for two consecutive fiscal years to identify the sources and uses of cash within the company. Changes in working capital and fixed asset expenditures are quantified and cash needs are highlighted, providing a clear view of the many competing uses of cash within the company.
With respect to MSME borrowers, in case reliable and timely financial information is not available, cash flow based assessment is recommended. Banks should incorporate a robust and efficient internal process of cash flow estimation for these borrowers.
D. Business Plan
A comprehensive financial analysis of the non-performing borrower includes an assessment of the company’s business plan containing a detailed description of how the owners and management are going to correct existing problems. While no one can forecast the future with certainty, a candid discussion between the borrower and the bank on new business plan and financial projections is an essential part of the viability assessment exercise. It provides both the bank and the borrower an opportunity to explore how the company will operate under different scenarios and allows management to have a contingency (or corrective action) plans in place should actual results deviate significantly from the projections. The focus of the Workout Unit will be on validating the assumptions (whether realistically conservative and in line with past performance) and performing a sensitivity analysis to see how results will vary under changed assumptions. Again, the emphasis should be placed on tracing the flow of cash through the business to determine the company’s ability to pay.
E. Cash budget
Cash budget is a powerful tool, which helps the borrower to limit expenditures and preserve cash to meet upcoming obligations such as taxes. It can also compensate for the poor quality of formal financial statements in the case of micro and small enterprises.
In a workout, the ability to generate and preserve cash is the key to the company’s survival. All borrowers should be encouraged to prepare a short-term cash budget. The cash budget is similar to the cash flow analysis and differs, however, in two important respects: (i) it is forward-looking; and (ii) it breaks down the annual sources and uses by month to reveal the pattern of cash usage within the company. It also clearly identifies additional financing needs as well as the timing and amount of cash available for loan service. For smaller borrowers, a simple listing of monthly cash receipts and cash disbursements will suffice. Actual results need to be monitored monthly and corrective actions are taken immediately to ensure that the company remains on plan.
5.1.6 Business Viability Analysis
Unlike financial analysis, which is highly quantitative, the business analysis is more qualitative in nature. Its purpose is to assess the borrower's ability to survive over the longer term. It focuses not on the borrower's financial performance, but rather on the quality of its management, the nature of the products & services, facilities and the external environment in which the borrower operates (including competition).
The primary cause of a business failure that has been acknowledged is the management of the business. The most common reasons include: (i) lack of necessary management skills required to run an organization; (ii) inability or unwillingness to delegate responsibilities; (iii) lack of experienced and qualified managers in key positions; (iv) lack of skills to run the business; and (v) inadequate management systems and controls.
Product assessment focuses on the nature of the product and its longevity potential. The main considerations include services or products, product mix diversified or reliant on a single product, technical obsolescence, and demand of the product/service.
The primary focus of the assessment of the facilities (physical plant, manufacturing units, etc.) is not on their valuation but rather on their capacity and efficiency. The attempt should be made to evaluate any requirements of significant upgrades or new facility to meet demand for the product presently and in the foreseeable future. The costs for the same should then be assessed and included in the base projections.
External factors include the assessment of the general macro environment as well as overall industry and market conditions. It focuses on assessing the potential impact on the borrower of changes in the economic as well as regulatory climate; analyzing the strength of the borrower's position within the industry (market share) and its competitors; and gaining a better understanding of the borrower's market and how changes within the market might affect the company's performance.
A. Use of outside expertise to prepare business viability assessment
For large commercial or real estate loans, the business viability portion of the analysis may be performed or validated by an independent third party such as a consultant or a restructuring advisor.
i. Micro and Small Enterprises
In the case of micro and small companies and subject to the cooperation of the owner or the management, which is trustworthy and provides reliable financial and other information, the use of external consultants may not be efficient in terms of time and costs. Banks are, therefore, encouraged to build internal capacity (or engage with external service providers as necessary) to assess the business viability of this segment and enable reasonable decision making in this regard.
ii. Medium-sized companies:
Medium-sized companies should be analyzed in more detail and it may be reasonable to use a similar approach as in the case of large companies. This may require a guided and aligned coordination between the banks and the inclusion of an external consultant to prepare an independent overview of operations, particularly in the following cases.
The process can be followed in case where at least one of the following conditions are met:
i. There is doubt about the reliability of financial and other information;
ii. There is doubt about the fairness and competence of the management;
iii. Activity involved of which the bank does not have sufficient internal knowhow;
iv. There is a great probability that the company will need additional financial assets.
All banks should have clear procedures regarding the level of approval authority required and the process to be followed when contracting for an independent review. The procedure guidelines at a minimum should include qualifications of the advisor, selection criteria, evaluation process and approval for these appointments. Whenever possible, Workout team should request proposals from several firms. In addition, these procedures should require that the deliverables (together with their due dates) and the pricing structure, should be clearly laid out. To expedite and further standardize the onboarding process, banks may choose to establish a list of pre-approved vendors.
B. Documenting the results of the financial and business viability analysis
The findings of the financial and business viability analysis should be documented in writing and communicated to the credit committee for review. The documentation should have sufficient detail to provide a comprehensive picture of the borrower's present financial condition and its ability to generate sustainable cash flows in the future. Banks will have its own standard format for documenting the analysis but should ensure that it incorporates, at a minimum, the below information:
i. Minutes of the meeting with the borrower with a clear identification of the reasons for the problems and the assessment of the ability to introduce radical changes into the operations;
ii. Exposure of the banks and all other creditors (related persons, in particular);
iii. The analysis of the balance sheet structure - the structure of maturity of receivables and operating liabilities, identification of assets suitable for sale and assessment of the value of this property;
iv. The analysis of the trends of the key indicators of individual categories of financial statements: EBITDA margin, net financial /EBITDA, total debt/equity, interest coverage, debt service coverage ratio (DSCR), net sales revenue/operating receivables, accounts payable/total debt, quick liquidity ratio, cash flow from operations, costs of services etc. (these ratios are indicative, banks in practice are free to utilize such ratios, which they deem appropriate).
v. 3- to 5-year projection (time period is dependent based on the tenor of the loan) of cash flows based on conservative assumptions - the plan of operations must not be a wish list but rather a critical view of the possibilities of the company's development in its branch of industry;
vi. Analysis of the necessary resources for the financing of working capital and investments (Capex);
vii. Review of all indemnities (in the case of personal guarantees also an overview and an assessment of the guarantor's property);
viii. Overview of the quality and assessment of the value of collaterals and the calculations of different scenarios (implementation of restructuring or the exit strategy).
The results of the financial analysis should be updated at least annually or more frequently in conjunction with the receipt of the borrower's financial statements. The business assessment should be updated at least every three years or whenever major changes occur in either borrower's management or the external operating environment.
Based on the financial analysis, the business plan and the understanding of the borrower’s loan service capacity, the banks should consider various restructuring solutions that can offer a sustainable restructuring and align the credit terms with the cash flow forecasts of the business. These solutions could include, but are not limited to:
i. Grace periods.
ii. Reduced interest rates or in some cases payment in kind (PIK) (PIK is the option to pay interest on debt instruments and preferred securities in kind, instead of in case.PIK interest has been designed for borrowers who wish to avoid making cash outlays during the growth phase of their business. PIK is the financial instrument that pays interest or dividends to investors of bonds, notes, or preferred stock with additional securities or equity instead of cash) interest.
iii. Assessing sustainable versus unsustainable debt.
iv. Agreeing repayment profiles around sustainable debt in line with forecast sensitized cash flows of the borrower.
v. Agreeing an asset sale plan.
vi. Agreeing a debt to equity conversion.
vii. Agreeing a debt to asset swap.
viii. Agreeing a cash sweep mechanism (it is the mandatory use of excess free cash flows to pay outstanding debt rather than distributing it to the shareholders) to benefit from any upsides to the borrower's business plan.
ix. Longer-term tenors when the business plan and financial analysis suggest that this is necessary for a more sustainable restructuring
5.2 Identifying the Workout Options
5.2.1 Purpose of Workout
Under a best-case workout scenario, the bank and the viable (or marginally viable) borrower will agree on the restructuring strategy aiming to return the defaulted borrower to a fully performing status in the shortest feasible time frame. This requires matching the borrower's sustainable repayment capacity with the correct restructuring option(s). There is no one standard (“one size fits all") approach and instead, the Workout Unit must choose from a variety of options to tailor a restructuring plan that meets the needs of specific borrower.
For the bank to consider approving a restructuring plan, the borrower must meet two essential pre-conditions: (i) borrower's projected cash flows must be sufficient to repay all or a substantial portion of its past due to obligations within a reasonable time frame: and (ii) borrower must display cooperative behavior.
Not all borrowers will be able to repay their obligations in full. However, this does not mean they should automatically be subject to legal action. Banks are advised to invoke out of court settlements for borrowers willing to cooperate with the restructuring process and are able to demonstrate that the economic loss as a result of any foreseeable restructuring is likely to be lower than seeking foreclosure. Instead, the bank should proceed with restructuring whenever it can reasonably document that the revised terms (which may include conditional loan forgiveness) will result in a greater recovery value for the bank than a legal procedure (bankruptcy or foreclosure).
In a syndicated or multi-bank scenario, wherein minority banks don't agree to a restructured/ work out solution, dissenting banks may utilize the guidelines laid down in the Bankruptcy law.
5.2.2 Workout Options
At the initial segmentation stage, the loan-to-value and viability parameters are generally used to help identify potentially viable borrowers (Refer to Chapter 3). This group of borrowers is then subject to in-depth financial analysis and business viability assessment, which narrows the number of candidates for potential restructuring even further. At this stage, the Workout Unit should have a fully informed view as to the nature and causes of the borrower's difficulties. Based on this understanding, the Workout Unit should work with the borrower on developing a realistic repayment plan designed around the borrower's projected sustainable cash flows and/or the liquidation of assets within acceptable timeframes. Understanding and knowing when to use each of the options discussed below provides a Workout Unit with the flexibility necessary to tailor appropriate restructuring proposals.
Consider personal guarantees, conversion of loans from owner(s) to equity or other subordinated form, capital increase, additional collateral, sale of excess assets, achievement of certain levels of financial indicators.
Borrower Type Workout Measure Description Viable Normal reprogramming Future cash flows sufficient for repayment of loan until a sustainable level of cash flow reached within the stipulated period (Actual timeline dependent on the profile of the borrower and tenor of the loan). Consider personal guarantees, conversion of loans from owner(s) to equity or other subordinated form, capital increase, additional collateral, sale of excess assets, achievement of certain levels of financial indicators. Marginal Extended repayment period Extended period of reprogramming (rescheduling) needed to reach a sustainable level of cash flow, i.e., with final payment in equal installments or balloon or bullet payment. Loan Splitting Loan is split into two parts: the first, representing the amount that can be repaid from sustainable cash flow) is repaid in equal installments (principal and interest) with a specified maturity date; the remaining portion is considered to be excess loan (which can be subordinated), which may be split into several parts/tranches. These may be non-interest bearing with interest payable either at maturity or from the proceeds of specific asset sales. Conditional Loan Forgiveness To be used to encourage owners to make an additional financial contribution to the company and to ensure that their interests are harmonized with those of the bank, particularly in those cases when the net present value of the company (taking into consideration all collateral and potential cash flow) is lower than the total loan. Bank may choose to: i. Partial write-off in the framework of the owner's cash equity contribution, particularly in all cases where the owner(s) have not guaranteed the loan; ii. Partial write-off in the framework of a cash capital increase from a third-party investor where they have not assumed the role of the guarantor; iii. Partial write-off in the case of a particularly successful business restructuring that materially deviates from the operating plan that served as the basis for the restructuring; iv. Partial write-off in those cases when the above-average engagement of the owner(s) (i.e. successful sale of excess assets) guarantees a higher level of repayment to the bank(s). Loans can also be written off if the collateral has no economic value, and such action ensures the continuation of the borrower's operations and the bank has confidence in the management or if the cause for the problems came from objective external factors. Loan to Equity Swaps Appropriate for medium-sized companies where the company can be sold, has established products/services, material know-how; or significant market share, etc. However, such measures should be in-line with the requirements stipulated by Banking Control Law (Issued by SAMA) under Article 10 subsection 2 and 4. Loan to Asset Swaps Can be an effective tool particularly in the case of stranded real estate projects provided that the real estate is in good condition and can be economically viable managed in the future. The transaction must not be legally disputable, considering the provisions of the bankruptcy and enforcement legislation. It may also be used for other real estate cases, equity stakes, and securities with determinable market value. Short Term restructuring Restructuring agreements with a one-year maturity may be appropriate in those cases such as micro and small borrowers, where the bank feels closer monitoring or increased pressure to perform is necessary. Loan Sale Sale of the loan is reasonable under the following conditions: • The bank does not have sufficient capacity to effectively manage the borrower; • The buyer has a positive reference; and • The buyer is a major specialist in the area of resolving non-performing loans. Non-Viable Borrowers Collateral Liquidation by owner MSME owners have strong attachments to their property. They may fail to carry out the sale within the agreed-upon time frame or have unrealistic expectations regarding the value of the property. It is recommended that the bank set short deadlines; obtain a notarized power of attorney allowing it to activate the sale procedures; and have sufficient human resources within the real estate market to expedite the sales process. Execution or Insolvency To be used when the borrower is not viable or non-cooperative, and no feasible restructuring solution can be put in place. The below figure presents the various options broken into three broad categories: (i) short term measures most appropriately used in early-stage arrears to stabilize the situation and give the borrower and the bank time to develop a longer-term strategy; (ii) longer-term/ permanent solutions, which will result in the reduction of the loan: and (iii) additional measures, which do not directly lead to repayment but strengthen the bank's collection efforts.
5.2.3 Short Term Restructuring Measures:
Short-term measures do not lead, in and of themselves, to the repayment of a borrower's obligations. Instead they are designed to provide: (i) temporary relief in response to a clearly identified short term disruption in a borrower's cash flow (e.g., event out of the borrower's control, like a sudden fall in demand due to external circumstances); or (ii) time for the creditor(s) to assess the situation and determine an appropriate course of action. They are most appropriate to use when there is a reasonable expectation that the borrower's sustainable cash flow will be strong enough to allow the resumption of its existing payment schedule at the end of the restructuring period. Evidence of such an event should be demonstrated in a formal manner (and not speculatively) via written documentation with defined evidence showing that the borrower's income will recover in the short-term or on the basis of the bank concluding that a long-term restructuring solution was not possible due to a temporary financial uncertainty of a general or borrower-specific nature. As these options envision that the borrower will be able to bring defaulted amounts of interest and/or principal current at the end of the restructuring period, they should not exceed a tenor of 24 months (12 months in the case of real estate or construction projects) and must be used in combination with longer-term solutions such as an extension of maturity, revision in terms and additional security.
Specific short-term measures to consider include:
i. Reduced payments - the company’s cash flow is sufficient to service interest and make partial principal repayments.
ii. Interest-only - the company's cash flow can only service its interest payments, and no principal repayments are made during a determined period of time.
iii. Moratorium - an agreement allowing the borrower to suspend payments of principal and/or interest for a clearly defined period. This technique is most commonly used at the beginning stages of a workout process (especially with multi-bank borrowers) to allow the bank and other creditors time to assess the viability of the business and develop a plan for moving forward. Another appropriate use is in response to natural disaster, which has temporarily interrupted the company's cash flow.
The contractual terms for any restructuring solution should ensure that the bank has the right to review the agreed restructuring measures if the situation of the borrower improves and more favorable conditions for the bank (ranging from the restructuring to the original contractual conditions) could, therefore, be enforced. The bank should also consider including strict consequences in the contractual terms for borrowers who fail to comply with the restructuring agreement (e.g. additional security).
5.2.4 Long Term/Permanent Restructuring
Longer-term/permanent options are designed to permanently reduce the borrower’s loan. Most borrowers will require a combination of options to ensure repayment. In all cases, the bank must be able to demonstrate (based on reasonable documented financial information) that the borrower's projected cash flow will be sufficient to meet the restructured payment terms.
Specific options that may be considered include:
i. Interest and Arrears capitalization - adds past due payments and/or accrued interest arrears to the outstanding principal balance for repayment under a sustainable revised repayment program. Workout Unit should always attempt to have the borrower bring past due payments and interest current at the time a loan is rescheduled. Capitalization, intended to be used selectively, is likely to be more widespread when borrowers have been in default for an extended period. This measure should be applied only once, and in an amount that does not exceed a pre-defined size relative to the overall principle as defined in the bank's Remedial/restructuring policy. The bank should also formally confirm that the borrower understands and accepts the capitalization conditions.
ii. Interest rate reduction - involves the permanent (or temporary) reduction of the interest rate (fixed or variable) to a fair and sustainable rate. This option could be considered when the evolution of interest rates has resulted in the borrower receiving finance at an exorbitant cost, compared with prevailing market conditions. However, banks should ensure that lower interest rate is sufficient to cover the relevant credit risk.
iii. Extension of maturity - extension of the maturity of the loan (i.e., of the last contractual loan installment date) allows a reduction in installment amounts by spreading the repayments over a longer period
iv. Rescheduled Payments - the existing contractual payment schedule is adjusted to a new sustainable repayment program based on a realistic assessment of the borrower's cash flows, both current and forecasted. This is usually used in combination with an extension of maturity. In addition to normal rescheduling, additional repayment options include:
a. Partial repayment - a payment is made against the credit facility (e.g., from a sale of assets) that is lower than the outstanding balance. This option is used to substantially reduce the loan at risk and to enable a sustainable repayment program for the remaining outstanding amount. This option is generally preferable, from the bank's standpoint to the balloon, bullet or step-up options described below.
b. Balloon or bullet payments - are used in the case of more marginal borrowers whose sustainable cash flow is insufficient to fully repay the loan within the rescheduled tenor. A balloon payment is a final installment substantially larger than the regularly scheduled installments. Bullet loans carry no regular installment payments. They are payable in full at the maturity date and frequently contain provisions allowing the capitalization of interest throughout the life of the loan.
These options are generally only be used/considered in exceptional circumstances, and when the bank can duly document future cash flow availability to meet the payment. Bullet loans are frequently used in conjunction with loan splitting. In this case, the unsustainable portion of the loan represented by the bullet loan should be fully provisioned and written off in accordance with bank policy.
c. Step-up payments - should be used when the bank can ensure and demonstrate that there is a good reason to expect that the borrower's future cash flow will be sufficient to meet increases (step-up) in payments.
v. Sale by owner/assisted sale - this option is used when the borrower agrees to voluntarily dispose of the secured assets to partially or fully repay the loan. It is usually combined with the partial repayment option or conditional loan forgiveness. The borrower must be monitored closely to ensure that the sale is conducted in a timely manner and the agreement should contain a covenant allowing the borrower to conduct the sale if the borrower fails to do so within the specified timeframe.
vi. Conditional loan forgiveness - involves the bank forfeiting the right to legally recover part or the whole of the amount of an outstanding loan upon the borrower's performance of certain conditions. This measure may be used when the bank agrees to a “reduced payment in full and final settlement", whereby the bank agrees to forgive all the remaining loan if the borrower repays the reduced amount of the principal balance within an agreed timeframe. This option should be used to encourage owners to make an additional financial contribution to the company and to ensure that their interests are aligned with the banks. It is particularly appropriate in those cases where the net present value of the borrower's projected repayment capacity (taking into consideration all the collateral and potential cash flow) is lower than the total loan. In these cases the bank may consider:
a) Partial write-off in return for a cash equity contribution from an owner(s), particularly in those cases where the owner(s) have not guaranteed the loan.
b) Partial write-off in the framework of a cash capital increase from a third- party investor where they have not assumed the role of guarantor.
c) Partial write-off in the case of a particularly successful business restructuring that materially deviates from the operating plan that served as the basis for the restructuring.
d) Partial write-off in those cases when the above-average engagement of the owner(s) (i.e. successful sale of excess assets) guarantees a higher level of repayment to the bank(s).
e) Loan can also be written off if: (i) the collateral has no economic value, and such action ensures the continuation of the company's operations; (ii) it is evident that the owner has invested his entire property in the business and has lost it; (iii) the borrower possesses significant “know-how", and the bank has confidence in the management; or, (iv) the problems were caused by objective external factors.
Banks should apply loan forgiveness options carefully since the possibility of forgiveness can give rise to moral hazard, weaken the payment discipline, and encourage “strategic defaults". Therefore, banks should define specific forgiveness policies and procedures to ensure strong controls are in place.
vii. Fresh money - providing new financing arrangements to support the recovery of a distressed borrower is usually not a standalone viable restructuring solution but should be combined with other measures addressing existing arrears. It should only be applied in exceptional cases and requires a thorough assessment of the borrower's ability to repay. For loans with significant amount, independent sector experts should be used to validate the viability of proposed business plans and cash flow projections.
The Banks are recommended to have strict policies prohibiting lending new monies or allowing roll-overs. There are, however, three specific situations where it may be warranted. They are: (i) the need for fresh money to be used for working capital to restart the business; (ii) advances required to protect the bank's collateral position; or, (iii) small advances to prevent large contingent exposures (guarantees) from being called.
viii. Loan splitting - is used to address collateral and cash flow shortfalls. In this option, the loan is split into two parts: (i) the portion representing the amount that can be repaid from sustainable cash flow is repaid in equal installments of principal and interest; and (ii) the remaining portion represents “excess loan" (which can be subordinated). This portion can be used in combination with payments from the sale of specific assets or bullet payments at the maturity.
5.2.5 Additional Measures
Additional measures are not considered to be viable stand-alone restructuring options as they do not result in an immediate reduction in the loan. However, when combined with one or more of the previously identified options, they can provide incentives for repayment or strengthen the bank's overall position.
i. Loan-to-asset swap - transfers a loan, or portion of a loan, into “other assets owned" where the ultimate collection of the original loan requires the sale of the asset. This technique is generally used in conjunction with conditional loan forgiveness or partial loan repayment and maturity extension options. The management and sale of real estate properties also requires specialized expertise to ensure that the bank maximizes its returns from these assets.
ii. Loan-to-equity swap - transfers the loan, or portion of the loan, into an investment. Generally used to strengthen the capital structure of large highly indebted corporate borrowers, it is seldom appropriate for MSME borrowers due to limited access to equity markets and difficulties in determining the fair value of illiquid securities. Like the loan-to-asset swap above, this option may also require the bank to allocate additional resources for managing the new investment. However, such measures should be in-line with the requirements stipulated by Banking Control Law (Issued by SAMA) under Article 10 subsection 2 and 4.
iii. Loan Consolidation - more common for small loans, entails the combination of multiple loans into a single loan or a limited number of loans. This solution should be combined with other restructuring measures addressing existing arrears. This option is particularly beneficial in situations, where combining collateral and secured cash flows provides greater overall security coverage for the entire loan than individually.
iv. Other alterations of contract/covenants - when entering a restructuring agreement, it is generally necessary to revise or modify existing contracts/covenants to meet the borrower’s current financial circumstances. Examples might include revising ratios such as minimum working capital or providing additional time for a borrower to sell excess assets.
Additional security - additional liens on unencumbered assets (e.g., pledge on a cash deposit, assignment of receivables, or a new/additional mortgage on immovable property) are generally obtained as additional security from a borrower to compensate for the higher risk loan or cure existing defaults in loan-to-value ratio covenants.
5.2.6 Utilizing New Information
If new information is obtained after deciding on the resolving approach, the bank must re-examine and refresh it. For example, if it turns out that the borrower had been misleading it with certain material information, the approach and the measures must be more conservative. On the other hand, if the borrower puts forward or presents a repayment proposal during the measures, which would considerably improve the bank's position, the bank may mitigate the measures subject to fulfillment of certain conditions or eliminate them completely. This means that there is a certain flexibility of restructuring measures for the company.
Banks generally have a choice of choosing to restructure a loan, sell the loan (note sale), or liquidate the underlying collateral either by sale by owner or legal procedures (e.g. enforcement or insolvency). These guidelines require banks to compare the value of the proposed restructuring option against the other alternatives. The analysis will be confined to comparing the value of the proposed restructuring against enforcement and bankruptcy. Choosing the optimal option, i.e., the solution that returns the highest value to the bank is not always clear-cut.
Evaluating alternative strategies based on NPV analysis
Using a simple Net Present Value (NPV) analysis is recommended in order to provide more quantitative justification for the decision.
The general formula to calculate net present value is:
Where i = interest rate per period
N = total number of periods
Rt= net cash flow per period t
t = period in which cash flow occurs
Net present value (NPV) is the sum of the present values (PV) of a stream of payments over a period of time. It is based on the concept of time value of money - money received in the future is less valuable than money received today. To determine NPV, the net cash flow (cash payments of principal, interest, and fees less the bank’s out-of-pocket costs for legal fees, consultants, etc.) received annually is calculated. Each of these amounts or future values (FV) is then discounted to the present by using an appropriate market-based discount rate. Alternatively, the Banks may also use original effective interest rate used for computation of provisioning under International Financial Reporting Standard (IFRS) 9 guidelines.
The sum of the PVs equals the NPV. Because of its simplicity, NPV is a useful tool to evaluate which of the possible workout options results in the maximum recovery to the bank.
For NPV analysis, the bank's standard risk-adjusted discount rate should be considered. NPV from various options should be considered including below considerations in each option:
i. Restructuring: evaluation based on estimated cash-flows for a period under negotiation for new tenor of contract. The factors to be considered are interest rate of the new term, any other expenses involved in restructuring and business plan or internal estimations of the bank.
ii. Enforcement (including legal): the parameters to be considered includes current value of the property, suitable haircuts to be applied, litigation charges and additional time to be taken to conclude these proceedings.
iii. Insolvency: cost of insolvency procedure, length of time to conclude insolvency proceedings and estimated value to be recovered.
5.3 Negotiating and Documenting Workout Plan
5.3.1 Developing the Negotiating Strategy
Restructuring plan should be viable and mutually acceptable. As every restructuring is unique, depending on borrower and the executing team, the notion of the strategy should keep, following things in mind before drafting the plan:
• Restructuring a loan, which is under stress, means introducing changes that will make underlying business viable and profitable once again and to implement changes so that it will generate enough cash flow to cover the service of loan and satisfactorily returns to shareholders. It is important to understand the underlying causes of the problem.
• The restructuring is more than just changing the terms and structure of the facility, as it focuses on sustainable business.
• Economic profitability should be priorities over accounting profitability while restructuring. The objective is to render the company viable and to ensure its continuity.
A. Better Practices for approaching negotiation in an efficient manner
i. Preparation is essential before the negotiation starts: Every negotiation requires preparation and a strategy to implement. During their preparation, the bank can propose and determine how the possible refinancing is going to be distributed, under what conditions, and subject to what limits and guarantees. Negotiating strategy and tactics should include identification of the negotiable points, possible counter-proposals from the banks, and matters kept in reserve (if possible) to be raised during the process.
a. Be Prepared - It is not possible to draw up a restructuring strategy without a reliable resolvability analysis. The bank should review all available information of the company and current state of business sector, identify the reason and nature of the distress situation.
b. Evaluate the position - Bank should evaluate its ranking in terms of security among the other creditors and stakeholders. The bank should also assess the number and value of secured claims in relation to other secured and unsecured creditors,
ii. Keep the borrower informed: For a successful negotiation, the bank should inform all the stakeholders and be involved actively in talks about the negotiation progress. Successful restructuring is a team effort. Success requires that borrowers work closely with their investment partners. In a restructuring, investors are not only shareholders but also supporting financial entities. For managers the challenge is always to be a step ahead by preparing the (eventual) next round: to be transparent, and to communicate effectively.
iii. Consistency will deliver results: At this crucial stage in a company's life, inconsistency in communication or strategy can be detrimental. Some ways to be consistent:
a) Draw up a consistent and credible action plan to improve the company's liquidity. Determine the financial needs in the short, medium and long term.
b) Be consistent in the plan: try to cover short-term needs with short-term funds, and long-term needs with long-term funds.
c) Do not equate restructuring with loan renegotiation n. Long-term needs can and must be financed by converting loan to equity, whenever the level of leverage is excessive.
d) When converting loan to equity, negotiate in detail the value of the stake held by the new shareholders or look for alternative sources of capital.
e) Finally, the success of the restructuring depends to a large extent on the company surrounding itself by qualified advisors who can offer the benefit of their experience.
iv. A restructuring process consists of reaching a private agreement in order to prevent legal proceedings. It is also possible to base the agreement on corresponding bankruptcy law, although it would have to be under judicial protection and subject to regulations that are often more rigid (creditors agreement).
B. SWOT (Strengths, weaknesses, opportunities, threats) Analysis
While negotiating the rehabilitation plan, the bank should identify and evaluate the strengths and weaknesses in the account. The strengths and weaknesses in the account should be thoroughly evaluated to assess and draft the strategy. Before initiating the negotiations with the borrower, bank should prepare a strategy to discuss and finalize the meaningful and successful plan.
The cases where the borrower is not sound to understand the restructuring, the banks should make all the efforts to educate and represent the facts in full faith and trust. If necessary, bank should involve external party for explaining the plan and reducing the resistance by the borrower in restructuring.
Bank may adopt SWOT analysis to formulate the plan. In SWOT, all internal and external factors are considered for identification of strengths and weaknesses in the account. On critical assessment of these factors, bank can build the plan into negotiating strategy. The strategy should cover the defined objectives along with needs of the borrower, reason for restructuring, root cause analysis of the problem, proposed solutions, and negotiating parameters. The strategy of the bank should be focused on incentivizing the borrower and must include fees, penalties, and interest. The structure of the new and old facility has to be clearly explained to borrower while negotiating the strategy. A good background check and through homework may reduce the last-minute surprises and enhances the chances of a successful outcome.
Although the borrower should be made aware of deadlines to complete negotiations (i.e., at the specific restructuring plan being offered will expire if not accepted within 30 days), the situation should not end up into a sub-optimal restructuring.
Despite the fact that negotiating with the borrower on restructuring may be heated at times, both parties must understand the need of the situation and work collaboratively in the interest of both the parties and to come to a consensual and mutually acceptable agreement. The negotiation should be drafted as win-win situations for both parties.
C. Use of advisor
After ascertaining the viability of business and ensuring that business plans are sustainable, both parties should come to a negotiable agreement. Depending on the complexity of structure and borrower's financial knowledge and sophistication, an external advisor may be required. Potential areas for advice are: a) drafting the entire restructuring proposal (financial and legal) and b) drafting business plans as a cornerstone for restructuring discussion with the bank.
In order to build trust of borrower in the restructuring plan, especially for less sophisticated borrowers, it is recommended to involve external advisor viz. a lawyer or a financial specialist.
The bank should organize borrower educational unit within the bank that would provide general financial counsel services to borrowers, including NPL resolution.
The bank should also consider providing independent counseling/mediation services to borrowers for finalizing the strategy.
D. Involvement of guarantor (/s)
Depending on the terms of a guarantee, a guarantor is either fully or partially liable for the loan of third party (the borrower). The guarantor, therefore, should be kept fully informed about the status of the loan and the resolution process so that the guarantor is fully prepared to meet his obligations if the bank chooses to call the guarantee. New guarantees or a re-statement of the previous ones should be obtained whenever changes are made to the loan.
This is to ensure that the guarantor cannot use as a defense against payment that changes were made, to which the guarantor would not have agreed, without prior knowledge or consent.
E. Dealing with multi-bank borrowers
The role of the coordinator should be assumed by the bank with the largest loan, but the other banks must also be willing to accept it, should the bank with the largest expose refuse such activities for objective reasons. When appointing the coordinator and setting its powers, the banks shall strive for the following:
i. As a rule, a coordinator should be appointed within 1 month.
ii. The coordinator should be appointed for a certain period (no more than 6 months) with the possibility of renewal (3 months).
iii. During this mandate term, the coordinator may not withdraw without a grounded reason. If the banks do not renew the coordinator's mandate term 1 month prior to expiry, the restructuring process is completed.
iv. The coordinator shall be responsible for the assessment of the need to sign a Standstill Agreement, the assessment of the need to extend the coordinator's mandate, the assessment of the need for external consultant (financial or legal) and the drafting of the proposed solution for borrower restructuring.
v. In the beginning of the process, the coordinator must clearly define the goals, take care of strict compliance of the deadlines, transparent communication and information of all stakeholders and cooperation by agreement
vi. The coordinator takes care of the minutes of creditor meetings which sum up the decisions and the orientations of the process. In case individual creditors or the borrower constantly change their positions without reason, thereby jeopardizing the process, the coordinator transparently informs all creditors and the borrower and is entitled to withdraw as coordinator.
vii. If appointment of an agent is necessary after the completion of the restructuring, this role can be assumed by the coordinator unless agreed otherwise by the creditors. The coordinator takes over all further communication with the borrower, with the purpose of limiting mutual administrative activities.
It is generally agreed that a negotiated out-of-court debt restructuring is preferable to court proceedings. It tends to be both faster and less costly, hence banks are encouraged to explore the same prior to seeking legal recourse
To facilitate the process, the primary bank must familiarize themselves with the role of the coordinator and be prepared to assume the responsibilities, if necessary, when a borrower has loans from more than one bank.
Banks should strive to actively participate and cooperate in these negotiations. While banks may have genuine differences of opinion about the proper course of action to be taken with a borrower, they should state their views openly and be prepared to compromise, when warranted.
F. Bearing the costs of the workout
Formalizing a workout implies incurring multiple costs that may significantly compromise the financial position of the parties involved in the workout.
This implies that the borrower does not only assume his own costs, but also the costs and fees of auditors, lawyers and financial advisors that were engaged at creditors' request to complete the restructuring. While this is standard practice, there are certain limits to this general rule that try to prevent that the amount of these external costs become excessive:
a) The borrower is only supposed to assume those costs incurred by the whole body of creditors. This implies that creditors who wish to use their own advisers shall cover their own costs.
b) When engaging the external consultants, throughout the course of the workout process, creditors must strive to help the borrower control and manage such costs, and should not incur any costs that may not be considered reasonable.
For MSME borrowers, banks are required to streamline workout processes, review existing processes to ensure that any cost levied to the borrower is kept at manageable levels
G. Checklists for Negotiations
Best practice in the recovery of distressed business loans is based on ensuring that ample effort goes into preparing for negotiations. To prepare for negotiations bank must have a
i. Know loans and security position.
ii. Know the mindset of each negotiating borrower.
iii. Have a realistic assessment of counterparties’ other personal or psychological attributes.
iv. Know the main negotiating points critical to the success of the workout, and how each negotiating point is likely to be perceived by the borrower.
v. Determine the overall posture best to adopt in conducting the negotiations.
vi. Detail the relative merits of your chosen “posture" in terms of flexibility.
vii. Separate the counterparties and their representatives from the problems caused by differences in positions.
viii. Focus on each borrower's needs and interests rather than their stated or presumed position.
ix. Look for solutions with mutual benefits (win-win strategies).
x. Push for objectivity in judging proposals.
H. Pricing the workout
While considering the price of the workout, the banks should consider cash flow, net present value, involvement of other banks (share, interest rate), and collateral value. The pricing should also factor in the risk in the proposal i.e. the change in risk profile of the borrower and waiver/ sacrifice amount while finalizing the work out strategy.
I. Maintaining fallback strategics
Fall-back strategies are important because of the potential fluidity of any workout. The following are worth keeping in mind as strategy is being developed:
a) Workout strategies can be rendered ineffective suddenly, without warning and often as the result of revisions to what were previously believed to be immutable facts.
b) The importance of comparing options carefully during initial strategy selection - The scope for different views and approaches is ample. While occasionally some solutions will so clearly dominate all others as to not require deep discussion of alternatives, more often the best course of action is not so immediately obvious. In such cases, a thorough analysis and discussion of the strategy options will be an indispensable part of the asset recovery process. Best practice also involves formalizing the process, by holding the type of decision meeting appropriate for removing ambiguity as to what was decided and by recording the decision.
Comparisons of the various asset recovery options should involve quantification. As a minimum, each strategy option considered should be presented in terms of its internal rate of return (IRR) and/or its net present value (NPV). However, to the extent that certain aspects of risk and uncertainty play an important role yet are not always easily quantified, the framework for analysis and presentation should accommodate important qualitative considerations as well. The SWOT framework may be useful for comparing alternative workout strategies. Regardless of the framework used, it is important to ensure that all main assumptions are set in writing. Over time, assumptions that appear obvious early on are altered and rendered inapplicable. The workout specialist will appreciate having a record of the changing assumptions as the workout plan evolves.
Clear communication helps keep market participants informed, build confidence in the resolution strategy and maintain public support. Authorities gather a large amount of information in the process of assessing the NPL problem and play a strong coordination role in the resolution strategy. They are therefore best placed to explain to market participants how the NPL crisis is developing, and to propose and implement solutions. Communication is essential to build public support, given that public sector intervention will have fiscal implications, as well as an impact on borrower companies and households. Finally, communication of the resolution strategy creates a basis for a subsequent policy review, thus keeping the authorities accountable.
J. Documentation of plan
Banks must document each loan workout determination as part of the formal record. This includes documented communication with the borrower demonstrating the borrower has a renewed willingness and ability to repay the loan. Further, sufficient documentation of the ability to repay the loan must be on records for the options evaluated for assessing the borrower's ability to repay.
The bank should establish comprehensive management and internal controls over loan workout activity. This includes establishing authority levels and segregation of duties over the various types of workouts (modification, refinance, adjusting due dates, etc.). In addition, the policy needs to specify volume thresholds tied to financial performance elements such as net worth, delinquency and/or net charge off rates, etc. that trigger enhanced reporting to SAMA.
The contract and documentation should include a well-defined borrower milestone target schedule, detailing all necessary milestones to be achieved by the borrower in order to repay the loan over the course of the contract term. These milestones/targets should be credible, appropriately conservative and take account of any potential deterioration of the borrower's financial situation.
Based on the collective monitoring of the performance of different restructuring options and on the examination of potential causes and instances of re-defaults (inadequate affordability assessment, issue with the characteristics of the restructuring treatment product, change in the borrower's conditions, external macroeconomic effects etc.), banks should regularly review their restructuring policies and products.
For the cases, where the borrower has experienced an identifiable event which has caused temporary liquidity constraints. Evidence of such an event should be demonstrated in a formal manner (and not speculatively) via written documentation with defined evidence showing that the borrower's income will recover in the short-term or on the basis of the bank concluding that a long-term restructuring solution was not possible due to a temporary financial uncertainty of a general or borrower specific nature.
Greater transparency on NPLs can improve the viability of all resolution options, as well as market functioning in normal times. In cases where the ownership of the NPL passes from the originating bank to an external party, information limitations play an important role. To help overcome this problem, some standardization of asset quality data, as well as completeness of legal documentation on the ownership of these loans, would help buyers and sellers agree on pricing. In addition, co-investment strategies in securities originated from a pool of NPLs may reduce information asymmetries between buyers and sellers. This could increase transaction volumes, or facilitate sales at higher prices. A third option is the establishment of databases for realized prices of real estate transactions, given that real estate is the most widely used form of collateral. A transparent and sufficiently large database on real estate sale prices would, therefore, enhance the stability and reliability of NPL valuations, ultimately facilitating the NPL disposal process and leading to smaller price discounts. This would encourage market-based solutions for NPL disposal.
K. Information Access:
One of the key success factors for the successful implementation of any strategy option is adequate technical infrastructure. In this context, it is important that all cases related data is centrally stored in robust and secured IT systems. Data should be complete and up-to-date throughout the workout process. An adequate technical infrastructure should enable units to easily access all relevant data and documentation including:
i. current NPL and early arrears borrower information including automated notifications in the case of updates;
ii. loan and collateral/guarantee information linked to the borrower or connected borrowers;
iii. monitoring/documentation tools with the IT capabilities to track restructuring performance and effectiveness;
iv. status of workout activities and borrower interaction, as well as details on restructuring measures, agreed, etc.;
v. foreclosed assets (where relevant);
vi. tracked cash flows of the loan and collateral;
vii. sources of underlying information and complete underlying documentation;
viii. access to central credit registers, land registers and other relevant external data sources where technically possible.
L. External Information
As a minimum, the following information should be obtained when restructuring a non-retail loan:
i. latest audited financial statements and/or latest management accounts;
ii. Verification of variable elements of current income; assumptions used for the discounting of variable elements;
iii. overall indebtedness;
iv. business plan and/or cash-flow forecast, depending on the size of the borrower and the maturity of the loan;
v. latest independent valuation report of any mortgaged immovable properties securing the underlying facility;
vi. information on any other collateral securing the underlying loan facilities.
vii. latest valuations of any other collateral securing the underlying loan facilities;
viii. historical financial data;
ix. relevant market indicators (unemployment rate, GDP, inflation, etc.).
x. In case of MSME's access to bank statements of all accounts maintained by the borrower may also be necessary.
M. Internal Information
Banks should maintain in the credit file of the transactions the documentation needed so that a third party can replicate the individual estimations of accumulated credit losses made over time. This documentation should include, inter alia, information on the scenario used to estimate the cash flows it is expected to collect (going concern vs. gone concern scenario), the method used to determine cash flows (either a detailed cash-flow analysis or other more simplified methods), their amount and timing as well as the effective interest rate used for discounting cash-flows.
Banks should maintain all internal supporting documentation, which may be made available for review by the supervisory authority upon request. It should include:
i. the criteria used to identify loans subject to an individual assessment;
ii. rules applied when grouping loans with similar credit risk characteristics, whether significant or not, including supporting evidence that the loans have similar characteristics;
iii. detailed information regarding the inputs, calculations, and outputs in support of each of the categories of assumptions made in relation to each group of loans;
iv. rationale applied to determine the considered assumptions in the impairment calculation;
v. results of testing of the assumptions against actual loss experience;
vi. policies and procedures which set out how the bank sets, monitors and assesses the considered assumptions;
vii. findings and outcomes of collective allowances;
viii. supporting documentation for any factors considered that produce an impact on the historical loss data;
ix. detailed information on the experienced judgment applied to adjust observable data for a group of financial assets to reflect current circumstances.
N. Restructuring documentation
Important documents in any workout will be the term sheet, the loan agreement, and the security documents. Even before the banks have determined that a going concern solution is feasible and indeed preferable and the transaction starts crystallizing, they will want to start preparing documents.
The documentation will also determine the conditions of effectiveness of the restructuring. Before these have been met, the restructuring is not complete and it is theoretically possible to revert to the default and real bankruptcy.
The proposal should contain the following elements:
i. Full description of the borrower
ii. Amount(s) of the loan(s) to be restructured
iii. Restructuring fees and expenses, if any
iv. Name(s) of the bank(s)
v. Anticipated date of closing
vi. Representations and warranties
vii. Repayment schedule(s)
viii. Mandatory repayment(s), if any
ix. Cash sweep mechanism, if any
x. Interest rate(s) and applicable margin(s) if floating rate
xi. Default interest
xii. Interest payment dates
xiii. (Revised) events of default
xiv. (Additional) security
xv. List of documentation
xvi. Taxes
xvii. Governing law
O. Checklist:
i. Establish parties to be part of the workout transaction
ii. Establish what minimum terms acceptable to parties other than the borrower
iii. Prepare draft term-sheet
iv. Negotiate draft term-sheet among parties other than borrower and reach tentative agreement
v. Submit draft term-sheet to borrower
vi. Negotiate, agree, and initial term-sheet
vii. Have lawyers prepare draft legal documents for workout, including new or amendatory loan agreement and security documents, based on initialed term-sheet
viii. Negotiate, agree, and sign legal documents for workout
ix. Determine when conditions of effectiveness have been met and workout is complete.
5.3.2 Drafting the Restructuring Agreement
A typical restructuring agreement at minimum should include: Purpose, Restructuring Fees and Expenses, banksLenders, Nature and Amount of Current Principal Loan, Role of External Counsel, Signing Date of the Loan Restructuring Agreements and other Documentation, Conditions of Effectiveness, Representations and Warranties, Repayment Schedule, Mandatory Prepayments, Cash Sweep Mechanism, Interest Rates, Applicable Margin - Base, Default Interest, Interest Periods, Shareholder Loan, Emergency Working, Deferral of Principal Payment, Undertakings, Events of Default, Security, Documentation, Taxes, Withholdings, Deductions and Relevant Governing Law.
A. Determining required documentation
Every restructuring transaction is different in its own way, and these differences lead to defining the type and number of documents required to formalize the workout. Factors like the number of creditors, the size of the loan restructured and the type of collateral used in the original lending transaction determine the complexity and number of documents required to formalize a workout.
Regardless of the number of creditors and complexity of loan structure, the restructuring documentation will determine the conditions and effectiveness of the restructuring, and it is essential that all parties should agree and sign the documents before implementing the workout. Until all documents have been formalized, it is still possible that the restructuring negotiations fail and initiating the bankruptcy proceedings.
The documentation formalizing the workout should always be prepared by a legal practitioner. While the legal practitioner should be primarily responsible for elaborating this documentation, close collaboration is required with the Workout Unit in charge of negotiating the workout.
In the case of MSME workouts, the banks are encouraged to explore developing restructuring documentation, which is typically simplified in comparison with the restructuring of larger corporate borrowers. This is just a reflection of the fact that the negotiating process is simpler, and most negotiating milestones are either abridged or do not take place at all.
For further guidance on relevant agreements refer to Appendix 4.
B. Communicating with the borrower during the workout process
The bank should have detailed internal guidelines and rules regarding bank's staff communication with the borrower. Communication with borrowers should be as per the procedures outlined in the bank's code of conduct. This should include; timelines for responding to borrower's requests/complaints, identify who within the bank is responsible/authorized to issue various types of communications to the borrowers, documenting process for all communications to/from the borrowers, signing/acknowledgement protocols with timelines, approval requirements for all workout proposals, templates to be used for communication with the borrowers.
With respect to borrowers, transferred to the specialized unit, some of the basic principles are as follows:
i. Work out unit must act honestly, fairly, and professionally at all times.
ii. RM should avoid putting excessive pressure on the borrower and/or guarantor. All contacts with the borrower should take place at reasonable times) and at a mutually convenient location.
iii. Documenting all the communication with the borrowers (and guarantors) and retaining for an appropriate time. Notes to the credit file should be factual.
iv. Sign all communications of a legal nature such as commitment letters, demand letters, or other communications with respect to legal proceedings by those individuals authorized to do so by policy.
v. All written communications from the borrower should be acknowledged within (5) business days.
vi. RM should make clear from the beginning that all restructuring proposals require the approval of either one or more committees or senior managers. The borrower should be given an approximate timetable for approval and promptly notified of any delays.
vii. All approved restructuring proposals should be communicated to the borrower and guarantor(s) in writing, clearly spelling out all the terms and conditions, including covenants if required together with all reasonable costs arising from the transaction.
viii. Notify borrowers in writing if their restructuring proposal is declined, including the reasons for rejection.
C. Resolution of disputes
When the bank and the borrower fail to reach an agreement or the borrower considers the proposed restructuring plan of the bank or negotiation process does not follow the principles described in the paragraphs above, the borrower should have the right to elevate his case to the level above the specialized unit. General established practice is for the borrower to write directly to the CRO. It should be ensured that the dispute is being reviewed independently of the personnel/team against whom the appeal has been filled.
Given the nature of the resolution process, which is likely, to generate a number of such inquiries, banks may wish to consider formalizing this process. An indicative example of a more formal process can be summarized as follows:
i. An Appeals Committee consisting of at least three senior officers is formed.
ii. The members of the Committee should be knowledgeable about the credit granting process but be independent of the credit origination, workout, and risk management functions.
iii. A member should disclose potential conflicts of interest and recuse themselves from further discussions with respect to any relevant case being discussed by the Committee.
The borrowers should have prompt and easy access to filing an appeal. Good practice in this regard includes standardized appeal forms together with a list of information or required documents needed in the review of the appeal, and deadlines for the submission and reviews of appeals.
a) Acknowledgment of submission of appeals in writing.
b) The decision of the Appeals Committee should be announced within one (1) month from the date of submission and should be in writing and include the reasons for the committee's decision.
c) The borrower would have a right to appeal on a specific issue only once.
Educating borrowers, especially in the MSME category may be required that restructuring of loan obligations is a concession provided by the bank and not a legal right of the borrower.
5.4 Monitoring the Restructuring Plan
SAMA expects banks to maintain effective controls in relation to restructured loans and in connection therewith, have laid out regulatory expectations regarding monitoring performance in accordance with the restructuring agreements once the new workout “regime” has been decided and implemented.
The monitoring function will need to address several aspects, the tracking of both how and when will the cash be generated is important.
The approval of the restructuring agreement is only a part of the resolution, whereas the bank must continue to monitor the borrower to ensure timely reprogramming of payments and meeting of commitments. If reasons exist on the part of the borrower to deviate from the agreement, that are reasonable and objectively justifiable, the bank may approve a waiver of commitment. In the event of material unjustified deviations, the bank must impose additional requirements, penalty interest, termination of agreement, blocking of the transaction account, execution, etc.
The control over the fulfillment of all commitments and timely payments must be ensured by the bank by setting up appropriate IT and Organizational support. If there is no confidence in the management, the bank should strive to involve an external consultant or authorized person to periodically monitor the company's operations on behalf of the bank.
For MSMEs, a short quarterly review may be the most cost-efficient manner, namely in the form of meetings with the key staff and inspecting the documentation, analyzing the financial statements in order to obtain an overview of a realistic business and financial situation of the borrower.
Tracking financial obligations and managing cash flow during the workout
Note: The below is not illustrated with a purpose of regulating borrowers, but rather as a guideline to banks to ensure that cash-flows management pertaining to restructured borrowers, is subject to adequate and proper oversight by the bank's staff, within the legal rights given by the restructuring agreement.
During a workout, managing cash becomes even more critical because the company as a borrower must concern itself not only with the overall manageability of its loan levels and timeliness of loan servicing payments but also with questions of fairness and equitable treatment among its various creditors and other payees as cash becomes available and decisions are taken as to how it is to be applied. Sales of assets, which during good times would have happened without issue, now must be subjected to additional scrutiny to ensure that they do not trigger alarms of “fraudulent conveyance.”
Careful cash flow forecasting should be accompanied by sound cash controls within the borrower company. This can be achieved either within the borrower's own systems or by introducing special organizational arrangements that effectively cordon off the cash management function.
When cash continues to be managed within the borrower company, the following is strongly advisable:
i. Establish expenditure thresholds for different levels of review and control.
ii. For expenditures over a certain threshold, ensure that double signatures are required to authorize payment.
iii. Depending on the nature of the business, either centralize approvals and handling of expenditures or set regular budgetary guidance and spending “envelopes" for unit or department managers with appropriate procedures for enforcing spending/budgeting reconciliation and accountability.
iv. Rationalize approvals and payments system.
v. Use a third-party consultant or auditor or bank's internal independent resource to perform periodic operational audits as part of an ongoing monitoring process tailored to the key aspects of the workout and distinct from other audit and financial reporting functions.
5.4.1 Monitoring Arrangements for Restructured Loans
Restructured borrowers should be subject to intensive monitoring to ensure their continued ability to meet their obligations, The specialized team should use the bank’s EWS system to alert business segments of any potential problems. All borrowers should be subject to periodic review, the timing of which and depth of analysis required should be proportional to the size of the loan together with the level of risk inherent in the credit. Those loans which are material in nature and pose the greatest risk to the bank should be reviewed monthly on an abbreviated basis focused on recent developments. More in-depth reviews would be done on a quarterly and annual basis in conjunction with receipt of interim and annual financial statements. Smaller loans might be monitored semi-annually for the first year with annual reviews thereafter. Finally, the smallest loans could be subject to an annual review of their financial statements.
Senior management should also be monitoring closely the key performance indicators (KPIs) of specific portfolio segments to ensure that the goals embedded in the strategic plan are on track. Deviations from the plan should be identified and appropriate time-bound, corrective action plans put in place and monitored.
A. Changing the risk rating of the loan
All banks should have clear written policies and procedures in place which outline the specific criteria together with required cure periods which must be satisfied to upgrade (or downgrade) the risk rating on a loan. While the goal of the restructuring is to improve the loan's risk rating, the borrower must demonstrate its ability to meet the terms of the restructuring as well as show an improvement in its risk profile for a specified period of time before an upgrade is appropriate. It requires a one year waiting period after restructuring before a loan becomes eligible for consideration of an upgrade.
It is important to realize that upgrade is not automatic after the one year period, but rather should be based on the borrower's current and expected future performance. The borrowers should demonstrate that financial difficulties no longer exist. The following criteria should be met in order to dispel concerns regarding financial difficulties:
i. the borrower has made all required payments in a timely manner for at least one year;
ii. the loan is not considered as impaired or defaulted;
iii. there is no past-due amount on the loan;
iv. the borrower has demonstrated its ability to comply with all other post restructuring conditions contained in the master restructuring agreement; and
v. the borrower does not have any other loans with amounts more than 90 dpd or 180 dpd (as the case may be) at the date when the loan is reclassified.
Particular attention should be paid to bullet and balloon loans (with reduced front payments). Even after one year of flawless performance, the repayment in full of a balloon loan that relies on a large payment at the end of repayment period can be questionable.
B. Transferring the borrower back to the originating unit
The following criteria should be applied when transferring a borrower back to the business unit:
i. The borrower regularly meets all its obligations from the restructuring agreement;
ii. At least one year has passed from the beginning of validity of the restructuring and
iii. The borrower has repaid at least 10 percent of the restructured principal in that period;
iv. The borrower's indebtedness, measured with the net financial liabilities/EBITDA indicator, etc.;
v. The transfer had been approved on the basis of the analysis of the borrower's financial position by the competent committee of the bank.
Once a borrower has demonstrated its ability to meet the all the terms of its restructured obligations for a period of at least one year, repaid at least 10 percent of its restructured loan, and no longer displays any of the signals which would cause automatic transfer to the specialized team, the loan should be transferred back to the originating unit for servicing and follow up. Borrowers need to be seen to be viable by their customers and suppliers. A bank's willingness to work with a company to resolve its problems together with the resumption of a normalized banking relationship provides the public with a level of comfort that allows them to do business with the company.
C. Monitoring of workout activities
Banks should establish a robust set of metrics to measure progress in the implementation of their work out strategy for all the accounts.
The monitoring systems should be based on targets approved in the risk strategy and related operational plans which are subsequently cascaded down to the operational targets of the business and specialized teams. A related framework of key performance indicators (KPIs) should be developed to allow the senior management committee and other relevant managers to measure progress.
Clear processes should be established to ensure that the outcomes of the monitoring of restructured indicators have an adequate and timely link to related business activities such as pricing of credit risk and provisioning.
Restructuring related KPIs can be grouped into several high-level categories, including but not necessarily limited to:
i. Bad/ stressed loan KPI's;
ii. Borrower engagement and cash collection;
iii. Restructuring activities;
iv. Liquidation activities;
v. Other (e.g. NPL-related profit and loss (P&L) items, foreclosed assets, early warning signals, outsourcing activities).
D. Bad/ stressed loan KPI’s:
Banks should define adequate indicators comparable with the portfolio should be monitored on a periodic basis.
Banks should closely monitor the relative and absolute levels of stressed loans and early arrears in their books at a sufficient level of portfolio granularity. Absolute and relative levels of foreclosed assets (or other assets stemming from workout activities), as well as the levels of performing forborne loans, should also be monitored.
Another key monitoring element is the level of impairment/provisions and collateral/ guarantees overall and for different NPL cohorts. These cohorts should be defined using criteria which are relevant for the coverage levels in order to provide the senior management and other relevant managers with meaningful information (e.g. by number of years since NPL classification, type of product/loan including secured/unsecured, type of collateral and guarantees, country and region of loan, time to recovery and the use of the going and gone concern approach).
Coverage movements should also be monitored and reductions clearly explained in the monitoring reports. Where possible, indicators related to the NPL ratio/level and coverage should also be appropriately benchmarked against peers in order to provide the senior management with a clear picture on competitive positioning and potential high-level shortcomings.
Finally, banks should monitor their loss budget and its comparison with actual. This should be sufficiently granular for the senior management and other relevant managers to understand the drivers of significant deviations from the plan.
Key figures on NPL inflows and outflows should be contained in periodic reporting to the senior management, including moves from/to NPLs, NPLs in cure period, performing, performing forborne and early arrears. Inflows from a performing status to a non-performing status appear gradually (e.g. from 0 dpd to 30dpd. 30dpd to 60dpd. 60dpd to 90dpd, or 180 days as the case may be etc.) but can also appear suddenly (e.g. event-driven). A useful monitoring tool for this area is the establishment of migration matrices, which will track the flow of loans into and out of non-performing classification.
Banks should estimate the migration rates and the quality of the performing book month by month so that actions can be taken promptly (i.e. prioritize the actions) to inhibit the deterioration of portfolio quality. Migration matrices can be further elaborated by loan type (housing, consumer, real estate), by business unit or by other relevant portfolio segment to identify whether the driver of the flows is attributed to a specific loan segment.
E. Borrower’s engagement and cash collection
Key operational performance metrics should be implemented to assess the specialized unit or employees' (if adequate) efficiency relative to the average performance and/or standard benchmark indicators (if they exist). These key operational measures should include both activity-type measures and efficiency type measures. The list below is indicative of the type of measures, without being exhaustive:
i. Scheduled vs. actual borrower engagements;
ii. Percentage of engagements converted to a payment or promise to pay;
iii. Cash collected in absolute terms and cash collected vs. contractual cash obligation split by:
- Cash collected from borrower payments;
- cash collected from other sources (e.g. collateral sale, salary garnishments, bankruptcy proceedings);
iv. promises to pay secured and promises to pay kept vs. promises to pay due;
v. total and long-term restructuring solutions agreed with the borrower (count and volume).
F. Workout activities
One key tool available to banks to resolve or limit the impact of NPLs is restructuring if properly managed. Banks should monitor workout activity in two ways: efficiency and effectiveness. Efficiency relates mainly to the volume of credit facilities offered restructuring and the time needed to negotiate with the borrower while effectiveness relates to the degree of success of the restructuring option (i.e. whether the revised/modified contractual obligations of the borrower are met).
In addition, proper monitoring of the quality of the restructuring is needed to ensure that the ultimate outcome of the restructuring measures is the repayment of the amount due and not a delaying of the assessment that the loan is uncollectable.
In this regard, the type of solutions agreed should be monitored and long-term (sustainable structural) solutions should be separated from short-term (temporary) solutions.
It is noted that modification in the terms and conditions of a loan or refinancing could take place in all phases of the credit life cycle; therefore, banks should ensure that they monitor the restructuring activity of both performing and non-performing loans.
G. Efficiency of workout activity
Depending on the potential targets set by the bank and the portfolio segmentation, key metrics to measure their efficiency could be:
a) the volume of concluded evaluations (both in number and value) submitted to the authorized approval body for a defined time period;
b) the volume of agreed modified solutions (both in number and value) reached with the borrower for a defined time period;
c) the value and number of positions resolved over a defined time period (in absolute values and as a percentage of the initial stock).
It might also be useful to monitor the efficiency of other individual steps within the workout process, e.g. length of decision-taking/approval procedure.
H. Effectiveness of workout activity
The ultimate target of loan modifications is to ensure that the modified contractual obligations of the borrower are met and the solution found is viable. In this respect, the type of agreed solutions per portfolio with similar characteristics should be separated and the success rate of each solution should be monitored over time.
Key metrics to monitor the success rate of each restructuring solution include:
i. Cure rate (the rate arrived at by conducting performance analysis of the forborne credit facilities after their designated cure period) and re-default rate (the rate arrived at by performing a performance analysis of the forborne credit facilities after their designated cure period):
Given the fact that most of the loans will present no evidence of financial difficulties right after the modification; a cure period is needed to determine whether the loan has been effectively cured. The minimum cure period applied to determine cure rates should be minimum for 12 months. Thus, banks should conduct a vintage analysis and monitor the behavior of forborne credit facilities after 12 months from the date of modification to determine the cure rate. This analysis should be conducted per loan segment (borrower with similar characteristics or basis industry segment) and, potentially, the extent of financial difficulties prior to restructuring.
Cure of arrears on facilities presenting arrears could take place either through restructuring measures of the credit facility (forborne cure) or naturally without modification of the original terms of the credit facility (natural cure). Banks should have a mechanism in place to monitor the rate and the volume of those defaulted credit facilities cured naturally. The re-default rate is another key performance indicator that should be included in internal NPL monitoring reports for the senior management and other relevant managers.
ii. Type of workout measure: Banks should clearly define which types of workout measures are defined as short-term versus long-term solutions. Individual characteristics of workout agreements should be flagged and stored in the IT systems and periodic monitoring should provide the senior management and other relevant managers with a clear view on what proportion of restructuring solutions agreed are:
o of a short-term versus long term nature; and
o have certain characteristics (e.g. payment holidays ≥ 12 months, increase of principal, additional collateral, etc.).
iii. Cash collection rate: Another key metric of workout activity is the cash collection from restructured credit facilities. Cash collection could be monitored against the revised contractual cash flows, i.e. the actual to contractual cash flow ratio, and in absolute terms. These two metrics may provide information to the bank for liquidity planning purposes and the relative success of each workout measure.
iv. NPL write-off: In certain cases, as part of a workout solution, banks may proceed with a restructuring option that involves NPL write-off, either on a partial or full basis. Any NPL write-off associated with the granting of these types of restructuring should be recorded and monitored against an approved loss budget. In addition, the net present value loss associated with the decision to write off unrecoverable loans should be monitored against the cure rate per loan segment and per restructuring solution offered to help better inform the banks’ restructuring strategy and policies. All NPL write off policies developed by banks are required to follow the rules defined under the circular on “Credit Risk Classification and Provisioning”.
Indicators relating to workout activities should be reported using a meaningful breakdown which could for instance include the type and length of arrears, the kind of loan, the probability of recovery, the size of the loans or the total amount of loans of the same borrower or connected borrowers, or the number of workout solutions applied in the past.
I. Liquidation activities
Provided that no sustainable restructuring solution has been reached, the bank is still expected to resolve the stressed loan. Resolution may involve initiating legal procedures, foreclosing assets, loan to asset/equity swap, and/or disposal of credit facilities.
Consequently, this activity should be monitored by the bank to help inform strategy and policies while also assisting with the allocation of resources.
J. Legal measures and pre-closure
Banks should monitor the volumes and recovery rates of legal and foreclosure cases. This performance should be measured against set targets, in terms of number of months/years and loss to the bank. In monitoring the actual loss rate, banks are expected to build historical time series per loan segment to back up the assumptions used for impairment review purposes and stress test exercises.
For facilities covered with collateral or another type of security, banks should monitor the time period needed to liquidate the collateral, potential forced sale haircuts upon liquidation and developments in certain markets (e.g. property markets) to obtain an outlook regarding the potential recovery rates.
In addition, by monitoring the recovery rates from foreclosure and other legal proceedings, banks will be in a better position to reliably assess whether the decision to foreclose will provide a higher net present value than pursuing a restructuring option. The data regarding the recovery rates from foreclosures should be monitored on an ongoing basis and feed potential amendments to banks' strategies for handling their loan recovery / legal portfolios.
Banks should also monitor the average lengths of legal procedures recently completed and the average recovery amounts (including related recovery costs) from these completed procedures.
K. Loan to asset/equity swap
Banks should carefully monitor cases where the loan is swapped with an asset or equity of the borrower, at least by using the volume indicators by type of assets and ensure compliance with any limits set by the relevant national regulations on holdings. The use of this approach as a restructuring measure should be backed by a proper business plan and limited to assets where the bank has sufficient expertise and the market realistically allows the determined value to be extracted from the asset in a short to medium-term horizon. The bank should also make sure that the valuation of the assets is carried out by qualified and experienced appraisers.
L. Other monitoring items
i. P&L-related items
Banks should also monitor and make transparent to their management bodies the amount of interest accounted for in the P&L stemming from restructured loans. Additionally, a distinction should be made between the interest payments on those restructure actually received and those not actually received. The evolution of loan loss provisions and the respective drivers should also be monitored.
ii. Foreclosed assets
If foreclosure is a part of banks' strategy, they should also monitor the volume, aging, coverage and flows in their portfolios of foreclosed assets (or other assets stemming from restructured loans). This should include sufficient granularity of material types of assets. Furthermore, the performance of the foreclosed assets with respect to the predefined business plan should be monitored in an appropriate way and reported to the senior management and other relevant managers on an aggregate level.
iii. Miscellaneous
Other aspects that might be relevant for reporting would include the efficiency and effectiveness of outsourcing/servicing agreements. Indicators used for this are most likely very similar to those applied to monitor the efficiency and effectiveness of internal units, though potentially less granular.
Generally, where restructuring-related KPIs differ from a regulatory and an accounting or internal reporting viewpoint, these differences should be clearly reported to the senior management and explained.
5.4.2 When Restructuring Fails
It is to be expected that a certain number of restructurings will fail. If the restructured borrower does not perform his obligations, the bank needs to quickly assess if the problem is temporary in nature and easily corrected (e.g., a temporary slowdown in sales to a major customer who is moving to a new location) or more permanent in nature (e.g., the company's major product has been rendered obsolete by regulations). If the company is still viable in the long term and the problem can be easily corrected, the borrower could be allowed to restructure the terms of repayment one more time. In general, however, multiple restructurings can be an indication that the borrower is no longer viable and that there are problems in the approval process. If the problem is of a more permanent nature (e.g., as evidenced by second payment default), the borrower should be deemed non-viable and promptly referred for legal proceedings.
The bank should closely monitor failed restructurings to determine the reasons behind them and assess the appropriateness of its strategies.
Appendix 1: Samples of Early Warning Signals
The Following are illustrated for indicative purposes and are not intended to be prescriptive, as stated in the rules of Management of Problem Loans, banks should establish EWS that are suitable to their portfolio:
EWS At Borrower Level from External Sources Debt and collateral increase in other banks Past-due or other NP classifications in other banks Guarantor default Debt in private central register (if any) Legal proceeding External Sources Bankruptcy Changes in the company structure (e.g. merger, capital reduction) External rating assigned and trends Other negative information regarding major clients/counterparties of the debtor/suppliers EWS at a borrower level from internal sources Negative trend in internal rating Balances not appearing in current account / lower balances in Margin account / Negative own funds Significant change in liquidity profile Liabilities leverage (e.g. equity/total < 5% or 10%) Number of days past due Companies Number of months with any overdraft/overdraft exceeded Profit before taxes/revenue (e.g. ratio < -1%) Continued losses Continued excess in commercial paper discount Decrease of turnover Reduction in credit lines related to trade receivables (e.g. year- on-year variation, 3m average/1y average) Unexpected reduction in undrawn credit lines (e.g. undrawn amount/total credit line) Negative trend in behavioral scoring Negative trend in probability of default and/or internal rating Mortgage loan installment > x time credit balance Mortgage and consumer credit days past due Decrease in the credit balance > 95% in the last 6 months Average total credit balance < 0.05% of total debt balance Forborne Exposures Nationality and related historic loss rates Individuals / sole proprietors Decrease in payroll in the last 3 months Unemployment Early arrears (e.g. 5-30 days of past due, depending on portfolio/borrower types) Reduction in bank transfers in current accounts Increase of loan installment over the payroll ratio Number of months with any overdraft exceeded Negative trend in behavioral scoring Negative trend in probability of default and/or internal rating EWS at a portfolio/segment level Size distribution and concentration level Portfolio Distribution Top X (e.g. 10) groups of connected borrowers and related risk indicators Asset class distribution Breakdown by industry, sector, collateral types, countries, maturities, etc. Risk parameters PD/LGD evolution (overall and per segment) PD/LGD forecasts and projections Default loan Volumes and trends of significant risk provisions on individual level NPL/restructuring status/foreclosure NPL volume by category (>90 past due, etc.) Restructuring volume and segmentation ( workout, forced prolongation, other modifications, deferrals, >90 past due, LLP) Foreclosed assets on total loans NPL ratio without foreclosed assets EWS by specific type of borrowers/sectors General Customizable index data (GDP, stock markets, commodity prices, CDS prices, etc.) Real estate Real estate-related indexes (segment, region, cities, rural areas, etc.) Rental market scores and expected market value changes Aviation Airline-specific indicators (passenger load, revenue per passenger, etc.) Energy Index data on regional alternative energy sources (e.g. wind quantities, etc.) Information-gathering system on potential technical or political risks on energy Appendix 2: Loan Life Coverage Ratio
Application and computation of the ratio
Loan Life Coverage Ratio (LLCR) should be used by Workout teams to assess the viability of a given amount of debt and consequently to evaluate the risk profile and the related costs. Unlike Debt Service Coverage Ratio (DSCR) which captures just a single point in time, LLCR allows for several time periods more suitable for understanding liquidity available for loans of medium to long time horizons. Thus, given its long-term nature, this ratio should be used for project finance and other multi-year loans, where long term viability needs to be assessed.
The LLCR is a financial ratio used to estimate the solvency of a firm, or the ability of a borrowing company to repay an outstanding loan. LLCR is calculated by dividing the net present value (NPV) of the money available for debt repayment by the amount of outstanding debt.
The Formula for the computation is as follows:
Present value of total available cash flow (ACF) during the loan life period (including interest and principal) + cash reserve available to repay the debt (the debt reserve)
LLCR = --------------------------------------------------------------------------------------
Outstanding loan Amount at the time of assessment
Where, CFt= cash - flows available for debt service at year t
t = the time period (year)
s = the number of years expected to pay the debt back
i = the weighted average cost of capital (WACC) expressed as an interest rate
In this calculation, the weighted average cost of debt is the discount rate for the NPV calculation and the project "cash flows" are more specifically the cash flows available for debt service. The loan life coverage ratio is a measure of the number of times over the cash flows of a project can repay an outstanding debt over the life of a loan. The higher the ratio, the less potential risk there is for the bank.
Appendix 3: Restructuring Principles
The guidelines set out below a set of generic principles that banks are encouraged to follow and adopt as part of their culture in relation to restructuring activities. These principles include, but are not limited to:
i. Restructuring activities should not be viewed as a cost center. Restructuring measures can allow the banks to maximize their recovery and maintain a good and long-term relationship with their borrowers.
ii. Restructuring can allow the borrowers to survive and potentially return to a sustainable and growth path that would benefit the borrower, the economy and the banks.
iii. If banks are effective in identifying early warning signs, addressing the issues and engaging in early restructuring solutions, this could prevent long-term default and losses and result in higher profit for both banks and borrowers.
iv. Restructuring should be done in utmost good faith and both banks and borrowers should show seriousness and commitment to lead a successful process.
v. Negotiations must be in the best interest of the borrower and the bank.
vi. Transparency and regular communication should take place between various stakeholders in a restructuring situation.
vii. Transparency and full disclosure of information, when appropriate, should take place between the borrower and the banks to ensure both parties can make informed decisions for the best interest of both parties.
viii. The banks should aim to provide a prompt response to the borrower's proposal for a restructuring solution.
ix. The borrower shall have reasonable and sufficient time to provide the requested information and consider the restructuring proposal.
x. Banks and borrowers should seek sustainable solutions and avoid repeated short-term fixes.
xi. Confidentiality should be respected throughout the process.
xii. Consensual but sustainable out-of-court restructuring solutions are considered the best and most favorable outcome when it comes to restructuring. Banks are expected to exhaust all consensual options before deciding to follow a court-led process or enforcing on securities.
Appendix 4: Details of Relevant Agreements
Standstill Agreement
In cases, where several creditors are involved, formalizing a standstill agreement is typically the first step involved in the workout process. The standstill is an agreement between the borrower and relevant creditors, typically lending banks, confirming that they will not enforce their rights against the borrower for any default during a limited period. The main purpose of the standstill is to give the borrower sufficient ‘breathing space' to collect information and prepare a survival strategy, while in parallel creditors work on formulating a joint approach. Standstill agreements may also include other obligations to be observed during the standstill period, for example, that creditors grant additional financing to the borrower to cover working capital or postpone any capital or interest payments due.
In the context of an MSME workout, it may be necessary to sign a Standstill agreement, even if the number of creditors is limited. The main advantage of formalizing such document is that it will provide sufficient certainty to both parties that a workout is being negotiated, ensuring that the borrower can focus his efforts in the operational changes needed to succeed. For those cases where it is required to formalize a Standstill agreement, a simplified template adopted to the MSME context. However, in certain cases, it may not be necessary to formalize a Standstill agreement and creditor(s) and borrower will proceed on the mutual understanding that a standstill exists. This will typically occur when there is just a single creditor that holds a close and long-standing commercial relationship with the borrower, who is being cooperative in the workout negotiations.
The contents of the standstill agreement will largely depend on the transaction at hand, but typically will imply that creditors will assume some (or all) of the following obligations, among others:
i. Not to start enforcement actions against the borrower or his assets;
ii. Not to declare the loan agreement breached, or accelerate the loan;
iii. Not to take additional collateral or improve his position with respect to other creditors;
iv. Not to charge additional fees or penalty interests;
v. Not to set-off any amounts against the borrower for pending obligations.
In return, the borrower will agree not to take any action that would harm the creditors, such as the sale or transfer of assets to a third party or make payments to any creditors except in the ordinary course of business, and will allow the creditors full access to all necessary books and records.
Restructuring Agreement
The restructuring agreement is the main document that regulates all the details of the workout. In the case of MSMEs, where the workout documentation will often be simplified, the restructuring agreement will many times be the only document formalized, and it is very important that all details be captured accurately, not just in connection with the payment obligations of the borrower but also with his behaviour during the lifetime of the restructuring agreement. When drafting a restructuring agreement, it should be born in mind that the main purposes of this document are (i) to explain how the borrower is going to restructure both his debt and his operations, if applicable, and (ii) to specify how and when creditors are to be repaid.
There is no standard format for how a restructuring agreement should look like. The details of the agreement will largely depend on the needs of the business and the willingness of creditors to make concessions to avoid a bankruptcy of the borrower. For example, in the case of a workout consisting of a simple rescheduling of maturities, a signed letter may be enough to document the workout. However, in case of modification in the maturity dates as well as the principal and applicable interests of the loan agreement, drafting a new agreement will probably be necessary. In this case, it is highly advisable that the legal department of the lending banks is brought on-board from the outset, since they should determine whether
i. the workout will be documented into a new agreement that will replace the existing contractual documentation existing between the borrower and creditors, or
ii. the original loan agreement will remain in place but as amended by the terms and conditions included in an additional agreement.
This second approach has the advantage that it will not be necessary to amend the already existing security package, which will keep its priority without the need of seeking new registrations.
In terms of the substantive content of the restructuring agreement, the document may include any of the loan restructuring techniques. These options can be combined or arranged in such a way that alternative options can be offered to several types of creditors, depending on the class to which they are allocated. Restructuring plans are consensual in nature and assume all parties to the agreement consent to the terms agreed in the document. However, a key concept for restructuring agreements to succeed is to treat all parties fairly and avoid discrimination of similarly situated creditors in terms of their collateral, priority and outstanding obligations. All creditors holding the same position vis-à-vis the borrower should obtain a similar treatment.
The Restructuring Proposal - Term Sheet
The term sheet is the most important piece of the workout documentation, as all further documentation will find their origin therein. A draft term sheet drawn up right at the beginning of the workout process provides banks with a useful checklist of parties involved in the workout process and of the terms that will have to be agreed upon with the borrower, other banks, and stakeholders. The draft term sheet is revised at every stage of the workout process, particularly during negotiations. In addition, before drafting the final and formal workout documents, including the new or amendatory loan agreement, lawyers will want to make sure that they can see the full picture of the proposed workout and can iron out any discrepancies and controversial points.
Term-sheets are a common feature in project lending or in the structuring of term loans. They facilitate the negotiations in that the various terms that have been discussed and agreed upon during the progress of the negotiations can be laid down until the final deal or transaction is agreed.
Term-sheets are particularly useful in workouts, as they allow the borrower and bank to spell out what has been agreed upon and move on to the next item to be negotiated. In a workout, it may be necessary to include more than one creditor or stakeholder in the transaction, and the term-sheet allows the parties to agree on the main terms of the proposed restructuring transaction before the lawyers are asked to prepare the legal documents.
After determining, that a workout will be feasible, banks will want to put a proposal on the table. For smaller borrowers, this may take the form of a conversation between the bank and the borrower, to be confirmed in writing. For medium to large companies, where the terms are likely to be more complex and there is a need for the borrower to carefully study and absorb them, the proposal will more typically be in the form of a draft term sheet spelling out the conditions on which the bank is willing to restructure or reschedule the loan(s).
The Restructuring Documents:
- Loan Agreements
The complexity of the restructuring dictates which documents will be necessary. For a simple rescheduling of maturities, a letter may suffice and will have legal validity. However, if the face value of the loan and basic terms such as maturities and interest are changed, there may be a need for a new agreement. Legal practitioners are better placed to determine whether this will take the form of an amendatory agreement, where the body of the original loan agreement is left intact and the terms and conditions to be changed are covered in an additional agreement, amending the original.
- Security Agreements
In the event that there is additional security under negotiated strategy, additional agreements will be required to have such security registered. Particular care will be necessary to ensure that the existing rights of the senior, secured banks are honored and are not diluted or set aside in favor of those of the junior and unsecured banks.
- Ancillary Agreements
These will include additional overdraft agreements, guarantee agreements, share pledge agreements, security-sharing agreements, and the like, all in line with what has been agreed among the borrower and banks.
Key covenants
Covenants are undertakings (or promises) given by a borrower as part of a loan agreement. Their purpose is to provide the bank with an early warning sign of potential problems. They also provide another avenue of communication between the borrower and the bank.
Covenants can be affirmative, negative or positive in nature. They usually cover such areas as financial performance (e.g., will maintain total debt to EBITDA not greater than 2:1, or pay all taxes as they become due); information sharing (e.g., will provide audited annual financial statements); or ownership/ management arrangements (e.g., will employ financial management with demonstrated experience, or will not pay dividends without the consent of the bank).
Violation of any covenant gives the banks right to call the loan, charge fees, or collect interest at a higher rate. In practice, it has proven difficult to call a loan that is paying as agreed based on a covenant default. In this case, after developing a thorough understanding of the cause of the problem and its severity, the borrower is likely to issue either a temporary or permanent waiver in return for the borrower undertaking an agreed upon corrective action program.
All restructuring agreements should contain covenants. At a minimum, they should include provisions to submit financial statements; pay taxes as they become due; prohibit sale of company, completely or in part, without prior approval of bank. Covenants for larger, more complex borrowers need to be specifically tailored to meet their individual situations. Bank should include covenants pertaining to but restricted to profitability, efficiency, liquidity, and solvency ratios; requirements to dispose of assets or raise equity within specific timeframes; or prohibit investments or restrict business activities to those currently engaged in. Bank should also develop an internal process to be able to monitor adherence to these covenants.
Appendix 5: Glossary of Technical Terms
For the purpose of this document, the terms and phrases used in these guidelines have the following meaning:
Term Definition Balloon payment Interest paid regularly together with only small repayments of principal so that the bulk of the loan is payable upon maturity. Bullet payment Principal and interest paid at maturity. Collateral Whose value can be considered whilst computing the recoverable amount for workout cases or foreclosed cases, on account of meeting the stipulated conditions laid out in these rules, as would be applicable based on the nature of the collateral. Collateral enforcement The exercise of rights and remedies with respect to collateral that is pledged against a loan. Conditional loan forgiveness A bank forfeiting the right to legally recover part or the whole of the amount of an outstanding loan upon the borrower's performance of certain conditions. Cooperative borrower A borrower which is actively working with a bank to resolve their problem loan. Cure rate The percentage of loans that previously presented arrears and,post restructuring, present no arrears. Covenant A borrower's commitment that certain activities will or will not be carried out. EBITDA (earnings before interest, taxes, depreciation and amortization) Valuation metric for comparing the income of companies with different capital structures. Early warning signals Quantitative or qualitative indicators, based on liquidity, profitability, market, collateral and macroeconomic metrics. Failed restructuring Any restructuring case where the borrower failed to repay the revised contractual cash flows as agreed upon with the bank and has transitioned into default. Key performance indicators Indicators through which bank management or supervisor can assess the institution's performance. Loan to value ratio Financial ratio expressing the value of the loan compared to the appraised value of the collateral securing the loan. Problem Loans Loans that display well-defined weaknesses or signs of potential problems. Problem loans shall be classified by the banks in accordance with accounting standards, and consistent with relevant regulations, as one or more of: a. non-performing; b. subject to restructuring (including forbearance) and/or rescheduling; c. IFRS 9 Stages 2; and exhibiting signs of significant credit deterioration or Stage 3; d. under watch-list, early warning or enhanced monitoring measures; or e. where concerns exist over the future stability of the borrower or on its ability to meet its financial obligations as they fall due Restructuring An agreement between the bank and the borrower to modify the terms of loan contract so as to enable eventual repayment. Restructuring plan A document containing the measures to be taken in order to restore borrower's viability. Risk management system A centralized system that allows a bank to holistically monitor bank's risks, including credit risk. Unsuccessful restructuring The cases where the bank and the borrower are not able to reach any restructuring agreement. Viability assessment An assessment of borrower's ability to generate adequate cash flow in order to service outstanding loans. Viable borrower Wherein the loss of any concessions as a result of restructuring, is considered to be lower than the loss borne due to foreclosure. Watch list Loans that have displayed characteristics of a recent increase in credit risk which are subject to enhanced monitoringand review by a bank. Workout Unit A bank's operational unit in charge of handling problematic loans. Sound Practices for Banks’ Interactions with Highly Leveraged Institutions (HLI)-BCBS
No: 191000000710 Date(g): 9/3/1999 | Date(h): 22/11/1419 Status: In-Force As you are aware, in September 1998 the near collapse of Long-Term Capital Management, a highly leveraged, hedge fund posed a significant threat to the US financial markets necessitating a major response from the US Banking Supervisory Authorities. Since then there has been global scrutiny of international banks’ exposures to highly leveraged financial institutions in general and hedge funds in particular.
A Task Force established by the Basle Committee on Banking Supervision has completed a study of the risks for banks arising from their dealings with such institutions. The Committee has prepared the attached paper on “Sound Practices for Banks’ Interactions with Highly Leveraged Institutions (HLI)” that aims to encourage development of prudent approaches by banks to the assessment, measurement and risk management of credit exposures to HLIs.
In Saudi Arabia, some Banks may have dealings with institutions that meet the definitions of an HLI or a hedge fund. We expect these exposures to be managed in accordance with the Internal Control Guidelines for Commercial Banks issued by SAMA, and prudent internal credit policies and procedures of your Bank. In issuing this Basle Committee paper to Saudi Banks our expectations are as follows:
1. You should ensure that managers of your Bank’s credit, risk management, and other relevant functions are fully conversant with the best management practices outlined in this paper. 2. The Bank should internalize these practices by ensuring that these are reflected in your credit management and risk management policies and procedures. 3. An internal procedural framework that requires regular identification and monitoring of such exposures and their reporting to senior management should be developed.
Preface
In recent years, the activities of highly leveraged institutions (HLIs) have grown in both magnitude and complexity. The scope of the interactions between HLIs and mainstream financial institutions, such as banks and securities firms, has also expanded, emphasising the need for a full understanding and management of the risks generated from these activities. As with other borrowers and counterparties, banks and other financial intermediaries play a key role in allocating credit to HLIs. However, in the case of HLIs this can be particularly challenging given the relative opaqueness of their activities, the significant use of leverage and the dynamic nature of their trading positions and, in some cases, their market impact. The Basel Committee on Banking Supervision recognises that not all banks deal with or have significant exposures to HLIs. Most institutions that do have exposures to HLIs appear to be reviewing and tightening their credit standards for HLIs following the near-collapse of the hedge fund LTCM in September 1998. A key motivation for issuing sound practices is to ensure that improvements in credit standards and risk management processes are "locked in” over time and that the lessons are applied to the management of counterparty credit relationships more generally.
The management of credit risk in respect of HLIs involves the same principles as management of credit risk in general, but must also take account of the particular types of counterparty risk associated with such institutions. The Committee will shortly publish general principles for the management of credit risk. This paper should be seen as complementary to that effort, and is a response to the specific challenges posed by credit risk emanating from interactions with HLIs. The Committee’s review of banks’ dealings with HLIs has revealed that in many cases there has not been an appropriate balance among the key elements of the credit risk management process, with an over reliance on collateralisation of mark-to-market exposures.1 Insufficient weight was placed on in-depth credit analyses of the HLI counterparties involved and the effective measurement and management of exposures. Moreover, in some cases, competitive forces and the desire to conduct business with certain counterparties may have led banks to make exceptions to their firm-wide credit standards.
Counterparty exposures to HLIs can take a variety of forms, including in particular secured and unsecured credits resulting from off-balance-sheet contracts. The characteristics and implications of OTC derivatives were analysed by G-10 central banks in 1994. Following that review, the Committee issued risk management guidelines for derivatives that identified the types and sources of risk to counterparties in OTC transactions and reviewed sound risk management practices for each type of risk. In September 1998, the Committee on Payment and Settlement Systems and the Euro-currency Standing Committee published a report on settlement procedures and counterparty risk management related to OTC derivatives, which provides a thorough analysis of the policies and procedures employed by OTC derivatives dealers. Where appropriate, these guidelines will draw on these earlier studies and apply them, together with other recent insights, to the specific risks posed by highly leveraged counterparties.
The Basel Committee is distributing these sound practice standards to supervisors, banks and other interested parties worldwide with the expectation that they will encourage the further development of prudent approaches to the assessment, measurement and risk management of credit exposures to HLIs. The Committee invites the financial industry to assess standards and practices and to react to the recommendations. The Committee encourages supervisors to promote the application of sound practices by banks in their interactions with HLIs. The Committee wishes to emphasise that sound internal risk management, including effective counterparty credit risk management, is essential to the prudent operations of banks. With respect to their involvement with HLIs, it may also contribute significantly to ensuring that HLIs do not assume excessive risks and leverage. Should a major HLI nevertheless default, sound risk management at the counterparty level could contribute considerably to limiting the destabilising effects on markets resulting from, for example, the rapid deleveraging and liquidation of positions. By helping to reduce the potential for stressed-market exposures, sound credit management and monitoring practices by counterparties of HLIs should contribute to greater stability in the financial system as a whole.
1 Banks ' interactions with highly leveraged institutions, Basel Committee (BIS), January 1999.
I Introduction
This paper sets out sound practice standards for the management of counterparty credit risk inherent in banks’ trading and derivatives activities with highly leveraged institutions (HLIs). Its recommendations are directed at relationships with HLIs, which are defined as large financial institutions that are subject to very little or no direct regulatory oversight as well as very limited public disclosure requirements and that take on significant leverage. For the purpose of this paper, leverage is defined broadly as the ratio between risk, expressed in a common denominator, and capital. Leverage increases HLIs’ exposure to movements in market price’s and consequently can expose creditors to significant counterparty risk. Hedge funds are currently the primary example of institutions within this definition but it should be noted that many hedge funds are not highly leveraged, and that other institutions may also have some or all of the attributes of an HLI.
While this paper focuses on the management of credit risk resulting from interactions with HLIs, the issues raised are not unique to interactions with such institutions. However, it is not intended to provide a complete overview of the more general credit management practices. The sound practices set out here specifically address the following areas: (1) establishing clear policies and procedures for banks’ involvement with HLIs as part of their overall credit risk environment; (2) information gathering, due diligence and credit analysis of HLIs’ activities, risks and operations; (3) developing more accurate measures of exposures resulting from trading and derivatives transactions; (4) setting meaningful overall credit limits for HLIs; (5) linking credit enhancement tools, including collateral and early termination provisions, to the specific characteristics of HLIs; and (6) closely monitoring credit exposures vis-à-vis HLIs, including their trading activities, risk concentration, leverage and risk management processes.
In Sections II to VII the credit risk management issues highlighted above are set out in more detail.
II Banks’ Involvement with HLIs and their Overall Credit Risk Strategy
Before conducting business with HLIs, a bank should establish clear policies that govern its involvement with these institutions consistent with its overall credit risk strategy. Banks should ensure that an adequate level of risk management, consistent with their involvement with HLIs, is in place.
In general terms, each bank should have in place a clear credit risk strategy and an effective credit risk management process approved by the board of directors and implemented by senior management. The credit risk strategy should define the bank’s risk appetite, its desired risk return trade-off and mix of products and markets. In this context, a bank should assess whether dealings with HLIs are consistent with its credit risk strategy, its risk appetite and its diversification targets. If so, policies and procedures for interactions with HLIs must be devised that establish effective monitoring and control of such relationships. These policies and procedures should drive the credit setting process and govern banks’ relationships with HLIs, and should not be overridden by competitive pressures.
An effective credit risk management process includes appropriate documentation, comprehensive financial information, effective due diligence, use of risk mitigants such as collateral and covenants, methodologies for measuring current and future exposure, effective limit setting procedures, and ongoing monitoring of both the firm’s exposure to and the changing risk profile of the counterparty. Upholding these standards is particularly important with respect to interactions with HLI counterparties, where information has been limited, leverage may be high and risk profiles can alter rapidly. Where credit concerns are identified with regard to an HLI, a bank should either not conduct business or take appropriate steps to limit and manage the exposure consistent with their overall underwriting standards and risk appetite. HLIs that provide either insufficient information to allow meaningful credit assessments or proportionately less information about their risk profile than other counterparties should face tougher credit conditions, including, for instance, a higher level of initial margin, no loss threshold, a narrower range of assets which are deemed acceptable for collateral purposes, and a stricter range of other financial covenants.
The long-term success of a bank’s credit relationships relies heavily on effective and sophisticated risk management. This applies to banks that assume credit risks arising out of derivatives and other trading transactions with HLIs such as repurchase agreements and securities lending, as well as to banks that commit funds to HLIs through loans, credit lines or equity participations. Assuming credit exposure implies counterparty monitoring commensurate with the size of the exposure. Effective monitoring of the activities of an HLI requires thorough knowledge and understanding of its trading strategies, exposure levels, risk concentrations and risk controls. Reliance on collateral cannot substitute for day-to-day risk management and monitoring. While it can help reduce counterparty credit risk, full collateralisation of mark-to-market positions does not eliminate exposure to secondary risks (such as declines in the value of securities pledged as collateral) from a volatile market environment that could follow the default or disorderly liquidation of a major HLI. Moreover, collateral cannot fully mitigate credit risk and may add to other risks, such as legal, operational and liquidity risks.
III Information Gathering, Due Diligence and Credit Analysis of HLIs
A bank that deals with HLIs should employ sound and well-defined credit standards which address the specific risks associated with HLIs.
An effective credit approval process is the first line of defence against excessive counterparty credit risk. It should be a general requirement but one which assumes increasing importance with the size and/or risk of the counterparty relationship. A sound credit approval process for HLIs should begin with comprehensive financial and other information, providing a clear picture of a counterparty’s risk profile and risk management standards. The credit process should identify the purpose and structure of the transactions for which approval is requested and provide a forward-looking analysis of the repayment capacity based on various scenarios. Credit standards should articulate policy regarding the use and nature of collateral arrangements and the application of contractual provisions designed to protect the bank in the event of changes in the future risk profile of the counterparty such as covenants and close-out provisions (Section VI). Moreover, credit standards should set a clear methodology and process for establishing limits (Sections IV and V).
Before entering into any new relationship with an HLI, a bank must become familiar with the counterparty and be confident that it is dealing with an institution of sound repute and creditworthiness. This can be achieved in a number of ways, including asking for references from known parties, accessing credit registers, evaluating legal status, and becoming knowledgeable about the individuals responsible for managing the institution by, for example, checking their personal references and financial state. Banks must also have a clear view about the stability of the HLI, in terms not only of tangible factors such as earnings but also of less tangible ones such as strategy, quality of risk management practices, and staff composition and turnover. However, a bank should not grant credit solely because the counterparty, or key members of its management, are familiar to the bank or are perceived to be highly reputable.
Before establishing a credit relationship with an HLI, a bank should ensure that all information relevant to that relationship will be available to the bank on a sufficiently timely and ongoing basis. Stipulating the conditions in advance for an adequate transfer of information lays the foundation for an appropriate monitoring of credit risk and for assessing the potential need for adjustments to non-price terms or the application of termination provisions. Banks should seek to obtain information about material developments such as changes in the general direction of trading activities, profit and loss developments, significant changes to leverage, alterations to the risk management procedures or the risk measurement process and changes in key personnel. In order to secure the necessary information, banks must in turn satisfy their HLI counterparties that they have in place effective procedures to ensure the confidentiality of the information obtained through the credit review process.
Banks should obtain comprehensive financial information about an HLI; covering both on and off-balance-sheet positions, to understand the overall risk profile of the institution. Although additional efforts may be necessary to develop effective measures of leverage that relate capital to a common denominator of risk across on and off-balance-sheet positions, a starting point could be some measure of firm-wide value-at-risk (VaR), supplemented with the results of realistic stress testing. It is important that, where this information is used, the bank understand the parameters and the assumptions used in arriving at measures of risk and leverage in order to check the plausibility of the VaR and stress testing results. The bank should establish a clear understanding of the quality and integrity of the HLI’s processes and operations for measuring, managing and controlling market, credit and liquidity risks, including back-office systems, accounting and valuation policies and methodologies. The bank should also obtain information about the HLI’s liquidity profile, such as committed lines of credit and the availability of liquid, unpledged assets to meet possible increases in margin calls under adverse market conditions. Banks should periodically confirm, in various scenarios, whether the HLI’s future repayment capacity is reasonably assured or, for instance, highly dependent on specific assumptions.
Comprehensive and current financial information about an HLI is essential for an effective analysis of the counterparty’s credit quality and prudent setting of an internal rating and, consequently, the credit limits granted to the institution and the credit enhancements applied to the relationship. Credit assessment of HLIs and the monitoring and control of the associated counterparty risks are a more complex and time-consuming activity than credit management in respect of other conventional counterparties. It entails a high level of skill and a willingness to devote resources to regular updating and monitoring, resulting in costs which banks must recognise as part of doing business prudently with such institutions.
IV Exposure Measurement
A bank taking on OTC derivatives positions, vis-à-vis HLIs should develop meaningful measures of credit exposure and incorporate these measures into its management decision-making process.
Exposure measurement methodologies which provide meaningful information for decision making are an essential underpinning of the credit risk management process for trading and derivatives activities. They form the basis of effective limit setting and monitoring, discussed in Section V. As banks’ trading and derivatives activities grow in complexity and as banks move in the direction of relying more on firm-wide credit modelling techniques, it is increasingly important that measures of exposure be based on meaningful methodologies that are subject to continuous improvements commensurate with changing market conditions and practices and the bank’s needs. In particular, there are three areas where individual banks and the industry should focus their efforts: (1) the development of more useful measures of potential future exposure (PFE) that provide a meaningful calculation of the overall extent of a bank’s activity with a given counterparty; (2) the effective measurement of unsecured exposure inherent in OTC derivatives transactions that are subject to daily margining; and (3) realistic and timely stress testing of counterparty credit exposures.
First, the banking industry must devote further resources to developing meaningful measures of PFE. Banks generally measure total exposure to a counterparty as the sum of the current replacement cost (mark-to-market exposure) and PFE. PFE is a measure of how far a contract could move into the money over some defined horizon (typically the life of the contract) and at some specified confidence interval. When added together with the current replacement cost, measures of PFE are used to convert derivatives contracts to “loan equivalent” amounts for aggregating counterparty credit exposures across products and instruments.
Banks must have an effective measure of PFE which gives an accurate picture of the extent of their involvement with the counterparty in relation to their overall activities. Peak exposure measures should be determined to serve as true loan equivalent measures. PFE should adequately incorporate netting of long and short positions, as well as portfolio effects across products, risk factors and maturities, and be analysed across multiple time horizons. Banks should seek greater industry consensus on the appropriate confidence interval, the volatility concept and calculation period, and the frequency with which volatilities are updated. Banks should also incorporate such improved measures of PFE into their management decision-making process. This would include the ongoing monitoring of mark- to-market exposures against initial estimates of PFE. Banks should use this measure of PFE for assessing whether counterpartie’ financial capacity is sufficient to meet the level of margin calls implied by their measure of PFE.
Second, banks must develop more effective measures for assessing the unsecured risks inherent in collateralised derivatives positions. Such unsecured exposures can take many forms, for example through the use of initial loss thresholds, potential gaps or delays in the collateral/margining process, and the time it takes to liquidate collateral and rebalance positions in the event of counterparty default. Even where OTC derivatives are subject to daily payment and receipt of variation margin (including initial margin), a bank can still face significant unsecured credit exposure under volatile market conditions.
Currently there is no clear industry consensus on how to measure this type of unsecured exposure. Many banks calculate just one measure of PFE, typically over the life of the contract. While such lifetime measures of PFE are appropriate for the purpose of comparing uncollateralised derivatives and loan exposures and measuring overall activity with a given counterparty, they do not provide a meaningful measure of the unsecured credit risk inherent in collateralised derivatives positions. Shorter horizons would be necessary to capture the exposure arising over the time needed to liquidate and rebalance positions and to realise the value of collateral in the event of a failure to meet a margin call or a default by the counterparty. Moreover, shorter horizons will be more appropriate for calibrating initial margins and establishing loss threshold amounts on collateralised derivatives transactions.
Third, banks must develop more meaningful measures of credit risk exposures under volatile market conditions through the development and implementation of timely and plausible stress tests of counterparty credit exposures. Stress testing should also evaluate the impact of large market moves on the credit exposure to individual counterparties and the inherent liquidation effects. Stress testing should also consider liquidity impacts on underlying markets and positions and the effect on the value of any pledged collateral. Simply applying higher confidence intervals or longer time horizons to measures of PFE may not capture the market and exposure dynamics under turbulent market conditions, particularly as they relate to the interaction between market, credit and liquidity risk.
V Limit Setting
Effective limit setting depends on the availability of meaningful exposure measurement methodologies. In particular, banks should establish overall credit limits at the level of individual counterparties that aggregate different types of exposures in a comparable and meaningful manner.
Effective measures of PFE are essential for the establishment of meaningful limits, placing an upper bound on the overall scale of activity with, and exposure to, a given counterparty, based on a comparable measure of exposure across a bank’s various activities (both on and off-balance-sheet). Mark-to-market exposures should be monitored against initial limits on PFE.
Banks should monitor actual exposures against these initial limits and have in place clear procedures for bringing down exposure as such limits are reached. Moreover, limits should generally be binding and not driven by customer demand. A bank’s limit structure should cover the types of exposures discussed in Section IV.
Moreover, banks’ credit limits should recognise and reflect the risks associated with the near-term liquidation of derivatives positions in the event of a counterparty default. Where a bank has several transactions with a counterparty, its potential exposure to that counterparty is likely to vary significantly and discontinuously over the maturity over which it is calculated. PFEs should therefore be calculated over multiple time horizons. In the case of collateralised OTC derivatives exposures, limits should factor in the unsecured exposure in a liquidation scenario, that is, the amount that could be lost over the time it takes to rebalance positions and liquidate collateral (net of any initial margin received).
Finally, banks should consider the results of stress testing in the overall limit setting and monitoring process.
VI Collateral, Early Termination and Other Contractual Provisions
A bank interacting with HLIs should align collateral, early termination and other contractual provisions with the credit quality of HLIs, taking into account the particular characteristics of these institutions such as their ability to rapidly change trading strategies, risk profiles and leverage. In doing so, banks may be able to control credit risk more pre-emptively than is the case when such provisions are driven solely by net asset values.
Bank policies should determine the contractual provisions that govern HLI counterparty relationships. It is these contractual arrangements, together with the bank’s internal limit structure, that should determine the size of unsecured credit exposure assumed by the bank. In a number of market segments the types of collateral arrangements and covenants offered to a counterparty, rather than pricing, constitute the primary means for compensating for risk differentiation. It is therefore paramount that these contractual conditions closely relate to the credit quality of the counterparty.
The use of collateral can significantly reduce counterparty credit risks. Banks use collateral provisions in secured loans, repurchase agreements2 and OTC derivatives transactions. This includes transactions for which PFE (Section IV) is highly uncertain and transactions with less creditworthy counterparties. Nonetheless, the use of collateral does not eliminate credit risk and may entail other risks: liquidity, legal, custody and operational risks. Moreover, two-way collateral provisions could give rise to another type of credit risk. A loss could occur, for instance, when the bank has provided collateral owing to a negative exposure and the value of this collateral at the moment of the counterparty's default is larger than the mark-to-market position.
In establishing collateral provisions vis-à-vis HLIs, banks should bear in mind that HLIs are unregulated financial institutions whose leverage is not restricted by the prudential supervision of risk management practices and the capital requirement regimes that apply to regulated financial intermediaries. If a bank does not receive meaningful financial information on a sufficiently frequent basis to permit effective monitoring of counterparty credit risk, it should consider requiring the institution to post excess collateral even when the bank has no current exposure (i.e. posting of initial margin). At a minimum, banks should design and enforce clear internal guidelines for determining when initial margin will be required from counterparties. Similar prudent policies should be established for setting minimum transfer amounts (amounts of collateral below which a counterparty is not required to transfer collateral) and loss thresholds (exposures below which no collateral is posted). Similarly, the granting of two-way margining and rehypothecation rights should be a function of the credit quality of the counterparty. If banks agree to two-way collateral provisions, they should make sure that the resulting additional credit risk exposure is integrated in the overall risk management process (including measurement of the PFE).
Contractual provisions should reflect bank credit standards regarding haircuts applied to the securities taken as collateral, by discounting the collateral value relative to the current market value. Banks usually base the size of the valuation adjustments on the price volatility of the securities over the time that would be required to liquidate them on the default of a counterparty (in normal market conditions). In accepting collateral from HLIs, banks should carefully assess and take into account the correlation between the probability of counterparty default and the likelihood of the collateral being impaired owing to market, credit or liquidity developments. Experience has shown that in stressed-market conditions, all but the most liquid securities issued by the best credits worldwide may be downgraded owing to a broad-based flight to quality following, during or preceding the default of a major HLI.
With respect to OTC derivatives transactions, banks should bear in mind that the effectiveness of collateral provisions established to cover counterparty credit exposures may be significantly reduced if the value of the collateral is negatively correlated with the probability of the counterparty’s default or with the market value of the contracts. In stressed-market conditions, sizable amounts of additional collateral may have to be posted by an HLI with a concentrated portfolio. There should be clear documentation setting forth the actions to be taken in the event that a counterparty fails to meet collateral calls.
In addition, banks should include covenants which permit termination or other action in the event of a material deterioration in an HLI’s credit quality. The application and design of such early termination or close-out provisions should be a function of the counterparty’s credit quality and the ability of the bank to observe changes in (prospective) creditworthiness and to react swiftly to any negative changes. In the case of HLIs, publicly available information may be insufficiently up-to-date to permit continuous credit monitoring. The bank should set adequate standards for information disclosure during the credit relationship and establish termination provisions in relation to the counterparty’s risk profile so that it can take risk-reducing measures in a timely manner.
Banks’ standard practice in relation to conventional corporate credits is to set a range of covenants relating to financial strength. For HLIs, verifiable covenants addressing significant changes in strategy, or relating to leverage and risk concentration, appear particularly relevant. Reflecting the difficulties of measuring the absolute levels of some of these variables, covenants should be specified in terms of changes to the levels existing at the start of a credit relationship and based on agreed definitions of risk and capital. They should be designed with a view to tightening credit limits as counterparty risk increases. However, banks should realise that industry-wide use of “sudden death” termination provisions could have systemic implications. If these provisions do not affect the extent of risk-taking by HLIs ex ante, the intended credit risk reduction may not materialise, and all lenders may tighten credit terms at the same time. Covenants should ensure that banks are made aware of adverse financial developments and are able to press for adjustment well before the time when cessation of the relationship is appropriate. This pre-emptive aspect is as important as the ability to require repayment once adverse changes have occurred.
2 Although different in legal terms, the purchase (sale) of securities in combination with an agreement to reverse the transaction within a specified period amounts to a collateralised transaction in economic terms. In credit risk terms, similar risk management techniques apply to collateralised loans and (reverse) repurchase agreements.
VII Ongoing Monitoring of Positions Vis-À-Vis HLIs
A bank dealing with HLIs should effectively monitor HLI creditworthiness and the development of its exposure to HLI counterparties. Banks should assess HLI risk profiles and risk management capabilities frequently, while considering the potential for stressed-market conditions.
Given the speed with which HLIs can change their risk profile, banks should conduct reviews of counterparty credit quality of material HLI exposures on a frequent basis, at least quarterly. Additional reviews should be triggered by significant increases in exposure or market volatility. With respect to HLIs, effective monitoring tools should go beyond monthly changes in net asset value and crude balance-sheet measures. There should be detailed quantitative information about risk, for instance VaR numbers supplemented with internal stress testing results. Banks should conduct regular reviews of HLI risk management capabilities. In addition, banks should have a proper understanding of concentrations of risk, including their own exposures to HLIs as a group as well as the risk concentration facing HLIs themselves.
Effective collateral management systems are important for monitoring and limiting counterparty credit exposures. Banks should ensure that collateral management systems capture all counterparty positions, that such positions and related collateral are marked to market on at least a daily basis, and that payment and receipt of (additional) collateral is conducted in a timely manner. Haircuts that apply to the various types of securities that are accepted as collateral should be revised on a regular basis, taking into account price volatility, liquidity and credit quality developments. Where banks focus on limiting credit risk resulting from OTC derivatives positions by timely collateralisation, they should monitor the unsecured part of the exposure (including PFE) particularly closely, taking into account the counterparty’s ability to meet future collateral demands. Since OTC derivatives exposures often make up a large part of the total exposure to HLIs, assessing the ability to provide additional collateral when required and setting meaningful credit limits based on such assessments may be especially relevant in dealings with HLIs.
Finally, ongoing exposure monitoring should incorporate the results of periodic stress testing of counterparty credit exposures that takes into account the interaction between market, credit and liquidity risks (Section IV). Such stress testing results should be included in senior management reports and provide sufficient information to trigger risk-reducing actions where necessary.
General Provisions
Guidelines on the Regulatory Treatment of Banks' Exposures to Central Counterparties
No: 41038270 Date(g): 26/1/2020 | Date(h): 1/6/1441 Status: 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).
3. Scope
These requirements are applicable to all banks (domestic and foreign) licensed under the Banking Control Law (Royal Decree No. M/5 dated 22/2/1386 H) that wish to become members of a CCP and have exposures to the CCP.
Foreign banks branches who are clearing members of the CCP will be deemed to be engaged in Critical Economic Functions and as such will be considered Systemically Important under the Foreign Bank Branch regulations issued by SAMA via circular No.4922/67 dated 25/01/1441AH.
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:
Sheet Cell Description Q17.2 $B$27 Exposure amount for contributions to the default fund of a Domestic CCP Q17.2 $B$28 Domestic QCCP Q17.2 $B$29 Foreign QCCP Q17.2 $B$68 Risk Relating to CCP Q17.4 $A$12 Of which: Centrally cleared through a Domestic QCCP Q17.4 $A$13 Of which: Centrally cleared through a Foreign QCCP Q17.4 $A$16 2% Q17.4 $A$17 4% Q17.5 $A$26 Centrally cleared through a Domestic QCCP Q17.5 $A$27 Centrally cleared through a Foreign QCCP Q17.5.3 $A$26 Centrally cleared through a Domestic QCCP Q17.5.3 $A$27 Centrally cleared through a Foreign QCCP Q17.9 $C$127 Risk 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).
Rules on Credit Risk Management
No: 341000036442 Date(g): 1/2/2013 | Date(h): 21/3/1434 Status: In-Force 1) In terms of its Charter issued by Royal Decree No. 23 dated 23-5-1377 H (15 December 1957 G), SAMA is empowered to regulate the commercial banks. In exercise of the powers vested upon it under the said Charter and the Banking Control Law, SAMA has decided to issue this Circular and the enclosed Rules on Credit Risk Management for Banks. The requirements contained in this Circular and the Rules are aimed to complement the existing regulatory requirements issued by SAMA from time to time.
2) The enclosed Rules on Credit Risk Management contain, inter alia, the following major requirements for banks:
i. The Board of Directors is required to provide effective oversight to ensure prudent conduct of credit activities and avoid unduly excessive risk taking by their bank;
ii. The Board of Directors is responsible for formulation of a well-defined Credit Policy for the bank. The Policy should set out the overall strategy and credit risk appetite of the bank as well as the broad parameters for assuming and managing credit risk. The Policy should be reviewed regularly to take into account market developments and any changes in the operating environment;
iii. The Board is also required to constitute a Board Committee headed by a non-executive director to assist the Board in overseeing the credit risk management process and to discharge such other related responsibilities as may be assigned to it by the Board;
iv. Banks are required to put in place an elaborate credit risk management framework to effectively manage their credit risk. Such framework would include, inter alia, the process for Board and senior management oversight, organizational structure, and systems and procedures for identification, acceptance, measurement, monitoring and control of credit risk;
v. The senior management of the bank is responsible for ensuring effective implementation of the credit policy and credit risk strategy approved by the Board. For this purpose, the management should develop and implement well-defined policies and procedures for identifying, measuring, monitoring and controlling credit risk in line with the overall strategy and credit policy approved by the Board;
vi. The organizational structure/framework for credit risk management should be commensurate with the bank’s size, complexity of operations and diversification of its activities. The organizational structure should facilitate effective management oversight and proper execution of credit risk management and control processes. The structure may comprise of a credit risk management department or unit independent of credit origination function and a management committee responsible for monitoring of credit risk;
vii. Banks should ensure to have in place adequate systems and procedures for credit risk management including those for credit origination, limit setting, credit approving authority, credit administration, credit risk measurement and internal rating framework, credit risk monitoring, credit risk review, and management of problem credits;
viii. Banks should conduct stress tests on their credit portfolio to assess its resilience under “worst case” scenario and to analyze any inherent potential risks in individual credits or the overall credit portfolio or any components thereof. For this purpose, banks should follow the guidance provided in the SAMA Rules on Stress Testing issued on 23 November 2011;
ix. Banks should ensure to have in place an effective management information system(MIS) to measure, monitor and control the credit risk inherent in the bank’s on- and off-balance sheet activities. The MIS should produce reports on measures of credit risk for appropriate levels of management, the relevant Board committee and the Board to enable them to take timely decisions on credit risk management;
x. Banks should introduce effective internal controls to manage credit risk. In this regard, bank’s internal audit function should independently assess the adequacy and effectiveness of such internal controls and report findings thereof to the senior management and the Board or its relevant committee for timely corrective actions;
3) The enclosed Rules shall be applicable to the locally incorporated banks as well as the branches of foreign banks. Where a locally incorporated bank has majority owned Subsidiary(ies) operating in the financial sector, it will either formulate group level Credit Policy consistent with these Rules for application across the group or will ensure that the subsidiary’s credit policies and procedures are in line with these Rules. Furthermore, in case of foreign subsidiaries, the legal and regulatory requirements of the host country shall also be taken into account while framing their credit policies and procedures. For the purpose of these rules, majority owned subsidiary(ies) include those subsidiary(ies) where a bank owns more than 50% of its shareholding. The branches of foreign banks licensed and operating in Saudi Arabia shall also follow these Rules. However, they will apply these Rules to the extent practically applicable to them and with such modifications as may be considered expedient keeping in view the size and complexity of their business activities. Further, their Credit Policy can be approved by the Chief Executive or a relevant management committee at Head Office instead of the Board of Directors.
4) Banks are also required to ensure compliance with all other regulatory requirements and guidelines on credit risk management as issued by SAMA from time to time. They are also required to comply with the “Principles for the Management of Credit Risk”, “Sound credit risk assessment and valuation for loans” and “Principles for enhancing corporate governance” issued by the Basel Committee on Banking Supervision in September 2000, June 2006 and October 2010 respectively as well as any other related principles and standards including updates thereof issued by the relevant international standard setting bodies.
5) The enclosed Rules shall come into force with immediate effect and banks are required to take all necessary steps to bring their existing policies, procedures and structures in line with these Rules by 30 June 2013. Furthermore, they are also required to submit a copy of their revised Credit Policy fully aligned with these Rules and duly approved by their Board of Directors to the Central bank latest by 30 June 2013. In case there are any practical issues in implementation of these rules, banks should approach SAMA to seek further guidance on addressing such issue
1. General Requirements
1.1. Overview
Credit risk is historically the most significant risk faced by banks. It is measured by estimating the actual or potential losses arising from the inability or unwillingness of the obligors to meet their credit obligations on time. Credit risk could stem from both on and off balance sheet exposures of banks. Keeping in view the importance of effective credit risk management for the safety and soundness of banks, these Rules are being issued by SAMA to set out the regulatory requirements for further strengthening of credit risk management framework in banks.
All banks operating in Saudi Arabia are required to ensure that they have put in place an elaborate credit risk management framework to effectively manage their credit risk. Such framework would cover various types of lending including corporate, commercial, SME, retail, consumer, etc. The credit risk management framework should include, inter alia, the following components:
i. Board and senior management’s Oversight;
ii. Organizational structure;
iii. Systems and procedures for identification, measurement, monitoring and control of credit risk.
While designing and strengthening their credit risk management framework, banks should ensure compliance of these Rules. Furthermore, banks should also take into account the requirements of the “Principles for the Management of Credit Risk”, “Sound credit risk assessment and valuation for loans”, and “Principles for enhancing corporate governance” issued by the Basel Committee on Banking Supervision in September 2000, June 2006 and October 2010 respectively, and any other related principles and standards including updates thereof issued by the relevant international standard setting bodies.
1.2. Objective of the Rules
The objective of these Rules is to set out the minimum requirements for banks in the area of credit risk management. However, banks are encouraged to adopt more stringent standards beyond the minimum requirements of these Rules to effectively manage their credit risk.
1.3. Scope of Application
These Rules shall be applicable to the locally incorporated banks as well as the branches of foreign banks. Where a locally incorporated bank has majority owned Subsidiary(ies) operating in the financial sector, it will either formulate group level Credit Policy consistent with these Rules for application across the group or will ensure that the subsidiary’s credit policies and procedures are in line with these Rules. Furthermore, in case of foreign subsidiaries, the legal and regulatory requirements of the host country shall also be taken into account while framing their credit policies and procedures. For the purpose of these rules, majority owned subsidiary(ies) include those subsidiary(ies) where a bank owns more than 50% of its shareholding. The branches of foreign banks licensed and operating in Saudi Arabia shall also follow these Rules. However, they will apply these Rules to the extent practically applicable to them and with such modifications as may be considered expedient keeping in view the size and complexity of their business activities. Further, their Credit Policy can be approved by the Chief Executive or a relevant management committee at Head Office instead of the Board of Directors.
1.4. Effective Date
These Rules shall come into force with immediate effect. All banks are required to take all necessary steps to bring their existing policies, procedures and structures in line with these Rules by 30 June 2013. Furthermore, they are also required to submit a copy of their revised Credit Policy fully aligned with these Rules and duly approved by their Board of Directors to the Central Bank latest by 30 June 2013. In case there are any practical issues in implementation of these rules, banks should approach SAMA to seek further guidance on addressing such issues.
2. Board and Senior Management’s Oversight
2.1. Responsibilities of the Board Of Directors
The Board of Directors is responsible for approving the credit risk strategy of the bank in line with its overall business strategy. The credit strategy should be aimed at determining the credit risk appetite of the bank. The overall credit strategy and related policy matters shall be clearly outlined in a policy document to be called “Credit Policy”. Specifically, the Board’s responsibilities with regard to creditgranting function of the bank would include the following:
i. Developing a credit strategy for the bank to spell out its overall risk appetite in relation to credit risk;
ii. Ensuring that the bank has a well-defined Credit Policy duly approved by the Board;
iii. Forming a Board Committee headed by a non-executive director to assist the Board in overseeing the credit risk management process and defining its terms of reference (this Committee may also monitor other risks in addition to credit risk);
iv. Ensuring that the bank has an effective credit risk management framework for the identification, measurement, monitoring and control of credit risk;
v. Requiring the management to ensure that the staff involved in credit appraisal, monitoring, review and approval processes possess sound expertise and knowledge to discharge their responsibilities;
vi. Ensuring that bank has adequate policies and procedures in place to identify and manage credit risk inherent in all products and activities including the risks of new products and activities before being introduced or undertaken. Such policies and procedures should also provide guidance on evaluation and approval of any new products and activities before being introduced or undertaken by the bank;
vii. Ensuring that the bank’s remuneration policies do not contradict its credit risk strategy. In this regard, the board should ensure that the bank’s credit processes are not weakened as a result of rewarding unacceptable behavior such as generating short-term profits while deviating from credit policies or exceeding established limits;
viii. Ensuring that the bank’s overall credit risk exposure is maintained at prudent levels;
2.2. Responsibilities of the Senior Management
The senior management of the bank shall be responsible, inter alia, for the following:
i. Ensuring effective Implementation of the credit policy and credit risk strategy approved by the board of directors. In this regard, the management should ensure that the bank’s credit-granting activities conform to the established strategy, that written procedures are developed and implemented, and that loan approval and review responsibilities are clearly and properly assigned;
ii. Developing policies and procedures for identifying, measuring, monitoring and controlling credit risk. Such policies and procedures should be in line with the overall strategy and credit policy approved by the Board and address credit risk in all of the bank’s activities and at both the individual credit and portfolio levels. These policies and procedures should, inter alia, provide guidance to the staff on the following matters:
a. Detailed and formalized credit evaluation/ appraisal process;
b. Credit approval authority at various hierarchy levels including authority for approving exceptions;
c. Credit risk identification, measurement, monitoring and control across all products and activities of the bank including risks inherent in new products and activities;
d. Credit risk acceptance criteria;
e. Credit origination, credit administration and loan documentation procedures;
f. Roles and responsibilities of units/staff involved in origination and management of credit;
g. Procedures for dealing with defaulted credits.
iii. Communication of approved credit policy and procedures down the line to the concerned staff;
iv. Ensuring that there is a periodic independent internal assessment of the bank’s credit policy and strategy as well as of the related credit-granting and management functions;
v. Instituting a process for reporting any significant deviation/exception from the approved policies and procedures to the senior management/board and ensuring rectification thereof through corrective measures;
3. Credit Policy and Procedures
Each Bank shall formulate a Credit Policy that is approved by its Board of Directors. Such policy should be clearly defined, consistent with prudent banking practices and relevant regulatory requirements, and adequate for the nature and complexity of the bank’s activities. The Credit Policy should be applied on a consolidated bank basis and at the level of individual subsidiaries, as applicable.
The Policy should, inter-alia, cover the following:
i. Overall strategy of the bank to determine its risk appetite and risk tolerance levels in relation to credit risk;
ii. Broad parameters for taking credit exposures to customers, banks, geographic areas/countries, economic sectors, related parties, etc. This should, inter alia, include obtaining a credit report from SIMAH and credit checks about the borrower from other banks;
iii. Exposure limits for different categories of borrowers. Such limits should be in line with the SAMA’s “Rules on Exposure Limits” as amended from time to time;
iv. Policy parameters for achieving reasonable diversification of credit portfolio. This would include diversification over client segments, loan products, economic sectors, geographical locations, lending currencies and maturities;
v. Know Your Customer process for taking credit exposures. Such process should, inter alia, include obtaining information on legal and ownership structure of the corporate borrowers, their governance structure including management profile, beneficial ownership and basic financial information of their major business affiliates / subsidiaries (both local and foreign), details of their global financial commitments (both local and foreign) including the lenders and type of security/collateral provided to them, business plan/financial forecasts of the borrower covering the tenor of the credit facilities,, regular visits to owners of borrowing entities and their guarantors, monitoring involvement of owners/major shareholders in key business decisions, and the requirements for signing credit agreements and associated documents by the borrowers in the presence of bank’s staff. With regard to signing of credit documents, the Credit Policy should provide that credit agreements and associated documents in respect of all those exposures (including funded and / or non-funded facilities) exceeding one percent of total Tier-1 capital of the bank or SAR 100 million whichever is less, must be signed in the presence of bank’s senior officers. The Policy should also lay down an elaborate process for signing the credit documents in respect of all other exposures in the presence of bank’s staff to fully protect the interest of the bank;
vi. Structuring of credit facilities/transactions with clearly defined purpose and monitoring end use of credit facilities. Furthermore, no financing to be provided to support speculative activities and general purpose activities or any activity which lacks a well-defined purpose for utilization of credit facilities. This will, however, not include the working capital or overdraft facilities provided the end use of such facilities is monitored by the bank to ensure their ultimate utilization for the purpose for which those were granted;
vii. Broad parameters for providing financing for the subscription of initial public offering(IPO) of shares. Such financing, if provided, should be based on a clear and cautious policy and against adequate collateral with sufficient margins to mitigate the risk of volatility in share prices. The maximum financing for the subscription of IPO of shares shall be restricted to 50% of the amount to be subscribed by a single person. Banks shall also obtain complete particulars of the borrower and verify his credentials including name, identity and credibility before granting any financing (as per SAMA Circular dated 22 Shaban 1413 H);
viii. Broad parameters for seeking collateral against financing facilities as well as the nature of such collateral. Furthermore, the parameters for taking any exposures without collateral should be clearly spelled out along with the procedures to cover the associated recovery/settlement risk in such exposures;
ix. Requiring the Senior Management to ensure that the staff involved in credit appraisal, credit administration, credit review and other related functions are well trained to discharge their responsibilities and are periodically rotated in their assignments;
x. Other related matters to spell out the credit policy parameters of the bank.
A copy of the Policy duly approved by the Board shall be submitted to SAMA within 30 days of its approval. The Board of Directors or a relevant sub-committee of the Board of each bank shall review their Credit Policy as and when needed but at-least once in every three years. All significant/material changes to the Credit Policy shall be approved by the Board of Directors or a relevant sub-committee of the Board and a copy thereof submitted to the Central Bank within 30 days of such approval. In case of frequent changes in the Credit Policy, banks may choose to submit the revised Credit Policy to the Central Bank once a year incorporating all changes made during a year, within 30 days of the end of a calendar year.
4. Organizational Structure
The overall structure for credit risk management should be commensurate with the bank’s size, complexity of operations and diversification of its activities. The organizational structure should facilitate effective management oversight and proper execution of credit risk management and control processes. While the organizational structure may vary from bank to bank, it would generally comprise of the following:
4.1. Credit Risk Management Department or a Unit
Such department or unit can be part of the overall risk management function of the bank but should be independent of the loan origination function. This department or unit should be responsible, inter alia, for the following:
a. Monitoring adherence to the overall risk tolerance limits set out in the Credit Policy of the bank;
b. Ensuring that the business lines comply with the established credit risk parameters and prudential limits;
c. Establishing the systems and procedures relating to credit risk identification, internal risk rating approaches, Management Information System, monitoring of loan portfolio quality and early warning;
d. undertaking portfolio evaluations and conducting comprehensive studies on the environment to test the resilience of the loan portfolio;
e. Coordinating on remedial measures to address deficiencies/problems in credit portfolio;
f. Other matters relating to credit risk management.
4.2. Credit Risk Management Committee
This Committee will be a management committee and responsible for monitoring of credit risk taking activities and overall credit risk management function. This Committee can either be a separate committee comprising of the heads of relevant functions depending upon their size, organizational structure and corporate culture or these responsibilities can be assigned to the overall Risk Management Committee of the bank. Its terms of reference may include, inter alia, the following:
a. Ensure implementation of the credit risk policy / strategy approved by the Board;
b. Monitor credit risk on a bank-wide basis and ensure compliance with limits approved by the Board;
c. Providing input in formulation of credit policy of the bank particularly on credit risk related issues including, for example, setting standards for presentation of credit proposals, financial covenants, rating standards and benchmarks, etc.;
d. Make Recommendations to the Risk Management Committee or any other relevant committee of the Board on matters relating to delegation of credit approving powers, prudential limits on large credit exposures, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning, etc. as and when required;
e. Dealing with any other matters relating to credit risk management.
The Credit Risk Management Department or Unit will provide necessary support to the Credit Risk Management Committee in discharging its responsibilities.
5. Systems and Procedures
Banks should put in place adequate systems and procedures for credit risk management. Broad guidelines for setting systems and procedures regarding various credit related activities of a bank are provided hereunder:
5.1. Credit Origination
Banks should establish sound and well-defined credit-granting criteria, which is essential to approving credit in a safe and sound manner. These criteria should include a clear indication of the bank’s target market and a thorough understanding of the borrower or counterparty, as well as the purpose and structure of the credit, and its source of repayment.
Banks should also have clearly established processes and procedures to assess the risk profile of the customer as well as the risks associated with the proposed credit transaction before granting any credit facility. These processes and procedures should be applicable for approving new credits as well as the amendment, renewal and re-financing of existing credits. The factors to be considered for origination of credit may include, inter alia, the following:
a. Credit assessment of the borrower’s industry, and macro economic factors;
b. The purpose of credit and source of repayment;
c. Assessing the track record / repayment history of the borrower. In case of new borrowers, assessing their integrity and repute as well as their legal capacity to assume the liability;
d. Assessment/evaluation of the repayment capacity of the borrower;
e. Determination of the terms and conditions and covenants of credit;
f. Assessment of the adequacy and enforceability of collaterals;
g. Assessment of adherence to exposure limits and determination of appropriate authority for credit approval;
All extensions of credit must be made on an arm’s-length basis. In particular, credits to related borrowers must be authorized on an exception basis, monitored with particular care and other appropriate steps taken to control or mitigate the risks of non-arm’s length lending.
In case of consortium/syndication loans, it is important that other consortium members should not over rely on the lead bank and should have their own systems and procedures to perform independent analysis and review of syndication terms.
5.2. Limit Setting
Banks should establish overall credit limits at the level of individual borrowers and counterparties, and groups of connected counterparties that aggregate in a comparable and meaningful manner different types of exposures, both in the banking and trading book and on and off the balance sheet.
SAMA has separately specified exposure limits for single counterparties and group of connected counterparties. While remaining within the overall limits specified by SAMA, banks can establish more conservative exposure limits. Banks are required to have well-defined policies and procedures for establishing their internal exposure limits as such limits are an important element of credit risk management. The limit structure should set the boundaries for overall risk taking, be consistent the bank’s overall risk management approach, be applied on a bank-wide basis, allow management to monitor exposures against predetermined risk tolerance levels and ensure prompt management attention to any exceptions to established limits. Banks should take into account the following parameters in establishing their exposure limits:
a. The size of the limits should be based on the credit strength of the borrower, genuine requirement of credit, economic conditions and the bank’s risk tolerance;
b. The limits should be consistent with the bank’s risk management process and commensurate with its capital position;
c. The limits should be established for both individual borrowers as well as groups of connected borrowers. The limits can be based on the internal risk rating of the borrower or any other basis linked to the borrower’s risk profile;
d. There can be separate limits for different credit products and activities, specific industries, economic sectors or geographic regions to avoid concentration risk. The ultimate objective should be to achieve reasonable diversification of credit portfolio;
e. The results of stress testing should be taken into account in the overall limit setting and monitoring process;
f. Credit limits should be reviewed regularly at least annually or more frequently if the borrower’s credit quality deteriorates;
g. All requests of increase in credit limits should be fully evaluated and substantiated.
Banks should closely monitor their credit exposures against established limits and put in place adequate procedures for timely identification of any exceptions against the approved limits. There should also be well defined procedures to deal with any excesses over approved limits. Furthermore, all such instances of excesses over limits should be reported to the senior management along with the details of the corrective action taken. Exceptions to the approved limits should be approved at senior level by the authorized persons. In case of occurrence of frequent exceptions, the management or the board should review the limit structure and devise a strategy to ensure non-occurrence of such breaches.
5.3. Delegation of Authority
Banks are required to establish responsibility for credit approvals and fully document any delegation of authority to approve credits or make changes in credit terms. In this regard, banks are required to take into account the following factors:
a. Board of Directors or its relevant sub-committee should approve the overall lending authority structure, and explicitly delegate credit sanctioning authority to senior management (by position/level of hierarchy) and/or the Credit Committee. The Senior Management may assign the delegated powers to specific individuals or positions down the line subject to adherence of the overall delegation of authority and the criteria laid down for this purpose by the Board or its relevant subcommittee;
b. Lending authority assigned to different levels of hierarchy should be commensurate with the level, experience, ability and character of the person. For this purpose, banks may develop a risk-based authority structure whereby the lending authority is tied to the risk ratings of the obligor;
c. There should be a clear segregation of duties between Relationship Managers, Credit Approvers, Operations processors and Risk Managers with regard to credit approvals or making any changes in credit terms. Any limitations on who should hold credit approval authority should also be clearly stated;
d. The credit policy should spell out the escalation process to ensure appropriate reporting and approval of credit extension beyond prescribed limits or any other exceptions to credit policy;
e. There should be a periodic review of lending authority assigned to different levels of hierarchy;
f. There should be an appropriate system in place to detect any exceptions or misuse of delegated powers and reporting thereof to the senior management and/or the Board of Directors or its relevant sub-committee;
5.4. Credit Administration
Credit administration is an important element of the credit process that support and control extension and maintenance of credit. Banks should have in place a system for the ongoing administration of their various credit risk-bearing portfolios. Banks should also have separate units to perform credit administration function. A typical credit administration unit generally performs the following functions:
a. Credit Documentation: Ensuring completeness of documentation (loan agreements, guarantees, transfer of title of collaterals, etc.) in accordance with the approved terms and conditions of credit;
b. Credit Disbursement: Ensuring that credit approval have been obtained from the competent authority and all other formalities have been completed before any loan disbursement is effected;
c. Credit monitoring: This process starts after disbursement of credit and include keeping track of borrowers’ compliance with credit terms, identifying early signs of irregularity, conducting periodic valuation of collateral and monitoring timely repayments;
d. Loan Repayment: The obligors should be communicated ahead of time as and when the principal and/or commission income becomes due. This may be done either by providing details of the due dates and repayable amounts for both commission and principal in the facility agreement or through a separate communication to the obligor before each due date of the principal and/or commission income or by adopting both these practices. Any delinquencies involving non-payment or late payment of principal or commission should be tagged and communicated to the management. Proper records and updates should also be made after receipt of overdue amount;
e. Maintenance of Credit Files: All credit files should be properly maintained including all original correspondence with the borrower and necessary information to assess its financial health and repayment performance. The credit files should be maintained in a well organized way so that these are easily accessible to external / internal auditors or SAMA inspection team. Banks may resort to maintain electronic credit files only if permitted by relevant law(s) and subject to compliance of all relevant rules/regulations;
f. Collateral and Security Documents: Ensuring that all collateral/security documents are kept in a secured way and under dual control. Proper record of all collateral/security documents should be maintained to keep track of their movement. Procedures should also be established to track and review relevant insurance coverage for facilities/collateral wherever required. Physical checks on collateral/security documents should also be conducted on a regular basis.
Banks should ensure that the credit administration function should be independent of business origination and credit approval process. In developing their credit administration function, banks should ensure:
a. the efficiency and effectiveness of credit administration operations, including monitoring documentation, contractual requirements, legal covenants, collateral, etc.;
b. the accuracy and timeliness of information provided to management information systems;
c. adequate segregation of duties;
d. the adequacy of controls over all “back office” procedures; and
e. compliance with prescribed management policies and procedures as well as applicable laws and regulations.
5.5. Credit Risk Measurement
Banks should adopt elaborate techniques to measure credit risk which may include both qualitative and quantitative techniques. Banks should also establish and utilize an internal credit risk rating framework in managing credit risk. The internal credit risk rating is a summary indicator of a bank’s individual credit exposures and categorizes all credits into various classes on the basis of underlying credit quality. This rating framework may incorporate, inter alia, the business risk (including industry characteristics, competitive position e.g. marketing/technological edge, management capabilities, etc.) and financial risk (including financial condition, profitability, capital structure, present and future cash flows, etc.). The rating system should be consistent with the nature, size and complexity of a bank’s activities.
An internal rating framework would facilitate banks in a number of ways such as:
a. Credit selection;
b. Amount of exposure;
c. Tenure and price of facility;
d. Frequency or intensity of monitoring;
e. Analysis of migration of deteriorating credits and more accurate computation of future loan loss provisions;
f. Deciding the level of approving authority of credit approval.
It is not the intention of these guidelines to prescribe any particular rating system. Banks can choose a rating system which commensurate with the size, nature and complexity of their business as well their risk profile. However, banks are encouraged to take into account the following factors in designing and implementing an internal rating system;
a. The rating system should explicitly define each risk rating grade. The number of grades on rating scale should be neither too large nor too small. A large number of grades may increase the cost of obtaining and analyzing additional information and thus make the implementation of rating system expensive. On the other hand, if the number of rating grades is too small it may not permit accurate characterization of the underlying risk profile of a loan portfolio;
b. The rating system should lay down an elaborate criteria for assigning a particular rating grade, as well as the circumstances under which deviations from criteria can take place;
c. The operating flow of the rating process should be designed in a way that promotes the accuracy and consistency of the rating system while not unduly restricting the exercise of judgment;
d. The operating design of a rating system should address all relevant issues including which exposures to rate; the division of responsibility for grading; the nature of ratings review; the formality of the process and specificity of formal rating definitions;
e. The rating system should ideally aim at assigning a risk rating to all credit exposures of the bank. However, the banks may decide as to which exposures needs to be rated taking into account the cost benefit analysis. The decision to rate a particular credit exposure could be based on factors such as exposure amount, nature of exposure(i.e. corporate, commercial, retail, etc.) or both. Generally corporate and commercial exposures are subject to internal ratings whereas consumer / retail loans are subject to scoring models;
f. Banks should take adequate measures to test and develop a risk rating system prior to adopting one. Adequate validation testing should be conducted during the design phase as well as over the life of the system to ascertain the applicability of the system to the bank’s portfolio. Furthermore, adequate training should be imparted to the staff to ensure uniformity in assignment of ratings;
g. Banks should clearly spell out the roles and responsibilities of different parties for assigning risk rating. Ratings are generally assigned /reaffirmed at the time of origination of a loan or its renewal /enhancement. Generally loan origination function initiates a loan proposal and also allocates a specific rating. This proposal passes through the credit approval process and the rating is also approved or recalibrated simultaneously by approving authority. This may, however, vary from bank to bank;
h. The rating process should take into account all relevant risk factors including borrower’s financial condition, size, industry and position in the industry; the reliability of financial statements of the borrower; quality of management; elements of transaction structure such as covenants, etc. before assigning a risk rating. The risk rating should reflect the overall risk profile of an exposure;
i. Banks should also ensure that risk ratings are updated periodically and are also reviewed as and when any adverse events occur. There should also be a periodic independent review of the risk ratings by a separate function independent of loan origination to ensure consistency and accuracy of ratings.
5.6. Credit Risk Monitoring
Banks should put in place an effective credit monitoring system that enables them to monitor the quality of individual credit exposures as well as the overall credit portfolio and determine the adequacy of provisions. The monitoring system should also enable the bank to take remedial measures as and when any deterioration occurs in individual credits or the overall portfolio. An effective system of credit monitoring should ensure that:
a. the current financial condition of the borrower is fully understood and assessed by the bank;
b. the overall risk profile of the borrower is within the risk tolerance limits established by the bank;
c. all credits are in compliance with the applicable terms & conditions and regulatory requirements;
d. usage of approved credit lines by borrowers is monitored by the bank;
e. the projected cash flow of major credits meet debt servicing requirements;
f. collateral held by the bank provides adequate coverage;
g. all loans are being serviced as per facility terms & conditions;
h. potential problem credits are identified and classified on a timely basis;
i. provisions held by the bank against non-performing loans are adequate;
The banks’ credit policy should explicitly provide procedural guidelines relating to credit risk monitoring covering, inter alia, the following points:
a. The roles and responsibilities of individuals responsible for credit risk monitoring;
b. The assessment procedures and analysis techniques (for individual loans & overall portfolio). This may include, inter alia, the assessment procedures for assessing the financial position and business conditions of the borrower, monitoring his account activity/conduct, monitoring adherence to loan covenants and valuation of collaterals;
c. The frequency of monitoring;
d. The periodic examination of collaterals and loan covenants;
e. The frequency of site visits;
f. Renewal of existing loans and the circumstances under which renewal may be deferred;
g. Restructuring or rescheduling of loans and other credit facilities;
h. The identification of any deterioration in any loan and follow-up actions to be taken.
5.7. Independent Credit Risk Review
Banks should establish a mechanism of conducting an independent review of credit risk management process. Such a review should be conducted by staff involved in credit risk assessment, independent from business area. The placement of this function within the organization and its reporting lines can be determined by the banks themselves provided its independence from the business is ensured. The Credit Policy of the bank should contain provisions for conducting the credit risk review whereas the modalities of conducting such a review should be spelt out in the procedural documents. The purpose of such review is to independently assess the credit appraisal and administration process, the accuracy of credit risk ratings, level of risk, sufficiency of collaterals and overall quality of loan portfolio. Banks should take into account the following factors for conducting a credit risk review:
a. All facilities except those managed on a portfolio basis should be subjected to individual risk review at least once in a year. The review may be conducted more frequently for new borrowers as well as for classified and low rated accounts that have higher probability of default;
b. The credit review should be conducted with updated information on the borrowers financial and business conditions, as well as conduct of account. Any exceptions noted in the credit monitoring process should also be evaluated for impact on the borrowers’ creditworthiness;
c. The credit review should be conducted on a solo as well as consolidated group basis to factor in the business connections among entities in a borrowing group;
d. The results of such review should be properly documented and reported directly to the board or its relevant sub-committee as well as to the senior management;
The credit risk review will mainly focus on corporate and commercial loans. Banks may decide not to cover a particular loans products or categories e.g. consumer loans or retail loans under the risk review. However, they should closely monitor the quality of such loans and report any deterioration in their quality along with the results of credit reviews conducted on other loans.
5.8. Managing Problem Credits
Banks should establish a system to identify problem loans ahead of time for taking appropriate remedial measures. Such a system should provide appropriate guidance to concerned staff on identifying and managing various types of problem loans including corporate, commercial and consumer loans. Once a loan is identified as a problem loan, it should be managed under a dedicated remedial process. In this regard, banks may take into account the following factors:
a. The credit policy should clearly set out how the bank will manage problem credits. The basic elements of managing problem credits may include, inter alia, negotiations and follow-up with the borrowers, working out remedial strategies e.g. restructuring of loan facility, enhancement in credit limits, reduction in commission rates, etc., review of collateral/security documents, and more frequent review and monitoring. Banks should provide detailed guidance in this regard in their systems and procedures for dealing with problem credits;
b. The organizational structure and methods for dealing with problem credits may vary from bank to bank. Generally the responsibility for such credits may be assigned to the originating business function, a specialized workout section, or a combination of the two, depending upon the size and nature of the credit and the reason for its problems. When a bank has significant credit-related problems, it is important to segregate the workout function from the credit origination function;
c. There should be an appropriate system for identification and reporting of problem credits along with the details of remedial measures on regular basis to the senior management and/or the Board of Directors or its relevant sub-committee;
6. Stress Testing of Credit Risk
Banks should take into consideration potential future changes in economic conditions when assessing individual credits and their credit portfolios, and should assess their credit risk exposures under stressful conditions. This will enable them to review their credit portfolio and assess its resilience under “worst case” scenario. For this purpose, banks should adopt robust stress testing techniques. The stress testing of credit portfolio will enable banks to proactively analyze any inherent potential risks in individual credits or the overall credit portfolio or any components thereof. This will also enable them to identify any possible events or future changes in economic conditions that have unfavorable effects on their credit exposures and assessing their ability to withstand such effects. Such detection of any potential events or risks which are likely to materialize in times of stress, will also enable the banks to take timely corrective actions before the situation may get out of control.
Some of the common sources of credit risk which should, inter alia, be analyzed by banks are mentioned hereunder for their guidance:
i. Credit concentrations are probably the single most important cause of major credit problems. Credit concentrations are viewed as any exposure where the potential losses are large relative to the bank’s capital, its total assets or the bank’s overall risk level. Credit concentrations can further be grouped roughly into two categories: (i) Conventional credit concentrations e.g. concentrations of credits to single borrowers or counterparties, a group of connected counterparties, and sectors or industries; (ii) Concentrations based on common or correlated risk factors reflecting subtler or more situation-specific factors e.g. correlations between market and credit risks, as well as between those risks and liquidity risk, etc.;
ii. Weakness in the credit granting and monitoring processes including e.g. shortcomings in credit appraisal processes as well as in underwriting and management of market-related credit exposures;
iii. Excessive reliance on name lending i.e. granting loans to persons with a reputation for strong financial condition or financial acumen, without conducting proper credit appraisal as done for other borrowers;
iv. Credit to related parties which are affiliated, directly or indirectly, with the bank;
v. Lack of an effective credit review process to provide appropriate checks and balances and independent judgment to ensure compliance of bank’s credit policy and prevent weak credits being granted;
vi. Failure to monitor borrowers or collateral values to recognize and stem early signs of financial deterioration;
vii. Failure to take sufficient account of business cycle effects whereby the credit analysis may incorporate overly optimistic assumptions relating to income prospects and asset values of the borrowers in the ascending portion of the business cycle;
viii. Challenges posed by the market-sensitive and liquidity-sensitive exposures to the credit processes at banks. Market-sensitive exposures (e.g. foreign exchange and financial derivative contracts) require a careful analysis of the customer’s willingness and ability to pay. Liquidity-sensitive exposures (e.g. margin and collateral agreements with periodic margin calls, liquidity back-up lines, commitments and some letters of credit, etc.) require a careful analysis of the customer’s vulnerability to liquidity stresses, since the bank’s funded credit exposure can grow rapidly when customers are subject to such stresses. Market- and liquidity-sensitive instruments change in riskiness with changes in the underlying distribution of price changes and market conditions;
Stress testing should involve identifying possible events or future changes in economic conditions that could have unfavorable effects on a bank’s credit exposures and assessing the bank’s ability to withstand such changes. Three areas that banks could usefully examine are: (i) economic or industry downturns; (ii) market-risk events; and (iii) liquidity conditions. Stress testing can range from relatively simple alterations in assumptions about one or more financial, structural or economic variables to the use of highly sophisticated financial models. Whatever the method of stress testing used, the output of the tests should be reviewed periodically by senior management and appropriate action taken in cases where the results exceed agreed tolerances. The output should also be incorporated into the process for assigning and updating policies and limits.
Detailed guidance on stress testing of credit risk has been provided in the SAMA Rules on Stress Testing issued on 23 November 2011. Banks are required to take into account the requirements of these SAMA Rules in stress testing of their credit portfolio.
7. Management Information System
Banks should put in place effective management information system(MIS) to enable management to be aware, measure, monitor and control the credit risk inherent in the bank’s all on- and off-balance sheet activities. An accurate, informative and timely management information system is an important factor in the overall effectiveness of the risk management process. Banks should comply with the following guidelines in developing and strengthening the MIS for credit risk:
i. The system should be capable of compiling credit information both on solo and consolidated basis as well as across various credit categories and products (including off-balance sheet activities);
ii. The system should be able to produce all the required information to enable the management to assess quickly and accurately the level of credit risk, ensure adherence to the risk tolerance levels and devise strategies to manage the credit risk effectively;
iii. The system should be able to provide information on the composition of the portfolio, concentrations of credit risk, quality of the overall credit portfolio as well as various categories of the portfolio and rescheduled/restructured and “watchlist” accounts;
iv. The reporting system should ensure that exposures approaching pre-defined maximum risk limits/thresholds set out for individual exposures are brought to the attention of management. All exposures should be included in a risk limit measurement system;
v. The management information reports should be prepared by persons who are independent of the business unit(s);
The credit risk management function should monitor and report its measures of risk to appropriate levels of management, the relevant Board committee and the Board. The board should be regularly briefed on the overall credit risk exposure (including off-balance sheet activities) of the bank. The board should be provided, inter alia, the following information for its review:
i. The amount of credit exposures undertaken with broken down by loans categories, types of exposures, products and level of credit grades, etc.;
ii. A periodic report on the existing lending products, their target market, performance and credit quality as also the details of any planned new products;
iii. Concentrations of credit to large exposures, groups of connected parties, specific industries, economic sectors or geographic regions, etc.;
iv. A report on the overall quality of the credit portfolio. This may include, inter alia, details of problem loans including those on the watchlist, categories of their classification, potential loss to the bank on each significant problem loan, the level of existing and additional provisions required there against, etc.;
v. Details of the actions taken and planned to recover the significant problem loans as well as the status of adherence to the terms and conditions of any significant rescheduled/restructured loans;
vi. Such other information as may be required by the board or deemed appropriate by the management to bring to the attention of the board;
Banks should regularly review their management information systems to ensure their adequacy and effectiveness, and introduce changes wherever required.
8. Internal Controls System
Bank's disclosures regarding Risk Management (both quantitative and qualitative) should be subject to the internal controls outlined in this section.As part of their internal controls system, banks should introduce effective controls to manage credit risk. The internal audit function of the bank should independently assess the adequacy and effectiveness of internal controls relating to credit risk management. The internal audit should periodically evaluate the soundness of relevant internal controls covering, inter alia, the following:
i. Adequacy of internal controls for each stage of the credit process;
ii. Appropriateness and effectiveness of internal controls in commensuration to the level of risks posed by the nature and scope of the bank’s lending activities;
iii. Reliability and timeliness of information reported to the Board of Directors, its relevant committee(s) and senior management;
iv. Effectiveness of organizational structure to promote checks and balances and to ensure existence of clear lines of authority and responsibilities for monitoring adherence to approved credit policies, procedures and limits;
v. Adequacy of credit policies and procedures as well as adherence to such policies and procedures;
vi. Compatibility of credit policies and procedures with legal and regulatory requirements as well as adherence to applicable laws/ regulations (this function can either be performed by internal audit or compliance);
vii. An assessment of the alignment of remuneration incentive plans with the approved risk appetite and credit policies of the bank;
viii. Identification of any weaknesses in the credit policies, procedures and related internal controls to enable the management and/or the Board to take timely corrective actions;
The internal audit should report the findings on adequacy and effectiveness of internal controls relating to credit function independently to the senior management and the Board or its relevant committee. The internal audit reports should also provide an assessment of the adequacy of any corrective actions being taken to address the material weaknesses.
loan Classification, Provisioning and Credit Review
No: 241000000312 Date(g): 19/1/2004 | Date(h): 27/11/1424 Status: In-Force In July 2002, SAMA had issued a draft Circular entitled ‘Credit Classification and Review.’ Subsequently, Saudi banks were required to provide comments on the circular and estimate the quantitative impact of these rules on their financial position. In 2003, all Saudi banks have submitted their comments to SAMA.
SAMA has also closely monitored international developments in this regard emanating from the Basel Committee on Banking Supervision and the International Accounting Standard Board. Currently there is considerable amount of work in progress which has relevance for this subject in these organizations. However, we have incorporated various relevant concepts from recent developments in this circular and also highlighted their implications over the next few years.
Consequently, the Central Bank has decided to implement the proposed rules as minimum standards, while Saudi banks are encouraged to develop more sophisticated and refined methodologies for loan classification and provisioning. The added incentive for the banks would be better alignment of their methodologies for provisioning and the Basel capital requirements under the IRB approaches. Consequently, an integrated system based on historical loss experience, on a portfolio based approach, may be desirable to enable banks for estimating their provision and capital requirements.
SAMA has also addressed specific issues raised by banks as follows:
1. There are inevitable differences between Accounting Provisions and Supervisory Provisions. The annual difference between the two calculations should be adjusted to the accumulated retained earnings in the Supervisory Returns. No adjustment needs to be made to the published financial statements of the banks. Where a bank has no accumulated retained earnings, the adjustment could be made to a general reserve or to statutory reserve following approval by SAMA on a case by case basis.
2. General Provisions will be 1% of loans in the ‘Standard’ and ‘Special Mention’ categories. All Saudi Government loans or claims fully backed by collateral of Saudi Government in form of securities or guarantees should be deducted before calculating general provisions.
3. SAMA has specified automatic provisioning requirements related to Banks’ non-performing loan portfolios, based on the number of days past due. However, exceptions are permitted for individual loans where a bank has strong documentary evidence that a loan is performing despite being past due. It is expected that such exceptions will be used in limited number of cases. Saudi banks are required to maintain a list of such loans that have been treated under this exception and document the underlying reasons.
SAMA requires all Saudi banks to provide the following information. These are to be provided by 15th of the month following the end of the quarter.
1. A quarterly report on the loan portfolios according to the proposed classification system - Annex 1.
2. A quarterly report on Loan Provisions -Annex 2.
3. A quarterly list of loans where exceptions have been made to the general rule of automatic classification - Annex 3.
4. Guidance Notes-Annex 4.
These rules are to be implemented from 1 January 2004, with the first Quarterly Reports due as of 31 March 2004.
Section I. Loan Classification
1.1 Introduction
Realistic assessment of asset quality and prudent recognition of income and expenses lie at the heart of the assessment of financial soundness of any individual banking institution. Therefore, it is essential that banks in Saudi Arabia follow minimum standards for loan assessment and classification.
This regulation aims to provide a degree of uniformity and consistency by requiring Saudi banks to use the proposed principal categories for loan classifications. All Saudi banks will be required to provide supervisory data on the basis of these proposed classification grades for comparison and for consolidation on a banking system-wide basis. However, Saudi banks are encouraged to develop and use more sophisticated classification systems and methodologies as long as they are consistent with the principal classification categories defined in this regulation.
1.2 Scope
The credit products covered by this regulation (collectively referred to as “loans”) include all types of consumer and corporate loans, advances, overdrafts, credit card balances, leasing, musharaka, murabaha, istisna, letters of guarantee and credit and any other commission and non-commission bearing credit-related instruments and arrangements. They also include loans to businesses, financial institutions, governments and their agencies, individuals, project finance, residential and commercial mortgages and direct financial leases. Off balance sheet items such as guarantees, letters of credits, and derivatives such as futures and forward contracts, etc. carry credit risk. These may turn into loans or receivables as a result of defaults and other events and should be classified in appropriate categories, when such credit risk crystallizes into a loan or receivable.
1.3 Objectives
The main objectives of a system of Ioan classification are as follows:
• To highlight those loans that represent an above-normal credit risk;
• To evaluate the degree of risk involved;
• To develop a strategy or action plan for monitoring and follow-up on weak loans and for the recovery or liquidation of impaired loans and other such outstanding credits;
• To provide essential information for the determination of adequate provisions for expected credit losses; and,
• To bring a degree of uniformity and consistency in the method of classification of loans outstanding among Saudi banks.
1.4 Assessment and Classification of Individual Loans
1.4.1 Large commercial loans to corporates, governments, private banking customers and others are often reviewed and assessed on an individual basis. Systematic measurement of impairment of individual loans must include the use of a classification system for assigning loans to risk categories. Such a system should segregate loans by the probability of risks associated with individual loans. Over time, banks should monitor and evaluate the levels and trends of risk in their commercial loan portfolios through an analysis of the classification categories. Banks should also target troubled loans for more frequent reviews and higher levels of scrutiny.
1.4.2 The assessment of each loan should be based upon its fundamentals, including as a minimum the following evaluation factors:
• The obligor’s character and integrity.
• The purpose of the loan and the sources of repayment.
• The overall financial condition and resources of the obligor, including the current and future cash flows.
• The credit and delinquency history of the obligor.
• The probability of default on existing loan and any new Ioan being extended.
• The types of secondary sources of repayment available, such as guarantor’s support and collateral values when they are not a primary sources of repayment. (Undue reliance on secondary sources of repayment should be questioned and the bank’s policy on such practice should be reviewed.)
1.4.3 While assessing a loan, banks should consider the extent of the shortfall in the operating results and cash flows of the obligor, the support provided by any pledged collateral, and/or the support provided by any third party.
1.4.4 In order to promote uniformity in the criteria used by Saudi Banks for assigning quality rating to loans, SAMA proposes the system of credit classifications described in the following paragraphs. It should be noted that banks may use classification systems that have more grades than those noted below, as long as they can demonstrate that their systems comply with and their data can be summarized in a manner consistent with the system proposed in these regulations.
1.4.5 Standard Category
Loans in this category are performing and have sound fundamental characteristics such as borrower’s overall financial conditions, resources and cash flows, credit history and primary or secondary sources of repayment.
A classification of standard should be given to all loans that exhibit neither actual nor potential weaknesses. Loans that exhibit potential weaknesses should be categorized as Special Mention. Standard and Special Mention loans are considered as “performing” credits.
1.4.6 Special Mention Category
A ‘Special Mention’ loan is defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan. These loans are normally current and up-to-date in terms of principal and commission/income payments but deserve management’s close attention. These potential weaknesses may include:
• Declining profitability
• Tightening liquidity or cash flow
• Increasing leverage and/or weakening net worth
• Weakened marketability and/or value of collateral
• Industry-specific problems
• Economic and/or other problems affecting the obligor’s performance
• Concerns about the obligor’s management competence or depth
• Material documentation problems
• Inability to obtain current financial information
1.4.7 ‘Special Mention’ loans would not expose an institution to sufficient risk to warrant a non-performing classification and would continue to accrue commission. ‘Special Mention’ loans would have characteristics, which corrective management actions could remedy. The ‘Special Mention’ category should also not be used to list loans that contain risks usually associated with that particular type of lending. Any lending involves certain risks, regardless of the collateral or the obligor’s capacity and willingness to repay the debt. But only where the risk has increased beyond that which existed at origination, should the loans be categorized as ‘Special Mention’. However, loans to businesses in certain industries (for example, those with declining revenues or reducing margins or which are subject to specific competitive issues) may be included.
1.4.8 Loans, which exhibit well-defined weaknesses and a distinct possibility of loss, should be assigned the following categories from less to most severe:
• “Substandard”
• “Doubtful”
• “Loss”
Loans in the ‘Substandard’, ‘Doubtful’ and ‘Loss’ categories would be collectively termed as “non-performing” credits.
1.4.9 ‘Substandard’ Category
Loans in this category have well-defined weaknesses, where the current financial soundness and paying capacity of the obligor is not assured. Orderly repayment of debt may be in jeopardy. A ‘Substandard’ loan is inadequately protected by future cash flows, the obligor’s current net worth or by the collateral pledge, if any. An important indicator is that any portion of commission/income or principal or both are more than 90 days past due or where there is insufficient credits for an overdraft. For corporate, government and private banking loans and other individually reviewed loans, the 90 days past due rule will also generally apply, unless a bank has strong documentary evidence to support a different classification.
1.4.10 ‘Doubtful’ Category
A loan classified as ‘Doubtful’ has all the weaknesses inherent in one classified ‘Substandard’ with the added characteristic that the weaknesses make collection or liquidation of the principal and contractual commission/income in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Classification as ‘loss’ is not warranted because of specific factors that generate additional cash flows other than from realization of existing collateral. Such factors include business cash flows, potential merger, acquisition, capital injection or additional collateral. In general a loan where the principal and commission are more than 180 days past due should be included in this classification, except where a bank has strong documentary evidence to support a different categorization such as ‘Sub-standard’ or ‘Special Mention’.
1.4.11 ‘Loss’ Category
A loan classified as ‘Loss’ is considered uncollectible in the normal course of business and recourse will have to be made to collateral. Loss category does not mean that the asset has absolutely no recovery or salvage value but rather that it is prudent to establish a provision for the entire loan not covered by collateral. For private banking loans and other individually reviewed loans where principal or commission/income are past due for more than 360 days should be included in this classification except where a bank has strong documentary evidence to support a different categorization.
1.5 Split Classifications
1.5.1 Split classifications refer to the practice of assigning different classifications to different entities within the same group relationship, or to different loans extended to the same obligor, or to different portions of a single loan.
1.5.2 Split within a relationship. Loans extended to subsidiaries of a parent company on the basis of direct or implied support from the parent should generally not be classified at the higher level than the parent. On the other hand, loans extended to subsidiaries without direct or implied parent support may be classified at a lower level than the parent. An exception may be where there is tangible collateral or independent cash flow.
1.5.3 Split to same obligor. All loans extended to one borrower should generally be classified at the same level. However, certain loans to an obligor may be classified at a different level than other loans if they are secured by collateral or guarantees of unquestionable value. For example, a loan secured by properly hypothecated cash collateral would be less severely classified than other less well-secured loans to the same borrower.
1.6 Assessing Classification and Impairment of a Group of Loans
1.6.1 Generally, it is impractical for a bank to analyze and provide for impairment losses for their smaller loans on an individual, Ioan by loan basis, e.g. consumer and credit card loans. For groups of small homogenous loans, the loss attributes should normally be based on available information such as past due status.
1.6.2 For retail and consumer loans, it is difficult or impractical to make an individual assessment, the banks should use the following classification system to classify outstandings on a grouped basis.
1.6.3 Standard Loans. Loans in this category are performing and have sound fundamental characteristic of credit history, cash flow and timely repayment. These are normally represented by current balances with no hint of default.
1.6.4 Special Mention. These loans exhibit potential weaknesses that at a future date may result in deterioration of repayment. These loans are current and up to date but deserve management’s close attention.
1.6.5 Substandard. Loans where any portion of commission income or principal are more than 90 days overdue.
1.6.6 Doubtful Category. Loans where any portion of commission income or principal are more than 180 days overdue.
1.6.7 Loss Category. Loans where any portion of commission income or principal are overdue by more than one year.
1.6.8 For banks that wish to use more sophisticated methodologies based on historical data, there is no single best method for quantifying loss attributes for groups of loans. Acceptable methods range from a simple average of bank’s historical loss experience over a period of years to more complex ‘migration’ analysis techniques. The specific method often depends on the sophistication of a bank’s information system.
1.7 Recognition of Income
1.7.1 Notwithstanding the provisions made under Section II below, all commission/income accrued but not received on loans that become non-performing should not be recognized as income and should be transferred to a commission/income in suspense account. Similarly, commission/interest charged to a non-performing overdraft is not considered to have been received. The bank should set aside a specific provision for the full amount of the commission transferred to the suspense account. This provision would offset the commission income receivable included under assets. These transfers to a suspense account should be made without regard to collateral, if any, and the possibility of the ultimate collection of the overdue amounts.
1.7.2 When amounts are received from borrowers in repayment of overdue commission/income or overdue principal, such amounts should first be offset against the overdue commission. This should be followed until such time as the loan is regularized and can be classified as performing, i.e. Standard or Special Mention.
Section II Minimum Provisioning Requirements
2.1 General Provisions
Experience shows that loan portfolios often contain loans which are in fact impaired at that balance sheet date, but which will not be specifically identified as such until some time in the future. Generally, there will not be sufficient information on hand during the review of loans to be certain that all impaired loans have been identified or of the correctness of the estimated losses and the adequacy of the provision for loan losses.
2.2 Impaired Loans
As a result, a general provision should be made to cover the impaired loans which will only be identified as such in the future. Unless otherwise prescribed by SAMA, this general provision should be a minimum of 1% of the outstanding balances of the Standard and Special Mention categories. All Saudi government loans or claims fully backed by collateral of Saudi government in form of securities or guarantees should be deducted before calculating general provision.
2.3 Historical Data
In general, if a bank has at least 3 years of reliable historical data captured through a system validated and approved by SAMA, it could establish an appropriate general provision using such data adjusted for current observable conditions. Such banks may seek exemption from SAMA in relation to the requirements in paragraph 2.2 above. Saudi banks are also encouraged to develop and implement more sophisticated systems that capture historical data on loan defaults and loss experience that could be used for general provisioning purposes. Although historical loss experience provides a reasonable starting point for a bank analysis, these cannot be accepted without analysis of current conditions and future prospects. Banks must make an adjustment that should reflect management’s best estimate of the level of charge-offs or specific provision that will be recognized. Factors include:
• Change in national and international lending policies and procedures.
• Change in local, national and international economic and business conditions.
• Changes in trends, volumes and severity of past due loans, impaired loans and troubled debt restructuring.
• Changes in experience, depth and ability of lending management and staff.
• Changes in bank’s loan review system and the degree of oversight by the Board.
• Existence and effect of any concentration of credit.
• Effect of external factors, competition, legislation, regulatory requirement, etc.
• Changes in the risk profile of the portfolio as a whole.
Loans that have been individually analyzed and provided for with a provision should also be included in the group for determining a bank’s historical experience for such group. However, to avoid double counting, loans for which specific provision has already been made should be subtracted from the group before a historical loss factor is applied to the group to establish appropriate general provisions.
Saudi banks should use a period of at least 3 years to determine their average historical loss experience. However, banks should weigh recent experience more heavily to accurately estimate bank’s expected losses in the current economic climate.
2.4 Specific Provisions
A specific provision should be made for incurred and expected losses for individually assessed corporate, government, private banking and other large loans to reduce the carrying value of impaired credits to their estimated net realizable amount. Retail loans that fall under the non-performing loan categories should also be covered by specific provisions. Unless otherwise prescribed by SAMA, the following minimum provisions should be made on the aggregate of individual net exposures for each classification category. Loans which have been individually assessed and on which specific provisions, in excess of the prescribed minimum, have been made should be excluded in computing the minimum provisions by each classification category. Minimum provisions are to be computed on the net exposure which represents the balance outstanding less a prudent estimate of the fair value of the perfected collateral.
Category Minimum Provision (% of net exposure) ‘Substandard’ 25% ‘Doubtful’ 50% ‘Loss’ 100% 2.5 Treatment of Differences between Supervisory and Accounting Provisions
Saudi banks are expected to apply the relevant Accounting Standards. For purposes of bank accounting and financial reporting, the computation of general and specific provisions for loan impairment is governed by these accounting standards. Consequently, these are likely to differ from the supervisory general and specific provisions provided in this circular. While the accounting provisions are to be used for all published financial statements of a Saudi bank, the supervisory provisions are to be used solely for the purpose of prudential reporting to SAMA.
The treatment of accumulated specific and general accounting and supervisory provisions will continue to be guided by the relevant accounting standards and relevant SAMA rules respectively. However, the difference in the annual charge between accounting and supervisory provisions must be reflected by an adjustment directly into the accumulated retained earnings of the bank on the supervisory returns. In case a bank has no retained earnings, the adjustment will be made to the general or statutory reserves after discussion with the Central Bank on a case by case basis.
Section III. Other Matters
3.1. Rescheduled Loans
A restructured troubled loan arises when a bank, for economic or legal reasons related to the obligor’s financial difficulties, grants him a concession that it would not otherwise consider. A bank should measure a restructured troubled loan by reducing the recorded outstanding to net realizable value as required by the relevant accounting standards, taking into account the cost of all concessions at the date of restructuring. The reduction in the outstanding amount should be recorded as a charge to the income statement in the period in which the loan is restructured.
In cases where non-performing loans in particular are rescheduled, such loans should not be upwardly reclassified merely because of the existence of a rescheduling agreement. Upward reclassification should only be made if and when there is sufficient evidence of adherence to the terms of the rescheduling agreement. This evidence would include the establishment of a history for at least 12 months of timely repayments of both principal and commission/interest under the rescheduling agreement.
3.2. Overdrafts
Formal procedures should be put into place to support the determination of the classification of an overdraft based on transactions within the overdraft and in particular the timeliness of repayments of commission/income.
As a minimum, these procedures should include:
• Periodic systematic comparison of the aggregate value of credits in the overdraft account with the repayments due and other debits in the account.
• Understanding the nature and source of the credits in the account.
• Review of the history of the account balance.
3.3. Collateral
Prudent and proper valuation of collateral is critical to the determination of provisions. Proper procedures should be put into place to value collateral on a periodic basis, at least once a year, using external appraisers or external reliable published information. In cases where judgment is used in the valuation of the collateral and where the collateral or the credit is significant, valuations should be carried out by more than one external appraiser. In general, collateral obtained for consumer credit and similar credits where large number of relatively small balances is outstanding would be excluded from such requirements. The valuations so obtained should be adjusted downwards by an appropriate percentage to reflect costs of disposal, fluctuations in market values and the inherent lack of accuracy in such valuations.
3.4. The Basel Capital Accord and Provisioning
The Basel 2 Capital Accord provides incentives to internationally active banks to develop and implement sophisticated and advance system for measuring and capturing credit, market and operational risks. For credit risk, it encourages banks to develop and implement sophisticated internal ratings based approaches. As a minimum, it requires all credit risk on the bank’s banking book to be classified into a system that has as a minimum 7 grades for performing loans and one for non-performing loans. It also requires banks to gather data for a minimum of 3 years on their history of losses arising from loan defaults. Data gathered from such systems permits banks and supervisors to collect information on Probability of Default (PD), Loss Given Default (LGD), and Expected Amount at Default (EAD). Such data permits banks to compute a capital charge for capital ratio purposes, using the risk weighted assets models designed by Basel under the IRB approach.
SAMA encourages all Saudi banks to understand, develop and implement, where cost-justified and appropriate, IRB approaches for capital adequacy purposes. While the IRB systems are primarily aimed at computation of regulatory capital, it is understood that the information on historical loss experience may have relevance for a bank’s calculation of general provisions. Consequently, SAMA will encourage Saudi banks to look into ways of aligning their capital adequacy and provisioning methodologies.
Section IV. Independent Credit Review System
4.1. Introduction
All Saudi banks are expected to establish a system of independent, ongoing credit review and results of such reviews should be communicated directly to senior management, the Board of Directors and the Audit Committee. While the determination of the impairment of an asset is made by banks based on their own internal credit review procedures, which can vary from one bank to another, this regulation is aimed at ensuring that banks’ own systems as a minimum meet the following requirements.
4.2. Objectives
The principal objectives of an effective independent credit review system are as follows:
• To ensure the credits are appropriately classified;
• To ensure that credits with potential or well-defined weaknesses are identified promptly and that timely action is taken to minimize credit losses;
• To project relevant trends that affect the collectibility of the portfolio and to isolate potential problem areas;
• To review the adequacy of the allowance for credit losses;
• To assess the adequacy of and adherence to internal credit policies and administrative procedures and to monitor compliance with relevant laws and regulations;
• To evaluate the activities of credit personnel;
• To provide senior management, the Board of Directors and the Audit Committee with an objective and timely assessment of the overall quality of the credit portfolio; and,
• To ensure that management is provided with accurate and timely information related to credit quality that can be used for financial and regulatory reporting purposes.
For an effective achievement of the above objectives, financial institutions should operate an independent credit review system having regard to the size of the institution and the complexity of its operations.
4.3. Elements of an Independent Credit Review System
An institution’s written policy on its independent credit review system should address the following elements:
• Qualifications of credit review personnel
• Independence of credit review personnel
• Frequency of reviews
• Scope of reviews
• Depth of reviews
• Review of findings and follow-up
• Workpaper and report distribution
4.4. Qualifications of Credit Review Personnel
Persons involved in the credit review function should be qualified based on level of education, experience, and extent of formal credit training and should be knowledgeable in both sound lending practices and the institution’s lending guidelines for the types of credits offered by the bank. In addition, these persons should be knowledgeable of all relevant laws and regulations affecting the bank’s lending activities.
4.5. Independence of Credit Review Personnel
An effective credit review system utilizes both the initial identification of emerging problem credits by credit officers, and the review of credit by individuals independent of the credit approval decisions. An important element of an effective system is to place responsibility on credit officers for continuous portfolio analysis and prompt identification and reporting of problem credits. Because of their frequent contact with borrowers, credit officers can usually identify potential problems before they become apparent to others. However, financial institutions should be careful to avoid over-reliance upon credit officers for identification of problem credits. Financial institutions should ensure that credits are also reviewed by individuals who do not have control over the credits they review and are not part of, or influenced by anyone associated with, the credit approval process.
While larger financial institutions would typically establish a separate department (unit) staffed with credit review specialists, cost and volume considerations may not justify such a department in smaller financial institutions. In smaller financial institutions, an independent credit review officer or internal audit may fill this role.
4.6 Frequency of Reviews
Optimally, the credit review function can be used to provide useful continual feedback on the effectiveness of the credit process in order to identify any emerging problems. For example, the frequency of independent review of significant credits could be at least annually, upon renewal, or more frequently for ‘Special Mention’ loans, or when internal or external factors indicate a potential for deteriorating credit quality in a particular type of credit or pool of credits. A system of on-going or periodic portfolio reviews is particularly important for the provisioning process, which is dependent on the accurate and timely identification of problem credits.
4.7. Scope of Reviews
The review should cover all credits that are significant. Also, the review typically includes, in addition to all credits over a pre-determined size, a sample of small credits, past due, non-accrual, renewed credits, restructured credits, credits previously considered non-performing or designated as ‘Special Mention’, related party credits, and concentrations and other credits affected by common repayment factors. The sample for each type of facility/portfolio selected for review should provide reasonable assurance that the results of the reviews have identified the major problems in the portfolio and reflect its quality as a whole, Financial institutions’ management is required to document the scope and the process of its reviews. The scope of credit reviews should be approved by the financial institutions’ Board of Directors and its Audit Committee on an annual basis or when any significant changes to the scope of reviews are made.
4.8. Depth of the Reviews
These reviews should analyze a number of important aspects of selected credits, including:
• Credit quality
• Sufficiency of credit and collateral documentation
• Proper lien perfection
• Proper approvals
• Adherence to any credit agreement covenants
• Compliance with internal policies and procedures and laws and regulations
• Appropriateness of the classification assigned to the credits
• Adequacy of the provisions made against such credits
Furthermore, these reviews should consider the appropriateness and timeliness of the identification of problem credits by credit officers and the adequacy of the overall level of provisions for the whole credit portfolio and for the nonperforming credits.
4.9. Review of Finding and Follow-Up
Findings should be reviewed with appropriate credit officers, department managers, and members of senior management and any existing or planned corrective action should be clarified for all noted deficiencies and identified weaknesses, including the timeframes for correction. All noted deficiencies and identified weaknesses that remain unresolved beyond the assigned timeframes for correction should be promptly reported to senior management, the Board of Directors and the Audit Committee.
4.10. Workpaper and Report Distribution
A list of credits reviewed, the date of the review and documentation (including summary analysis) to substantiate assigned classifications of credits should be prepared on all credits reviewed. A report that summarizes the results of the credit review should be submitted to the Board of Directors on at least a quarterly basis. In addition to reporting current credit quality findings, comparative trends can be presented to the Board of Directors that identify significant changes in the overall quality of the portfolio. Findings should also address the adequacy of and adherence to internal policies, practices and procedures, and compliance with laws and regulations so that any noted deficiencies can be remedied in a timely manner.
Annex 1 SAMA Prudential Return Classification of Loans For the Quarter Ending
Individually Assessed Loans Loans Assessed as a Group Total Loans (SR OOP's) (SR 000's) (SR OOP's) Current QTR Previous QTR QTR in Previous Year Current QTR Previous QTR QTR in Previous Year Current QTR Previous QTR QTR in Previous Year Standard Special Mention Substandard Doubtful Loss TOTAL Annex 2 SAMA Prudential Return Supervisory Loan Provisioning For the Quarter Ending
(SR 000's)
Current QuarterGross Loan Amount Interest in Suspense General Provision Specific Provision Total Total Previous QTR Current QTR Charge to Net Income 1. Standard 2. Special Mention 3. Substandard 4. Doubtful 5. Loss TOTAL 6. Provisions for Published Statements per IAS Retained Eaminqs: • Retained Earnings on Supervisory Returns 7. Cumulative Charge (Addition) to Accumulated Retained Earnings on Supervisory Return 8. Supervisory Retained Earnings at end of the period Annex 3 SAMA Prudential Return List of Individually Assessed Loans Where Exceptions Made to the 90, 180, 360 Day Rule for Classification For the Quarter Ending
(SR 000's)
I. Analysis of the Loan Portfolio:
Performing Loans Loans 90 Overdue Loans 180 Overdue Loans 360 Overdue Total Number of Loans Amount II. Analysis of Exceptions:
Gross Amount (SR OOP's) Loans on Which Exceptions Made Impact on Classification Number of Loans Amount (+ or -) Standard Specific Mention Substandard Doubtful Loss TOTAL III. List 10 Major Loans on which exceptions made:
(SR OOP's) Name of Counterparty Amount Impact on Classification (+ or -) Annex 4 Guidance Notes for Prudential Returns For Loan Classification and Provisioning
1. Annex 1 - Loan Classification
• Columns 1, 4 and 7 - Total reflects gross loan amount before Provisions.
• Columns 2, 5 and 8 - Previous quarter gross Loans.
• Columns 3, 6 and 9 - Same Quarter previous year.
• Totals in columns 7, 8 and 9 should agree with total for item 9 on the M-1 returns.
2. Annex 2 - Loan Provisioning
• Column 1 - Shows gross loan outstanding amounts before Provisions. This should agree with item 9 on M-1 Return.
• Column 2 - Interest in suspense to agree with 27.2 on M-1 return.
• Column 3 - Shows general provisions to agree with 27.13 on M-1.
• Column 4 - Shows specific provisions to agree with 27.12 on M-1.
• Column 5 - Total Provisions for columns 2, 3 and 4.
• Column 6 - Total provisions for same Quarter in previous year
• Column 7 - This should reflect the charge (or credit) to net income on supervisory returns for the current Quarter.
• Item 6 - This line should reflect the most recent available Quarter (indicate date) for which Accounting provision information is available.
• Item 7 - This should reflect the adjustment (charge or credit) to supervisory Accumulated Retained Earnings arising from the difference between supervisory and accounting provisions.
• Item 8 - Supervisory retained earnings at the end of the Quarter.
3. Annex 3 - Loan Classification Exceptions
• Item I - This is a simple aging analysis of the loan portfolio of the bank in terms of the number of loans and the amounts (before any exceptions are made).
• Item II - Analysis of Exceptions:
• Column 1 - Shows gross amount of loans in each category - equals item 9 on M-1.
• Column 2 - Shows # of loans on which exception is made
• Column 3 - Shows Amount of Loans on which exception is made
• Column 4 - Impact of the exception on proposed classifications - show + or i.e. net impact on classification grades.
• Item III - Shows impact for top 10 loans on standard classifications.
Liquidity Risk Management
Principles for Sound Liquidity Risk Management and Supervision
No: 351000147075 Date(g): 25/9/2014 | Date(h): 1/12/1435 Status: In-Force On 5 December 2008, SAMA issued a Circular entitled "Principles for Sound Liquidity Risk Management and Supervision". This circular was based on a BCBS document on this subject issued in September 2008. SAMA provided specific instructions to banks to introduce and integrate these Principles concerning Sound Liquidity Risk Management into their internal systems and processes. *SAMA also instructed banks to audits their internal systems and processes against these Principles and submit a report to SAMA on the main findings. Banks had undertaken those audits and submitted their findings to SAMA.
*SAMA would like the Banks to arrange an internal audit to assess the implementation of these Principles by the Banks (refer to attachment for guidance).
*The highlighted text is no longer applicable. Liquidity Coverage Ratio (LCR)
No: 361000009335 Date(g): 9/11/2014 | Date(h): 17/1/1436 SAMA’s General Guidance Concerning Amended LCR
The Liquidity Coverage Ratio Regulations and Guidance Documents were issued by SAMA circular No (341000107020), dated 02/09/1434H, corresponding to 10/07/2013G, and amended by SAMA Circular No. (361000009335), dated 17/01/1436H, Corresponding To 09/11/2014G.For the ease of implementation, SAMA has used reference to paras in the BCBS document of January 2013. For example para 16 on page 2 of this document is adopted from para 16 of the BCBS document.SAMA's General Guidance
1. Background and Frequency of Reporting
SAMA wishes to continue monitoring the LCR and NSFR Global Liquidity Ratios where for LCR, it will be on the basis of the Amended LCR package being implemented through this circular, and NSFR will continue to be on the basis of SAMA’s circular of 8 February, 2012.
These guidance notes are built under the current BCBS regime of LCR as agreed in the GHOS meeting of January, 2013. In this regard, the following documents were issued in January 2013 and approved by the BCBS.
• A GHOS Press Release was issued entitled "Group of Governors and Heads of Supervision endorses revised liquidity standard for banks" of January 2013
• A BCBS document entitled "Basel III: The Liquidity Coverage Ratio and Liquidity Monitoring Tool".
The attached Guidance Notes and Prudential returns are based on the most recent Basel QIS package, and it should be noted that the attached SAMA Prudential returns contains a column entitled "Paragraph in document". This is reference to the paragraph in the BCBS document of January 2013 entitled "Basel III: Liquidity Coverage Ratio and Liquidity Monitoring tools” which can be obtained from the BIS website.
1A). Objective of LCR and use of HQLA
16. This standard aims to ensure that a bank has an adequate stock of unencumbered HQLA that consists of cash or assets that can be converted into cash at little or no loss of value in private markets, to meet its liquidity needs for a 30 calendar day liquidity stress scenario. At a minimum, the stock of unencumbered HQLA should enable the bank to survive until Day 30 of the stress scenario, by which time it is assumed that appropriate corrective actions can be taken by management and supervisors (SAMA), or that the bank can be resolved in an orderly way. Furthermore, it gives the central bank additional time to take appropriate measures, should they be regarded as necessary. As noted in the Sound Principles, given the uncertain timing of outflows and inflows, banks are also expected to be aware of any potential mismatches within the 30-day period and ensure that sufficient HQLA are available to meet any cash flow gaps throughout the period.
17. The LCR builds on traditional liquidity “coverage ratio” methodologies used internally by banks to assess exposure to contingent liquidity events. The total net cash outflows for the scenario are to be calculated for 30 calendar days into the future. The standard requires that, absent a situation of financial stress, the value of the ratio be no lower than 100%. The 100% threshold is the minimum requirement absent a period of financial stress, and after the phase-in arrangements are complete. References to 100% may be adjusted for any phase-in arrangements in force (The 100% threshold is the minimum requirement absent a period of financial stress, and after the phase-in arrangements are complete.) I.e. the stock of HQLA should at least equal total net cash outflows, on an ongoing basis because the stock of unencumbered HQLA is intended to serve as a defense against the potential onset of liquidity stress. During a period of financial stress, however, banks may use their stock of HQLA, thereby falling below 100%, as maintaining the LCR at 100% under such circumstances could produce undue negative effects on the bank and other market participants. SAMA will subsequently assess this situation and will adjust their response flexibly according to the circumstances.
18. SAMA’s decisions regarding a bank’s use of its HQLA should be guided by consideration of the core objective and definition of the LCR. SAMA would exercise judgment in their assessment and account not only for prevailing macro financial conditions, but also consider forward-looking assessments of macroeconomic and financial conditions. In determining a response, SAMA is aware that some actions could be pro-cyclical if applied in circumstances of market-wide stress. SAMA would seek to take these considerations into account on a consistent basis across jurisdictions, where considered pertinent.
(a) SAMA would assess conditions at an early stage, and take actions if deemed necessary, to address potential liquidity risk.
(b) SAMA would allow for differentiated responses to a reported LCR below 100%. Any potential supervisory response would be proportionate with the drivers, magnitude, duration and frequency of the reported shortfall.
(c) SAMA would assess a number of firm- and market-specific factors in determining the appropriate response as well as other considerations related to both domestic and global frameworks and conditions. Potential considerations include, but are not limited to: (i) The reason(s) that the LCR fell below 100%. This includes use of the stock of HQLA, an inability to roll over funding or large unexpected draws on contingent obligations. In addition, the reasons may relate to overall credit, funding and market conditions, including liquidity in credit, asset and funding markets, affecting individual banks or all institutions, regardless of their own condition; (ii) The extent to which the reported decline in the LCR is due to a firm-specific or market-wide shock; (iii) A bank’s overall health and risk profile, including activities, positions with respect to other supervisory requirements, internal risk systems, controls and other management processes, among others; (iv) The magnitude, duration and frequency of the reported decline of HQLA; (v) The potential for contagion to the financial system and additional restricted flow of credit or reduced market liquidity due to actions to maintain an LCR of 100%; (vi) The availability of other sources of contingent funding such as central bank funding,(The Sound Principles require that a bank develop a Contingency Funding Plan (CFP) that clearly sets out strategies for addressing liquidity shortfalls, both firm-specific and market-wide situations of stress. A CFP should, among other things, “reflect central bank lending programs and collateral requirements, including facilities that form part of normal liquidity management operations, e.g. the availability of seasonal credit)” or other actions by prudential authorities.
(d) SAMA has a range of tools/ options at their disposal to address a reported LCR below 100%, Banks may use their stock of HQLA in both idiosyncratic and systemic stress events, although the supervisory response may differ between the two. (i) At a minimum, a bank should present an assessment of its liquidity position, including the factors that contributed to its LCR falling below 100%, the measures that have been and will be taken and the expectations on the potential length of the situation. Enhanced reporting to SAMA should be commensurate with the duration of the shortfall. (ii) If appropriate, SAMA could also require actions by a bank to reduce its exposure to liquidity risk, strengthen its overall liquidity risk management, or improve its contingency funding plan. (iii) However, in a situation of sufficiently severe system-wide stress, effects on the entire financial system should be considered. Potential measures to restore liquidity levels should be discussed, and should be executed over a period of time considered appropriate to prevent additional stress on the bank and on the financial system as a whole.
(e) SAMA’s responses should be consistent with the overall approach to the prudential framework.
1B) Definition of the LCR
19. The scenario for this standard entails a combined idiosyncratic and market-wide shock that would result in:
(a) The run-off of a proportion of retail deposits;
(b) A partial loss of unsecured wholesale funding capacity;
(c) A partial loss of secured, short-term financing with certain collateral and counterparties;
(d) Additional contractual outflows that would arise from a downgrade in the bank’s public credit rating by up to and including three notches, including collateral posting requirements;
(e) Increases in market volatilities that impact the quality of collateral or potential future exposure of derivative positions and thus require larger collateral haircuts or additional collateral, or lead to other liquidity needs;
(f) Unscheduled draws on committed but unused credit and liquidity facilities that the bank has provided to its clients; and
(g) The potential need for the bank to buy back debt or honor non-contractual obligations in the interest of mitigating reputational risk.
20. In summary, the stress scenario specified incorporates many of the shocks experienced during the crisis that started in 2007 into one significant stress scenario for which a bank would need sufficient liquidity on hand to survive for up to 30 calendar days.
21. This stress test should be viewed as a minimum supervisory requirement for banks. Banks are expected to conduct their own stress tests to assess the level of liquidity they should hold beyond this minimum, and construct their own scenarios that could cause difficulties for their specific business activities. Such internal stress tests should incorporate longer time horizons than the one mandated by this standard. Banks are expected to share the results of these additional stress tests with SAMA.
22. The LCR has two components:
(a) Value of the stock of HQLA in stressed conditions; and
(b) Total net cash outflows, calculated according to the scenario parameters outlined below.
Stock of HQLA/ Total net cash outflows over the next 30 calendar days ≥ 100%
Stock of HQLA23. The numerator of the LCR is the “stock of HQLA”. Under the standard, banks must hold a stock of unencumbered HQLA to cover the total net cash outflows (as defined below) over a 30-day period under the prescribed stress scenario. In order to qualify as “HQLA”, assets should be liquid in markets during a time of stress and, ideally, be central bank eligible. The following sets out the characteristics that such assets should generally possess and the operational requirements that they should satisfy. (Refer to the sections on “Definition of HQLA” and “Operational requirements” for the characteristics that an asset must meet to be part of the stock of HQLA and the definition of “unencumbered” respectively.)
Characteristics of HQLA24. Assets are considered to be HQLA if they can be easily and immediately converted into cash at little or no loss of value. The liquidity of an asset depends on the underlying stress scenario, the volume to be monetized and the timeframe considered. Nevertheless, there are certain assets that are more likely to generate funds without incurring large discounts in sale or repurchase agreement (repo) markets due to fire-sales even in times of stress. This section outlines the factors that influence whether or not the market for an asset can be relied upon to raise liquidity when considered in the context of possible stresses. These factors should assist supervisors in determining which assets, despite meeting the criteria from paragraphs 49 to 54 of BCBS LCR Guidelines, 2013, are not sufficiently liquid in private markets to be included in the stock of HQLA.
(i) Fundamental characteristics
• Low risk: assets that are less risky tend to have higher liquidity. High credit standing of the issuer and a low degree of subordination increase an asset’s liquidity. Low duration, (Footnote: Duration measures the price sensitivity of a fixed income security to changes in interest rate.) low legal risk, low inflation risk and denomination in a convertible currency with low foreign exchange risk all enhance an asset’s liquidity.
• Ease and certainty of valuation: an asset’s liquidity increases if market participants are more likely to agree on its valuation. Assets with more standardized, homogenous and simple structures tend to be more fungible, promoting liquidity. The pricing formula of a high-quality liquid asset must be easy to calculate and not depend on strong assumptions. The inputs into the pricing formula must also be publicly available. In practice, this should rule out the inclusion of most structured or exotic products.
• Low correlation with risky assets: the stock of HQLA should not be subject to wrong-way (highly correlated) risk. For example, assets issued by financial institutions are more likely to be illiquid in times of liquidity stress in the banking sector.
• Listed on a developed and recognized exchange: being listed increases an asset’s transparency.
(ii) Market-related characteristics
• Active and sizable market: the asset should have active outright sale or repo markets at all times. This means that:
- There should be historical evidence of market breadth and market depth. This could be demonstrated by low bid-ask spreads, high trading volumes, and a large and diverse number of market participants. Diversity of market participants reduces market concentration and increases the reliability of the liquidity in the market.
- There should be robust market infrastructure in place. The presence of multiple committed market makers increases liquidity as quotes will most likely be available for buying or selling HQLA.
• Low volatility: Assets whose prices remain relatively stable and are less prone to sharp price declines over time will have a lower probability of triggering forced sales to meet liquidity requirements. Volatility of traded prices and spreads are simple proxy measures of market volatility. There should be historical evidence of relative stability of market terms (e.g. prices and haircuts) and volumes during stressed periods.
• Flight to quality: historically, the market has shown tendencies to move into these types of assets in a systemic crisis. The correlation between proxies of market liquidity and banking system stress is one simple measure that could be used.
Note: By large, deep and active markets, SAMA understands that the relevant instrument should be at least repo-able with the Central banks and preferably other regulated entities
25. As outlined by these characteristics, the test of whether liquid assets are of “high quality” is that, by way of sale or repo, their liquidity-generating capacity is assumed to remain intact even in periods of severe idiosyncratic and market stress. Lower quality assets typically fail to meet that test. An attempt by a bank to raise liquidity from lower quality assets under conditions of severe market stress would entail acceptance of a large fire-sale discount or haircut to compensate for high market risk. That may not only erode the market’s confidence in the bank, but would also generate mark-to-market losses for banks holding similar instruments and add to the pressure on their liquidity position, thus encouraging further fire sales and declines in prices and market liquidity. In these circumstances, private market liquidity for such instruments is likely to disappear quickly.
26. HQLA (except Level 2B assets as defined below) should ideally be eligible at central banks (In most jurisdictions, HQLA should be central bank eligible in addition to being liquid in markets during stressed periods. In jurisdictions where central bank eligibility is limited to an extremely narrow list of assets, SAMA may allow unencumbered, non-central bank eligible assets that meet the qualifying criteria for Level 1 or Level 2 assets to count as part of the stock - see Definition of HQLA beginning from paragraph 45) for intraday liquidity needs and overnight liquidity facilities. In the past, central banks have provided a further backstop to the supply of banking system liquidity under conditions of severe stress. Central bank eligibility should thus provide additional confidence that banks are holding assets that could be used in events of severe stress without damaging the broader financial system. That in turn would raise confidence in the safety and soundness of liquidity risk management in the banking system.
27. It should be noted however, that central bank eligibility does not by itself constitute the basis for the categorization of an asset as HQLA.
Operational Requirement28. All assets in the stock of HQLA are subject to the following operational requirements. The purpose of the operational requirements is to recognize that not all assets outlined in paragraphs 49-54 of BCBS LCR Guidelines 2013 that meet the asset class, risk-weighting and credit-rating criteria should be eligible for the stock as there are other operational restrictions on availability of HQLA that can prevent timely monetization during a stress period.
29. These operational requirements are designed to ensure that the stock of HQLA is managed in such a way that the bank can, and is able to demonstrate that it can, immediately use the stock of assets as a source of contingent funds that is available for the bank to convert into cash through outright sale or repo, to fill funding gaps between cash inflows and outflows at any time during the 30-day stress period, with no restriction on the use of the liquidity generated.
30. A bank should periodically monetize a representative proportion of the assets in the stock through repo or outright sale, in order to test its access to the market, the effectiveness of its processes for monetization, the availability of the assets, and to minimize the risk of negative signaling during a period of actual stress.
31. All assets in the stock should be unencumbered. “Unencumbered” means free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell, transfer, or assign the asset. An asset in the stock should not be pledged (either explicitly or implicitly) to secure, collateralize or credit- enhance any transaction, nor be designated to cover operational costs (such as rents and salaries). Assets received in reverse repo and securities financing transactions that are held at the bank, have not been re- hypothecated, and are legally and contractually available for the bank's use can be considered as part of the stock of HQLA. In addition, assets which qualify for the stock of HQLA that have been pre-positioned or deposited with, or pledged to, the central bank or a public sector entity (PSE) but have not been used to generate liquidity may be included in the stock. (If a bank has deposited, pre-positioned or pledged Level 1, Level 2 and other assets in a collateral pool and no specific securities are assigned as collateral for any transactions, it may assume that assets are encumbered in order of increasing liquidity value in the LCR, i.e. assets ineligible for the stock of HQLA are assigned first, followed by Level 2B assets, then Level 2A and finally Level 1. This determination must be made in compliance with any requirements, such as concentration or diversification, of the central bank or PSE.)
32. A bank should exclude from the stock those assets that, although meeting the definition of “unencumbered” specified in paragraph 31 BCBS LCR Guidelines, 2013, the bank would not have the operational capability to monetize to meet outflows during the stress period. Operational capability to monetize assets requires having procedures and appropriate systems in place, including providing the function identified in paragraph 33 BCBS LCR Guidelines, 2013, with access to all necessary information to execute monetization of any asset at any time. Monetization of the asset must be executable, from an operational perspective, in the standard settlement period for the asset class in the relevant jurisdiction.
33. The stock should be under the control of the function charged with managing the liquidity of the bank (e.g. the treasurer), meaning the function has the continuous authority, and legal and operational capability, to monetize any asset in the stock. Control must be evidenced either by maintaining assets in a separate pool managed by the function with the sole intent for use as a source of contingent funds, or by demonstrating that the function can monetize the asset at any point in the 30-day stress period and that the proceeds of doing so are available to the function throughout the 30-day stress period without directly conflicting with a stated business or risk management strategy. For example, an asset should not be included in the stock if the sale of that asset, without replacement throughout the 30-day period, would remove a hedge that would create an open risk position in excess of internal limits.
34. A bank is permitted to hedge the market risk associated with ownership of the stock of HQLA and still include the assets in the stock. If it chooses to hedge the market risk, the bank should take into account (in the market value applied to each asset) the cash outflow that would arise if the hedge were to be closed out early (in the event of the asset being sold).
35. In accordance with Principle 9 of the Sound Principles a bank “should monitor the legal entity and physical location where collateral is held and how it may be mobilized in a timely manner”. Specifically, it should have a policy in place that identifies legal entities, geographical locations, currencies and specific custodial or bank accounts where HQLA are held. In addition, the bank should determine whether any such assets should be excluded for operational reasons and therefore, have the ability to determine the composition of its stock on a daily basis.
36. As noted in paragraphs 171 and 172, BCBS LCR Guidelines, 2013, qualifying HQLA that are held to meet statutory liquidity requirements at the legal entity or sub-consolidated level (where applicable) may only be included in the stock at the consolidated level to the extent that the related risks (as measured by the legal entity’s or sub-consolidated group’s net cash outflows in the LCR) are also reflected in the consolidated LCR. Any surplus of HQLA held at the legal entity can only be included in the consolidated stock if those assets would also be freely available to the consolidated (parent) entity in times of stress.
37. In assessing whether assets are freely transferable for regulatory purposes, banks should be aware that assets may not be freely available to the consolidated entity due to regulatory, legal, tax, accounting or other impediments. Assets held in legal entities without market access should only be included to the extent that they can be freely transferred to other entities that could monetize the assets.
38. In certain jurisdictions, large, deep and active repo markets do not exist for eligible asset classes, and therefore such assets are likely to be monetized through outright sale. In these circumstances, a bank should exclude from the stock of HQLA those assets where there are impediments to sale, such as large fire-sale discounts which would cause it to breach minimum solvency requirements, or requirements to hold such assets, including, but not limited to, statutory minimum inventory requirements for market making.
39. Banks should not include in the stock of HQLA any assets, or liquidity generated from assets, they have received under right of rehypothecation, if the beneficial owner has the contractual right to withdraw those assets during the 30-day stress period. (Refer to paragraph 146 for the appropriate treatment if the contractual withdrawal of such assets would lead to a short position - e.g. because the bank had used the assets in longer-term securities financing transactions).
40. Assets received as collateral for derivatives transactions that are not segregated and are legally able to be rehypothecated may be included in the stock of HQLA provided that the bank records an appropriate outflow for the associated risks as set out in paragraph 116 BCBS LCR Guidelines, 2013.
41. As stated in Principle 8 of the Sound Principles, a bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems. Banks and regulators should be aware that the LCR stress scenario does not cover expected or unexpected intraday liquidity needs.
42. While the LCR is expected to be met and reported in a single currency, banks are expected to be able to meet their liquidity needs in each currency and maintain HQLA consistent with the distribution of their liquidity needs by currency. The bank should be able to use the stock to generate liquidity in the currency and jurisdiction in which the net cash outflows arise. As such, the LCR by currency is expected to be monitored and reported to allow the bank and SAMA to track any potential currency mismatch issues that could arise, as outlined in Part 2. In managing foreign exchange liquidity risk, the bank should take into account the risk that its ability to swap currencies and access the relevant foreign exchange markets may erode rapidly under stressed conditions. It should be aware that sudden, adverse exchange rate movements could sharply widen existing mismatched positions and alter the effectiveness of any foreign exchange hedges in place.
43. In order to mitigate cliff effects that could arise, if an eligible liquid asset became ineligible (e.g. due to rating downgrade), a bank is permitted to keep such assets in its stock of liquid assets for an additional 30 calendar days. This would allow the bank additional time to adjust its stock as needed or replace the asset.
Diversification of the stock of HQLA44. The stock of HQLA should be well diversified within the asset classes themselves (except for sovereign debt of the bank’s home jurisdiction or from the jurisdiction in which the bank operates; central bank reserves; central bank debt securities; and cash). Although some asset classes are more likely to remain liquid irrespective of circumstances, ex-ante it is not possible to know with certainty which specific assets within each asset class might be subject to shocks ex-post. Banks should therefore have policies and limits in place in order to avoid concentration with respect to asset types, issue and issuer types, and currency (consistent with the distribution of net cash outflows by currency) within asset classes.
(Refer to Paragraph 16-44 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
2. Frequency and Timing
With regard to submission of the attached Prudential return (Amended LCR), all Banks (except foreign bank's branches) will be expected to provide their returns to SAMA on a monthly basis to be due 30 days following each month end. However, given the significant changes in the amended LCR calculations, SAMA will provide additional time for banks for their first set of Prudential returns. This is in order to introduce the necessary systems changes and enhancements. Consequently, the first submission of prudential returns for data as of 30 June 2013 should be provided by 30 September 2013 while all subsequent monthly submissions are to be provided within 30 days following each month end.
All reporting will be as per the attached Prudential Returns in SR 000’s.
3. Summary of Major Requirement and Changes in the amended LCR
3.1 Graduated approach
10. Specifically, the LCR will be introduced as planned on 1 January 2015, but the minimum requirement will be set at 60% and rise in equal annual steps to reach 100% on 1 January 2019. This graduated approach, coupled with the revisions made to the 2010 publication of the liquidity standards are designed to ensure that the LCR can be introduced without material disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.
1 January 2015 1 January 2016 1 January 2017 1 January 2018 1 January 2019 Minimum LCR 60% 70% 80% 90% 100%
11.
The Basel Committee and SAMA affirms their view that, during periods of stress, it would be entirely appropriate for banks to use their stock of HQLA, thereby falling below the minimum. SAMA will subsequently assess this situation and will give guidance on usability according to circumstances.
(Refer to Paragraph 11 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
3.2 Definition of High Quality Liquid Assets (HQLA)1
45. The stock of HQLA should comprise assets with the characteristics outlined in paragraphs 24-27 of LCR BCBS documentation. This section describes the type of assets that meet these characteristics and can therefore be included in the HQLA (stock).
46. There are two categories of assets that can be included in the stock. Assets to be included in each category are those that the bank is holding on the first day of the stress period, irrespective of their residual maturity. “Level 1” assets can be included without limit, while “Level 2” assets can only comprise up to 40% of the total (level 1 and level 2) stock.
47. SAMA may also choose to include within Level 2 as an additional class of assets (Level 2B assets - see paragraph 53 below). If included, these assets should comprise no more than 15% of the total stock of HQLA. They must also be included within the overall 40% cap on Level 2 assets.
48. The 40% cap on Level 2 assets and the 15% cap on Level 2B assets should be determined after the application of required haircuts, and after taking into account the unwind of short-term securities financing transactions and collateral swap transactions maturing within 30 calendar days that involve the exchange of HQLA. The details of the calculation methodology are provided in Annex 1 of BCBS document. In this context, short term transactions are transactions with a maturity date up to and including 30 calendar days.
(Refer to Paragraph 48 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Note that SAMA has disallowed Level 2B assets in all aspect to LCR computation till further notice
(i) Level 1 assets
49. Level 1 assets can comprise an unlimited share of the pool and are not subject to a haircut under the LCR (For purpose of calculating the LCR, Level 1 assets in the stock of HQLA should be measured at an amount no greater than their current market value). However, national supervisors may wish to require haircuts for Level 1 securities based on, among other things, their duration, credit and liquidity risk, and typical repo haircuts.
(Refer to footnote 11 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
In KSA, there are no requirements for haircuts to level-1 assets.
50. Level 1 assets are limited to:
(a) coins and banknotes;
(b) central bank reserves ,including required reserves, (In this context, central bank reserves would include banks’ overnight deposits with the central bank, and term deposits with the central bank that: (i) are explicitly and contractually repayable on notice from the depositing bank; or (ii) that constitute a loan against which the bank can borrow on a term basis or on an overnight but automatically renewable basis ,only where the bank has an existing deposit with the relevant central bank. Other term deposits with central banks are not eligible for the stock of HQLA; however, if the term expires within 30 days, the term deposit could be considered as an inflow per paragraph 154.) to the extent that the central bank policies allow them to be drawn down in times of stress; (Refer to footnote 12 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Note: The Murabahah facility made available to SAMA by Shariah Compliant banks fall under the category on Central Bank reserves and can be included in Level 1 assets
(c) marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs, the Bank for International Settlements, the International Monetary Fund, the European Central Bank and European Community, or multilateral development banks (The Basel III liquidity framework follows the categorization of market participants applied in the Basel II Framework, unless otherwise specified) , and satisfying all of the following conditions:
(Refer to footnote 14 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
• Assigned a 0% risk-weight under the Basel II Standardized Approach for credit risk (Paragraph 50(c) includes only marketable securities that qualify for Basel II paragraph 53. When a 0% risk-weight has been assigned at national discretion according to the provision in paragraph 54 of the Basel II Standardized Approach, the treatment should follow paragraph 50(d) or 50(e).);
(Refer to footnote 15 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
• Traded in large, deep and active repo or cash markets characterized by a low level of concentration;
• Have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions; and
• Not an obligation of a financial institution or any of its affiliated entities. (This requires that the holder of the security must not have recourse to the financial institution or any of the financial institution's affiliated entities. In practice, this means that securities, such as government- guaranteed issuance during the financial crisis, which remain liabilities of the financial institution, would not qualify for the stock of HQLA. The only exception is when the bank also qualifies as a PSE under the Basel II Framework where securities issued by the bank could qualify for Level 1 assets if all necessary conditions are satisfied.)
(Refer to footnote 16 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Note: By Reliable source of liquidity, SAMA understands that the relevant instrument, as a minimum has been eligible for Repo (without a significant increase in haircut received) either from the Central Bank or other key regulated entities even in stressful times such as those which transpired in the global financial crises from 2007, onwards.
(d) Where the sovereign has a non-0% risk weight, sovereign or central bank debt securities issued in domestic currencies by the sovereign or central bank.
(e) where the sovereign has a non-0% risk weight, domestic sovereign or central bank debt securities issued in foreign currencies are eligible up to the amount of the bank’s stressed net cash outflows in that specific foreign currency stemming from the bank’s operations in the jurisdiction where the bank’s liquidity risk is being taken.
Note: The onus is on the regulated entities to determine if all of the above conditions are satisfied whilst reporting Liquid Assets under level 1 category to SAMA. SAMA would also review adherence to the stipulated conditions through off site and onsite monitoring.
(ii) Level 2A and 2B assets
With regard to Level 2A and 2B assets2, in KSA, there is only a deep, large and active market for Saudi shares or equity. For other markets, banks must decide as to meeting the BCBS criteria.
51. Level 2 assets (comprising Level 2A assets and any Level 2B assets2 permitted by the supervisor) can be included in the stock of HQLA, subject to the requirement that they comprise no more than 40% of the overall stock after haircuts have been applied. The method for calculating the cap on Level 2 assets and the cap on Level 2B assets is set out in paragraph 48 and Annex 1 of the BCBS LCR Guidelines, 2013.
52. A 15% haircut is applied to the current market value of each Level 2A asset held in the stock of HQLA.
Level 2A assets are limited to the following:
(a) Marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs or multilateral development banks that satisfy all of the following conditions:
• assigned a 20% risk weight under the Basel II Standardized Approach for credit risk (Paragraphs 50(d) and (e) may overlap with paragraph 52(a) in terms of sovereign and central bank securities with a 20% risk weight. In such a case, the assets can be assigned to the Level 1 category according to Paragraph 50(d) or (e), as appropriate.); (Refer to footnote 17 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
• traded in large, deep and active repo or cash markets characterized by a low level of concentration;
• have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (ie maximum decline of price not exceeding 10% or increase in haircut not exceeding 10 percentage points over a 30-day period during a relevant period of significant liquidity stress);
(Refer to Paragraph 52(a) of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
• not an obligation of a financial institution or any of its affiliated entities.
(b) Corporate debt securities ,including commercial paper, in this respect include only plain-vanilla assets whose valuation is readily available based on standard methods and does not depend on private knowledge, i.e. these do not include complex structured products or subordinated debt.):and covered bonds (Covered bonds are bonds issued and owned by a bank or mortgage institution and are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest).that satisfy all of the following conditions:
(Refer to footnotes 19 and 20 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
• In the case of corporate debt securities or covered bonds not issued by a financial institution or any of its affiliated entities;
• Either (i) have a long-term credit rating from a recognized external credit assessment institution (ECAI) of at least AA- (In the event of split ratings, the applicable rating should be determined according to the method used in Basel II’s standardized approach for credit risk. Local rating scales (rather than international ratings) of a SAMA approved ECAI that meet the eligibility criteria outlined in paragraph 91 of the Basel II Capital Framework can be recognized if corporate debt securities or covered bonds are held by a bank for local currency liquidity needs arising from its operations in that local jurisdiction. This also applies to Level 2B assets).or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating; or (ii) do not have a credit assessment by a recognized ECAI but are internally rated as having a probability of default (PD) corresponding to a credit rating of at least AA-;
(Refer to footnote 21 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
• Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
• have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions: ie maximum decline of price or increase in haircut over a 30-day period during a relevant period of significant liquidity stress not exceeding 10%.
(Refer to Paragraph 54(a) of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Note: By relevant period of significant liquidity stress, SAMA understands these to be of similar quantum such as those which transpired in the global financial crises from 2007, onwards.
Note: The onus is on the regulated entities to determine if all of the above conditions are satisfied whilst reporting Liquid Assets under level 2A category to SAMA. SAMA would also review adherence to the stipulated conditions through off site and onsite monitoring.
(iii) Level 2B assets (additional HQLA available under amended LCR)
53. Certain additional assets (Level 2B assets)2 may be included in Level 2 at the discretion of national authorities. In choosing to include these assets in Level 2 for the purpose of the LCR, supervisors are expected to ensure that such assets fully comply with the qualifying criteria (As with all aspects of the framework, compliance with these criteria will be assessed as part of peer reviews undertaken under the Committee’s Regulatory Consistency Assessment Programme). Supervisors are also expected to ensure that banks have appropriate systems and measures to monitor and control the potential risks (e.g. credit and market risks) that banks could be exposed to in holding these assets.
(Refer to footnote 22 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
54. A larger haircut is applied to the current market value of each Level 2B asset held in the stock of HQLA.
Level 2B assets are limited to the following:
(a) Residential mortgage backed securities (RMBS) that satisfy all of the following conditions may be included in Level 2B, subject to a 25% haircut:
• Not issued by, and the underlying assets have not been originated by the bank itself or any of its affiliated entities;
• Have a long-term credit rating from a recognized ECAI of AA or higher, or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating;
• Traded in large, deep and active repo or cash markets characterized by a low level of concentration;
• The underlying mortgages are “full recourse’’ loans (i.e. in the case of foreclosure the mortgage owner remains liable for any shortfall in sales proceeds from the property) and have a maximum loan-to-value ratio (LTV) of 80% on average at issuance; and
(b) Corporate debt securities (Corporate debt securities (including commercial paper) in this respect include only plain-vanilla assets whose valuation is readily available based on standard methods and does not depend on private knowledge, ie these do not include complex structured products or subordinated debt.) that satisfy all of the following conditions may be included in Level 2B, subject to a 50% haircut:
• Not issued by a financial institution or any of its affiliated entities;
• Either (i) have a long-term credit rating from a recognized ECAI between A+ and BBB- or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating; or (ii) do not have a credit assessment by a recognized ECAI and are internally rated as having a PD corresponding to a credit rating of between A+ and BBB-;
• Traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
(Refer to footnote 22 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
(c) Common equity shares that satisfy all of the following conditions may be included in Level 2B, subject to a 50% haircut:
• not issued by a financial institution or any of its affiliated entities;
• exchange traded and centrally cleared;
• a constituent of the major stock index in the home jurisdiction or where the liquidity risk is taken, as decided by the supervisor in the jurisdiction where the index is located;
• denominated in the domestic currency of a bank’s home jurisdiction or in the currency of the jurisdiction where a bank’s liquidity risk is taken;
• traded in large, deep and active repo or cash markets characterized by a low level of concentration; and
• have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, ie a maximum decline of share price not exceeding 40% or increase in haircut not exceeding 40 percentage points over a 30-day period during a relevant period of significant liquidity.
(Refer to Paragraph 52(a) of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Note: SAMA does not utilize Level 2B assets for the purpose of LCR computation, currently
3.2.1 Treatment for Jurisdictions with insufficient HQLA2
(a) Assessment of eligibility for alternative liquidity approaches (ALA)
55. Some jurisdictions may have an insufficient supply of Level 1 assets (or both Level 1 and Level 2 assets - Insufficiency in Level 2 assets alone does not qualify for the alternative treatment.) in their domestic currency to meet the aggregate demand of banks with significant exposures in this currency. To address this situation, the Committee has developed alternative treatments for holdings in the stock of HQLA, which are expected to apply to a limited number of currencies and jurisdictions, and subject to qualifying criteria set out in Annex 2 and will be determined through an independent peer review process overseen by the Committee. The purpose of this process is to ensure that the alternative treatments are only used when there is a true shortfall in HQLA in the domestic currency relative to the needs in that currency. (For member states of a monetary union with a common currency, that common currency is considered the “domestic currency”).
(Refer to footnotes 24 and 25 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
56. To qualify for the alternative treatment, a jurisdiction should be able to demonstrate that:
• There is an insufficient supply of HQLA in its domestic currency, taking into account all relevant factors affecting the supply of, and demand for, such HQLA; (The assessment of insufficiency is only required to take into account the Level 2B assets if the national authority chooses to include them within HQLA. In particular, if certain Level 2B assets are not included in the stock of HQLA in a given jurisdiction, then the assessment of insufficiency in that jurisdiction does not need to include the stock of Level 2B assets that are available in that jurisdiction) (Refer to footnote 26 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
• The insufficiency is caused by long-term structural constraints that cannot be resolved within the medium term;
• It has the capacity, through any mechanism or control in place, to limit or mitigate the risk that the alternative treatment cannot work as expected; and
• It is committed to observing the obligations relating to supervisory monitoring, disclosure, and periodic self-assessment and independent peer review of its eligibility for alternative treatment.
All of the above criteria have to be met to qualify for the alternative treatment.
57. Irrespective of whether a jurisdiction seeking ALA treatment will adopt the phase-in arrangement set out in paragraph 10 for implementing the LCR, the eligibility for that jurisdiction to adopt ALA treatment will be based on a fully implemented LCR standard (i.e. 100% requirement).
(b) Potential options for alternative treatment2
58. Option 1: A jurisdiction seeking to adopt Option 1 should justify in the independent peer review that the fee is suitably set in a manner as prescribed in this paragraph. Contractual committed liquidity facilities from the relevant central bank, with a fee: For currencies that do not have sufficient HQLA, as determined by reference to the qualifying principles and criteria, Option 1 would allow banks to access contractual committed liquidity facilities provided by the relevant central bank (i.e. relevant given the currency in question) for a fee. These facilities should not be confused with regular central bank standing arrangements. In particular, these facilities are contractual arrangements between the central bank and the commercial bank with a maturity date which, at a minimum, falls outside the 30-day LCR window. Further, the contract must be irrevocable prior to maturity and involve no ex-post credit decision by the central banks. Such facilities are only permissible if there is also a fee for the facility which is charged regardless of the amount, if any, drawn down against that facility and the fee is set so that banks which claim the facility line to meet the LCR, and banks which do not, have similar financial incentives to reduce their exposure to liquidity risk. That is, the fee should be set so that the net yield on the assets used to secure the facility should not be higher than the net yield on a representative portfolio of Level 1 and Level 2 assets, after adjusting for any material differences in credit risk. A jurisdiction seeking to adopt Option 1 should justify in the independent peer review that the fee is suitably set in a manner as prescribed in this paragraph.
(Refer to Paragraph 58 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
59. Option 2 – Foreign currency HQLA to cover domestic currency liquidity needs:
To qualify for this treatment, the jurisdiction concerned should demonstrate in the independent peer review the effectiveness of its currency peg mechanism and assess the long-term prospect of keeping the peg.
For currencies that do not have sufficient HQLA, as determined by reference to the qualifying principles and criteria, Option 2 would allow supervisors to permit banks that evidence a shortfall of HQLA in the domestic currency (which would match the currency of the underlying risks) to hold HQLA in a currency that does not match the currency of the associated liquidity risk, provided that the resulting currency mismatch positions are justifiable and controlled within limits agreed by their supervisors. Supervisors should restrict such positions within levels consistent with the bank’s foreign exchange risk management capacity and needs, and ensure that such positions relate to currencies that are freely and reliably convertible, are effectively managed by the bank, and would not pose undue risk to its financial strength. In managing those positions, the bank should take into account the risks that its ability to swap currencies, and its access to the relevant foreign exchange markets, may erode rapidly under stressed conditions. It should also take into account that sudden, adverse exchange rate movements could sharply widen existing mismatch positions and alter the effectiveness of any foreign exchange hedges in place.
60. To account for foreign exchange risk associated with foreign currency HQLA used to cover liquidity needs in the domestic currency, such liquid assets should be subject to a minimum haircut of 8% for major currencies that are active in global foreign exchange markets (These refer to currencies that exhibit significant and active market turnover in the global foreign currency market (e.g. the average market turnover of the currency as a percentage of the global foreign currency market turnover over a ten-year period is not lower than 10%). For other currencies, jurisdictions should increase the haircut to an appropriate level on the basis of historical (monthly) exchange rate volatilities between the currency pair over an extended period of time. (As an illustration, the exchange rate volatility data used for deriving the FX haircut may be based on the 30-day moving FX price volatility data (mean + 3 standard deviations) of the currency pair over a ten-year period, adjusted to align with the 30-day time horizon of the LCR).If the domestic currency is formally pegged to another currency under an effective mechanism, the haircut for the pegged currency can be lowered to a level that reflects the limited exchange rate risk under the peg arrangement. To qualify for this treatment, the jurisdiction concerned should demonstrate in the independent peer review the effectiveness of its currency peg mechanism and assess the long-term prospect of keeping the peg.
(Refer to Paragraph 60 and footnotes 27 and 28 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
61. Haircuts for foreign currency HQLA used under Option 2 would apply only to HQLA in excess of a threshold specified by supervisors which is not greater than 25%. (The threshold for applying the haircut under Option 2 refers to the amount of foreign currency HQLA used to cover liquidity needs in the domestic currency as a percentage of total net cash outflows in the domestic currency. Hence under a threshold of 25%, a bank using Option 2 will only need to apply the haircut to that portion of foreign currency HQLA in excess of 25% that are used to cover liquidity needs in the domestic currency.) This is to accommodate a certain level of currency mismatch that may commonly exist among banks in their ordinary course of business.
(Refer to footnotes 29 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
62. Option 3 – Additional use of Level 2 assets with a higher haircut: This option addresses currencies for which there are insufficient Level 1 assets, as determined by reference to the qualifying principles and criteria, but where there are sufficient Level 2A assets. In this case, supervisors may choose to allow banks that evidence a shortfall of HQLA in the domestic currency (to match the currency of the liquidity risk incurred) to hold additional Level 2A assets in the stock. These additional Level 2A assets would be subject to a minimum haircut of 20%, i.e. 5% higher than the 15% haircut applicable to Level 2A assets that are included in the 40% cap. The higher haircut is used to cover any additional price and market liquidity risks arising from increased holdings of Level 2A assets beyond the 40% cap, and to provide a disincentive for banks to use this option based on yield considerations. (For example, a situation to avoid is that the opportunity cost of holding a portfolio that benefits from this option would be lower than the opportunity cost of holding a theoretical compliant portfolio of Level 1 and Level 2 assets, after adjusting for any material differences in credit risk.)
(Refer to footnotes 30 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Supervisors have the obligation to conduct an analysis to assess whether the additional haircut is sufficient for Level 2A assets in their markets, and should increase the haircut if this is warranted to achieve the purpose for which it is intended. Supervisors should explain and justify the outcome of the analysis (including the level of increase in the haircut, if applicable) during the independent peer review assessment process. Any Level 2B assets held by the bank would remain subject to the cap of 15%, regardless of the amount of other Level 2 assets held.
Note: SAMA has not utilized any of the options under the alternate treatment
(Refer to Paragraph 62 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
(c) Maximum level of usage of options for alternative treatment2
63. The usage of any of the above options would be constrained by a limit specified by supervisors in jurisdictions whose currency is eligible for the alternative treatment. The limit should be expressed in terms of the maximum amount of HQLA associated with the use of the options (whether individually or in combination) that a bank is allowed to include in its LCR, as a percentage of the total amount of HQLA the bank is required to hold in the currency concerned. (The required amount of HQLA in the domestic currency includes any regulatory buffer (i.e. above the 100% LCR standard) that the supervisor may reasonably impose on the bank concerned based on its liquidity risk profile.)
(Refer to footnotes 31 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Amount of HQLA associated with the options refer to:
(i) in the case of Option 1, the amount of committed liquidity facilities granted by the relevant central bank;
(ii) in the case of Option 2, the amount of foreign currency HQLA used to cover the shortfall of HQLA in the domestic currency; and
(iii) in the case of Option 3, the amount of Level 2 assets held (including those within the 40% cap).
64. If, for example, the maximum level of usage of the options is set at 80%, it means that a bank adopting the options, either individually or in combination, would only be allowed to include HQLA associated with the options (after applying any relevant haircut) up to 80% of the required amount of HQLA in the relevant currency. (As an example, if a bank has used Option 1 and Option 3 to the extent that it has been granted an Option 1 facility of 10%, and held Level 2 assets of 55% after haircut (both in terms of the required amount of HQLA in the domestic currency), the HQLA associated with the use of these two options amount to 65% (i.e. 10%+55%), which is still within the 80% level. The total amount of alternative HQLA used is 25% (i.e. 10% + 15% (additional Level 2A assets used).Thus, at least 20% of the HQLA requirement will have to be met by Level 1 assets in the relevant currency.
(Refer to footnotes 32 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
65. The appropriateness of the maximum level of usage of the options allowed by a supervisor will be evaluated in the independent peer review process. The level set should be consistent with the projected size of the HQLA gap faced by banks subject to the LCR in the currency concerned, taking into account all relevant factors that may affect the size of the gap over time. The supervisor should explain how this level is derived, and justify why this is supported by the insufficiency of HQLA in the banking system. Where a relatively high level of usage of the options is allowed by the supervisor (eg over 80%), the suitability of this level will come under closer scrutiny in the independent peer review.
Note: SAMA has not utilized any of the options under the alternate treatment
(Refer to Paragraph 65 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
(d) Supervisory obligations and requirements2
66. A jurisdiction with insufficient HQLA must, among other things, fulfil the following obligations (the detailed requirements are set out in Annex 2 ):
• Supervisory monitoring: There should be a clearly documented supervisory framework for overseeing and controlling the usage of the options by its banks, and for monitoring their compliance with the relevant requirements applicable to their use of the options;
• Disclosure framework: The jurisdiction should disclose its framework for applying the options to its banks (whether on its website or through other means). The disclosure should enable other national supervisors and stakeholders to gain a sufficient understanding of its compliance with the qualifying principles and criteria and the manner in which it supervises the use of the options by its banks;
• Periodic self-assessment of eligibility for alternative treatment: The jurisdiction should perform a self-assessment of its eligibility for alternative treatment every five years after it has adopted the options, and disclose the results to other national supervisors and stakeholders.
(Refer to Paragraph 66 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
67. The use of the options by their banks, having regard to the guiding principles set out below.
• Principle 1: Banks’ use of the options is not simply an economic choice that maximizes the profits of the bank through the selection of alternative HQLA based primarily on yield considerations.
• Principle 2: Supervisors should ensure that the use of the options is constrained, both for all banks with exposures in the relevant currency and on a bank-by-bank basis.
• banks have, to the extent practicable, taken reasonable steps to use Level 1 and Level 2 assets and reduce before the alternative treatment.
• Principle 4: Supervisors should have a mechanism for restraining the usage of the options to mitigate risks of non-performance of the alternative HQLA.
Note: SAMA has not utilized any of the options under the alternate treatment
3.4 Treatment for Shariah2
68. Shari’ah compliant banks face a religious prohibition on holding certain types of assets, such as interest-bearing debt securities. Even in jurisdictions that have a sufficient supply of HQLA, an insurmountable impediment to the ability of Shari’ah compliant banks to meet the LCR requirement may still exist. In such cases, national supervisors in jurisdictions in which Shari’ah compliant banks operate have the discretion to define Shari’ah compliant financial products (such as Sukuk) as alternative HQLA applicable to such banks only, subject to such conditions or haircuts that the supervisors may require. It should be noted that the intention of this treatment is not to allow Shari’ah compliant banks to hold fewer HQLA. The minimum LCR standard, calculated based on alternative HQLA (post-haircut) recognized as HQLA for these banks, should not be lower than the minimum LCR standard applicable to other banks in the jurisdiction concerned.
Note: SAMA has not utilized any of the options under the alternate treatment
B. Total net cash outflows
69. The term total net cash outflows (Where applicable, cash inflows and outflows should include interest that is expected to be received and paid during the 30-day time horizon).is defined as the total expected cash outflows minus total expected cash inflows in the specified stress scenario for the subsequent calendar days. Total expected cash inflows are subject to an aggregate cap of 75% of total expected cash outflows. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by the rates at which they are expected to run off or be drawn down. Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in under the scenario up to an aggregate cap of 75% of total expected cash outflows.
Total net cash outflows over the next 30 calendar days = Total expected cash outflows – Min {total expected cash inflows; 75% of total expected cash outflows}
(Refer to footnotes 33 and Paragraph 69 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Note: Saudi Arabia has no effective deposit insurance scheme. Consequently, any run-off rate subject to deposit insurance is not valid for KSA banks.
70. While most roll-off rates, draw-down rates and similar factors are harmonized across jurisdictions as outlined in this standard, a few parameters are to be determined by supervisory authorities at the national level. Where this is the case, the parameters should be transparent and made publicly available.
71. Annex 4 of BCBS LCR guidelines provide a summary of the factors that are applied to each category.
72. Banks will not be permitted to double count items, ie if an asset is included as part of the “stock of HQLA” (ie the numerator), the associated cash inflows cannot also be counted as cash inflows (ie part of the denominator). Where there is potential that an item could be counted in multiple outflow categories, (e.g. committed liquidity facilities granted to cover debt maturing within the 30 calendar day period), a bank only has to assume up to the maximum contractual outflow for that product.
(Refer to Paragraph 70-72 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
3.5 Cash Outflows
3.5.1 (i) RETAIL DEPOSIT RUN-OFF
73. Retail deposits are defined as deposits placed with a bank by a natural person, and those subject to the LCR include demand deposits and term deposits, unless otherwise excluded under the criteria set out in paragraphs 82 and 83 BCBS LCR Guidelines, 2013.
74. These retail deposits are divided into “stable” and “less stable” portions of funds as described below. The run-off rates for retail deposits are minimum floors, with higher run-off rates established by individual jurisdictions as appropriate to capture depositor behavior in a period of stress in each jurisdiction.
(Refer to Paragraph 74 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
(a) Stable deposits (run-off rate = 3% and higher)
75. Stable deposits, which usually receive a run-off factor of 5%, are the amount of the deposits that are fully insured (“Fully insured” means that 100% of the deposit amount, up to the deposit insurance limit, is covered by an effective deposit insurance scheme. Deposit balances up to the deposit insurance limit can be treated as “fully insured” even if a depositor has a balance in excess of the deposit insurance limit. However, any amount in excess of the deposit insurance limit is to be treated as “less stable”. For example, if a depositor has a deposit of 150 that is covered by a deposit insurance scheme, which has a limit of 100, where the depositor would receive at least 100 from the deposit insurance scheme if the financial institution were unable to pay, then 100 would be considered “fully insured” and treated as stable deposits while 50 would be treated as less stable deposits. However if the deposit insurance scheme only covered a percentage of the funds from the first currency unit (e.g. 90% of the deposit amount up to a limit of 100) then the entire 150 deposit would be less stable.)
by an effective deposit insurance scheme or by a public guarantee that provides equivalent protection and where:
• The depositors have other established relationships with the bank that make deposit withdrawal highly unlikely; or
• The deposits are in transactional accounts (e.g. accounts where salaries are automatically deposited).
(Refer to footnotes 34 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
76. For the purposes of this standard, an “effective deposit insurance scheme” refers to a scheme (i) that guarantees that it has the ability to make prompt payouts, (ii) for which the coverage is clearly defined and (iii) of which public awareness is high. The deposit insurer in an effective deposit insurance scheme has formal legal powers to fulfil its mandate and is operationally independent, transparent and accountable. A jurisdiction with an explicit and legally binding sovereign deposit guarantee that effectively functions as deposit insurance can be regarded as having an effective deposit insurance scheme.
(Refer to Paragraph 76 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
77. The presence of deposit insurance alone is not sufficient to consider a deposit “stable”.
78. Jurisdictions may choose to apply a run-off rate of 3% to stable deposits in their jurisdiction, if they meet the above stable deposit criteria and the following additional criteria for deposit insurance schemes (The Financial Stability Board has asked the International Association of Deposit Insurers (IADI), in conjunction with the Basel Committee and other relevant bodies where appropriate, to update its Core Principles and other guidance to better reflect leading practices. The criteria in this paragraph will therefore be reviewed by the Committee once the work by IADI has been completed).
(Refer to footnotes 35 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
• The insurance scheme is based on a system of prefunding via the periodic collection of levies on banks with insured deposits; (The requirement for periodic collection of levies from banks does not preclude that deposit insurance schemes may, on occasion, provide for contribution holidays due to the scheme being well-funded at a given point in time.)
(Refer to footnotes 36 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
• the scheme has adequate means of ensuring ready access to additional funding in the event of a large call on its reserves, e.g. an explicit and legally binding guarantee from the government, or a standing authority to borrow from the government;
• access to insured deposits is available to depositors in a short period of time once the deposit insurance scheme is triggered. (This period of time would typically be expected to be no more than 7 business days)
Jurisdictions applying the 3% run-off rate to stable deposits with deposit insurance arrangements that meet the above criteria should be able to provide evidence of run-off rates for stable deposits within the banking system below 3% during any periods of stress experienced that are consistent with the conditions within the LCR.
Note: KSA does not currently have deposit insurance; hence the guidelines identified above, for stable deposits do not apply
(Refer to Paragraph 78 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
(b) Less stable deposits (run-off rates = 10% and higher)
79. Supervisory authorities are expected to develop additional buckets with higher run-off rates as necessary to apply to buckets of potentially less stable retail deposits in their jurisdictions, with a minimum run-off rate of 10%. These jurisdiction-specific run-off rates should be clearly outlined and publicly transparent. Buckets of less stable deposits could include deposits that are not fully covered by an effective deposit insurance scheme or sovereign deposit guarantee, high-value deposits, deposits from sophisticated or high net worth individuals, deposits that can be withdrawn quickly (e.g. internet deposits) and foreign currency deposits, as determined by each jurisdiction.
Note: In connection with the guidance provided in Para 79, above, SAMA would be undertaking a study shortly to assess if potentially higher run off rates would be applicable to the less stable deposits category.
(Refer to Paragraph 79 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
80. If a bank is not able to readily identify which retail deposits would qualify as “stable” according to the above definition (e.g. the bank cannot determine which deposits are covered by an effective deposit insurance scheme or a sovereign deposit guarantee), it should place the full amount in the “less stable” buckets as established by its supervisor.
81. Foreign currency retail deposits are deposits denominated in any other currency than the domestic currency in a jurisdiction in which the bank operates. Supervisors will determine the run-off factor that banks in their jurisdiction should use for foreign currency deposits. Foreign currency deposits will be considered as “less stable” if there is a reason to believe that such deposits are more volatile than domestic currency deposits. Factors affecting the volatility of foreign currency deposits include the type and sophistication of the depositors, and the nature of such deposits (eg whether the deposits are linked to business needs in the same currency, or whether the deposits are placed in a search for yield).
Note: In KSA, run-off rates for all currencies are as per BCBS guidelines.
Currently in KSA, there are no material factors to suggest that foreign currency deposits would be less stable in comparison to SAR denominated deposits. Its noteworthy that the USD denominated deposits are the most common category of FCY deposits with regulated entities, which is pegged to Saudi Riyal.
(Refer to Paragraph 81 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
82. Cash outflows related to retail term deposits with a residual maturity or withdrawal notice period of greater than 30 days will be excluded from total expected cash outflows if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR. (If a portion of the term deposit can be withdrawn without incurring such a penalty, only that portion should be treated as a demand deposit. The remaining balance of the deposit should be treated as a term deposit.)
In KSA, with regard to item 82 above, Term Deposits are not to be withdrawn under exceptional circumstances as described below in items 83 and 84.
(Refer to footnote 38 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
83. If a bank allows a depositor in exceptional circumstances to withdraw such deposits without applying the corresponding penalty, or despite a clause that says the depositor has no legal right to withdraw, the entire category of these funds would then have to be treated as demand deposits (i.e. regardless of the remaining term, the deposits would be subject to the deposit run-off rates as specified in paragraphs 74-81 BCBS LCR Guidelines, 2013.
84. Notwithstanding the above, SAMA may also opt to treat retail term deposits that meet the qualifications set out in paragraph 82, BCBS LCR Guidelines, 2013, with a higher than 0% run-off rate, if they clearly state the treatment that applies for their jurisdiction and apply this treatment in a similar fashion across banks in their jurisdiction. Such reasons could include, but are not limited to, supervisory concerns that depositors would withdraw term deposits in a similar fashion as retail demand deposits during either normal or stress times, concern that banks may repay such deposits early in stressed times for reputational reasons, or the presence of unintended incentives on banks to impose material penalties on consumers if deposits are withdrawn early. In these cases SAMA would assess a higher run-off against all or some of such deposits.
3.5.2 (ii) Unsecured wholesale funding run-off
85. For the purposes of the LCR, "unsecured wholesale funding” is defined as those liabilities and general obligations that are raised from non-natural persons (i.e. legal entities, including sole proprietorships and partnerships) and are not collateralized by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution. Obligations related to derivative contracts are explicitly excluded from this definition.
86. The wholesale funding included in the LCR is defined as all funding that is callable within the LCR’s horizon of 30 days or that has its earliest possible contractual maturity date situated within this horizon (such as maturing term deposits and unsecured debt securities) as well as funding with an undetermined maturity. This should include all funding with options that are exercisable at the investor’s discretion within the 30 calendar day horizon. For funding with options exercisable at the bank’s discretion, SAMA would take into account reputational factors that may limit a bank's ability not to exercise the option. (This could reflect a case where a bank may imply that it is under liquidity stress if it did not exercise an option on its own funding.) In particular, where the market expects certain liabilities to be redeemed before their legal final maturity date, banks and SAMA should assume such behavior for the purpose of the LCR and include these liabilities as outflows.
87. Wholesale funding that is callable (This takes into account any embedded options linked to the funds provider’s ability to call the funding before contractual maturity.) by the funds provider subject to a contractually defined and binding notice period surpassing the 30-day horizon is not included.
88. For the purposes of the LCR, unsecured wholesale funding is to be categorised as detailed below, based on the assumed sensitivity of the funds providers to the rate offered and the credit quality and solvency of the borrowing bank. This is determined by the type of funds providers and their level of sophistication, as well as their operational relationships with the bank. The runoff rates for the scenario are listed for each category.
(Refer to Paragraph 86-88 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
(a) Unsecured wholesale funding provided by small business customers: 5%, 10% and higher
89. Unsecured wholesale funding provided by small business customers is treated the same way as retail deposits for the purposes of this standard, effectively distinguishing between a "stable" portion of funding provided by small business customers and different buckets of less stable funding defined by each jurisdiction. The same bucket definitions and associated run-off factors apply as for retail deposits.
90. This category consists of deposits and other extensions of funds made by nonfinancial small business customers. “Small business customers” are defined in line with the definition of loans extended to small businesses in paragraph 231 of the Basel II framework that are managed as retail exposures and are generally considered as having similar liquidity risk characteristics to retail accounts provided the total aggregated funding (“Aggregated funding” means the gross amount (i.e. not netting any form of credit extended to the legal entity) of all forms of funding (e.g. deposits or debt securities or similar derivative exposure for which the counterparty is known to be a small business customer). In addition, applying the limit on a consolidated basis means that where one or more small business customers are affiliated with each other, they may be considered as a single creditor such that the limit is applied to the total funding received by the bank from this group of customers.) raised from one small business customer is less than €1 million (on a consolidated basis where applicable).
(Refer to footnote 41 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
92. Term deposits from small business customers should be treated in accordance with the treatment for term retail deposits as outlined in paragraph 82, 83, and 84, BCBS LCR Guidelines, 2013.
(b) Operational deposits generated by clearing, custody and cash management activities: 25%
93. Certain activities lead to financial and non-financial customers needing to place, or leave, deposits with a bank in order to facilitate their access and ability to use payment and settlement systems and otherwise make payments. These funds may receive a 25% run-off factor only if the customer has a substantive dependency with the bank and the deposit is required for such activities. SAMA’s approval on a case by case basis*, would have to be given to ensure that banks utilizing this treatment (para 93-104) actually are conducting these operational activities at the level indicated. SAMA may choose not to permit banks to utilise the operational deposit run-off rates in cases where, for example, a significant portion of operational deposits are provided by a small proportion of customers (i.e. concentration risk).
94. Qualifying activities in this context refer to clearing, custody or cash management activities that meet the following criteria:
• The customer is reliant on the bank to perform these services as an independent third party intermediary in order to fulfil its normal banking activities over the next 30 days. For example, this condition would not be met if the bank is aware that the customer has adequate back-up arrangements.
• These services must be provided under a legally binding agreement to institutional customers.
• The termination of such agreements shall be subject either to a notice period of at least 30 days or significant switching costs (such as those related to transaction, information technology, early termination or legal costs) to be borne by the customer if the operational deposits are moved before 30 days.
95. Qualifying operational deposits generated by such an activity are ones where:
• The deposits are by-products of the underlying services provided by the banking organization and not sought out in the wholesale market in the sole interest of offering interest income.
• The deposits are held in specifically designated accounts and priced without giving an economic incentive to the customer (not limited to paying market interest rates) to leave any excess funds on these accounts. In the case that interest rates in a jurisdiction are close to zero, it would be expected that such accounts is non-interest bearing. Banks should be particularly aware that during prolonged periods of low interest rates, excess balances (as defined below) could be significant.
96. Any excess balances that could be withdrawn and would still leave enough funds to fulfil these clearing, custody and cash management activities do not qualify for the 25% factor. In other words, only that part of the deposit balance with the service provider that is proven to serve a customer’s operational needs can qualify as stable. Excess balances should be treated in the appropriate category for non-operational deposits. If banks are unable to determine the amount of the excess balance, then the entire deposit should be assumed to be excess to requirements and, therefore, considered non-operational.
97. Banks must determine the methodology for identifying excess deposits that are excluded from this treatment. This assessment should be conducted at a sufficiently granular level to adequately assess the risk of withdrawal in an idiosyncratic stress. The methodology should take into account relevant factors such as the likelihood that wholesale customers have above average balances in advance of specific payment needs, and consider appropriate indicators (e.g. ratios of account balances to payment or settlement volumes or to assets under custody) to identify those customers that are not actively managing account balances efficiently.
98. Operational deposits would receive a 0% inflow assumption for the depositing bank given that these deposits are required for operational reasons, and are therefore not available to the depositing bank to repay other outflows.
99. Notwithstanding these operational categories, if the deposit under consideration arises out of correspondent banking or from the provision of prime brokerage services, it will be treated as if there were no operational activity for the purpose of determining run-off factors. (Correspondent banking refers to arrangements under which one bank /correspondent, holds deposits owned by other banks/ respondents and provides payment and other services in order to settle foreign currency transactions e.g. so-called nostro and vostro accounts used to settle transactions in a currency other than the domestic currency of the respondent bank for the provision of clearing and settlement of payments. Prime brokerage is a package of services offered to large active investors, particularly institutional hedge funds. These services usually include: clearing, settlement and custody; consolidated reporting; financing e.g. margin, repo or synthetic; securities lending; capital introduction; and risk analytics.)
(Refer to Paragraph 93-99 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
100. The following paragraphs describe the types of activities that may generate operational deposits. A bank should assess whether the presence of such an activity does indeed generate an operational deposit as not all such activities qualify due to differences in customer dependency, activity and practices.
101. A clearing relationship. In this context, refers to a service arrangement that enables customers to transfer funds (or securities) indirectly through direct participants in domestic settlement system to final recipients. Such services are limited to the following activities: transmission, reconciliation and confirmation of payment orders; daylight overdraft, overnight financing and maintenance of post-settlement balances; and determination of intra-day and final settlement positions.
(Refer to Paragraph 101 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
102. A custody relationship, in this context, refers to the provision of safekeeping, reporting, processing of assets or the facilitation of the operational and administrative elements of related activities on behalf of customers in the process of their transacting and retaining financial assets. Such services are limited to the settlement of securities transactions, the transfer of contractual payments, the processing of collateral, and the provision of custody related cash management services. Also included are the receipt of dividends and other income, client subscriptions and redemptions. Custodial services can furthermore extend to asset and corporate trust servicing, treasury, escrow, funds transfer, stock transfer and agency services, including payment and settlement services (excluding correspondent banking), and depository receipts.
(Refer to Paragraph 102 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
103. A cash management relationship, in this context, refers to the provision of cash management and related services to customers. Cash management services, in this context, refers to those products and services provided to a customer to manage its cash flows, assets and liabilities, and conduct financial transactions necessary to the customer’s ongoing operations. Such services are limited to payment remittance, collection and aggregation of funds, payroll administration, and control over the disbursement of funds
(Refer to Paragraph 103 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
(d) Unsecured wholesale funding provided by non-financial corporates and sovereigns, central banks, multilateral development banks, and PSEs: 20% or 40%
104. The portion of the operational deposits generated by clearing, custody and cash management activities that is fully covered by deposit insurance can receive the same treatment as “stable” retail deposits.
As per SAMA circular No. (361000050640) dated 26/1/2015, SAMA's approval will be on the basis that the banks meet the requirements laid out in para 94 to 104. Consequently, effective 1 January 2015, banks are required to obtain SAMA's approval with regard to the aforementioned aspect of Operational Deposits
(c)
Treatment of deposits in institutional networks of cooperative banks: 25% or 100% 105. Treatment of deposits in institutional networks of cooperative banks: 25% or 100% - An institutional network of cooperative (or otherwise named) banks is a group of legally autonomous banks with a statutory framework of cooperation with common strategic focus and brand where specific functions are performed by central institutions or specialized service providers. A 25% run-off rate can be given to the amount of deposits of member institutions with the central institution or specialized central service providers that are placed (a) due to statutory minimum deposit requirements, which are registered at regulators or (b) in the context of common task sharing and legal, statutory or contractual arrangements so long as both the bank that has received the monies and the bank that has deposited participate in the same institutional network’s mutual protection scheme against illiquidity and insolvency of its members. As with other operational deposits, these deposits would receive a 0% inflow assumption for the depositing bank, as these funds are considered to remain with the centralized institution.
106. SAMA’s prior approval would have be required to ensure that banks utilizing this treatment actually are the central institution or a central service provider of such a cooperative (or otherwise named) network. Correspondent banking activities would not be included in this treatment and would receive a 100% outflow treatment, as would funds placed at the central institutions or specialized service providers for any other reason other than those outlined in (a) and (b) in the paragraph above, or for operational functions of clearing, custody, or cash management as outlined in paragraphs 101-103, BCBS LCR Guidelines, 2013.
(d)
Unsecured wholesale funding provided by non-financial corporates and sovereigns, central banks, multilateral development banks, and PSEs: 20% or 40%
(Refer to Paragraph 104-106 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
107. This category comprises all deposits and other extensions of unsecured funding from non-financial corporate customers (that are not categorized as small business customers) and (both domestic and foreign) sovereign, central bank, multilateral development bank, and PSE customers that are not specifically held for operational purposes (as defined above). The run-off factor for these funds is 40%, unless the criteria in paragraph 108, BCBS LCR Guidelines, 2013, are met.
108. Unsecured wholesale funding provided by non-financial corporate customers, sovereigns, central banks, multilateral development banks, and PSEs without operational relationships can receive a 20% run-off factor if the entire amount of the deposit is fully covered by an effective deposit insurance scheme or by a public guarantee that provides equivalent protection.
(e)
Unsecured wholesale funding provided by other legal entity customers: 100% 109. This category consists of all deposits and other funding from other institutions (including banks, securities firms, insurance companies, etc.), fiduciaries, (Fiduciary is defined in this context as a legal entity that is authorized to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles).beneficiaries, (Beneficiary is defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract), conduits and special purpose vehicles, affiliated entities of the bank (Outflows on unsecured wholesale funding from affiliated entities of the bank are included in this category unless the funding is part of an operational relationship, a deposit in an institutional network of cooperative banks or the affiliated entity of a nonfinancial corporate) and other entities that are not specifically held for operational purposes (as defined above) and not included in the prior three categories. The run-off factor for these funds is 100%.
(Refer to footnotes 43-45 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
110. All notes, bonds and other debt securities issued by the bank are included in this category regardless of the holder, unless the bond is sold exclusively in the retail market and held in retail accounts (including small business customer accounts treated as retail per paragraphs 89-91), in which case the instruments can be treated in the appropriate retail or small business customer deposit category. To be treated in this manner, it is not sufficient that the debt instruments are specifically designed and marketed to retail or small business customers. Rather there should be limitations placed such that those instruments cannot be bought and held by parties other than retail or small business customers.
111. Customer cash balances arising from the provision of prime brokerage services, including but not limited to the cash arising from prime brokerage services as identified in paragraph 99, should be considered separate from any required segregated balances related to client protection regimes imposed by national regulations, and should not be netted against other customer exposures included in this standard. These offsetting balances held in segregated accounts are treated as inflows in paragraph 154 and should be excluded from the stock of HQLA.
(Refer to Paragraph 110-111 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
(iii)
Secured funding run-off 112. For the purposes of this standard, “secured funding” is defined as those liabilities and general obligations that are collateralized by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution.
113. Loss of secured funding on short-term financing transactions: In this scenario, the ability to continue to transact repurchase, reverse repurchase and other securities financing transactions is limited to transactions backed by HQLA or with the bank’s domestic sovereign, PSE or central bank.( In this context, PSEs that receive this treatment should be limited to those that are 20% risk weighted or better, and “domestic” can be defined as a jurisdiction where a bank is legally incorporated.) Collateral swaps should be treated as repurchase or reverse repurchase agreements, as should any other transaction with a similar form. Additionally, collateral lent to the bank’s customers to effect short positions (A customer short position in this context describes a transaction where a bank’s customer sells a security it does not own, and the bank subsequently obtains the same security from internal or external sources to make delivery into the sale. Internal sources include the bank’s own inventory of collateral as well as rehypothecatable collateral held in other customer margin accounts. External sources include collateral obtained through a securities borrowing, reverse repo, or like transaction.) should be treated as a form of secured funding. For the scenario, a bank should apply the following factors to all outstanding secured funding transactions with maturities within the 30 calendar day stress horizon, including customer short positions that do not have a specified contractual maturity. The amount of outflow is calculated based on the amount of funds raised through the transaction, and not the value of the underlying collateral.
114. Due to the high-quality of Level 1 assets, no reduction in funding availability against these assets is assumed to occur. Moreover, no reduction in funding availability is expected for any maturing secured funding transactions with the bank’s domestic central bank. A reduction in funding availability will be assigned to maturing transactions backed by Level 2 assets equivalent to the required haircuts. A 25% factor is applied for maturing secured funding transactions with the bank’s domestic sovereign, multilateral development banks, or domestic PSEs that have a 20% or lower risk weight, when the transactions are backed by assets other than Level 1 or Level 2A assets, in recognition that these entities are unlikely to withdraw secured funding from banks in a time of market-wide stress. This, however, gives credit only for outstanding secured funding transactions, and not for unused collateral or merely the capacity to borrow.
(Refer to Paragraph 113-114 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
(iv)
Additional requirements 116. Derivatives cash outflows: the sum of all net cash outflows should receive a 100% factor. Banks should calculate, in accordance with their existing valuation methodologies, expected contractual derivative cash inflows and outflows. Cash flows may be calculated on a net basis (i.e. inflows can offset outflows) by counterparty. Only where a valid master netting agreement exists. Banks should exclude from such calculations those liquidity requirements that would result from increased collateral needs due to market value movements or falls in value of collateral posted. (These risks are captured in paragraphs 119 and 123,of BCBS LCR guidelines). Options should be assumed to be exercised when they are ‘in the money’ to the option buyer.
(Refer to Paragraph 116 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
2.
Cash inflows 142. When considering its available cash inflows, the bank should only include contractual inflows (including interest payments) from outstanding exposures that are fully performing and for which the bank has no reason to expect a default within the 30-day time horizon. Contingent inflows are not included in total net cash inflows.
Illustrative Summary of the Amended LCRItem Factors Stock of HQLA A. Level 1 assets: • Coins and bank notes 100% • Qualifying marketable securities from sovereigns, central banks, PSEs, and multilateral development banks • Qualifying central bank reserves • Domestic sovereign or central bank debt for non-0% risk-weighted • Sovereigns B. Level 2 assets (maximum of 40% of HQLA): Level 2A assets • Sovereign, central bank, multilateral development banks, and PSE assets qualifying for 20% risk weighting 85% • Qualifying corporate debt securities rated AA-or higher • Qualifying covered bonds rated AA-or higher Level 2B assets (maximum of 15% of HQLA) • Qualifying RMBS 75% • Qualifying corporate debt securities rated between A+ and BBB- 50% • Qualifying common equity shares 50% Total value of stock of HQLA Cash Outflows A. Retail deposits: Demand deposits and term deposits (less than 30 days maturity) • Stable deposits (deposit insurance scheme meets additional criteria) 3% • Stable deposits 5% • Less stable retail deposits 10% Term deposits with residual maturity greater than 30 days 0% B. Unsecured wholesale funding: Demand and term deposits (less than 30 days maturity) provided by small business customers: • Stable deposits 5% • Less stable deposits 10% Operational deposits generated by clearing, custody and cash management activities 25% • Portion covered by deposit insurance 5% Cooperative banks in an institutional network (qualifying deposits with the centralized institution) 25% Non-financial corporates, sovereigns, central banks, multilateral development banks, and PSEs 40% • If the entire amount fully covered by deposit insurance scheme 20% Other legal entity customers 100% C. Secured funding: • Secured funding transactions with a central bank counterparty or 0% • backed by Level 1 assets with any counterparty. • Secured funding transactions backed by Level 2A assets, with any 15% • counterparty • Secured funding transactions backed by non-Level 1 or non-Level 2A 25% • assets, with domestic sovereigns, multilateral development banks, or • domestic PSEs as a counterparty • Backed by RMBS eligible for inclusion in Level 2B 25% • Backed by other Level 2B assets 50% • All other secured funding transactions 100% D. Additional requirements: Liquidity needs (e.g. collateral calls) related to financing transactions, derivatives and other contracts 3 notch downgrade Market valuation changes on derivatives transactions (largest absolute net 30-day collateral flows realized during the preceding 24 months) Look back approach Valuation changes on non-Level 1 posted collateral securing derivatives 20% Excess collateral held by a bank related to derivative transactions that could contractually be called at any time by its counterparty 100% Liquidity needs related to collateral contractually due from the reporting bank on derivatives transactions 100% Increased liquidity needs related to derivative transactions that allow collateral substitution to non-HQLA assets 100% ABCP, SIVs, conduits, SPVs, etc.: • Liabilities from maturing ABCP, SIVs, SPVs, etc. (applied to maturing amounts and returnable assets) 100% • Asset Backed Securities (including covered bonds) applied to maturing amounts. 100% Currently undrawn committed credit and liquidity facilities provided to: • retail and small business clients 5% • non-financial corporates, sovereigns and central banks, multilateral development banks, and PSEs 10% for credit 30% for liquidity • banks subject to prudential supervision 40% • other financial institutions (include securities firms, insurance companies) 40% for credit 100% for liquidity • other legal entity customers, credit and liquidity facilities 100% Other contingent funding liabilities (such as guarantees, letters of credit, revocable credit and liquidity facilities, etc.) National discretion Trade finance 0-5% Customer short positions covered by other customers’ collateral 50% Any additional contractual outflows 100% Net derivative cash outflows 100% Any other contractual cash outflows 100% Total cash outflows Specific changes in LCR3
A. High Quality Liquid Assets (HQLA)
Expand the definition of HQLA by including Level 2B assets, subject to higher haircuts and a limit
• Corporate debt securities rated A+ to BBB– with a 50% haircut
• Certain unencumbered equities subject to a 50% haircut
• Certain residential mortgage-backed securities rated AA or higher with a 25% haircut
Aggregate of Level 2B assets, after haircuts, subject to a limit of 15% of total HQLA
Rating requirement on qualifying Level 2 assets• Use of local rating scales and inclusion of qualifying commercial paper
Usability of the liquidity pool• Incorporate language related to the expectation that banks will use their pool of HQLA during periods of stress
Operational requirements• Refine and clarify the operational requirements for HQLA
Operation of the cap on Level 2 HQLA• Revise and improve the operation of the cap on Level 2 assets
Central bank reserves• Clarify language to confirm that supervisors have national discretion to include or exclude required central bank reserves (as well as overnight and certain term deposits) as HQLA as they consider appropriate.
B. Inflows and Outflows
Insured deposits• Reduce outflow on certain types of fully insured retail deposits from 5% to 3%3
Reduce outflow on fully insured non-operational deposits from non-financial corporates, sovereigns, central banks and public sector entities (PSEs) from 40% to 20%
Non-financial corporate deposits• Reduce the outflow rate for “non-operational” deposits provided by nonfinancial corporates, sovereigns, central banks and PSEs from 75% to 40%
Committed liquidity facilities to non-financial corporates• Clarify the definition of liquidity facilities and reduce the drawdown rate on the unused portion of committed liquidity facilities to non-financial corporates, sovereigns, central banks and PSEs from 100% to 30%
Committed but unfunded inter-financial liquidity and credit facilities• Distinguish between interbank and inter-financial credit and liquidity facilities and reduce the outflow rate on the former from 100% to 40%
Derivatives• Additional derivatives risks included in the LCR with a 100% outflow (relates to collateral substitution, and excess collateral that the bank is contractually obligated to return/provide if required by a counterparty)
• Introduce a standardized approach for liquidity risk related to market value changes in derivatives positions
• Assume net outflow of 0% for derivatives (and commitments) that are contractually secured/collateralized by HQLA
Trade finance• Include guidance to indicate that a low outflow rate (0–5%) is expected to apply
Equivalence of central bank operations• Reduce the outflow rate on maturing secured funding transactions with central banks from 25% to 0%
Client servicing brokerage• Clarify the treatment of activities related to client servicing brokerage (which generally lead to an increase in net outflows)
C. OTHERS
Rules text clarifications• A number of clarifications to the rules text to promote consistent application and reduce arbitrage opportunities (e.g. operational deposits from wholesale clients, derivatives cash flows, open maturity loans). Also incorporation of previously published FAQs.
Internationally agreed phase-in of the LCR• The minimum LCR in 2015 would be 60% and increase by 10 percentage points per year to reach 100% in 2019.
• Regulatory Guidance concerning specific items on Prudential returns refer to next page.
1 With regard to level 2B assets, banks must refer to National Discretion item # 2 contained in attachment # 5
2 Refer to Note 1 on page 3.
3 Extract of GHOS Press Release of January 2013Attachment
*The review should address the following:
1. The Banks existing liquidity management organization, policies, procedures, processes and controls are to be assessed against the Principles outlined in the document.
2. The Internal Auditor should make the following assessment against each Principle outlined in the Guidance document:
1. Fully Compliant 2. Largely Compliant 3. Adequate but improvements are needed 4. Largely Non-compliant 5. Non-compliant
3. For those principles where assessment is less than Fully Compliant, the weaknesses and gap should be identified.
4. A detailed plan should be made for each weakness/gap along with the actions to be taken and the time frame for completion of the corrective actions.
*Suggest removing, as this is not relevant anymore. SAMA’s Specific Guidance to Complete Prudential Returns Concerning Amended LCR
This section has been replaced by section 28 "Liquidity" under Pillar 3 Disclosure Requirements Framework, issued by SAMA circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G.Overview:
Bank must complete the attached Prudential Returns (attachment # 3) on the basis of the following:
1. Specific Guidance Document – attachment # 2
2. Frequently Asked Questions (FAQs) – attachment # 4
3. SAMA’s response to National Discretion Items – attachment # 5
SPECIFIC GUIDANCE
Row Heading Description Basel III LCR standards reference A)a) Level 1 assets 6 Coins and banknotes Coins and banknotes currently held by the bank that are immediately available to meet obligations. Deposits placed at, or receivables from, other institutions should be reported in the inflows section. 50(a) 7 Total central bank reserves; of which: Total amount held in central bank reserves (including required reserves) including banks’ overnight deposits with the central bank, and term deposits with the central bank that: (i) are explicitly and contractually repayable on notice from the depositing bank; or (ii) that constitute a loan against which the bank can borrow on a term basis or on an overnight but automatically renewable basis (only where the bank has an existing deposit with the relevant central bank). Other term deposits with central banks are not eligible for the stock of HQLA; however, if the term expires within 30 days, the term deposit could be considered as an inflow (reported in line 304). 50(b), footnote 12 8 part of central bank reserves that can be drawn in times of stress Total amount held in central bank reserves and overnight and term deposits at the same central bank (as reported in line 7) which can be drawn down in times of stress. Amounts required to be installed in the central bank reserves within 30 days should be reported in line 165 of the outflows section. Please refer to the instructions from your supervisor for the specification of this item. 50(b), footnote 13 Securities with a 0% risk weight: 11 issued by sovereigns Marketable debt securities issued by sovereigns, receiving a 0% risk weight under the standardized approach to credit risk of the *Basel II framework (paragraph 53). 50(c) 12 guaranteed by sovereigns Marketable debt securities guaranteed by sovereigns, receiving a 0% risk weight under the standardized approach to credit risk of the *Basel II framework (paragraph 53). 50(c) 13 issued or guaranteed by central banks Marketable debt securities issued or guaranteed by central banks, receiving a 0% risk weight under the standardized approach to credit risk of the *Basel II framework (paragraph 53). 50(c) 14 issued or guaranteed by PSEs Marketable debt securities issued or guaranteed by public sector entities, receiving a 0% risk weight under the standardized approach to credit risk of the *Basel II framework (paragraphs 57 and 58). 50(c) 15 issued or guaranteed by BIS, IMF, ECB and European Community or MDBs Marketable debt securities issued or guaranteed by the Bank for International Settlements, the International Monetary Fund, the European Central Bank (ECB) and European Community. or multilateral development banks (MDBs); receiving a 0% risk weight under the standardized approach to credit risk of the *Basel II framework (paragraphs 56 and 59). 50(c) *Refer to SAMA Circular 440471440000, Basel III Reforms.
For non-0% risk-weighted sovereigns:
17 sovereign or central bank debt securities issued in domestic currency by the sovereign or central bank in the country in which the liquidity risk is taken or in the bank's home country
Debt securities issued by the sovereign or central bank in the domestic currency of that country that is not eligible for inclusion in line items 11 or 13 because of the non-0% risk weight of that country. Banks are only permitted to include debt issued by sovereigns or central banks of their home jurisdictions or, to the extent of the liquidity risk taken in other jurisdictions, of those jurisdictions. 50(d) 18 domestic sovereign or central bank debt securities issued in foreign currencies, up to the amount of the bank's stressed net cash outflows in that specific foreign currency stemming from the bank's operations in the jurisdiction where the bank's liquidity risk is being taken Debt securities issued by the domestic sovereign or central bank in foreign currencies (that are not eligible for inclusion in line items 11 or 13 because of the non-0% risk weight), up to the amount of the bank's stressed net cash outflows in that specific foreign currency stemming from the bank's operations in the jurisdiction where the bank's liquidity risk is being taken. 50(e) Total Level 1 assets: 19 Total stock of Level 1 assets Total outright holdings of Level 1 assets plus all borrowed securities of Level 1 assets 49 20 Adjustment to stock of Level 1 assets Adjustment to the stock of Level 1 assets for purpose of calculating the caps on Level 2 and Level 2B assets. Annex 1 21 Adjusted amount of Level 1 assets Adjusted amount of Level 1 assets used for the purpose of calculating the adjustment to the stock of HQLA due to the cap on Level 2 assets in line item 49 and the cap on Level 2B assets in line item 48. Annex 1 A)b) Level 2A assets Securities with a 20% risk weight: 25 issued by sovereigns Marketable debt securities issued by sovereigns, receiving a 20% risk weight under the standardized approach to credit risk of the *Basel II framework (paragraph 53), satisfying all the conditions listed in paragraph 52(a) of the Basel III LCR standards, and not included in lines 17 or 18. 52(a) 26 guaranteed by sovereigns Marketable debt securities guaranteed by sovereigns, receiving a 20% risk weight under the standardized approach to credit risk of the *Basel II framework (paragraph 53), satisfying all the conditions listed in paragraph 52(a) of the Basel III LCR standards. 52(a) 27 issued or guaranteed by central banks Marketable debt securities issued or guaranteed by central banks, receiving a 20% risk weight under the standardized approach to credit risk of the *Basel II framework (paragraph 53), satisfying all the conditions listed in paragraph 52(a) of the Basel III LCR standards, and not included in lines 17 or 18. 52(a) 28 issued or guaranteed by PSEs Marketable debt securities issued or guaranteed by PSEs, receiving a 20% risk weight under the standardized approach to credit risk of the *Basel II framework (paragraphs 57 and 58), satisfying all the conditions listed in paragraph 52(a) of the Basel III LCR standards. 52(a) 29 issued or guaranteed by MDBs Marketable debt securities issued or guaranteed by multilateral development banks, receiving a 20% risk weight under the standardized approach to credit risk of the *Basel II framework (paragraph 59), satisfying all the conditions listed in paragraph 52(a) of the Basel III LCR standards. 52(a) *Refer to SAMA Circular 440471440000, Basel III Reforms.
Non-financial corporate bonds:
30 rated AA-or better Non-financial corporate bonds (including commercial paper) (i) having a long-term credit assessment by a recognized ECAI of at least AA-or in the absence of a long term rating, a short term rating equivalent in quality to the long-term rating or (ii) not having a credit assessment by a recognized ECAI but are internally rated as having a probability of default (PD) corresponding to a credit rating of at least AA-, satisfying the conditions listed in paragraph 52(b) of the Basel III LCR standards. 52(b) Covered bonds (not self-issued): 31 rated AA-or better Covered bonds, not self-issued, (i) having a long-term credit assessment by a recognized ECAI of at least AA-or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating or (ii) not having a credit assessment by a recognized ECAI but are internally rated as having a probability of default (PD) corresponding to a credit rating of at least AA-, satisfying the conditions listed in paragraph 52(b) of the Basel III LCR standards. 52(b) Total Level 2A assets: 32 Total stock of Level 2A assets Total outright holdings of Level 2A assets plus all borrowed securities of Level 2A assets, after applying haircuts 52(a),(b) 33 Adjustment to stock of Level 2A assets Adjustment to the stock of Level 2A assets for purpose of calculating the caps on Level 2 and Level 2B assets. Annex 1 34 Adjusted amount of Level 2A assets Adjusted amount of Level 2A assets used for the purpose of calculating the adjustment to the stock of HQLA due to the cap on Level 2 assets in line item 49 and the cap on Level 2B assets in line item 48. Annex 1 A)c) Level 2B assets
Please refer to the instructions from your supervisor for the specification of items in the Level 2B assets subsection. (Note below)
In choosing to include any Level 2B assets in Level 2, national supervisors are expected to ensure that (i) such assets fully comply with the qualifying criteria set out Basel III LCR standards, paragraph 54; and (ii) banks have appropriate systems and measures to monitor and control the potential risks (e.g. credit and market risks) that banks could be exposed to in holding these assets.
37 Residential mortgage backed securities (RMBS), rated AA or better RMBS that satisfy all of the conditions listed in paragraph 54(a) of the Basel III LCR standards. 54(a) 38 Non-financial corporate bonds, rated BBB- to A+ Non-financial corporate debt securities (including commercial paper) rated BBB- to A+ that satisfy all of the conditions listed in paragraph 54(b) of the Basel III LCR standards. 54(b) 39 Non-financial common equity shares Non-financial common equity shares that satisfy all of the conditions listed in paragraph 54(c) of the Basel III LCR standards. 54(c) Total Level 2B assets: 40 Total stock of Level 2B RMBS assets Total outright holdings of Level 2B RMBS assets plus all borrowed securities of Level 2B RMBS assets, after applying haircuts 54(a) 41 Adjustment to stock of Level 2B RMBS assets Adjustment to the stock of Level 2B RMBS assets for purpose of calculating the caps on Level 2 and Level 2B assets. Annex 1 42 Adjusted amount of Level 2B RMBS assets Adjusted amount of Level 2B RMBS assets used for the purpose of calculating the adjustment to the stock of HQLA due to the cap on Level 2 assets in line item 49 and the cap on Level 2B assets in line item 48. Annex 1 43 Total stock of Level 2B non-RMBS assets Total outright holdings of Level 2B non-RMBS assets plus all borrowed securities of Level 2B non-RMBS assets, after applying haircuts 54(b),(c) 44 Adjustment to stock of Level 2B non-RMBS assets Adjustment to the stock of Level 2B non-RMBS assets for purpose of calculating the caps on Level 2 and Level 2B assets. Annex 1 45 Adjusted amount of Level 2B non-RMBS assets Adjusted amount of Level 2B non-RMBS assets used for the purpose of calculating the adjustment to the stock of HQLA due to the cap on Level 2 assets in line item 49 and the cap on Level 2B assets in line item 48. Annex 1 46 Adjusted amount of Level 2B (RMBS and non-RMBS) assets Sum of adjusted amount of Level 2B RMBS assets and adjusted amount of Level 2B non-RMBS assets Annex 1 48 Adjustment to stock of HQLA due to cap on Level 2B assets Adjustment to stock of HQLA due to 15% cap on Level 2B assets. 47, Annex 1 49 49 Adjustment to stock of HQLA due to cap on Level 2 assets Adjustment to stock of HQLA due to 40% cap on Level 2 assets. 51, Annex 1 A)d) Total stock of HQLA 52 Total stock of HQLA Total stock of HQLA after taking haircuts and the adjustment for the caps on Level 2 and Level 2B assets into account. 56 Assets held at the entity level, but excluded from the consolidated stock of HQLA Any surplus of liquid assets held at the legal entity that is excluded (i.e. not reported in lines above) from the consolidated stock because of reasonable doubts that they would be freely available to the consolidated (parent) entity in times of stress. Eligible liquid assets that are held by a legal entity being consolidated to meet its local LCR requirements (where applicable) can be included in the consolidated LCR to the extent that such liquid assets are used to cover the total net cash outflows of that entity, notwithstanding that the assets are subject to liquidity transfer restrictions. If the liquid assets held in excess of the total net cash outflows of the legal entity are not transferable, such surplus liquidity should be excluded from the standard and reported in this line. For practical reasons, the liquidity transfer restrictions to be accounted for in the consolidated ratio are confined to existing restrictions imposed under applicable laws, regulations and supervisory requirements.
Banks should report the market value of Level 1 assets excluded in column D, the market value of Level 2A assets excluded in column E, the market value of Level 2B RMBS assets excluded in column F and the market value of Level 2B non-RMBS assets excluded in column G.
36–37, 171– 172 57 of which, can be included in the consolidated stock by the time the standard is implemented Any assets reported in row 56 but which the bank believes will, through management actions executed prior to the implementation date of the standard; meet the eligibility requirements for the stock of liquid assets. 59 Assets excluded from the stock of HQLA due to operational restrictions Level 1 and Level 2 assets held by the bank that are not included in the stock of HQLA (i.e. not reported in lines above), because of the operational restrictions noted in paragraphs 31-34 and 38-40 of the Basel III LCR standards. Banks should report the market value of Level 1 assets excluded in column D, the market value of Level 2A assets excluded in column E, the market value of Level 2B RMBS assets excluded in column F and the market value of Level 2B non-RMBS assets excluded in column G. 31–34, 38–40 60 of which, can be included in the stock by the time the standard is implemented Any assets reported in row 59 but which the bank believes will, through management actions executed prior to the implementation date of the standard; meet the eligibility requirements for the stock of liquid assets. A)e) Treatment for jurisdictions with insufficient HQLA
Please refer to the instructions from your supervisor for the specification of this subsection. (Note below)
Some jurisdictions may not have sufficient supply of Level 1 assets (or both Level 1 and Level 2 assets) in their domestic currency to meet the aggregate demand of banks with significant exposures in this currency (note that an insufficiency in Level 2 assets alone does not qualify for the alternative treatment). To address this situation, the Committee has developed alternative treatments for the holdings in the stock of HQLA, which are expected to apply to a limited number of currencies and jurisdictions.
Eligibility for such alternative treatment will be judged on the basis of qualifying criteria set out in Annex 2 of the Basel III LCR standards and will be determined through an independent peer review process overseen by the Committee. The purpose of this process is to ensure that the alternative treatments are only used when there is a true shortfall in HQLA in the domestic currency relative to the needs in that currency.
There are three potential options for this treatment (line items 67 to 71). If your supervisor intends to adopt this treatment, it is expected that they provide specific instructions to the banks under its supervision for reporting the relevant information under the option it intends to use. To avoid double-counting, if an asset has already been included in the eligible stock of HQLA, it should not be reported under these options.
Option 1 – Contractual committed liquidity facilities from the relevant central bank, with a fee. These facilities should not be confused with regular central bank standing arrangements. In particular, these facilities are contractual arrangements between the central bank and the commercial bank with a maturity date which, at a minimum, falls outside the 30-day LCR window. Further, the contract must be irrevocable prior to maturity and involve no ex-post credit decision by the central bank.
Such facilities are only permissible if there is also a fee for the facility which is charged regardless of the amount, if any, drawn down against that facility and the fee is set so that banks which claim the facility line to meet the LCR, and banks which do not, have similar financial incentives to reduce their exposure to liquidity risk. That is, the fee should be set so that the net yield on the assets used to secure the facility should not be higher than the net yield on a representative portfolio of Level 1 and Level 2 assets, after adjusting for any material differences in credit risk.
67 Option 1 – Contractual committed liquidity facilities from the relevant central bank Only include the portion of facility that is secured by available collateral accepted by the central bank, after haircut specified by the central bank. Please refer to the instructions from your supervisor for the specification of this item. (Note below) 58 Option 2 – Foreign currency HQLA to cover domestic currency liquidity needs
For currencies that do not have sufficient HQLA, supervisors may permit banks that evidence a shortfall of HQLA in the domestic currency (which would match the currency of the underlying risks) to hold HQLA in a currency that does not match the currency of the associated liquidity risk, provided that the resulting currency mismatch positions are justifiable and controlled within limits agreed by their supervisors.
To account for foreign exchange risk associated with foreign currency HQLA used to cover liquidity needs in the domestic currency, such liquid assets should be subject to a minimum haircut of 8% for major currencies that are active in global foreign exchange markets. For other currencies, supervisors should increase the haircut to an appropriate level on the basis of historical (monthly) exchange rate volatilities between the currency pair over an extended period of time.
If the domestic currency is formally pegged to another currency under an effective mechanism, the haircut for the pegged currency can be lowered to a level that reflects the limited exchange rate risk under the peg arrangement. Haircuts for foreign currency HQLA used under Option 2 would apply only to HQLA in excess of a threshold specified by supervisors which is not greater than 25% that are used to cover liquidity needs in the domestic currency.
69 Level 1 assets Subject to the limit mentioned above, the aggregate amount of the excess of Level 1 assets in a given foreign currency or currencies that can be used to cover the associated liquidity need of the domestic currency. Please refer to the instructions from your supervisor for the specification of this item. 59 70 Level 2 assets Subject to the limit mentioned above, the aggregate amount of the excess of Level 2 assets in a given foreign currency or currencies that can be used to cover the associated liquidity need of the domestic currency. Please refer to the instructions from your supervisor for the specification of this item. 59 Option 3 – Additional use of Level 2 assets with a higher haircut
This option addresses currencies for which there are insufficient Level 1 assets, as determined by the qualifying principles and criteria, but where there are sufficient Level 2A assets. In this case, supervisors may choose to allow banks that evidence a shortfall of liquid assets in the domestic currency (to match the currency of the liquidity risk incurred) to hold additional Level 2A assets in the stock. These additional Level 2A assets should be subject to a minimum 20% – i.e. 5% higher than the 15% haircut applicable to Level 2A assets that are included in the 40% cap. Any Level 2B assets held by the bank would remain subject to the cap of 15%, regardless of the amount of other Level 2 assets held.
71 Option 3 – Additional use of Level 2 assets with a higher haircut Assets reported in lines 25 to 31 that are not counted towards the regular stock of HQLA because of the cap on Level 2 assets. Please refer to the instructions from your supervisor for the specification of this item. 62 72 Total usage of alternative treatment (post-haircut) before applying the cap Sum of the usage of alternative treatment should be equal to total outright holdings and all borrowed securities under different options. Please refer to the instructions from your supervisor for the specification of this item. 73 Cap on usage of alternative treatment Please refer to the instructions from your supervisor for the specification of this item. 74 Total usage of alternative treatment (post-haircut) after applying the cap The lower of the cap and eligible alternative treatment (post haircut) before applying the cap. Please refer to the instructions from your supervisor for the specification of this item. A)f) Total stock of HQLA plus usage of alternative treatment 77 Total stock of HQLA plus usage of alternative treatment Sum of stock of HQLA and usage of alternative treatment after cap. 6.1.2 Outflows, Liquidity Coverage Ratio (LCR) (panel B1)
This section calculates the total expected cash outflows in the LCR stress scenario for the subsequent 30 calendar days. They are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by the rates at which they are expected to run off or to be drawn down (Basel III LCR standards paragraph 69).
Where there is potential that an item could be reported in multiple outflow categories, (e.g. committed liquidity facilities granted to cover debt maturing within the 30 calendar day period), a bank only has to assume up to the maximum contractual outflow for that product (Basel III LCR standards paragraph 72).
a) Retail deposit run-off
Retail deposits are defined as deposits placed with a bank by a natural person. Deposits from legal entities, sole proprietorships and partnerships are captured in wholesale deposit categories. Retail deposits reported in lines 87 to 104 include demand deposits and term deposits maturing in or with a notice period up to 30 days. Term deposits with a residual contractual maturity greater than 30 days which may be withdrawn within 30 days without entailing a significant withdrawal penalty materially greater than the loss of interest, should be considered to mature within the 30-day horizon and should also be included in lines 87 to 104 as appropriate. If a portion of the term deposit can be withdrawn without incurring such a penalty, only that portion should be treated as a demand deposit. The remaining balance of the deposit should be treated as a term deposit.
Notes, bonds and other debt securities sold exclusively to the retail market and held in retail accounts can be reported in the appropriate retail deposit category (Basel III LCR standards paragraph 110). To be treated in this manner, it is not sufficient that the debt instruments are specifically designed and marketed to retail customers. Rather there should be limitations placed such that those instruments cannot be bought and held by parties other than retail customers. Per paragraph 76 of the Basel III LCR standards, an “effective deposit insurance scheme” refers to a scheme (i) that guarantees that it has the ability to make prompt payouts, (ii) for which the coverage is clearly defined and (iii) of which public awareness is high. The deposit insurer in an effective deposit insurance scheme has formal legal powers to fulfill its mandate and is operationally independent, transparent and accountable. A jurisdiction with an explicit and legally binding sovereign deposit guarantee that effectively functions as deposit insurance can be regarded as having an effective deposit insurance scheme.
83 Total retail deposits; of which Total retail deposits as defined above. 73–84 84 Insured deposits; of which: The portion of retail deposits that are fully insured by an effective deposit insurance scheme. 75–78 85 in transactional accounts; of which: Total insured retail deposits in transactional accounts (e.g. accounts where salaries are automatically credited) 75, 78 86 eligible for a 3% run-off rate; of which: The amount of insured transactional retail deposits that are in jurisdictions where the supervisor chooses to apply a 3% runoff rate given the deposits are fully insured by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards. Please refer to the instructions from your supervisor for the specification of these items. 78 87 are in the reporting bank's home jurisdiction Of the deposits referenced in line 86, the amount that are in the reporting bank's home jurisdiction. 78 88 are not in the reporting bank's home jurisdiction Of the deposits referenced in line 86, the amount that are not in the reporting bank's home jurisdiction. 78 89 eligible for a 5% run-off rate; of which: The amount of insured transactional retail deposits that are in jurisdictions where the supervisor does not choose to apply a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 75 90 are in the reporting bank's home jurisdiction Of the deposits referenced in line 89, the amount that are in the reporting bank's home jurisdiction. 75 91 are not in the reporting bank's home jurisdiction Of the deposits referenced in line 89, the amount that are not in the reporting bank's home jurisdiction. 75 92 in non-transactional accounts with established relationships that make deposit withdrawal highly unlikely; of which: Total insured retail deposits in non-transactional accounts where the customer has another relationship with the bank that would make deposit withdrawal highly unlikely. 75, 78 94 are in the reporting bank's home jurisdiction Of the deposits referenced in line 93, the amount that are in the reporting bank's home jurisdiction. 78 95 are not in the reporting bank's home jurisdiction Of the deposits referenced in line 93, the amount that are not in the reporting bank's home jurisdiction. 78 96 eligible for a 5% run-off rate; of which: The amount of insured non-transactional established relationship retail deposits that are in jurisdictions where the supervisor does not choose to apply a 3% run-off rate. Please1 refer to the instructions from your supervisor for the specification of these items. 75 97 are in the reporting bank's home jurisdiction Of the deposits referenced in line 96, the amount that are in the reporting bank's home jurisdiction. 75 98 are not in the reporting bank's home jurisdiction Of the deposits referenced in line 96, the amount that are not in the reporting bank's home jurisdiction. 75 99 in non-transactional and non-relationship accounts Insured retail deposits in non-transactional accounts where the customer does not have another relationship with the bank that would make deposit withdrawal highly unlikely. 79 100 Uninsured deposits The portion of retail deposits that are non-maturing or mature within 30 days that are not fully insured by an effective deposit insurance scheme (i.e. all retail deposits not reported in lines 87 to 99, excluding any deposits included in lines 102 to 104). 79 101 Additional deposit categories with higher runoff rates as specified by supervisor Other retail deposit categories, as defined by the supervisor. These amounts should not be included in the lines above. 79 102 Category 1 As defined by supervisor 79 103 Category 2 As defined by supervisor 79 104 Category 3 As defined by supervisor 79 105 Term deposits (treated as having >30 day remaining maturity); of which Retail deposits with a residual maturity or withdrawal notice period greater than 30 days where the depositor has no legal right to withdraw deposits within 30 days, or where early withdrawal results in a significant penalty that is materially greater than the loss of interest. 82–84 106 With a supervisory run-off rate As defined by supervisor 84 107 Without supervisory run-off rate All other term retail deposits treated as having > 30 day remaining maturity as defined in line 105. 82 b) Unsecured wholesale funding run-off
Unsecured wholesale funding is defined as liabilities and general obligations that are raised from non-natural persons (i.e. legal entities, including sole proprietorships and partnerships) and are not collateralized by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution, excluding derivatives.
Wholesale funding included in the LCR is defined as all funding that is callable within the LCR's 30-day horizon or that has its earliest possible contractual maturity date within this horizon (such as maturing term deposits and unsecured debt securities) as well as funding with an undetermined maturity. This includes all funding with options that are exercisable at the investor's discretion within the 30-day horizon. It also includes funding with options exercisable at the bank's discretion where the bank's ability not to exercise the option is limited for reputational reasons. In particular, where the market expects certain liabilities to be redeemed before their legal final maturity date and within the 30-day horizon, such liabilities should be included in the appropriate outflows category.
Small business customers
Unsecured wholesale funding provided by small business customers consists of deposits and other extensions of funds made by non-financial small business customers. “Small business customers” are defined in line with the definition of loans extended to small businesses in paragraph 231 of the Basel II framework that are managed as retail exposures and are generally considered as having similar liquidity risk characteristics to retail accounts, provided the total aggregated funding raised from the small business customer is less than €1 million (on a consolidated basis where applicable) (Basel III LCR standards paragraph 90).
“Aggregated funding” means the gross amount (i.e. not netting any form of credit extended to the legal entity) of all forms of funding (e.g. deposits or debt securities or similar derivative exposure for which the counterparty is known to be a small business customer) (Basel III LCR standards footnote 41).
Applying the limit on a consolidated basis means that where one or more small business customers are affiliated with each other, they may be considered as a single creditor such that the limit is applied to the total funding received by the bank from this group of customers (Basel III LCR standards footnote 41).
Where a bank does not have any exposure to a small business customer that would enable it to use the definition under paragraph 231 of the Basel II Framework, the bank may include such a deposit in this category provided that the total aggregate funding raised from the customer is less than €1 million (on a consolidated basis where applicable) and the deposit is managed as a retail deposit. This means that the bank treats such deposits in its internal risk management systems consistently over time and in the same manner as other retail deposits, and that the deposits are not individually managed in a way comparable to larger corporate deposits.
Term deposits from small business customers with a residual contractual maturity of greater than 30 days which can be withdrawn within 30 days without a significant withdrawal penalty materially greater than the loss of interest should be considered to fall within the 30-day horizon and should also be included in lines 116 to 133 as appropriate. If a portion of the term deposit can be withdrawn without incurring such a penalty, only that portion should be treated as a demand deposit. The remaining balance of the deposit should be treated as a term deposit.
111 Total unsecured wholesale funding 85–111 112 Total funding provided by small business customers; of which: Total small business customer deposits as defined above. 89–92 113 Insured deposits; of which: The portion of deposits or other forms of unsecured wholesale funding which are provided by non-financial small business customers and are non-maturing or mature within 30 days that are fully insured by an effective deposit insurance scheme. 89, 75–78 114 in transactional accounts; of which: Total insured small business customer deposits in transactional accounts (e.g. accounts where salaries are paid out from). 89, 75, 78 115 eligible for a 3% run-off rate; of which: The amount of insured transactional small business customer deposits that are in jurisdictions where the supervisor chooses to apply a 3% run-off rate given the deposits are fully insured by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards. Please refer to the instructions from your supervisor for the specification of these items. 89, 78 116 are in the reporting bank's home jurisdiction Of the deposits referenced in line 115, the amount that are in the reporting bank's home jurisdiction. 89, 78 117 are not in the reporting bank's home jurisdiction Of the deposits referenced in line 115, the amount that are not in the reporting bank's home jurisdiction. 89, 78 118 eligible for a 5% run-off rate; of which: The amount of insured transactional small business customer deposits that are in jurisdictions where the supervisor does not choose to apply a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 89, 75 119 are in the reporting bank's home jurisdiction Of the deposits referenced in line 118, the amount that are in the reporting bank's home jurisdiction. 89, 75 120 are not in the reporting bank's home jurisdiction Of the deposits referenced in line 118, the amount that are not in the reporting bank's home jurisdiction. 89, 75 121 in non-transactional accounts with established relationships that make deposit withdrawal highly unlikely; of which: Total insured small business customer deposits in non-transactional accounts where the customer has another relationship with the bank that would make deposit withdrawal highly unlikely. 89, 75, 78 122 eligible for a 3% run-off rate; of which: The amount of insured non-transactional established relationship small business customer deposits that are in jurisdictions where the supervisor chooses to apply a 3% runoff rate given the deposits are fully insured by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards. Please refer to the instructions from your supervisor for the specification of these items. 89, 78 123 are in the reporting bank's home jurisdiction Of the deposits referenced in line 122, the amount that are in the reporting bank's home jurisdiction. 89, 78 124 are not in the reporting bank's home jurisdiction Of the deposits referenced in line 122, the amount that are not in the reporting bank's home jurisdiction. 89, 78 125 eligible for a 5% run-off rate; of which: The amount of insured non-transactional established relationship small business customer deposits that are in jurisdictions where the supervisor does not choose to apply a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 89, 75 126 are in the reporting bank's home jurisdiction Of the deposits referenced in line 125, the amount that are in the reporting bank's home jurisdiction. 89, 75 127 are not in the reporting bank's home jurisdiction Of the deposits referenced in line 125, the amount that are not in the reporting bank's home jurisdiction. 89, 75 128 in non-transactional and non-relationship accounts Insured small business customer deposits in non-transactional accounts, where the customer does not have another relationship with the bank that would make deposit withdrawal highly unlikely. 89, 79 129 Uninsured deposits The portion of small business customer deposits that are non-maturing or mature within 30 days, that are not fully insured by an effective deposit insurance scheme (i.e. all small business customer deposits not reported in lines 116 to 128, excluding any reported in lines 131 to 133). 89, 79 130 Additional deposit categories with higher runoff rates as specified by supervisor Other small business customer deposits, as defined by supervisor. Amounts in these categories should not be included in the lines above. 89, 79 131 Category 1 As defined by supervisor 89, 79 132 Category 2 As defined by supervisor 89, 79 133 Category 3 As defined by supervisor 89, 79 134 Term deposits (treated as having >30 day maturity); of which: Small business customer deposits with a residual maturity or withdrawal notice period of greater than 30 days where the depositor has no legal right to withdraw deposits within 30 days, or if early withdrawal is allowed, would result in a significant penalty that is materially greater than the loss of interest. 92, 82-84 135 With a supervisory run-off rate As defined by supervisor 92, 84 136 Without supervisory run-off rate All other term small business customer deposits treated as having > 30 day remaining maturity as defined in line 134. 92, 82 Unsecured wholesale funding generated by clearing, custody and cash management activities (“operational deposits”):
Reported in lines 140 to 153 are portions of deposits and other extensions of funds from financial and non-financial wholesale customers (excluding deposits less than €1 million from small business customers which are reported in lines 116 to 136) generated out of clearing, custody and cash management activities (“operational deposits”). These funds may receive a 25% run-off factor only if the customer has a substantive dependency with the bank and the deposit is required for such activities.
Qualifying activities in this context refer to clearing, custody or cash management activities that meet the following criteria:
- The customer is reliant on the bank to perform these services as an independent third party intermediary in order to fulfill its normal banking activities over the next 30 days. For example, this condition would not be met if the bank is aware that the customer has adequate back-up arrangements.
- These services must be provided under a legally binding agreement to institutional customers.
- The termination of such agreements shall be subject either to a notice period of at least 30 days or significant switching costs (such as those related to transaction, information technology, early termination or legal costs) to be borne by the customer if the operational deposits are moved before 30 days.
Qualifying operational deposits generated by such an activity are ones where:
- The deposits are by-products of the underlying services provided by the banking organization and not sought out in the wholesale market in the sole interest of offering interest income.
- The deposits are held in specifically designated accounts and priced without giving an economic incentive to the customer (not limited to paying market interest rates) to leave any excess funds on these accounts. In the case that interest rates in a jurisdiction are close to zero, it would be expected that such accounts is non-interest bearing.
Any excess balances that could be withdrawn and would still leave enough funds to fulfill these clearing, custody and cash management activities do not qualify for the 25% factor. In other words, only that part of the deposit balance with the service provider that is proven to serve a customer's operational needs can qualify as stable. Excess balances should be treated in the appropriate category for non-operational deposits. If banks are unable to determine the amount of the excess balance, then the entire deposit should be assumed to be excess to requirements and, therefore, considered non-operational.
Deposits arising out of correspondent banking or from the provision of prime brokerage services (as defined in Basel III LCR standards footnote 42) should not be reported in these lines rather as non-operational deposits in lines 156 to 163 as appropriate (Basel III LCR standards paragraph 99) and lines 169 and 171, respectively.
A clearing relationship, in this context, refers to a service arrangement that enables customers to transfer funds (or securities) indirectly through direct participants in domestic settlement systems to final recipients. Such services are limited to the following activities: transmission, reconciliation and confirmation of payment orders; daylight overdraft, overnight financing and maintenance of post-settlement balances; and determination of intra-day and final settlement positions. (Basel III LCR standards, paragraph 101)
A custody relationship, in this context, refers to the provision of safekeeping, reporting, processing of assets or the facilitation of the operational and administrative elements of related activities on behalf of customers in the process of their transacting and retaining financial assets. Such services are limited to the settlement of securities transactions, the transfer of contractual payments, the processing of collateral, and the provision of custody related cash management services. Also included are the receipt of dividends and other income, client subscriptions and redemptions. Custodial services can furthermore extend to asset and corporate trust servicing, treasury, escrow, funds transfer, stock transfer and agency services, including payment and settlement services (excluding correspondent banking), and depository receipts. (Basel III LCR standards, paragraph 102)
A cash management relationship, in this context, refers to the provision of cash management and related services to customers. Cash management services, in this context, refers to those products and services provided to a customer to manage its cash flows, assets and liabilities, and conduct financial transactions necessary to the customer's ongoing operations. Such services are limited to payment remittance, collection and aggregation of funds, payroll administration, and control over the disbursement of funds. (Basel III LCR standards, paragraph 103)
137 Total operational deposits; of which: The portion of unsecured operational wholesale funding generated by clearing, custody and cash management activities as defined above. 93–104 138 provided by non-financial corporates Such funds provided by non-financial corporates. Funds from small business customers that meet the requirements outlined in paragraphs 90 and 91 of the Basel III LCR standards should not be reported here but are subject to lower run-off rates in rows 116 to 129. 93–104 139 insured, with a 3% run-off rate The portion of such funds provided by non-financial corporates that are fully covered by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards and are in jurisdictions where the supervisor chooses to prescribe a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 140 insured, with a 5% run-off rate The portion of such funds provided by non-financial corporates that are fully covered by an effective deposit insurance scheme but that are not prescribed a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 141 uninsured The portion of such funds provided by non-financial corporates that are not fully covered by an effective deposit insurance scheme. 93–103 142 provided by sovereigns, central banks, PSEs and MDBs Such funds provided by sovereigns, central banks, PSEs and multilateral development banks. 93–104 143 insured, with a 3% run-off rate The portion of such funds provided by sovereigns, central banks, PSEs and multilateral development banks that are fully covered by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards and are in jurisdictions where the supervisor chooses to prescribe a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 144 insured, with a 5% run-off rate The portion of such funds provided by sovereigns, central banks, PSEs and multilateral development banks that are fully covered by an effective deposit insurance scheme but that are not prescribed a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 145 uninsured The portion of such funds provided by sovereigns, central banks, PSEs and multilateral development banks that are not fully covered by an effective deposit insurance scheme. 93–103 146 provided by banks Such funds provided by banks. 93–104 147 insured, with a 3% run-off rate The portion of such funds provided by banks that are fully covered by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards and are in jurisdictions where the supervisor chooses to prescribe a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 148 insured, with a 5% run-off rate The portion of such funds provided by banks that are fully covered by an effective deposit insurance scheme but that are not prescribed a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 149 uninsured The portion of such funds provided by banks that are not fully covered by an effective deposit insurance scheme. 93–103 150 provided by other financial institutions and other legal entities Such funds provided by financial institutions (other than banks) and other legal entities. 93–104 151 insured, with a 3% run-off rate The portion of such funds provided by financial institutions (other than banks) and other legal entities that are fully covered by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards and are in jurisdictions where the supervisor chooses to prescribe a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 152 insured, with a 5% run-off rate The portion of such funds provided by financial institutions (other than banks) and other legal entities that are fully covered by an effective deposit insurance scheme but that are not prescribed a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 153 uninsured The portion of such funds provided by financial institutions (other than banks) and other legal entities that are not fully covered by an effective deposit insurance scheme. 93–103 Non-operational deposits in lines 156 to 163 include all deposits and other extensions of unsecured funding not included under operational deposits in lines 140 to 153, excluding notes, bonds and other debt securities, covered bond issuance or repo and secured funding transactions (reported below). Deposits arising out of correspondent banking or from the provision of prime brokerage services (as defined in the Basel III LCR standards, footnote 42) should not be included in these lines (Basel III LCR standards, paragraph 99).
Customer cash balances arising from the provision of prime brokerage services, including but not limited to the cash arising from prime brokerage services as identified in Basel III LCR standards, paragraph 99, should be considered separate from any required segregated balances related to client protection regimes imposed by national regulations, and should not be netted against other customer exposures included in this standard. These offsetting balances held in segregated accounts are treated as inflows in Basel III LCR standards, paragraph 154 and should be excluded from the stock of HQLA (Basel III LCR standards, paragraph 111).
154 Total non-operational deposits; of which The portion of unsecured wholesale funding not considered as “operational deposits” as defined above. 105–109 155 provided by non-financial corporates; of which: Total amount of such funds provided by non-financial corporates. 107–108 156 where entire amount is fully covered by an effective deposit insurance scheme Amount of such funds provided by non-financial corporates where the entire amount of the deposit is fully covered by an effective deposit insurance scheme. 108 157 where entire amount is not fully covered by an effective deposit insurance scheme Amount of such funds provided by non-financial corporates where the entire amount of the deposit is not fully covered by an effective deposit insurance scheme. 107 158 provided by sovereigns, central banks, PSEs and MDBs; of which: Such funds provided by sovereigns, central banks (other than funds to be reported in line item 165), PSEs, and multilateral development banks. 107-108 159 where entire amount is fully covered by an effective deposit insurance scheme Amount of such funds provided by sovereigns, central banks, PSEs and MDBs where the entire amount of the deposit is fully covered by an effective deposit insurance scheme. 108 160 where entire amount is not fully covered by an effective deposit insurance scheme Amount of such funds provided by sovereigns, central banks, PSEs and MDBs where the entire amount of the deposit is not fully covered by an effective deposit insurance scheme. 107 161 provided by members of institutional networks of cooperative (otherwise named) banks An institutional network of cooperative (or otherwise named) banks is a group of legally autonomous banks with a statutory framework of cooperation with common strategic focus and brand where specific functions are performed by central institutions or specialized service providers. Central institutions or specialized central service providers of such networks should report in this line the amount of deposits placed by network member institutions (that are not reported in line items 148 or 149 and that are) (a) due to statutory minimum deposit requirements which are registered at regulators or (b) in the context of common task sharing and legal, statutory or contractual arrangements so long as both the bank that has received the monies and the bank that has deposited participate in the same institutional network's mutual protection scheme against illiquidity and insolvency of its members.
Deposits from network member institutions that are neither included in line items 148 or 149, nor placed for purposes as referred to in letters (a) and (b) above, are to be reported in line items 162 or 163.
Banks that are not the central institutions or specialized central service provider of such network should report zero in this line.
105 162 provided by other banks Such funds provided by other banks, not reported in line 161. 109 163 provided by other financial institutions and other legal entities Such funds provided by financial institutions other than banks and by other legal entities not included in the categories above. Funding from fiduciaries, beneficiaries, conduits and special purpose vehicles and affiliated entities should also be reported here. 109 Notes, bonds and other debt securities issued by the bank are included in line 164 regardless of the holder, unless the bond is sold exclusively in the retail market and held in retail accounts (including small business customers treated as retail), in which case the instruments can be reported in the appropriate retail or small business customer deposit category in lines 87 to 107 or lines 116 to 136, respectively. Outflows on covered bonds should be reported in line 227. 164 Unsecured debt issuance Outflows on notes, bonds and other debt securities, excluding on bonds sold exclusively to the retail or small business customer markets and excluding outflows on covered bonds. 110 165 Additional balances required to be installed in central bank reserves Amounts to be installed in the central bank reserves within 30 days. Funds reported in this line should not be included in line 159 or 160. Please refer to the instructions from your supervisor for the specification of this item. Extension of 50(b) 168 Of the non-operational deposits reported above, amounts that could be considered operational in nature but per the standards have been excluded from receiving the operational deposit treatment due to: 169 correspondent banking activity Amounts in accounts with a clearing, custody or cash management relationship but which have been excluded from the operational deposit category because the account is a correspondent banking account.
Correspondent banking refers to arrangements under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services in order to settle foreign currency transactions (e.g. so-called nostro and vostro accounts used to settle transactions in a currency other than the domestic currency of the respondent bank for the provision of clearing and settlement of payments).
99, footnote 42 171 prime brokerage services Amounts in accounts with a clearing, custody or cash management relationship but which have been excluded from the operational deposit category because the account holder is a prime brokerage client of the reporting institution.
Prime brokerage is a package of services offered to large active investors, particularly hedge funds.
99, footnote 42 173 excess balances in operational accounts that could be withdrawn and would leave enough funds to fulfil the learing, custody and cash management activities Amounts in accounts with a clearing, custody or cash management relationship but which have been excluded from the operational deposit category because these funds are excess balances and could be withdrawn and would leave enough funds to fulfil the clearing, custody and cash management activities. 96 c) Secured funding run-off
Secured funding is defined as those liabilities and general obligations that are collateralized by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution. In this section any transaction in which the bank has received a collateralized loan in cash, such as repo transactions, expiring within 30 days should be reported. Collateral swaps where the bank receives a collateralized loan in the form of other assets than cash, should not be reported here, but in panel C below.
Additionally, collateral lent to the bank's customers to affect short positions should be treated as a form of secured funding. A customer short position in this context describes a transaction where a bank's customer sells a security it does not own, and the bank subsequently obtains the same security from internal or external sources to make delivery into the sale. Internal sources include the bank's own inventory of collateral as well as rehypothecatable Level 1 or Level 2 collateral held in other customer margin accounts. The contingent risk associated with non-contractual obligations where customer short positions are covered by other customers’ collateral that does not qualify as Level 1 or Level 2 should be reported in line 263. External sources include collateral obtained through a securities borrowing, reverse repo, or like transaction.
If the bank has deposited both liquid and non-liquid assets in a collateral pool and no assets are specifically assigned as collateral for the secured transaction, the bank may assume for this monitoring exercise that the assets with the lowest liquidity get assigned first: assets that are not eligible for the stock of liquid assets are assumed to be assigned first. Only once all those assets are fully assigned should Level 2B assets be assumed to be assigned, followed by Level 2A assets. Only once all Level 2 assets are assigned should Level 1 assets be assumed to be assigned.
A bank should report all outstanding secured funding transactions with remaining maturities within the 30 calendar day stress horizon, including customer short positions that do not have a specified contractual maturity. The amount of funds raised through the transaction should be reported in column D (“amount received”). The value of the underlying collateral extended in the transaction should be reported in column E (“market value of extended collateral”). Both values are needed to calculate the caps on Level 2 and Level 2B assets and both should be calculated at the date of reporting, not the trade or settlement date of the transaction.
Please refer to the instructions from your supervisor for the specification of items related to Level 2B assets in this subsection.
177 Transactions conducted with the bank's domestic central bank; of which: In column D: Amount raised in secured funding or repo transactions with the bank's domestic central bank that mature within 30 days.
In column E: The market value of the collateral extended on these transactions.
114–115 178 Backed by Level 1 assets; of which: In column D: Amount raised in secured funding or repo transactions with the bank's domestic central bank that mature within 30 days and are backed by Level 1 assets.
In column E: The market value of the Level 1 asset collateral extended on these transactions.
114–115 179 Transactions involving eligible liquid assets In column D: Of the amount reported in line 174, that which is raised in secured funding or repo transactions that mature within 30 days and are backed by Level 1 assets where these assets would otherwise qualify to be reported in panel Aa of the “LCR” worksheet (if they were not already securing the particular transaction in question), because:
(i) they would be held unencumbered; and
(ii) they would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column E: The market value of the Level 1 asset collateral extended on these transactions.
114–115 181 Backed by Level 2A assets; of which: In column D: Amount raised in secured funding or repo transactions with the bank's domestic central bank that mature within 30 days and are backed by Level 2A assets.
In column E: The market value of the Level 2A asset collateral extended on these transactions.
114–115 182 Transactions involving eligible liquid assets In column D: Of the amount reported in line 181, that which is raised in secured funding or repo transactions that mature within 30 days and are backed by Level 2A assets where these assets would otherwise qualify to be reported in panel Ab of the “LCR” worksheet (if they were not already securing the particular transaction in question) because:
(i) they would be held unencumbered; and
(ii) they would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column E: The market value of the Level 2A asset collateral extended on these transactions.
114–115 184 Backed by Level 2B RMBS assets; of which: In column D: Amount raised in secured funding or repo transactions with the bank's domestic central bank that mature within 30 days and are backed by Level 2B RMBS assets. In column E: The market value of the Level 2B RMBS asset collateral extended on these transactions. 114–115 185 Transactions involving eligible liquid assets In column D: Of the amount reported in line 184, that which is raised in secured funding or repo transactions that mature within 30 days and are backed by Level 2B RMBS assets where these assets would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (if they were not already securing the particular transaction in question) because:
(i) they would be held unencumbered; and
(ii) they would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column E: The market value of the Level 2B RMBS asset collateral extended on these transactions.
114–115 187 Backed by Level 2B non-RMBS assets; of which: In column D: Amount raised in secured funding or repo transactions with the bank's domestic central bank that mature within 30 days and is backed by Level 2B non-RMBS assets. In column E: The market value of the Level 2B non-RMBS asset collateral extended on these transactions. 114–115 188 Transactions involving eligible liquid assets In column D: Of the amount reported in line 187, that which is raised in secured funding or repo transactions that mature within 30 days and are backed by Level 2B non-RMBS assets where these assets would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (if they were not already securing the particular transaction in question) because:
(i) they would be held unencumbered; and
(ii) they would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column E: The market value of the Level 2B non-RMBS asset collateral extended on these transactions.
114–115 190 Backed by other assets In column D: Amount raised on secured funding or repo transactions with the bank's domestic central bank that mature within 30 days and are backed by all other assets (i.e. other than Level 1 or Level 2 assets).
In column E: The market value of the other asset collateral extended on these transactions.
114–115 191 Transactions not conducted with the bank's domestic central bank and backed by Level 1 assets; of which: In column D: Amount raised in secured funding or repo transactions that are not conducted with the bank's domestic central bank and that mature within 30 days and are backed by Level 1 assets. 114–115 192 Transactions involving eligible liquid assets In column D: Of the amount reported in line 191, that which is raised in secured funding or repo transactions that mature within 30 days and are backed by Level 1 assets where these assets would otherwise qualify to be reported in panel Aa of the “LCR” worksheet (if they were not already securing the particular transaction in question), because:
(i) they would be held unencumbered; and
(ii) they would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column E: The market value of the Level 1 asset collateral extended on these transactions.
114–115 194 Transactions not conducted with the bank's domestic central bank and backed by Level 2A assets; of which: In column D: Amount raised in secured funding or repo transactions that are not conducted with the bank's domestic central bank and that mature within 30 days and are backed by Level 2A assets.
In column E: The market value of the Level 2A asset collateral extended on these transactions.
114–115 195 Transactions involving eligible liquid assets In column D: Of the amount reported in line 194, that which is raised in secured funding or repo transactions that mature within 30 days and are backed by Level 2A assets where these assets would otherwise qualify to be reported in panel Ab of the “LCR” worksheet (if they were not already securing the particular transaction in question) because:
(i) they would be held unencumbered; and
(ii) they would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column E: The market value of the Level 2A asset collateral extended on these transactions.
114–115 197 Transactions not conducted with the bank's domestic central bank and backed by Level 2B RMBS assets; of which: In column D: Amount raised in secured funding or repo transactions that are not conducted with the bank's domestic central bank and that mature within 30 days and are backed by Level 2B RMBS assets.
In column E: The market value of the Level 2B RMBS asset collateral extended on these transactions.
114–115 198 Transactions involving eligible liquid assets In column D: Of the amount reported in line 197, that which is raised in secured funding or repo transactions that mature within 30 days and are backed by Level 2B RMBS assets where these assets would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (if they were not already securing the particular transaction in question) because:
(i) they would be held unencumbered; and
(ii) they would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column E: The market value of the Level 2B RMBS asset collateral extended on these transactions.
114–115 200 Transactions not conducted with the bank's domestic central bank and backed by Level 2B non-RMBS assets; of which: In column D: Amount raised in secured funding or repo transactions that are not conducted with the bank's domestic central bank and that mature within 30 days and are backed by Level 2B non-RMBS assets.
In column E: The market value of the Level 2B non-RMBS asset collateral extended on these transactions.
114–115 201 Counterparties are domestic sovereigns, MDBs or domestic PSEs with a 20% risk weight; of which: In column D: Secured funding transactions with domestic sovereign, multilateral development banks or domestic PSEs that are backed by Level 2B non-RMBS assets.
PSEs that receive this treatment should be limited to those that are 20% or lower risk weighted.
In column E: The market value of collateral extended on these transactions.
114–115 202 Transactions involving eligible liquid assets In column D: Of the amount reported in line 201, that which is raised in secured funding or repo transactions that mature within 30 days and are backed by Level 2B non-RMBS assets where these assets would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (if they were not already securing the particular transaction in question) because:
(i) they would be held unencumbered; and
(ii) they would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column E: The market value of the Level 2B non-RMBS asset collateral extended on these transactions.
114–115 204 Counterparties are not domestic sovereigns, MDBs or domestic PSEs with a 20% risk weight; of which: In column D: Secured funding transactions with counterparties other than domestic sovereign, multilateral development banks or domestic PSEs with a 20% risk weight that are backed by Level 2B non-RMBS assets.
In column E: The market value of collateral extended on these transactions.
114–115 205 Transactions involving eligible liquid assets In column D: Of the amount reported in line 204, that which is raised in secured funding or repo transactions that mature within 30 days and are backed by Level 2B non-RMBS assets where these assets would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (if they were not already securing the particular transaction in question) because:
(i) they would be held unencumbered; and
(ii) they would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column E: The market value of the Level 2B non-RMBS asset collateral extended on these transactions.
114–115 207 Transactions not conducted with the bank's domestic central bank and backed by other assets (non-HQLA); of which: In column D: Amount raised in secured funding or repo transactions that are not conducted with the bank's domestic central bank and that mature within 30 days and are backed by other assets (non-HQLA).
In column E: The market value of the other (non-HQLA) asset collateral extended on these transactions.
114–115 208 Counterparties are domestic sovereigns, MDBs or domestic PSEs with a 20% risk weight; of which: In column D: Secured funding transactions with domestic sovereign, multilateral development banks or domestic PSEs that are backed by other assets (non-HQLA).
PSEs that receive this treatment should be limited to those that are 20% or lower risk weighted.
In column E: The market value of collateral extended on these transactions.
114–115 209 Counterparties are not domestic sovereigns, MDBs or domestic PSEs with a 20% risk weight; of which: In column D: Secured funding transactions with counterparties other than domestic sovereign, multilateral development banks or PSEs that are backed by other assets (non-HQLA).
In column E: The market value of collateral extended on these transactions.
114–115 d) Additional requirements 213 Derivatives cash outflow Banks should calculate, in accordance with their existing valuation methodologies, expected contractual derivative cash inflows and outflows. Cash flows may be calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. The sum of all net cash outflows should be reported here. The sum of all net cash inflows should be reported in line 315.
Banks should exclude from such calculations those liquidity requirements that would result from increased collateral needs due to market value movements (to be reported in line 221) or falls in value of collateral posted (reported in line 216 and line 217). Options should be assumed to be exercised when they are ‘in the money’ to the option buyer.
Where derivative payments are collateralized by HQLA, cash outflows should be calculated net of any corresponding cash or collateral inflows that would result, all other things being equal, from contractual obligations for cash or collateral to be provided to the bank, if the bank is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the collateral is received. This is in line with the principle that banks should not double count liquidity inflows and outflows.
Note that cash flows do not equal the marked-to-market value, since the marked-to-market value also includes estimates for contingent inflows and outflows and may include cash flows that occur beyond the 30-day horizon.
It is generally expected that a positive amount would be provided for both this line item and line 315 for institutions engaged in derivatives transactions.
116, 117 214 Increased liquidity needs related to downgrade triggers in derivatives and other financing transactions (100% of the amount of collateral that would be posted for, or contractual cash outflows associated with, any downgrade up to and including a 3-notch downgrade). Often, contracts governing derivatives and other transactions have clauses that require the posting of additional collateral, drawdown of contingent facilities, or early repayment of existing liabilities upon the bank's downgrade by a recognized credit rating organization. The scenario therefore requires that for each contract in which “downgrade triggers” exist, the bank assumes that 100% of this additional collateral or cash outflow will have to be posted for any downgrade up to and including a 3-notch downgrade of the bank's long-term credit rating. Triggers linked to a bank's short-term rating should be assumed to be triggered at the corresponding long-term rating in accordance with published ratings criteria. The impact of the downgrade should consider impacts on all types of margin collateral and contractual triggers which change rehypothecation rights for non-segregated collateral.
118 215 Increased liquidity needs related to the potential for valuation changes on posted collateral securing derivative and other transactions: Increased liquidity needs related to the potential for valuation changes on posted collateral securing derivative and other transactions: (20% of the value of non-Level 1 posted collateral).
Observation of market practices indicates that most counterparties to derivatives transactions typically are required to secure the mark-to-market valuation of their positions and that this is predominantly done using cash or sovereign, central bank, multilateral development banks, or PSE debt securities with a 0% risk weight under the *Basel II 62 standardized approach. When these Level 1 liquid asset securities are posted as collateral, the framework will not require that an additional stock of HQLA be maintained for potential valuation changes. If however, counterparties are securing mark-to-market exposures with other forms of collateral, to cover the potential loss of market value on those securities, 20% of the value of all such posted collateral, net of collateral received on a counterparty basis (provided that the collateral received is not subject to restrictions on reuse or rehypothecation) will be added to the stock of required HQLA by the bank posting such collateral. This 20% will be calculated based on the notional amount required to be posted as collateral after any other haircuts have been applied that may be applicable to the collateral category. Any collateral that is in a segregated margin account can only be used to offset outflows that are associated with payments that are eligible to be offset from that same account.
*Refer to SAMA Circular 440471440000, Basel III Reforms.
119 216 Cash and Level 1 assets Current market value of relevant collateral posted as margin for derivatives and other transactions that, if they had been unencumbered, would have been eligible for inclusion in line items 6 to 18. 217 For other collateral (i.e. all non-Level 1 collateral) Current market value of relevant collateral posted as margin for derivatives and other transactions other than those included in line item 216 (all non-Level 1 collateral). This amount should be calculated net of collateral received on a counterparty basis (provided that the collateral received is not subject to restrictions on reuse or rehypothecation). Any collateral that is in a segregated margin account can only be used to offset outflows that are associated with payments that are eligible to be offset from that same account. 218 Increased liquidity needs related to excess nonsegregated collateral held by the bank that could contractually be called at any time by the counterparty The amount of non-segregated collateral that the reporting institution currently has received from counterparties but could under legal documentation be recalled because the collateral is in excess of that counterparty's current collateral requirements. 120 219 Increased liquidity needs related to contractually required collateral on transactions for which the counterparty has not yet demanded the collateral be posted The amount of collateral that is contractually due from the reporting institution, but for which the counterparty has not yet demanded the posting of such collateral. 121 220 Increased liquidity needs related to contracts that allow collateral substitution to non-HQLA assets The amount of HQLA collateral that can be substituted for non-HQLA without the bank's consent that has been received to secure transactions and that has not been segregated (e.g. otherwise included in HQLAs, as secured funding collateral or in other bank operations). 122 221 Increased liquidity needs related to market valuation changes on derivative or other transactions Any potential liquidity needs deriving from collateralization of mark-to-market exposures on derivative and other transactions. Unless its national supervisor has provided other instructions (i.e. according flexibility as per circumstances), banks should calculate any outflow generated by increased needs related to market valuation changes by identifying the largest absolute net 30-day collateral flow realized during the preceding 24 months, where the absolute net collateral flow is based on both realized outflows and inflows. Inflows and outflows of transactions executed under the same master netting agreement can be treated on a net basis. 123 222 Loss of funding on ABS and other structured financing instruments issued by the bank, excluding covered bonds Loss of funding on asset-backed securities (To the extent that sponsored conduits/SPVs are required to be consolidated under liquidity requirements, their assets and liabilities will be taken into account. Supervisors need to be aware of other possible sources of liquidity risk beyond that arising from debt maturing within 30 days.) covered bonds and other structured financing instruments: The scenario assumes the outflow of 100% of the funding transaction maturing within the 30-day period, when these instruments are issued by the bank itself (as this assumes that the re-financing market will not exist).
124 223 Loss of funding on ABCP, conduits, SIVs and other such financing activities; of which: All funding on asset-backed commercial paper, conduits, securities investment vehicles and other such financing facilities maturing or returnable within 30 days. Banks having structured financing facilities that include the issuance of short-term debt instruments, such as asset backed commercial paper, should report the potential liquidity outflows from these structures. These include, but are not limited to, (i) the inability to refinance maturing debt, and (ii) the existence of derivatives or derivative-like components contractually written into the documentation associated with the structure that would allow the “return” of assets in a financing arrangement, or that require the original asset transferor to provide liquidity, effectively ending the financing arrangement ("liquidity puts") within the 30-day period. Where the structured financing activities are conducted through a special purpose entity (such as a special purpose vehicle, conduit or SIV), the bank should, in determining the HQLA requirements, look through to the maturity of the debt instruments issued by the entity and any embedded options in financing arrangements that may potentially trigger the “return” of assets or the need for liquidity, irrespective of whether or not the SPV is consolidated.
Note; A special purpose entity (SPE) is defined in the Basel II Framework (paragraph 552) as a corporation, trust, or other entity organized for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the credit risk of an originator or seller of exposures. SPEs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.
125 224 debt maturing ≤ 30 days Portion of the funding specified in line 223 maturing within 30 days. 125 225 with embedded options in financing arrangements Portion of the funding specified in line 223 not maturing within 30 days but with embedded options that could reduce the effective maturity of the debt to 30 days or less. 125 226 other potential loss of such funding Portion of the funding specified in line 223 that is not included in line 224 or 225. 125 227 Loss of funding on covered bonds issued by the bank Balances of covered bonds, issued by the bank that mature in 30 days or less. 124 Credit and liquidity facilities are defined as explicit contractual agreements or obligations to extend funds at a future date to retail or wholesale counterparties. For the purpose of the standard, these facilities only include contractually irrevocable (“committed”) or conditionally revocable agreements to extend funds in the future (Basel III LCR standards, paragraph 126). These off-balance sheet facilities or funding commitments can have long or short-term maturities, with short-term facilities frequently renewing or automatically rolling-over. In a stressed environment, it will likely be difficult for customers drawing on facilities of any maturity, even short-term maturities, to be able to quickly pay back the borrowings. Therefore, for purposes of this standard, all facilities that are assumed to be drawn (as outlined in the paragraphs below) will remain outstanding at the amounts assigned throughout the duration of the test, regardless of maturity.
Unconditionally revocable facilities that are unconditionally cancellable by the bank (in particular, those without a precondition of a material change in the credit condition of the borrower) are excluded from this section and should be reported in lines 249 to 261, as appropriate (Basel III LCR standards, paragraph 126).
The currently undrawn portion of these facilities should be reported. The reported amount may be net of any HQLAs eligible for the stock of HQLAs, if the HQLAs have already been posted as collateral by the counterparty to secure the facilities or that are contractually obliged to be posted when the counterparty will draw down the facility (e.g. a liquidity facility structured as a repo facility), if the bank is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the facility is drawn, and there is no undue correlation between the probability of drawing the facility and the market value of the collateral. The collateral can be netted against the outstanding amount of the facility to the extent that this collateral is not already counted in the stock of HQLAs (Basel III LCR standards, paragraph 127).
A liquidity facility is defined as any committed, undrawn back-up facility that would be utilized to refinance the debt obligations of a customer in situations where such a customer is unable to rollover that debt in financial markets (e.g. pursuant to a commercial paper programme, secured financing transactions, obligations to redeem units, etc.).
The amount of a commitment to be treated as a liquidity facility is the amount of the currently outstanding debt issued by the customer (or proportionate share, if a syndicated facility) maturing within a 30 day period that is backstopped by the facility. The portion of a liquidity facility that is backing debt that does not mature within the 30-day window is excluded from the scope of the definition of a facility. Any additional capacity of the facility (i.e. the remaining commitment) would be treated as a committed credit facility and should be reported as such.
General working capital facilities for corporate entities (e.g. revolving credit facilities in place for general corporate and/or working capital purposes) will not be classified as liquidity facilities, but as credit facilities.
Notwithstanding the above, any facilities provided to hedge funds, money market funds and special purpose funding vehicles, for example SPEs (as defined in the Basel III LCR standards, paragraph 125) or conduits, or other vehicles used to finance the banks own assets, should be captured in their entirety as a liquidity facility and reported in line 238.
For that portion of financing programs that are captured in the Basel III LCR standards, paragraphs 124 and 125 (i.e. are maturing or have liquidity puts that may be exercised in the 30-day horizon); banks that are providers of associated liquidity facilities do not need to double count the maturing financing instrument and the liquidity facility for consolidated programs.
228 Undrawn committed credit and liquidity facilities to retail and small business customers Any contractual loan drawdowns from committed facilities (Committed facilities refer to those which are irrevocable) and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows:
Balances of undrawn committed credit and liquidity facilities extended by the bank to natural persons and small business customers, as defined above. Banks should assume a 5% drawdown of the undrawn portion of these facilities.
131(a) 229 non-financial corporates Any contractual loan drawdowns from committed facilities (Committed facilities refer to those which are irrevocable) and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows:
Balances of undrawn committed credit facilities extended by the bank to non-financial institution corporations (excluding small business customers). The amount reported in this line should also include any ‘additional capacity’ of liquidity facilities (as defined above) provided to non-financial corporates. Banks should assume a 10% drawdown of the undrawn portion of these credit facilities.
131(b) 231 sovereigns, central banks, PSEs and MDBs Any contractual loan drawdowns from committed facilities (Committed facilities refer to those which are irrevocable) and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows:
Balances of undrawn committed credit facilities extended by the bank to sovereigns, central banks, PSEs, multilateral development banks and any other entity not included in other drawdown categories. The amount reported in this line should also include any ‘additional capacity’ of liquidity facilities (as defined above) provided to sovereigns, central banks, PSEs, multilateral development banks. Banks should assume a 10% drawdown of the undrawn portion of these credit facilities.
131(b) 232 Undrawn committed liquidity facilities to 233 non-financial corporates Any contractual loan drawdowns from committed facilities (Committed facilities refer to those which are irrevocable) and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows:
The amount of undrawn committed liquidity facilities should be the amount of currently outstanding debt (or proportionate share if a syndicated facility) issued by non-financial institution corporations (excluding small business customers) maturing within a 30 day period that is backstopped by the facility.
Any ‘additional capacity’ of liquidity facilities (as defined above) provided to non-financial corporates should not be reported here, rather should be reported in line 230. Banks should assume a 30% drawdown of the undrawn portion of these liquidity facilities.
131(c) 234 sovereigns, central banks, PSEs and MDBs Any contractual loan drawdowns from committed facilities (Committed facilities refer to those which are irrevocable) and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows:
The amount of undrawn committed liquidity facilities should be the amount of currently outstanding debt (or proportionate share if a syndicated facility) issued by sovereigns, central banks, PSEs, or multilateral development banks maturing within a 30 day period that is backstopped by the facility.
Any ‘additional capacity’ of liquidity facilities (as defined above) provided to sovereigns, central banks, PSEs, or multilateral development banks should not be reported here, rather should be reported in line 231. Banks should assume a 30% drawdown of the undrawn portion of these liquidity facilities.
131(c) 235 Undrawn committed credit and liquidity facilities provided to banks subject to prudential supervision Any contractual loan drawdowns from committed facilities (Committed facilities refer to those which are irrevocable) and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows:
Balances of undrawn committed credit and liquidity facilities extended to banks that are subject to prudential supervision. Banks should assume a 40% drawdown of the undrawn portion of these facilities.
131(d) 236 Undrawn committed credit facilities provided to other FIs Any contractual loan drawdowns from committed facilities (Committed facilities refer to those which are irrevocable) and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows:
Balances of undrawn committed credit facilities extended by the bank to other financial institutions (including securities firms, insurance companies, fiduciaries and beneficiaries). The amount reported in this line should also include any ‘additional capacity’ of liquidity facilities (as defined above) provided to other financial institutions (including securities firms, insurance companies, fiduciaries and beneficiaries). Banks should assume a 100% drawdown of the undrawn portion of these liquidity facilities.
Note
Fiduciary is defined in this context as a legal entity that is authorized to manage assets on behalf of a third party.
Fiduciaries include asset management entities such as pension funds and other collective investment vehicles.
Beneficiary is defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract.
(Refer to Paragraph 131(f) and footnotes 43 and 44 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
131(e) 237 Undrawn committed liquidity facilities provided to other FIs Any contractual loan drawdowns from committed facilities (Committed facilities refer to those which are irrevocable) and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows:
The amount of undrawn committed liquidity facilities should be the amount of currently outstanding debt (or proportionate share if a syndicated facility) issued by to other financial institutions (including securities firms, insurance companies, fiduciaries and beneficiaries) maturing within a 30 day period that is backstopped by the facility.
Any ‘additional capacity’ of liquidity facilities (as defined above) provided to other financial institutions (including securities firms, insurance companies, fiduciaries and beneficiaries) should not be reported here, rather should be reported in line 236.
Note:
Banks should assume a 100% drawdown of the undrawn portion of these liquidity facilities.
Note: Definition of other financial institutions include, leasing, house finance/mortgage companies
Fiduciary is defined in this context as a legal entity that is authorized to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles.
Beneficiary is defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract.
(Refer to Paragraph 131(f) footnotes 43 and 44 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
131(f) 238 Undrawn committed credit and liquidity facilities to other legal entities Any contractual loan drawdowns from committed facilities (Committed facilities refer to those which are irrevocable) and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows:
Balances of undrawn committed credit and liquidity facilities extended to other legal entities, including hedge funds, money market funds and special purpose funding vehicles,( The potential liquidity risks associated with the bank's own structured financing facilities should be treated according to paragraphs 124 and 125 of this document (100% of maturing amount and 100% of returnable assets are included as outflows). for example SPEs (as defined in the Basel III LCR standards, paragraph 125) or conduits, or other vehicles used to finance the banks own assets (not included in lines 228 to 237). Banks should assume a 100% drawdown of the undrawn portion of these facilities.
131(g) Other contractual obligations to extend funds (within a 30 day period 240 Other contractual obligations to extend funds to: Any contractual lending obligations not captured elsewhere in the standard should be captured here at a 100% outflow rate. 132-133 241 financial institutions Any contractual lending obligations to financial institutions not captured elsewhere. 132 For Rows 242-246, the following is applicable:
If the total of all contractual obligations to extend funds to retail and non-financial corporate clients within the next 30 calendar days (not captured in the prior categories) exceeds 50% of the total contractual inflows due in the next 30 calendar days from these clients, the difference should be reported as a 100% outflow.
242 retail clients The full amount of contractual obligations to extend funds to retail clients within the next 30 calendar days (not netted for the assumed roll-over on the inflows in line 301). 133 243 small business customers The full amount of contractual obligations to extend funds to small business customers within the next 30 calendar days (not netted for the assumed roll-over on the inflows in line 302). 133 244 non-financial corporates The full amount of contractual obligations to extend funds to non-financial corporate clients within the next 30 calendar days (not netted for the assumed roll-over on the inflows in line 303). 133 245 other clients The full amount of contractual obligations to extend funds to other clients within the next 30 calendar days (not netted for the assumed roll-over on the inflows in line 309). 133 246 retail, small business customers, non-financials and other clients The amounts of contractual obligations to extend funds to retail, small business customers, non-financial corporate and other clients within the next 30 calendar days (lines 242 to 245) are added up in this line. The roll-over of funds that is implicitly assumed in the inflow section (lines 301, 302, 303 and 309) are then subtracted. If the result is positive, it is included here as an outflow in column H. Otherwise, the outflow included here is zero. 133 Other contingent funding obligations (treatment determined by national supervisor) These contingent funding obligations may be either contractual or non-contractual and are not lending commitments.
Non-contractual contingent funding obligations include associations with, or sponsorship of, products sold or services provided that may require the support or extension of funds in the future under stressed conditions. Non-contractual obligations may be embedded in financial products and instruments sold, sponsored, or originated by the institution that can give rise to unplanned balance sheet growth arising from support given for reputational risk considerations (Basel III LCR standards, paragraph 135). These include products and instruments for which the customer or holder has specific expectations regarding the liquidity and marketability of the product or instrument and for which failure to satisfy customer expectations in a commercially reasonable manner would likely cause material reputational damage to the institution or otherwise impair on-going viability.
SAMA will continue to work with supervised institutions in its jurisdictions to determine the liquidity risk impact of these contingent liabilities and the resulting stock of HQLA that should accordingly be maintained. SAMA has already disclosed the run-off rates they assign to each category publicly and will continue to intimate, in case of revisions made.
Note: In order to refine the cash outflow estimates in connection with trade and non trade related Letter of Credit and Guarantees, SAMA would undertake a study shortly, on account of which information would be solicited from the banking industry
Some of these contingent funding obligations are explicitly contingent upon a credit or other event that is not always related to the liquidity events simulated in the stress scenario, but may nevertheless have the potential to cause significant liquidity drains in times of stress. For this standard, SAMA and bank should consider which of these “other contingent funding obligations” may materialize under the assumed stress events. The potential liquidity exposures to these contingent funding obligations are to be treated as a nationally determined behavioral assumption where it is up to the SAMA to determine whether and to what extent these contingent outflows are to be included in the LCR. All identified contractual and non-contractual contingent liabilities and their assumptions should be reported, along with their related triggers. Supervisors and banks should, at a minimum, use historical behavior in determining appropriate outflows.
253 Non-contractual obligations related to potential liquidity draws from joint ventures or minority investments in entities Non contractual contingent funding obligations related to potential liquidity draws from joint ventures or minority investments in entities, which are not consolidated per paragraph 164 of the Basel III LCR standards, where there is the expectation that the bank will be the main liquidity provider when the entity is in need of liquidity. The amount included should be calculated in accordance with the methodology agreed by the bank's supervisor. Please refer to the instructions from your supervisor for the specification of this item. 137 254 Unconditionally revocable “uncommitted” credit and liquidity facilities Balances of undrawn credit and liquidity facilities where the bank has the right to unconditionally revoke the undrawn portion of these facilities. 140 255 Trade-finance related obligations (including guarantees and letters of credit) Trade finance instruments consist of trade-related obligations directly underpinned by the movement of goods or the provision of services. Amounts to be reported here include items such as:
- outstanding documentary trade letters of credit, documentary and clean collection, import bills, and export bills; and
- outstanding guarantees directly related to trade finance obligations, such as shipping guarantees.
Lending commitments, such as direct import or export financing for non-financial corporate firms, are excluded from this treatment and reported in lines 228 to 238.
138, 139 256 Guarantees and letters of credit unrelated to trade finance obligations The outstanding amount of letters of credit issued by the bank and guarantees unrelated to trade finance obligations described in line 255. 140 257 Non-contractual obligations: 258 Debt-buy back requests (incl related conduits) Potential requests for debt repurchases of the bank's own debt or that of related conduits, securities investment vehicles and other such financing facilities. In case debt amounts qualify for both line 258 and line 262, please enter them in just one of these lines. 140 259 Structured products Structured products where customers anticipate ready marketability, such as adjustable rate notes and variable rate demand notes (VRDNs). 140 260 Managed funds Managed funds that are marketed with the objective of maintaining a stable value such as money market mutual funds or other types of stable value collective investment funds etc. 140 261 Other non-contractual obligations Any other non-contractual obligation not entered above. 140 262 Outstanding debt securities with remaining maturity > 30 days For issuers with an affiliated dealer or market maker, there may be a need to include an amount of the outstanding debt securities (unsecured and secured, term as well as short term) having maturities greater than 30 calendar days, to cover the potential repurchase of such outstanding securities. In case debt amounts qualify for both line 258 and line 262, please enter them in just one of these lines. 140 263 Non contractual obligations where customer short positions are covered by other customers’ collateral Amount of contingent obligations related to instances where banks have internally matched client assets against other clients’ short positions where the collateral does not qualify as Level 1 or Level 2, and the bank may be obligated to find additional sources of funding for these positions in the event of client withdrawals. Instances where the collateral qualifies as Level 1 or Level 2 should be reported in the appropriate line of the secured funding section (lines 191 to 205). 140 264 Bank outright short positions covered by a collateralized securities financing transaction Amount of the bank's outright short positions that are being covered by collateralized securities financing transactions. Such short positions are assumed to be maintained throughout the 30-day period and receive a 0% outflow. The corresponding collateralized securities financing transactions that are covering such short positions should be reported in lines 290 to 295 or 405 to 429.
Further guidance please refer para 147 of Basel III LCR standards reference:
In the case of a bank's short positions, if the short position is being covered by an unsecured security borrowing, the bank should assume the unsecured security borrowing of collateral from financial market participants would run-off in full, leading to a 100% outflow of either cash or HQLA to secure the borrowing, or cash to close out the short position by buying back the security. This should be recorded as a 100% other contractual outflow according to paragraph 141. If, however, the bank's short position is being covered by a collateralized securities financing transaction, the bank should assume the short position will be maintained throughout the 30-day period and receive a 0% outflow
147 265 Other contractual cash outflows (including those related to unsecured collateral borrowings and uncovered short positions) Any other contractual cash outflows within the next 30 calendar days should be captured in this standard, such as such as outflows to cover unsecured collateral borrowings, uncovered short positions, dividends or contractual interest payments, with explanation given in an accompanying note to your supervisor as to what comprises the amounts included in this line. This amount should exclude outflows related to operating costs. 141, 147 Secured lending, including reverse repos and securities borrowing Despite the roll-over assumptions in paragraphs 145 and 146, a bank should manage its collateral such that it is able to fulfil obligations to return collateral whenever the counterparty decides not to roll-over any reverse repo or securities lending transaction.( s is in line with Principle 9 of the Sound Principles.) This is especially the case for non-HQLA collateral, since such outflows are not captured in the LCR framework. SAMA would be monitoring individual banks collateral management as part of their onsite inspection.
148 Cash Inflow – Committed Facilities
Committed facilities
No credit facilities, liquidity facilities or other contingent funding facilities that the bank holds at other institutions for its own purposes are assumed to be able to be drawn. Such facilities receive a 0% inflow rate, meaning that this scenario does not consider inflows from committed credit or liquidity facilities. This is to reduce the contagion risk of liquidity shortages at one bank causing shortages at other banks and to reflect the risk that other banks may not be in a position to honor credit facilities, or may decide to incur the legal and reputational risk involved in not honoring the commitment, in order to conserve their own liquidity or reduce their exposure to that bank.
6.1.3 Inflows, Liquidity Coverage Ratio (LCR) (panel B2)
Total expected contractual cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in under the scenario up to an aggregate cap of 75% of total expected cash outflows (Basel III LCR standards, paragraph 69).
Items must not be double counted – if an asset is included as part of the “stock of HQLA” (i.e. the numerator), the associated cash inflows cannot also be counted as cash inflows (i.e. part of the denominator) (Basel III LCR standards, paragraph 72).
When considering its available cash inflows, the bank should only include contractual inflows (including interest payments) from outstanding exposures that are fully performing and for which the bank has no reason to expect a default within the 30-day time horizon (Basel III LCR standards, paragraph 142). Pre-payments on loans (not due within 30 days) should not be included in the inflows.
Contingent inflows are not included in total net cash outflows (Basel III LCR standards, paragraph 142).
Banks and SAMA need to monitor the concentration of expected inflows across wholesale counterparties in the context of banks’ liquidity management in order to ensure that their liquidity position is not overly dependent on the arrival of expected inflows from one or a limited number of wholesale counterparties. SAMA in connection with the aforementioned cover the same through liquidity monitoring tools and onsite inspections.
a) Secured lending including reverse repos and securities borrowing
Secured lending is defined as those loans that the bank has extended and are collateralized by legal rights to specifically designated assets owned by the borrowing institution, which the bank use or rehypothecate for the duration of the loan, and for which the bank can claim ownership to in the case of default by the borrower. In this section any transaction in which the bank has extended a collateralized loan in cash, such as reverse repo transactions, expiring within 30 days should be reported. Collateral swaps where the bank has extended a collateralized loan in the form of other assets than cash, should not be reported here, but in panel C below.
A bank should report all outstanding secured lending transactions with remaining maturities within the 30 calendar day stress horizon. The amount of funds extended through the transaction should be reported in column D (“amount extended”). The value of the underlying collateral received in the transactions should be reported in column E (“market value of received collateral”). Both values are needed to calculate the caps on Level 2 and Level 2B assets and both should be calculated at the date of reporting, not the date of the transaction. Note that if the collateral received in the form of Level 1 or Level 2 assets is not rehypothecated and is legally and contractually available for the bank's use it should be reported in the appropriate lines of the stock of HQLA section (lines 11 to 39) and not here (see paragraph 31 of the Basel III LCR standards).
Please refer to the instructions from your supervisor for the specification of items related to Level 2B assets in this subsection.
273 Reverse repo and other secured lending or securities borrowing transactions maturing ≤ 30 days All reverse repo or securities borrowing transactions maturing within 30 days, in which the bank has extended cash and obtained collateral. 145–146 274 Of which collateral is not reused (i.e. is not rehypothecated) to cover the reporting institution's outright short positions Such transactions in which the collateral obtained is not reused (i.e. is not rehypothecated) to cover the reporting institution's outright short positions. If the collateral is re-used, the transactions should be reported in lines 290 to 295. 145–146 275 Transactions backed by Level 1 assets All such transactions in which the bank has obtained collateral in the form of Level 1 assets. These transactions are assumed to roll-over in full, not giving rise to any cash inflows.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 1 collateral received in these transactions.
145–146 276 Transactions involving eligible liquid assets Of the transactions backed by Level 1 assets, those where the collateral obtained is reported in panel Aa of the “LCR” worksheet as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 1 collateral received in these transactions.
145–146 278 Transactions backed by Level 2A assets; of which: All such transactions in which the bank has obtained collateral in the form of Level 2A assets. These are assumed to lead to a 15% cash inflow due to the reduction of funds extended against the collateral.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 2A collateral received in these transactions.
145–146 279 Transactions involving eligible liquid assets Of the transactions backed by Level 2A assets, those where the collateral obtained is reported in panel Ab of the “LCR” worksheet as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 2A collateral received in these transactions.
145–146 281 Transactions backed by Level 2B RMBS assets; of which: All such transactions in which the bank has obtained collateral in the form of Level 2B RMBS assets. These are assumed to lead to a 25% cash inflow due to the reduction of funds extended against the collateral.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 2B RMBS collateral received in these transactions.
145–146 282 Transactions involving eligible liquid assets Of the transactions backed by Level 2B RMBS assets, those where the collateral obtained is reported in panel Ac of the “LCR” worksheet as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 2B RMBS collateral received in these transactions.
145–146 284 Transactions backed by Level 2B non-RMBS assets; of which: All such transactions in which the bank has obtained collateral in the form of Level 2B non-RMBS assets. These are assumed to lead to a 50% cash inflow due to the reduction of funds extended against the collateral.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 2B non-RMBS collateral received in these transactions.
145–146 285 Transactions involving eligible liquid assets Of the transactions backed by Level 2B non-RMBS assets, those where the collateral obtained is reported in panel Ac of the “LCR” worksheet as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 2B non-RMBS collateral received in these transactions.
145–146 287 Margin lending backed by non-Level 1 or non-Level 2 collateral Collateralized loans extended to customers for the purpose of taking leveraged trading positions (“margin loans”) made against non-HQLA collateral. These are assumed to lead to a 50% cash inflow.
In column D: The amounts extended in these transactions.
In column E: The market value of the collateral received in these transactions.
145–146 288 Transactions backed by other collateral All such transactions (other than those reported in line 287) in which the bank has obtained collateral in another form than Level 1 or Level 2 assets. These are assumed not to roll over and therefore lead to a 100% cash inflow.
In column D: The amounts extended in these transactions.
In column E: The market value of the collateral received in these transactions.
145–146 289 Of which collateral is re-used (i.e. is rehypothecated) to cover the reporting institution's outright short positions If the collateral obtained in these transactions is re-used (i.e. rehypothecated) to cover the reporting institution's outright short positions that could be extended beyond 30 days, it should be assumed that the transactions will be rolled-over and will not give rise to any cash inflows. This reflects the need to continue to cover the short position or to repurchase the relevant securities. Institutions should only report reverse repo amounts in these cells where it itself is short the collateral.
If the collateral is not re-used, the transaction should be reported in lines 274 to 288.
145–146 290 Transactions backed by Level 1 assets All such transactions in which the bank has obtained collateral in the form of Level 1 assets.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 1 collateral received in these transactions.
145–146 291 Transactions backed by Level 2A assets All such transactions in which the bank has obtained collateral in the form of Level 2A assets.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 2A collateral received in these transactions.
145–146 292 Transactions backed by Level 2B RMBS assets All such transactions in which the bank has obtained collateral in the form of Level 2B RMBS assets.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 2B RMBS collateral received in these transactions.
145–146 293 Transactions backed by Level 2B non-RMBS assets All such transactions in which the bank has obtained collateral in the form of Level 2B non-RMBS assets.
In column D: The amounts extended in these transactions.
In column E: The market value of the Level 2B non-RMBS collateral received in these transactions.
145–146 294 Margin lending backed by non-Level 1 or non-Level 2 collateral Collateralized loans extended to customers for the purpose of taking leveraged trading positions (“margin loans”) made against non-HQLA collateral.
In column D: The amounts extended in these transactions.
In column E: The market value of the collateral received in these transactions.
145–146 295 Transactions backed by other collateral All such transactions (other than those reported in line 294) in which the bank has obtained collateral in another form than Level 1 or Level 2 assets.
In column D: The amounts extended in these transactions.
In column E: The market value of collateral received in these transactions.
145–146 b) Other inflows by counterparty
Contractual inflows (including interest payments and installments) due in ≤ 30 days from fully performing loans, not reported in lines 275 to 295. These include maturing loans that have already been agreed to roll over. The agreed rollover should also be reported in lines 241 to 245 as appropriate.
For all other types of transactions, either secured or unsecured, the inflow rate will be determined by counterparty. In order to reflect the need for a bank to conduct ongoing loan origination/roll-over with different types of counterparties, even during a time of stress, a set of limits on contractual inflows by counterparty type is applied.
When considering loan payments, the bank should only include inflows from fully performing loans. Inflows should only be taken at the latest possible date, based on the contractual rights available to counterparties. For revolving credit facilities, this assumes that the existing loan is rolled over and that any remaining balances are treated in the same way as a committed facility according to Basel III LCR standards, paragraph 131.
Inflows from loans that have no specific maturity (i.e. have non-defined or open maturity) should not be included; therefore, no assumptions should be applied as to when maturity of such loans would occur. An exception to this, as noted below, would be minimum payments of principal, fee or interest associated with an open maturity loan, provided that such payments are contractually due within 30 days. These minimum payment amounts should be captured as inflows at the rates prescribed in paragraphs 153 and 154. of LCR Basel III guidelines
301 Retail customers All payments (including interest payments and installments) from retail customers on fully performing loans not reported in lines 275 to 295 that are contractually due within the 30-day horizon. Only contractual payments due should be reported, e.g. required minimum payments of principal, fee or interest, and not total loan balances of undefined or open maturity.
Note: At the same time, however, banks are assumed to continue to extend loans to retail and small business customers, at a rate of 50% of contractual inflows. This results in a net inflow number of 50% of the contractual amount.
153 302 Small business customers All payments (including interest payments and installments) from small business customers on fully performing loans not reported in lines 275 to 295 that are contractually due within the 30-day horizon. Only contractual payments due should be reported, e.g. required minimum payments of principal, fee or interest, and not total loan balances of undefined or open maturity.
Note: At the same time, however, banks are assumed to continue to extend loans to retail and small business customers, at a rate of 50% of contractual inflows. This results in a net inflow number of 50% of the contractual amount.
153 303 Non-financial corporates All payments (including interest payments and installments) from non-financial corporates on fully performing loans not reported in lines 275 to 295 that are contractually due within the 30-day horizon. Only contractual payments due should be reported, e.g. required minimum payments of principal, fee or interest, and not total loan balances of undefined or open maturity.
Note:
Banks are assumed to continue to extend loans to wholesale clients, at a rate of 0% of inflows for financial institutions and central banks, and 50% for all others, including non-financial corporates, sovereigns, multilateral development banks, and PSEs. This will result in an inflow percentage of 100% for financial institution and central bank counterparties; and 50% for non-financial wholesale counterparties
154 304 Central banks All payments (including interest payments and installments) from central banks on fully performing loans. Central bank reserves (including required reserves) including banks’ overnight deposits with the central bank, and term deposits with the central bank that: (i) are explicitly and contractually repayable on notice from the depositing bank; or (ii) that constitute a loan against which the bank can borrow on a term basis or on an overnight but automatically renewable basis (only where the bank has an existing deposit with the relevant central bank), should be reported in lines 7 or 8 and not here. If the term of other deposits (not included in lines 7 or 8) expires within 30 days, it should be included in this line.
Note:
Banks are assumed to continue to extend loans to wholesale clients, at a rate of 0% of inflows for financial institutions and central banks, and 50% for all others, including non-financial corporates, sovereigns, multilateral development banks, and PSEs. This will result in an inflow percentage of 100% for financial institution and central bank counterparties; and 50% for non-financial wholesale counterparties
154 305 Financial institutions, of which All payments (including interest payments and installments) from financial institutions on fully performing loans not reported in lines 275 to 295 that are contractually due within the 30-day horizon. Only contractual payments due should be reported, e.g. required minimum payments of principal, fee or interest, and not total loan balances of undefined or open maturity. 154 306 operational deposits All deposits held at other financial institutions for operational activities, as outlined in the Basel III LCR standards, paragraphs 93 to 104, such as for clearing, custody, and cash management activities.
Note:
Deposits held at other financial institutions for operational purposes are assumed to stay at those institutions, and no inflows can be counted for these funds
156 307 deposits at the centralized institution of an institutional network that receive 25% run-off For banks that belong to a cooperative network as described in paragraphs 105 and 106 of the Basel III LCR standards, this item includes all (portions of) deposits (not included in line item 306) held at the centralized institution in the cooperative banking network that are placed (a) due to statutory minimum deposit requirements which are registered at regulators, or (b) in the context of common task sharing and legal, statutory or contractual arrangements. These deposits receive a 25% runoff at the centralized institution.
Further, the depositing bank should not count any inflow for these funds – i.e. they will receive a 0% inflow rate.
157 308 all payments on other loans and deposits due in ≤ 30 days All payments (including interest payments and installments) from financial institutions on fully performing unsecured and secured loans, that are contractually due within the 30-day horizon, and the amount of deposits held at financial institutions that is or becomes available within 30 days, and that are not included in lines 306 or 307.
Banks may also recognize in this category inflows from the release of balances held in segregated accounts in accordance with regulatory requirements for the protection of customer trading assets, provided that these segregated balances are maintained in Level 1 or Level 2 assets. This inflow should be calculated in line with the treatment of other related outflows and inflows covered in this standard.
154 309 Other entities All payments (including interest payments and installments) from other entities (including sovereigns, multilateral development banks, and PSEs) on fully performing loans that are contractually due within 30 days, not included in lines 301 to 308. 154 c) Other cash inflows 315 Derivatives cash inflow Banks should calculate, in accordance with their existing valuation methodologies, expected contractual derivative cash inflows and outflows. Cash flows may be calculated on a net basis (i.e. inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. The sum of all net cash inflows should be reported here. The sum of all net cash outflows should be reported in line 213. Banks should exclude from such calculations those liquidity requirements that would result from increased collateral needs due to market value movements (to be reported in line 221) or falls in value of collateral posted (reported in line 216 and line 217). Options should be assumed to be exercised when they are ‘in the money’ to the option buyer. Where derivatives are collateralized by HQLA, cash inflows should be calculated net of any corresponding cash or contractual collateral outflows that would result, all other things being equal, from contractual obligations for cash or collateral to be posted by the bank, given these contractual obligations would reduce the stock of HQLA. This is in line with the principle that banks should not double count liquidity inflows and outflows.
Note that cash flows do not equal the marked-to-market value, since the marked-to-market value also includes estimates for contingent inflows and outflows and may include cash flows that occur beyond the 30-day horizon.
It is generally expected that a positive amount would be provided for both this line item and line 213 for institutions engaged in derivatives transactions.
158, 159 316 Contractual inflows from securities maturing ≤ 30 days and not included anywhere above Contractual inflows from securities, including certificates of deposit, maturing ≤ 30 days that are not already included in any other item of the LCR framework, provided that they are fully performing (i.e. no default expected). Level 1 and Level 2 securities maturing within 30 days should be included in the stock of liquid assets in panel A, provided that they meet all operational and definitional requirements outlined in the Basel III LCR standards.
Note:
Inflows from securities maturing within 30 days not included in the stock of HQLA are treated in the same category as inflows from financial institutions (i.e. 100% inflow). Banks may also recognize in this category inflows from the release of balances held in segregated accounts in accordance with regulatory requirements for the protection of customer trading assets, provided that these segregated balances are maintained in HQLA. This inflow should be calculated in line with the treatment of other related outflows and inflows covered in this standard.
155 317 Other contractual cash inflows Any other contractual cash inflows to be received ≤ 30 days that are not already included in any other item of the LCR framework. Inflow percentages should be determined as appropriate for each type of inflow by supervisors in each jurisdiction. Cash inflows related to non-financial revenues are not to be included, since they are not taken into account in the calculation of LCR. Any non-contractual contingent inflows should not be reported, as they are not included in the LCR. Please provide your supervisor with an explanatory note on any amounts included in this line. 160 Cap on cash inflows
In order to prevent banks from relying solely on anticipated inflows to meet their liquidity requirement, and also to ensure a minimum level of HQLA holdings, the amount of inflows that can offset outflows is capped at 75% of total expected cash outflows as calculated in the standard. This requires that a bank must maintain a minimum amount of stock of HQLA equal to 25% of the total net cash outflows (Basel III LCR standards, paragraph 144).
323 Cap on cash inflows The cap on cash inflows is equal to 75% of total cash outflows. 69, 144 324 Total cash inflows after applying the cap The amount of total cash inflows after applying the cap is the lower of the total cash inflows before applying the cap and the level of the cap.
This requires that a bank must maintain a minimum amount of stock of HQLA equal to 25% of the total cash outflows.
69, 144 6.1.4 Collateral swaps (panel C)
Any transaction maturing within 30 days in which non-cash assets are swapped for other noncash assets should be reported in this panel. “Level 1 assets” in this section refers to Level 1 assets other than cash. Please refer to the instructions from your supervisor for the specification of items related to Level 2B assets in this subsection.
329 Collateral swaps maturing ≤ 30 days Any transaction maturing within 30 days in which non-cash assets are swapped for other non-cash assets. 48, 113, 146, Annex 1 330 Of which the borrowed assets are not re-used (i.e. are not rehypothecated) to cover short positions Such transactions in which the collateral obtained is not reused (i.e. is not rehypothecated) in transactions to cover short positions.
If the collateral is re-used, the transaction should be reported in lines 405 to 429.
48, 113, 146, Annex 1 331 Level 1 assets are lent and Level 1 assets are borrowed; of which: Such transactions in which the bank has swapped Level 1 assets (lent) for other Level 1 assets (borrowed). 48, 113, 146, Annex 1 332 Involving eligible liquid assets Of the transactions where Level 1 assets are lent and Level 1 assets are borrowed, those where:
(i) the Level 1 collateral borrowed is reported in panel Aa of the “LCR” worksheet (which should also be reported in E332), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 1 collateral lent would otherwise qualify to be reported in panel Aa of the “LCR” worksheet (which is the value that should be reported in D332), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 334 Level 1 assets are lent and Level 2A assets are borrowed; of which: Such transactions in which the bank has swapped Level 1 assets (lent) for Level 2A assets (borrowed). 48, 113, 146, Annex 1 335 Involving eligible liquid assets Of the transactions where Level 1 assets are lent and Level 2A assets are borrowed, those where:
(i) the Level 2A collateral borrowed is reported in panel Ab of the “LCR” worksheet (which should also be reported in E335), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 1 collateral lent would otherwise qualify to be reported in panel Aa of the “LCR” worksheet (which is the value that should be reported in D335), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 337 Level 1 assets are lent and Level 2B RMBS assets are borrowed; of which: Such transactions in which the bank has swapped Level 1 assets (lent) for Level 2B RMBS assets (borrowed). 48, 113, 146, Annex 1 338 Involving eligible liquid assets Of the transactions where Level 1 assets are lent and Level 2B RMBS assets are borrowed, those where:
(i) the Level 2B RMBS collateral borrowed is reported in panel Ac of the “LCR” worksheet (which should also be reported in E338), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 1 collateral lent would otherwise qualify to be reported in panel Aa of the “LCR” worksheet (which is the value that should be reported in D338), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 340 Level 1 assets are lent and Level 2B non-RMBS assets are borrowed; of which: Such transactions in which the bank has swapped Level 1 assets (lent) for Level 2B non-RMBS assets (borrowed). 48, 113, 146, Annex 1 341 Involving eligible liquid assets Of the transactions where Level 1 assets are lent and Level 2B non-RMBS assets are borrowed, those where:
(i) the Level 2B non-RMBS collateral borrowed is reported in panel Ac of the “LCR” worksheet (which should also be reported in E341), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 1 collateral lent would otherwise qualify to be reported in panel Aa of the “LCR” worksheet (which is the value that should be reported in D341), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 343 Level 1 assets are lent and other assets are borrowed; of which: Such transactions in which the bank has swapped Level 1 assets (lent) for other assets than Level 1 or Level 2 assets (borrowed). 48, 113, 146, Annex 1 344 Involving eligible liquid assets Of the transactions where Level 1 assets are lent and other assets are borrowed, those where:
(i) the Level 1 collateral lent would otherwise qualify to be reported in panel Aa of the “LCR” worksheet (value to be reported in D344), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards); and
(ii) the collateral borrowed is non-Level 1 and non-Level 2 assets (which is the value that should be reported in E344).
48, 113, 146, Annex 1 346 Level 2A assets are lent and Level 1 assets are borrowed; of which: Such transactions in which the bank has swapped Level 2A assets (lent) for Level 1 assets (borrowed). 48, 113, 146, Annex 1 347 Involving eligible liquid assets Of the transactions where Level 2A assets are lent and Level 1 assets are borrowed, those where:
(i) the Level 1 collateral borrowed is reported in panel Aa of the “LCR” worksheet (which should also be reported in E347), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2A collateral lent would otherwise qualify to be reported in panel Ab of the “LCR” worksheet (which is the value that should be reported in D347), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 349 Level 2A assets are lent and Level 2A assets are borrowed; of which: Such transactions in which the bank has swapped Level 2A assets (lent) for other Level 2A assets (borrowed). 48, 113, 146, Annex 1 350 Involving eligible liquid assets Of the transactions where Level 2A assets are lent and Level 2A assets are borrowed, those where:
(i) the Level 2A collateral borrowed is reported in panel Ab of the “LCR” worksheet (which should also be reported in E350), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2A collateral lent would otherwise qualify to be reported in panel Ab of the “LCR” worksheet (which is the value that should be reported in D350), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 352 Level 2A assets are lent and Level 2B RMBS assets are borrowed; of which: Such transactions in which the bank has swapped Level 2A assets (lent) for Level 2B RMBS assets (borrowed). 48, 113, 146, Annex 1 353 Involving eligible liquid assets Of the transactions where Level 2A assets are lent and Level 2B RMBS assets are borrowed, those where:
(i) the Level 2B RMBS collateral borrowed is reported in panel Ac of the “LCR” worksheet (which should also be reported in E353), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2A collateral lent would otherwise qualify to be reported in panel Ab of the “LCR” worksheet (which is the value that should be reported in D353), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 355 Level 2A assets are lent and Level 2B non-RMBS assets are borrowed; of which: Such transactions in which the bank has swapped Level 2A assets (lent) for other Level 2B non-RMBS assets (borrowed). 48, 113, 146, Annex 1 356 Involving eligible liquid assets Of the transactions where Level 2A assets are lent and Level 2B non-RMBS assets are borrowed, those where:
(i) the Level 2B non-RMBS collateral borrowed is reported in panel Ac of the “LCR” worksheet (which should also be reported in E356), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2A collateral lent would otherwise qualify to be reported in panel Ab of the “LCR” worksheet (which is the value that should be reported in D356), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 358 Level 2A assets are lent and other assets are borrowed; of which: Such transactions in which the bank has swapped Level 2A assets (lent) for other assets than Level 1 or Level 2 assets (borrowed). 48, 113, 146, Annex 1 359 Involving eligible liquid assets Of the transactions where Level 2A assets are lent and other assets are borrowed, those where:
(i) the Level 2A collateral lent would otherwise qualify to be reported in panel Ab of the “LCR” worksheet (which is the value that should be reported in D359), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards); and
(ii) the collateral borrowed is non-Level 1 and non-Level 2 assets (which is the value that should be reported in E359).
48, 113, 146, Annex 1 361 Level 2B RMBS assets are lent and Level 1 assets are borrowed; of which: Such transactions in which the bank has swapped Level 2B RMBS assets (lent) for Level 1 assets (borrowed). 48, 113, 146, Annex 1 362 Involving eligible liquid assets Of the transactions where Level 2B RMBS assets are lent and Level 1 assets are borrowed, those where:
(i) the Level 1 collateral borrowed is reported in panel Aa of the “LCR” worksheet (which should also be reported in E362), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2B RMBS collateral lent would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (which is the value that should be reported in D362), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 364 Level 2B RMBS assets are lent and Level 2A assets are borrowed; of which: Such transactions in which the bank has swapped Level 2B RMBS assets (lent) for Level 2A assets (borrowed). 48, 113, 146, Annex 1 365 Involving eligible liquid assets Of the transactions where Level 2B RMBS assets are lent and Level 2A assets are borrowed, those where:
(i) the Level 2A collateral borrowed is reported in panel Ab of the “LCR” worksheet (which should also be reported in E365), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2B RMBS collateral lent would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (which is the value that should be reported in D365), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 367 Level 2B RMBS assets are lent and Level 2B RMBS assets are borrowed; of which: Such transactions in which the bank has swapped Level 2B RMBS assets (lent) for Level 2B RMBS assets (borrowed). 48, 113, 146, Annex 1 368 Involving eligible liquid assets Of the transactions where Level 2B RMBS assets are lent and Level 2B RMBS assets are borrowed, those where:
(i) the Level 2B RMBS collateral borrowed is reported in panel Ac of the “LCR” worksheet (which should also be reported in E368), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2B RMBS collateral lent would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (which is the value that should be reported in D368), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 370 Level 2B RMBS assets are lent and Level 2B non-RMBS assets are borrowed; of which: Such transactions in which the bank has swapped Level 2B RMBS assets (lent) for other Level 2B non-RMBS assets (borrowed). 48, 113, 146, Annex 1 371 Involving eligible liquid assets Of the transactions where Level 2B RMBS assets are lent and Level 2B non-RMBS assets are borrowed, those where:
(i) the Level 2B non-RMBS collateral borrowed is reported in panel Ac of the “LCR” worksheet (which should also be reported in E371), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2B RMBS collateral lent would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (which is the value that should be reported in D371), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 373 Level 2B RMBS assets are lent and other assets are borrowed; of which: Such transactions in which the bank has swapped Level 2B RMBS assets (lent) for other assets than Level 1 or Level 2 assets (borrowed). 48, 113, 146, Annex 1 374 Involving eligible liquid assets Of the transactions where Level 2B RMBS assets are lent and other assets are borrowed, those where:
(i) the Level 2B RMBS collateral lent would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (which is the value that should be reported in D374), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards); and
(ii) the collateral borrowed is non-Level 1 and non-Level 2 assets (which is the value that should be reported in E374).
48, 113, 146, Annex 1 376 Level 2B non-RMBS assets are lent and Level 1 assets are borrowed; of which: Such transactions in which the bank has swapped Level 2B non-RMBS assets (lent) for Level 1 assets (borrowed). 48, 113, 146, Annex 1 377 Involving eligible liquid assets Of the transactions where Level 2B non-RMBS assets are lent and Level 1 assets are borrowed, those where:
(i) the Level 1 collateral borrowed is reported in panel Aa of the “LCR” worksheet (which should also be reported in E377), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2B non-RMBS collateral lent would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (which is the value that should be reported in D377), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 379 Level 2B non-RMBS assets are lent and Level 2A assets are borrowed; of which: Such transactions in which the bank has swapped Level 2B non-RMBS assets (lent) for Level 2A assets (borrowed). 48, 113, 146, Annex 1 380 Involving eligible liquid assets Of the transactions where Level 2B non-RMBS assets are lent and Level 2A assets are borrowed, those where:
(i) the Level 2A collateral borrowed is reported in panel Ab of the “LCR” worksheet (which should also be reported in E380), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2B non-RMBS collateral lent would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (which is the value that should be reported in D380), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 382 Level 2B non-RMBS assets are lent and Level 2B RMBS assets are borrowed; of which: Such transactions in which the bank has swapped Level 2B non-RMBS assets (lent) for Level 2B RMBS assets (borrowed). 48, 113, 146, Annex 1 383 Involving eligible liquid assets Of the transactions where Level 2B non-RMBS assets are lent and RMBS assets are borrowed, those where:
(i) the RMBS collateral borrowed is reported in panel Ac of the “LCR” worksheet (which should also be reported in E383), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2B non-RMBS collateral lent would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (which is the value that should be reported in D383), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 385 Level 2B non-RMBS assets are lent and Level 2B non-RMBS assets are borrowed; of which: Such transactions in which the bank has swapped Level 2B non-RMBS assets (lent) for other Level 2B non-RMBS assets (borrowed). 48, 113, 146, Annex 1 386 Involving eligible liquid assets Of the transactions where Level 2B non-RMBS assets are lent and Level 2B non-RMBS assets are borrowed, those where:
(i) the Level 2B non-RMBS collateral borrowed is reported in panel Ac of the “LCR” worksheet (which should also be reported in E386), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the Level 2B non-RMBS collateral lent would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (which is the value that should be reported in D386), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards).
48, 113, 146, Annex 1 388 Level 2B non-RMBS assets are lent and other assets are borrowed; of which: Such transactions in which the bank has swapped Level 2B non-RMBS assets (lent) for other assets than Level 1 or Level 2 assets (borrowed). 48, 113, 146, Annex 1 389 Involving eligible liquid assets Of the transactions where Level 2B non-RMBS assets are lent and other assets are borrowed, those where:
(i) the Level 2B non-RMBS collateral lent would otherwise qualify to be reported in panel Ac of the “LCR” worksheet (which is the value that should be reported in D389), if they were not already securing the particular transaction in question (i.e. would be unencumbered and would meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards); and
(ii) the collateral borrowed is non-Level 1 and non-Level 2 assets (which is the value that should be reported in E389).
48, 113, 146, Annex 1 391 Other assets are lent and Level 1 assets are borrowed; of which: Such transactions in which the bank has swapped other assets than Level 1 or Level 2 assets (lent) for Level 1 assets (borrowed). 48, 113, 146, Annex 1 392 Involving eligible liquid assets Of the transactions where other assets are lent and Level 1 assets are borrowed, those where:
(i) the Level 1 collateral borrowed is reported in panel Aa of the “LCR” worksheet (which should also be reported in E392), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the collateral lent is non-Level 1 and non-Level 2 assets (which is the value that should be reported in D392).
48, 113, 146, Annex 1 394 Other assets are lent and Level 2A assets are borrowed; of which: Such transactions in which the bank has swapped other assets than Level 1 or Level 2 assets (lent) for Level 2A assets (borrowed). 48, 113, 146, Annex 1 395 Involving eligible liquid assets Of the transactions where other assets are lent and Level 2A assets are borrowed, those where:
(i) the Level 2A collateral borrowed is reported in panel Ab of the “LCR” worksheet (which should also be reported in E395), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the collateral lent is non-Level 1 and non-Level 2 assets (which is the value that should be reported in D395).
48, 113, 146, Annex 1 397 Other assets are lent and Level 2B RMBS assets are borrowed; of which: Such transactions in which the bank has swapped other assets than Level 1 or Level 2 assets (lent) for Level 2B RMBS assets (borrowed). 48, 113, 146, Annex 1 398 Involving eligible liquid assets Of the transactions where other assets are lent and Level 2B RMBS assets are borrowed, those where:
(i) the Level 2B RMBS collateral borrowed is reported in panel Ac of the “LCR” worksheet (which should also be reported in E398), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the collateral lent is non-Level 1 and non-Level 2 assets (which is the value that should be reported in D398).
48, 113, 146, Annex 1 400 Other assets are lent and Level 2B non-RMBS assets are borrowed; of which: Such transactions in which the bank has swapped other assets than Level 1 or Level 2 assets (lent) for Level 2B non-RMBS assets (borrowed). 48, 113, 146, Annex 1 401 Involving eligible liquid assets Of the transactions where other assets are lent and Level 2B non-RMBS assets are borrowed, those where:
(i) the Level 2B non-RMBS collateral borrowed is reported in panel Ac of the “LCR” worksheet (which should also be reported in E401), as the assets meet the operational requirements for HQLA as specified in paragraphs 28 to 40 of the Basel III LCR standards; and
(ii) the collateral lent is non-Level 1 and non-Level 2 assets (which is the value that should be reported in D401).
48, 113, 146, Annex 1 403 Other assets are lent and other assets are borrowed Such transactions in which the bank has swapped other assets than Level 1 or Level 2 assets (lent) for other assets than Level 1 or Level 2 assets (borrowed). 48, 113, 146, Annex 1 404 Of which the borrowed assets are re-used (i.e. are rehypothecated) in transactions to cover short positions If the collateral obtained in these transactions is re-used (i.e. rehypothecated) to cover short positions that could be extended beyond 30 days, it should be assumed that the transactions will be rolled-over and will not give rise to any cash inflows. This reflects the need to continue to cover the short position or to repurchase the relevant securities.
If the collateral is not re-used, the transaction should be reported in lines 331 to 403.
48, 113, 146, Annex 1 405 level 1 assets are lent and Level 1 assets are borrowed Such transactions in which the bank has swapped Level 1 assets (lent) for other Level 1 assets (borrowed). 48, 113, 146, Annex 1 406 Level 1 assets are lent and Level 2A assets are borrowed Such transactions in which the bank has swapped Level 1 assets (lent) for Level 2A assets (borrowed). 48, 113, 146, Annex 1 407 Level 1 assets are lent and Level 2B RMBS assets are borrowed Such transactions in which the bank has swapped Level 1 assets (lent) for Level 2B RMBS assets (borrowed). 48, 113, 146, Annex 1 408 Level 1 assets are lent and Level 2B non-RMBS assets are borrowed Such transactions in which the bank has swapped Level 1 assets (lent) for Level 2B non-RMBS assets (borrowed). 48, 113, 146, Annex 1 409 Level 1 assets are lent and other assets are borrowed Such transactions in which the bank has swapped Level 1 assets (lent) for other assets than Level 1 or Level 2 assets (borrowed). 48, 113, 146, Annex 1 410 Level 2A assets are lent and Level 1 assets are borrowed Such transactions in which the bank has swapped Level 2A assets (lent) for Level 1 assets (borrowed). 48, 113, 146, Annex 1 411 Level 2A assets are lent and Level 2A assets are borrowed Such transactions in which the bank has swapped Level 2A assets (lent) for other Level 2A assets (borrowed). 48, 113, 146, Annex 1 412 Level 2A assets are lent and Level 2B RMBS assets are borrowed Such transactions in which the bank has swapped Level 2A assets (lent) for Level 2B RMBS assets (borrowed). 48, 113, 146, Annex 1 413 Level 2A assets are lent and Level 2B non-RMBS assets are borrowed Such transactions in which the bank has swapped Level 2A assets (lent) for Level 2B non-RMBS assets (borrowed). 48, 113, 146, Annex 1 414 Level 2A assets are lent and other assets are borrowed Such transactions in which the bank has swapped Level 2A assets (lent) for other assets than Level 1 or Level 2 assets (borrowed). 48, 113, 146, Annex 1 415 Level 2B RMBS assets are lent and Level 1 assets are borrowed Such transactions in which the bank has swapped Level 2B RMBS assets (lent) for Level 1 assets (borrowed). 48, 113, 146, Annex 1 416 Level 2B RMBS assets are lent and Level 2A assets are borrowed Such transactions in which the bank has swapped Level 2B RMBS assets (lent) for Level 2A assets (borrowed). 48, 113, 146, Annex 1 417 Level 2B RMBS assets are lent and Level 2B RMBS assets are borrowed Such transactions in which the bank has swapped Level 2B RMBS assets (lent) for other Level 2B RMBS assets (borrowed). 48, 113, 146, Annex 1 418 Level 2B RMBS assets are lent and Level 2B non-RMBS assets are borrowed Such transactions in which the bank has swapped Level 2B RMBS assets (lent) for Level 2B non-RMBS assets (borrowed). 48, 113, 146, Annex 1 419 Level 2B RMBS assets are lent and other assets are borrowed Such transactions in which the bank has swapped Level 2B RMBS assets (lent) for other assets than Level 1 or Level 2 assets (borrowed). 48, 113, 146, Annex 1 420 Level 2B non-RMBS assets are lent and Level 1 assets are borrowed Such transactions in which the bank has swapped Level 2B non-RMBS assets (lent) for Level 1 assets (borrowed). 48, 113, 146, Annex 1 421 Level 2B non-RMBS assets are lent and Level 2A assets are borrowed Such transactions in which the bank has swapped Level 2B non-RMBS assets (lent) for Level 2A assets (borrowed). 48, 113, 146, Annex 1 422 Level 2B non-RMBS assets are lent and Level 2B RMBS assets are borrowed Such transactions in which the bank has swapped Level 2B non-RMBS assets (lent) for Level 2B RMBS assets (borrowed). 48, 113, 146, Annex 1 423 Level 2B non-RMBS assets are lent and Level 2B non-RMBS assets are borrowed Such transactions in which the bank has swapped Level 2B non-RMBS assets (lent) for other Level 2B non-RMBS assets (borrowed). 48, 113, 146, Annex 1 424 Level 2B non-RMBS assets are lent and other assets are borrowed Such transactions in which the bank has swapped Level 2B non-RMBS assets (lent) for other assets than Level 1 or Level 2 assets (borrowed). 48, 113, 146, Annex 1 425 Other assets are lent and Level 1 assets are borrowed Such transactions in which the bank has swapped other assets than Level 1 or Level 2 assets (lent) for Level 1 assets (borrowed). 48, 113, 146, Annex 1 426 Other assets are lent and Level 2A assets are borrowed Such transactions in which the bank has swapped other assets than Level 1 or Level 2 assets (lent) for Level 2A assets (borrowed). 48, 113, 146, Annex 1 427 Other assets are lent and Level 2B RMBS assets are borrowed Such transactions in which the bank has swapped other assets than Level 1 or Level 2 assets (lent) for Level 2B RMBS assets (borrowed). 48, 113, 146, Annex 1 428 Other assets are lent and Level 2B non-RMBS assets are borrowed Such transactions in which the bank has swapped other assets than Level 1 or Level 2 assets (lent) for Level 2B non-RMBS assets (borrowed). 48, 113, 146, Annex 1 429 Other assets are lent and other assets are borrowed Such transactions in which the bank has swapped other assets than Level 1 or Level 2 assets (lent) for other assets than Level 1 or Level 2 assets (borrowed). 48, 113, 146, Annex 1 III. Application issues for the LCR – SAMA’s General Guidance, Attachment 2 A161. This section outlines a number of issues related to the application of the LCR. These issues include the frequency with which banks calculate and report the LCR, the scope of application of the LCR (whether they apply at group or entity level and to foreign bank branches) and the aggregation of currencies within the LCR.
A. Frequency of calculation and reporting162. The LCR should be used on an ongoing basis to help monitor and control liquidity risk. The LCR should be reported to supervisors at least monthly, with the operational capacity to increase the frequency to weekly or even daily in stressed situations at the discretion of the supervisor. The time lag in reporting should be as short as feasible and ideally should not surpass two weeks.
163. Banks are expected to inform supervisors of their LCR and their liquidity profile on an ongoing basis. Banks should also notify supervisors immediately if their LCR has fallen, or is expected to fall, below 100%.
B. Scope of application164. *The application of the requirements in this document follow the existing scope of application set out in Part I (Scope of Application) of the Basel II Framework.( See BCBS, International Convergence of Capital Measurement and Capital Standards: A Revised Framework - Comprehensive Version, June 2006 (“Basel II Framework”). The LCR standard and monitoring tools should be applied to all internationally active banks on a consolidated basis, but may be used for other banks and on any subset of entities of internationally active banks as well to ensure greater consistency and a level playing field between domestic and cross-border banks. The LCR standard and monitoring tools should be applied consistently wherever they are applied.
*Please refer to SAMA Circular 440471440000, Basel III Reforms, Scope of Application.
Note: SAMA requires the LCR standards to apply to all commercial banks/ regulated entities in KSA, with the exception of foreign bank branches
165. SAMA shall determine which investments in banking, securities and financial entities of a banking group that are not consolidated per paragraph 164 should be considered significant, taking into account the liquidity impact of such investments on the group under the LCR standard. Normally, a non-controlling investment (e.g. a joint-venture or minority-owned entity) can be regarded as significant if the banking group will be the main liquidity provider of such investment in times of stress (for example, when the other shareholders are non-banks or where the bank is operationally involved in the day-to-day management and monitoring of the entity’s liquidity risk). SAMA will agree with each relevant bank on a case-by-case basis on an appropriate methodology for how to quantify such potential liquidity draws, in particular, those arising from the need to support the investment in times of stress out of reputational concerns for the purpose of calculating the LCR standard. To the extent that such liquidity draws are not included elsewhere, they should be treated under “Other contingent funding obligations”, as described in paragraph 137.
Note: SAMA would consider on a case by case basis if significant investment in an insurance entity would warrant its inclusion in the LCR Ratio.
166. Regardless of the scope of application of the LCR, in keeping with Principle 6 as outlined in the Sound Principles, a bank should actively monitor and control liquidity risk exposures and funding needs at the level of individual legal entities, foreign branches and subsidiaries, and the group as a whole, taking into account legal, regulatory and operational limitations to the transferability of liquidity.
167. To ensure consistency in applying the consolidated LCR across jurisdictions, further information is provided below on two application issues.
1. Differences in home / host liquidity requirements
168. While most of the parameters in the LCR are internationally “harmonized”, national differences in liquidity treatment may occur in those items subject to national discretion (e.g. deposit run-off rates, contingent funding obligations, market valuation changes on derivative transactions, etc.) and where more stringent parameters are adopted by some supervisors.
169. When calculating the LCR on a consolidated basis, a cross-border banking group should apply the liquidity parameters adopted in the home jurisdiction to all legal entities being consolidated except for the treatment of retail / small business deposits that should follow the relevant parameters adopted in host jurisdictions in which the entities (branch or subsidiary) operate. This approach will enable the stressed liquidity needs of legal entities of the group (including branches of those entities) operating in host jurisdictions to be more suitably reflected, given that deposit run-off rates in host jurisdictions are more influenced by jurisdiction specific factors such as the type and effectiveness of deposit insurance schemes in place and the behavior of local depositors.
170. Home requirements for retail and small business deposits should apply to the relevant legal entities (including branches of those entities) operating in host jurisdictions if: (i) there are no host requirements for retail and small business deposits in the particular jurisdictions; (ii) those entities operate in host jurisdictions that have not implemented the LCR; or (iii) the home supervisor decides that home requirements should be used that are stricter than the host requirements.
Note: With reference to paragraphs 168-170, above, SAMA may at its discretion require more stringent measures for deposit run-off rates, contingent funding obligations, market valuation changes on derivative transactions, etc. if considered necessary in future.
2. Treatment of liquidity transfer restrictions
171. As noted in paragraph 36, as a general principle, no excess liquidity should be recognized by a cross-border banking group in its consolidated LCR if there is reasonable doubt about the availability of such liquidity. Liquidity transfer restrictions (e.g. ring-fencing measures, non-convertibility of local currency, foreign exchange controls, etc.) in jurisdictions in which a banking group operates will affect the availability of liquidity by inhibiting the transfer of HQLA and fund flows within the group. The consolidated LCR should reflect such restrictions in a manner consistent with paragraph 36. For example, the eligible HQLA that are held by a legal entity being consolidated to meet its local LCR requirements (where applicable) can be included in the consolidated LCR to the extent that such HQLA are used to cover the total net cash outflows of that entity, notwithstanding that the assets are subject to liquidity transfer restrictions. If the HQLA held in excess of the total net cash outflows are not transferable, such surplus liquidity should be excluded from the standard.
172. For practical reasons, the liquidity transfer restrictions to be accounted for in the consolidated ratio are confined to existing restrictions imposed under applicable laws, regulations and supervisory requirements. (There are a number of factors that can impede cross-border liquidity flows of a banking group, many of which are beyond the control of the group and some of these restrictions may not be clearly incorporated into law or may become visible only in times of stress.) A banking group should have processes in place to capture all liquidity transfer restrictions to the extent practicable, and to monitor the rules and regulations in the jurisdictions in which the group operates and assess their liquidity implications for the group as a whole.
Note: as per SAMA circular No. (361000126260), SAMA has issued a circular dated 8 July 2015 regarding a change in repo facility for level 1 HQLA assets from 75% to 100%. This means that Banks in the KSA can now access liquidity from SAMA for up to 100 % of their investment in Saudi Government Bonds and SAMA Bills. SAMA is aware that Saudi banks with overseas branches and subsidiaries have to meet LCR requirements of their host jurisdictions. However, these requirements concerning haircuts on level 1 HQLA or related repo facility may not be totally in sync with SAMA requirements. Consequently, in view of the scope of application of paragraphs 164 to 172, SAMA would like Saudi banks to apply the more conservative treatment of the rules of SAMA or host jurisdiction for level 1 HQLA and its repo facility for the purpose of consolidated LCR calculation.
C. Currencies
173. As outlined in paragraph 42, while the LCR is expected to be met on a consolidated basis and reported in a common currency, supervisors and banks should also be aware of the liquidity needs in each significant currency. As indicated in the LCR, the currencies of the stock of HQLA should be similar in composition to the operational needs of the bank. Banks and supervisors cannot assume that currencies will remain transferable and convertible in a stress period, even for currencies that in normal times are freely transferable and highly convertible.
(Refer to Paragraph 161-173 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Part 2: Monitoring tools – SAMA’s General Guidance, Attachment 2 B174. In addition to the LCR outlined in Part 1 to be used as a standard, this section outlines metrics to be used as consistent monitoring tools. These metrics capture specific information related to a bank’s cash flows, balance sheet structure, available unencumbered collateral and certain market indicators.
175. These metrics, together with the LCR standard, provide the cornerstone of information that aid supervisors in assessing the liquidity risk of a bank. In addition, supervisors may need to supplement this framework by using additional tools and metrics tailored to help capture elements of liquidity risk specific to their jurisdictions. In utilizing these metrics, supervisors should take action when potential liquidity difficulties are signaled through a negative trend in the metrics, or when a deteriorating liquidity position is identified, or when the absolute result of the metric identifies a current or potential liquidity problem. Examples of actions that supervisors can take are outlined in the Committee’s Sound Principles (paragraphs 141-143).
176. The metrics discussed in this section include the following:
I. Contractual maturity mismatch;
II. Concentration of funding;
III. Available unencumbered assets;
IV. LCR by significant currency; and
V. Market-related monitoring tools
I. Contractual maturity mismatchA. Objective
177. The contractual maturity mismatch profile identifies the gaps between the contractual inflows and outflows of liquidity for defined time bands. These maturity gaps indicate how much liquidity a bank would potentially need to raise in each of these time bands if all outflows occurred at the earliest possible date. This metric provides insight into the extent to which the bank relies on maturity transformation under its current contracts.
B. Definition and practical application of the metricContractual cash and security inflows and outflows from all on- and off-balance sheet items, mapped to defined time bands based on their respective maturities.
178. A bank should report contractual cash and security flows in the relevant time bands based on their residual contractual maturity. Supervisors in each jurisdiction will determine the specific template, including required time bands, by which data must be reported. Supervisors should define the time buckets so as to be able to understand the bank’s cash flow position. Possibilities include requesting the cash flow mismatch to be constructed for the overnight, 7 day, 14 day, 1, 2, 3, 6 and 9 months, 1, 2, 3, 5 and beyond 5 years buckets. Instruments that have no specific maturity (non-defined or open maturity) should be reported separately, with details on the instruments, and with no assumptions applied as to when maturity occurs. Information on possible cash flows arising from derivatives such as interest rate swaps and options should also be included to the extent that their contractual maturities are relevant to the understanding of the cash flows.
179. At a minimum, the data collected from the contractual maturity mismatch should provide data on the categories outlined in the LCR. Some additional accounting (non-dated) information such as capital or non-performing loans may need to be reported separately.
1. Contractual cash flow assumptions
180. No rollover of existing liabilities is assumed to take place. For assets, the bank is assumed not to enter into any new contracts.
181. Contingent liability exposures that would require a change in the state of the world (such as contracts with triggers based on a change in prices of financial instruments or a downgrade in the bank's credit rating) need to be detailed, grouped by what would trigger the liability, with the respective exposures clearly identified.
182. A bank should record all securities flows. This will allow supervisors to monitor securities movements that mirror corresponding cash flows as well as the contractual maturity of collateral swaps and any uncollateralized stock lending/borrowing where stock movements occur without any corresponding cash flows.
183. A bank should report separately the customer collateral received that the bank is permitted to rehypothecate as well as the amount of such collateral that is rehypothecated at each reporting date. This also will highlight instances when the bank is generating mismatches in the borrowing and lending of customer collateral.
C. Utilization of the metric184. Banks will provide the raw data to the supervisors, with no assumptions included in the data. Standardized contractual data submission by banks enables supervisors to build a market-wide view and identify market outlier’s vis-à-vis liquidity.
185. Given that the metric is based solely on contractual maturities with no behavioral assumptions, the data will not reflect actual future forecasted flows under the current, or future, strategy or plans, i.e., under a going-concern view. Also, contractual maturity mismatches do not capture outflows that a bank may make in order to protect its franchise, even where contractually there is no obligation to do so. For analysis, supervisors can apply their own assumptions to reflect alternative behavioral responses in reviewing maturity gaps.
186. As outlined in the Sound Principles, banks should also conduct their own maturity mismatch analyses, based on going-concern behavioral assumptions of the inflows and outflows of funds in both normal situations and under stress. These analyses should be based on strategic and business plans and should be shared and discussed with supervisors, and the data provided in the contractual maturity mismatch should be utilized as a basis of comparison. When firms are contemplating material changes to their business models, it is crucial for supervisors to request projected mismatch reports as part of an assessment of impact of such changes to prudential supervision. Examples of such changes include potential major acquisitions or mergers or the launch of new products that have not yet been contractually entered into. In assessing such data supervisors need to be mindful of assumptions underpinning the projected mismatches and whether they are prudent.
187. A bank should be able to indicate how it plans to bridge any identified gaps in its internally generated maturity mismatches and explain why the assumptions applied differ from the contractual terms. The supervisor should challenge these explanations and assess the feasibility of the bank’s funding plans.
II. Concentration of fundingA. Objective188. This metric is meant to identify those sources of wholesale funding that are of such significance that withdrawal of this funding could trigger liquidity problems. The metric thus encourages the diversification of funding sources recommended in the Committee’s Sound Principles.
B. Definition and practical application of the metricA. Funding liabilities sourced from each significant counterparty as a % of total liabilities
B. Funding liabilities sourced from each significant product/instrument as a % of total liabilities
C. List of asset and liability amounts by significant currency
1. Calculation of the metric189. The numerator for A and B is determined by examining funding concentrations by counterparty or type of instrument/product. Banks and supervisors should monitor both the absolute percentage of the funding exposure, as well as significant increases in concentrations.
(i) Significant counterparties190. The numerator for counterparties is calculated by aggregating the total of all types of liabilities to a single counterparty or group of connected or affiliated counterparties, as well as all other direct borrowings, both secured and unsecured, which the bank can determine arise from the same counterparty58 (such as for overnight commercial paper / certificate of deposit (CP/CD) funding).
191. A “significant counterparty” is defined as a single counterparty or group of connected or affiliated counterparties accounting in aggregate for more than 1% of the bank's total balance sheet, although in some cases there may be other defining characteristics based on the funding profile of the bank. A group of connected counterparties is, in this context, defined in the same way as in the “Large Exposure” regulation of the host country in the case of consolidated reporting for solvency purposes. Intra-group deposits and deposits from related parties should be identified specifically under this metric, regardless of whether the metric is being calculated at a legal entity or group level, due to the potential limitations to intra-group transactions in stressed conditions.
(ii) Significant instruments / products192. The numerator for type of instrument/product should be calculated for each individually significant funding instrument/product, as well as by calculating groups of similar types of instruments/products.
193. A “significant instrument/product” is defined as a single instrument/product or group of similar instruments/products that in aggregate amount to more than 1% of the bank's total balance sheet.
(iii) Significant currencies194. In order to capture the amount of structural currency mismatch in a bank’s assets and liabilities, banks are required to provide a list of the amount of assets and liabilities in each significant currency.
195. A currency is considered “significant” if the aggregate liabilities denominated in that currency amount to 5% or more of the bank's total liabilities.
(iv) Time buckets196. The above metrics should be reported separately for the time horizons of less than one month, 1-3 months, 3-6 months, 6-12 months, and for longer than 12 months.
C. Utilization of the metric197. In utilizing this metric to determine the extent of funding concentration to a certain counterparty, both the bank and supervisors must recognize that currently it is not possible to identify the actual funding counterparty for many types of debt.59 The actual concentration of funding sources, therefore, could likely be higher than this metric indicates. The list of significant counterparties could change frequently, particularly during a crisis. Supervisors should consider the potential for herding behavior on the part of funding counterparties in the case of an institution-specific problem. In addition, under market-wide stress, multiple funding counterparties and the bank itself may experience concurrent liquidity pressures, making it difficult to sustain funding, even if sources appear well diversified.
198. In interpreting this metric, one must recognize that the existence of bilateral funding transactions may affect the strength of commercial ties and the amount of the net outflow.60
199. These metrics do not indicate how difficult it would be to replace funding from any given source.
200. To capture potential foreign exchange risks, the comparison of the amount of assets and liabilities by currency will provide supervisors with a baseline for discussions with the banks about how they manage any currency mismatches through swaps, forwards, etc. It is meant to provide a base for further discussions with the bank rather than to provide a snapshot view of the potential risk.
III. Available unencumbered assetsA. Objective201. These metrics provide supervisors with data on the quantity and key characteristics, including currency denomination and location, of banks’ available unencumbered assets. These assets have the potential to be used as collateral to raise additional HQLA or secured funding in secondary markets or are eligible at central banks and as such may potentially be additional sources of liquidity for the bank.
B. Definition and practical application of the metricAvailable unencumbered assets that are marketable as collateral in secondary markets and Available unencumbered assets that are eligible for central banks’ standing facilities202. A bank is to report the amount, type and location of available unencumbered assets that could serve as collateral for secured borrowing in secondary markets at prearranged or current haircuts at reasonable costs.
203. Likewise, a bank should report the amount, type and location of available unencumbered assets that are eligible for secured financing with relevant central banks at prearranged (if available) or current haircuts at reasonable costs, for standing facilities only (i.e. excluding emergency assistance arrangements). This would include collateral that has already been accepted at the central bank but remains unused. For assets to be counted in this metric, the bank must have already put in place the operational procedures that would be needed to monetize the collateral.
204. A bank should report separately the customer collateral received that the bank is permitted to deliver or re-pledge, as well as the part of such collateral that it is delivering or re-pledging at each reporting date.
205. In addition to providing the total amounts available, a bank should report these items categorized by significant currency. A currency is considered “significant” if the aggregate stock of available unencumbered collateral denominated in that currency amounts 5% or more of the associated total amount of available unencumbered collateral (for secondary markets or central banks).
206. In addition, a bank must report the estimated haircut that the secondary market or relevant central bank would require for each asset. In the case of the latter, a bank would be expected to reference, under business as usual, the haircut required by the central bank that it would normally access (which likely involves matching funding currency – e.g. ECB for eurodenominated funding, Bank of Japan for yen funding, etc.).
207. As a second step after reporting the relevant haircuts, a bank should report the expected monetized value of the collateral (rather than the notional amount) and where the assets are actually held, in terms of the location of the assets and what business lines have access to those assets
C. Utilization of the metric208. These metrics are useful for examining the potential for a bank to generate an additional source of HQLA or secured funding. They will provide a standardized measure of the extent to which the LCR can be quickly replenished after a liquidity shock either via raising funds in private markets or utilizing central bank standing facilities. The metrics do not, however, capture potential changes in counterparties’ haircuts and lending policies that could occur under either a systemic or idiosyncratic event and could provide false comfort that the estimated monetized value of available unencumbered collateral is greater than it would be when it is most needed. Supervisors should keep in mind that these metrics do not compare available unencumbered assets to the amount of outstanding secured funding or any other balance sheet scaling factor. To gain a more complete picture, the information generated by these metrics should be complemented with the maturity mismatch metric and other balance sheet data
IV. LCR by significant currencyA. Objective209. While the LCR is required to be met in one single currency, in order to better capture potential currency mismatches, banks and supervisors should also monitor the LCR in significant currencies. This will allow the bank and the supervisor to track potential currency mismatch issues that could arise.
B. Definition and practical application of the metricForeign Currency LCR =
Stock of HQLA in each significant currency / Total net cash outflows over a 30-day time period in each significant currency
(Note: Amount of total net foreign exchange cash outflows should be net of foreign exchange hedges)
210. The definition of the stock of high-quality foreign exchange assets and total net foreign exchange cash outflows should mirror those of the LCR for common currencies.61
211. A currency is considered “significant” if the aggregate liabilities denominated in that currency amount to 5% or more of the bank's total liabilities.
212. As the foreign currency LCR is not a standard but a monitoring tool, it does not have an internationally defined minimum required threshold. Nonetheless, supervisors in each jurisdiction could set minimum monitoring ratios for the foreign exchange LCR, below which a supervisor should be alerted. In this case, the ratio at which supervisors should be alerted would depend on the stress assumption. Supervisors should evaluate banks’ ability to raise funds in foreign currency markets and the ability to transfer a liquidity surplus from one currency to another and across jurisdictions and legal entities. Therefore, the ratio should be higher for currencies in which the supervisors evaluate a bank’s ability to raise funds in foreign currency markets or the ability to transfer a liquidity surplus from one currency to another and across jurisdictions and legal entities to be limited.
C. Utilization of the metric213. This metric is meant to allow the bank and supervisor to track potential currency mismatch issues that could arise in a time of stress.
V Market-related monitoring toolsA. Objective214. High frequency market data with little or no time lag can be used as early warning indicators in monitoring potential liquidity difficulties at banks.
B. Definition and practical application of the metric215. While there are many types of data available in the market, supervisors can monitor data at the following levels to focus on potential liquidity difficulties:
1. Market-wide information
2. Information on the financial sector
3. Bank-specific information
1. Market-wide information216. Supervisors can monitor information both on the absolute level and direction of major markets and consider their potential impact on the financial sector and the specific bank. Market-wide information is also crucial when evaluating assumptions behind a bank’s funding plan.
217. Valuable market information to monitor includes, but is not limited to, equity prices (i.e. overall stock markets and sub-indices in various jurisdictions relevant to the activities of the supervised banks), debt markets (money markets, medium-term notes, long term debt, derivatives, government bond markets, credit default spread indices, etc.); foreign exchange markets, commodities markets, and indices related to specific products, such as for certain securitized products (e.g. the ABX).
2. Information on the financial sector218. To track whether the financial sector as a whole is mirroring broader market movements or is experiencing difficulties, information to be monitored includes equity and debt market information for the financial sector broadly and for specific subsets of the financial sector, including indices.
3. Bank-specific information219. To monitor whether the market is losing confidence in a particular institution or has identified risks at an institution, it is useful to collect information on equity prices, CDS spreads, money-market trading prices, the situation of roll-overs and prices for various lengths of funding, the price/yield of bank debenture or subordinated debt in the secondary market.
C. Utilization of the metric/data
220. Information such as equity prices and credit spreads are readily available. However, the accurate interpretation of such information is important. For instance, the same CDS spread in numerical terms may not necessarily imply the same risk across markets due to market-specific conditions such as low market liquidity. Also, when considering the liquidity impact of changes in certain data points, the reaction of other market participants to such information can be different, as various liquidity providers may emphasize different types of data.
(Refer to Paragraphs 174 to 220 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Annex 1 – SAMA’s General Guidance 2CCalculation of the cap on Level 2 assets with regard to short-term securities financing transactions1. This annex seeks to clarify the appropriate method for the calculation of the cap on Level 2 (including Level 2B) assets with regard to short-term securities financing transactions.
2. As stated in paragraph 36, the calculation of the 40% cap on Level 2 assets should take into account the impact on the stock of HQLA of the amounts of Level 1 and Level 2 assets involved in secured funding, (See definition in paragraph 112 of BCBS LCR documentation, 2013) secured lending (See definition in paragraph 145 of BCBS LCR documentation, 2013) and collateral swap transactions maturing within 30 calendar days. The maximum amount of adjusted Level 2 assets in the stock of HQLA is equal to two-thirds of the adjusted amount of Level 1 assets after haircuts have been applied. The calculation of the 40% cap on Level 2 assets will take into account any reduction in eligible Level 2B assets on account of the 15% cap on Level 2B assets. (When determining the calculation of the 15% and 40% caps, supervisors may, as an additional requirement, separately consider the size of the pool of Level 2 and Level 2B assets on an unadjusted basis.)
3. Further, the calculation of the 15% cap on Level 2B assets should take into account the impact on the stock of HQLA of the amounts of HQLA assets involved in secured funding, secured lending and collateral swap transactions maturing within 30 calendar days. The maximum amount of adjusted Level 2B assets in the stock of HQLA is equal to 15/85 of the sum of the adjusted amounts of Level 1 and Level 2 assets, or, in cases where the 40% cap is binding, up to a maximum of 1/4 of the adjusted amount of Level 1 assets, both after haircuts have been applied.
4. The adjusted amount of Level 1 assets is defined as the amount of Level 1 assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 1 assets (including cash) that meet, or would meet if held unencumbered, the operational requirements for HQLA set out in paragraphs 28 to 40. The adjusted amount of Level 2A assets is defined as the amount of Level 2A assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 2A assets that meet, or would meet if held unencumbered, the operational requirements for HQLA set out in paragraphs 28 to 40. The adjusted amount of Level 2B assets is defined as the amount of Level 2B assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 2B assets that meet, or would meet if held unencumbered, the operational requirements for HQLA set out in paragraphs 28 to 40. In this context, short-term transactions are transactions with a maturity date up to and including 30 calendar days. Relevant haircuts would be applied prior to calculation of the respective caps.
5. The formula for the calculation of the stock of HQLA is as follows:
Stock of HQLA = Level 1 + Level 2A + Level 2B – Adjustment for 15% cap – Adjustment for 40% cap
Where:
Adjustment for 15% cap = Max (Adjusted Level 2B – 15/85*(Adjusted Level 1 + Adjusted Level 2A), Adjusted Level 2B - 15/60*Adjusted Level 1, 0)
Adjustment for 40% cap = Max ((Adjusted Level 2A + Adjusted Level 2B – Adjustment for 15% cap) - 2/3*Adjusted Level 1 assets, 0)
6. Alternatively, the formula can be expressed as:
Stock of HQLA = Level 1 + Level 2A + Level 2B – Max ((Adjusted Level 2A+Adjusted Level 2B) – 2/3*Adjusted Level 1, Adjusted Level 2B – 15/85*(Adjusted Level 1 + Adjusted Level 2A), 0)
Note: Currently, SAMA does not allow the recognition of Level 2B Assets for the purpose of computing the Liquidity Coverage Ratio
(Refer to Annex 1 of Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools – Jan 2013)
Package of Prudential Return Concerning Amended LCR
This section has been updated by section 28 "Liquidity" under Pillar 3 Disclosure Requirements Framework, issued by SAMA circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G.SAMA's Comments Concerning Amended LCR - FAQs
Comment # 1
Coins and Bank Notes – Level 1 Assets (para 50 a) – treatment of reverse repos and current accounts with SAMA
We note that in Level 1 assets the term “Cash” under previous liquidity standards has been revised to “Coins and Bank Notes”. Kindly confirm if current account with SAMA and reverse repo placements can continue to be classified in this category. Kindly advise.
Response: Yes. Bank reverse repo placements and Bank current account with SAMA are to be classified as Level-1 Assets. (Para 50 B) (Footnote 12)
Comment # 2
Non-inclusion of Sovereign exposures (rated BBB+ to BBB-) – Level 2B1 Assets (para 54 (b))
The newly defined Level 2B assets include Corporate Debt Securities which have an external rating between A+ to BBB-. However it does not include Sovereign Debt.
Under the existing rules Sovereign Debt are only eligible for inclusion in High Quality Liquid Assets (Level 1 and Level 2) if their risk weights are 0% (corresponding to external rating better than AA-) or 20% (corresponding to external rating better than A-).
We recommend that in the revised rules since lower rated corporate debt is included as Level 2B assets, Sovereign Debt with external rating between BBB+ to BBB- should also be considered for inclusion in Level 2B assets.
Response: Revised BCBS rules as provided are final with regard to amended LCR. Currently, this is not allowed.
Comment # 32
Common Equity Shares – Level 2B Assets (para 54 (c))2
Kindly confirm our understanding that all shares other than those issued by financial institutions which are traded on the Saudi Stock Exchange would meet the eligibility criteria given in para 54 (c).
Response: Yes. Shares issued in KSA exclusive of those issued by Financial Institutions meet the six (6) eligibility requirements as provided in Para 54 (c). Level 2 B Assets are not currently allowed for LCR computation purposes.
Comment # 42
Residential Mortgage Backed Securities – Level 2B Assets (para 54 (a))
Since Mortgage Backed Securities (MBS) issued by US Agencies -Fannie Mae / Freddie Mac are guaranteed by the agencies and the underlying pools are effectively considered as collateral these are considered as general obligation bonds issued by Fannie Mae and Freddie Mac. Accordingly we would continue classifying them as Level 2 assets (external rating of AAA). Accordingly these would not be reported as Level 2B assets. Kindly confirm our treatment of these bonds.
Response: Fannie Mae and Freddie Mac (external rating of AAA) are to be reported as Level 2b assets. This is because these are Mortgage Backed Securities and do not meet Level 2a asset requirements of para 52 (a). Level 2 B Assets are not currently allowed for LCR computation purposes.
Comments # 5
General Comments on the Template
■ We note that in some places the ≥ signs have been replaced with question marks (?) this may create some confusion in interpreting the intent of the required input.
Response: This will be corrected in SAMA Finalized Prudential Returns Package.
Comments # 6
SAMA to provide to the banking industry the classification criteria for the statutory bodies/government owned agencies/government owned companies that qualify as PSE for the purpose of Level 1 assets.
Response: Currently, there are no PSE’s in KSA that qualify for Level 1 assets.
Comment # 7
As a number of issuers for the fixed income/sukuk owned by the bank is limited, can the bank be allowed to use the external data as the proxy to develop the internal rating system?
Response: Yes. This is permitted so long the external data relates to similar bank investments and other BCBS Basel II requirements for using external data are met. Further, SAMA will review the robustness of such internal systems relating to credit and market risk that the bank could be exposed to.
Comments # 82
Is trading in a large, deep and active market compulsory criteria for Level 2B asset?
Response: Criteria in Para 54 (a) are a BCBS requirements. KSA has a large, deep and active exchange traded share market. In addition, note that Level 2 B Assets are not currently allowed for LCR computation purposes.
Comments # 9
As the run-off for the deposits have been reduced further from 5% to 3% to indicate Basel Committee’s preference to implement the Deposit Insurance Scheme, it is suggested that SAMA explores the feasibility and viability of implementing the Deposit Insurance Scheme in Saudi Arabia.
Response: Currently, there is no effective Deposit Insurance Scheme in Saudi Arabia.
Comment # 10
We understand that correct document is titled as “Instructions for Basel III monitoring” rather than "Basle III: International Framework for Liquidity Risk Measurement, Standards and Monitoring". Kindly confirm
Response: SAMA will amend the current document title to “Instruction for Basel III Monitoring”.
Comment # 11
BIS has allowed banks to include unrated corporate bonds as part of level 2B2 assets based on banks internal rating. Is this permission applicable to non-IRB banks in KSA?
Response: No. This is not permitted and banks can use this own Internal Rating systems subject to their validation and approval by SAMA. Note that currently, level 2 B assets are not currently allowed for LCR computation purposes.
Comment # 131
Comment # 12
Operational requirements are discussed in BIS document “Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools” however these are not included in captioned document. In our opinion same should be incorporated in the captioned document as well.
Response: Yes. The Operational Requirements of Para 28 to 43 will be provided in the SAMA Finalized Package.
Comment # 13
Page 37 – Row 179 (Description)
line 174 in prudential returns is non-inputable field. Correct reference is line 178.
Response: This will be in the SAMA’s Finalized Prudential Return Package.
Comment # 14
A new level of HQLA has been introduced in this document (Level 2B Assets).These assets can comprise a maximum of 15% of the total HQLA. We believe, an Islamic bank, can include its investments in Common Equity here at 50% hair-cut, since these assets satisfy all the required features of Level 2B HQLA. We seek your further guidance and direction in this context for consideration.
Response: Bank investments in Level 2b Assets include common shares which are subject to Para 54 (c) rules. Currently, Level 2 B Assets are not currently allowed for LCR computation purposes.
Comment # 15
In the light of Sovereign rating of KSA (KSA being rated at A-), we request SAMA to clarify the treatment of Sukuk in the final regulatory document to be issued by the end of April 2013.
Response: Sukuks issued by KSA can qualify Level 2A assets of HQLA depending on their rating and other requirements of 52 (a) respectively.
Saudi Arabia does not have a large deep and active cash market in Sukuks.
Comment # 16
Term Deposit: The definition and criteria outlined in the subject consultative document may not be practical for the KSA banking industry and hence the entire KSA banking Industry’s term deposits may be classified as demand deposits. We request SAMA to outline exceptional circumstances that would qualify as hardship, under which the exceptional term deposit could be withdrawn by the depositor without changing the treatment of the entire pool of deposits.” We seek your further guidance and direction regarding the definition along with associated terms related to exceptional circumstances.
Response:
The response given to you earlier was incorrect. SAMA position is that retail term deposits cannot be withdrawn before maturity.
Comment # 17
Unsecured wholesale funding from SME Customers: It is treated the same way as the retail deposits – 10% hair-cut. The aggregated funding raised by a Small Business customer is less than Euro 1.0 million. In the light of this, we assume the SAR equivalent of Euro for the local KSA banking industry. Request confirmation from SAMA.
Response: Yes. A similar definition can be used at Euro 1 million for SME’s funds provided to a Bank.
Comment # 18
Like earlier occasions, it would be highly helpful to all KSA Banks, if SAMA can provide the FAQs on this consultative document and the prudential returns as well.
Response: Yes. This FAQ will be circulated to all Banks.
Comment # 192
Level 2B assets – One of the conditions that need to be satisfied by common equity shares for inclusion is that it should be a constituent of the major stock index in the home jurisdiction or where the liquidity risk is taken, as decided by the supervisor in the jurisdiction where the index is located. For KSA, we would expect that the TASI represents the major stock index. In other jurisdictions, there are multiple major stock indices. For example, the US market has the S&P 500, Dow Jones Industrial, Nasdaq and Indian market has the Sensex and Nifty Indices. In this regard, is there any regulatory or supervisory guidance on the qualifying major stock index/ indices for the various jurisdictions?
Response: Bank should look into the liquidity profile and decide on a deep and a well traded market. Currently, Level 2 B Assets are not currently allowed for LCR computation purposes.
Comment # 20
In the Prudential Returns, all formulas used in calculating the Weighted Amounts and data quality checks have been removed and that renders the template unusable for reporting purposes. Will SAMA be sending any revised template with the formulas intact? In this template, certain cells have also been shaded in green color. What do these green cells represent?
Response: Ignore all colors and complete the appropriate cells.
Comment # 21
As per para 50 of the guidance note, how do we ascertain that the marketable securities qualifying for level 1 assets is:
■ Traded in large, deep and active repo or cash markets characterized by a low level of concentration. What constitutes this criteria?
■ Has a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions?
Response: Refer to comment # 19.
Comment # 22
The claims guaranteed by the sovereigns, central banks, PSEs or multilateral development banks—does ‘guarantee only explicit’ guarantee or implied guarantee is also included.
Response: Only explicit guarantees are applicable.
Comment # 23
For level 2A assets, the ECAI of AA- should be lowered to reflect the average ratings corporates and covered bonds (if applicable) issuers representing the region.
Response: This is not possible. BCBS document final.
Comment # 24
How do we define ‘low level of concentration’ for traded corporate debt securities?
Response: Refer to comment # 20.
Comment # 25
As per para 50 of the guidance note, if the local jurisdiction demonstrates the effectiveness of its currency peg mechanism and assess the long term prospect of keeping the peg, will LCR in USD be required as distinct for LCR in SAR.
Response: No. The LCR will continue to be in SAR.
1 Note 1: All references to level 2B assets in this document should be read in conjunction with SAMA’s National Discretion (item # 2) in attachment # 5.
2 Refer to Note 1 on page 1.National Discretion Items Concerning Amended LCR
Issue # 1
Please refer to the instructions from your supervisor for the specification of this item.
8 part of central bank reserves that can be drawn in times of stress Total amount held in central bank reserves and overnight and term deposits at the same central bank (as reported in line 7) which can be drawn down in times of stress. Amounts required to be installed in the central bank reserves within 30 days should be reported in line 165 of the outflows section. 50(b), footnote 13 SAMA Recommendation
• Saudi bank can include as level 1 assets, all amounts held in central bank reserves and overnight and term deposits as these can be utilized in term of stress within a period of 30 days.
Issue # 2
A)c) Level 2B assets
Please refer to the instructions from your supervisor for the specification of items in the Level 2B assets subsection.
In choosing to include any Level 2B assets in Level 2, national supervisors are expected to ensure that (i) such assets fully comply with the qualifying criteria set out Basel III LCR standards, paragraph 54; and (ii) banks have appropriate systems and measures to monitor and control the potential risks (eg credit and market risks) that banks could be exposed to in holding these assets. 37 Residential mortgage backed securities (RMBS), rated AA or better RMBS that satisfy all of the conditions listed in paragraph 54(a) of the Basel III LCR standards. 54(a 38 Non-financial corporate bonds, rated BBB- to A+ Non-financial corporate debt securities (including commercial paper) rated BBB- to A+ that satisfy all of the conditions listed in paragraph 54(b) of the Basel III LCR standards. 54(b) 39 Non-financial common equity shares Non-financial common equity shares that satisfy all of the conditions listed in paragraph 54(c) of the Basel III LCR standards. 54(c) Total Level 2B assets: 40 Total stock of Level 2B RMBS assets Total outright holdings of Level 2B RMBS assets plus all borrowed securities of Level 2B RMBS assets, after applying haircuts 54(a) 41 Adjustment to stock of Level 2B RMBS assets Adjustment to the stock of Level 2B RMBS assets for purpose of calculating the caps on Level 2 and Level 2B assets. Annex 1 42 Adjusted amount of Level 2B RMBS assets Adjusted amount of Level 2B RMBS assets used for the purpose of calculating the adjustment to the stock of HQLA due to the cap on Level 2 assets in line item 49 and the cap on Level 2B assets in line item 48. Annex 1 43 Total stock of Level 2B non- RMBS assets Total outright holdings of Level 2B non-RMBS assets plus all borrowed securities of Level 2B non-RMBS assets, after applying haircuts 54(b),(c) 44 Adjustment to stock of Level 2B non-RMBS assets Adjustment to the stock of Level 2B non-RMBS assets for purpose of calculating the caps on Level 2 and Level 2B assets. Annex 1 45 Adjusted amount of Level 2B non-RMBS assets Adjusted amount of Level 2B non-RMBS assets used for the purpose of calculating the adjustment to the stock of HQLA due to the cap on Level 2 assets in line item 49 and the cap on Level 2B assets in line item 48. Annex 1 46 Adjusted amount of Level 2B (RMBS and non-RMBS) assets Sum of adjusted amount of Level 2B RMBS assets and adjusted amount of Level 2B non-RMBS assets Annex 1 48 Adjustment to stock of HQLA due to cap on Level 2B assets Adjustment to stock of HQLA due to 15% cap on Level 2B assets. 47, Annex 1 49 49 Adjustment to stock of HQLA due to cap on Level 2 assets Adjustment to stock of HQLA due to 40% cap on Level 2 assets. 51, Annex 1 SAMA Recommendation
At this point in time, SAMA has decided not to allow any level 2B assets to be included as level 2 assets. However, SAMA will initiate some research with Saudi banks to make a quantitative assessment to determine the impact of including or not including these in the LCR. Also, a Working Group meeting on liquidity will be scheduled before the end of July 2013 where this item will be further discussed.
Issue # 3
A)e) Treatment for jurisdictions with insufficient HQLA
Please refer to the instructions from your supervisor for the specification of this subsection.
Some jurisdictions may not have sufficient supply of Level 1 assets (or both Level 1 and Level 2 assets) in their domestic currency to meet the aggregate demand of banks with significant exposures in this currency (note that an insufficiency in Level 2 assets alone does not qualify for the alternative treatment). To address this situation, the Committee has developed alternative treatments for the holdings in the stock of HQLA, which are expected to apply to a limited number of currencies and jurisdictions.
Eligibility for such alternative treatment will be judged on the basis of qualifying criteria set out in Annex 2 of the Basel III LCR standards and will be determined through an independent peer review process overseen by the Committee. The purpose of this process is to ensure that the alternative treatments are only used when there is a true shortfall in HQLA in the domestic currency relative to the needs in that currency. SAMA Recommendation
• Currently, SAMA is not going to adopt Alternative Approaches because of the sufficiency of HQLA.
Issue # 4
There are three potential options for this treatment (line items 67 to 71). If your supervisor intends to adopt this treatment, it is expected that they provide specific instructions to the banks under its supervision for reporting the relevant information under the option it intends to use. To avoid double-counting, if an asset has already been included in the eligible stock of HQLA, it should not be reported under these options.
Option 1 – Contractual committed liquidity facilities from the relevant central bank, with a fee These facilities should not be confused with regular central bank standing arrangements. In particular, these facilities are contractual arrangements between the central bank and the commercial bank with a maturity date which, at a minimum, falls outside the 30-day LCR window. Further, the contract must be irrevocable prior to maturity and involve no ex-post credit decision by the central bank.
Such facilities are only permissible if there is also a fee for the facility which is charged regardless of the amount, if any, drawn down against that facility and the fee is set so that banks which claim the facility line to meet the LCR, and banks which do not, have similar financial incentives to reduce their exposure to liquidity risk. That is, the fee should be set so that the net yield on the assets used to secure the facility should not be higher than the net yield on a representative portfolio of Level 1 and Level 2 assets, after adjusting for any material differences in credit risk.
SAMA Recommendation
• Refer to response of issue # 3.
Issue # 5
67 Option 1 – Contractual committed liquidity facilities from the relevant central bank Only include the portion of facility that is secured by available collateral accepted by the central bank, after haircut specified by the central bank. Please refer to the instructions from your supervisor for the specification of this item. 58 SAMA Recommendation
• Refer to response of issue # 3.
Issue # 6
Option 2 – Foreign currency HQLA to cover domestic currency liquidity needs For currencies that do not have sufficient HQLA, supervisors may permit banks that evidence a shortfall of HQLA in the domestic currency (which would match the currency of the underlying risks) to hold HQLA in a currency that does not match the currency of the associated liquidity risk, provided that the resulting currency mismatch positions are justifiable and controlled within limits agreed by their supervisors.
To account for foreign exchange risk associated with foreign currency HQLA used to cover liquidity needs in the domestic currency, such liquid assets should be subject to a minimum haircut of 8% for major currencies that are active in global foreign exchange markets. For other currencies, supervisors should increase the haircut to an appropriate level on the basis of historical (monthly) exchange rate volatilities between the currency pair over an extended period of time.
If the domestic currency is formally pegged to another currency under an effective mechanism, the haircut for the pegged currency can be lowered to a level that reflects the limited exchange rate risk under the peg arrangement.
Haircuts for foreign currency HQLA used under Option 2 would apply only to HQLA in excess of a threshold specified by supervisors which is not greater than 25% that are used to cover liquidity needs in the domestic currency.
69 Level 1 assets Subject to the limit mentioned above, the aggregate amount of the excess of Level 1 assets in a given foreign currency or currencies that can be used to cover the associated liquidity need of the domestic currency. Please refer to the instructions from your supervisor for the specification of this item. 59 70 Level 2 assets Subject to the limit mentioned above, the aggregate amount of the excess of Level 2 assets in a given foreign currency or currencies that can be used to cover the associated liquidity need of the domestic currency. Please refer to the instructions from your supervisor for the specification of this item. 59 SAMA Recommendation
• Refer to response of issue # 3.
Issue # 7
71 Option 3 – Additional use of Level 2 assets with a higher haircut for Level 1 asset Assets reported in lines 25 to 31 that are not counted towards the regular stock of HQLA because of the cap on Level 2 assets.
Please refer to the instructions from your supervisor for the specification of this item.62 SAMA Recommendation
• Refer to response of issue # 3.
Issue # 8
86 eligible for a 3% run-off rate; of which: The amount of insured transactional retail deposits that are in jurisdictions where the supervisor chooses to apply a 3% runoff rate given the deposits are fully insured by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards. Please refer to the instructions from your supervisor for the specification of these items. 78 SAMA Recommendation
There is no effective deposit insurance schemes in KSA.
Issue # 9 89 eligible for a 5% run-off rate; of which: The amount of insured transactional retail deposits that are in jurisdictions where the supervisor does not choose to apply a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 75 SAMA Recommendation
• The referenced conditions are not applicable to Saudi banks.
Issue # 10
96 eligible for a 5% run-off rate; of which: The amount of insured non-transactional established relationship retail deposits that are in jurisdictions where the supervisor does not choose to apply a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 75 SAMA Recommendation
• Refer to response of issue # 9
Issue # 11
115 eligible for a 3% run-off rate; of which: The amount of insured transactional small business customer deposits that are in jurisdictions where the supervisor chooses to apply a 3% run-off rate given the deposits are fully insured by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards. Please refer to the instructions from your supervisor for the specification of these items. 89, 78 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 12
122 eligible for a 3% run-off rate; of which: The amount of insured non-transactional established relationship small business customer deposits that are in jurisdictions where the supervisor chooses to apply a 3% runoff rate given the deposits are fully insured by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards. Please refer to the instructions from your supervisor for the specification of these items. 89, 78 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 13
125 eligible for a 5% run-off rate; of which: The amount of insured non-transactional established relationship small business customer deposits that are in jurisdictions where the supervisor does not choose to apply a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 89, 75 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 14
139 insured, with a 3% run-off rate The portion of such funds provided by non-financial corporates that are fully covered by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards and are in jurisdictions where the supervisor chooses to prescribe a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 15
140 insured, with a 5% run-off rate The portion of such funds provided by non-financial corporates that are fully covered by an effective deposit insurance scheme but that are not prescribed a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 16
143 insured, with a 3% run-off rate The portion of such funds provided by sovereigns, central banks, PSEs and multilateral development banks that are fully covered by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards and are in jurisdictions where the supervisor chooses to prescribe a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 17
144 insured, with a 5% run-off rate The portion of such funds provided by sovereigns, central banks, PSEs and multilateral development banks that are fully covered by an effective deposit insurance scheme but that are not prescribed a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 18
147 insured, with a 3% run-off rate The portion of such funds provided by banks that are fully covered by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards and are in jurisdictions where the supervisor chooses to prescribe a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 19
148 insured, with a 5% run-off rate The portion of such funds provided by banks that are fully covered by an effective deposit insurance scheme but that are not prescribed a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 20
151 insured, with a 3% run-off rate The portion of such funds provided by financial institutions (other than banks) and other legal entities that are fully covered by an effective deposit insurance scheme that meets the conditions outlined in paragraph 78 of the Basel III LCR standards and are in jurisdictions where the supervisor chooses to prescribe a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 21
152 insured, with a 5% run-off rate The portion of such funds provided by financial institutions (other than banks) and other legal entities that are fully covered by an effective deposit insurance scheme but that are not prescribed a 3% run-off rate. Please refer to the instructions from your supervisor for the specification of these items. 104 SAMA Recommendation
• Refer to response of issue # 9.
Issue # 22
165 Additional balances required to be installed in central bank reserves Amounts to be installed in the central bank reserves within 30 days. Funds reported in this line should not be included in line 159 or 160. Please refer to the instructions from your supervisor for the specification of this item. Extension of 50(b) SAMA Recommendation
• Agreed. Funds include in line 159 or 160 should not be included in line 165.
Issue # 23
253 Non-contractual obligations related to potential liquidity draws from joint ventures or minority investments in entities Non contractual contingent funding obligations related to potential liquidity draws from joint ventures or minority investments in entities, which are not consolidated per paragraph 164 of the Basel III LCR standards, where there is the expectation that the bank will be the main liquidity provider when the entity is in need of liquidity. The amount included should be calculated in accordance with the methodology agreed by the bank’s supervisor. Please refer to the instructions from your supervisor for the specification of this item. 137 SAMA Recommendation
• Such cases should be referred to SAMA and each case will be dealt with individually.
Issue # 24
317 Other contractual cash inflows Any other contractual cash inflows to be received ≤ 30 days that are not already included in any other item of the LCR framework. Inflow percentages should be determined as appropriate for each type of inflow by supervisors in each jurisdiction. Cash inflows related to non-financial revenues are not to be included, since they are not taken into account in the calculation of LCR. Any non-contractual contingent inflows should not be reported, as they are not included in the LCR. Please provide your supervisor with an explanatory note on any amounts included in this line. 160 SAMA Recommendation
• For the time being, SAMA is not adding any item to LCR.
Issue # 26
6.1.4 Collateral swaps (panel C)
Any transaction maturing within 30 days in which non-cash assets are swapped for other noncash assets, should be reported in this panel. “Level 1 assets” in this section refers to Level 1 assets other than cash. Please refer to the instructions from your supervisor for the specification of items related to Level 2B assets in this subsection.48, 113, 146, annex SAMA Recommendation
• Banks should comply with the BCBS guidance provided on page 52 to 61 and paras 48, 113, 146, annex of the BCBS document of January 2013.
• Level 2B assets are related the alternative treatment which SAMA at the present has not adopted – refer to SAMA’s response to isssue # 3.
Loans to Deposits Ratio Guidelines
No: 44071146 Date(g): 27/3/2023 | Date(h): 6/9/1444 Status: In-Force Based on the Central Bank Law issued by Royal Decree No. (M/36) dated 11/04/1442 H and the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386 H. With reference to Central Bank Circular No. (392) dated 01/07/1427 H. and supplementary Circular No. (391000072844) dated 06/25/1439 H., including the Guidelines for Calculating the Loan-to-Deposit Ratio.
Please find the updated loan-to-deposit ratio guidelines which replaces the above-mentioned loan-to-deposit ratio guidelines. They aim to promote the diversification of banks' funding sources and support lending.
For your information and action accordingly as of June 1, 2023 G.
1. Introduction
In line with SAMA’s continuous efforts to maintain the quality and soundness of banks' regulatory ratios and to support banks in managing their liquidity, SAMA has reviewed the existing Loans to Deposits Ratio (LDR) guidelines to comprehensively capture banks' funding base.
These guidelines are issued by SAMA in exercise of the authority vested in SAMA under the Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued 01/01/1386H.
These guidelines supersede the Loans to Deposits Ratio Guidelines circular No B.C.S 392 dated 01/07/1427H and subsequent guidelines for calculating Loans to Deposits Ratio (LDR) issued via SAMA circular No 391000072844 dated 25/06/1439H.
2. Implementation Timeline
These guidelines will be effective as of 1St of June 2023.
3. Reporting Requirements
Banks are required to report the Loan to Deposit ratio (LDR) to SAMA on consolidated basis using the updated LDR returns on monthly basis. The ratio should include local and foreign currency transactions of resident and non-resident entities of the bank.
4. General Requirements
4.1 The Loans to Deposits Ratio is defined as net loans divided by deposits after applying weights:
4.2 Net Loan (The numerator) for the purpose of these guidelines, includes Loans and advances after deducting the following :
• Provisions for loan losses;
• Unearned commissions income;
• Commission in suspense.
4.3 Deposits (The denominator) for the purpose of these guidelines, includes the following components:
a. Deposits and Repos.
b. Long Term Debts:
• Sukuks/ Bonds;
• Syndicated debts;
• Subordinated debts;
• Other Debts (any other long term debts not classified above).
4.4 For avoidance of doubt, interbank transactions and transactions with SAMA should not be included in the LDR calculation, unless specifically stated by SAMA.
4.5 SAMA expects banks to maintain total LDR below 90%, Subject to numerator not exceeding unweighted denominator.
5. Weighted Denominator Calculation
5.1 Banks will apply the weights below to the denominator components (as applicable) in order to compute the weighted amount:
Demand/over night Less than 1M (1-30 D) 1-3 M (31-90D) 3-4 M (91-120 D) 4-6 M (121-180 D) 6-8 M (181-240 D) 8 M - 1Y (241-365 D) Over 1 Y to 2 Y Over 2 Y to 5 Y Over 5 Y 100% 105% 110% 115% 120% 130% 140% 150% 170% 190%
Table (1): *D= Days / M= Months / Y= Years
5.2 Original maturities should be used for new transactions while outstanding transactions should be based on residual maturities.
5.3 For callable sukuks/bonds, residual maturity is calculated based on the first callable date of the sukuks/bonds to determine the applicable weight in the table (1).
5.4 For perpetual sukuks/bonds, banks should apply 190% weights unless the sukuks/bonds have a callable date then the sukuks/bonds weight will be applied based on the sukuks/bonds callable date.
Guidance Document Concerning Basel III: The Net Stable Funding Ratio (NSFR) - Based on BCBS Document of October 2014
No: 449670000041 Date(g): 26/6/2018 | Date(h): 13/10/1439 Status: In-Force Further to SAMA's instructions regarding the percentage of net stable funding ratio issued by SAMA Circular No. 361000036260 dated 8/11/1436 H, and Circular No. 391000059160 dated 22/5/1439 H containing the update to the instructions.
We inform you to make updates to these instructions (attached) to comply with international best practices, and SAMA confirms that all banks must abide by these updated instructions as of its date.
1. Overview
No: 449670000041 Date(g): 26/6/2018 | Date(h): 13/10/1439 Status: In-Force This document presents SAMA's guidance document concerning the Net Stable Funding Ratio (NSFR), to promote a more resilient Saudi banking sector and is based on the BCBS document entitled "Basel Ill: The Net Stable Funding Ratio" of October 2014. The NSFR requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities in order to reduce the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance sheet items, and promotes funding stability. This SAMA document sets out the NSFR standard and timeline for its implementation.
Maturity transformation performed by banks is a crucial part of financial intermediation that contributes to efficient resource allocation and credit creation. However, private incentives to limit excessive reliance on unstable funding of core (often illiquid) assets are weak. Just as banks may have private incentives to increase leverage, incentives arise for banks to expand their balance sheets, often very quickly, relying on relatively cheap and abundant short-term wholesale funding. Rapid balance sheet growth can weaken the ability of individual banks to respond to liquidity (and solvency) shocks when they occur, and can have systemic implications when banks fail to internalize the costs associated with large funding gaps. A highly interconnected financial system tends to exacerbate these spill overs.
During the early liquidity phase of the financial crisis starting in 2007, many banks - despite meeting the existing capital requirements - experienced difficulties because they did not prudently manage their liquidity. The crisis drove home the importance of liquidity to the proper functioning of financial markets and the banking sector. Prior to the crisis, asset markets were buoyant and funding was readily and cheaply available. The rapid reversal in market conditions showed how quickly liquidity can dry up and also how long it can take to come back. The banking system came under severe stress, which forced central banks to take action in support of both the functioning of money markets and, in some cases, individual institutions.
The difficulties experienced by some banks arose from failures to observe the basic principles of liquidity risk management. In response, SAMA in 2008 published Circular no. BCS 771 dated 5 December 2008 as the foundation of its liquidity framework 1. The Circular offers detailed guidance on the risk. management and supervision of funding liquidity risk and should help promote better risk management in this critical area, provided that they are fully implemented by banks and supervisors. SAMA will accordingly continue to monitor the implementation of these fundamental principles to ensure that banks in adhere to them.
SAMA has participated in BCBS work to further strengthen its liquidity framework by developing two minimum standards for funding and liquidity. These standards are designed to achieve two separate but complementary objectives. The first is to promote the short-term resilience of a bank's liquidity risk profile by ensuring that it has sufficient high-quality liquid assets (HQLA) to survive a significant stress scenario lasting for 30 days, known as the liquidity overage ratio (LCR). To that end, SAMA has implemented the liquidity coverage ratio (LCR).2 The second objective is to reduce funding risk over a longer time horizon by requiring banks to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress, known as the net stable funding ratio (NSFR), which SAMA has also implemented.
In addition to the LCR and NSFR standards, the minimum quantitative standards that banks must comply with, SAMA, as a BCBS member, has participated in developing a set of liquidity risk monitoring tools to measure other dimensions of a bank's liquidity and funding risk profile. These tools promote global consistency in supervising ongoing liquidity and funding risk exposures of banks, and in communicating these exposures to home and host supervisors. Although currently defined in the following SAMA guidelines .Circular No: 341000107020 Date: 1434/09/02H (10 July 2013G). Subject: SAMA 's Finalized Guidance and Prudential Returns Concerning Amended Liquidity Coverage Ratio (LCR) based on BCBS Amendments of January 2013 and Circular No.: 351000147086 Dated: 24 September 2014. Subject: SAMA's Implementation of Monitoring Tools in Conjunction with the Amended LCR, these tools are supplementary to both the LCR and the NSFR. In this regard, the contractual maturity mismatch metric, particularly the elements that take into account assets and liabilities with residual maturity of more than one year, should be considered as a valuable monitoring tool to complement the NSFR.
In 2010, BCBS members agreed to review the development of the NSFR over an observation period. The focus of this review was on addressing any unintended consequences for financial market functioning and the economy, and on improving its design with respect to several key issues, notably: (i) the impact on retail business activities; (ii) the treatment of short-term matched funding of assets and liabilities; and (iii) analysis of sub-one year buckets for both assets and liabilities.
In line with the timeline specified in the Circular #361000141528 dated 24 August 2015 3, the NSFR has become a minimum standard on 1 January 2016.
1 The circular No. BCS 771, 5 December 2008G is available at sama.gov.sa
2 See SAMA's Finalized Guidance and Prudential Returns Concerning Amended Liquidity Coverage Ratio (LCR) based on BCBS Amendments, January 2013, issued vide SAMA guidelines, Circular No: 341000107020 Date: 1434/09/02H (10 July 2013G)
3 See circular No.361000141528, 24 August,2015, sama.gov.sa
2. Frequency of Calculation and Reporting
Banks are expected to meet the NSFR requirement on an ongoing basis. The NSFR should be reported at least quarterly. The time lag in reporting should not surpass the allowable time lag under the Basel capital standards.
3. Scope of Application
The application of the NSFR requirement in this document follows the scope of application set out in Regulation No. 1 Circular No: BCS 290 Date: 12 June, 2006, Title "Basel II - SAMA's Detailed Guidance Document relating to Pillar 1, June 2006 "Subsection: 2. Scope of Application of Basel II and Other Significant Items and SAMA Basel II Prudential Returns - circular # BCS 180 dated 22 March 2007* 4.The NSFR should be applied to all internationally active banks on a consolidated basis, but may be used for other banks and on any subset of entities of internationally active banks as well to ensure greater consistency and a level playing field between domestic and cross-border banks.
Regardless of the scope of application of the NSFR, in line with Principle 6 as outlined in Circular #BCS 771 dated 5 December 2008, a bank should actively monitor and control liquidity risk exposures and funding needs at the level of individual legal entities, foreign branches and subsidiaries, and the group as a whole, taking into account legal, regulatory and operational limitations to the transferability of liquidity.
* The application of the NSFR requirement in this document follows the scope of application set out in Circular No: 440471440000 dated Dec, 2022, Titled "Recent Basel Reforms "Subsection: Application of the Framework on Banking Groups in Saudi Arabia and Reporting Requirements. Local banks must comply with SAMA’s Basel Framework at both standalone and consolidated level.
4 See circular No. BCS 290 Title"Basel II-SAMA's Detailed Guidance Document relating to Pillar 1, June 2006, sama.gov.sa and SAMA Basel II Prudential Returns-circular No. BCS 180 dated 22 March 2007.
4. Minimum Requirements and Other Guidance
The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. This ratio should be equal to at least 100% on an ongoing basis. "Available stable funding" is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of such stable funding required ("Required stable funding") of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance sheet (OBS) exposures.
Available amount of stable funding ≥100% Required amount of stable funding
The NSFR consists primarily of internationally agreed-upon definitions and calibrations. Some elements, however, remain subject to national discretion to reflect jurisdiction-specific conditions. In these cases, SAMA has explicitly and clearly outlined these in the regulation.
As a key component of the SAMA supervisory approach to funding risk, the NSFR will be supplemented by supervisory assessment work. SAMA may require an individual bank to adopt more stringent standards to reflect its funding risk profile and the SAMA assessment of its compliance with the Sound Principles.
The amounts of available and required stable funding specified in the standard are calibrated to reflect the presumed degree of stability of liabilities and liquidity of assets.
The calibration reflects the stability of liabilities across two dimensions: (a) Funding tenor - The NSFR is generally calibrated such that longer-term liabilities are assumed to be more stable than short-term liabilities. (b) Funding type and counterparty - The NSFR is calibrated under the assumption that short-term (maturing in less than one year) deposits provided by retail customers and funding provided by small business customers are behaviourally more stable than wholesale funding of the same maturity from other counterparties.
In determining the appropriate amounts of required stable funding for various assets, the following criteria were taken into consideration, recognizing the potential trade-offs between these criteria: (a) Resilient credit creation - The NSFR requires stable funding for some proportion of lending to the real economy in order to ensure the continuity of this type of intermediation. (b) Bank behaviour - The NSFR is calibrated under the assumption that banks may seek to roll over a significant proportion of maturing loans to preserve customer relationships. (c) Asset tenor - The NSFR assumes that some short-dated assets (maturing in less than one year) require a smaller proportion of stable funding because banks would be able to allow some proportion of those assets to mature instead of rolling them over. (d) Asset quality and liquidity value - The NSFR assumes that unencumbered, high-quality assets that can be securitized or traded, and thus can be readily used as collateral to secure additional funding or sold in the market, do not need to be wholly financed with stable funding.
Additional stable funding sources are also required to support at least a small portion of the potential calls on liquidity arising from OBS commitments and contingent funding obligations (Prudential Returns - 3).
NSFR definitions mirror those outlined in the LCR, unless otherwise specified. All references to LCR definitions or Paras/ text of LCR in this NSFR guidelines, refer to the definitions and Paras/ text in the LCR guidelines published by SAMA. If SAMA chooses to implement a more stringent definition in the LCR rules than those set out in the Basel Committee LCR standard, SAMA will inform banks whether to apply this stricter definition for the purposes of implementing the NSFR requirements in their jurisdiction.
5. General Guidance
A. Definition of Available Stable Funding
The amount of available stable funding (ASF) is measured based on the broad characteristics of the relative stability of an institution's funding sources, including the contractual maturity of its liabilities and the differences in the propensity of different types of funding providers to withdraw their funding. The amount of ASF is calculated by first assigning the carrying value of an institution's capital and liabilities to one of five categories as presented below. The amount assigned to each category is then multiplied by an ASF factor, and the total ASF is the sum of the weighted amounts. Carrying value represents the amount at which a liability or equity instrument is recorded before the application of any regulatory deductions, filters or other adjustments.
When determining the maturity of an equity or liability instrument, investors are assumed to redeem a call option at the earliest possible date. For funding 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 5. In particular, where the market expects certain liabilities (e.g. Tier 2 sub debt) to be redeemed before their legal final maturity date, banks and SAMA will assume such behaviour for the purpose of the NSFR and include these liabilities in the corresponding ASF category. For long-dated liabilities, only the portion of cash flows falling at or beyond the six-month and one-year time horizons should be treated as having an effective residual maturity of six months or more and one year or more, respectively.
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 25th 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.sa7 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.B. Definition of Required Stable Funding for Assets and Off-Balance Sheet Exposures
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 25th 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.
6. Specific Guidance - Liabilities and Capital
Liabilities and capital instruments receiving a 100% ASF factor comprise: (a) the total amount of regulatory capital, before the application of capital deductions, as defined in chapter A "Regulatory Capital Under Basel III", in Section A - Finalized guidance document concerning the implementation of Basel Ill, 2012 (also reproduced in Appendix - A for the convenience of the reader),15 excluding the proportion of Tier 2 instruments with residual maturity of less than one year; (b) the total amount of any capital instrument not included in (a) that has an effective residual maturity of one year or more, but excluding any instruments with explicit or embedded options that, if exercised, would reduce the expected maturity to less than one year; and (c) The total amount of secured and unsecured borrowings and liabilities (including term deposits) with effective residual maturities of one year or more. Cash flows falling below the one-year horizon but arising from liabilities with a final maturity greater than one year do not qualify for the 100% ASF factor.
Liabilities receiving a 95% ASF factor comprise "stable" (as defined in the LCR in paragraphs 75-78 - Attachment# 1, SAMA's General Guidance concerning Amended LCR.) non-maturity (demand) deposits and/or term deposits with residual maturities of less than one year provided by retail and small business customers.16
Liabilities receiving a 90% ASF factor comprise "less stable" (as defined in the LCR in paragraphs 79-81 - Attachment # 1, SAMA's General Guidance concerning Amended LCR.) non-maturity (demand) deposits and/or term deposits with residual maturities of less than one year provided by retail and small business customers.
Liabilities receiving a 50% ASF factor comprise: (a) funding (secured and unsecured) with a residual maturity of less than one year provided by non-financial corporate customers; (b) operational deposits (as defined in LCR paragraphs 93-104, Attachment# 1,SAMA's General Guidance concerning Amended LCR ): (c) funding with residual maturity of less than one year from sovereigns, public sector entities (PSEs), and multilateral and national development banks; and (d) other funding (secured and unsecured) not included in the categories above with residual maturity between six months to less than one year, including funding from central banks and financial institutions.
Liabilities receiving a 0% ASF factor comprise: (a) all other liabilities and equity categories not included in the above categories, including other funding with residual maturity of less than six months from central banks and financial institutions;17 (b) Other liabilities without a stated maturity. This category may include short positions and open maturity positions. Two exceptions can be recognized for liabilities without a stated maturity: • first, deferred tax liabilities, which should be treated according to the nearest possible date on which such liabilities could be realized;
• Second, minority interest, which should be treated according to the term of the instrument, usually in perpetuity.
These liabilities would then be assigned either a 100% ASF factor if the effective maturity is one year or greater, or 50%, if the effective maturity is between six months and less than one year;
(c) NSFR derivative liabilities as calculated according to item # 5 of this document titled "General Guidance Section A: Definition of Available Stable Funding", and Net of NSFR derivative assets as calculated according to item# 5 of this document Section B definition of "Required Stable Funding" paragraphs entitled "Calculations of Derivative assets amount, if NSFR derivative liabilities are greater than NSFR derivative assets;18 and (d) "trade date" payables arising from purchases of financial instruments, foreign currencies and commodities that (i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction, or (ii) have failed to, but are still expected to, settle.
Note: Prudential return 1 (refer prudential return section of this document) summarises the components of each of the ASF categories and the associated maximum ASF factor to be applied in calculating an institution's total amount of available stable funding under the standard.
15 Capital instruments reported here should meet all requirements outlined in Section A - Finalized guidance document concerning the implementation of Basel Ill, 2012, and should only include amounts after transitional arrangements have expired under fully implemented Basel III standards (i.e. as in 2022).
16 Retail deposits are defined in LCR paragraph 73. Small business customers are defined in LCR paragraph 90 and 91. Refer Attachment# 1, SAMA's General Guidance concerning Amended LCR.
17 SAMA has not adopted the discretion specified by the Basel Committee in terms of certain deposits i.e. deposits between banks within the same cooperative network can be excluded from liabilities receiving a 0% ASF provided they are either (a) required by law In some jurisdictions to be placed at the central organization and are legally constrained within the cooperative bank network as minimum deposit requirements, or (b) in the context of common task sharing and legal, statutory or contractual arrangements, so long as the bank that has received the monies and the bank that has deposited participate in the same institutional network's mutual protection scheme against illiquidity and Insolvency of its members. Such deposits can be assigned an ASF up to the RSF factor assigned by regulation for the same deposits to the depositing bank, not to exceed 85%.
18 ASF = 0% x MAX ((NSFR derivative liabilities - NSFR derivative assets), 0).7. Specific Guidance Notes – Assets
Assets assigned a 0% RSF factor comprise:
(a) coins and banknotes immediately available to meet obligations; (b) all central bank reserves (including required reserves and excess reserves);19 (c) all claims on central banks with residual maturities of less than six months; and (d) "trade date" receivables arising from sales of financial instruments, foreign currencies and commodities that (i) are expected to settle within the standard settlement cycle or period that is customary for the relevant exchange or type of transaction, or (ii) have failed to, but are still expected to, settle.
Assets assigned a 5% RSF factor comprise unencumbered Level 1 assets as defined in LCR paragraph 50, Attachment # 1, SAMA's General Guidance concerning Amended LCR, excluding assets receiving a 0% RSF as specified above, and including:
• marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs, the Bank for International Settlements, the International Monetary Fund, the European Central Bank and the European Community, or multilateral development banks that are assigned a 0% risk weight under the Basel II standardized approach for credit risk - Basel II - SAMA's Detailed Guidance Document relating to Pillar 1, June 2006 and as specified by BCBS and SAMA in future; and
• Certain non-0% risk-weighted sovereign or central bank debt securities as specified in the LCR.
Assets assigned a 10% RSF factor compromise unencumbered loans to financial institutions with residual maturities of less than six months, where the loan is secured against Level 1 assets as defined in LCR paragraph 50, Attachment # 1, SAMA's General Guidance concerning Amended LCR, and where the bank has the ability to freely re-hypothecate the received collateral for the life of the loan.
Assets assigned a 15% RSF factor comprise:
(a) unencumbered Level 2A assets as defined in LCR paragraph 52, Attachment# 1, SAMA's General Guidance concerning Amended LCR, including: • marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs or multilateral development banks that are assigned *a 20% risk weight under the Basel II standardized approach for credit risk Basel II - SAMA's Detailed Guidance Document relating to Pillar 1, June 2006; and • corporate debt securities (including commercial paper) and covered bonds with a credit rating equal or equivalent to at least AA-;
(b) All other unencumbered loans to financial institutions with residual maturities of less than six months not included in "Assets assigned a 10% FSF factor" in the previous page.
Assets assigned a 50% RSF factor comprise:
(a) unencumbered Level 28 assets as defined and subject to the conditions set forth in LCR paragraph 54, Attachment # 1, SAMA's General Guidance concerning Amended LCR, including:
• residential mortgage-backed securities (RMBS) with a credit rating of at least AA;
• corporate debt securities (including commercial paper) with a credit rating of between A+ and BBB-; and
• exchange-traded common equity shares not issued by financial institutions or their affiliates;
Note: Level 2B Assets have not been adopted for NSFR purposes and hence any securities that do not qualify for Level 1 or Level 2A Assets under LCR guidelines issued by SAMA - need to be classified under securities that do not meet the definition of HQLA and therefore no securities should be classified under Level 2B HQLA, whilst computing NSFR or disclosing the same.
(b) any HQLA as defined in the LCR that are encumbered for a period of between six months and less than one year; (c) all loans to financial institutions and central banks with residual maturity of between six months and less than one year; and (d) deposits held at other financial institutions for operational purposes, as outlined in LCR paragraphs 93-104. Attachment # 1, SAMA's General Guidance concerning Amended LCR. that are subject to the 50% ASF factor of this document; and (e) all other non-HQLA not included in the above categories that have a residual maturity of less than one year, including loans to non-financial corporate clients, loans to retail customers (i.e. natural persons) and small business customers, and loans to sovereigns and PSEs.
Assets assigned a 65% RSF factor comprise: (a) unencumbered residential mortgages with a residual maturity of one year or more that would qualify for a 35% or lower risk weight under the Basel II standardized approach for credit risk - Currently SAMA does not allow at RWA of 35% or less for residential mortgage; and (b) other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more that would qualify for *a 35% or lower risk weight under the Basel II standardized approach for credit risk - Basel II- SAMA's Detailed Guidance Document relating to Pillar 1. June 2006.
Assets assigned an 85% RSF factor comprise: (a) Cash, securities or other assets posted as initial margin for derivative contracts20 and cash or other assets provided to contribute to the default fund of a central counterparty (CCP). Where securities or other assets posted as initial margin for derivative contracts would otherwise receive a higher RSF factor, they should retain that higher factor. (b) other unencumbered performing loans21 that do not qualify for the *35% or lower risk weight under the Basel II standardized approach (Basel II - SAMA's Detailed Guidance Document relating to Pillar 1. June 2006) for credit risk and have residual maturities of one year or more, excluding loans to financial institutions; (c) unencumbered securities with a remaining maturity of one year or more and exchange-traded equities, that are not in default and do not qualify as HQLA according to the LCR; and (d) Physical traded commodities, including gold.
Assets assigned a 100% RSF factor comprise: (a) All assets that are encumbered for a period of one year or more; (b) NSFR derivative assets as calculated according item# 5 of this document Section B definition of "Required Stable Funding" paragraphs entitled "Calculations of Derivative assets amount, Net of NSFR derivative liabilities as calculated according to Item # 5 titled "General Guidance Section A: Definition of Available Stable Funding", if NSFR derivative assets are greater than NSFR derivative liabilities;22 (c) all other assets not included in the above categories, including nonperforming loans, loans to financial institutions with a residual maturity of one year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, retained interest, insurance assets, subsidiary interests and defaulted securities; and (d) 20% of derivative liabilities (i.e. negative replacement cost amounts) as calculated according to General Guidance Section A "Definition of Available Stable Funding" (item # 5), (before deducting variation margin posted).
Note: Prudential return 2 (refer prudential return section of this document) summarises the specific types of assets to be assigned to each asset category and their associated RSF factor.
The NSFR assigns a 20% "required stable funding" factor to derivative liabilities. Although the Basel Committee has agreed that, at national discretion, jurisdictions may lower the value of this factor, with a floor of 5%, SAMA has decided not to exercise this discretion.
19 It should be noted that no central bank reserves mandated by SAMA (either required reserves or excess reserves) require RSF factor greater than 0%.
20 Initial margin posted on behalf of a customer, where the bank does not guarantee performance of the third party, would be exempt from this requirement.
21 Performing loans are considered to be those that are not past due for more than 90 days in accordance with *page 23 and 24 of the Basel II standardized approach (Basel II - SAMA's Detailed Guidance Document relating to Pillar 1, June 2006. Conversely, non-performing loans are considered to be loans that are more than 90 days past due.
22 RSF = 100% x MAX ((NSFR derivative assets - NSFR derivative liabilities), 0).* Reference to that circular is no longer relevant. This Circular has been superseded by Basel III Reforms, (44047144), dated 04/06/1444 H.
8. Interdependent Assets and Liabilities
With regard to this section, SAMA in consultation with Banks through multilateral and bilateral meetings will provide the necessary Required Stable Funding factor.
SAMA may, in limited circumstances, determine whether certain asset and liability items, on the basis of contractual arrangements, are interdependent such that the liability cannot fall due while the asset remains on the balance sheet, the principal payment flows from the asset cannot be used for something other than repaying the liability, and the liability cannot be used to fund other assets. For interdependent items, SAMA may adjust RSF and ASF factors so that they are both 0%, subject to the following criteria: • The individual interdependent asset and liability items must be clearly identifiable. • The maturity and principal amount of both the liability and its interdependent asset should be the same. • The bank is acting solely as a pass-through unit to channel the funding received (the interdependent liability) into the corresponding interdependent asset. • The counterparties for each pair of interdependent liabilities and assets should not be the same.
Before exercising this discretion, SAMA will consider whether perverse incentives or unintended consequences are being created.
Please note that based on assessment, SAMA has decided not to exercise its discretion to apply any exceptional treatment to interdependent assets and liabilities.
9. Off-Balance Sheet Exposures
Many potential OBS liquidity exposures require little direct or immediate funding but can lead to significant liquidity drains over a longer time horizon. The NSFR assigns an RSF factor to various OBS activities in order to ensure that institutions hold stable funding for the portion of OBS exposures that may be expected to require funding within a one-year horizon.
Consistent with the LCR, the NSFR identifies OBS exposure categories based broadly on whether the commitment is a credit or liquidity facility or some other contingent funding obligation. Table 3 identifies the specific types of OBS exposures to be assigned to each OBS category and their associated RSF factor.
Net Stable Funding Ratio Prudential Returns
Prudential Returns - 1 Summary of Liability Categories and Associated ASF Factors
Table 1 below summarizes the components of each of the ASF categories and the associated maximum ASF factor to be applied in calculating an institution's total amount of available stable funding under the standard.
Table 1
Components of ASF category ASF factor RAW Amount Amount of Available Stable Funding 1 Total regulatory capital (excluding Tier 2 instruments with residual maturity of less than one year) 100% 2 Other capital instruments and liabilities with effective residual maturity of one year or more 100% 3 Stable non-maturity (demand) deposits and term deposits with residual maturity of less than one year provided by retail and small business customers 95% 4 Less stable non-maturity deposits and term deposits with residual maturity of less than one year provided by retail and small business customers 90% 5 Funding with residual maturity of less than one year provided by non-financial corporate customers 50% 6 Operational deposits 50% 7 Funding with residual maturity of less than one year from sovereigns, PSEs, and multilateral and national development Banks 50% 8 Other funding with residual maturity between six months and less than one year not included in the above categories, including funding provided by central banks and financial institutions 50% 9 All other liabilities and equity not included in the above categories, including liabilities without a stated maturity (with a specific treatment for deferred tax liabilities and minority interests) 0% 10 NSFR derivative liabilities net of NSFR derivative assets if NSFR derivative liabilities are greater than NSFR derivative assets 0% 11 "Trade date" payables arising from purchases of financial instruments, foreign currencies and commodities 0% Total Amount of Available Stable Funding XXX Prudential Returns - 2 Summary of Assets Categories and Associated ASF Factors
Table 2 summarizes the specific types of assets to be assigned to each asset category and their associated RSF factor.
Table 2
Components of RSF category RSF factor RAW Amount Required Stable Funding Amount 1. Coins and banknotes 0% 2. All central bank reserves 0% 3. All claims on central banks with residual maturities of less than six months 0% 4. "Trade date" receivables arising from sales of financial instruments, foreign currencies and commodities. 0% 5. Unencumbered Level 1 assets, excluding coins, banknotes and central bank reserves. 5% 6. Unencumbered loans to financial institutions with residual maturities of less than six months, where the loan is secured against Level 1 assets as defined In LCR paragraph 50, (Attachment# 1. SAMA's General Guidance concerning Amended LCR.) and where the bank has the ability to freely rehypothecate the received collateral for the life of the loan 10% 7. All other unencumbered loans to financial institutions with residual maturities of less than six months not included in the above categories 15% 8. Unencumbered Level 2A assets 15% 9. Unencumbered Level 28 assets (Note: Level 28 Assets have not been adopted for NSFR purposes and hence any securities that do not qualify for Level 1 or Level 2A Assets under LCR guidelines issued by SAMA - need to be classified under securities that do not meet the definition of HQLA and therefore no securities should be classified under Level 28 HQLA, whilst computing NSFR or disclosing the same.) 50% 10. HQLA encumbered for a period of six months or more and less than one year. 50% 11. Loans to financial Institutions and central banks with residual maturities between six months and less than one year 50% 12. Deposits held at other financial institutions for operational purposes 50% 13. All other assets not Included In the above categories with residual maturity of less than one year, including loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns and PSEs 50% 14. Unencumbered residential mortgages with a residual maturity of one year or more and with a risk weight of less than or equal to 35% under the Standardized Approach 65% 15. Other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more and with a risk weight of less than or equal to 35% under the standardized approach 65% 16. Cash, securities or other assets posted as initial margin for derivative contracts and cash or other assets provided to contribute to the default fund of a CCP 85% 17. Other unencumbered performing loans with risk weights greater than 35% under the standardized approach and residual maturities of one year or more, excluding loans to financial institutions 85% 18. Unencumbered securities that are not in default and do not qualify as HQLA with a remaining maturity of one year or more and exchange-traded equities 85% 19. Physical traded commodities, including gold 85% 20. All assets that are encumbered for a period of one year or more 100% 21. NSFR derivative assets net of NSFR derivative liabilities if NSFR derivative assets are greater than NSFR derivative liabilities. 100% 22. 20% of derivative liabilities as calculated according to "Calculation of derivative liability amounts'' of this guidelines, Page 6 and 7 100% 23. All other assets not included in the above categories, including non- performing loans, loans to financial institutions with a residual maturity of one year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, retained interest, insurance assets, subsidiary interests and· defaulted securities 100% Total Amount of Required Stable Funding XXX Prudential Returns - 3 Summary of Off-Balance Sheet Categories and Associated RSF Factors
Table 3
RSF category RSF factor RAW Amount Amount of Required Stable Funding Irrevocable and conditionally revocable credit and liquidity facilities to any client 5% of the currently undrawn portion Other contingent funding obligations, including products and instruments such as: SAMA has set the RSF factor AT 0% based on current national circumstances.19 • Unconditionally revocable credit and liquidity facilities • Trade finance-related obligations (including guarantees and letters of credit) • Guarantees and letters of credit unrelated to trade finance obligations • Non-contractual obligations such as: - potential requests for debt repurchases of the bank's own debt or that of related conduits, securities investment vehicles and other such financing facilities - structured products where customers anticipate ready marketability, such as adjustable rate notes and variable rate demand notes (VRDNs) - managed funds that are marketed with the objective of maintaining a stable value Total Amount of Required Stable Funding Xxx 19 SAMA in consultation with banks will provide the appropriate RSF factors.
Prudential Template – 4
The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. This ratio should be equal to at least 100% on an ongoing basis. "Available stable funding'' is defined as the portion of capital and liabilities expected to be reliable over the time horizon considered by the NSFR, which extends to one year. The amount of such stable funding required ("Required stable funding") of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off-balance sheet (OBS) exposures.
Available amount of stable funding ≥100% Available amount of stable funding Framework on Monitoring Tools for Intraday Liquidity Management
Background
The Basel framework on monitoring tools for intraday liquidity management introduces a new reporting framework that will enable banking supervisors to better monitor a bank's management of intraday liquidity risk and its ability to meet payment and settlement obligations on a timely basis along with providing supervisors with a better understanding of banks' payment and settlement behaviour. This framework includes:
• the detailed design of the monitoring tools for a bank's intraday liquidity risk; • stress scenarios; • key application issues; and • the reporting regime.
SAMA has conducted a consultation process with the Saudi Banks in the development of this final regulation, which is attached in the annexures containing:
• Annexure 1: Monitoring tools for intraday liquidity management (available on BIS website (http://www.bis.org/publ/bcbs248.pdf). • *Annexure 2: SAMA's position on National Discretion • *Annexure 3: Intraday liquidity template • *Annexure 4: Frequently Asked Questions (FAQs) and answers
Implementation date
These rules are applicable from 1 January 2017 as specified in the Basel document.
*Annexure 2,3 and 4 are not available, please ask SAMA for the attachments. Operational Risk Management
The Management of Operational Risk Through Appropriate Insurance Schemes
Status: In-Force 1. Overview on Operational Risk
All banks are subject to financial and operational risks. While most bankers are acutely aware of the potential impact of financial risks such as, interest rate shifts, exchange rate movements, etc. the area of operational risk is often less well understood. Operational risk - as distinct from financial risk -represents pure risk. A pure risk is one in which there are only two possible outcomes - loss or no loss. Whereas financial risks may lead to financial rewards, operational risks involve no opportunity for gain; as non-occurrence of an operational loss means only maintenance of the status quo. In addition, unlike financial risks, operational risks are purely human in nature and are a function of an organization being a bank. Crime, Losses, litigations, and adverse regulations are purely human in origin and may have no direct relationship with conditions in global financial markets.
The purpose of this guide is to assist directors and senior management in understanding the nature of operational risk and the management techniques which may be used to manage this risk. Since one of the most effective forms of minimizing a bank's exposure to operational risks through the implementation of a strong program of internal controls, this Guide is designed to be used in conjunction with SAMA's Internal Contrail Guidelines for Commercial Banks Operating in the Kingdom of Saudi Arabia (1989), Disaster Recovery Planning Guideline for the Saudi Banks (1993) and the Guidelines on Physical Security for Saudi Banks (1995). This is essential for developing an integrated program of operational risk control and management. While much of the material in this Guide is oriented towards conventional insurance, its ultimate purpose is to address the issues of identification and analysis of the full spectrum of operational risks encountered by a bank and to discuss the various methods both internal and external - which may be used to finance these risks.
In order for operational risk to be effectively managed and financed it is necessary that banks accomplish three functions.
1.1 Identify and Analyze Risks: Only those risks which have been identified may be successfully controlled. The components of operational risks are deeply embedded in an institution's business structure. These are often difficult to isolate and identify, and constantly change as the bank's business and the policies, systems and procedures which support it change. It is ironic that banks have evolved stringent policies and standards as well as complex analytical models for the analysis of financial and market risk but often ignore the operational risk exposure inherent in their day to day operations. Therefore, it is critical that senior management ensures that a formal program of operational risk analysis is in place within the bank at least equal in management visibility and rigour with that used for analyzing and controlling financial and market risk exposure.
1.2 Select and Implement Risk Management Techniques: Operational risks are most effectively controlled through integration of various risk control methods. The incidence of fraud may be controlled through rigorous training of personnel, fraud prevention and detection program, effective operational management, and internal auditing and, finally, through the Bankers Blanket Bond (BBB) and Financial Institution Bond (FIB). Litigation risks associated with professional liability may be dealt with through careful product risk analysis and training of personnel prior to implementation of sale or marketing programs, close attention to contractual indemnities with customers and, finally through a program of Professional Indemnity Insurance.
All of these strategies involve the careful analysis, selection, integration, and management of risk assumption, risk avoidance, control and transfer tools (including insurance) based on a thorough knowledge of the bank's business lines and operational risk exposures.
1.3 Managing and Evaluating Operational Risk Management: The management of operational risk is one of the major functions of the Board of Directors of any bank. Therefore, it is incumbent upon the Board to ensure that operational risks are being properly identified, analyzed, controlled, and managed. This should be done by the Board through a periodic review of the performance of operational risk management within the bank in much the same manner as it reviews the effectiveness of financial and market risk management activities. On an annual basis the Board of Directors, or the Audit Committee, should receive the results of an internal review of the Risk Management Function. Furthermore at least once every 5 years, or more frequently if appropriate, an independent review of risk management activity must be conducted, and reported to the Board.
2. Elements of Operational Risk
2.1 Criminal Risk
Historically, the single largest area of operational risk within the Saudi banks has been that associated with criminal activities. In a survey conducted by the Agency covering all the claims filed by Saudi Bank with insurers there for financial losses attributable to fraud end other criminal activities either on the part of employees or third-parties. These represent 100% of all operational losses claimed under existing insurance coverage.
2.1.1 Fraud
In 1993, the accounting firm KPMG conducted a fraud survey of six countries-the United States, Canada, Australia, the Netherlands, Ireland, and Bermuda. This study found that, on average, approximately 80% of all frauds committed were perpetrated by employees, 60% by non-managerial personnel and 20% by managers. In all of the countries surveyed, misappropriation of cash was the most common form of employee fraud. This would appear to fit the situation currently being encountered by Saudi banks, since most employee fraud losses have come from the theft of cash and or travelers checks from. branches and ATMs. Consistent with international trends Fraud currently represents the single largest area of operational loss within the Kingdom's banking system. During the past five years, approximately 85% of all operational losses sustained by banks in the Kingdom involved employee dishonesty.
Recovery of funds lost due to fraud (particularly cash) is, at best, difficult and in many cases simply impossible. This highlights the fact that programs designed to prevent fraud are significantly more effective and less expensive than are attempts to recover the funds once stolen.
2.1.2 Forgery
During the period 1988-1993, in the Kingdom, forgery (including check fraud) was the second largest area of operational loss, accounting for approximately 12% of total reported losses. This is entirely consistent with the results of the KPMG study in which losses in this area averaged between 10% and 18% for the six countries surveyed. Within the Kingdom the majority of crimes in this area appear to represent either simple check forgery or the forgery of negotiable instruments such as letters of credit and generally involved the failure of bank employees to adequately verify the authenticity of the documents before negotiation.
From a cash-based system, the Kingdom is rapidly moving into electronic-banking thus minimizing the intermediate state represented by the paper check. These actions have the long term potential of reducing the incidence of the relatively simple forgeries currently being encountered. However, document technology such as optical scanners, color laser printers, and powerful desktop publishing software now allows the creation of forgeries which are virtually undetectable except by highly sophisticated technical means. Therefore, while the number of simple document forgeries will probably decrease in the future, the level of technical sophistication and monetary value of forgeries may be expected to increase significantly.
With the increasing use of electronic imaging used in verification of signatures in many banking transactions, transfers etc. banks' risk management policies and procedures should include preventation of forgery through electronic means. This will become even more important with further advances in payment cards and payment systems technologies.
2.1.3 Counterfeit Currency
Counterfeit currency does not currently appear to be a major area of potential loss to Saudi banks. However, two current trends should be noted:
1- Technology - As with forgers, the counterfeiters of both currency and negotiable securities are also the beneficiary of new document processing technology. A recent incident involving the counterfeiting of a major international currency using color laser printers was of such a magnitude as to cause the Central Bank to redesign the currency to incorporate various anticounterfeiting measures into the new currency. However, it is expected that despite advances in design and manufacture of currencies, counterfeiting activities will continue to increase. Consequently banks must remain vigilant to these trends.
2- State Supported Counterfeiting - State supported counterfeiting is assuming importance specifically for the US Dollars. US Government estimates the amount of this currency-$20, $50, and $100 notes at approximately US$ 1 billion. This bogus currency is of extremely high quality, virtually undetectable by even experienced personnel, and is primarily circulated outside the United States.
2.1.4 Robbery and Burglary
Although a highly "cash rich" society, robbery and burglary do not currently represent a significant source of operational risk in Saudi Arabia. This can be attributed to the deterrent effect of physical security measures taken by banks and law enforcement agencies, the severity of judicial punishment, and cultural factors within Saudi society, and the lack of significant illegal drug problem within the Kingdom. Studies in other countries have shown that the majority of robberies and burglaries directed against bank branches and ATMs are drug related. Therefore, barring significant social or political changes within the Kingdom, it seems unlikely that robbery or burglary will present a major operational exposure to Saudi banks within the foreseeable future. In recognition of these trends the Agency has issued detailed rules in 1995 entitled "Minimum Physical Security Standards".
2.1.5 Electronic Crime
Although no different except for mode of execution than any other form of criminal activity, electronic crime represents the fastest growing form of criminal activity currently facing both the international and Saudi banks. This presents itself in four major areas as given below
ATMs - While major shifts are taking place, Saudi Arabia is still a highly cash oriented society. This, in turn, drives the exposure to operational loss presented by ATMs. High daily cash withdrawal limits or no limits at all mean that ATMs routinely are stocked with far more cash than that normally found in other developed countries. This presents both a lucrative and tempting target for either employee fraud or third-party burglary. In addition, these high cash withdrawal limits also expose banks to potentially higher losses from customer fraud. As banks add additional functionality’s to ATMs (foreign currency, travellers checks, airline tickets, etc.) and connect their ATMs internationally through shared network such as CIRRUS, new opportunities for fraud against Saudi banks both from within and outside the Kingdom increase significantly.
Credit Cards - Based on experience both within the Kingdom and outside, credit cards represent a major and a rapidly growing' operational risk. This risk may be divided into two areas:
Internal Fraud - As with most other types of fraud, credit card fraud involving employees (either working along or in collusion with outsiders) is the most common and most costly. All credit card issuers are subject to internal fraud risks associated with application generation /approval, account setup / activation, card embossing, and statement preparation / distribution.
External Fraud - Although far less common than internal fraud, external credit card fraud is growing rapidly as a result of large scale international trafficking in stolen cards and obtaining valid cards through fraudulent applications.
Point of Sale (POS) - As the use and acceptance of POS grows within the Kingdom, so too will merchant fraud in number, level of sophistication, and monetary value. This type of criminal activity may range from an employee of the merchant generating fraudulent transactions (generally in collusion with a third party) to large scale and highly organized activities by the merchant himself. Therefore, prevention and detection of this type of criminal activity by banks will become increasingly more complex and costly.
Commercial Services - The extension of electronic payment and trade services to commercial customers represents a major source of fee for service income. This is income which represents virtually no credit risk. However, these systems and products may represent a major exposure to costly and embarrassing losses to corporate customers. Two areas present especially high potential exposures to third party fraud.
Cash Management Services - While providing both a greatly enhanced financial management tool to corporate customers and a significant source of both cost savings and fee for service income to the banks, electronic cash management services also represent a major source of operational risk from both third party penetration and customer fraud. By their very nature these services allow the conduct of transactions with the bank in which the only security present is that provided by technical means such as encryption, message authentication, and logical access checking of passwords and user ID's. While powerful, these technical controls are not infallible. Therefore, given the high monetary value represented by corporate cash management transactions, the potential for a "long tailed risk" (i.e. low probability of occurrence with extremely high monetary value) presents the potential for both a catastrophic financial loss as well as severe damage to reputation and credibility of the bank.
Electronic Data Interchange (EDI) - As both banks and corporate customers move toward the use of electronic communications to replace paper based trade documents (i.e. invoices, receiving reports, bills of lading, warehouse receipts, etc.), traditional forms of controlling these transactions will no longer apply. EDI systems have generally been designed with less stringent levels of both access control and authentication of transactions. This has been based on the assumption that since these transactions were "non-monetary" in nature they present less exposure. While this may be technically correct, the non-monetary aspect of an EDI transaction - a receiving report. bill of lading, or warehouse receipt - ultimately generates a payment (electronic or manual) to settle the transaction. Therefore, these systems also present the potential for. "long-tailed" risks from both third parties and employees of either the customer or the vendor of good and services.
2.1.6 Retail Electronic Banking
As with a bank's commercial customer base, electronic banking is also penetrating the retail market. Services such as telephone bill payments, PC based home banking, and the use of "smart" telephones combining the features of both a conventional telephone and a microcomputers present significant opportunities for enhancing both the level of customer service and revenue in the highly competitive retail sector. However, at the same time, these new electronic products open new avenues of exposure to both third party and employee fraud as well as potential areas of professional liability exposure. In future this will become an increasingly important risk exposure area for the banks. The increased use of telephone services that permit computer access to banks' systems also provide an increasing opportunity to "hackers” and other criminals. These require improvements in security measures and additional risk management techniques to minimize losses.
2.2. Professional Risk
Exposures directly related to the provision of financial products and services currently constitute both the single largest and most rapidly growing form of operational risk globally within the financial industry.
2.2.1 Professional Errors and Ommissions
All banks are subject to operational losses associated with professional errors and omission by employees. These include losses through errors committed by staff such as unauthorized trading, erroneous transfer of funds to wrong accounts. errors in booking or recording securities transaction, etc. In the event where such losses are for the account of the bank itself i.e. for trades on the bank's own account, these type of losses are completely uninsurable and must be controlled by means of traditional methods such as strong internal controls, quality assurance programs, rigorous staff training programs and strong and active management
2.2.2 Professional liability risk
On the other hand if professional errors and omissions result in losses for the client, such events are insurable. In order to effectively assess risks in this area, it is necessary to understand the difference between professional liability risks which may affect the Board of Directors and Officer (D&O) and those professional liability risks which affect the bank itself.
Directors and Officer liability
This coverage is for the directors and officer of a hank, and not for the bank itself. One of the most complex problems facing any business is the liability of its directors and officers (executive or non-executive). The personal assets of directors and senior officers may be at risk for losses arising out of the alleged negligent or imprudent acts or omissions of such individuals. The D&O coverage provides payment to the bank as it is the bank which purchases the policy to indemnify its directors and officers..
In addition, the D&O policy will reimburse directors and officers for losses for which the bank was unable to indemnify them for legal, regulatory, or financial reasons.
Professional Indemnity
This coverage is designed to indemnify the bank itself against litigation by customers, and other third parties alleging errors, omissions, misstatement or imprudence committed by directors, officers and employees in the performance of their service.
These two areas encompass professional liability, and there is some overlap between the insurance coverages designed to address them. However, although D&O is narrower in scope in terms of the individuals covered, it is significantly broader in terms of the wrongful acts which it covers generally covering all wrongful acts not specifically excluded. On the other hand, PI covers only specific professional services provided by the bank - trust, brokerage, investment advisory etc. D&O policies may specifically exclude such services from coverage.
Professional liability is created by the relationship between various parties including clients, regulators, shareholders, employees, vendors, joint venture partners and the banks. The relationship is based on the legal system in which the bank's activities take place. In addition, the same act may result in a liability situation for both the bank (through the actions of employees) as well as the Board of Directors. Thus acts of negligence or misconduct by employees, inappropriate or prohibited investments in a customer portfolio, errors in securities processing, failure to execute contractual obligations with a client may result in a liability for the bank However, the legal system may also involve allegations of mismanagement by the Board of Directors, regulatory non-compliance, product fraud, insider trading, bad loans which materially effect share price. In this case the liability may also extend to the Directors both singly and severally. Professional liability arise from a number of sources.
Shareholder Actions - Globally, the largest single source of professional liability exposure arises from shareholder actions against management, officers and employees for negligence and misconduct.
Client Services - The most rapidly growing area of professional indemnity liability exposure is in the area of the provision of client services. Trust, custodian relationships, buy/sell agreements, and investment advisory services all provide a large and growing exposure for both directors and officers and the bank itself.
Employment Practices - Employment actions represent the second largest source of D&O liability globally. D&O claims arise from employees during major business transactions i.e. mergers, acquisitions, implementation of new technology, downsizing, as well as from hiring, promotion, transfer, and termination practices.
Environmental Claims - The growth of environmental liability has coincided with the trend to impose personal liability on directors and officers who, in the performance of their duties, become subject to civil or criminal penalties for violation of environmental tows.
Lender Liability Claims - Lender liability places directors and officers at risk both as defendants in the first instance or as indemnitors when their bank have been held liable. The range of lenders' liabilities includes contractual liability, product liability, personal injury, property damage, fraud, duress, and emotional distress.
During the initial negotiations with the borrower, lender can be held liable for revoking a loan commitment where no commitment was intended, charging the terms of the commitment, or fraudulently inducing a borrower to borrow. Once a loan is made, additional liability exposure may arise in situations when the lender refuses to advance funds or restructure debt, threatens to invoke covenants in the loan agreement, accelerates the loan, responds to credit inquiries, or institutes foreclosure proceedings. Should a loan go bad the bank will typically step into a more aggressive role in its relationship with the borrower. This more aggressive posture combined with a generally more strained relationship between lender and borrower creates a fertile environment for lender liability.
Lenders may face an assortment of exposures including workout negotiations, collateral liquidations, assets seizure, and actually taking control of the management of the borrower's business. In an increasingly more competitive global business environment, it is only reasonable to expect that the business of lending both within and outside the Kingdom will become more complex. This increased level of complexity will inevitably lead to a higher exposure to lender liability issues.
Since these exposures are entirely driven by the social, legal and business environment in which business operations occur, it is important to address these exposures not only as they relate to operations within Saudi Arabia, but also outside the Kingdom.
Within Saudi Arabia - Under Saudi Company Law (Royal Decree M/6 of 1385)* Articles 66 to 82, members of Boards of Directors are jointly responsible for compensating the company, the shareholders or others for damages resulting from their management of the company or contravention of provisions of company law. This seems to differ little from the provisions of the proposed European Community Fifth Company Law Directive and other European countries. Therefore, Saudi Company Law differs little from that of other developed countries with respect to the legal obligations of corporate directors and officers; and a substantial exposure to professional liability, particularly Directors and Officers liability, currently exists for banks within the Kingdom.
Outside Saudi Arabia - The third party legal liability situation outside Saudi Arabia is far more grave than that found within the Kingdom. Any Saudi bank operating in another sovereign jurisdictions will be subject to the laws, business practices, political and social conditions of that area. Thus any Saudi bank operating in the United States, the United Kingdom, or western Europe runs a significant risk of being sued for alleged illegalities and/or mismanagement in connection with the bank's activities in these areas.
Another area of exposure which Saudi banks must recognize is the exposure created by their outside directors, such as directors and officers of Saudi banks serving on the boards of joint venture companies or partnerships or other non-Saudi corporations. Outside or independent directors are now routinely threatened with potential liability and are sued along with the rest of the board. In the past, outside directors were not expected to be involved in a bank's day to day affairs. How, today the trend is for outside directors to be knowledgeable oven experts in bank's issues and are being looked upon by courts, regulators and litigants as the "watchdogs" of board activities.
Professional liability represent a fast growing and potentially damaging area of operational risk for activities outside Saudi Arabia. Thus it is essential that Saudi banks develop policies and procedures to carefully assess product and services risks in this area and take measures to manage these risks.
* The Saudi Company Law (Royal Decree M/6 of 1385) has been replaced by the Companies Law (Royal Decree M/132), dated 01/12/1443H.
2.2.3 Contingent Client - Related Liability Risks
One of the fastest growing and most intractable areas of operational loss exposure is that presented by contingent client-related liability. This relates to indirect responsibility for a client's business operations and products. Since major liability losses may bankrupt a client, plaintiffs will seek anyone connected with the client possessing sufficient funds to secure a financial settlement. Unfortunately, this is often a bank with whom the client had or has a relationship. These types of contingent liabilities may arise from a number of situations including.
1. Environmental Liability: Banks may incur substantial environmental liability when they become responsible for environmental damage or hazardous waste cleanup (i.e. an oil spill from a tanker for which the bank was a lender). This type of liability exposure is expanding globally at a tremendous rate as countries continue to enact ever more punitive environmental laws and regulations.
2. Product Liability: Product liability may occur when a client in which the bank has an equity position or financing interest is sued alleging negligence (i.e., class action suits against a pharmaceutical manufacturer).
3. Death and Bodily Injury : This liability may arise from an event involving a bank owned asset that is leased to or operated by others (i.e. commercial aircraft) or from an event involving a repossessed asset (i.e., fire at bank owned or controlled hotel).
Therefore, as global environmental and product liability laws and regulations becomes more stringent and tort liability becomes more widespread, all Saudi banks will become increasingly more exposed to this type of operational risk both inside and outside the Kingdom.
2.3 Other Risks
2.3.1 Statutory and Regulatory Liability
Globally, banking laws and regulations are becoming more complex, compliance more costly and time consuming, and the consequences of non-compliance (financial, legal, and reputation) more severe. In addition, some countries are increasingly applying criminal statuses to such essentially non-criminal areas as investment operations and cash management services. These liabilities may take three forms:
1. Financial Penalties : Within the Kingdom, violation of SAMA circulars and directives may result in substantial financial penalties being levied. Saudi banks operating outside the Kingdom are also subject to not only fines imposed by regulatory agencies, but may also find themselves responding to both civil and/or criminal charges which may carry financial penalties of such a magnitude as to cause a substantial impact on the balance sheet.
2. Restriction or Termination of Operations: Within Saudi Arabia, violation of SAMA rules and directives may lead to censure by the regulators and, in extreme cases, restriction of certain banking activities or total revocation of banking privileges within the Kingdom. This exposure is even more severe for Saudi banks operating outside the Kingdom. Even relatively minor technical violations of banking regulations may lead to the closure of major overseas branches.
3. Risk to Reputation: All banks fundamentally operate on the basis of trust. Therefore, publicity associated with statutory and regulatory infractions may act to undermine this trust with both customers and shareholders. While banks may be able to absorb both financial penalties and regulatory sanctions, they cannot absorb a major loss of customer and investor confidence.
Therefore the maintenance of aggressive and highly pro-active compliance program by banks is becoming increasingly more critical as a major component in controlling the operational risks associated with regulatory and legal non-compliance.
2.3.2 Political Risks
All banks operating within the Gulf Region are subject to certain distinct geo-political risks. However, if viewed in a broader perspective, these risks are certainly no more severe than those faced by banks operating in other areas. Therefore, of far more concern from an operational risk perspective is the prospect of new and more restrictive banking and securities regulations in other countries in which Saudi banks operate. Within the Kingdom, the prospect of punitive and highly restrictive regulation must be viewed as remote. However, in those oversees areas in which Saudi banks have significant business interests that some restrictive regulations may be expected.
Given the major social and political changes taking place in the industrialized countries and developing world, all markets now possess a significant degree of political instability for international banking operations. Therefore, it is imperative that all Saudi banks operating outside the Kingdom or significantly involved with international trade, develop management systems and procedures for actively monitoring operational risk associated with the political and regulatory environments in which they conduct their business operations. Such systems should include appropriate "red flag" and warning indicators, and effective alternative strategies and action plans to prevent or mitigate losses.
3. Management of Operational Risk Through Insurance Schemes
The successful management of operational risks is central to the long-term profitability and . survival of a bank. All banks are exposed to a variety of such risks and must develop an integrated management approach for their effective control. Management response must include a strong organizational structure, an affective system of internal controls' segregation of duties, ; internal and external audits, physical security procedures, etc.
Another important method to limit operational risk includes the purchase of insurance. The various forms of insurance schemes include self insurance, regular insurance and other insurance alternatives, encompassing retention groups, group captives, risk sharing pools, etc. Insurance is a method to fund a loss exposure as opposed to managing or controlling risks. Other effective i mechanisms to limit the impact of losses arising from operational risk include the finite risk insurance approach. This approach involve risk transfer through regular insurance and self insurance, and generally has an upper limit to its liability, hence finite insurance.
3.1 Self Insurance
The financing of operational risk is based upon the premise that any organization of a certain size will pay for its operational losses either by purchasing insurance or by totally self-insuring. Eventually insurance costs will adjust to pay for actual incurred losses. There is a clear and direct relationship between insurance premiums and actual losses which may be tracked over a period of time (generally three to ten years). Consequently, some organizations decide to underwrite the risk themselves by not insuring with external parties. The exception to this theory is the random catastrophic loss (or "long tailed risk") which occurs rarely, if ever. Even in self insured programs, insurance is purchased or should be purchased to cover these "long tailed risks" The retention of risk is most appropriate for low cost/high frequency losses. Some unsophisticated buyers purchase insurance only for smaller losses. This is both an extremely uneconomical method of financing small losses and exposes the organization to potentially catastrophic losses. Once management realizes that the organisation will ultimately pay for its own losses, risk identification and risk control will become paramount in managing risk.
Even in "insured" programs there is a strong element of self insurance. This becomes more predominant for those risks whose costs becomes higher as the size of the organization increases i.e. where insurance cover is generally reserved for catastrophic risks. Therefore, as the nature and the size of banks within the Kingdom changes, so too does the need to address the issue of self insurance.
Self insurance has three major advantages:
- Improved loss control as a result of increased risk awareness.
- Improved claims control.
- Cash flow benefits.
However, it also has two significant disadvantages:
- Financial instability in cases of poor budgeting/reserving.
- A need for increased management oversight and administration.
There are various forms of self insurance as given below:
3.1.1 Through Contracts
A bank may transfer its financial responsibility through purchase of insurance or it may transfer its liability through a contractual arrangement (hold harmless agreement).
Self insurance may be obtained through a contractual agreement. As a practical matter, the ability to transfer risk contractually depends on whether one party or the other to the contract is in a better bargaining position. As one cannot always arrange to have a contract drawn in one's favour, there should be a review of all contracts before they are signed to make sure what liabilities are being accepted.
Even when the bank is in the position of being able to dictate terms of contract, every effort should be made to ensure that the provisions for the transfer of risk are both reasonable and equitable to both parties. In recent years, many countries have enacted legislation which has acted to significantly restrict the use of "hold harmless" language in contracts. When transferring risk through any form of hold-harmless agreement, it is essential that a number of points be reviewed by competent legal counsel:
Reasonable of Provisions - Harsh and restrictive language may serve to both antagonize customers .and may be invalidated in court as being contrary to both law end public policy. 1t is essential that the bank clearly understand precisely what contractual limitations of liability are legally acceptable in the jurisdiction in which the contract is to be enforced.
Clarity of Language - Unclear or ambiguous language will usually be construed against the maker of the contract. Therefore, it is critical that all contracts be written clearly and that unnecessary legal 'jargon' is avoided since much of the traditional legal language has been invalidated by recent changes in statute in many countries.
Disclosure of Obligations - All contracts should clearly disclose the obligations of all parties to the contract. Failure to adequately disclose obligations may make the contract un-enforceable.
Financial Soundness - The bank should always ensure that the counter-parties are financially to meet their contractual commitments. It is often useful to obtain an irrevocable financial guarantee from the counter-party
3.1.2 Unfunded Retention
The most common method of unfunded retention is the deductible. Also refer to section 3.2.3 entitled Deductible. Generally deductibles should be used to eliminate coverage for losses that are apt to occur regularly. For example deductible levels of employee dishonesty should be sufficiently high to eliminate low level theft of cash by Tellers and ATM Machines.
3.1.3 Funded Retention
Although more rare than unfunded programs, self insurance also includes programs where funds are actually set aside to pay incurred losses These have several significant benefits including the following:
1. Liability Accounting - By using a funded approach, the funding process goes hand in hand with an accounting system which establishes the amount of the liabilities. It is extremely useful to have an accurate measurement of year-by-year costs of operational losses - particularly as these risks grow relative to the bank’s size. This assessment ensures that significant unfunded and unrecognized liabilities are not accumulating under the self-insurance program. Furthermore, it is crucial that actuarial analysis is used for projecting losses and in determining loss reserves to avoid significant unfunded or unrecognized liabilities.
2. Service and Product Pricing - An accurate accounting and assessment of costs associated with operational losses can be important in both pricing the institution's products and services and in determining those business areas which are profitable and those which are not.
3. Investment of Funds - A funded program allows specific investment income to be earned on the funds comprising the funded loss pool. This, in turn, offsets the cost of the losses themselves.
3.1.4 Setting up own Insurance Companies
When a banks actually establishes its own insurance company it is also called "single parent captive". Such insurance companies actually act as a re-insurers, using the services of a licensed insurance company to issue policies and handle claims. This licensed insurance company is often referred to as the "fronting" insurer. Under this arrangement, the fronting insurer does the insurer's claims handling and loss control services, satisfies various legal and regulatory requirements concerning policy issuance, and may also satisfy creditors shareholders, regulators, and other interested parties The "fronting" insurance company actually assumes the primary legal obligation for the payment of claims. Thus, if professional indemnity is insured in the captive but the bank becomes insolvent, the "fronting" insurer issuing the professional Indemnity Policy is ultimately responsible for the payment of all incurred claims, regardless of whether it is able to collect from the captive or the bank. Therefore, while the use of single parent captives may provide a potentially viable vehicle for managing operational risk within a single bank, its use must be carefully evaluated in relation to legal implications within the Kingdom.
3.2 Regular Insurance
The most common method of risk transfer is through the purchase of insurance whereby the insured exchanges the possibility of incurring an unknown large loss for a comparatively smaller premium payment.
3.2.1 Relations with the Market
Unfortunately, some banks treat the purchase of insurance essentially as "commodity', transaction being driven entirely by price. Consequently, it is routine for banks to place their insurance programs out on an annual tender offer basis, and place little emphasis on developing stable and long-term relationships with both brokers and underwriters. All financial markets reward stability and consistency and the bank insurance market is no exception. The effect of this instability and fragmentation in the some of the insurance market has been two-fold.
Quality of underlying re-insurance - When account relationship is perceived by the both underwriters and brokers to be totally price driven, it is often impossible to re-insure the risk with the most reputable and stable re-insurers. This means that brokers must often place the risk with .re-insurers of lesser quality and stability. This, in turn, frequently leads to difficulties in claims settlement and other coverage issues, as weaker re-insurers are often reluctant to settle even the most valid of-claims. In addition, brokers also tend to charge a premium for these types of placements - meaning that brokerage commissions are higher as a percentage of overall cost and it is often difficult (if not possible) to find out the exact extent of these charges or to get full visibility into who the re-insurers are on the cover.
Lack of Enhanced Coverages and "Value Added" Services - Brokers and underwriters reward stable long-term relationships with the provision of "value added" services and enhanced coverage. Both brokers and underwriters add value to relationships through such vehicles as underwriter/broker financed risk management, audits and consulting services, assistance in structuring risk financing programs (such as captives, pooling arrangements, and finite programs), and other forms of expert operational risk management support. Long-term and stable relationships also invariably bring with them an increased willingness by underwriters to enhance coverage within existing premiums and deductible levels, to provide more favourable policy wording, and to continue to renew coverage even in the face of loss. Banks should consider the possibility of multiple year insurance contracts and also negotiating broker services based on fees as opposed to commissions.
3.2.2 Type of Coverage
Although globally over fifty different types of insurance coverages are available specifically for banks, six types are of primary concern.
The Bankers Blanket Bond/Financial Institution Bond (BBB/FIB)- This coverage generally consists of six basic insuring agreements: employee dishonesty, loss of property on premises, loss of property in transit, forgery, forged securities, and counterfeit money. The BBB/FIB has traditionally provided the cornerstone for any bank insurance program. Although, most banks world-wide purchase this coverage, which is mostly a function of management's perception of operational risk exposures as well as generally accepted business customs. Further, there are no rules either formal or informal for establishing bond limits. Only in some jurisdicticus there are legal or regulatory requirements that a financial institution purchase a BBB/FIB
Electronic and Computes Crime (ECC) Coverage -The ECC may either be a separate or stand-alone policy or appended to the BBB/FIB. It is designed to respond to financial loss from third-party fraud or mysterious and unexplained disappearance relating to the insured computer or telecommunications systems. It is for this reason that ECC coverage may not be written without a BBB/FIB being present. The ECC (in its London form) currently consists of eleven insuring agreements i.e Computer Systems, Insured Service Bureau Operations, Electronic Computer Instructions, Electronic Data and Media, Computer Virus, Electronic Communications, Electronic Transmissions, Electronic Securities, Forged Tele facsimile, and Voice Initiated Transfers. Generally, the ECC is purchased in the same limit as the BBB/FIB since it is truly a companion piece to the BBB/FIB.
Directors and Officers (D&O) Coverage - D&O coverage indemnifies directors and officers of the bank against liability claims arising from alleged negligence, wrongful acts, errors and omissions. The wording and insuring agreements of directors and officers policies are specific to the jurisdiction in which the coverage is being written. On a global basis, D&O coverage is rapidly overtaking the BBB/FIB as a institution's most important and expensive form of transferring operational risk through insurance.
Professional Indemnity (PI) Coverage - Unlike Directors and Officers liability insurance, banks professional indemnity coverage is intended to provide insurance to the bank itself against claims arising from alleged errors or omissions committed by bank's employees and officers in the performance of their professional duties(fiduciary and operations), investment advisory activities, private banking, etc. This is driven by the shift in emphasis away from lending income into income streams generated by fee for service.
Payment Card Coverage - Coverage for losses incurred by banks as the result of counterfeit, forged and or altered payment cards is currently available through most international payment card organizations such as VISA and MASTERCARD. This coverage is designed to address counterfeiting, forgery and or alteration of both the embossed plastic as well as magnetic encoding on the card. In addition, specialised coverage for merchants, banks, processors, and independent service organizations against fraudulent and/or excessive charge baclcs by participating merchants has recently been introduced. Underwriters view the loss, theft, or misuse of cards as a completely uninsurable risk. Therefore, no coverage for this exposure is available in the market.
Given the potential profitability of payment card operations, growing consumer demand for these services, and the potential for enhanced sharing of credit data between Saudi banks, it is inevitable that the number of payment cards in circulation within the Kingdom will increase dramatically in the near term. It is also inevitable that given global trends in payment card, fraud losses to banks will increase substantially. To address this growing operational risk, banks within the Kingdom will need to take a hybrid approach consisting of loss prevention, and regular and self insurance of risk.
Loss Prevention - The payment card industry has found that the most effective way of dealing with card fraud and abuse is prevention. Careful screening of both cardholders and participating merchants, on-line monitoring and analysis of account activity, anti counterfeiting measures, sharing of fraud information among institutions. and aggressive investigation and persecution of abuse has significantly reduced losses on a global basis. As Saudi banks increase their participation in the payment card market, it will be essential that they establish with the assistance of organizations such as VISA International and MASTERCARD International viable and effective loss prevention programs in this area.
Internal Risk Financing - All banks involved in payment card operations must understand that a certain level of loss to fraud is simply a cost of doing business. While loss prevention programs may keep this amount within manageable limits, each institution must establish self insurance mechanisms - funded retention, loss allocation, contractual transfer of risk to address these losses.
External Risk Financing - Due to the relatively high cost and coverage restrictions of conventional insurance, Saudi banks should explore the possibility of using alternative forms of external risk transfer including risk retention groups, risk pooling, and group captives to address the financing of their exposures.
Political Risk Insurance - First written in the early l96o’s, political risk insurance is designed to facilitate stability in international trade and investment by indemnifying certain operational risk associated with political and regulatory activities in the counterparty country. This type of coverage is written by commercial underwriters in the United States, the United Kingdom, and Western Europe. In addition, it is also available through the facilities of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank. Political risk insurance may be written to cover a number or areas:
Confiscation, Nationalization, Expropriation, and Deprivation (CNE&D) This is most commonly purchased form of political coverage. These policies are generally used by organizations with assets permanently located in another country and respond when these assets are taken over by government action.
Contract Frustration - This entails the nonperformance or frustration of a contract with a overseas customer through an invalid action by that customer. This invalid action wrongfully invalidates an overseas transaction in such a manner that the bank is unable to obtain payment for its services or recoup its assets.
Currency Inconvertibility - This type of loss occurs when payment occurs in local currency and the local government is unable or unwilling to exchange the currency at prevailing market rates. This has traditionally been a problem in many developing countries.
Trade Disruption - This types of losses are associated with interruption of trading activities due to war, strike, change in government, or change in law or regulation in the counterparty country. Trade disruption coverage can provide protection not only for the direct loss of revenue associated with the disrupted transactions, but also potential loss of earnings, extra expense, loss of profits, and loss of market.
3.2.3 Deductibles
One of the major "revolutions" which has taken place in the bank insurance industry globally has been in the area of retention find deductible levels. Many banks have realized that retaining and financing significant portions of their operational risk exposure simply makes good business sense. No longer can insurance be used as a substitute for sound management and loss control. Generally deductibles should be used to eliminate coverage for, losses that are apt to occur with some degree of regularity. For example, when purchasing employee infidelity coverage under the BBB/FIB, the deductible level for employee dishonesty should be set sufficiently high to eliminate low level theft of cash by tellers and ATM technicians which occur rather frequently.
There are two primary types of deductibles:
Straight Deductible - This is a flat amount that is subtracted from each loss. The sum insured is then paid over and above this amount of retention.
Aggregate Deductible - These types of deductible protect against a series of losses which, in total, may exceed the amount which can be safely assumed by the bank. Often written in conjunction with a straight deductible, this "stop loss" protection limits the total amount of losses to be absorbed to a specific amounts An aggregate deductible may apply annually or during a specified policy period, may limit the amount to be retained by the accumulation of a number of deductibles, or it may require that claims in total exceed specified amount before coverage is afforded.
While many approaches have been devised by both insurers and insiders to determine the "correct" level of deductible, the most commonly used method is to calculate the deductible as a percent of total assets. The rationale behind this approach being that the larger the institution in terms of asset base, the better its capability to absorb losses without resorting to insurance. Currently. the factor used by many underwriters in determining the minimum deductible level is approximately .0005% of total assets. Thus, using this factor as a guide, a bank with assets greater than SR 60 billion should, as a minimum, be retaining approximately SR 3 million loss as its deductible for BBB/FIB, EEC, D&O, and PI coverages, with a negotiated deductible of SR 5 million as being optimal from the insurers standpoint.
3.2.4 Managing Losses
One of the significant methods for measuring the effectiveness of banks in managing their operational risks is the evaluation of the losses. In evaluating levels of loss several factors should be kept in mind:
Recurring Vs Catastrophic Losses - In general, routine recurring losses (small teller frauds, thefts of cash from ATMs, low value check forgery, etc.) should not exceed the banks deductible level. Although, all banks should attempt to control and reduce these losses to the lowest practical level, some losses must be expected as a cost of doing business. In fact, implementing a true "zero loss" environment would probably be far more costly than simply observing an acceptable level of small losses. Insurance should be viewed as catastrophe cover and should only be used to assist the institution in dealing with the consequences of "low probability and high cost" risks. Again, insurance should not be used as a substitute for sound and effective management of operational risks.
Frequency, of Claims Payment - If deductible levels have been established properly underwriters expect to pay a loss on an account every 7 to 10 years. However, with a loss frequency of more than 1 per 5 years indicates both a deductible level which is too low and problems with the bank's internal controls
Allocation of Losses
In an organisation, such as a bank which consists of many different departments and subsidiaries. it is good risk management to charge a unit directly for its losses However, it may be very difficult for smaller units to handle their self-insurance as self-insurance levels may be handled more easily by large units or subsidiaries. Therefore, in order that all units be allocated their fair share of premiums and loss costs, it is often necessary to establish an internal pooling or loss allocation system. Banks may add to the credibility and create accurate allocating systems by using acturial methodology and techniques. Such a system allows for the direct allocation of loss in some cases and the sharing of loss in others. This can make a system of higher deductibles practical.
For example, consider a bank with fifty branches and other non bank subsidiaries. A SR 5 million loss spread among the fifty units in one time period would amount to SR 0.1 million on the average. If an appropriate deductible is charged to the unit that actually suffered the loss and loss-sharing levels of the other units are adjusted relative to their size, a relatively large loss may be absorbed relatively painless. Further, very large losses could be amortized over a period of years. However, there are two important issues to consider in constructing such a system.
Penalize Frequency; Accommodate Severity -Allocation system should penalize frequency and be more forgiving of severity. This is based on the fact that severe or the high cost low probability risks" are far more difficult to control than incidents which to occur frequently and that if many incidents are allowed to occur frequently, it is inevitable that one or more will be severe. For this reason, charging units directly for loss costs can significantly improve loss controls, but the size of the penalty should be appropriate to the size of the operation.
The System Must be Accurate and Understandable - Allocation systems must be both accurate and clearly understandable to unit managers. Many allocation systems have failed because they became very complex in an attempt to create a degree of accuracy that may serve no useful purpose. The following example may serve to illustrate the point:
In this bank, a deductible of SR 1 million is set for Head Office and other wholesale nondepository subsidiaries (i.e trust company, the private bank, etc) while deductible as low as SR 50,000 are set for the small branches - a total of 35 units. Each unit pays 100% of its deductible for losses occurring in its units, and 50% of the loss in excess of the deductible up to an amount no greater than 150% of the stated deductible amount. Thus, a unit with a SR 50.000 deductable would pay the first SR 50,000 of the loss plus 25,000 of the next 50,000 loss for a total possible deductible of Sr 75,000. All units then share equally an excess losses up to the institution's aggregate of SR 1,000,000 deductible. Therefore, the largest loss which could be shared is SR 925,000 which when divided by 35 units is SR 26,428 per unit. If this is still too large a burden for the smaller units, the risk sharing percentages may be adjusted or a cap set on the maximum loss to be borne by smaller units, with the remainder shared corporate-wide.
3.2.5 Premium levels
In evaluating the level of premiums paid by banks for their insurance coverage it is useful to use the standard insurance industry metric of “Rate on Line”_ This is simply the . ratio of premium charged to sum insured (i.e. premium charge/sum insured = "Rate on. Line"). Globally, the spread for Rate on Line runs between 1% - 2% for highly preferred risks with excellent loss records and high retention to approximately 10 % for low quality risks with high loss records and low retention.
Therefore, as may be readily seen insurance pricing is designed to insure that underwriters will recapture the cost of all but the most catastrophic (and lowest probability) losses through the premium structure The premiums of conventional insurance programs may be structured in a number of ways:
Guaranteed Cost Programs - The standard approach for determining a bank's insurance premiums is by means of a guaranteed cost rating. most Saudi banks currently use these types of insurance programs. The guaranteed cost plan is intended to pre-fund all losses that are expected to occur during the policy period. This approach applies predetermined rates to an exposure base to determine premiums. The premium is guaranteed in the sense that it will not vary. However, depending on actual loss incurred during the policy period, premiums may be adjusted at renewal to reflect actual exposures which existed during the rating period. Therefore, reserves for losses that have been Incurred But Not Reported (IBNR) or paid remain with the insurer and investment income accrues to the insurer and the insured receives no benefit from them. However, if the insured has poor loss experience during the policy period, the insurer has no recourse for these which could far exceed earnings generated from the reserves.
Retrospective Rating Programs - Retrospective rating programs are based on the risk management ability and performance of the bank. For these arrangements which offer the insured the opportunity for substantial cost savings over a guaranteed cost plan if the loss record is good. Consequently, if the loss record is poor, the insured may end up paying more premium to the insurer than under self-insurance. Retrospective rating programs offer a system of rewards and punishments depending upon the effectiveness with which the bank manages its risk. Retrospective programs may involve a variety of methods.
No Claims Bonus - The simplest of the retrospective rating programs is the no claims bonus. Under this type of policy a percentage of the premium is returned to the insured at the end of the policy period if no claims are filed with the insurer.
Incurred Loss Retro- Here, an initial premium is paid at policy inception and is adjusted during subsequent years as actual incurred losses become known - with deposit premium being adjusted upward or downward based on loss experience. Generally, premium adjustments are computed annually and a minimum is established for the protection of the insurer. It is adjusted on the basis of losses that have actually been paid, as opposed to losses that have actually occured which may be more than losses that have been paid. This eases the insured's cash flow problem and allows the use of the loss reserves. The difference Between the standard premium and the amount paid by the insured is normally secured by a Letter of Credit or other acceptable financial guarantee.
Loss Multiplier Plans - Since all retro methods are essentially cost-plus contracts, a simple way to compare retros is by comparing the amount of "load" for non-loss costs on a percentage basis. Dividing the premium by the incurred losses gives an index known as the Effective Loss Multiplier (ELM) - thus a plan with an ELM of l30% is less expensive than plan with an ELM of 150%. Some plans utilize this-concept for determining the premium by simply multiplying the incurred losses by a stated loss multiplier subject to agreed upon minimum and maximum premium levels. This greatly simplifies the calculation process for both insured and insurer.
Present Value Discount Plans- Under these plans, losses are forecasted and then discounted back to present value at some agreed upon interest rate. Insurer expenses are added and a flat premium is charged. This premium is intended to be adequate to cover losses and to avoid the need for adjustments. However, most plans include provisions for eventually adjustment if actual losses are substantially higher or lower than expected.
Fixed_ Cost Participating Dividend Plans - This type of program is really a hybrid between retrospective and guaranteed costs policies as it gives the insurer an option to return a portion or all of the under-writing profits to the participant if it chooses, but generally does no allow the insurer to charge an additional premium for worse than expected losses. While the potential savings are not as great as under a pure retrospective program, the insured is in a no loss position. This is because maximum premium which may be charged is equal to the guaranteed cost premium less any applicable "dividend" discounts granted by the insurer.
Multiline Aggregate Program - Becoming increasingly more attractive as operational risk exposures rise, multi-line aggregate programs use a single insurance policy to cover all of the institution's exposures subject to an aggregate deductible applied to all covered losses. Once the aggregate deductible is satisfied by the payment of one or more claims, the policy would respond to any additional losses upto the aggregate limit. The theory is that by combining the various types of insurable exposures the overall predictability of loss costs is enhanced. An insured may then pay directly for planned and budged loss costs and rely on the multi-line aggregate policy to cover unplanned "high value low probability risk".
3.2.6 Claims
Banks which have strong internal audit and investigative functions and are able to properly document losses, generally experience little difficulty in getting claims paid in a prompt and satisfactory manner.
As a very general measure, insurers typically pay about 75% of the claimed value for about 90% of the items for which legitimate claims are submitted. Therefore, if an insured submitted ten legitimate claims totaling SR 1 million in a year, they could reasonably expect to receive between SR 600,000 and SR 800,000 in compensation less deductibles. It is extremely important that the bank clearly understand what is covered and more importantly what is not covered under the insurance contract. The filing of frivolous claims for which no coverage was contemplated in the policy not only creates extra work for the banks but also serves to antagonize both brokers and underwriters. However, it should be noted that claim payment is almost entirely a function of the quality of claims. Fully documented paid in full by underwriters, while poorly documented claims are, at best settled for a negotiated amount below that claimed or denied completely. In addition the quality of claims documentation and processing by both the bank and its broker directly effects the speed with which claims are settled. If underwriters must repeatedly request additional documentation in order to reach a settlement decision, claims processing becomes a drawn out and cumbersome process. In addition, if a bank has inadequate audit trails and investigative documentation procedures it will be necessary to secure the services of outside accountants, attorneys' or loss surveyors to conduct a proper investigation and generate claim documentation which will be acceptable to the underwriter. This process is both costly and time consuming and materially erodes whatever financial settlement is ultimately reached with the insurer.
It should also be noted that nowhere in any BBB/FIB or ECC contract a condition precedent to liability exists which requires a court judgment against a perpetrator to prove a claim. In fact, no condition precedent to liability exists in the insurance contract that incidents of either internal or external fraud be reported to the police.
Although this may be a legal/regulatory requirement and is certainly a prudent action on the part of the bank.
3.3. Other Insurance Alternatives
In addition to conventional insurance programs, a number of alternative techniques have developed in recent years to facilitate the external financing of operational risk.
3.3.1 Risk Retention Groups. Group Captives,. and Risk Sharing Pools
Although they are established as insurance companies, they are more properly viewed as self-insurance mechanisms. Risk retention groups, group captives and risk sharing pools are simply cooperative risk funding vehicles designed to write insurance to cover risks. They maybe formed to reduce insurance costs within a specific group of participants, increase limits of coverage and secure more favourable terms of coverage, or to spread the risk as compared to going without insurance entirely.
Pools are developed by group captives and self insureds that wish to transfer some of the risk they have agreed to assume. Pooling arrangements frequently occur when group captives cannot find adequate reinsurance or the cost of such reinsurance is excessively high relative to the risk. Thus, participants in a risk retention group, group captive or pool should understand that they are participating in self-insurance. Viewing the captive or pool in this manner is important for two reasons:
Paying for Loss - With the exception of reinsurance for potential catastrophic losses, the group will pay for virtually all of its own losses.
Pooling the Risk - Experience indicates that the "average premium" theories that underline traditional insurance industry thinking are valid only if good risks are willing to stay in the pool with the bad risks.
3.3.2 Agency Captives
These are captive insurance companies formed by brokers or agents to provide coverage for their insured. These types of captives increase the probability that brokers will have a market into which to place their insured and therefore may allow them to offer broader levels of coverage than that offered by risk retention groups or group captives.
3.3.3 Rent-a-Captive
A highly specialized form of captive operation. These companies are designed for firms that do not want to own a captive but want to obtain some of its advantages. A rent-a-captive is formed by investors and is operated as an income producing business. An insured pays a premium and usually pays a deposit or posts a letter of credit to back up its business. The operators of rent-a-captives handled the operations and claims for the insured and place the reinsurance. .At the end of the policy period the insured is paid a dividend based on incurred losses, operating expenses, and cost of reinsurance.
3.4 Finite Risk Insurance - A Combined Approach
It is a hybrid involving risk transfer through an insurance contract and internal financing of risk. Finite risk insurance and financial reinsurance both involve risks which are limited by an aggregate limit across the policy so that the insurer has a limited liability (hence the term "finite"). They both attempt to "smooth" the peaks and valleys of losses for the insured and the insurer by redistributing these losses over a period or a series of fiscal periods. Finite risk products are tailored for each bank and reflect its own unique risk transfer needs. Therefore, no two programs are alike. Indeed, even definitions of what constitutes "finite risk" differ based on the proposed use of the techniques involved. However, finite risk contracts do share several common features.
3.4.1 Loss Severity and Frequency
Finite risk works best in situations where a severe loss is possible. A typical finite risk prospect is an organization which has a high severity/low frequency loss situation (i.e an "upstream" professional liability loss from overseas derivative trading) for which inadequate insurance coverage is available in the conventional market or the cost of the coverage is prohibitive.
Frequently, a bank will use a single-parent captive to front a finite program to fill the middle layer of operational risk - above the self-insurance used for smaller recurring losses and below commercial insurance used for catastrophe cover - although some insurers have used finite insurance on top of self insurance and handled the upper layer of risk through a captive.
An example of how a finite risk program can handle a high severity/low frequency situation might be that of an investment banking firm which has developed a new series of global derivative trading products. To fully exploit the potential market the firm wishes to spin off this function as a separate operating subsidiary through an Initial Public Offering (IPO). However, investors are concerned that, given current liability issues involving derivative trading products, the proposed firms professional liability exposures are inadequately covered, since they fear that a professional liability loss in the first year of the IPO would drive insurance premiums to a prohibitive level and/or severely deplete capital. To address this issue, a program is structured utilizing both finite and conventional insurance. The finite portion consists of a five year program with a guaranteed premium for the underlying primary finite layer. For coverage in excess of this primary finite layer, commercial insurance is used since premium rates in the excess layers are less than using the finite market. This program gives the firm precisely what it needs during the critical IPO phase - maximum transfer of risk with a guaranteed premium level for five years. In addition, if there are no significant losses over the period of the finite contract, the firm will receive a return of premium at the end of that time.
3.4.2. Multi-Year Duration
One of the primary attributes of any finite insurance program is the ability to address the financing of liabilities over a multi-year period, thereby minimizing the impact of a severe loss in a single year. In addition, finite programs also minimize the "financial costs" of insurance - the cost of going into the market year after year to renew policies and being subject to market cycles. It also help building and strengthening long-term relationships with insurer. Since going into the market on an annual basis is highly inefficient, finite programs are designed to maximize the allocation of premiums to loss payments and minimize their use for transaction costs and overheads. '
3.4.3 Profit Sharing
One of the most attractive aspects of finite insurance programs is the possibility of premium reduction through the return premium mechanism. In return for limitation of liability through an aggregate cap and for a guarantee of premiums over a specific period of time, the insurer agrees to share underwriting profits with the insured in the event of favourable loss performance.
3.4.4 Disadvantages
As with all approaches to managing operational risk. finite risk insurance has certain drawbacks:
Risk Management Expertise - To effectively blend the internal and external financing elements necessary in a successful finite risk program, it is necessary that management clearly understands the nature and magnitude of the bank loss exposures and is willing to pav for a significant portion of these exposures through self-insurance. Banks' must have a very clear view of the financial resources they will need for these programs. Since these programs are multi-year in nature, a bank must be certain about its future period cash flows and how much cash it wants to devote to the program. Otherwise finite risk management programs simply will not work more effectively with structuring the program than will normal conventional insurance.
Cost - Since finite programs are typically structured for three to five years, they may represent a higher initial cost both in terms of guaranteed premiums and costs associated with structuring the program than will conventions insurance. They are certainly more expensive than self insurance. In addition, failure to control losses over the period of the contract may result in no return of premium one of the primary advantages of finite programs,
4. Risk Management Evaluation Questionnaire
This Operational Risk Management Evaluation Questionnaire is designed to provide a tool to assist Banks within the Kingdom in assessing and quantifying the adequacy of their programs for managing and financing operational risk This is not a detailed questionnaire, but covers the main areas of importance in the implementation and management of an effective program of operational risk management within the bank.
For this assessment to be both accurate and objective, the questions should be completed by staff who have an appreciation of overall operational risk management and the implications of the questions with respect to the banks operations and financial planning but who do not have day-to-day responsibility for either major operational areas or for the institution's insurance program. Involvement of Internal Audit personnel may provide both technical assistance in assessing operational risk and controls as well as helping to insure objectivity in the survey process.
There is no "pass" or "fail" score for this Questionnaire. Primary questions are designed to elicit a "yes" or "no" answer. A written response or comment to all questions may be given when the institution uses a different approach than that stated to address the issue or if it is felt that there are or other considerations which should be brought to management's attention. Accordingly, this questionnaire is divided into:
(1) Management oversight
(2) Risk Assessment
(3) Operational Risk Reduction and Control
(4) Insurance Options
The scope of all answers should include both domestic and foreign operations i.e inside and outside Saudi Arabia.
Management Oversight
1. YES
No
COMMENTS
- Has the Bank developed an Operational Risk Management Plan outlining objectives, policies, and standards ?
1.1 If yes to 1, has this plan been: * Formally approved in writing by the Board of Directors?
* Disseminated in writing by senior management ?
* Reviewed on at least an annual basis ?
- Have annual Operational Risk Management Program Goals been established in terms of measurable organizational objectives where possible (i.e., a 50% reduction in branch fraud, a 15% reduction in credit card losses, etc.) ?
2.2 Is the Plan; formally evaluated against these Goals on at least an annual basis by the Board of Directors ?
- Has an Operational Risk Manager been appointed to address overall operational risk management and financing issues within the bank ?
3.1 If yes to 3, is this a full-time position ? 3.2 If yes to 3, does this individual: * Have clear and specific responsibility for operational risk assessment, risk management, and risk financing activities within the bank ?
* Have a written position description ?
- Has an Operational Risk Management Committee been formed to assist the Operational Risk Management in assessing, planning, and managing operational risk management activities?
4.1 If yes to 4, are all major operational and staff areas of the bank represented on the committee to include: Specify such areas represented i.e. Internal Audit, Treasury Operations, Credit Card / ATM's etc.
4.2 If yes to 4, does the Committee meet on at least a quarterly basis? 4.3 If yes to 4, does the Committee report to the Chief Operating Officer ? 4.4 If yes to 4, does the operational scope of the Committee include consideration of: * Fraud, forgery, and other criminal risks ?
* Professional and client related liability exposures ?
* Risk associated with legal and regulatory
non-compliance ?
* Political risk ?
Risk Assessment
2. YES
NO
COMMENTS
- Is there any inventory of the institution's tangible and nontangible resources which may be subject to operational risks. These may include the following:
- Physical Assets (i.e. physical plant, systems, real estate, etc)
- Financial Assets (i.e. cash, securities, negotiable instruments, etc.)
- Human Assets (i.e. employees, officers, directors, customers, shareholders, vendors and contractors, etc.)
- Intangible Assets (i.e. reputation, good will; etc.)
- Are operational risks with respect to new acquisitions, divestitures, expansions, or downsizing been identified. These may include the following:
- Physical Assets (i.e. physical plant, systems, real estate, etc.)
- Financial Assets (i.e. cash securities, negotiable instruments, etc.)
- Human Assets (i.e. employees, officers, customers, share holders, vendors and contractors, etc.)
- Intangible Assets (i.e., reputation, goodwill, etc.)
- Can the bank identify actual and potential loss exposures and risk events for all products and services currently being offered or proposed for implementation. Such risks may include the following:
Criminal acts including fraud, forgery, robbery, burglary and counterfeiting ? Direct loss of injury to or sickness of personnel ? * Loss or compromise of information / data ? * Direct loss of or damage to physical property ? * Consequential loss and or loss of use ? * Customer Contractual Liability ? * Tort and Product Liability ? * Statutory and Regulatory Liability (Legal and Regulatory Compliance ) ? * Political risk and regulatory instability ? - On at least an annual basis, are formal qualitative and quantitative analyses conducted to measure the level of current operational risk?
Does this analyses include.
* Judgmental risk estimates by senior staff and operational managers based on probable and maximum severity costs of a single occurance and / or aggregate losses in a single year ? * Assessment of risk event probabilities by senior managers and operational personnel ? * Review of available loss data from other banks institutions both within the Kingdom and internationally ? * Maintenance of a data base of incident reports and exposure and loss history for both insured and uninsured losses ? * Comparison of past losses and loss ratios to the premium and exposure bases ? * Analysis of trends, reporting, and payment patterns for past losses ? * Decision and event tree analysis ? * Scenario development (including "worse case" analyses) ? * Frequency and severity analyses and projections ? * Preventive measures in place ? Operational Risk Reduction and Control
3. YES
NO
COMMENTS
1. Have formal written programs of operational risk and loss control including risk assessment and control matrices been developed for all operational and staff areas ?
If yes 1, do these programs include:
* Proprietary and confidential data ? * Physical security of the bank's premises ? * Branch fraud prevention and awareness ? * Credit card, ATM, trading, and payment systems fraud ? * Software piracy and patent / copyright infringement ? * Information Systems Security ? * Product and service quality assurance ? * A dherence to customer contractual obligations ? * Compliance with regulatory and statutory requirements within Saudi Arabia ? * Others as applicable ? 2. Does the Operational Risk Management function provide central direction and coordination for operational risk management and loss control and risk financing programs within the institution ? Does its scope include: * Timely reporting of losses to senior management, SAMA, insurance carriers, and law enforcement (when appropriate) ? * Complete investigation of losses in conjunction with internal audit, bank's security department, insurance carriers and law enforcement (when appropriate) ? * Written claims handling procedures for line and staff personnel as well as both in-house claims personnel and external claims handling services ? * Review of claims files and investigative procedures ? * Coordination of claims and periodic qualitative evaluation of the overall claims handling process ? * Follow-up on all open claims and periodic qualitative evaluation of the overall claims handling process? 3. Has the institution developed penalty/reward systems ? Do these systems include: * Regular scheduled comparative evaluation of loss records of various units. * Monetary and non-monetary incentives 4. Has a formal program of operational risk control training been established which emphasizes responsibility and accountability for the control of operational losses ? Insurance Policies
4. YES
NO
COMMENTS
- Is there a written corporate risk financing policy which defines the methods to be used by the bank for insuring itself by considering all the methods available i.e. conventional insurance, loss retention guidelines, parent captive, risk retention group, finite insurance etc.
1.1 Has this plan been approved by the Board of Directors 1.2 Does this policy address loss retention guidelines by addressing the following: * Effect of risk financing options on earnings, budgets and balance sheet ? * Risk aversion (loss tolerance) by management and the Board of Directors ? * Relative cost of risk funding options in the existing market ? * Projection of expected operational losses and possible variance from expected levels ? * Statutory, regulatory, or contractual limitations on risk retention ? - Are all corporate risk financing policies and guidelines formally reviewed by the Board of Directors on at least an annual basis ?
- Are internal risk financing options (self insurance) used which are commensurate with the financial resources of the institution, dispersion (or aggregation) of risk, and established policy ? Do these options include:
* Contractual transfer of risk ?
* Unfunded retention
- Straight deductibles ?
- Aggregate deductibles
- Allocation of small/high frequency losses directly to responsble units ?
- Absorb large and/or random losses at the
corporate level ?
* Funded retention ?
* Single parent captives ?
4. Are conventional insurance options analysed Do these options include ? * Conventional insurance
- Banker's Blanket Bond ?
- Electronic and Computer Crime coverage
- Directors and Officers (D&O) Liablity Coverage?
- Professional Indemnity Coverage ?
- Environmental Liability ?
* Risk retention groups, group captives and risk sharing pools?
* Agency Captives ?
* Rent-a-captive ?
* Finite risk financing ?
5. Do formal policies and procedures exist to coordinate conventional insurance, group captives, risk pooling, finite risk etc., with internal financing options i.e deductibles, losses and deductible sharing within the groups etc. 6. On at least an annual basis is a formal market review of conventional insurance done. Does this review include: * Market capacity ?
* Terms, conditions, and flexibility of coverage ?
* Cost ?
7. Are the results of this, review formally reported to the Operational Risk Management Committee and the Board of Directors ? 8. On at least an annual basis is a formal review of the insurance program conducted to evaluate the performance of both Underwriters and Brokers ? If yes, does this review include:
* Financial stability ?
* Claims payment record ?
* Responsiveness to the institution’s coverage needs ?
* Premium structure and pricing ?
* Quality of program administration ?
* Professional competence and value added ?
* Fee for service/negotiated commission ?
* Performance parameters established by written
agreement ?
* Arunual review of performance against contractual obligations?
* Quarterly progress reports / review sessions ?
* Claims handling records ?
* Quality of program administration ?
9. Does bank maintain a direct relationship with its Underwriters (both primary insurers and reinsurers) ?
- 10. On at least an annual basis does the bank review its exposure to catastrophic risk (i.e "long tail risks" which exceed existing risk financing measures and cause significant impact to the balance sheet and / or share price ) ?
- Are these findings reviewed by both senior management and the Board of Directors ?
- Are appropriate measures. taken to secure protection for catastrophic losses ? Do these measures include:
* Use of highly qualified and specific indemnities (i.e customer
contractual, governmental, etc) ?
* Use of global insurance markets to secure specific catastrophe coverage in excess of primary limits ?
* Plan for post-funding potential losses in excess of
purchased protection ?
* Pre-loss reserving and finite insurance programs ?
5. Glossary of Terms
External Risk Financing Options - This represents the transfer of risk to a third party and may include: conventional insurance, risk retention groups, group captives, risk sharing pools, rent-a-captives, agency captives, and finite risk insurance.
Internal Risk Financing Options - This represents self insurance and may involve a number of techniques including: unfunded retention, single parent captives, contractual transfer of risk, and funded retention.
Lone Retention Guidelines - Formal guidelines established as a part of the Operational Risk Management Plans as to how much risk may be retained by the institution in the form. of self insurance.
Operational Risk - The risk of loss - either financial or non-financial inherent in the bank Operations. Operational risk is pure risk i.e there is no opportunity for gain as in financial risk. Operational risk either result in loss or no loss. Examples of operational risk are: losses due to criminal activity (fraud, counterfeiting, forgery, etc.,) loss of revenue due to system outages or destruction, professional liability losses (shareholder suits, fines for regulatory non-compliance, suits by customers) intangible losses such as damage to reputation and credibility, etc.
Operational Risk Manager - The senior manager within the bank responsible for the development of the bank's Operational Risk Management Plan and implementation and management of the Operational Risk Management Program. The Operational Risk Manager should report directly to the .managing Director/General Manager.
Operational Risk Management Committee - An operational committee of the bank reporting directly to the Operational Risk Manager. this committee should be composed of members of all major operational and staff departments within the bank; to include, but not be limited;: to Internal Audit, Treasury Operations, Credit Card/ATM, Data Processing / Telecommunications, Insurance, Domestic Branch Operations, Overseas Branch/Subsidiary Operations, Private Banking, and Compliance. The Operational Risk Management Committee shall be responsible for assisting the Operational Risk Manager in developing Risk Assessment and Control Matrices for each functional area within the bank. and developing and implementing the Operational Risk Management Plan.
Operational Risk Management Plan - The strategic plan developed by the Operational Risk Manager and the Operational Risk
Management Committee and formally approved by the Board of Directors for addressing the management of operational risks within the institution. This plan should define how the institution proposes to handle each category of operational risk (i.e. crime, professional liability, regulatory/legal non-compliance, political risk, etc. ) and the methods to be used in their control (internal controls, internal retention of risk, risk transfer through conventional insurance, finite risk management programs, etc.). This plan should be reviewed and approved by the Board of Directors on at least an annual basis.
Penalty / Reward System - In the context of operational risk management, Penalty/Reward Systems should be used to create a system of incentives for the effective management of operational risk at the level of the operational department or unit. For example, branches which reduce losses below a target amounting receive bonuses equal to half of the amount saved.
Risk Assessment and Control Matrices - These matrices should be developed by each functional area and reviewed by both the Operational Risk Manager and the Internal Auditor. They should identify each area of operational risk to which the department / unit is subject, the level of potential loss (either financial or non-financial), and all internal and external methods to be used to either control or finance risk.
Risk Financing Policy - Formal guidelines established as apart of the Operational Risk Management Plan defining the methods to be used by the institution (i.e. conventional insurance, single parent captive, risk retention group, finite insurance. etc.) for the financing of operational risk.
Risk Management for Shariah Compliant Banking
Risk Management Framework for Shari’ah Compliant Banking
No: 43038156 Date(g): 2/12/2021 | Date(h): 27/4/1443 Status: In-Force Based on the powers granted to the Central Bank under Saudi Central Bank Law issued by Royal Decree No. (M/36) dated 11/04/1442 H and related regulations. Referring to the Central Bank Circular No. 41042498 dated18/06/1441 H on the Shariah Governance Framework for Local banks Operating in Saudi Arabia, which is considered the first stage of establishing a supervisory framework for banks and banks practicing Islamic banking.
And as a complement to the Central Bank's issuance in this regard, and in order to enhance the environment of compliance with the provisions and principles of Shariah, we inform you of the issuance of the “Risk Management Framework for Banks Practicing Islamic Banking”, which aims to set minimum principles for risk management, market risk and operational risk.
For your information, and action accordingly as from May 1, 2022 G.
1. Introduction
This Risk Management Framework for shari’ah compliant Banking is issued by SAMA in exercise of the powers vested upon it under its charter issued by the Royal Decree No. M/36 on 11-04-1442H (26 Nov 2020G) and the Banking Control Law issued by the Royal Decree No. M/5 on 22-02-1386H (26 June 1966G) and the rules for Enforcing its Provisions issued by Ministerial Decision No 3/2149 on 14-10-1406H.
In February 2020, SAMA has issued Shari’ah Governance Framework for enhancing governance, risk management and compliance practices of Banks conducting Shari'ah compliant Banking. The Risk Management Framework for Shari'ah compliant Banking provides 2 set of rules for establishing and implementing effective risk management in Banks offering Shari'ah compliant product and services. The Risk Management Framework for Shari'ah compliant Banking will further complement and enhance the current Risk Management regime by identifying and suggesting techniques to manage various types of risks unique to Shari’ah compliant Banking. The Risk Management Framework for Shari'ah Compliant Banking should be considered in addition to the various risk management regulations and guidelines issued by SAMA from time to time and Banks will be required to comply with all sets of rules and guidelines. Shari ‘ah compliant Banking products and services are also exposed to various types of risks including the following major categories of risks:
• Credit risk
• Equity investment risk
• Market risk
• Liquidity risk
• Rate of return risk
• Operational risk
SAMA will roll out the Risk Management Framework for Shari’ah Compliant Banking in phases. This will allow a reasonable timespan for Banks to implement various rules stipulated in each phase of the framework. In the first phase, this circular specifies rules regarding overall management of the risks by Banks conducting Shari'ah compliant Banking as well as 2 minimum set of regulatory requirements for managing market risk and operational risk relating to Shari’ah compliant Banking.
2. Definitions
The following terms and phrases used in this document shall have the corresponding meanings unless otherwise stated:
SAMA: Saudi Central Bank.
Rules: Principles and regulations mentioned in the Risk Management Framework for Shari'ah compliant Banking.
Bank: For the purpose of these rules, the Bank means 2 Bank conducting Shari'ah compliant Banking either as a full fledged Islamic Bank or through an Islamic window.
Full Fledged Islamic Bank: A Bank that conducts only Shari 'ah compliant Banking.
Islamic Window: That part of a conventional Bank (which may be a branch or a dedicated unit of that Bank) that provides Shari’ah compliant finance and investment services both for assets and liabilities products.
Fiduciary Risk: The risk that arises from a Bank’s failure to perform in accordance with explicit and implicit standards applicable to their fiduciary responsibilities.
Salam: The sale of a specified commodity that is of a known type, quantity and attributes for a known price paid at the time of signing the contract for its delivery in the future in one or several batches.
Parallel Salam: A second Salam contract with a third party to acquire for a specified price a commodity of known type, quantity and attributes, which corresponds to the specifications of the commodity in the first Salam contract without the presence of any links between the two contracts.
Sukuk: Certificates that represent a proportional undivided ownership right intangible assets, or a pool of tangible assets, receivables and other types of assets. These assets could be in a specific project or specific investment activity that is Shari'ah compliant.
Murabahah: A sale contract whereby the bank sells to a customer a specified asset, where the selling price is the sum of the cost price and an agreed profit margin. The Murabahah contract can be preceded by a promise to purchase from the customer.
Commodity Murabahah (Tawarruq): A Murābahah transaction based on the purchase of a commodity from a seller or a broker and its resale to the customer on the basis of deferred Murābahah, followed by the sale of the commodity by the customer for a spot price to 2 third party for the purpose of obtaining liquidity, provided that there are no links between the two contracts.
Ijarah: A contract made to lease the usufruct of a specified asset for an agreed period against a specified rental. It could be preceded by a unilateral binding promise from one of the contracting parties. As for the Ijarah contract, it is binding on both contracting parties.
Ijarah Mawsufah fial-Dhimmah (Forward Lease): A contract where the lessor leases the usufruct of a specific future asset, which will be delivered by the lessor to the lessee for the latter to acquire the usufruct on a specific date in the future. This usufruct can be of an asset (manfa‘at‘ayn) or 0 service (manfa ‘at khidmah).
Ijarah Muntahia Bi Al Tamilk: A lease contract combined with a separate promise from the giving the lessee a binding promise to own the asset at the end of the end lease period either by purchase of the asset through a token consideration, or by the payment of an agreed upon price or the payment of its market value. This can be done through a promise to sell, a promise to donate, or a contract of conditional donation.
Istisna: The sale of a specified asset, with an obligation on the part of the seller to manufacture/construct it using his own materials and to deliver it on a specific date in return for a specific price to be paid in one lump sum or instalments.
Parallel Istisna: A second Istisna contract whereby a third party commits to manufacture/construct a specified asset, which corresponds to the specifications of the asset in the first Istisna contract without the presence of any links between the two contracts.
Wakalah: An agency contract where the customer (principal) appoints an institution as agent (wakīl) to carry out the business on his behalf. The contract can be for a fee or without a fee.
Musharakah: A partnership contract in which the partners agree to contribute capital to an enterprise, whether existing or new. Profits generated by that enterprise are shared in accordance with the percentage specified in the Musharakah contract, while losses are shared in proportion to each partner’s share of capital.
Mudarabah: A partnership contract between the capital provider (rabb al-māl) and an entrepreneur (mudārib) whereby the capital provider would contribute capital to an enterprise or activity that is to be managed by the entrepreneur. Profits generated by that enterprise or activity are shared in accordance with the percentage specified in the contract, while losses are to be borne solely by the capital provider unless the losses are due to misconduct, negligence or breach of contracted terms.
Market risk: The risk of losses in on- and off-balance sheet positions arising from movement in market price, i.e. fluctuations in market values in tradable, marketable or leaseable assets (including Sukuk) and in off-balance sheet individual portfolios.
Operational risk: The risk of losses resulting from inadequacy or failure of interna l processes, people and systems, or from external events, which includes, but is not limited to, legal risk, Shari'ah non-compliance risk and the failure in conducting fiduciary responsibilities.
Shari’ah non-compliance risk: The risk that arises from a Bank’s failure to comply with the shari’ah rules and principles prescribed by Shari'ah Committee of the Bank.
The Board: The Board of Directors appointed by the shareholders in line with applicable laws and regulations.
Senior Management: the Senior Management consists of a key group of individuals responsible for overseeing the day-to-day management of the Bank and they shall be accountable in this respect. These individuals should have the necessary experience, competence and integrity to manage the business under the Board’s supervision. The Board shall have appropriate controls applicable to these individuals.
The definitions of Shari’ah compliant products mentioned above are extracted from the set of definitions proposed by Islamic Financial Services Board (IFSB). These definitions do not limit offering the Shari’ah compliant products and services that are approved by the respective Shari’ah Committee of each Bank.
3. Scope and Level, of Application
Risk Management Framework for Shari'ah Compliant Banking shall be applicable to the following institutions:
i. All locally incorporated Banks that are licensed and operating in the Kingdom of Saudi Arabia and are conducting Shari'ah compliant Banking.
ii. Where a locally incorporated Bank has 2 majority owned subsidiary(ies) licensed and operating outside Saudi Arabia and/or has branch operations in any foreign jurisdiction that conduct Shari'ah compliant Banking shall follow these rules provided that there is no inconsistency with the legal and regulatory requirements of host country.
4. General Principle
4.1 Principle 1.0: Banks conducting Shari'ah compliant Banking shall have in place a comprehensive risk management and reporting processes, including appropriate board and senior management oversight, to identify, measure, monitor, report and control all relevant categories of risks. The process shall take into account appropriate steps to comply with Shari'ah rules and principles.
Board of Directors (BOD) oversight;
4.2 The Board of Directors is responsible for establishing a robust and effective risk management framework for the Bank.
4.3 As there are specific risks associated with Shari'ah compliant Banking, the risk management activities of Banks conducting Shari'ah Compliant Banking require active oversight by the Board of Directors and Senior Management. The Board of Directors or the related committee of the Board shall approve the risk management objectives, strategies and policies that are consistent with the risk profile, risk appetite and risk tolerance for the Bank.
4.4 The Board of Directors or the related committee of Board shall ensure the existence of an effective risk management structure for conducting activities including adequate systems for measuring, monitoring, reporting and controlling risk exposures commensurate with the scope, size and complexity of the Bank’s business and operations.
4.5 The Board of Directors or the related committee of Board shall review the effectiveness of the risk management activities periodically and make appropriate changes as and when necessary.
Senior Management oversight:
4.6 The senior management shall develop and implement well defined procedures for identifying, measuring, monitoring and controlling risks in line with the risk management objectives, strategies and policies approved by the Board of Directors or the related committee of Board.
4.7 Senior Management shall execute the strategic direction set by the Board of Directors or the related committee of Board on an ongoing basis and set clear lines of authority and responsibility for managing, monitoring and reporting risks. The Senior Management shall ensure that the financing and investment activities are within the approved appetite and risk tolerance limits.
4.8 Senior Management shall ensure that the risk management function should be separated from risk taking function and is reporting directly to the Chief Executive officer/General Manager. In addition, the Chief Risk Officer shall have independent access to the related committee of the Board ultimately responsible for establishing the risk management in the Bank. The risk management function shall define the policies, establish procedures and monitor compliance with the established limits and report to the related committee of the Board and Senior Management on risk matters accordingly.
Risk Management Process:
4.9 The Bank shall have a sound process for executing all elements of risk management including risk identification, measurement, mitigation, monitoring, reporting and control. This process requires the implementation of appropriate policies, limits, procedures and effective management information systems (MIS) for internal risk reporting and decision making that are commensurate with the scope, complexity and nature of the Banks’ activities.
4.10 The Bank shall ensure that an adequate system of controls with appropriate checks and balances is set in place. The controls shall (a) comply with the shari’sah rules and principles; (b) comply with applicable regulatory and internal policies and procedures; and (c) take into account the integrity of risk management processes.
4.11 The Bank shall make appropriate and timely disclosure of information to depositors having deposits on Profit and Loss Sharing basis (also known as Profit-sharing Investment Accounts, PSIAs) so that they are able to assess the potential risks and rewards of their deposits and protect their own interests in their decision making process.
4.12 In addition to the above, the following general requirements shall also be taken into account by Banks:
i. Application of Emergency and Contingency Plan: The Senior Management shall draw up an emergency and contingency plan, approved by the Business Continuity Committee as required under the Business Continuity Management Framework issued by SAMA in February 2017 or the updated version as applicable in order to be able to deal with risks and problems which may arise from unforeseen events.
ii. Integration of Risk Management: While assessing and managing risk, the management should have an overall view of risks the Bank is exposed to. This requires having a structure in place to look at risk interrelationships across the Bank. Such a setup could be in the form of a separate department or Bank’s Risk Management Committee could perform such a function. The structure should be such that ensures effective monitoring and control over risks being taken.
iii. Risk Measurement: For each category of risk, the Bank is encouraged to establish systems/models that quantify its risk profile. The results of these models should be assessed and validated by an independent function within or outside the Bank.
iv. Utilization: The Bank should develop a mechanism which should, to the highest possible extent, monitor that funds provided by the depositors and investors were utilized for the purpose these were advanced.
v. Role of Risk Administration Department: It should be separated from the department originating the risk. It should be among the responsibilities of Risk Administration Department to monitor that the documents are obtained according to the requirements as specified in the product. For example, the dates play a very important role in Murabahah transactions and any transaction can be rendered invalid if the sequencing of obtaining documents is changed.
vi. Management Information System: The Bank should specify control reports to be prepared by the independent risk management department that should be periodically (at least quarterly) submitted to the related committee of Board and the Senior Management.
vii. Human Resources: The Bank shall ensure that the board members, senior management and staff working on related Shari’ah compliant products and processes have been adequately trained regarding Shari'ah principles and procedures.
4.13 The risk management approaches and methodologies must be able to distinguish the different nature and combination of risks that are associated with various types of Shari'ah compliant contracts used to structure financial products. A robust and dynamic risk assessment approach is required for products that involve different types of Shari’ah compliant contracts throughout the life of the product.
5. Market Risk
5.1 Principle 2.0: Banks shall have in place an appropriate framework for market risk management (including reporting) in respect of all assets held, including those that do not have 2 ready market and/or are exposed to high price volatility.
5.2 Banks shall develop a market risk strategy including the level of acceptable market risk appetite taking into account contractual agreements with fund providers, types of risk- taking activities and target markets in order to maximize returns while keeping exposures at or below the pre-determined levels. The strategy should be reviewed periodically by the Bank, communicated to relevant staff and disclosed to fund providers.
5.3 Banks shall establish a sound and comprehensive market risk management process and information system which (among others) comprise:
• a conceptual framework to assist in identifying underlying market risks;
• appropriate frameworks for pricing, valuation and income recognition;
• a strong MIS for controlling, monitoring and reporting market risk exposure and performance to appropriate levels of senior management.
Given that all the required measures are in place (e.g. pricing, valuation and income recognition frameworks, strong MIS for managing exposures etc.), the applicability of any market risk management framework that has been developed should be assessed taking into account of consequential business and reputation risks.
5.4 Banks should be able to quantify market risk exposures and assess exposure to the probability of future losses in their net open asset positions.
5.5 The risk exposures in the investment securities are similar to the risks faced by conventional financial intermediaries, namely market price, liquidity and foreign exchange rates. In this regard, Banks shall ensure that their strategy includes the definition of their risk appetite for these tradable assets.
5.6 In the valuation of assets where no direct market prices are available, Banks shall incorporate in their own product program a detailed approach to valuing their market risk positions. Banks may employ appropriate forecasting techniques to assess the potential value of these assets.
5.7 Where available valuation methodologies are deficient, Banks shall assess the need (a) to allocate funds to cover risks resulting from illiquidity, new assets and uncertainty in assumptions underlying valuation and realization; and (b) to establish a contractual agreement with the counterparty specifying the methods to be used in valuing the assets.
5.8 The policies and related procedures for market risk management shall also account for the risks associated to the following Shari’ah compliant products:
• The risks that relate to the current and future volatility of market values of specific assets (for example, the commodity price of a Salam asset, the market value of a Sukuk, the market value of Murabahah assets purchased to be delivered over 2 specific period) and of foreign exchange rates.
• In salam, Banks can be exposed to counterparty credit risk on a long position and commodity price fluctuations while holding the subject matter until it is disposed of. In the case of Parallel salam, there is also the risk that a failure of delivery of the subject matter would leave the Banks exposed to commodity price risk as a result of the need to purchase a similar asset in the spot market in order to honor the Parallel Salam contract.
5.9 When Banks are involved in buying assets that are not actively traded with the intention of selling them, it is important to analyze and assess the factors attributable to changes in liquidity of the markets in which the assets are traded and which give rise to greater market risk. Assets traded in illiquid markets may not be realizable at prices quoted in other more active markets.
5.10 Banks are also exposed to foreign exchange fluctuations arising from general FX spot rate changes in both cross-border transactions and the resultant foreign currency receivables and payables. These exposures may be hedged using Shari'ah compliant methods.
5.11 In addition to the above, there should be a middle office or an independent function to perform market risk management function and to independently monitor, measure and analyze risks inherent in the treasury operations of a Shari'ah compliant Banking. In addition, the unit should also prepare control reports indicating deviations for the information of senior management.
6. Operational Risk
6.1 Principle 3.0: Banks shall have in place adequate systems and controls, including Shari'ah Committee, Shari’ah Compliance and Shari’ah Audit to ensure compliance with Shari'ah rules and principles.
6.2 Operational risk is inherent in all activities, products and services of Banks and can transverse multiple activities and business lines within Banks. Operational risk may result in direct financial losses as well as indirect financial losses (e.g. loss of business and market share) due to reputational damage.
6.3 In addition to the usual form of operational risks, the Shari'ah compliant Banks and Islamic Windows are exposed to risks relating to Shari'ah non-compliance and risks associated with the Banks’ fiduciary responsibilities towards different fund providers. These risks expose Banks to fund providers’ withdrawals, loss of income or voiding of contracts leading to an impairment of reputation and/or the limitation of business opportunities.
6.4 Banks shall consider the full range of material operational risks affecting their operations, including the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Banks shall also incorporate possible causes of loss resulting from Shari'ah non-compliance and the failure in their fiduciary responsibilities.
Shari'ah Non-Compliance Risk:
6.5 Principle 4.0: Banks shall ensure that the policies and related procedures shall be in place to measure, mitigate and monitor the Shari'ah non-compliance risk. Shari'ah compliance is critical to a Bank’s operations and such compliance requirements must be communicated throughout the Bank and their products and activities.
6.6 In Shari’ah compliant Banking, a majority of the fund providers use Shari’ah compliant Banking services. As a matter of principle, their perception regarding the Bank’s compliance with Shari’ah rules and principles is of great importance to the sustainability of the Bank. In this regard, the Bank must consider Shari'ah compliance as falling within a higher priority category in relation to other identified risks.
6.7 Banks are also exposed to reputational risk arising from failures in governance, business strategy and process. Negative publicity about a Shari'ah compliant Banking business practices, particularly relating to Shari'ah non-compliance in their products and services, could have an impact upon their market position, profitability and liquidity.
6.8 Banks shall ensure that they comply at all times with the Shari'ah rules and principles as approved/instructed by the Banks’ Shari'ah Committee with respect to its products and activities. This means that Shari'ah compliance considerations are taken into account whenever the Banks accept deposits and investment funds, provide finance and carry out investment services for their customers.
6.9 Banks shall ensure that their contract documentation complies with Shari'ah rules and principles - with regard to formation, termination and elements possibly affecting contract performance such as fraud, misrepresentation, duress or any other rights and obligations.
6.10 Banks shall undertake a Shari'ah compliance review at least annually, performed either by a separate a Shari'ah audit department or as part of the existing internal audit function by persons having the required knowledge and expertise for the purpose. The objective is to ensure that (a) the nature of the Banks’ financing and equity investment and (b) the operations relating to all Shari'ah compliant products and services are executed in adherence to the applicable Shari'ah rules and principles, policies and procedures approved by the Bank’s Shari'ah Committee.
6.11 Banks shall keep track of income not recognized arising out of Shari’ah non-compliance and assess the probability of similar cases arising in the future. Based on historical reviews and potential areas of Shari'ah non-compliance. Banks may assess potential profits that cannot be recognized as eligible Banks’ profits, the Bank shall seek its Shari’ah Committee ruling and direction with regard to the appropriate cleansing and disposal of Non-Shari’ah Compliant income.
Fiduciary risk:
6.12 Principle 5.0: Banks shall have in place appropriate mechanisms to safeguard the interests of all fund providers. Where Profit & Loss Sharing depositors’ funds are comingled with the Banks’ own funds, Banks shall ensure that the bases for the asset, revenue, expenses and profit allocations are established, applied and reported in a manner consistent with the Banks’ fiduciary responsibilities.
6.13 Banks failure to perform in accordance with their fiduciary responsibilities could result losses in investments, the Bank may become insolvent and therefore unable to (a) meet the demands of current account holders for repayment of their funds; and (b) safeguard the interests of their Profit & Loss Sharing deposit holders. The Bank may fail to act with due care when managing investments resulting in the risk of possible forgone profits to Profit & Loss Sharing deposit holders.
6.14 Banks shall establish and implement a clear and formal policy for undertaking their different and potentially conflicting roles in respect to managing different types of investment accounts. The policy relating to safeguarding the interests of their Profit & Loss Sharing deposit holders may include the following:
i. Identification of investing activities that contribute to investment returns and taking reasonable steps to carry on those activities in accordance with the Banks' fiduciary and agency duties and to treat all their fund providers appropriately and in accordance with the terms and conditions of their investment agreements, if any;
ii. Allocation of assets and profits between Banks and their Profit and Loss Sharing deposit holders will be managed and applied appropriately to Profit & Loss Sharing deposit holders having funds invested over different investment periods; and
iii. Limiting the risk transmission between current and investment accounts.
6.15 A reliable IT system is necessary for profit & loss sharing mechanism, failure of which may lead to Shari'ah non-compliance risk. The Bank should identify key risk indicators and should place key control activities like Code of Conduct, Delegation of authority, segregation of duties, succession planning, mandatory leave, staff compensation, recruitment and training, dealing with customers, compliant handling, record keeping, MIS, physical controls etc.
6.16 Banks shall adequately disclose information on a timely basis to their Profit & Loss Sharing deposit holders and markets in order to provide a reliable basis for assessing their risk profiles and investment performance.
7. Effective Date
These Rules shall come into force in 1 May 2022.
Disclosure and Reporting Requirements
Pillar 3 Disclosure Requirements Framework
Glossary
1. Introduction
Basel Committee on Banking Supervision issued a document on Basel III: Finalizing post-crisis reforms in December 2017. Which includes the revised disclosure requirements that aims to enhance transparency by setting the minimum requirements for market disclosures of information on the risk management practices and capital adequacy of banks. This will enable market participants to obtain key information on risk exposures, risk management framework, adequacy of regulatory capital of banks, reduces information asymmetry and helps promote comparability of banks' risk profiles within and across jurisdictions. In addition, banks' Pillar 3 disclosure will also facilitate supervisory monitoring while strengthening incentives for banks to implement robust risk management.
Among the key revisions to the Pillar 3 framework include disclosure requirements related to:
a) Credit risk, operational risk, the leverage ratio and credit valuation adjustment (CVA) risk;
b) Risk-weighted assets (RWAs) as calculated by the bank's internal models and according to the standardised approaches;
c) Disclosures related to the revised market risk framework
d) Overview of risk management framework, RWAs and key prudential metrics; and
e) Asset encumbrance; and
f) Capital distribution constraints
This framework is issued by SAMA in exercise of the authority vested in SAMA under the Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued 01/01/1386H.
This framework supersedes all circulars/instructions/rules related to Pillar 3 Disclosure Requirements previously issued by SAMA.
2. Scope of Application
2.1 Disclosure requirements are an integral part of the Basel framework. Unless otherwise stated, the Tables and Templates are applicable to all domestic banks both on a consolidated basis, which include all branches and subsidiaries, and on a standalone basis.
2.2 This framework is not applicable to Foreign Banks Branches operating in the kingdom of Saudi Arabia.
2.3 Banks must assess the applicability of the disclosure requirements based on their specific compliance obligations.
3. Implementation Dates
3.1 Disclosure requirements will be effective on 01 January 2023.
3.2 Disclosure requirements are applicable for Pillar 3 reports related to fiscal periods that include or come after the specific calendar implementation date which means that the first set of templates/tables will cover data as at March 31, 2023.
4. Guiding Principles of Banks' Pillar 3 Disclosures
4.1 Banks should ensure compliance with the following guiding principles which aim to provide a firm foundation for achieving transparent, high-quality Pillar 3 risk disclosures that will enable users to better understand and compare a bank's business and its risks:
Principle 1: Disclosures should be clear
4.2 Disclosures should be presented in a form that is understandable to key stakeholders (eg investors, analysts, financial customers and others) and communicated through an accessible medium. Important messages should be highlighted and easy to find. Complex issues should be explained in simple language with important terms defined. Related risk information should be presented together.
Principle 2: Disclosures should be comprehensive
4.3 Disclosures should describe a bank's main activities and all significant risks, supported by relevant underlying data and information. Significant changes in risk exposures between reporting periods should be described, together with the appropriate response by management.
4.4 Disclosures should provide sufficient information in both qualitative and quantitative terms on a bank's processes and procedures for identifying, measuring and managing those risks. The level of detail of such disclosure should be proportionate to a bank's complexity.
4.5 Approaches to disclosure should be sufficiently flexible to reflect how senior management and the board of directors internally assess and manage risks and strategy, helping users to better understand a bank's risk tolerance/appetite.
Principle 3: Disclosures should be meaningful to users
4.6 Disclosures should highlight a bank's most significant current and emerging risks and how those risks are managed, including information that is likely to receive market attention. Where meaningful, linkages must be provided to line items on the balance sheet or the income statement. Disclosures that do not add value to users' understanding or do not communicate useful information should be avoided. Furthermore, information which is no longer meaningful or relevant to users should be removed.
Principle 4: Disclosures should be consistent over time
4.7 Disclosures should be consistent over time to enable key stakeholders to identify trends in a bank's risk profile across all significant aspects of its business. Additions, deletions and other important changes in disclosures from previous reports, including those arising from a bank's specific, regulatory or market developments, should be highlighted and explained.
Principle 5: Disclosures should be comparable across banks
4.8 The level of detail and the format of presentation of disclosures should enable key stakeholders to perform meaningful comparisons of business activities, prudential metrics, risks and risk management between banks and across jurisdictions.
5. Assurance of Pillar 3 Data
5.1 Banks must establish a formal board-approved disclosure policy for Pillar 3 information that sets out the internal controls and procedures for disclosure of such information. The key elements of this policy should be described in the year-end Pillar 3 report or cross-referenced to another location where they are available.
5.2 The board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over the disclosure of financial information, including Pillar 3 disclosures. They must also ensure that appropriate review of the disclosures takes place. The information provided by banks under Pillar 3 must be subject, at a minimum, to the same level of internal review and internal control processes as the information provided by banks for their financial reporting (i.e. the level of assurance must be the same as for information provided within the management discussion and analysis part of the financial report).
5.3 One or more senior officers of a bank must attest in writing that all Pillar 3 disclosures have been prepared in accordance with the board-agreed internal control processes.
6. Reporting Location
6.1 Banks must publish their Pillar 3 report in a standalone document that provides a readily accessible source of prudential measures for users. The Pillar 3 report may be appended to, or form a discrete section of, a bank's financial reporting, but it must be easily identifiable to users. Signposting of disclosure requirements is permitted in certain circumstances, as set out in section 7.2. Banks must also make available on their websites an archive for 10 years retention period of Pillar 3 reports (quarterly, semi-annual and annual) relating to prior reporting periods.
6.2 Banks are required to submit a copy of the disclosures to SAMA via the following email address.
7. Presentation of the Disclosure Requirements
7.1 Templates and tables:
7.1.1 The disclosure requirements are presented either in the form of templates or tables. Templates must be completed with quantitative data in accordance with the definitions provided. Tables generally relate to qualitative requirements, but quantitative information is also required in some instances. Banks may choose the format they prefer when presenting the information requested in tables.
7.1.2 In line with Principle 3 in section 4.6, the information provided in the templates and tables should be meaningful to users. The disclosure requirements in this document that necessitate an assessment from banks are specifically identified. When preparing these individual tables and templates, banks will need to consider carefully how widely the disclosure requirement should apply. If a bank considers that the information requested in a template or table would not be meaningful to users, for example because the exposures and risk-weighted asset (RWA) amounts are deemed immaterial, it may choose not to disclose part or all of the information requested. In such circumstances, however, the bank will be required to explain in a narrative commentary why it considers such information not to be meaningful to users. It should describe the portfolios excluded from the disclosure requirement and the aggregate total RWA those portfolios represent.
7.1.3 For templates, the format is designated as either fixed or flexible:
a) Where the format of a template is described as fixed, banks must complete the fields in accordance with the instructions given. If a row/column is not considered to be relevant to a bank's activities or the required information would not be meaningful to users (eg immaterial from a quantitative perspective), the bank may delete the specific row/column from the template, but the numbering of the subsequent rows and columns must not be altered. Banks may add extra rows and extra columns to fixed format templates if they wish to provide additional detail to a disclosure requirement by adding sub-rows or columns, but the numbering of prescribed rows and columns in the template must not be altered.
b) Where the format of a template is described as flexible, banks may present the required information either in the format provided in this document or in one that better suits the bank. The format for the presentation of qualitative information in tables is not prescribed. Notwithstanding, banks should comply with the restrictions in presentation, should such restrictions be prescribed in the template (eg Template CCR5 in section 20). In addition, when a customised presentation of the information is used, the bank must provide information comparable with that required in the disclosure requirement (ie at a similar level of granularity as if the template/table were completed as presented in this document).
7.2 Signposting:
7.2.1 Banks may disclose in a document separate from their Pillar 3 report (eg in a bank's annual report or through published regulatory reporting) the templates/tables with a flexible format, and the fixed format templates where the criteria in section 7.2.2 are met. In such circumstances, the bank must signpost clearly in its Pillar 3 report where the disclosure requirements have been published. This signposting in the Pillar 3 report must include:
a) The title and number of the disclosure requirement;
b) The full name of the separate document in which the disclosure requirement has been published;
c) A web link, where relevant; and
d) The page and paragraph number of the separate document where the disclosure requirements can be located.
7.2.2 The disclosure requirements for templates with a fixed format may be disclosed by banks in a separate document other than the Pillar 3 report, provided all of the following criteria are met:
a) The information contained in the signposted document is equivalent in terms of presentation and content to that required in the fixed template and allows users to make meaningful comparison with information provided by banks disclosing the fixed format templates;
b) The information contained in the signposted document is based on the same scope of consolidation as the one used in the disclosure requirement;
c) The disclosure in the signposted document is mandatory; and
d) SAMA is responsible for ensuring the implementation of the Basel standards is subject to legal constraints in its ability to require the reporting of duplicative information.
7.2.3 Banks can only make use of signposting to another document if the level of assurance on the reliability of data in the separate document are equivalent to, or greater than, the internal assurance level required for the Pillar 3 report (see sections on reporting location and assurance above).
8. Frequency and Timing of Disclosures
8.1 The frequencies of disclosure as indicated in the disclosure templates and tables vary between quarterly, semiannual and annual reporting depending upon the nature of the specific disclosure requirement. Annexure 2 summarizes the frequency and timing of disclosures for each table.
8.2 A bank's Pillar 3 report must be published concurrently with its financial report for the corresponding period. If a Pillar 3 disclosure is required to be published for a period when a bank does not produce any financial report (eg semiannual), disclosures must be published as soon as practicable and the time lag must be no longer than the maximum period of 30 days for quarterly disclosures and 60 days for semiannually and annually disclosures from its regular financial reporting period-ends.
9. Retrospective Disclosures, Disclosure of Transitional Metrics and Reporting Periods
9.1 In templates which require the disclosure of data points for current and previous reporting periods, the disclosure of the data point for the previous period is not required when a metric for a new standard is reported for the first time unless this is explicitly stated in the disclosure requirement.
9.2 Unless otherwise specified in the disclosure templates, when a bank is under a transitional regime permitted by the standards, the transitional data should be reported unless the bank already complies with the fully loaded requirements. Banks should clearly state whether the figures disclosed are computed on a transitional or fully-loaded basis. Where applicable, banks under a transitional regime may separately disclose fully-loaded figures in addition to transitional metrics.
9.3 Unless otherwise specified in the disclosure templates, the data required for annual, semiannual and quarterly disclosures should be for the corresponding 12-month, six-month and three-month period, respectively.
10. Proprietary and Confidential Information
10.1 In exceptional cases, where disclosure of certain items required by Pillar 3 may reveal the position of a bank or contravene its legal obligations by making public information that is proprietary or confidential in nature, a bank does not need to disclose those specific items, but must disclose more general information about the subject matter of the requirement instead. It must also explain in the narrative commentary to the disclosure requirement the fact that the specific items of information have not been disclosed and the reasons for this.
11. Qualitative Narrative to Accompany the Disclosure Requirements
11.1 Banks should supplement the quantitative information provided in both fixed and flexible templates with a narrative commentary to explain at least any significant changes between reporting periods and any other issues that management considers to be of interest to market participants. The form taken by this additional narrative is at the bank's discretion.
11.2 Additional voluntary risk disclosures allow banks to present information relevant to their business model that may not be adequately captured by understand and analyse any figures provided. It must also be accompanied by a qualitative discussion. Any additional disclosure must comply with the five guiding principles above.
12. Overview of Risk Management, Key Prudential Metrics and RWA
12.1 The disclosure requirements under this section are:
12.1.1 Template KM1 - Key metrics (at consolidated level)
12.1.2 Template KM2 - Key metrics - total loss-absorbing capacity (TLAC) requirements (at resolution group level)
12.1.3 Table OVA - Bank risk management approach
12.1.4 Template OV1 - Overview of risk-weighted assets (RWA)
12.2 The disclosure requirements related to TLAC are not required to be completed by banks unless otherwise specified by SAMA.
12.3 Template KM1 provides users of Pillar 3 data with a time series set of key prudential metrics covering a bank’s available capital (including buffer requirements and ratios), its RWA, leverage ratio, Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). As set out in circular No.391000029731 dated 15/03/1439 H, banks are required to publicly disclose whether they are applying a transitional arrangement for the impact of expected credit loss accounting on regulatory capital. If a transitional arrangement is applied, Template KM1 will provide users with information on the impact on the bank’s regulatory capital and leverage ratios compared to the bank’s “fully loaded” capital and leverage ratios had the transitional arrangement not been applied.
12.4 Template KM2 requires global systemically important banks (G-SIBs) to disclose key metrics on TLAC. Template KM2 becomes effective from the TLAC conformance date.
12.5 Table OVA provides information on a bank’s strategy and how senior management and the board of directors assess and manage risks.
12.6 Template OV1 provides an overview of total RWA forming the denominator of the risk-based capital requirements.
Template KM1: Key metrics (at consolidated group level) Purpose: To provide an overview of a bank’s prudential regulatory metrics. Scope of application: The template is mandatory for all banks. Content: Key prudential metrics related to risk-based capital ratios, leverage ratio and liquidity standards. Banks are required to disclose each metric’s value using the corresponding standard’s specifications for the reporting period-end (designated by T in the template below) as well as the four previous quarter-end figures (T–1 to T–4). All metrics are intended to reflect actual bank values for (T), with the exception of “fully loaded expected credit losses (ECL)” metrics, the leverage ratio (excluding the impact of any applicable temporary exemption of central bank reserves) and metrics designated as “pre-floor” which may not reflect actual values. Frequency: Quarterly. Format: Fixed. If banks wish to add rows to provide additional regulatory or financial metrics, they must provide definitions for these metrics and a full explanation of how the metrics are calculated (including the scope of consolidation and the regulatory capital used if relevant). The additional metrics must not replace the metrics in this disclosure requirement. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant change in each metric’s value compared with previous quarters, including the key drivers of such changes (eg whether the changes are due to changes in the regulatory framework, group structure or business model).
Banks that apply transitional arrangement for ECL are expected to supplement the template with the key elements of the transition they use.a b c d e T T-1 T-2 2-3 T-4 Available capital (amounts) 1 Common Equity Tier 1 (CET1) 1a Fully loaded ECL accounting model 2 Tier 1 2a Fully loaded ECL accounting model Tier 1 3 Total capital 3a Fully loaded ECL accounting model total capital Risk-weighted assets (amounts) 4 Total risk-weighted assets (RWA) 4a Total risk-weighted assets (pre-floor) Risk-based capital ratios as a percentage of RWA 5 CET1 ratio (%) 5a Fully loaded ECL accounting model CET1 (%) 5b CET1 ratio (%) (pre-floor ratio) 6 Tier 1 ratio (%) 6a Fully loaded ECL accounting model Tier 1 ratio (%) 6b Tier 1 ratio (%) (pre-floor ratio) 7 Total capital ratio (%) 7a Fully loaded ECL accounting model total capital ratio (%) 7b Total capital ratio (%) (pre-floor ratio) Additional CET1 buffer requirements as a percentage of RWA 8 Capital conservation buffer requirement (2.5% from 2019) (%) 9 Countercyclical buffer requirement (%) 10 Bank G-SIB and/or D-SIB additional requirements (%) 11 Total of bank CET1 specific buffer requirements (%) (row 8 + row 9 + row 10) 12 CET1 available after meeting the bank’s minimum capital requirements (%) Basel III leverage ratio 13 Total Basel III leverage ratio exposure measure 14 Basel III leverage ratio (%) (including the impact of any applicable temporary exemption of central bank reserves) 14a Fully loaded ECL accounting model Basel III leverage ratio (including the impact of any applicable temporary exemption of central bank reserves) (%) 14b Basel III leverage ratio (%) (excluding the impact of any applicable temporary exemption of central bank reserves) 14c Basel III leverage ratio (%) (including the impact of any applicable temporary exemption of central bank reserves) incorporating mean values for SFT assets 14d Basel III leverage ratio (%) (excluding the impact of any applicable temporary exemption of central bank reserves) incorporating mean values for SFT assets Liquidity Coverage Ratio (LCR) 15 Total high-quality liquid assets (HQLA) 16 Total net cash outflow 17 LCR ratio (%) Net Stable Funding Ratio (NSFR) 18 Total available stable funding 19 Total required stable funding 20 NSFR ratio Instructions Row Number Explanation 4a For pre-floor total RWA, the disclosed amount should exclude any adjustment made to total RWA from the application of the capital floor. 5a, 6a, 7a, 14a For fully loaded ECL ratios (%) in rows 5a, 6a, 7a and 14a, the denominator (RWA, Basel III leverage ratio exposure measure) is also “Fully loaded ECL”, ie as if ECL transitional arrangements were not applied. 5b, 6b, 7b For pre-floor risk based ratios in rows 5b, 6b and 7b, the disclosed ratios should exclude the impact of the capital floor in the calculation of RWA. 12 CET1 available after meeting the bank’s minimum capital requirements (as a percentage of RWA): it may not necessarily be the difference between row 5 and the Basel III minimum CET1 requirement of 4.5% because CET1 capital may be used to meet the bank’s Tier 1 and/or total capital ratio requirements. See instructions to [CC1:68/a]. 13 Total Basel III leverage ratio exposure measure: The amounts may reflect period-end values or averages depending on local implementation. 15 Total HQLA: total adjusted value using simple averages of daily observations over the previous quarter (ie the average calculated over a period of, typically, 90 days). 16 Total net cash outflow: total adjusted value using simple averages of daily observations over the previous quarter (ie the average calculated over a period of, typically, 90 days). Linkages across templates
Amount in [KM1:1/a] is equal to [CC1:29/a]
Amount in [KM1:2/a] is equal to [CC1:45/a]
Amount in [KM1:3/a] is equal to [CC1:59/a]
Amount in [KM1:4/a] is equal to [CC1:60/a] and is equal to [OV1.29/a]
Amount in [KM1:4a/a] is equal to ([OV1.29/a] – [[OV1.28/a])
Amount in [KM1:5/a] is equal to [CC1:61/a]
Amount in [KM1:6/a] is equal to [CC1:62/a]
Amount in [KM1:7/a] is equal to [CC1:63/a]
Amount in [KM1:8/a] is equal to [CC1:65/a]
Amount in [KM1:9/a] is equal to [CC1:66/a]
Amount in [KM1:10/a] is equal to [CC1:67/a]
Amount in [KM1:12/a] is equal to [CC1:68/a]
Amount in [KM1:13/a] is equal to [LR2:24/a] (only if the same calculation basis is used)
Amount in [KM1:14/a] is equal to [LR2:25/a] (only if the same calculation basis is used)
Amount in [KM1:14b/a] is equal to [LR2:25a/a] (only if the same calculation basis is used)
Amount in [KM1:14c/a] is equal to [LR2:31/a]
Amount in [KM1:14d/a] is equal to [LR2:31a/a]
Amount in [KM1:15/a] is equal to [LIQ1:21/b]
Amount in [KM1:16/a] is equal to [LIQ1:22/b]
Amount in [KM1:17/a] is equal to [LIQ1:23/b]
Amount in [KM1:18/a] is equal to [LIQ2:14/e]
Amount in [KM1:19/a] is equal to [LIQ2:33/e]
Amount in [KM1:20/a] is equal to [LIQ2:34/e]Template KM2: Key metrics - TLAC requirements (at resolution group level) Purpose: Provide summary information about total loss-absorbing capacity (TLAC) available, and TLAC requirements applied, at resolution group level under the single point of entry and multiple point of entry (MPE) approaches. Scope of application: The template is mandatory for all resolution groups of G-SIBs. Content: Key prudential metrics related to TLAC. Banks are required to disclose the figure as of the end of the reporting period (designated by T in the template below) as well as the previous four quarter-ends (designed by T-1 to T-4 in the template below). When the banking group includes more than one resolution group (MPE approach), this template is to be reproduced for each resolution group. Frequency: Quarterly. Format: Fixed. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant change over the reporting period and the key drivers of such changes. a b c d e T T-1 T-2 2-3 T-4 Resolution group 1 1 Total Loss Absorbing Capacity (TLAC) available 1a Fully loaded ECL accounting model TLAC available 2 Total RWA at the level of the resolution group 3 TLAC as a percentage of RWA (row1/row2) (%) 3a Fully loaded ECL accounting model TLAC as a percentage of fully loaded ECL accounting model RWA (%) 4 Leverage exposure measure at the level of the resolution group 5 TLAC as a percentage of leverage exposure measure (row1/row4) (%) 5a Fully loaded ECL accounting model TLAC as a percentage of fully loaded ECL accounting model leverage ratio exposure measure (%) 6a Does the subordination exemption in the antepenultimate paragraph of Section 11 of the FSB TLAC Term Sheet apply? 6b Does the subordination exemption in the penultimate paragraph of Section 11 of the FSB TLAC Term Sheet apply? 6c If the capped subordination exemption applies, the amount of funding issued that ranks pari passu with Excluded Liabilities and that is recognised as external TLAC, divided by funding issued that ranks pari passu with Excluded Liabilities and that would be recognised as external TLAC if no cap was applied (%) Linkages across templates
Amount in [KM2:1/a] is equal to [resolution group-level TLAC1:22/a]
Amount in [KM2:2/a] is equal to [resolution group-level TLAC1:23/a]
Aggregate amounts in [KM2:2/a] across all resolution groups will not necessarily equal or directly correspond to amount in [KM1:4/a]
Amount in [KM2:3/a] is equal to [resolution group-level TLAC1:25/a]
Amount in [KM2:4/a] is equal to [resolution group-level TLAC1:24/a]
Amount in [KM2:5/a] is equal to [resolution group-level TLAC1:26/a][KM2:6a/a] refers to the uncapped exemption in Section 11 of the FSB TLAC Term Sheet in which all liabilities excluded from TLAC specified in Section 10 are statutorily excluded from the scope of the bail-in tool and therefore cannot legally be written down or converted to equity in a bail-in resolution. Possible answers for [KM2:6a/a]: [Yes], [No].
[KM2:6b/a] refers to the capped exemption in Section 11 of the FSB TLAC Term Sheet where SAMA may, under exceptional circumstances specified in the applicable resolution law, exclude or partially exclude from bail-in all of the liabilities excluded from TLAC specified in Section 10, and where the relevant authorities have permitted liabilities that would otherwise be eligible to count as external TLAC but which rank alongside those excluded liabilities in the insolvency creditor hierarchy to contribute a quantum equivalent of up to 2.5% RWA (from 2019) or 3.5% RWA (from 2022. Possible answers for [KM2:6b/a]: [Yes], [No].
Amount in [KM2:6c/a] is equal to [resolution group-level TLAC1:14 divided by TLAC1:13]. This only needs to be completed if the answer to [KM2:6b] is [Yes]. Table OVA: Bank risk management approach Purpose: Description of the bank's strategy and how senior management and the board of directors assess and manage risks, enabling users to gain a clear understanding of the bank's risk tolerance/appetite in relation to its main activities and all significant risks. Scope of application: The template is mandatory for all banks. Content: Qualitative information. Frequency: Annual Format: Flexible Banks must describe their risk management objectives and policies, in particular: (a) How the business model determines and interacts with the overall risk profile (eg the key risks related to the business model and how each of these risks is reflected and described in the risk disclosures) and how the risk profile of the bank interacts with the risk tolerance approved by the board. (b) The risk governance structure: responsibilities attributed throughout the bank (eg oversight and delegation of authority; breakdown of responsibilities by type of risk, business unit etc); relationships between the structures involved in risk management processes (eg board of directors, executive management, separate risk committee, risk management structure, compliance function, internal audit function). (c) Channels to communicate, decline and enforce the risk culture within the bank (eg code of conduct; manuals containing operating limits or procedures to treat violations or breaches of risk thresholds; procedures to raise and share risk issues between business lines and risk functions). (d) The scope and main features of risk measurement systems. (e) Description of the process of risk information reporting provided to the board and senior management, in particular the scope and main content of reporting on risk exposure. (f) Qualitative information on stress testing (eg portfolios subject to stress testing, scenarios adopted and methodologies used, and use of stress testing in risk management). (g) The strategies and processes to manage, hedge and mitigate risks that arise from the bank's business model and the processes for monitoring the continuing effectiveness of hedges and mitigants. Template OV1: Overview of RWA Purpose: To provide an overview of total RWA forming the denominator of the risk-based capital requirements. Further breakdowns of RWA are presented in subsequent parts. Scope of application: The template is mandatory for all banks. Content: RWA and capital requirements under Pillar 1. Pillar 2 requirements should not be included. Frequency: Quarterly. Format: Fixed. Accompanying narrative: Banks are expected to identify and explain the drivers behind differences in reporting periods T and T-1 where these differences are significant.
When minimum capital requirements in column (c) do not correspond to 8% of RWA in column (a), banks must explain the adjustments made. If the bank uses the internal model method (IMM) for its equity exposures under the market-based approach, it must provide annually a description of the main characteristics of its internal model.a b c RWA Minimum capital requirements T T-1 T 1 Credit risk (excluding counterparty credit risk) 2 Of which: standardised approach (SA) 3 Of which: foundation internal ratings-based (F-IRB) approach 4 Of which: supervisory slotting approach 5 Of which: advanced internal ratings-based (A-IRB) approach 6 Counterparty credit risk (CCR) 7 Of which: standardised approach for counterparty credit risk 8 Of which: IMM 9 Of which: other CCR 10 Credit valuation adjustment (CVA) 11 Equity positions under the simple risk weight approach and the internal model method during the five-year linear phase-in period 12 Equity investments in funds - look-through approach 13 Equity investments in funds - mandate-based approach 14 Equity investments in funds - fall-back approach 15 Settlement risk 16 Securitisation exposures in banking book 17 Of which: securitisation IRB approach
(SEC-IRBA)18 Of which: securitisation external ratings-based approach
(SEC-ERBA), including internal assessment approach (IAA)19 Of which: securitisation standardised approach (SEC-SA) 20 Market risk 21 Of which: standardised approach (SA) 22 Of which: internal model approach (IMA) 23 Capital charge for switch between trading book and banking book 24 Operational risk 25 Amounts below the thresholds for deduction (subject to 250% risk weight) 26 Output floor applied 27 Floor adjustment (before application of transitional cap) 28 Floor adjustment (after application of transitional cap) 29 Total (1 + 6 + 10 + 11 + 12 + 13 + 14 + 15 + 16 + 20 + 23 + 24 + 25 + 28) Definitions and instructions
RWA: risk-weighted assets according to the Basel framework and as reported in accordance with the subsequent parts of this standard. Where the regulatory framework does not refer to RWA but directly to capital charges (eg for market risk and operational risk), banks should indicate the derived RWA number (ie by multiplying capital charge by 12.5).
RWA (T-1): risk-weighted assets as reported in the previous Pillar 3 report (ie at the end of the previous quarter). Minimum capital requirement T: Pillar 1 capital requirements at the reporting date. This will normally be RWA * 8% but may differ if a floor is applicable or adjustments (such as scaling factors) are applied at jurisdiction level. Row number Explanation 1 Credit risk (excluding counterparty credit risk): RWA and capital requirements according to the credit risk standard of the Basel framework (SCRE), with the exceptions of RWA and capital requirements related to: (i) counterparty credit risk (reported in row 6); (ii) equity positions (reported in row 11 to 14); (iii) settlement risk (reported in row 15); (iv) securitisation positions subject to the securitisation regulatory framework, including securitisation exposures in the banking book (reported in row 16); and (v) amounts below the thresholds for deduction (reported in row 25). 2 Of which: standardised approach: RWA and capital requirements according to the standardised approach to credit risk (as specified in SCRE5 to SCRE9). 3 and 5 Of which: (foundation/advanced) internal rating based approaches: RWA and capital requirements according to the F-IRB approach and/or A-IRB approach (as specified in SCRE10 to SCRE16 with the exception of SCRE13). 4 Of which: supervisory slotting approach: RWA and capital requirements according to the supervisory slotting approach (as specified in SCRE13). 6 to 9 Counterparty credit risk: RWA and capital charges according to the counterparty credit risk chapters of the Basel framework (SCCR3 to SCCR10). 10 Credit valuation adjustment: RWA and capital charge requirements according to SCCR11. 11 Equity positions under the simple risk weight approach and internal models method: the amounts in row 11 correspond to RWA where the bank applies the simple risk weight approach or the internal model method, which remain available during the five-year linear phase-in arrangement as specified in SCRE17.2. Equity positions under the PD/LGD approach during the five-year linear phase-in arrangement should be reported in row 3. Where the regulatory treatment of equities is in accordance with the standardised approach, the corresponding RWA are reported in Template CR4 and included in row 2 of this template. 12 Equity investments in funds - look-through approach: RWA and capital requirements calculated in accordance with SCRE24. 13 Equity investments in funds - mandate-based approach: RWA and capital requirements calculated in accordance with SCRE24. 14 Equity investments in funds - fall-back approach: RWA and capital requirements calculated in accordance with SCRE24. 15 Settlement risk: the amounts correspond to the requirements in SCRE25. 16 to 19 Securitisation exposures in banking book: the amounts correspond to capital requirements applicable to the securitisation exposures in the banking book. The RWA amounts must be derived from the capital requirements (which include the impact of the cap in accordance with SCRE18.50 to SCRE18.55, and do not systematically correspond to the RWA reported in Templates SEC3 and SEC4, which are before application of the cap). 20 Market risk: the amounts reported in row 20 correspond to the RWA and capital requirements in the market risk standard (MAR), with the exception of amounts that relate to CVA risk (as specified in SCCR11 and reported in row 10). They also include capital charges for securitisation positions booked in the trading book but exclude the counterparty credit risk capital charges (reported in row 6 of this template). The RWA for market risk correspond to the capital charge times 12.5. 21 Of which: standardised approach: RWA and capital requirements according to the market risk standardised approach, including capital requirements for securitisation positions booked in the trading book. 22 Of which: Internal Models Approach: RWA and capital requirements according to the market risk IMA. 23 Capital charge for switch between trading book and banking book: outstanding accumulated capital surcharge imposed on the bank in accordance with Basel Framework “Risk-based capital requirements” (Boundary between the banking book and trading book) 25.14 and 25.15, when the total capital charge (across banking book and trading book) of a bank is reduced as a result of the instruments being switched between the trading book and the banking book at the bank's discretion and after their original designation. The outstanding accumulated capital surcharge takes into account any adjustment due to run-off as the positions mature or expire, in a manner agreed with SAMA. 24 Operational risk: the amounts corresponding to the minimum capital requirements for operational risk as specified in the operational risk standard (SOPE). 25 Amounts below the thresholds for deduction (subject to 250% risk weight): the amounts correspond to items subject to a 250% risk weight according to SACAP4.4. They include significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation and below the threshold for deduction, after application of the 250% risk weight. 26 Output floor applied: the output floor (expressed as a percentage) applied by the bank in its computation of the floor adjustment value in rows 27 and 28. 27 Floor adjustment (before the application of transitional cap): the impact of the output floor before the application of the transitional cap, based on the output floor applied in row 26, in terms of the increase in RWA. 28 Floor adjustment (after the application of transitional cap): the impact of the output floor after the application of the transitional cap, based on the output floor applied in row 26, in terms of the increase in RWA. The figure disclosed in this row takes into account the transitional cap (if any) applied by SAMA, which will limit the increase in RWA to 25% of the bank's RWA before the application of the output floor. 29 The bank's total RWA. Linkages across templates
Amount in [OV1:2/a] is equal to [CR4:12/e]
Amount in [OV1:3/a] and [OV1:5/a] is equal to the sum of [CR6: Total (all portfolios)/i]
Amount in [OV1:6/a] is equal to the sum of CCR1:6/f+CCR8:1/b+CCR8:11/b]
Amount in [OV1:16/c] is equal to the sum of [SEC3:1/n + SEC3:1/o + SEC3:1/p + SEC3:1/q] + [SEC4:1/n + SEC4:1/o + SEC4:1/p + SEC4:1/q]
Amount in [OV1:21/c] is equal to [MR1:12/a]
Amount in [OV1:22/c] is equal to [MR2:12]13. Comparison of Modelled and Standardised RWA
13.1 This chapter covers disclosures on RWA calculated according to the full standardised approach as compared to the actual RWA at the risk level, and for credit risk at asset class and sub-asset class levels. The disclosure requirements related in this section are not required to be completed by banks unless SAMA approve the bank to use the IRB and/or IMA approach.
13.2 The disclosure requirements under this section are:
13.2.1 Template CMS1 - Comparison of modelled and standardised RWA at risk level
13.2.2 Template CMS2 - Comparison of modelled and standardised RWA for credit risk at asset class level
13.3 Template CMS1 provides the disclosure of RWA calculated according to the full standardised approach as compared to actual RWA at risk level. Template CMS2 further elaborates on the comparison between RWA computed under the standardised and the internally modelled approaches by focusing on RWA for credit risk at asset class and sub-asset class levels.
Template CMS1 – Comparison of modelled and standardised RWA at risk level Purpose: To compare full standardised risk-weighted assets (RWA) against modelled RWA for banks which have received SAMA’s approval to use internal models in accordance with the Basel framework. The disclosure also provides the full standardised RWA amount that is the base of the output floor as defined in Basel Framework “Risk-based capital requirements” (calculation of minimum risk-based capital requirements) as specified in the Output floor to be issued by SAMA. Scope of application: The template is mandatory for all banks using internal models. Content: RWA. Frequency: Quarterly. Format: Fixed. Accompanying narrative: Banks are expected to explain the main drivers of difference (eg asset class or sub-asset class of a particular risk category, key assumptions underlying parameter estimations, national implementation differences) between the internally modelled RWA disclosed that are used to calculate their capital ratios and RWA disclosed under the full standardised approach that would be used should the banks not be allowed to use internal models. Explanation should be specific and, where appropriate, might be supplemented with quantitative information. In particular, if the RWA for securitisation exposures in the banking book are a main driver of the difference, banks are expected to explain the extent to which they are using each of the three potential approaches (SEC-ERBA, SEC-SA and 1,250% risk weight) for calculating SA RWA for securitisation exposures. a b c d RWA RWA for modelled approaches banks which have received SAMA approval to use internal model RWA for portfolios where standardised approaches are used Total Actual RWA (a + b) (ie RWA which banks report as current requirements) RWA calculated using full standardised approach (ie RWA used in capital floor computation) 1 Credit risk (excluding counterparty credit risk) 2 Counterparty credit risk 3 Credit valuation adjustment 4 Securitisation exposures in the banking book 5 Market risk 6 Operational risk 7 Residual RWA 8 Tota Definitions and instructions
Rows:
Credit risk (excluding counterparty credit risk, credit valuation adjustments and securitisation exposures in the banking book)
(row 1):
Definition of standardised approach: The standardised approach for credit risk. When calculating the degree of credit risk mitigation, banks must use the simple approach or the comprehensive approach with standard supervisory haircuts. This also includes failed trades and non-delivery-versus-payment transactions as set out in SCRE25.
The prohibition on the use of the IRB approach for equity exposures will be subject to a five-year linear phase-in arrangement as specified in SCRE17.2. During the phase-in period, the risk weight for equity exposures used to calculate the RWA reported in column (a) will be the greater of: (i) the risk weight as calculated under the IRB approach, and (ii) the risk weight set for the linear phase-in arrangement under the standardised approach for credit risk
RWA for modelled approaches that banks have SAMA approval to use (cell 1/a): For exposures where the RWA is not computed based on the standardised approach described above (ie subject to the credit risk IRB approaches (Foundation Internal Ratings-Based (F-IRB), Advanced Internal Ratings-Based (AIRB) and supervisory slotting approaches of the credit risk framework). The row excludes all positions subject to SCRE18 to SCRE23, including securitisation exposures in the banking book (which are reported in row 4) and capital requirements relating to a counterparty credit risk charge, which are reported in row 2.
RWA for portfolios where standardised approaches are used (cell 1/b): RWA which result from applying the above-described standardised approach.
RWA for portfolios where standardised approaches are used (cell 1/b): RWA which result from applying the above-described standardised approach.
Total actual RWA (cell 1/c): The sum of cells 1/a and 1/b.
RWA calculated using full standardised approach (cell 1/d): RWA as would result from applying the above-described standardised approach to all exposures giving rise to the RWA reported in cell 1/c.
Counterparty credit risk (row 2):
Definition of standardised approach: To calculate the exposure for derivatives, banks must use the standardised approach for measuring counterparty credit risk (SA-CCR). The exposure amounts must then be multiplied by the relevant borrower risk weight using the standardised approach for credit risk to calculate RWA under the standardised approach for credit risk.
RWA for modelled approaches that banks have SAMA approval to use (cell 2/a): For exposures where the RWA is not computed based on the standardised approach described above.
RWA for portfolios where standardised approaches are used (cell 2/b): RWA which result from applying the above-described standardised approach.
Total actual RWA (cell 2/c): The sum of cells 2/a and 2/b.
RWA calculated using full standardised approach (cell 2/d): RWA as would result from applying the above-described standardised approach to all exposures giving rise to the RWA reported in cell 2/c.
Credit valuation adjustment (row 3):
Definition of standardised approach: The standardised approach for CVA (SA-CVA), the basic approach (BA-CVA) or 100% of a bank’s counterparty credit risk capital requirements (depending on which approach the bank uses for CVA risk).
Total actual RWA (cell 3/c) and RWA calculated using full standardised approach (cell 3/d): RWA according to the standardised approach described above.
Securitisation exposures in the banking book (row 4):
Definition of standardised approach: The external ratings-based approach (SEC-ERBA), the standardised approach (SEC-SA) or a risk weight of 1,250%.
RWA for modelled approaches that banks have SAMA approval to use (cell 4/a): For exposures where the RWA is computed based on the SEC-IRBA or SEC-IAA.
RWA for portfolios where standardised approaches are used (cell 4/b): RWA which result from applying the above-described standardised approach.
Total actual RWA (cell 4/c): The sum of cells 4/a and 4/b.
RWA calculated using full standardised approach (cell 4/d): RWA as would result from applying the above-described standardised approach to all exposures giving rise to the RWA reported in cell 4/c.
Market risk (row 5):
Definition of standardised approach: The standardised approach for market risk. The SEC-ERBA, SEC-SA or a risk weight of 1,250% must also be used when determining the default risk charge component for securitisations held in the trading book.
RWA for modelled approaches that banks have SAMA approval to use (cell 5/a): For exposures where the RWA is not computed based on the standardised approach described above.
RWA for portfolios where standardised approaches are used (cell 5/b): RWA which result from applying the above-described standardised approach.
Total actual RWA (cell 5/c): The sum of cells 5/a and 5/b.
RWA calculated using full standardised approach (cell 5/d): RWA as would result from applying the above-described standardised approach to all exposures giving rise to the RWA reported in cell 5/c.
Operational risk (row 6):
Definition of standardised approach: The standardised approach for operational risk.
Total actual RWA (cell 6/c) and RWA calculated using full standardised approach (cell 6/d): RWA according to the revised standardised approach for operational risk.
Residual RWA (row 7):
Total actual RWA (cell 7/c) and RWA calculated using full standardised approach (cell 7/d): RWA not captured within rows 1 to 6 (ie the RWA arising from equity investments in funds (rows 12 to 14 in Template OV1), settlement risk (row 15 in Template OV1), capital charge for switch between trading book and banking book (row 23 in Template OV1) and amounts below the thresholds for deduction (row 25 in Template OV1)).
Total (row 8):
RWA for modelled approaches that banks have SAMA approval to use (cell 8/a): The total sum of cells 1/a, 2/a, 4/a and 5/a.
RWA for portfolios where standardised approaches are used (cell 8/b): The total sum of cells 1/b, 2/b, 3/b, 4/b, 5/b, 6/b and 7/b.
Total actual RWA (cell 8/c): The bank’s total RWA before the output floor adjustment. The total sum of cells 1/c, 2/c, 3/c, 4/c, 5/c, 6/c and 7/c.
RWA calculated using full standardised approach (cell 8/d): The bank’s RWA that are the base of the output floor, as specified in the Output floor to be issued by SAMA (ie amount before multiplication by 72.5%). The total sum of cells 1/d, 2/d, 3/d, 4/d, 5/d, 6/d and 7/d. Disclosed numbers in rows 1 to 7 are calculated purely for comparison purposes and do not represent requirements under the Basel framework.
Linkages across templates
[CMS1: 1/c] is equal to [OV1:1/a]
[CMS1: 2/c] is equal to [OV1:6/a]
[CMS1:3/c] is equal to [OV1:10/a]
[CMS1: 4/c] is equal to [OV1:16/a]
[CMS1: 5/c] is equal to [OV1:20/a]
[CMS1:5/d] is equal to [MR2:12/a] multiplied by 12.5
[CMS1:6/c] is equal to [OV1:24/a]Template CMS2 – Comparison of modelled and standardised RWA for credit risk at asset class level Purpose: To compare risk-weighted assets (RWA) calculated according to the standardised approach (SA) for credit risk at the asset class level against the corresponding RWA figure calculated using the approaches (including both the standardised and IRB approach for credit risk and the supervisory slotting approach) that banks have SAMA approval to use in accordance with the Basel framework for credit risk. Scope of application: The template is mandatory for all banks using internal models for credit risk. Similar to row 1 of Template CMS1, it excludes counterparty credit risk, credit valuation adjustments and securitisation exposures in the banking book. Content: RWA. Frequency: Semiannual. Format: Fixed. The columns are fixed, but the portfolio breakdowns in the rows will be set by SAMA to reflect the exposure classes required under national implementation of IRB and SA. Banks are encouraged to add rows to show where significant differences occur. Accompanying narrative: Banks are expected to explain the main drivers of differences between the internally modelled amounts disclosed that are used to calculate their capital ratios and amounts disclosed should the banks apply the standardised approach. Where differences are attributable to mapping between IRB and SA, banks are encouraged to provide explanation and estimated materiality. a b c d RWA RWA for modelled approaches that banks have SAMA approval to use RWA for column (a) if re-computed using the standardised approach Total Actual RWA (ie RWA which banks report as current requirements) RWA calculated using full standardised approach (ie RWA used in the base of the output floor) 1 Sovereign Of which: categorised as MDB/PSE in SA 2 Banks and other financial institutions 3 Equity1 4 Purchased receivables 5 Corporates Of which: F-IRB is applied Of which: A-IRB is applied 6 Retail Of which: qualifying revolving retail Of which: other retail Of which: retail residential mortgages 7 Specialised lending Of which: income-producing real estate and high volatility commercial real estate 8 Others 9 Total Definitions and instructions
Columns:
RWA for modelled approaches that banks have SAMA approval to use (column (a)): Represents the portion of RWA according to the IRB approach for credit risk as specified in SCRE10 to SCRE16.
Corresponding standardised approach RWA for column (a) (column (b)): RWA equivalent as derived under the standardised approach.
Total actual RWA (column (c)): Represents the sum of the RWA for modelled approaches that banks have SAMA approval to use and the RWA under standardised approaches.
RWA calculated using full standardised approach (column (d)): Total RWA assuming the full standardised approach applied at asset class level.
Disclosed numbers for each asset class are calculated purely for comparison purposes and do not represent requirements under the Basel framework.Linkages across templates
[CMS2:9/a] is equal to [CMS1:1/a]
[CMS2:9/c] is equal to [CMS1:1/c]
[CMS2:9/d] is equal to [CMS1:1/d]
1 The prohibition on the use of the IRB approach for equity exposures will be subject to a five-year linear phase-in arrangement as specified in SCRE17.2. During the phase-in period, the risk weight for equity exposures (to be reported in column (a)) will be the greater of: (i) the risk weight as calculated under the IRB approach, and (ii) the risk weight set for the linear phase-in arrangement under the standardised approach for credit risk. Column (b) should reflect the corresponding RWA for these exposures based on the phased-in standardised approach. After the phase-in period, columns (a) and (b) for equity exposures should both be empty.
14. Composition of Capital and TLAC
14.1 The disclosures described in this chapter cover the composition of regulatory capital, the main features of regulatory capital instruments and, for global systemically important banks, the composition of total loss-absorbing capacity and the creditor hierarchies of material subgroups and resolution entities. The disclosure requirements related to TLAC only, are not required to be completed by banks unless otherwise specified by SAMA.
14.2 The disclosure requirements set out in this chapter are:
14.2.1 Table CCA - Main features of regulatory capital instruments and of other total loss-absorbing capacity (TLAC) - eligible instruments
14.2.2 Template CC1 - Composition of regulatory capital
14.2.3 Template CC2 - Reconciliation of regulatory capital to balance sheet
14.2.4 Template TLAC1 - TLAC composition for global systemically important banks (G-SIBs) (at resolution group level)
14.2.5 Template TLAC2 - Material subgroup entity - creditor ranking at legal entity level
14.2.6 Template TLAC3 - Resolution entity - creditor ranking at legal entity level
14.3 The following table and templates must be completed by all banks:
14.3.1 Table CCA details the main features of a bank's regulatory capital instruments and other TLAC-eligible instruments, where applicable. This table should be posted on a bank's website, with the web link referenced in the bank's Pillar 3 report to facilitate users' access to the required disclosure. Table CCA represents the minimum level of disclosure that banks are required to report in respect of each regulatory capital instrument and, where applicable, other TLAC-eligible instruments issued.2
14.3.2 Template CC1 details the composition of a bank's regulatory capital.
14.3.3 Template CC2 provides users of Pillar 3 data with a reconciliation between the scope of a bank's accounting consolidation, as per published financial statements, and the scope of its regulatory consolidation.
14.4 The following additional templates must be completed by banks which have been designated as G-SIBs:
14.4.1 Template TLAC1 provides details of the TLAC positions of G-SIB resolution groups. This disclosure requirement applies to all G-SIBs at the resolution group level. For single point of entry G-SIBs, there is only one resolution group. This means that they only need to complete Template TLAC1 once to report their TLAC positions.
14.4.2 Templates TLAC2 and TLAC3 present information on creditor rankings at the legal entity level for material subgroup entities (ie entities that are part of a material subgroup) which have issued internal TLAC to one or more resolution entities, and also for resolution entities. These templates provide information on the amount and residual maturity of TLAC and on the instruments issued by resolution entities and material subgroup entities that rank pari passu with, or junior to, TLAC instruments.
14.5 Templates TLAC1, TLAC2 and TLAC3 become effective from the TLAC conformance date.
14.6 Through the following three-step approach, all banks are required to show the link between the balance sheet in their published financial statements and the numbers disclosed in Template CC1:
14.6.1 Step 1: Disclose the reported balance sheet under the regulatory scope of consolidation in Template CC2. If the scopes of regulatory consolidation and accounting consolidation are identical for a particular banking group, banks should state in Template CC2 that there is no difference and move on to Step 2. Where the accounting and regulatory scopes of consolidation differ, banks are required to disclose the list of those legal entities that are included within the accounting scope of consolidation, but excluded from the regulatory scope of consolidation or, alternatively, any legal entities included in the regulatory consolidation that are not included in the accounting scope of consolidation. This will enable users of Pillar 3 data to consider any risks posed by unconsolidated subsidiaries. If some entities are included in both the regulatory and accounting scopes of consolidation, but the method of consolidation differs between these two scopes, banks are required to list the relevant legal entities separately and explain the differences in the consolidation methods. For each legal entity that is required to be disclosed in this requirement, a bank must also disclose the total assets and equity on the entity's balance sheet and a description of the entity's principal activities.
14.6.2 Step 2: Expand the lines of the balance sheet under the regulatory scope of consolidation in Template CC2 to display all of the components that are used in Template CC1. It should be noted that banks will only need to expand elements of the balance sheet to the extent necessary to determine the components that are used in Template CC1 (eg if all of the paid-in capital of the bank meets the requirements to be included in Common Equity Tier 1 (CET1) capital, the bank would not need to expand this line). The level of disclosure should be proportionate to the complexity of the bank's balance sheet and its capital structure.
14.6.3 Step 3: Map each of the components that are disclosed in Template CC2 in Step 2 to the composition of capital disclosure set out in Template CC1.
Table CCA - Main features of regulatory capital instruments and of other TLAC-eligible instruments Purpose: Provide a description of the main features of a bank's regulatory capital instruments and other TLAC-eligible instruments, as applicable, that are recognised as part of its capital base / TLAC resources. Scope of application: The template is mandatory for all banks. In addition to completing the template for all regulatory capital instruments, G-SIB resolution entities should complete the template (including lines 3a and 34a) for all other TLAC-eligible instruments that are recognised as external TLAC resources by the resolution entities, starting from the TLAC conformance date. Internal TLAC instruments and other senior debt instruments are not covered in this template. Content: Quantitative and qualitative information as required. Frequency: Table CCA should be posted on a bank's website. It should be updated whenever the bank issues or repays a capital instrument (or other TLAC-eligible instrument where applicable), and whenever there is a redemption, conversion/writedown or other material change in the nature of an existing instrument. Updates should, at a minimum, be made semiannually. Banks should include the web link in each Pillar 3 report to the issuances made over the previous period. Format: Flexible. Accompanying information: Banks are required to make available on their websites the full terms and conditions of all instruments included in regulatory capital and TLAC. a Quantitative / qualitative information 1 Issuer 2 Unique identifier (eg Committee on Uniform Security Identification Procedures (CUSIP), International Securities Identification Number (ISIN) or Bloomberg identifier for private placement) 3 Governing law(s) of the instrument 3a Means by which enforceability requirement of Section 13 of the TLAC Term Sheet is achieved (for other TLAC-eligible instruments governed by foreign law) 4 Transitional Basel III rules 5 Post-transitional Basel III rules 6 Eligible at solo/group/group and solo 7 Instrument type (refer to SACAP) 8 Amount recognised in regulatory capital (currency in millions, as of most recent reporting date) 9 Par value of instrument 10 Accounting classification 11 Original date of issuance 12 Perpetual or dated 13 Original maturity date 14 Issuer call subject to prior SAMA approval 15 Optional call date, contingent call dates and redemption amount 16 Subsequent call dates, if applicable Coupons / dividends 17 Fixed or floating dividend/coupon 18 Coupon rate and any related index 19 Existence of a dividend stopper 20 Fully discretionary, partially discretionary or mandatory 21 Existence of step-up or other incentive to redeem 22 Non-cumulative or cumulative 23 Convertible or non-convertible 24 If convertible, conversion trigger(s) 25 If convertible, fully or partially 26 If convertible, conversion rate 27 If convertible, mandatory or optional conversion 28 If convertible, specify instrument type convertible into 29 If convertible, specify issuer of instrument it converts into 30 Writedown feature 31 If writedown, writedown trigger(s) 32 If writedown, full or partial 33 If writedown, permanent or temporary 34 If temporary write-down, description of writeup mechanism 34a Type of subordination 35 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument in the insolvency creditor hierarchy of the legal entity concerned). 36 Non-compliant transitioned features 37 If yes, specify non-compliant features Instructions
Banks are required to complete the template for each outstanding regulatory capital instrument and, in the case of G-SIBs, TLAC-eligible instruments (banks should insert "NA" if the question is not applicable).
Banks are required to report each instrument, including common shares, in a separate column of the template, such that the completed Table CCA would provide a "main features report" that summarises all of the regulatory capital and TLAC-eligible instruments of the banking group. G-SIBs disclosing these instruments should group them under three sections (horizontally along the table) to indicate whether they are for meeting (i) only capital (but not TLAC) requirements; (ii) both capital and TLAC requirements; or (iii) only TLAC (but not capital) requirements.Row number Explanation Format / list of options (where relevant) 1 Identifies issuer legal entity. Free text 2 Unique identifier (eg CUSIP, ISIN or Bloomberg identifier for private placement). Free text 3 Specifies the governing law(s) of the instrument. Free text 3a Other TLAC-eligible instruments governed by foreign law (ie a law other than that of the home jurisdiction of a resolution entity) include a clause in the contractual provisions whereby investors expressly submit to, and provide consent to the application of, the use of resolution tools in relation to the instrument by the home authority notwithstanding any provision of foreign law to the contrary, unless there is equivalent binding statutory provision for cross-border recognition of resolution actions. Select "NA" where the governing law of the instrument is the same as that of the country of incorporation of the resolution entity. Disclosure: [Contractual] [Statutory] [NA] 4 Specifies the regulatory capital treatment during the Basel III transitional phase (ie the component of capital from which the instrument is being phased out). Disclosure: [Common Equity Tier 1] [Additional Tier 1] [Tier 2] 5 Specifies regulatory capital treatment under Basel III rules not taking into account transitional treatment. Disclosure: [Common Equity Tier 1] [Additional Tier 1] [Tier 2] [Ineligible] 6 Specifies the level(s) within the group at which the instrument is included in capital. Disclosure: [Solo] [Group] [Solo and Group] 7 Specifies instrument type, varying by jurisdiction. Helps provide more granular understanding of features, particularly during transition. Disclosure: refer to SACAP. 8 Specifies amount recognised in regulatory capital. Free text 9 Par value of instrument. Free text 10 Specifies accounting classification. Helps to assess loss-absorbency. Disclosure: [Shareholders' equity] [Liability - amortised cost] [Liability - fair value option] [Non-controlling interest in consolidated subsidiary] 11 Specifies date of issuance. Free text 12 Specifies whether dated or perpetual. Disclosure: [Perpetual] [Dated] 13 For dated instrument, specifies original maturity date (day, month and year). For perpetual instrument, enter "no maturity". Free text 14 Specifies whether there is an issuer call option. Disclosure: [Yes] [No] 15 For instrument with issuer call option, specifies: (i) the first date of call if the instrument has a call option on a specific date (day, month and year); (ii) the instrument has a tax and/or regulatory event call; and (iii) the redemption price. Free text 16 Specifies the existence and frequency of subsequent call dates, if applicable. Free text 17 Specifies whether the coupon/dividend is fixed over the life of the instrument, floating over the life of the instrument, currently fixed but will move to a floating rate in the future, or currently floating but will move to a fixed rate in the future. Disclosure: [Fixed], [Floating] [Fixed to floating], [Floating to fixed] 18 Specifies the coupon rate of the instrument and any related index that the coupon/dividend rate references. Free text 19 Specifies whether the non-payment of a coupon or dividend on the instrument prohibits the payment of dividends on common shares (ie whether there is a dividend-stopper). Disclosure: [Yes] [No] 20 Specifies whether the issuer has full, partial or no discretion over whether a coupon/dividend is paid. If the bank has full discretion to cancel coupon/dividend payments under all circumstances, it must select "fully discretionary" (including when there is a dividend-stopper that does not have the effect of preventing the bank from cancelling payments on the instrument). If there are conditions that must be met before payment can be cancelled (eg capital below a certain threshold), the bank must select "partially discretionary". If the bank is unable to cancel the payment outside of insolvency, the bank must select "mandatory". Disclosure: [Fully discretionary] [Partially discretionary] [Mandatory] 21 Specifies whether there is a step-up or other incentive to redeem. Disclosure: [Yes] [No] 22 Specifies whether dividends/coupons are cumulative or non-cumulative. Disclosure: [Non-cumulative] [Cumulative] 23 Specifies whether the instrument is convertible. Disclosure: [Convertible] [Nonconvertible] 24 Specifies the conditions under which the instrument will convert, including point of non-viability. Where one or more authorities have the ability to trigger conversion, the authorities should be listed. For each of the authorities it should be stated whether the legal basis for the authority to trigger conversion is provided by the terms of the contract of the instrument (a contractual approach) or statutory means (a statutory approach). Free text 25 For conversion trigger separately, specifies whether the instrument will: (i) always convert fully; (ii) may convert fully or partially; or (iii) will always convert partially. Free text referencing one of the options above 26 Specifies the rate of conversion into the more loss-absorbent instrument. Free text 27 For convertible instruments, specifies whether conversion is mandatory or optional. Disclosure: [Mandatory] [Optional] [NA] 28 For convertible instruments, specifies the instrument type it is convertible into. Disclosure: [Common Equity Tier 1] [Additional Tier 1] [Tier 2] [Other] 29 If convertible, specifies the issuer of the instrument into which it converts. Free text 30 Specifies whether there is a writedown feature. Disclosure: [Yes] [No] 31 Specifies the trigger at which writedown occurs, including point of non-viability. Where one or more authorities have the ability to trigger writedown, the authorities should be listed. For each of the authorities it should be stated whether the legal basis for the authority to trigger conversion is provided by the terms of the contract of the instrument (a contractual approach) or statutory means (a statutory approach). Free text 32 For each writedown trigger separately, specifies whether the instrument will: (i) always be written down fully; (ii) may be written down partially; or (iii) will always be written down partially. Free text referencing one of the options above 33 For writedown instruments, specifies whether writedown is permanent or temporary. Disclosure: [Permanent] [Temporary] [NA] 34 For instruments that have a temporary writedown, description of writeup mechanism. Free text 34a Type of subordination. Disclosure: [Structural] [Statutory] [Contractual] [Exemption from subordination] 35 Specifies instrument to which it is most immediately subordinate. Where applicable, banks should specify the column numbers of the instruments in the completed main features template to which the instrument is most immediately subordinate. In the case of structural subordination, "NA" should be entered. Free text 36 Specifies whether there are non-compliant features. Disclosure: [Yes] [No] 37 If there are non-compliant features, specifies which ones. Free text Template CC1 - Composition of regulatory capital Purpose: Provide a breakdown of the constituent elements of a bank's capital. Scope of application: The template is mandatory for all banks at the consolidated level. Content: Breakdown of regulatory capital according to the scope of regulatory consolidation Frequency: Semiannual. Format: Fixed. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such change. a b Amounts Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation Common Equity Tier 1 capital: instruments and reserves 1 Directly issued qualifying common share (and equivalent for non-joint stock companies) capital plus related stock surplus h 2 Retained earnings 3 Accumulated other comprehensive income (and other reserves) 4 Directly issued capital subject to phase-out from CET1 capital (only applicable to non-joint stock companies) 5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1 capital) 6 Common Equity Tier 1 capital before regulatory adjustments Common Equity Tier 1 capital: regulatory adjustments 7 Prudent valuation adjustments 8 Goodwill (net of related tax liability) a minus d 9 Other intangibles other than mortgage servicing rights (MSR) (net of related tax liability) b minus e 10 Deferred tax assets (DTA) that rely on future profitability, excluding those arising from temporary differences (net of related tax liability) 11 Cash flow hedge reserve 12 Shortfall of provisions to expected losses 13 Securitisation gain on sale (as set out in SACAP4.1.4) 14 Gains and losses due to changes in own credit risk on fair valued liabilities 15 Defined benefit pension fund net assets 16 Investments in own shares (if not already subtracted from paid-in capital on reported balance sheet) 17 Reciprocal cross-holdings in common equity 18 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) 19 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation (amount above 10% threshold) 20 MSR (amount above 10% threshold) c minus f minus 10% threshold 21 DTA arising from temporary differences (amount above 10% threshold, net of related tax liability) 22 Amount exceeding the 15% threshold 23 Of which: significant investments in the common stock of financials 24 Of which: MSR 25 Of which: DTA arising from temporary differences 26 National specific regulatory adjustments 27 Regulatory adjustments applied to Common Equity Tier 1 capital due to insufficient Additional Tier 1 and Tier 2 capital to cover deductions 28 Total regulatory adjustments to Common Equity Tier 1 capital 29 Common Equity Tier 1 capital (CET1) Additional Tier 1 capital: instruments 30 Directly issued qualifying additional Tier 1 instruments plus related stock surplus i 31 Of which: classified as equity under applicable accounting standards 32 Of which: classified as liabilities under applicable accounting standards 33 Directly issued capital instruments subject to phase-out from additional Tier 1 capital 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group additional Tier 1 capital) 35 Of which: instruments issued by subsidiaries subject to phase-out 36 Additional Tier 1 capital before regulatory adjustments Additional Tier 1 capital: regulatory adjustments 37 Investments in own additional Tier 1 instruments 38 Reciprocal cross-holdings in additional Tier 1 instruments 39 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold) 40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation 41 National specific regulatory adjustments 42 Regulatory adjustments applied to additional Tier 1 capital due to insufficient Tier 2 capital to cover deductions 43 Total regulatory adjustments to additional Tier 1 capital 44 Additional Tier 1 capital (AT1) 45 Tier 1 capital (T1 = CET1 + AT1) Tier 2 capital: instruments and provisions 46 Directly issued qualifying Tier 2 instruments plus related stock surplus 47 Directly issued capital instruments subject to phase-out from Tier 2 capital 48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) 49 Of which: instruments issued by subsidiaries subject to phase-out 50 Provisions 51 Tier 2 capital before regulatory adjustments Tier 2 capital before regulatory adjustments 52 Investments in own Tier 2 instruments 53 Reciprocal cross-holdings in Tier 2 instruments and other TLAC liabilities 54 Investments in the capital and other TLAC liabilities of banking, financial and insurance entities that are outside the scope of regulatory consolidation, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold) 54a Investments in the other TLAC liabilities of banking, financial and insurance entities that are outside the scope of regulatory consolidation and where the bank does not own more than 10% of the issued common share capital of the entity: amount previously designated for the 5% threshold but that no longer meets the conditions (for G-SIBs only) 55 Significant investments in the capital and other TLAC liabilities of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) 56 National specific regulatory adjustments 57 Total regulatory adjustments to Tier 2 capital 58 Tier 2 capital 59 Total regulatory capital (= Tier 1 + Tier2) 60 Total risk-weighted assets Capital adequacy ratios and buffers 61 Common Equity Tier 1 capital (as a percentage of risk-weighted assets) 62 Tier 1 capital (as a percentage of risk-weighted assets) 63 Total capital (as a percentage of risk-weighted assets) 64 Institution-specific buffer requirement (capital conservation buffer plus countercyclical buffer requirements plus higher loss absorbency requirement, expressed as a percentage of riskweighted assets) 65 Of which: capital conservation buffer requirement 66 Of which: bank-specific countercyclical buffer requirement 67 Of which: higher loss absorbency requirement 68 Common Equity Tier 1 capital (as a percentage of risk-weighted assets) available after meeting the bank's minimum capital requirements National minima (if different from Basel III) 69 National minimum Common Equity Tier 1 capital adequacy ratio (if different from Basel III minimum) 70 National minimum Tier 1 capital adequacy ratio (if different from Basel III minimum) 71 National minimum Total capital adequacy ratio (if different from Basel III minimum) Amounts below the thresholds for deduction (before risk-weighting) 72 Non-significant investments in the capital and other TLAC liabilities of other financial entities 73 Significant investments in the common stock of financial entities 74 MSR (net of related tax liability) 75 DTA arising from temporary differences (net of related tax liability) Applicable caps on the inclusion of provisions in Tier 2 capital 76 Provisions eligible for inclusion in Tier 2 capital in respect of exposures subject to standardised approach (prior to application of cap) 77 Cap on inclusion of provisions in Tier 2 capital under standardised approach 78 Provisions eligible for inclusion in Tier 2 capital in respect of exposures subject to internal ratingsbased approach (prior to application of cap) 79 Cap for inclusion of provisions in Tier 2 capital under internal ratings-based approach Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2018 and 1 Jan 2022) 80 Current cap on CET1 instruments subject to phase-out arrangements 81 Amount excluded from CET1 capital due to cap (excess over cap after redemptions and maturities) 82 Current cap on AT1 instruments subject to phase-out arrangements 83 Amount excluded from AT1 capital due to cap (excess over cap after redemptions and maturities) 84 Current cap on Tier 2 instruments subject to phase-out arrangements 85 Amount excluded from Tier 2 capital due to cap (excess over cap after redemptions and maturities) Instructions (i) Rows in italics will be deleted after all the ineligible capital instruments have been fully phased out (ie from 1 January 2022 onwards). (ii) The reconciliation requirements included in Template CC2 result in the decomposition of certain regulatory adjustments. For example, the disclosure template below includes the adjustment "Goodwill net of related tax liability". The reconciliation requirements will lead to the disclosure of both the goodwill component and the related tax liability component of this regulatory adjustment. (iii) Shading: - Each dark grey row introduces a new section detailing a certain component of regulatory capital. - Light grey rows with no thick border represent the sum cells in the relevant section. - Light grey rows with a thick border show the main components of regulatory capital and the capital adequacy ratios. Columns Source: Banks are required to complete column b to show the source of every major input, which is to be cross-referenced to the corresponding rows in Template CC2. Rows Set out in the following table is an explanation of each row of the template above. Regarding the regulatory adjustments, banks are required to report deductions from capital as positive numbers and additions to capital as negative numbers. For example, goodwill (row 8) should be reported as a positive number, as should gains due to the change in the own credit risk of the bank (row 14). However, losses due to the change in the own credit risk of the bank should be reported as a negative number as these are added back in the calculation of CET1 capital. Row number Explanation 1 Instruments issued by the parent company of the reporting group that meet all of the CET1 capital entry criteria set out in SACAP2.2.1. This should be equal to the sum of common stock (and related surplus only) and other instruments for non-joint stock companies, both of which must meet the common stock criteria. This should be net of treasury stock and other investments in own shares to the extent that these are already derecognised on the balance sheet under the relevant accounting standards. Other paid-in capital elements must be excluded. All minority interest must be excluded. 2 Retained earnings, prior to all regulatory adjustments. In accordance with SACAP2.2.1, this row should include interim profit and loss that has met any audit, verification or review procedures that SAMA has put in place. Dividends are to be removed in accordance with the applicable accounting standards, ie they should be removed from this row when they are removed from the balance sheet of the bank. 3 Accumulated other comprehensive income and other disclosed reserves, prior to all regulatory adjustments. 4 Directly issued capital instruments subject to phase-out from CET1 capital in accordance with the requirements of SACAP5.7. This is only applicable to non-joint stock companies. Banks structured as joint stock companies must report zero in this row. 5 Common share capital issued by subsidiaries and held by third parties. Only the amount that is eligible for inclusion in group CET1 capital should be reported here, as determined by the application of SACAP3.1 (see SACAP Annex #7 for an example of the calculation). 6 Sum of rows 1 to 5. 7 Prudent valuation adjustments according to the requirements of Basel Framework “prudent valuation guidance” (Adjustment to the current valuation of less liquid positions for regulatory capital purposes), taking into account the guidance set out in Supervisory guidance for assessing banks' financial instrument fair value practices, April 2009 (in particular Principle 10). 8 Goodwill net of related tax liability, as set out in SACAP4.1.1. 9 Other intangibles other than MSR (net of related tax liability), as set out in SACAP4.1.1. 10 DTA that rely on future profitability excluding those arising from temporary differences (net of related tax liability), as set out in SACAP4.1.2. 11 The element of the cash flow hedge reserve described in SACAP4.1.3. 12 Shortfall of provisions to expected losses as described in SACAP4.1.4. 13 Securitisation gain on sale (as set out in SACAP4.1.4). 14 Gains and losses due to changes in own credit risk on fair valued liabilities, as described in SACAP4.1.4. 15 Defined benefit pension fund net assets, the amount to be deducted as set out in SACAP4.1.5. 16 Investments in own shares (if not already subtracted from paid-in capital on reported balance sheet), as set out in SACAP4.1.6. 17 Reciprocal cross-holdings in common equity, as set out in SACAP4.1.7. 18 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation and where the bank does not own more than 10% of the issued share capital, net of eligible short positions and amount above 10% threshold. Amount to be deducted from CET1 capital calculated in accordance with SACAP4.2. 19 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions and amount above 10% threshold. Amount to be deducted from CET1 capital calculated in accordance with SACAP4.3 to SACAP4.4. 20 MSR (amount above 10% threshold), amount to be deducted from CET1 capital in accordance with SACAP4.4. 21 DTA arising from temporary differences (amount above 10% threshold, net of related tax liability), amount to be deducted from CET1 capital in accordance with SACAP4.4. 22 Total amount by which the three threshold items exceed the 15% threshold, excluding amounts reported in rows 19-21, calculated in accordance with SACAP4.4. 23 The amount reported in row 22 that relates to significant investments in the common stock of financials. 24 The amount reported in row 22 that relates to MSR. 25 The amount reported in row 22 that relates to DTA arising from temporary differences. 26 Any national specific regulatory adjustments that SAMA requires to be applied to CET1 capital in addition to the Basel III minimum set of adjustments. Refer to SACAP for guidance. 27 Regulatory adjustments applied to CET1 capital due to insufficient AT1 capital to cover deductions. If the amount reported in row 43 exceeds the amount reported in row 36, the excess is to be reported here. 28 Total regulatory adjustments to CET1 capital, to be calculated as the sum of rows 7-22 plus rows 26-7. 29 CET1 capital, to be calculated as row 6 minus row 28. 30 Instruments issued by the parent company of the reporting group that meet all of the AT1 capital entry criteria set out in SACAP2.2.2 and any related stock surplus as set out in SACAP2.2.2. All instruments issued by subsidiaries of the consolidated group should be excluded from this row. This row may include AT1 capital issued by an SPV of the parent company only if it meets the requirements set out in SACAP3.3. 31 The amount in row 30 classified as equity under applicable accounting standards. 32 The amount in row 30 classified as liabilities under applicable accounting standards. 33 Directly issued capital instruments subject to phase-out from AT1 capital in accordance with the requirements of SACAP5.7. 34 AT1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties, the amount allowed in group AT1 capital in accordance with SACAP3.2. 35 The amount reported in row 34 that relates to instruments subject to phase-out from AT1 capital in accordance with the requirements of SACAP5.7. 36 The sum of rows 30, 33 and 34. 37 Investments in own AT1 instruments, amount to be deducted from AT1 capital in accordance with SACAP4.1.6. 38 Reciprocal cross-holdings in AT1 instruments, amount to be deducted from AT1 capital in accordance with SACAP4.1.7. 39 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation and where the bank does not own more than 10% of the issued common share capital of the entity, net of eligible short positions and amount above 10% threshold. Amount to be deducted from AT1 capital calculated in accordance with SACAP4.2. 40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions. Amount to be deducted from AT1 capital in accordance with SACAP4.3. 41 Any national specific regulatory adjustments that SAMA requires to be applied to AT1 capital in addition to the Basel III minimum set of adjustments. Refer to SACAP for guidance. 42 Regulatory adjustments applied to AT1 capital due to insufficient Tier 2 capital to cover deductions. If the amount reported in row 57 exceeds the amount reported in row 51, the excess is to be reported here. 43 The sum of rows 37-42. 44 AT1 capital, to be calculated as row 36 minus row 43. 45 Tier 1 capital, to be calculated as row 29 plus row 44. 46 Instruments issued by the parent company of the reporting group that meet all of the Tier 2 capital criteria set out in SACAP2.2.3 and any related stock surplus as set out in SACAP2.2.3. All instruments issued by subsidiaries of the consolidated group should be excluded from this row. This row may include Tier 2 capital issued by an SPV of the parent company only if it meets the requirements set out in SACAP3.3 47 Directly issued capital instruments subject to phase-out from Tier 2 capital in accordance with the requirements of SACAP5.7. 48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2 capital), in accordance with SACAP3.3. 49 The amount reported in row 48 that relates to instruments subject to phase-out from Tier 2 capital in accordance with the requirements of SACAP5.7. 50 Provisions included in Tier 2 capital, calculated in accordance with SACAP2.2.3. 51 The sum of rows 46-8 and row 50. 52 Investments in own Tier 2 instruments, amount to be deducted from Tier 2 capital in accordance with SACAP4.1.6. 53 Reciprocal cross-holdings in Tier 2 capital instruments and other TLAC liabilities, amount to be deducted from Tier 2 capital in accordance with SACAP4.1.7. 54 Investments in the capital instruments and other TLAC liabilities of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity: amount in excess of the 10% threshold that is to be deducted from Tier 2 capital in accordance with SACAP4.2. For non-G-SIBs, any amount reported in this row will reflect other TLAC liabilities not covered by the 5% threshold and that cannot be absorbed by the 10% threshold. For G-SIBs, the 5% threshold is subject to additional conditions; deductions in excess of the 5% threshold are reported instead in 54a. 54a (This row is for G-SIBs only.) Investments in other TLAC liabilities of banking, financial and insurance entities that are outside the scope of regulatory consolidation and where the bank does not own more than 10% of the issued common share capital of the entity, previously designated for the 5% threshold but no longer meeting the conditions under paragraph 80a of the TLAC holdings standard, measured on a gross long basis. The amount to be deducted will be the amount of other TLAC liabilities designated to the 5% threshold but not sold within 30 business days, no longer held in the trading book or now exceeding the 5% threshold (eg in the instance of decreasing CET1 capital). Note that, for G-SIBs, amounts designated to this threshold may not subsequently be moved to the 10% threshold. This row does not apply to non-G-SIBs, to whom these conditions on the use of the 5% threshold do not apply. 55 Significant investments in the capital and other TLAC liabilities of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions), amount to be deducted from Tier 2 capital in accordance with SACAP4.3. 56 Any national specific regulatory adjustments that SAMA requires to be applied to Tier 2 capital in addition to the Basel III minimum set of adjustments. Refer to SACAP for guidance. 57 The sum of rows 52-6. 58 Tier 2 capital, to be calculated as row 51 minus row 57. 59 Total capital, to be calculated as row 45 plus row 58. 60 Total risk-weighted assets of the reporting group. 61 CET1 capital adequacy ratio (as a percentage of risk-weighted assets), to be calculated as row 29 divided by row 60 (expressed as a percentage). 62 Tier 1 capital adequacy ratio (as a percentage of risk-weighted assets), to be calculated as row 45 divided by row 60 (expressed as a percentage). 63 Total capital adequacy ratio (as a percentage of risk-weighted assets), to be calculated as row 59 divided by row 60 (expressed as a percentage). 64 Bank-specific buffer requirement (capital conservation buffer plus countercyclical buffer requirements plus higher loss absorbency requirement, expressed as a percentage of risk-weighted assets). If an MPE G-SIB resolution entity is not subject to a buffer requirement at that scope of consolidation, then it should enter zero. 65 The amount in row 64 (expressed as a percentage of risk-weighted assets) that relates to the capital conservation buffer, ie banks will report 2.5% here. 66 The amount in row 64 (expressed as a percentage of risk-weighted assets) that relates to the bank-specific countercyclical buffer requirement. 67 The amount in row 64 (expressed as a percentage of risk-weighted assets) that relates to the bank's higher loss absorbency requirement, if applicable. 68 CET1 capital (as a percentage of risk-weighted assets) available after meeting the bank's minimum capital requirements. To be calculated as the CET1 capital adequacy ratio of the bank (row 61) less the ratio of RWA of any common equity used to meet the bank's minimum CET1, Tier 1 and Total capital requirements. For example, suppose a bank has 100 RWA, 10 CET1 capital, 1.5 additional Tier 1 capital and no Tier 2 capital. Since it does not have any Tier 2 capital, it will have to earmark its CET1 capital to meet the 8% minimum capital requirement. The net CET1 capital left to meet other requirements (which could include Pillar 2, buffers or TLAC requirements) will be 10 - 4.5 - 2 = 3.5. 69 National minimum CET1 capital adequacy ratio (if different from Basel III minimum). Refer to SACAP for guidance. 70 National minimum Tier 1 capital adequacy ratio (if different from Basel III minimum). Refer to SACAP for guidance. 71 National minimum Total capital adequacy ratio (if different from Basel III minimum). Refer to SACAP for guidance. 72 Investments in the capital instruments and other TLAC liabilities of banking, financial and insurance entities that are outside the scope of regulatory consolidation where the bank does not own more than 10% of the issued common share capital of the entity (in accordance with SACAP4.2. 73 Significant investments in the common stock of financial entities, the total amount of such holdings that are not reported in row 19 and row 23. 74 MSR, the total amount of such holdings that are not reported in row 20 and row 24. 75 DTA arising from temporary differences, the total amount of such holdings that are not reported in row 21 and row 25. 76 Provisions eligible for inclusion in Tier 2 capital in respect of exposures subject to standardised approach, calculated in accordance with SACAP2.2.3, prior to the application of the cap. 77 Cap on inclusion of provisions in Tier 2 capital under the standardised approach, calculated in accordance with SACAP2.2.3. 78 Provisions eligible for inclusion in Tier 2 capital in respect of exposures subject to the internal ratings-based approach, calculated in accordance with SACAP2.2.3, prior to the application of the cap. 79 Cap on inclusion of provisions in Tier 2 capital under the internal ratings-based approach, calculated in accordance with SACAP2.2.3. 80 Current cap on CET1 instruments subject to phase-out arrangements; see SACAP5.7. 81 Amount excluded from CET1 capital due to cap (excess over cap after redemptions and maturities); see SACAP5.7. 82 Current cap on AT1 instruments subject to phase-out arrangements; see SACAP5.7. 83 Amount excluded from AT1 capital due to cap (excess over cap after redemptions and maturities); see SACAP5.7. 84 Current cap on Tier 2 capital instruments subject to phase-out arrangements; see SACAP5.7. 85 Amount excluded from Tier 2 capital due to cap (excess over cap after redemptions and maturities); see SACAP5.7. Template CC2 - Reconciliation of regulatory capital to balance sheet Purpose: Enable users to identify the differences between the scope of accounting consolidation and the scope of regulatory consolidation, and to show the link between a bank's balance sheet in its published financial statements and the numbers that are used in the composition of capital disclosure template set out in Template CC1. Scope of application: The template is mandatory for all banks. Content: Carrying values (corresponding to the values reported in financial statements). Frequency: Semiannual. Format: Flexible (but the rows must align with the presentation of the bank's financial report). Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes in the expanded balance sheet items over the reporting period and the key drivers of such change. Narrative commentary to significant changes in other balance sheet items could be found in Table LIA. a b c Balance sheet as in published financial statements Under regulatory scope of consolidation Reference As at period-end As at period-end Assets Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Available for sale financial investments Current and deferred tax assets Prepayments, accrued income and other assets Investments in associates and joint ventures Goodwill and intangible assets Of which: goodwill a Of which: other intangibles (excluding MSR) b Of which: MSR c Property, plant and equipment Total assets Liabilities Deposits from banks Items in the course of collection due to other banks Customer accounts Repurchase agreements and other similar secured borrowing Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial instruments Debt securities in issue Accruals, deferred income and other liabilities Current and deferred tax liabilities Of which: deferred tax liabilities (DTL) related to goodwill d Of which: DTL related to intangible assets (excluding MSR) e Of which: DTL related to MSR f Subordinated liabilities Provisions Retirement benefit liabilities Total liabilities Shareholders' equity Paid-in share capital Of which: amount eligible for CET1 capital h Of which: amount eligible for AT1 capital i Retained earnings Accumulated other comprehensive income Total shareholders' equity Columns
Banks are required to take their balance sheet in their published financial statements (numbers reported in column a above) and report the numbers when the regulatory scope of consolidation is applied (numbers reported in column b above)..
If there are rows in the balance sheet under the regulatory scope of consolidation that are not present in the published financial statements, banks are required to add these and give a value of zero in column a.
If a bank's scope of accounting consolidation and its scope of regulatory consolidation are exactly the same, columns a and b should be merged and this fact should be clearly disclosed.
Rows
Similar to Template LI1, the rows in the above template should follow the balance sheet presentation used by the bank in its financial statements, on which basis the bank is required to expand the balance sheet to identify all the items that are disclosed in Template CC1. Set out above (ie items a to i) are some examples of items that may need to be expanded for a particular banking group. Disclosure should be proportionate to the complexity of the bank's balance sheet. Each item must be given a reference number/letter in column c that is used as cross-reference to column b of Template CC1.
Linkages across templates
(i) The amounts in columns a and b in Template CC2 before balance sheet expansion (ie before Step 2) should be identical to columns a and b in Template LI1. (ii) Each expanded item is to be cross-referenced to the corresponding items in Template CC1. Template TLAC1: TLAC composition for G-SIBs (at resolution group level) Purpose: Provide details of the composition of a G-SIB's TLAC. Scope of application: This template is mandatory for all G-SIBs. It should be completed at the level of each resolution group within a G-SIB. Content: Carrying values (corresponding to the values reported in financial statements). Frequency: Semiannual. Format: Fixed. Accompanying narrative: G-SIBs are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of any such change(s). Qualitative narrative on the G-SIB resolution strategy, including the approach (SPE or multiple point of entry (MPE)) and structure to which the resolution measures are applied, may be included to help understand the templates. a Amounts Regulatory capital elements of TLAC and adjustments 1 Common Equity Tier 1 (CET1) capital 2 Additional Tier 1 (AT1) capital before TLAC adjustments 3 AT1 capital ineligible as TLAC as issued out of subsidiaries to third parties 4 Other adjustments 5 AT1 instruments eligible under the TLAC framework 6 Tier 2 capital before TLAC adjustments 7 Amortised portion of Tier 2 instruments where remaining maturity > 1 year 8 Tier 2 capital ineligible as TLAC as issued out of subsidiaries to third parties 9 Other adjustments 10 Tier 2 instruments eligible under the TLAC framework 11 TLAC arising from regulatory capital Non-regulatory capital elements of TLAC 12 External TLAC instruments issued directly by the bank and subordinated to excluded liabilities 13 External TLAC instruments issued directly by the bank which are not subordinated to excluded liabilities but meet all other TLAC Term Sheet requirements 14 Of which: amount eligible as TLAC after application of the caps 15 External TLAC instruments issued by funding vehicles prior to 1 January 2022 16 Eligible ex ante commitments to recapitalise a G-SIB in resolution 17 TLAC arising from non-regulatory capital instruments before adjustments Non-regulatory capital elements of TLAC: adjustments 18 TLAC before deductions 19 Deductions of exposures between MPE resolution groups that correspond to items eligible for TLAC (not applicable to single point of entry G-SIBs) 20 Deduction of investments in own other TLAC liabilities 21 Other adjustments to TLAC 22 TLAC after deductions Risk-weighted assets (RWA) and leverage exposure measure for TLAC purposes 23 Total RWA adjusted as permitted under the TLAC regime 24 Leverage exposure measure TLAC ratios and buffers 25 TLAC (as a percentage of RWA adjusted as permitted under the TLAC regime) 26 TLAC (as a percentage of leverage exposure) 27 CET1 (as a percentage of RWA) available after meeting the resolution group's minimum capital and TLAC requirements 28 Bank-specific buffer requirement (capital conservation buffer plus countercyclical buffer requirements plus higher loss absorbency requirement, expressed as a percentage of RWA) 29 Of which: capital conservation buffer requirement 30 Of which: bank-specific countercyclical buffer requirement 31 Of which: higher loss-absorbency requirement Instructions For SPE G-SIBs, where the resolution group is the same as the regulatory scope of consolidation for Basel III regulatory capital, those rows that refer to regulatory capital before adjustments coincide with information provided under Template CC1. For MPE G-SIBs, information is provided for each resolution group. Aggregation of capital and total RWA for capital purposes across resolution groups will not necessarily equal or directly correspond to values reported for regulatory capital and RWA under Template CC1. The TLAC position related to the regulatory capital of the resolution group shall include only capital instruments issued by entities belonging to the resolution group. Similarly, the TLAC position is based on the RWA (adjusted as permitted under Section 3 of the TLAC Term Sheet) and leverage ratio exposure measures calculated at the level of the resolution group. Regarding the shading: - Each dark grey row introduces a new section detailing a certain component of TLAC. - The light grey rows with no thick border represent the sum cells in the relevant section. - The light grey rows with a thick border show the main components of TLAC. The following table explains each row of the above template. Regarding the regulatory adjustments, banks are required to report deductions from capital or TLAC as positive numbers and additions to capital or TLAC as negative numbers. For example, the amortised portion of Tier 2 where remaining maturity is greater than one year (row 7) should be reported as a negative number (as it adds back in the calculation of Tier 2 instruments eligible as TLAC), while Tier 2 capital ineligible as TLAC (row 8) should be reported as a positive number. Row number Explanation 1 CET1 capital of the resolution group, calculated in line with the Basel III and TLAC frameworks. 2 AT 1 capital. This row will provide information on the AT1 capital of the resolution group, calculated in line with the SACAP standard and the TLAC framework. 3 AT1 instruments issued out of subsidiaries to third parties that are ineligible as TLAC. According to Section 8c of the TLAC Term Sheet, such instruments could be recognised to meet minimum TLAC until 31 December 2021. An amount (equal to that reported in row 34 in Template CC1) should thus be reported only starting from 1 January 2022. 4 Other elements of AT1 capital that are ineligible as TLAC (excluding those already incorporated in row 3). 5 AT1 instruments eligible under the TLAC framework, to be calculated as row 2 minus rows 3 and 4. 6 Tier 2 capital of the resolution group, calculated in line with the Basel III and TLAC frameworks. 7 Amortised portion of Tier 2 instruments where remaining maturity is greater than one year. This row recognises that as long as the remaining maturity of a Tier 2 instrument is above the one-year residual maturity requirement of the TLAC Term Sheet, the full amount may be included in TLAC, even if the instrument is partially derecognised in regulatory capital via the requirement to amortise the instrument in the five years before maturity. Only the amount not recognised in regulatory capital but meeting all TLAC eligibility criteria should be reported in this row. 8 Tier 2 instruments issued out of subsidiaries to third parties that are ineligible as TLAC. According to Section 8c of the TLAC Term Sheet, such instruments could be recognised to meet minimum TLAC until 31 December 2021. An amount (equal to that reported in row 48 of Template CC1) should thus be reported only starting from 1 January 2022. 9 Other elements of Tier 2 capital that are ineligible as TLAC (excluding those that are already incorporated in row 8). 10 Tier 2 instruments eligible under the TLAC framework, to be calculated as: row 6 + row 7 - row 8 - row 9. 11 TLAC arising from regulatory capital, to be calculated as: row 1 + row 5 + row 10. 12 External TLAC instruments issued directly by the resolution entity and subordinated to excluded liabilities. The amount reported in this row must meet the subordination requirements set out in points (a) to (c) of Section 11 of the TLAC Term Sheet, or be exempt from the requirement by meeting the conditions set out in points (i) to (iv) of the same section. 13 External TLAC instruments issued directly by the resolution entity that are not subordinated to Excluded Liabilities but meet the other TLAC Term Sheet requirements. The amount reported in this row should be those subject to recognition as a result of the application of the penultimate and antepenultimate paragraphs of Section 11 of the TLAC Term Sheet. The full amounts should be reported in this row, ie without applying the 2.5% and 3.5% caps set out the penultimate paragraph. 14 The amount reported in row 13 above after the application of the 2.5% and 3.5% caps set out in the penultimate paragraph of Section 11 of the TLAC Term Sheet. 15 External TLAC instrument issued by a funding vehicle prior to 1 January 2022. Amounts issued after 1 January 2022 are not eligible as TLAC and should not be reported here. 16 Eligible ex ante commitments to recapitalise a G-SIB in resolution, subject to the conditions set out in the second paragraph of Section 7 of the TLAC Term Sheet. 17 Non-regulatory capital elements of TLAC before adjustments. To be calculated as: row 12 + row 14 + row 15 + row 16. 18 TLAC before adjustments. To be calculated as: row 11 + row 17. 19 Deductions of exposures between MPE G-SIB resolution groups that correspond to items eligible for TLAC (not applicable for SPE GSIBs). All amounts reported in this row should correspond to deductions applied after the appropriate adjustments agreed by the crisis management group (CMG) (following the penultimate paragraph of Section 3 of the TLAC Term Sheet, the CMG shall discuss and, where appropriate and consistent with the resolution strategy, agree on the allocation of the deduction). 20 Deductions of investments in own other TLAC liabilities; amount to be deducted from TLAC resources in accordance with SACAP4.1.6. 21 Other adjustments to TLAC. 22 TLAC of the resolution group (as the case may be) after deductions. To be calculated as: row 18 - row 19 - row 20 - row 21. 23 Total RWA of the resolution group under the TLAC regime. For SPE G-SIBs, this information is based on the consolidated figure, so the amount reported in this row will coincide with that in row 60 of Template CC1. 24 Leverage exposure measure of the resolution group (denominator of leverage ratio). 25 TLAC ratio (as a percentage of RWA for TLAC purposes), to be calculated as row 22 divided by row 23. 26 TLAC ratio (as a percentage of leverage exposure measure), to be calculated as row 22 divided by row 24. 27 CET1 capital (as a percentage of RWA) available after meeting the resolution group's minimum capital requirements and TLAC requirement. To be calculated as the CET1 capital adequacy ratio, less any common equity (as a percentage of RWA) used to meet CET1, Tier 1, and Total minimum capital and TLAC requirements. For example, suppose a resolution group (that is subject to regulatory capital requirements) has 100 RWA, 10 CET1 capital, 1.5 AT1 capital, no Tier 2 capital and 9 non-regulatory capital TLAC-eligible instruments. The resolution group will have to earmark its CET1 capital to meet the 8% minimum capital requirement and 18% minimum TLAC requirement. The net CET1 capital left to meet other requirements (which could include Pillar 2 or buffers) will be 10 - 4.5 - 2 - 1 = 2.5. 28 Bank-specific buffer requirement (capital conservation buffer plus countercyclical buffer requirements plus G-SIB buffer requirement, expressed as a percentage of RWA). Calculated as the sum of: (i) the G-SIB's capital conservation buffer; (ii) the G-SIB's specific countercyclical buffer requirement calculated in accordance with SACAP; and (iii) the higher loss-absorbency requirement as set out in SACAP. Not applicable to individual resolution groups of an MPE G-SIB, unless the relevant authority imposes buffer requirements at the level of consolidation and requires such disclosure. 29 The amount in row 28 (expressed as a percentage of RWA) that relates to the capital conservation buffer), ie G-SIBs will report 2.5% here. Not applicable to individual resolution groups of an MPE G-SIB, unless otherwise required by the relevant authority. 30 The amount in row 28 (expressed as a percentage of RWA) that relates to the G-SIB's specific countercyclical buffer requirement. Not applicable to individual resolution groups of an MPE G-SIB, unless otherwise required by the relevant authority. 31 The amount in row 28 (expressed as a percentage of RWA) that relates to the higher loss-absorbency requirement. Not applicable to individual resolution groups of an MPE G-SIB, unless otherwise required by the relevant authority. Template TLAC2 - Material subgroup entity - creditor ranking at legal entity level Purpose: Provide creditors with information regarding their ranking in the liabilities structure of a material subgroup entity (ie an entity that is part of a material subgroup) which has issued internal TLAC to a G-SIB resolution entity. Scope of application: The template is mandatory for all G-SIBs. It is to be completed in respect of every material subgroup entity within each resolution group of a G-SIB, as defined by the FSB TLAC Term Sheet, on a legal entity basis. G-SIBs should group the templates according to the resolution group to which the material subgroup entities belong (whose positions are represented in the templates) belong, in a manner that makes it clear to which resolution entity they have exposures. Content: Nominal values. Frequency: Semiannual. Format: Fixed (number and description of each column under "Creditor ranking" depending on the liabilities structure of a material subgroup entity). Accompanying narrative: Where appropriate, banks should provide bank- or jurisdiction-specific information relating to credit hierarchies. Creditor ranking Sum of 1 to n 1 1 2 2 - n n (most junior) (most junior) (most senior) (most senior) 1 Is the resolution entity the creditor/investor? (yes or no) - 2 Description of creditor ranking (free text) 3 Total capital and liabilities net of credit risk mitigation - 4 Subset of row 3 that are excluded liabilities - 5 Total capital and liabilities less excluded liabilities (row 3 minus row 4) - 6 Subset of row 5 that are eligible as TLAC - 7 Subset of row 6 with 1 year ≤ residual maturity < 2 years - 8 Subset of row 6 with 2 years ≤ residual maturity < 5 years - 9 Subset of row 6 with 5 years ≤ residual maturity < 10 years - 10 Subset of row 6 with residual maturity ≥ 10 years, but excluded perpetual securities - 11 Subset of row 6 that is perpetual securities Template TLAC3 - Resolution entity - creditor ranking at legal entity level Purpose: Provide creditors with information regarding their ranking in the liabilities structure of each G-SIB resolution entity. Scope of application: The template is to be completed in respect of every resolution entity within the G-SIB, as defined by the TLAC standard, on a legal entity basis. Content: Nominal values. Frequency: Semiannual. Format: Fixed (number and description of each column under "Creditor ranking" depending on the liabilities structure of a resolution entity). Accompanying narrative: Where appropriate, banks should provide bank- or jurisdiction-specific information relating to credit hierarchies. Creditor ranking Sum of 1 to n 1 2 - n (most senior) (most senior) 1 Description of creditor ranking (free text) 2 Total capital and liabilities net of credit risk mitigation - 3 Subset of row 2 that are excluded liabilities - 4 Total capital and liabilities less excluded liabilities (row 2 minus row 3) - 5 Subset of row 4 that are potentially eligible as TLAC - 6 Subset of row 5 with 1 year ≤ residual maturity < 2 years - 7 Subset of row 5 with 2 years ≤ residual maturity < 5 years - 8 Subset of row 5 with 5 years ≤ residual maturity < 10 years - 9 Subset of row 5 with residual maturity ≥ 10 years, but excluding perpetual securities - 10 Subset of row 5 that is perpetual securities - Definitions and instructions
This template is the same as Template TLAC 2 except that no information is collected regarding exposures to the resolution entity (since the template describes the resolution entity itself). This means that there will only be one column for each layer of the creditor hierarchy.
Row 5 represents the subset of the amounts reported in row 4 that are TLAC-eligible according to the FSB TLAC Term Sheet (eg those that have a residual maturity of at least one year, are unsecured and if redeemable are not redeemable without SAMA approval). For the purposes of reporting this amount, the 2.5% cap (3.5% from 2022) on the exemption from the subordination requirement under the penultimate paragraph of Section 11 of the TLAC Term Sheet should be disapplied. That is, amounts that are ineligible solely as a result of the 2.5% cap (3.5%) should be included in full in row 5 together with amounts that are receiving recognition as TLAC. See also the second paragraph in Section 7 of the FSB TLAC Term Sheet.
2 In this context, “other TLAC-eligible instruments” are instruments other than regulatory capital instruments issued by G-SIBs that meet the TLAC eligibility criteria.
15. Capital Distribution Constraints
15.1 The disclosure requirement under this section is: Template CDC - Capital distribution constraints.
15.2 Template CDC provides the common equity tier 1 (CET1) capital ratios that would trigger capital distribution constraints. This disclosure extends to leverage ratio in the case of G-SIBs.
Template CDC: Capital distribution constraints Purpose: To provide disclosure of the capital ratio(s) below which capital distribution constraints are triggered as required under the Basel framework (i.e. risk-based, leverage, etc.) to allow meaningful assessment by market participants of the likelihood of capital distributions becoming restricted. Scope of application The table is mandatory for banks. Where applicable, the template may include additional rows to accommodate other national requirements that could trigger capital distribution constraints. Content: Quantitative information. Includes the CET1 capital ratio that would trigger capital distribution constraints when taking into account (i) CET1 capital that banks must maintain to meet the minimum CET1 capital ratio, applicable risk based buffer requirements (i.e. capital conservation buffer, G-SIB surcharge and countercyclical capital buffer) and Pillar 2 capital requirements (if CET1 capital is required); (ii) CET1 capital that banks must maintain to meet the minimum regulatory capital ratios and any CET1 capital used to meet Tier 1 capital, total capital and TLAC3 requirements, applicable risk-based buffer requirements (i.e. capital conservation buffer, G-SIB surcharge and countercyclical capital buffer) and Pillar 2 capital requirements (if CET1 capital is required); and (iii) the leverage ratio inclusive of leverage ratio buffer requirement. Frequency: Annual. Format: Fixed. Accompanying narrative: In cases where capital distribution constraints have been imposed, banks should describe the constraints imposed. In addition, banks shall provide a link to the SAMA’s website, where the characteristics governing capital distribution constraints are set out (eg stacking hierarchy of buffers, relevant time frame between breach of buffer and application of constraints, definition of earnings and distributable profits used to calculate restrictions). Further, banks may choose to provide any additional information they consider to be relevant for understanding the stated figures. a b CET1 capital ratio that would trigger capital distribution constraints (%) Current CET1 capital ratio (%) 1 CET1 minimum requirement plus Basel III buffers (not taking into account CET1 capital used to meet other minimum regulatory capital/ TLAC ratios) 2 CET1 capital plus Basel III buffers (taking into account CET1 capital used to meet other minimum regulatory capital/ TLAC ratios) Leverage ratio that would trigger capital distribution constraints (%) Current leverage ratio (%) 3 [Applicable only for G-SIBs] Leverage ratio Instructions Row Number Explanation 1 CET1 minimum plus Basel III buffers (not taking into account CET1 capital used to meet other minimum regulatory capital/TLAC ratios): CET1 capital ratio which would trigger capital distribution constraints, should the bank’s CET1 capital ratio fall below this level. The ratio takes into account only CET1 capital that banks must maintain to meet the minimum CET1 capital ratio (4.5%), applicable risk-based buffer requirements (i.e. capital conservation buffer (2.5%), G-SIB surcharge and countercyclical capital buffer) and Pillar 2 capital requirements (if CET1 capital is required). The ratio does not take into account instances where the bank has used its CET1 capital to meet its other minimum regulatory ratios (i.e. Tier 1 capital, total capital and/or TLAC requirements), which could increase the CET1 capital ratio which the bank has to meet in order to prevent capital distribution constraints from being triggered. 2 CET1 minimum plus Basel III buffers (taking into account CET1 capital used to meet other minimum regulatory capital/TLAC ratios): CET1 capital ratio which would trigger capital distribution constraints, should the bank’s CET1 capital ratio fall below this level. The ratio takes into account CET1 capital that banks must maintain to meet the minimum regulatory ratios (ie CET1, Tier 1, total capital requirements and TLAC requirements), applicable risk-based buffer requirements (i.e. capital conservation buffer (2.5%), G-SIB surcharge and countercyclical capital buffer) and Pillar 2 capital requirements (if CET1 capital is required). 3 Leverage ratio: Leverage ratio which would trigger capital distribution constraints, should the bank’s leverage ratio fall below this level. Linkages across templates
Amount in [CDC:1/b] is equal to [KM1:5/a]
Amount in [CDC:3/b] is equal to [KM1:14/a]
3 SACAP9.1 (B) states that Common Equity Tier 1 must first be used to meet the minimum capital and TLAC requirements if necessary (including the 6% Tier 1, 8% total capital and 18% TLAC requirements), before the remainder can contribute to the capital conservation buffer.
16. Links Between Financial Statements and Regulatory Exposures
16.1 This chapter describes requirements for banks to disclose reconciliations between elements of the calculation of regulatory capital to audited financial statements.
16.2 The disclosure requirements set out in this chapter are:
16.2.1 Table LIA - Explanations of differences between accounting and regulatory exposure amounts
16.2.2 Template LI1 - Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories
16.2.3 Template LI2 - Main sources of differences between regulatory exposure amounts and carrying values in financial statements
16.2.4 Template PV1 - Prudent valuation adjustments (PVAs)
16.3 Table LIA provides qualitative explanations on the differences observed between accounting carrying value (as defined in Template LI1) and amounts considered for regulatory purposes (as defined in Template LI2) under each framework.
Table LIA: Explanations of differences between accounting and regulatory exposure amounts Purpose: Provide qualitative explanations on the differences observed between accounting carrying value (as defined in Template LI1) and amounts considered for regulatory purposes (as defined in Template LI2) under each framework. Scope of application: The template is mandatory for all banks. Content: Qualitative information. Frequency: Annual. Format: Flexible. Banks must explain the origins of the differences between accounting amounts, as reported in financial statements amounts and regulatory exposure amounts, as displayed in Templates LI1 and LI2. (a) Banks must explain the origins of any significant differences between the amounts in columns (a) and (b) in Template LI1. (b) Banks must explain the origins of differences between carrying values and amounts considered for regulatory purposes shown in Template LI2. (c) In accordance with the implementation of the guidance on prudent valuation (see Basel Framework “prudent valuation guidance”), banks must describe systems and controls to ensure that the valuation estimates are prudent and reliable. Disclosure must include: • Valuation methodologies, including an explanation of how far mark-to-market and mark-to-model methodologies are used. • Description of the independent price verification process. • Procedures for valuation adjustments or reserves (including a description of the process and the methodology for valuing trading positions by type of instrument). (d) Banks with insurance subsidiaries must disclose: • The national regulatory approach used with respect to insurance entities in determining a bank's reported capital positions (ie deduction of investments in insurance subsidiaries or alternative approaches, as discussed in Basel Framework “Scope and definitions” Banking, securities and other financial subsidiaries (Insurance entities); and • Any surplus capital in insurance subsidiaries recognized when calculating the bank's capital adequacy (see Basel Framework “Scope and definitions” Banking, securities and other financial subsidiaries (Insurance entities). Template LI1: Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories Purpose: Columns (a) and (b) enable users to identify the differences between the scope of accounting consolidation and the scope of regulatory consolidation; and columns (c)-(g) break down how the amounts reported in banks' financial statements (rows) correspond to regulatory risk categories. Scope of application: The template is mandatory for all banks. Content: Carrying values (corresponding to the values reported in financial statements). Frequency: Annual. Format: Flexible (but the rows must align with the presentation of the bank's financial report). Accompanying narrative: See Table LIA. Banks are expected to provide qualitative explanation on items that are subject to regulatory capital charges in more than one risk category. a b c d e f g Carrying values as reported in published financial statements Carrying values under scope of regulatory consolidation Carrying values of items: Subject to credit risk framework Subject to counterparty credit risk framework Subject to the securitization framework Subject to the market risk framework Not subject to capital requirements or subject to deduction from capital Assets Cash and balances at central banks Items in the course of collection from other banks Trading portfolio assets Financial assets designated at fair value Derivative financial instruments Loans and advances to banks Loans and advances to customers Reverse repurchase agreements and other similar secured lending Available for sale financial investments -. Total assets Liabilities Deposits from banks Items in the course of collection due to other banks Customer accounts Repurchase agreements and other similar secured borrowings Trading portfolio liabilities Financial liabilities designated at fair value Derivative financial instruments -. Total liabilities Instructions
Rows
The rows must strictly follow the balance sheet presentation used by the bank in its financial reporting.
Columns
If a bank's scope of accounting consolidation and its scope of regulatory consolidation are exactly the same, columns (a) and (b) should be merged.
The breakdown of regulatory categories (c) to (f) corresponds to the breakdown prescribed in the rest of SDIS, ie column (c) corresponds to the carrying values of items other than off-balance sheet items reported in section 19 column (d) corresponds to the carrying values of items other than off-balance sheet items reported in section 20, column (e) corresponds to carrying values of items in the banking book other than off-balance sheet items reported in section 21 and column (f) corresponds to the carrying values of items other than off-balance sheet items reported in section 22.
Column (g) includes amounts not subject to capital requirements according to the Basel framework or subject to deductions from regulatory capital.
Note: Where a single item attracts capital charges according to more than one risk category framework, it should be reported in all columns that it attracts a capital charge. As a consequence, the sum of amounts in columns (c) to (g) may not equal the amounts in column (b) as some items may be subject to regulatory capital charges in more than one risk category.
For example, derivative assets/liabilities held in the regulatory trading book may relate to both column (d) and column (f). In such circumstances, the sum of the values in columns (c)-(g) would not equal to that in column (b). When amounts disclosed in two or more different columns are material and result in a difference between column (b) and the sum of columns (c)-(g), the reasons for this difference should be explained by banks in the accompanying narrative. Template LI2: Main sources of differences between regulatory exposure amounts and carrying values in financial statements Purpose: Provide information on the main sources of differences (other than due to different scopes of consolidation which are shown in Template LI1) between the financial statements' carrying value amounts and the exposure amounts used for regulatory purposes. Scope of application: The template is mandatory for all banks. Content: Carrying values that correspond to values reported in financial statements but according to the scope of regulatory consolidation (rows 1-3) and amounts considered for regulatory exposure purposes (row 10). Frequency: Annual. Format: Flexible. Row headings shown below are provided for illustrative purposes only and should be adapted by the bank to describe the most meaningful drivers for differences between its financial statement carrying values and the amounts considered for regulatory purposes. Accompanying narrative: See Table LIA a b c d e Total Items subject to: Credit risk framework Securitization framework Counterparty credit risk framework Market risk framework 1 Asset carrying value amount under scope of regulatory consolidation (as per Template LI1) 2 Liabilities carrying value amount under regulatory scope of consolidation (as per Template LI1) 3 Total net amount under regulatory scope of consolidation (Row 1 - Row 2) 4 Off-balance sheet amounts 5 Differences in valuations 6 Differences due to different netting rules, other than those already included in row 2 7 Differences due to consideration of provisions 8 Differences due to prudential filters 9 ⁞ 10 Exposure amounts considered for regulatory purposes Instructions
Amounts in rows 1 and 2, columns (b)-(e) correspond to the amounts in columns (c)-(f) of Template LI1.
Row 1 of Template LI2 includes only assets that are risk-weighted under the Basel framework, while row 2 includes liabilities that are considered for the application of the risk weighting requirements, either as short positions, trading or derivative liabilities, or through the application of the netting rules to calculate the net position of assets to be risk-weighted. These liabilities are not included in column (g) in Template LI1. Assets that are risk weighted under the Basel framework include assets that are not deducted from capital because they are under the applicable thresholds or due to the netting with liabilities.
Off-balance sheet amounts include off-balance sheet original exposure in column (a) and the amounts subject to regulatory framework, after application of the credit conversion factors (CCFs) where relevant in columns (b)-(d).
Column (a) is not necessarily equal to the sum of columns (b)-(e) due to assets being risk-weighted more than once (see Template LI1). In addition, exposure values used for risk weighting may differ under each risk framework depending on whether standardized approaches or internal models are used in the computation of this exposure value. Therefore, for any type of risk framework, the exposure values under different regulatory approaches can be presented separately in each of the columns if a separate presentation eases the reconciliation of the exposure values for banks.
The breakdown of columns in regulatory risk categories (b)-(e) corresponds to the breakdown prescribed in the rest of the document, ie column (b) credit risk corresponds to the exposures reported in section 19, column (c) corresponds to the exposures reported in section 21, column (d) corresponds to exposures reported in section 20, and column (e) corresponds to the exposures reported in section 22.
Differences due to consideration of provisions: The exposure values under row 1 are the carrying amounts and hence net of provisions (ie specific and general provisions, as set out in SACAP2.2.3). Nevertheless, exposures under the foundation internal ratings-based (F-IRB) and advanced internal ratings-based (A-IRB) approaches are risk-weighted gross of provisions. Row 7 therefore is the re-inclusion of general and specific provisions in the carrying amount of exposures in the F-IRB and A-IRB approaches so that the carrying amount of those exposures is reconciled with their regulatory exposure value. Row 7 may also include the elements qualifying as general provisions that may have been deducted from the carrying amount of exposures under the standardized approach and that therefore need to be reintegrated in the regulatory exposure value of those exposures. Any differences between the accounting impairment and the regulatory provisions under the Basel framework that have an impact on the exposure amounts considered for regulatory purposes should also be included in row 7.
Exposure amounts considered for regulatory purposes: The expression designates the aggregate amount considered as a starting point of the RWA calculation for each of the risk categories. Under the credit risk framework this should correspond either to the exposure amount applied in the standardized approach for credit risk (see SCRE5) or to the exposures at default (EAD) in the IRB approach for credit risk (see SCRE12.29); securitization exposures should be defined as in the securitization framework (see SCRE18.4 and SCRE18.5); and counterparty credit exposures are defined as the EAD considered for counterparty credit risk purposes (see SCCR5).
Linkages across templates
Template LI2 is focused on assets in the regulatory scope of consolidation that are subject to the regulatory framework. Therefore, column (g) in Template LI1, which includes the elements of the balance sheet that are not subject to the regulatory framework, is not included in Template LI2. The following linkage holds: column (a) in Template LI2 = column (b) in Template LI1 - column (g) in Template LI1. Template PV1: Prudent valuation adjustments (PVAs) Purpose: Provide a breakdown of the constituent elements of a bank's PVAs according to the requirements of Basel Framework “prudent valuation guidance”, taking into account SAMA’s circular No. 301000000768 on Supervisory guidance for assessing banks' financial instrument fair value practices, July 2009. Scope of application: The template is mandatory for all banks which record PVAs. Content: PVAs for all assets measured at fair value (marked to market or marked to model) and for which PVAs are required. Assets can be non-derivative or derivative instruments. Frequency: Annual. Format: Fixed. The row number cannot be altered. Rows which are not applicable to the reporting bank should be filled with "0" and the reason why they are not applicable should be explained in the accompanying narrative. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes. In particular, banks are expected to detail "Other adjustments", where significant, and to define them when they are not listed in the Basel framework. Banks are also expected to explain the types of financial instruments for which the highest amounts of PVAs are observed. a b c d e f g h Equity Interest rates Foreign exchange Credit Commodities Total Of which: in the trading book Of which: in the banking book 1 Closeout uncertainty, of which: 2 Mid-market value 3 Closeout cost 4 Concentration 5 Early termination 6 Model risk 7 Operational risk 8 Investing and funding costs 9 Unearned credit spreads 10 Future administrative costs 11 Other 12 Total adjustment Definitions and instructions Row Number Explanation 3 Closeout cost: PVAs required to take account of the valuation uncertainty to adjust for the fact that the position level valuations calculated do not reflect an exit price for the position or portfolio (for example, where such valuations are calibrated to a mid-market price). 4 Concentration: PVAs over and above market price and closeout costs that would be required to get to a prudent exit price for positions that are larger than the size of positions for which the valuation has been calculated (i.e. cases where the aggregate position held by the bank is larger than normal traded volume or larger than the position sizes on which observable quotes or trades that are used to calibrate the price or inputs used by the core valuation model are based). 5 Early termination: PVAs to take into account the potential losses arising from contractual or non-contractual early terminations of customer trades that are not reflected in the valuation. 6 Model risk: PVAs to take into account valuation model risk which arises due to: (i) the potential existence of a range of different models or model calibrations which are used by users of Pillar 3 data; (ii) the lack of a firm exit price for the specific product being valued; (iii) the use of an incorrect valuation methodology; (iv) the risk of using unobservable and possibly incorrect calibration parameters; or (v) the fact that market or product factors are not captured by the core valuation model. 7 Operational risk: PVAs to take into account the potential losses that may be incurred as a result of operational risk related to valuation processes. 8 Investing and funding costs: PVAs to reflect the valuation uncertainty in the funding costs that other users of Pillar 3 data would factor into the exit price for a position or portfolio. It includes funding valuation adjustments on derivatives exposures. 9 Unearned credit spreads: PVAs to take account of the valuation uncertainty in the adjustment necessary to include the current value of expected losses due to counterparty default on derivative positions, including the valuation uncertainty on CVA. 10 Future administrative costs: PVAs to take into account the administrative costs and future hedging costs over the expected life of the exposures for which a direct exit price is not applied for the closeout costs. This valuation adjustment has to include the operational costs arising from hedging, administration and settlement of contracts in the portfolio. The future administrative costs are incurred by the portfolio or position but are not reflected in the core valuation model or the prices used to calibrate inputs to that model. 11 Other: "Other" PVAs which are required to take into account factors that will influence the exit price but which do not fall in any of the categories listed in Basel Framework “prudent valuation guidance” (Introduction). These should be described by banks in the narrative commentary that supports the disclosure. Linkages across templates
[PV1:12/f] is equal to [CC1:7/a]17- Asset Encumbrance
17.1 The disclosure requirement under this section is: Template ENC - Asset encumbrance.
17.2 Template ENC provides information on the encumbered and unencumbered assets of a bank.
17.3 The definition of “encumbered assets” in Template ENC is different to that under LCR30 for on-balance sheet assets. Specifically, the definition of “encumbered assets” in Template ENC excludes the aspect of asset monetization. Under Template ENC, “encumbered assets” are assets that the bank is restricted or prevented from liquidating, selling, transferring or assigning, due to regulatory, contractual or other limitations.
Template ENC: Asset encumbrance Purpose: To provide the amount of encumbered and unencumbered assets. Scope of application The template is mandatory for all banks. Content: Carrying amount for encumbered and unencumbered assets on the balance sheet using period-end values. Banks must use the specific definition of “encumbered assets” set out in the instructions below in making the disclosure. The scope of consolidation for the purposes of this disclosure requirement should be a bank’s regulatory scope of consolidation, but including its securitization exposures. Frequency: Semiannual. Format: Fixed. Banks should always complete columns (a), (b) and (c). Banks should group any assets used in central bank facilities with other encumbered and unencumbered assets, as appropriate. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain (i) any significant change in the amount of encumbered and unencumbered assets from the previous disclosure; (ii) as applicable, any definition of the amounts of encumbered and/or unencumbered assets broken down by types of transaction/category; and (iii) any other relevant information necessary to understand the context of the disclosed figures. a b c Encumbered assets Unencumbered assets Total The assets on the balance sheet would be disaggregated; there can be as much disaggregation as desired Definitions
The definitions are specific to this template and are not applicable for other parts of the Basel framework.
Encumbered assets: Encumbered assets are assets that the bank is restricted or prevented from liquidating, selling, transferring or assigning due to legal, regulatory, contractual or other limitations. The definition of “encumbered assets” in Template ENC is different than that under the Liquidity Coverage Ratio for on-balance sheet assets. Specifically, the definition of “encumbered assets” in Template ENC excludes the aspect of asset monetization. For an unencumbered asset to qualify as high-quality liquid assets, the LCR requires a bank to have the ability to monetize that asset during the stress period such that the bank can meet net cash outflows.
Unencumbered assets: Unencumbered assets are assets which do not meet the definition of encumbered.
Instructions
Total (in column (c)): Sum of encumbered and unencumbered assets. The scope of consolidation for the purposes of this disclosure requirement should be based on a bank’s regulatory scope of consolidation, but including its securitization exposures. 18. Remuneration
18.1 The disclosures described in this chapter provide information on a bank's remuneration policy, the fixed and variable remuneration awarded during the financial year, details of any special payments made, and information on a bank's total outstanding deferred and retained remuneration.
18.2 The disclosure requirements under this section are:
18.2.1 Table REMA - Remuneration policy
18.2.2 Template REM1 - Remuneration awarded during financial year
18.2.3 Template REM2 - Special payments
18.2.4 Template REM3 - Deferred remuneration
18.3 Table REMA provides information on a bank's remuneration policy as well as key features of the remuneration system.
18.4 Templates REM1, REM2 and REM3 provide information on a bank's fixed and variable remuneration awarded during the financial year, details of any special payments made, and information on a bank's total outstanding deferred and retained remuneration, respectively.
18.5 The disclosure requirements should be published annually. When it is not possible for the remuneration disclosures to be made at the same time as the publication of a bank's annual report, the disclosures should be made as soon as possible thereafter.
Table REMA: Remuneration policy Purpose: Describe the bank's remuneration policy as well as key features of the remuneration system to allow meaningful assessments by users of Pillar 3 data of banks' compensation practices. Scope of application: The table is mandatory for all banks. Content: Qualitative information. Frequency: Annual Format: Flexible. Banks must describe the main elements of their remuneration system and how they develop this system. In particular, the following elements, where relevant, should be described: Qualitative disclosures (a) Information relating to the bodies that oversee remuneration. Disclosures should include:
• Name, composition and mandate of the main body overseeing remuneration. • External consultants whose advice has been sought, the body by which they were commissioned, and in what areas of the remuneration process. • A description of the scope of the bank's remuneration policy (eg by regions, business lines), including the extent to which it is applicable to foreign subsidiaries and branches. • A description of the types of employees considered as material risk-takers and as senior managers.
(b) Information relating to the design and structure of remuneration processes. Disclosures should include:
• An overview of the key features and objectives of remuneration policy. • Whether the remuneration committee reviewed the firm's remuneration policy during the past year, and if so, an overview of any changes that were made, the reasons for those changes and their impact on remuneration. • A discussion of how the bank ensures that risk and compliance employees are remunerated independently of the businesses they oversee.
(c) Description of the ways in which current and future risks are taken into account in the remuneration processes. Disclosures should include an overview of the key risks, their measurement and how these measures affect remuneration.
(d) Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration. Disclosures should include:
• An overview of main performance metrics for bank, top-level business lines and individuals. • A discussion of how amounts of individual remuneration are linked to bank-wide and individual performance. • A discussion of the measures the bank will in general implement to adjust remuneration in the event that performance metrics are weak, including the bank's criteria for determining "weak" performance metrics.
(e) Description of the ways in which the bank seeks to adjust remuneration to take account of longer-term performance. Disclosures should include:
• A discussion of the bank's policy on deferral and vesting of variable remuneration and, if the fraction of variable remuneration that is deferred differs across employees or groups of employees, a description of the factors that determine the fraction and their relative importance. • A discussion of the bank's policy and criteria for adjusting deferred remuneration before vesting and after vesting through clawback arrangements, subject to the relevant laws in Saudi Arabia.
(f) Description of the different forms of variable remuneration that the bank utilizes and the rationale for using these different forms. Disclosures should include:
• An overview of the forms of variable remuneration offered (ie cash, shares and share-linked instruments and other forms). • A discussion of the use of the different forms of variable remuneration and, if the mix of different forms of variable remuneration differs across employees or groups of employees), a description the factors that determine the mix and their relative importance. Template REM1: Remuneration awarded during the financial year Purpose: Provide quantitative information on remuneration for the financial year. Scope of application: The template is mandatory for all banks. Content: Quantitative information. Frequency: Annual Format: Flexible. Accompanying narrative: Banks may supplement the template with a narrative commentary to explain any significant movements over the reporting period and the key drivers of such movements. a b Remuneration amount Senior management, as defined in SAMA circular No.42081293 date 21/11/1442H Other material risktakers 1 Fixed remuneration Number of employees 2 Total fixed remuneration (rows 3 + 5 + 7) 3 Of which: cash-based 4 Of which: deferred 5 Of which: shares or other share-linked instruments 6 Of which: deferred 7 Of which: other forms 8 Of which: deferred 9 Variable remuneration Number of employees 10 Total variable remuneration (rows 11 + 13 + 15) 11 Of which: cash-based 12 Of which: deferred 13 Of which: shares or other share-linked instruments 14 Of which: deferred 15 Of which: other forms 16 Of which: deferred 17
Total remuneration (rows 2 + 10)
Definitions and instructions
Senior management and other material risk-takers categories in columns (a) and (b) must correspond to the type of employees described in Table REMA.
Other forms of remuneration in rows 7 and 15 must be described in Table REMA and, if needed, in the accompanying narrative. Template REM2: Special payments Purpose: Provide quantitative information on special payments for the financial year. Scope of application: The template is mandatory for all banks. Content: Quantitative information. Frequency: Annual. Format: Flexible. Accompanying narrative: Banks may supplement the template with a narrative commentary to explain any significant movements over the reporting period and the key drivers of such movements.
Special payments Guaranteed bonuses Sign-on awards Severance payments Number of employees Total amount Number of employees Total amount Number of employees Total amount Senior management Other material risk-takers Definitions and instructions
Senior management and other material risk-takers categories in rows 1 and 2 must correspond to the type of employees described in Table REMA.
Guaranteed bonuses are payments of guaranteed bonuses during the financial year.
Sign-on awards are payments allocated to employees upon recruitment during the financial year.
Severance payments are payments allocated to employees dismissed during the financial year. Template REM3: Deferred remuneration Purpose: Provide quantitative information on deferred and retained remuneration. Scope of application: The template is mandatory for all banks. Content: Quantitative information. Frequency: Annual. Format: Flexible. Accompanying narrative: Banks may supplement the template with a narrative commentary to explain any significant movements over the reporting period and the key drivers of such movements.
a b c d e Deferred and retained remuneration Total amount of outstanding deferred remuneration Of which:
total amount of outstanding deferred and retained remuneration exposed to ex post explicit and/or implicit adjustmentTotal amount of amendment during the year due to ex post explicit adjustments Total amount of amendment during the year due to ex post implicit adjustments Total amount of deferred remuneration paid out in the financial year Senior management
Cash
Shares
Cash-linked instruments
Other
Other material risk-takers
Cash
Shares
Cash-linked instruments
Other
Total
Definitions
Outstanding exposed to ex post explicit adjustment: Part of the deferred and retained remuneration that is subject to direct adjustment clauses (for instance, subject to malus, clawbacks or similar reversal or downward revaluations of awards).
Outstanding exposed to ex post implicit adjustment: Part of the deferred and retained remuneration that is subject to adjustment clauses that could change the remuneration, due to the fact that they are linked to the performance of other indicators (for instance, fluctuation in the value of shares performance or performance units).
In columns (a) and (b), the amounts at reporting date (cumulated over the last years) are expected. In columns (c)-(e), movements during the financial year are expected. While columns (c) and (d) show the movements specifically related to column (b), column (e) shows payments that have affected column (a). 19. Credit Risk
plement the template with a narrative commentary to explain any significant change over the reporting period and the key drivers of such changes. Banks should describe the sequence in which CCFs, provisioning and credit risk mitigation
HVCRE: high-volatility commercial real estate.
19.1 The scope of section 19 includes items subject to risk-weighted assets (RWA) for credit risk as defined in Basel Framework “Risk-based capital requirements” (Calculation of Minimum risk-based capital requirements) 20.6(1), i.e. excluding:
19.1.1 All positions subject to the securitization regulatory framework, including those that are included in the banking book for regulatory purposes, which are reported in section 21.
19.1.2 Capital requirements relating to counterparty credit risk, which are reported in section 20.General information about credit risk:
19.2 The disclosure requirements under this section are:
19.2.1 General information about credit risk:
a. Table CRA - General qualitative information about credit risk
b. Template CR1 - Credit quality of assets
c. Template CR2 - Changes in stock of defaulted loans and debt securities
d. Table CRB - Additional disclosure related to the credit quality of assets
e. Table CRB-A - Additional disclosure related to prudential treatment of problem assets
19.2.2 Credit risk mitigation:
f. Table CRC - Qualitative disclosure related to credit risk mitigation techniques
g. Template CR3 - Credit risk mitigation techniques - overview
19.2.3 Credit risk under standardized approach:
h. Table CRD - Qualitative disclosure on banks' use of external credit ratings under the standardised approach for credit risk
i. Template CR4 - Standardised approach - Credit risk exposure and credit risk mitigation effects
j. Template CR5 - Standardised approach - Exposures by asset classes and risk weights
19.2.4 Credit risk under internal risk-based approaches. The disclosure requirements related in this section are not required to be completed by banks unless SAMA approve the bank to use the IRB approach.
k. Table CRE - Qualitative disclosure related to internal ratings-based (IRB) models
l. Template CR6 - IRB - Credit risk exposures by portfolio and probability of default (PD) range
m. Template CR7 - IRB - Effect on RWA of credit derivatives used as credit risk mitigation (CRM) techniques
n. Template CR8 - RWA flow statements of credit risk exposures under IRB
o. Template CR9 - IRB - Backtesting of PD per portfolio
p. Template CR10 - IRB (specialised lending and equities under the simple risk weight method)456789
Table CRA: General qualitative information about credit risk Purpose: Describe the main characteristics and elements of credit risk management (business model and credit risk profile, organization and functions involved in credit risk management, risk management reporting). Scope of application: The table is mandatory for all banks. Content: Qualitative information. Frequency: Annual. Format: Flexible. Banks must describe their risk management objectives and policies for credit risk, focusing in particular on:
(a) How the business model translates into the components of the bank's credit risk profile (b) Criteria and approach used for defining credit risk management policy and for setting credit risk limits (c) Structure and organization of the credit risk management and control function (d) Relationships between the credit risk management, risk control, compliance and internal audit functions (e) Scope and main content of the reporting on credit risk exposure and on the credit risk management function to the executive management and to the board of directors Template CR1: Credit quality of assets Purpose: Provide a comprehensive picture of the credit quality of a bank's (on- and off-balance sheet) assets. Scope of application: The template is mandatory for all banks. Columns d, e and f are only applicable for banks that have adopted an ECL accounting model. Content: Carrying values (corresponding to the accounting values reported in financial statements but according to the scope of regulatory consolidation). Frequency: Semiannual. Format: Fixed. Accompanying narrative: Banks must include their definition of default in an accompanying narrative. a b c d e f g Gross carrying values of Allowances/impairments Of which ECL accounting provisions for credit losses on SA exposures Of which ECL accounting provisions for credit losses on IRB exposures Net values (a+b-c) Defaulted exposures Non-defaulted exposures Allocated in regulatory category of Specific Allocated in regulatory category of General 1 Loans 2 Debt Securities 3 Off-balance sheet exposures 4 Total Definitions Gross carrying values: on- and off-balance sheet items that give rise to a credit risk exposure according to the Basel framework. On-balance sheet items include loans and debt securities. Off-balance sheet items must be measured according to the following criteria: (a) guarantees given - the maximum amount that the bank would have to pay if the guarantee were called. The amount must be gross of any credit conversion factor (CCF) or credit risk mitigation (CRM) techniques. (b) Irrevocable loan commitments - total amount that the bank has committed to lend. The amount must be gross of any CCF or CRM techniques. Revocable loan commitments must not be included. The gross value is the accounting value before any allowance/impairments but after considering write-offs. Banks must not take into account any credit risk mitigation technique.
Write-offs for the purpose of this template are related to a direct reduction of the carrying amount when the entity has no reasonable expectations of recovery.
Defaulted exposures: banks should use the definition of default that they also use for regulatory purposes. Banks must provide this definition of default in the accompanying narrative. For a bank using the standardized approach for credit risk, the default exposures in Templates CR1 and CR2 should correspond to exposures that are "past due for more than 90 days", as stated in SCRE7.96.
Non-defaulted exposures: any exposure not meeting the above definition of default.
Allowances/impairments: are those that are considered "credit-impaired" in the meaning of IFRS 9 Appendix A. Accounting provisions for credit losses: total amount of provisions, made via an allowance against impaired and not impaired exposures according to the applicable accounting framework. For example, when the accounting framework is IFRS 9, "impaired exposures" are those that are considered "credit-impaired" in the meaning of IFRS 9 Appendix A. When the accounting framework is US GAAP, "impaired exposures" are those exposures for which credit losses are measured under ASC Topic 326 and for which the bank has recorded a partial write-off/write-down.
Banks must fill in column d to f in accordance with the categorization of accounting provisions distinguishing those meeting the conditions to be categorized in general provisions, as defined in SACAP2.2.3, and those that are categorized as specific provisions. This categorization must be consistent with information provided in Table CRB. Net values: Total gross value less allowances/impairments.
Debt securities: Debt securities exclude equity investments subject to the credit risk framework. However, banks may add a row between rows 2 and 3 for "other investment" (if needed) and explain in the accompanying narrative.
Linkages across templates Amount in [CR1:1/g] is equal to the sum [CR3:1/a] + [CR3:1/b]. Amount in [CR1:2/g] is equal to the sum [CR3:2/a] + [CR3:2/b]. Amount in [CR1:4/a] is equal to [CR2:6/a], only when (i) there is zero defaulted off-balance sheet exposure or SAMA has exercised its discretion to include off-balance sheet exposures in Template CR2. Table CR2: Changes in stock of defaulted loans and debt securities Purpose: Identify the changes in a bank's stock of defaulted exposures, the flows between non-defaulted and defaulted exposure categories and reductions in the stock of defaulted exposures due to write-offs. Scope of application: The template is mandatory for all banks. Content: Carrying values. Frequency: Semiannual. Format: Fixed. Accompanying narrative: Banks should explain the drivers of any significant changes in the amounts of defaulted exposures from the previous reporting period and any significant movement between defaulted and non-defaulted loans.
Banks should disclose in their accompanying narrative whether defaulted exposures include off-balance sheet items.a 1 Defaulted loans and debt securities at end of the previous reporting period 2 Loans and debt securities that have defaulted since the last reporting period 3 Returned to non-defaulted status 4 Amounts written off 5 Other changes 6 Defaulted loans and debt securities at end of the reporting period
(1+2-3-4+5)Definitions
Defaulted exposure: such exposures must be reported net of write-offs and gross of (ie ignoring) allowances/impairments. For a bank using the standardised approach for credit risk, the default exposures in Templates CR1 and CR2 should correspond to exposures that are "past due for more than 90 days", as stated in SCRE7.96.
Loans and debt securities that have defaulted since the last reporting period: refers to any loan or debt securities that became marked as defaulted during the reporting period.
Return to non-defaulted status: refers to loans or debt securities that returned to non-default status during the reporting period.
Amounts written off: both total and partial write-offs.
Other changes: balancing items that are necessary to enable total to reconcile. Table CRB: Additional disclosure related to the credit quality of assets Purpose: Supplement the quantitative templates with information on the credit quality of a bank's assets. Scope of application: The table is mandatory for all banks. Content: Additional qualitative and quantitative information (carrying values). Frequency: Annual. Format: Flexible. Banks must provide the following disclosures:
Qualitative disclosures (a) The scope and definitions of "past due" and "impaired" exposures used for accounting purposes and the differences, if any, between the definition of past due and default for accounting and regulatory purposes. When the accounting framework is IFRS 9, "impaired exposures" are those that are considered "credit-impaired" in the meaning of IFRS 9 Appendix A. (b) The extent of past-due exposures (more than 90 days) that are not considered to be impaired and the reasons for this. (c) Description of methods used for determining accounting provisions for credit losses. In addition, banks that have adopted an ECL accounting model must provide information on the rationale for categorisation of ECL accounting provisions in general and specific categories for standardised approach exposures. (d) The bank's own definition of a restructured exposure. Banks should disclose the definition of restructured exposures they use (which may be a definition from the local accounting or regulatory framework). Quantitative disclosures (e) Breakdown of exposures by geographical areas, industry and residual maturity. (f) Amounts of impaired exposures (according to the definition used by the bank for accounting purposes) and related accounting provisions, broken down by geographical areas and industry. (g) Ageing analysis of accounting past-due exposures. (h) Breakdown of restructured exposures between impaired and not impaired exposures. Table CRB-A – Additional disclosure related to prudential treatment of problem assets Purpose: To supplement the quantitative templates with additional information related to non-performing exposures and forbearance. Scope of application: The table is mandatory for banks. Content: Qualitative and quantitative information (carrying values corresponding to the accounting values reported in financial statements but according to the regulatory scope of consolidation) Frequency: Annual. Format: Flexible. Banks must provide the following disclosures:
Qualitative disclosures a) The bank's own definition of non-performing exposures. The bank should specify in particular if it is using the definition provided in the guidelines on prudential treatment of problem assets (hereafter in this table referred to as SAMA's Rules on Management of Problem No. 41033343, January 2020. And provide a discussion on the implementation of its definition, including the materiality threshold used to categorise exposures as past due, the exit criteria of the non-performing category (providing information on a probation period, if relevant), together with any useful information for users’ understanding of this categorisation. This would include a discussion of any differences or unique processes for the categorisation of corporate and retail loans. b) The bank's own definition of a forborne exposure. The bank should specify in particular if it is using the definition provided in the Guidelines and provide a discussion on the implementation of its definition, including the exit criteria of the restructured or forborne category (providing information on the probation period, if relevant), together with any useful information for users’ understanding of this categorisation. This would include a discussion of any differences or unique processes for the catagorisation of corporate and retail loans.4 Quantitative disclosures c) Gross carrying value of total performing as well as non-performing exposures, broken down first by debt securities, loans and off-balance sheet exposures. Loans should be further broken down by corporate and retail exposures. Non-performing exposures should in addition be split into (i) defaulted exposures and/or impaired exposures;5 (ii) exposures that are not defaulted/impaired exposures but are more than 90 days past due; and (iii) other exposures where there is evidence that full repayment is unlikely without the bank's realisation of collateral (which would include exposures that are not defaulted/impaired and are not more than 90 days past due but for which payment is unlikely without the bank's realisation of collateral, even if the exposures are not past due).
Value adjustments and provisions6 or non-performing exposures should also be disclosed.d) Gross carrying values of restructured/forborne exposures broken down first by debt securities, loans and off-balance sheet exposures. Loans should be further broken down by corporate and retail exposures to enable an understanding of material differences in the level of risk among different portfolios (eg retail exposures secured by real estate/mortages, revolving exposures, SMEs, other retail). Exposures should, in addition, be split into performing and non-performing, and impaired and not impaired exposures.
Value adjustments and provisions for non-performing exposures should also be disclosed.
Definitions
Gross carrying values: on- and off-balance sheet items that give rise to a credit risk exposure according to the finalised Basel III framework. On-balance sheet items include loans and debt securities. Off-balance sheet items must be measured according to the following criteria: a) Guarantees given – the maximum amount that the bank would have to pay if the guarantee were called. The amount must be gross of any credit conversion factor (CCF) or credit risk mitigation (CRM) techniques.
b) Irrevocable loan commitments – the total amount that the bank has committed to lend. The amount must be gross of any CCF or CRM techniques. Revocable loan commitments must not be included. The gross value is the accounting value before any allowance/impairments but after considering write-offs. Banks must not take into account any CRM technique. Table CRC: Qualitative disclosure related to credit risk mitigation techniques Purpose: Provide qualitative information on the mitigation of credit risk. Scope of application: The table is mandatory for all banks. Content: Qualitative information. Frequency: Annual. Format: Flexible. Banks must disclose:
(a) Core features of policies and processes for, and an indication of the extent to which the bank makes use of, on- and off-balance sheet netting. (b) Core features of policies and processes for collateral evaluation and management. (c) Information about market or credit risk concentrations under the credit risk mitigation instruments used (ie by guarantor type, collateral and credit derivative providers).
Banks should disclose a meaningful breakdown of their credit derivative providers, and set the level of granularity of this breakdown in accordance with section 10. For instance, banks are not required to identify their derivative counterparties nominally if the name of the counterparty is considered to be confidential information. Instead, the credit derivative exposure can be broken down by rating class or by type of counterparty (eg banks, other financial institutions, non-financial institutions).
Table CR3: Credit risk mitigation techniques - overview Purpose: Disclose the extent of use of credit risk mitigation techniques. Scope of application: The table is mandatory for all banks. Content: Carrying values. Banks must include all CRM techniques used to reduce capital requirements and disclose all secured exposures, irrespective of whether the standardised or IRB approach is used for RWA calculation.
Please refer to section 28.3 for an illustration on how the template should be completed.Frequency: Semiannual. Format: Fixed. Where banks are unable to categorise exposures secured by collateral, financial guarantees or credit derivative into "loans" and "debt securities", they can either (i) merge two corresponding cells, or (ii) divide the amount by the pro-rata weight of gross carrying values; they must explain which method they have used. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes.
a b c d e Exposures unsecured: carrying amount Exposures to be secured Exposures secured by collateral Exposures secured by financial guarantees Exposures secured by credit derivatives 1 Loans 2 Debt securities 3 Total 4 Of which defaulted Definitions
Exposures unsecured- carrying amount: carrying amount of exposures (net of allowances/impairments) that do not benefit from a credit risk mitigation technique.
Exposures to be secured: carrying amount of exposures which have at least one credit risk mitigation mechanism (collateral, financial guarantees, credit derivatives) associated with them. The allocation of the carrying amount of multi-secured exposures to their different credit risk mitigation mechanisms is made by order of priority, starting with the credit risk mitigation mechanism expected to be called first in the event of loss, and within the limits of the carrying amount of the secured exposures.
Exposures secured by collateral: carrying amount of exposures (net of allowances/impairments) partly or totally secured by collateral. In case an exposure is secured by collateral and other credit risk mitigation mechanism(s), the carrying amount of the exposures secured by collateral is the remaining share of the exposure secured by collateral after consideration of the shares of the exposure already secured by other mitigation mechanisms expected to be called beforehand in the event of a loss, without considering over collateralisation.
Exposures secured by financial guarantees: carrying amount of exposures (net of allowances/impairments) partly or totally secured by financial guarantees. In case an exposure is secured by financial guarantees and other credit risk mitigation mechanism, the carrying amount of the exposure secured by financial guarantees is the remaining share of the exposure secured by financial guarantees after consideration of the shares of the exposure already secured by other mitigation mechanisms expected to be called beforehand in the event of a loss, without considering over collateralisation. Table CRD: Qualitative disclosure on banks' use of external credit ratings under the standardised approach for credit risk Purpose: Supplement the information on a bank's use of the standardised approach with qualitative data on the use of external ratings. Scope of application: The table is mandatory for all banks that: (a) use the credit risk standardised approach (or the simplified standardised approach); and (b) make use of external credit ratings for their RWA calculation.
In order to provide meaningful information to users, the bank may choose not to disclose the information requested in the table if the exposures and RWA amounts are negligible. It is however required to explain why it considers the information not to be meaningful to users, including a description of the portfolios concerned and the aggregate total RWA these portfolios represent.
Content: Qualitative information. Frequency: Annual. Format: Flexible. A. For portfolios that are risk-weighted under the standardised approach for credit risk, banks must disclose the following information:
(a) Names of the external credit assessment institutions (ECAIs); (b) The asset classes for which each ECAI is used; (c) A description of the process used to transfer the issuer to issue credit ratings onto comparable assets in the banking book (see SCRE8.16 to SCRE8.18); and (d) The alignment of the alphanumerical scale of each agency used with risk buckets (as per SAMA circular No. B.C.S 242, issued April 11, 2007). Template CR4: Standardised approach – credit risk exposure and credit risk mitigation (CRM) effects Purpose: To illustrate the effect of CRM (comprehensive and simple approach) on capital requirement calculations under the standardised approach for credit risk. RWA density provides a synthetic metric on the riskiness of each portfolio. Scope of application: The template is mandatory for banks using the standardised approach for credit risk.
Subject to SAMA approval of the immateriality of the asset class, banks that intend to adopt a phased rollout of the IRB approach may apply the standardised approach to certain asset classes. In circumstances where exposures and RWA amounts subject to the standardised approach may be considered to be negligible, and disclosure of this information to users would not provide any meaningful information, the bank may choose not to disclose the template for the exposures treated under the standardised approach. The bank must, however, explain why it considers the information not to be meaningful to users. The explanation must include a description of the exposures included in the respective portfolios and the aggregate total of RWA from such exposures.Content: Regulatory exposure amounts Frequency: Semiannual. Format: Fixed. The columns and rows cannot be altered unless SAMA make policy changes to the asset classes as defined under the finalised Basel III framework. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant change over the reporting period and the key drivers of such changes. Banks should describe the sequence in which CCFs, provisioning and credit risk mitigation measures are applied. a b c d e f Exposures before CCF and CRM Exposures post-CCF and postCRM RWA and RWA density Asset classes On-balance sheet amount Off-balance sheet amount On-balance sheet amount Off-balance sheet amount RWA RWA density 1 Sovereigns and their central banks 2 Non-central government public sector entities 3 Multilateral development banks 4 Banks Of which: securities firms and other financial institutions 5 Covered bonds 6 Corporates Of which: securities firms and other financial institutions Of which: specialised lending 7 Subordinated debt, equity and other capital 8 Retail MSMEs 9 Real estate Of which: general RR Of which: IPRRE Of which: general CRE Of which: IPCR Of which: land acquisition, development and construction 10 Defaulted exposures 11 Other assets 12 Total Definitions
Rows:
General residential real estate (General RRE): refers to regulatory residential real estate exposures that are not materially dependent on cash flows generated by the property as set out in SCRE7.74 and SCRE7.75, and any residential real estate exposures covered by SCRE7.81.
Income-producing residential real estate (IPRRE): refers to regulatory residential real estate exposures that are materially dependent on cash flows generated by the property as set out in SCRE7.76, and any residential real estate exposures covered by SCRE7.81.
General commercial real estate (General CRE): refers to regulatory commercial real estate exposures that are not materially dependent on cash flows generated by the property as set out in SCRE7.77 and SCRE7.78, and any commercial real estate exposures covered by SCRE7.81.
Income-producing commercial real estate (IPCRE): refers to regulatory commercial real estate exposures that are materially dependent on cash flows generated by the property as set out in SCRE7.79 and any commercial real estate exposures covered by SCRE7.81.
Land acquisition, development and construction: refers to exposures subject to the risk weights set out SCRE7.82 and SCRE7.83.
Other assets: refers to assets subject to specific risk weight as set out in SCRE7.102.
Columns:
Exposures before credit conversion factors (CCF) and CRM - On-balance sheet amount: Banks must disclose the regulatory exposure amount (net of specific provisions, including partial write-offs) under the regulatory scope of consolidation gross of (ie before taking into account) the effect of CRM techniques.
Exposures before CCF and CRM - Off-balance sheet amount: Banks must disclose the exposure value, gross of CCFs and the effect of CRM techniques under the regulatory scope of consolidation.
Exposures post-CCF and post-CRM: This is the amount to which the capital requirements are applied. It is a net credit equivalent amount, after CRM techniques and CCF have been applied.
RWA density: Total risk-weighted assets/exposures post-CCF and post-CRM (ie column (e) / (column (c) + column (d))), expressed as a percentage.
Linkages across templates:
Amount in [CR4:12/c] + [CR4:12/d] is equal to amount in [CR5: Exposure amounts and CCFs applied to off-balance sheet exposures, categorised based on risk bucket of converted exposures 11/d]. Template CR5: Standardised approach - exposures by asset classes and risk weights Purpose: To present the breakdown of credit risk exposures under the standardised approach by asset class and risk weight (corresponding to the riskiness attributed to the exposure according to standardised approach). Scope of application: The template is mandatory for banks using the standardised approach.
Subject to SAMA approval of the immateriality of the asset class, banks that intend to adopt a phased rollout of the internal ratings-based (IRB) approach may apply the standardised approach to certain asset classes. In circumstances where exposures and RWA amounts subject to the standardised approach may be considered to be negligible, and disclosure of this information would not provide any meaningful information to users, the bank may choose not to disclose the template for the exposures treated under the standardised approach. The bank must, however, explain why it considers the information not to be meaningful to users. The explanation must include a description of the exposures included in the respective portfolios and the aggregate total of RWA from such exposures.
Content: Regulatory exposure amounts. Frequency: Semiannual. Format: Fixed. The columns and rows cannot be altered unless SAMA make policy changes to the asset classes as defined under the finalised Basel III framework. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant change over the reporting period and the key drivers of such changes. Banks should describe the sequence in which CCFs, provisioning and credit risk mitigation measures are applied. 1 0% 20% 50% 100% 150% Other Total credit exposure amount (post-CCF and post-CRM) Sovereigns and their central banks 2 20% 50% 100% 150% Other Total credit exposure amount (post-CCF and post-CRM) Non-central government public sector entities 3 0% 20% 30% 50% 100% 150% Other Total credit exposure amount (post-CCF and post-CRM) Multilateral development banks 4 20% 30% 40% 50% 75% 100% 150% Other Total credit exposure amount (post-CCF and post-CRM) Banks Of which: securities firms and other financial institutions 5 10% 15% 50% 20% 25% 50% 100% Other Total credit exposure amount (post-CCF and post-CRM) Covered bonds 6 20% 50% 65% 75% 80% 85% 100% 130% 150% Other Total credit exposure amount (post-CCF and post-CRM) Corporates/including corporate SMEs Of which: securities firms and other financial institutions Of which: specialised lending 7 100% 150% 250%7 400%7 Other Total credit exposure amount (post-CCF and post-CRM) Subordinated debt, equity and other capital8 8 45% 75% 100% Other Total credit exposure amount (post-CCF and post-CRM) Retail MSMEs9 9 0 % 20 % 25 % 30 % 35 % 40 % 45 % 50 % 60 % 65 % 70 % 75 % 85 % 90 % 100 % 105 % 110 % 150 % Others Total credit exposure amount (post-CCF and postCRM) Real estate Of which: general RRE Of which: no loan splitting applied Of which: loan splitting applied (secured) Of which: loan splitting applied (unsecured) Of which: IPRRE Of which: general CRE Of which: no loan splitting applied Of which: loan splitting applied (secured) Of which: loan splitting applied (unsecured) Of which: IPCRE Of which: land acquisition, development and construction 10 50% 100% 150% Other Total credit exposure amount (post-CCF and post-CRM) Defaulted exposures 11 0% 20% 100% 1250% Other Total credit exposure amount (post-CCF and post-CRM) Other assets Exposure amounts and CCFs applied to off-balance sheet exposures, categorised based on risk bucket of converted exposures Risk weight a b cd On-balance sheet exposure Off-balance sheet exposure (pre-CCF) Weighted average CCF*Exposure (post-CCF and post-CRM) 1 Less than 40% 2 40-70% 3 75% 4 85% 5 90-100% 6 105-130% 7 150% 8 250% 9 400% 10 1,250% 11 Total exposures * Weighting is based on off-balance sheet exposure (pre-CCF). Definitions
Loan splitting: refers to the approaches set out in SCRE7.75 and SCRE7.78.
Total credit exposure amount (post-CCF and post-CRM): the amount used for the capital requirements calculation (for both on- and off-balance sheet amounts), therefore net of specific provisions (including partial write-offs) and after CRM techniques and CCF have been applied but before the application of the relevant risk weights.
Defaulted exposures: correspond to the unsecured portion of any loan past due for more than 90 days or represent an exposure to a defaulted borrower, as defined in SCRE7.96.
Other assets: refers to assets subject to specific risk weighting as set out in SCRE7.102. Template CRE: Qualitative disclosure related to IRB models Purpose: Provide additional information on IRB models used to compute RWA. Scope of application: he table is mandatory for banks using A-IRB or F-IRB approaches for some or all of their exposures.
To provide meaningful information to users, the bank must describe the main characteristics of the models used at the group-wide level (according to the scope of regulatory consolidation) and explain how the scope of models described was determined. The commentary must include the percentage of RWA covered by the models for each of the bank's regulatory portfolios.Content: Qualitative information. Frequency: Annual. Format: Flexible. Banks must provide the following information on their use of IRB models:
(a) nternal model development, controls and changes: role of the functions involved in the development, approval and subsequent changes of the credit risk models (b) Relationships between risk management function and internal audit function and procedure to ensure the independence of the function in charge of the review of the models from the functions responsible for the development of the models. (c) Scope and main content of the reporting related to credit risk models. (d) Scope of the supervisor's acceptance of approach.
The "scope of the supervisor's acceptance of approach" refers to the scope of internal models approved by SAMA in terms of entities within the group (if applicable), portfolios and exposure classes, with a breakdown between foundation IRB (F-IRB) and advanced IRB (A-IRB), if applicable.
(e) For each of the portfolios, the bank must indicate the part of EAD within the group (in percentage of total EAD) covered by standardised, F-IRB and A-IRB approach and the part of portfolios that are involved in a roll-out plan. (f) The number of key models used with respect to each portfolio, with a brief discussion of the main differences among the models within the same portfolios. (g) Description of the main characteristics of the approved models:
(i) definitions, methods and data for estimation and validation of PD (eg how PDs are estimated for low default portfolios; if there are regulatory floors; the drivers for differences observed between PD and actual default rates at least for the last three periods);and where applicable:
(ii) LGD (eg methods to calculate downturn LGD; how LGDs are estimated for low default portfolio; the time lapse between the default event and the closure of the exposure);
(iii) credit conversion factors, including assumptions employed in the derivation of these variables;Template CR6: IRB - Credit risk exposures by portfolio and PD range Purpose: Provide main parameters used for the calculation of capital requirements for IRB models. The purpose of disclosing these parameters is to enhance the transparency of banks' RWA calculations and the reliability of regulatory measures. Scope of application: The template is mandatory for banks using either the F-IRB or the A-IRB approach for some or all of their exposures. Content: Columns (a) and (b) are based on accounting carrying values and columns (c) to (l) are regulatory values. All are based on the scope of regulatory consolidation. Frequency: Semiannual. Format: Fixed. Accompanying narrative: Banks are expected to supplement the template with a narrative to explain the effect of credit derivatives on RWAs. PD scale a b c d e f g h i j k l Original on-balance sheet gross exposure Off-balance sheet exposures pre CCF Average CCF EAD post CRM and post-CCF Average PD Number of obligors Average LGD Average maturity RWA RWA density EL Provisions Portfolio X 0.00 to <0.15 0.15 to <0.25 0.25 to <0.50 0.50 to <0.75 0.75 to <2.50 2.50 to <10.00 10.00 to
<100.00
100.00 (Default) Sub-total Total (all portfolios) Definitions
Rows
Portfolio X includes the following prudential portfolios for the FIRB approach: (i) Sovereign; (ii) Banks; (iii) Corporate; (iv) Corporate - Specialised Lending; (v) Purchased receivables, and the following prudential portfolios for the AIRB approach: (i) Sovereign; (ii) Banks; (iii) Corporate; (iv) Corporate - Specialised Lending; (v) Retail - qualifying revolving (QRRE); (vi) Retail - Residential mortgage exposures; (vii) Retail - SME; (viii) Other retail exposures; (ix) Purchased receivables. Information on F-IRB and A-IRB portfolios, respectively, must be reported in two separate templates.
Default: The data on defaulted exposures may be further broken down according to SAMA’s definitions for categories of defaulted exposures.
Columns
PD scale: Exposures shall be broken down according to the PD scale used in the template instead of the PD scale used by banks in their RWA calculation. Banks must map the PD scale they use in the RWA calculations into the PD scale provided in the template.
Original on-balance sheet gross exposure: amount of the on-balance sheet exposure gross of accounting provisions (before taking into account the effect of credit risk mitigation techniques).
Off-balance sheet exposure pre conversion factor: exposure value without taking into account value adjustments and provisions, conversion factors and the effect of credit risk mitigation techniques.
Average CCF: EAD post-conversion factor for off-balance sheet exposure to total off-balance sheet exposure preconversion factor.
EAD post-CRM: the amount relevant for the capital requirements calculation.
Number of obligors: corresponds to the number of individual PDs in this band. Approximation (round number) is acceptable.
Average PD: obligor grade PD weighted by EAD.
Average LGD: the obligor grade LGD weighted by EAD. The LGD must be net of any CRM effect.
Average maturity: the obligor maturity in years weighted by EAD; this parameter needs to be filled in only when it is used for the RWA calculation.
RWA density: Total risk-weighted assets to EAD post-CRM.
EL: the expected losses as calculated according to SCRE13.8 to SCRE13.12 and SCRE15.2 to SCRE15.3.
Provisions: provisions calculated according to SCRE15.4. Template CR7: IRB - Effect on RWA of credit derivatives used as CRM techniques Purpose: Illustrate the effect of credit derivatives on the IRB approach capital requirements' calculations. The pre-credit derivatives RWA before taking account of credit derivatives mitigation effect has been selected to assess the impact of credit derivatives on RWA. This is irrespective of how the CRM technique feeds into the RWA calculation. Scope of application: The template is mandatory for banks using the A-IRB and/or F-IRB approaches for some or all of their exposures. Content: Risk-weighted assets (subject to credit risk treatment). Frequency: Semiannual. Format: Fixed. Accompanying narrative: Banks should supplement the template with a narrative commentary to explain the effect of credit derivatives on the bank's RWAs. a b Pre-credit derivatives RWA Actual RWA 1 Sovereign - F-IRB 2 Sovereign - A-IRB 3 Banks - F-IRB 4 Banks - A-IRB 5 Corporate - F-IRB 6 Corporate - A-IRB 7 Specialised lending - F-IRB 8 Specialised lending - A-IRB 9 Retail - qualifying revolving (QRRE) 10 Retail - residential mortgage exposures 11 Retail -MSMEs 12 Other retail exposures 13 Equity - F-IRB 14 Equity - A-IRB 15 Purchased receivables - F-IRB 16 Purchased receivables - A-IRB 17 Total
Pre-credit derivatives RWA: hypothetical RWA calculated assuming the absence of recognition of the credit derivative as a CRM technique.Actual RWA: RWA calculated taking into account the CRM technique impact of the credit derivative.
Template CR8: RWA flow statements of credit risk exposures under IRB Purpose: Present a flow statement explaining variations in the credit RWA determined under an IRB approach. Scope of application: The template is mandatory for banks using the A-IRB and/or F-IRB approaches. Content: Risk-weighted assets corresponding to credit risk only (counterparty credit risk excluded). Changes in RWA amounts over the reporting period for each of the key drivers should be based on a bank's reasonable estimation of the figure. Frequency: Quarterly. Format: Fixed. Columns and rows 1 and 9 cannot be altered. Banks may add additional rows between rows 7 and 8 to disclose additional elements that contribute significantly to RWA variations. Accompanying narrative: Banks should supplement the template with a narrative commentary to explain any significant change over the reporting period and the key drivers of such changes. a RWA amounts 1 RWA as at end of previous reporting period 2 Asset size 3 Asset quality 4 Model updates 5 Methodology and policy 6 Acquisitions and disposals 7 Foreign exchange movements 8 Other 9 RWA as at end of reporting period Asset size: organic changes in book size and composition (including origination of new businesses and maturing loans) but excluding changes in book size due to acquisitions and disposal of entities.
Asset quality: changes in the assessed quality of the bank's assets due to changes in borrower risk, such as rating grade migration or similar effects.
Model updates: changes due to model implementation, changes in model scope, or any changes intended to address model weaknesses.
Methodology and policy: changes due to methodological changes in calculations driven by regulatory policy changes, including both revisions to existing regulations and new regulations.
Acquisitions and disposals: changes in book sizes due to acquisitions and disposal of entities.
Foreign exchange movements: changes driven by market movements such as foreign exchange movements.
Other: this category must be used to capture changes that cannot be attributed to any other category. Banks should add additional rows between rows 7 and 8 to disclose other material drivers of RWA movements over the reporting period. Template CR9: IRB - Backtesting of probability of default (PD) per portfolio Purpose: Provide backtesting data to validate the reliability of PD calculations. In particular, the template compares the PD used in IRB capital calculations with the effective default rates of bank obligors. A minimum five-year average annual default rate is required to compare the PD with a "more stable" default rate, although a bank may use a longer historical period that is consistent with its actual risk management practices. Scope of application: he template is mandatory for banks using the A-IRB and/or F-IRB approaches. Where a bank makes use of a F-IRB approach for certain exposures and an A-IRB approach for others, it must disclose two separate sets of portfolio breakdown in separate templates.
To provide meaningful information to users on the backtesting of their internal models through this template, the bank must include in this template the key models used at the group-wide level (according to the scope of regulatory consolidation) and explain how the scope of models described was determined. The commentary must include the percentage of RWA covered by the models for which backtesting results are shown here for each of the bank's regulatory portfolios.
The models to be disclosed refer to any model, or combination of models, approved SAMA, for the generation of the PD used for calculating capital requirements under the IRB approach. This may include the model that is used to assign a risk rating to an obligor, and/or the model that calibrates the internal ratings to the PD scale.
Content: Modelling parameters used in IRB calculation. Frequency: Annual. Format: Flexible. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes. Banks may wish to supplement the template when disclosing the amount of exposure and the number of obligors whose defaulted exposures have been cured in the year. a b c d e f g h i Portfolio X* PD Range External rating equivalent Weighted average PD Arithmetic average PD by obligors Number of obligors Defaulted obligors in the year of which: new defaulted obligors in the year Average historical annual default rate End of previous year End of the year * The dimension Portfolio X includes the following prudential portfolios for the F-IRB approach:
(i) Sovereign; (ii) Banks; (iii) Corporate; (iv) Corporate - Specialised lending; (v) Purchased receivables, and the following prudential portfolios for the A-IRB approach:
(i) Sovereign; (ii) Banks; (iii) Corporate; (iv) Corporate - Specialised Lending; (v) Retail - QRRE; (vi) Retail - Residential mortgage exposures; (vii) Retail - SME; (viii) Other retail exposures; (ix) Purchased receivables.
External rating equivalent: refers to external ratings that may be available for retail borrowers. This may, for instance, be the case for small or mediumsized entities (SMEs) that fit the requirements to be included in the retail portfolios which could have an external rating, or a credit score or a range of credit scores provided by a consumer credit bureau. One column has to be filled in for each rating agency authorised for prudential purposes in the jurisdictions where the bank operates. However, where such external ratings are not available, they need not be provided.
Weighted average PD: the same as reported in Template CR6. These are the estimated PDs assigned by the internal model authorised under the IRB approaches. The PD values are EAD-weighted and the "weight" is the EAD at the beginning of the period.
Arithmetic average PD by obligors: PD within range by number of obligor within the range. The average PD by obligors is the simple average: Arithmetic average PD = sum of PDs of all accounts (transactions) / number of accounts.
Number of obligors: two sets of information are required: (i) the number of obligors at the end of the previous year; (ii) the number of obligors at the end of the year subject to reporting;
Defaulted obligors in the year: number of defaulted obligors during the year; of which: new obligors defaulted in the year: number of obligors having defaulted during the last 12-month period that were not funded at the end of the previous financial year;
Average historical annual default rate: the five-year average of the annual default rate (obligors at the beginning of each year that are defaulted during that year/total obligor hold at the beginning of the year) is a minimum. The bank may use a longer historical period that is consistent with the bank's actual risk management practices. The disclosed average historical annual default rate disclosed should be before the application of the margin of conservatism. Template CR10: IRB (specialised lending under the slotting approach) Purpose: To provide quantitative disclosures of banks’ specialised lending exposures using the supervisory slotting approach. Scope of application: The template is mandatory for banks using the supervisory slotting approach. The breakdown by regulatory categories included in the template is indicative, as the data included in the template are provided by banks according to applicable domestic regulation. Content: Carrying values, exposure amounts and RWA Frequency: Semiannual. Format: Flexible. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes. Specialised lending Other than HVCRE Regulatory categories Residual maturity On-balance sheet amount Off-balance sheet amount RW Exposure amount RWA Expected losses PF OF CF IPRE Total Strong Less than 2.5 years 50% Equal to or more than 2.5 years 70% Good Less than 2.5 years 70% Equal to or more than 2.5 years 90% Satisfactory 115% Weak 250% Default - Total HVCRE Regulatory categories Residual maturity On-balance sheet amount Off-balance sheet amount RW Exposure amount RWA Expected losses Strong Less than 2.5 years 70% Equal to or more than 2.5 years 95% Good Less than 2.5 years 95% Equal to or more than 2.5 years 120% Satisfactory 140% Weak 250% Default - Total Definitions
HVCRE: high-volatility commercial real estate. On-balance sheet amount: banks must disclose the amount of exposure (net of allowances and write-offs) under the regulatory scope of consolidation. Off-balance sheet amount: banks must disclose the exposure value without taking into account conversion factors and the effect of credit risk mitigation techniques. Exposure amount: the amount relevant for the capital requirement’s calculation, therefore after CRM techniques and CCF have been applied. Expected losses: amount of expected losses calculated according to SCRE13.8 to SCRE13.12. PF: project finance.PF: project finance. OF: object finance. CF: commodities finance. IPRRE: income-producing residential real estate. 4 Banks are allowed to (i) merge row (d) of Table CRB with row (b) of Table CRB-A and (ii) merge row (h) of Table CRB with row (d) of Table CRB-A if and only if the bank uses a common definition for restructured and forborne exposures. The bank should clarify in the disclosure that they are applying a common definition for restructured and forborne exposures. In such case, the bank should also specify in the accompanying narrative that it uses a common definition for restructured exposures and forborne exposures that therefore, information disclosed regarding requirements of row (b) and row (d) of Table CRB-A have been merged with the row (d) and row (h) of Table CRB, respectively.
5 When the accounting framework is IFRS 9, “impaired exposures” are those that are considered “credit- impaired” in the meaning of IFRS 9 Appendix A.
6 Please refer to paragraph 33 of the Guidelines, where it is stated: “these value adjustments and provisions refer to both the allowance for credit losses and direct reductions of the outstanding of an exposure to reflect a decline in the counterparty's creditworthiness”. For banks not applying the Guidelines, please refer to the definition of accounting provisions included in Template CR1, which is in line with paragraph 33 of the Guidelines.
7 The prohibition on the use of the IRB approach for equity exposures will be subject to a five-year linear phase-in arrangement from 1 January 2022 (please see SCRE17.1 and SCRE17.2). During this phase-in period, the risk weight for equity exposures will be the greater of: (i) the risk weight as calculated under the IRB approach, and (ii) the risk weight set for the linear phase-in arrangement under the standardised approach for credit risk. Alternatively, SAMA may require banks to apply the fully phased-in standardised approach treatment from the date of implementation of this standard. Accordingly, for disclosure purposes, banks that continue to apply the IRB approach during the phase-in period should report their equity exposures in either the 250% or the 400% column, according to whether the respective equity exposures are speculative unlisted equities or all other equities.
8 For disclosure purposes, banks that use the standardised approach for credit risk during the transitional period should report their equity exposures according to whether they would be classified as “other equity holdings” (250%) or “speculative unlisted equity” (400%). Risk weights disclosed for “speculative unlisted equity exposures” and “other equity holdings” should reflect the actual risk weights applied to these exposures in a particular year (please refer to the respective transitional arrangements set out in SCRE17.1)
9 Defined as per SAMA circular No.381000094106 dated 06/09/1438.20. Counterparty Credit Risk
20.1 This section includes all exposures in the banking book and trading book that are subject to a counterparty credit risk charge, including the charges applied to exposures to central counterparties (CCPs).10
20.2 The disclosure requirements under this section are:
20.2.1 Table CCRA - Qualitative disclosure related to CCR
20.2.2 Template CCR1 - Analysis of CCR exposures by approach
20.2.3 Template CCR3 - Standardised approach - CCR exposures by regulatory portfolio and risk weights
20.2.4 Template CCR4 - IRB - CCR exposures by portfolio and probability-of- default (PD) scale
20.2.5 Template CCR5 - Composition of collateral for CCR exposures
20.2.6 Template CCR6 - Credit derivatives exposures
20.2.7 Template CCR7 - RWA flow statements of CCR exposures under the internal models method (IMM)
20.2.8 Template CCR8 - Exposures to central counterparties
Table CCRA: Qualitative disclosure related to CCR Purpose: Describe the main characteristics of counterparty credit risk management (eg operating limits, use of guarantees and other credit risk mitigation (CRM) techniques, impacts of own credit downgrading). Scope of application: The table is mandatory for all banks. Content: Qualitative information. Frequency: Annual. Format: Flexible.
Banks must provide risk management objectives and policies related to counterparty credit risk, including:(a) The method used to assign the operating limits defined in terms of internal capital for counterparty credit exposures and for CCP exposures; (b) Policies relating to guarantees and other risk mitigants and assessments concerning counterparty risk, including exposures towards CCPs; (c) Policies with respect to wrong-way risk exposures; (d) The impact in terms of the amount of collateral that the bank would be required to provide given a credit rating downgrade. Template CCR1: Analysis of CCR exposures by approach Purpose: Provide a comprehensive view of the methods used to calculate counterparty credit risk regulatory requirements and the main parameters used within each method. Scope of application: The template is mandatory for all banks. Content: Regulatory exposures, RWA and parameters used for RWA calculations for all exposures subject to the counterparty credit risk framework (excluding CVA charges or exposures cleared through a CCP). Frequency: Semiannual. Format: Fixed. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes. a b c d e f Replacement cost Potential future exposure Effective EPE Alpha used for computing regulatory EAD EAD post- CRM RWA 1 SA-CCR (for derivatives) 1.4 2 Internal Model Method (for derivatives and SFTs) 3 Simple Approach for credit risk mitigation (for SFTs) 4 Comprehensive Approach for credit risk mitigation (for SFTs) 5 Value-at-risk (VaR) for SFTs 6 Total
DefinitionsSA-CCR (for derivatives): Banks should report SA-CCR in row 1.
Replacement Cost (RC): For trades that are not subject to margining requirements, the RC is the loss that would occur if a counterparty were to default and was closed out of its transactions immediately. For margined trades, it is the loss that would occur if a counterparty were to default at present or at a future date, assuming that the closeout and replacement of transactions occur instantaneously. However, closeout of a trade upon a counterparty default may not be instantaneous. The replacement cost under the standardised approach for measuring counterparty credit risk exposures is described in SCCR6.
Potential Future Exposure is any potential increase in exposure between the present and up to the end of the margin period of risk. The potential future exposure for the standardised approach is described in SCCR3.
Effective Expected Positive Exposure (EPE) is the weighted average over time of the effective expected exposure over the first year, or, if all the contracts in the netting set mature before one year, over the time period of the longest-maturity contract in the netting set where the weights are the proportion that an individual expected exposure represents of the entire time interval (see SCCR3).
EAD post-CRM: exposure at default. This refers to the amount relevant for the capital requirements calculation having applied CRM techniques, credit valuation adjustments according to SCCR5.10 and specific wrong-way adjustments (see SCCR7). Template CCR3: Standardised approach - CCR exposures by regulatory portfolio and risk weights Purpose: Provide a breakdown of counterparty credit risk exposures calculated according to the standardised approach: by portfolio (type of counterparties) and by risk weight (riskiness attributed according to standardised approach). Scope of application: The template is mandatory for all banks using the credit risk standardised approach to compute RWA for counterparty credit risk exposures, irrespective of the CCR approach used to determine exposure at default.
If a bank deems that the information requested in this template is not meaningful to users because the exposures and RWA amounts are negligible, the bank may choose not to disclose the template. The bank is, however, required to explain in a narrative commentary why it considers the information not to be meaningful to users, including a description of the exposures in the portfolios concerned and the aggregate total of RWAs amount from such exposures. Content: Credit exposure amounts. Frequency: Semiannual. Format: Fixed. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes.
a b c d e f g h i Risk weight*→ 0% 10% 20% 50% 75% 100% 150% Others Total credit exposure Regulatory portfolio*↓ Sovereigns Non-central government public sector entities Multilateral development banks Banks Securities firms Corporates Regulatory retail portfolios Other assets Total
*The breakdown by risk weight and regulatory portfolio included in the template is for illustrative purposes. Banks may complete the template with the breakdown of asset classes according to the local implementation of the Basel framework.
Total credit exposure: the amount relevant for the capital requirements calculation, having applied CRM techniques. Other assets: the amount excludes exposures to CCPs, which are reported in Template CCR8. Template CCR4: IRB - CCR exposures by portfolio and PD scale Purpose: Provide all relevant parameters used for the calculation of counterparty credit risk capital requirements for IRB models. Scope of application: The template is mandatory for banks using an advanced IRB (A-IRB) or foundation IRB (F-IRB) approach to compute RWA for counterparty credit risk exposures, whatever CCR approach is used to determine exposure at default. Where a bank makes use of an FIRB approach for certain exposures and an AIRB approach for others, it must disclose two separate sets of portfolio breakdown in two separate templates.
To provide meaningful information, the bank must include in this template the key models used at the group-wide level (according to the scope of regulatory consolidation) and explain how the scope of models described in this template was determined. The commentary must include the percentage of RWAs covered by the models shown here for each of the bank's regulatory portfolios. Content: RWA and parameters used in RWA calculations for exposures subject to the counterparty credit risk framework (excluding CVA charges or exposures cleared through a CCP) and where the credit risk approach used to compute RWA is an IRB approach. Frequency: Semiannual. Format: Fixed. Columns and PD scales in the rows are fixed. However, the portfolio breakdown shown in the rows will be set by SAMA to reflect the exposure categories required under local implementations of IRB approaches. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes.
PD scale a b c d e f g EAD post-CRM average PD Number of obligors Average LGD Average maturity RWA RWA density Portfolio X 0.00 to <0.15 0.15 to <0.25 0.25 to <0.50 0.50 to <0.75 0.75 to <2.50 2.50 to <10.00 10.00 to <100.00 100.00 (Default) Sub-total Total (sum of portfolios)
Definitions
Rows Portfolio X refers to the following prudential portfolios for the FIRB approach: (i) Sovereign; (ii) Banks; (iii) Corporate; and the following prudential portfolios for the AIRB approach: (i) Sovereign; (ii) Banks; (iii) Corporate. The information on FIRB and AIRB portfolios must be reported in separate templates. Default: The data on defaulted exposures may be further broken down according to a SAMA's definitions for categories of defaulted exposures.
Columns PD scale: Exposures shall be broken down according to the PD scale used in the template instead of the PD scale used by banks in their RWA calculation. Banks must map the PD scale they use in the RWA calculations to the PD scale provided in the template; EAD post-CRM: exposure at default. The amount relevant for the capital requirements calculation, having applied the CCR approach and CRM techniques, but gross of accounting provisions; Number of obligors: corresponds to the number of individual PDs in this band. Approximation (round number) is acceptable; Average PD: obligor grade PD weighted by EAD; Average loss-given-default (LGD): the obligor grade LGD weighted by EAD. The LGD must be net of any CRM effect; Average maturity: the obligor maturity weighted by EAD; RWA density: Total RWA to EAD post-CRM. Template CCR5: Composition of collateral for CCR exposure Purpose: Provide a breakdown of all types of collateral posted or received by banks to support or reduce the counterparty credit risk exposures related to derivative transactions or to SFTs, including transactions cleared through a CCP. Scope of application: The template is mandatory for all banks. Content: Carrying values of collateral used in derivative transactions or SFTs, whether or not the transactions are cleared through a CCP and whether or not the collateral is posted to a CCP. Please refer to section 29.1 for an illustration on how the template should be completed. Frequency: Semiannual. Format: Flexible (the columns cannot be altered but the rows are flexible). Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes.
a b c d e f Collateral used in derivative transactions Collateral used in SFTs Fair value of collateral received Fair value of posted collateral Fair value of collateral received Fair value of posted collateral Segregated Unsegregated Segregated Unsegregated Cash - domestic currency Cash - other currencies Domestic sovereign debt Other sovereign debt Government agency debt Corporate bonds Equity securities Other collateral Total
DefinitionsCollateral used is defined as referring to both legs of the transaction. Example: a bank transfers securities to a third party, and the third party in turn posts collateral to the bank. The bank reports both legs of the transaction. The collateral received is reported in column (e), while the collateral posted by the bank is reported in column (f). The fair value of collateral received or posted must be after any haircut. This means the value of collateral received will be reduced by the haircut (ie C(1 - Hs)) and collateral posted will be increased after the haircut (ie E(1 + Hs)).
Segregated refers to collateral which is held in a bankruptcy-remote manner according to the description included in SCCR8.18 to SCCR8.23.
Unsegregated refers to collateral that is not held in a bankruptcy-remote manner.
Domestic sovereign debt refers to the sovereign debt of the jurisdiction of incorporation of the bank, or, when disclosures are made on a consolidated basis, the jurisdiction of incorporation of the parent company.
Domestic currency refers to items of collateral that are denominated in the bank's (consolidated) reporting currency and not the transaction currency. Template CCR6: Credit derivatives exposures Purpose: Illustrate the extent of a bank's exposures to credit derivative transactions broken down between derivatives bought or sold. Scope of application: This template is mandatory for all banks. Content: Notional derivative amounts (before any netting) and fair values. Frequency: Semiannual. Format: Flexible (the columns are fixed but the rows are flexible). Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes.
a b Protection bought Protection sold Notionals Single-name credit default swaps Index credit default swaps Total return swaps Credit options Other credit derivatives Total notionals Fair values Positive fair value (asset) Negative fair value (liability) Template CCR7: RWA flow statements of CCR exposures under Internal Model Method (IMM) Purpose: Present a flow statement explaining changes in counterparty credit risk RWA determined under the Internal Model Method for counterparty credit risk (derivatives and SFTs). Scope of application: The template is mandatory for all banks using the IMM for measuring exposure at default of exposures subject to the counterparty credit risk framework, irrespective of the credit risk approach used to compute RWA from exposures at default. Content: Risk-weighted assets corresponding to counterparty credit risk (credit risk shown in Template CR8 is excluded). Changes in RWA amounts over the reporting period for each of the key drivers should be based on a bank's reasonable estimation of the figure. Frequency: Quarterly. Format: Fixed. Columns and rows 1 and 9 are fixed. Banks may add additional rows between rows 7 and 8 to disclose additional elements that contribute to RWA variations. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant change over the reporting period and the key drivers of such changes.
a Amounts 1 RWA as at end of previous reporting period 2 Asset size 3 Credit quality of counterparties 4 Model updates (IMM only) 5 Methodology and policy (IMM only) 6 Acquisitions and disposals 7 Foreign exchange movements 8 Other 9 RWA as at end of current reporting period
Asset size: organic changes in book size and composition (including origination of new businesses and maturing exposures) but excluding changes in book size due to acquisitions and disposal of entities.
Credit quality of counterparties: changes in the assessed quality of the bank's counterparties as measured under the credit risk framework, whatever approach the bank uses. This row also includes potential changes due to IRB models when the bank uses an IRB approach.
Model updates: changes due to model implementation, changes in model scope, or any changes intended to address model weaknesses. This row addresses only changes in the IMM model.
Methodology and policy: changes due to methodological changes in calculations driven by regulatory policy changes, such as new regulations (only in the IMM model).
Acquisitions and disposals: changes in book sizes due to acquisitions and disposal of entities.
Foreign exchange movements: changes driven by changes in FX rates.
Other: this category is intended to be used to capture changes that cannot be attributed to the above categories. Banks should add additional rows between rows 7 and 8 to disclose other material drivers of RWA movements over the reporting period. Template CCR8: Exposures to central counterparties Purpose: Provide a comprehensive picture of the bank's exposures to central counterparties. In particular, the template includes all types of exposures (due to operations, margins, contributions to default funds) and related capital requirements. Scope of application: The template is mandatory for all banks. Content: Exposures at default and risk-weighted assets corresponding to exposures to central counterparties. Frequency: Semiannual. Format: Fixed. Banks are requested to provide a breakdown of the exposures by central counterparties (qualifying, as defined below, or not qualifying). Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes.
a b EAD (post-CRM) RWA 1 Exposures to QCCPs (total) 2 Exposures for trades at QCCPs (excluding initial margin and default fund contributions); of which 3 (i) OTC derivatives 4 (ii) Exchange-traded derivatives 5 (iii) Securities financing transactions 6 (iv) Netting sets where cross-product netting has been approved 7 Segregated initial margin 8 Non-segregated initial margin 9 Pre-funded default fund contributions 10 Unfunded default fund contributions 11 Exposures to non-QCCPs (total) 12 Exposures for trades at non-QCCPs (excluding initial margin and default fund contributions); of which 13 (i) OTC derivatives 14 (ii) Exchange-traded derivatives 15 (iii) Securities financing transactions 16 (iv) Netting sets where cross-product netting has been approved 17 Segregated initial margin 18 Non-segregated initial margin 19 Pre-funded default fund contributions 20 Unfunded default fund contributions
Definitions
Exposures to central counterparties: This includes any trades where the economic effect is equivalent to having a trade with the CCP (eg a direct clearing member acting as an agent or a principal in a client-cleared trade). These trades are described in SCCR8.7 to SCCR8.23.
EAD post-CRM: exposure at default. The amount relevant for the capital requirements calculation, having applied CRM techniques, credit valuation adjustments according to SCCR5.10 and specific wrong-way adjustments (see SCCR7). A qualifying central counterparty (QCCP) is an entity that is licensed to operate as a CCP (including a licence granted by way of confirming an exemption), and is permitted by the appropriate regulator/overseer 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, and publicly indicated, that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the Committee on Payments and Market Infrastructures and International Organization of Securities Commissions' Principles for Financial Market Infrastructures. See SCCR8 for the comprehensive definition and associated criteria.
Initial margin means a clearing member's or client's funded collateral posted to the CCP to mitigate the potential future credit exposure of the CCP to the clearing member arising from the possible future change in the value of their transactions. For the purposes of this template, initial margin does not include contributions to a CCP for mutualised loss-sharing arrangements (ie in cases where a CCP uses initial margin to mutualise losses among the clearing members, it will be treated as a default fund exposure).
Prefunded default fund contributions are prefunded clearing member contributions towards, or underwriting of, a CCP's mutualised loss-sharing arrangements.
Unfunded default fund contributions are unfunded clearing member contributions towards, or underwriting of, a CCP's mutualised loss-sharing arrangements. If a bank is not a clearing member but a client of a clearing member, it should include its exposures to unfunded default fund contributions if applicable. Otherwise, banks should leave this row empty and explain the reason in the accompanying narrative.
Segregated refers to collateral which is held in a bankruptcy-remote manner according to the description included in SCCR8.18 to SCCR8.23.
Unsegregated refers to collateral that is not held in a bankruptcy-remote manner. 10 The relevant sections of the Basel framework are in SCCR3 to SCCR9 and SCCR11.
21. Securitisation
21.1 This chapter describes the disclosure requirements applying to securitisation exposures.
21.2 The scope of this section:11
21.2.1 Covers all securitisation exposures12 in Table SECA and in templates SEC1 and SEC2;
21.2.2 Focuses on banking book securitisation exposures subject to capital charges according to the securitisation framework in templates SEC3 and SEC4; and
21.2.3 Excludes capital charges related to securitisation positions in the trading book that are reported in section 22.
21.3 Only securitisation exposures that the bank treats under the securitisation framework (SCRE18 to SCRE22) are disclosed in templates SEC3 and SEC4. For banks acting as originators, this implies that the criteria for risk transfer recognition as described in SCRE18.24 to SCRE18.29 are met. Conversely, all securitisation exposures, including those that do not meet the risk transfer recognition criteria, are reported in templates SEC1 and SEC2. As a result, templates SEC1 and SEC2 may include exposures that are subject to capital requirements according to both the credit risk and market risk frameworks and that are also included in other parts of the Pillar 3 report. The purpose is to provide a comprehensive view of banks' securitisation activities. There is no double counting of capital requirements as templates SEC3 and SEC4 are limited to exposures subject to the securitisation framework.
21.4 The disclosure requirements under this section are:
21.4.1 Table SECA - Qualitative disclosure requirements related to securitisation exposures
21.4.2 Template SEC1 - Securitisation exposures in the banking book
21.4.3 Template SEC2 - Securitisation exposures in the trading book
21.4.4 Template SEC3 - Securitisation exposures in the banking book and associated regulatory capital requirements - bank acting as originator or as sponsor
21.4.5 Template SEC4 - Securitisation exposures in the banking book and associated capital requirements - bank acting as investor
Table SECA: Qualitative disclosure requirements related to securitisation exposures Purpose: Provide qualitative information on a bank's strategy and risk management with respect to its securitisation activities. Scope of application: The table is mandatory for all banks with securitisation exposures. Content: Qualitative information. Frequency: Annually. Format: Flexible. Qualitative disclosures (A) Banks must describe their risk management objectives and policies for securitisation activities and main features of these activities according to the framework below. If a bank holds securitisation positions reflected both in the regulatory banking book and in the regulatory trading book, the bank must describe each of the following points by distinguishing activities in each of the regulatory books. (a) The bank's objectives in relation to securitisation and re-securitisation activity, including the extent to which these activities transfer credit risk of the underlying securitised exposures away from the bank to other entities, the type of risks assumed and the types of risks retained. (b) The bank must provide a list of:
● special purpose entities (SPEs) where the bank acts as sponsor (but not as an originator such as an Asset Backed Commercial Paper (ABCP) conduit), indicating whether the bank consolidates the SPEs into its scope of regulatory consolidation. A bank would generally be considered a "sponsor" if it, in fact or in substance, manages or advises the programme, places securities into the market, or provides liquidity and/or credit enhancements. The programme may include, for example, ABCP conduit programmes and structured investment vehicles. ● affiliated entities (i) that the bank manages or advises and (ii) that invest either in the securitisation exposures that the bank has securitised or in SPEs that the bank sponsors. ● a list of entities to which the bank provides implicit support and the associated capital impact for each of them (as required in SCRE18.14 and SCRE18.49
.(c) Summary of the bank's accounting policies for securitisation activities. Where relevant, banks are expected to distinguish securitisation exposures from re-securitisation exposures. (d) If applicable, the names of external credit assessment institution (ECAIs) used for securitisations and the types of securitisation exposure for which each agency is used. (e) If applicable, describe the process for implementing the Basel internal assessment approach (IAA). The description should include:
● structure of the internal assessment process and relation between internal assessment and external ratings, including information on ECAIs as referenced in item (d) of this table. ● control mechanisms for the internal assessment process including discussion of independence, accountability, and internal assessment process review. ● the exposure type to which the internal assessment process is applied; and stress factors used for determining credit enhancement levels, by exposure type. For example, credit cards, home equity, auto, and securitisation exposures detailed by underlying exposure type and security type (eg residential mortgage-backed securities, commercial mortgage-backed securities, asset-backed securities, collateralised debt obligations) etc.
(f) Banks must describe the use of internal assessment other than for SEC-IAA capital purposes. Template SEC1: Securitisation exposures in the banking book Purpose: Present a bank's securitisation exposures in its banking book. Scope of application: The template is mandatory for all banks with securitisation exposures in the banking book. Content: Carrying values. In this template, securitisation exposures include securitisation exposures even where criteria for recognition of risk transference are not met. Refer to SAMA circular No.371000112753 date 28/10/1437H on Simple, Transparent and Comparable (STC). Frequency: Semiannually. Format: Flexible. Banks may in particular modify the breakdown and order proposed in rows if another breakdown (eg whether or not criteria for recognition of risk transference are met) would be more appropriate to reflect their activities. Originating and sponsoring activities may be presented together. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes. a b c d e f g h i j k l Bank acts as originator Bank acts as sponsor Banks acts as investor Traditional Of which simple, transparent and comparable (STC) Synthetic Sub- total Traditional Of which STC Synthetic Sub- total Traditional Of which STC Synthetic Sub- total 1 Retail (total) - of which 2 residential mortgage 3 credit card 4 other retail exposures 5 re-securitisation 6 Wholesale (total) - of which 7 loans to corporates 8 commercial mortgage 9 lease and receivables 10 other wholesale 11 re-securitisation Definitions (i) When the "bank acts as originator" the securitisation exposures are the retained positions, even where not eligible for the securitisation framework due to the absence of significant and effective risk transfer (which may be presented separately). (ii) When "the bank acts as sponsor", the securitisation exposures include exposures to commercial paper conduits to which the bank provides programme-wide enhancements, liquidity and other facilities. Where the bank acts both as originator and sponsor, it must avoid double-counting. In this regard, the bank can merge the two columns of "bank acts as originator" and "bank acts as sponsor" and use "bank acts as originator/sponsor" columns. (iii) Securitisation exposures when "the bank acts as an investor" are the investment positions purchased in third-party deals. Synthetic transactions: if the bank has purchased protection it must report the net exposure amounts to which it is exposed under columns originator/sponsor (ie the amount that is not secured). If the bank has sold protection, the exposure amount of the credit protection must be reported in the "investor" column. Re-securitisation: all securitisation exposures related to re-securitisation must be completed in rows "re-securitisation", and not in the preceding rows (by type of underlying asset) which contain only securitisation exposures other than re-securitisation. Template SEC2: Securitisation exposures in the trading book Purpose: Present a bank's securitisation exposures in its trading book. Scope of application: The template is mandatory for all banks with securitisation exposures in the trading book. In this template, securitisation exposures include securitisation exposures even where criteria for recognition of risk transference are not met. Content: Carrying values. Frequency: Semiannually. Format: Flexible. Banks may in particular modify the breakdown and order proposed in rows if another breakdown (eg whether or not criteria for recognition of risk transference are met) would be more appropriate to reflect their activities. Originating and sponsoring activities may be presented together. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes.
a b c d e f g h i j k l Bank acts as originator Bank acts as sponsor Banks acts as investor Traditional Of which STC Synthetic Sub- total Traditional Of which STC Synthetic Sub- total Traditional Of which STC Synthetic Sub- total 1 Retail (total) - of which 2 residential mortgage 3 credit card 4 other retail exposures 5 re-securitisation 6 Wholesale (total) - of which 7 loans to corporates 8 commercial mortgage 9 lease and receivables 10 other wholesale 11 re-securitisation Definitions
(i) When the "bank acts as originator" the securitisation exposures are the retained positions, even where not eligible to the securitisation framework due to absence of significant and effective risk transfer (which may be presented separately).
(ii) When "the bank acts as sponsor", the securitisation exposures include exposures to commercial paper conduits to which the bank provides programme-wide enhancements, liquidity and other facilities. Where the bank acts both as originator and sponsor, it must avoid double-counting. In this regard, the bank can merge two columns of "bank acts as originator" and "bank acts as sponsor" and use "bank acts as originator/sponsor" columns.
(iii) Securitisation exposures when "the bank acts as an investor" are the investment positions purchased in third-party deals. Synthetic transactions: if the bank has purchased protection it must report the net exposure amounts to which it is exposed under columns originator/sponsor (ie the amount that is not secured). If the bank has sold protection, the exposure amount of the credit protection must be reported in the "investor" column.
Re-securitisation: all securitisation exposures related to re-securitisation must be completed in rows "re-securitisation", and not in the preceding rows (by type of underlying asset) which contain only securitisation exposures other than re-securitisation. Template SEC3: Securitisation exposures in the banking book and associated regulatory capital requirements - bank acting as originator or as sponsor Purpose: Present securitisation exposures in the banking book when the bank acts as originator or sponsor and the associated capital requirements. Scope of application: The template is mandatory for all banks with securitisation exposures as sponsor or originator. Content: Exposure amounts, risk-weighted assets and capital requirements. This template contains originator or sponsor exposures that are treated under the securitisation framework. Frequency: Semiannual. Format: Fixed. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes.
a b c d e f g h i j k l m n o p q Exposure values (by risk weight bands) Exposure values (by regulatory approach) RWA (by regulatory approach) Capital charge after cap ≤20% >20% to 50% >50% to 100% >100% to <1250% RW 1250% SEC-IRBA SEC- ERBA and SEC-IAA SEC- SA 1250% SEC-IRBA SEC-ERBA and SEC-IAA SEC- SA 1250% SEC-IRBA SEC-ERBA and SEC-IAA SEC- SA 1250% 1 Total exposures 2 Traditional securitisation 3 Of which securitisation 4 Of which retail underlying 5 Of which STC 6 Of which wholesale 7 Of which STC 8 Of which re- securitisation 9 Synthetic securitisation 10 Of which securitisation 11 Of which retail underlying 12 Of which wholesale 13 Of which re- securitisation Definitions Columns (a) to (e) are defined in relation to regulatory risk weights. Columns (f) to (q) correspond to regulatory approach used. "1250%" covers securitisation exposures to which none of the approaches laid out in SCRE18.42 to SCRE18.48 can be applied. Capital charge after cap will refer to capital charge after application of the cap as described in SCRE18.50 to SCRE18.55. Template SEC4: Securitisation exposures in the banking book and associated capital requirements - bank acting as investor Purpose: Present securitisation exposures in the banking book where the bank acts as investor and the associated capital requirements. Scope of application: The template is mandatory for all banks having securitisation exposures as investor. Content: Exposure amounts, risk-weighted assets and capital requirements. This template contains investor exposures that are treated under the securitisation framework. Frequency: Semiannual. Format: Fixed. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes.
a b c d e f g h i j k l m n o p q Exposure values (by risk weight bands) Exposure values (by regulatory approach) RWA (by regulatory approach) Capital charge after cap ≤20% >20% to 50% >50% to 100% >100% to <1250% 1250% SEC-IRBA SEC-ERBA and SEC-IAA SEC- SA 1250% SEC- IRBA SEC-ERBA and SEC-IAA SEC- SA 1250% SEC- IRBA SEC-ERBA and SEC-IAA SEC- SA 1250% 1 Total exposures 2 Traditional securitisation 3 Of which securitisation 4 Of which retail underlying 5 Of which STC 6 Of which wholesale 7 Of which STC 8 Of which re- securitisation 9 Synthetic securitisation 10 Of which securitisation 11 Of which retail underlying 12 Of which wholesale 13 Of which re- securitisation Definitions
Columns (a) to (e) are defined in relation to regulatory risk weights.
Columns (f) to (q) correspond to regulatory approach used. "1250%" covers securitisation exposures to which none of the approaches laid out in SCRE18.42 to SCRE18.48 can be applied
Capital charge after cap will refer to capital charge after application of the cap as described in SCRE18.50 to SCRE18.55. 11 Unless stated otherwise, all terms used in section 21 are used consistently with the definitions in SCRE18.
12 Securitisation refers to the definition of what constitutes a securitisation under the Basel framework. Securitisation exposures correspond to securitisation exposures as defined in the Basel framework. According to this framework, securitisation exposures can include, but are not restricted to, the following: asset-backed securities, mortgage-backed securities, credit enhancements, liquidity facilities, interest rate or currency swaps, credit derivatives and tranched cover as described in SCRE9. Reserve accounts, such as cash collateral accounts, recorded as an asset by the originating bank must also be treated as securitisation exposures. Securitisation exposures refer to retained or purchased exposures and not to underlying pools.22. Market Risk
22.1 The market risk section includes the market risk capital requirements calculated for trading book and banking book exposures that are subject to market risk capital requirements in SMAR2 to SMAR13. It also includes capital requirements for securitisation positions held in the trading book. However, it excludes the counterparty credit risk capital requirements that apply to the same exposures, which are reported in section 20.
22.2 The disclosure requirements under this section are:
22.2.1 General information about market risk:
a. Table MRA - General qualitative disclosure requirements related to market risk under the standardised approach
b. Template MR1 - Market risk under the standardised approach
22.2.2 Market risk under the internal models approach (IMA). The disclosure requirements related in this section are not required to be completed by banks unless SAMA approves the bank to use the IMA approach.
a. Table MRB - Qualitative disclosures for banks using the IMA
b. Template MR2 - Market risk IMA per risk type
22.2.3 Market risk under the simplified standardised approach (SSA)
a. Template MR3 - Market risk under the simplified standardised approach
22.2.1 General information about market risk:
Table MRA: General qualitative disclosure requirements related to market risk Purpose: Provide a description of the risk management objectives and policies for market risk as defined in SMAR3.1. Scope of application: The table is mandatory for all banks that are subject to the market risk framework. Content: Quantitative information. Frequency: Annual. Format: Flexible.
Banks must describe their risk management objectives and policies for market risk according to the framework as follows:
(a)
Strategies and processes of the bank, which must include an explanation and/or a description of:
•
The bank's strategic objectives in undertaking trading activities, as well as the processes implemented to identify, measure, monitor and control the bank's market risks, including policies for hedging risk and the strategies/processes for monitoring the continuing effectiveness of hedges.• Policies for determining whether a position is designated as trading, including the definition of stale positions and the risk management policies for monitoring those positions. In addition, banks should describe cases where instruments are assigned to the trading or banking book contrary to the general presumptions of their instrument category and the market and gross fair value of such cases, as well as cases where instruments have been moved from one book to the other since the last reporting period, including the gross fair value of such cases and the reason for the move. • Description of internal risk transfer activities, including the types of internal risk transfer desk (SMAR5)
(b)
The structure and organisation of the market risk management function, including a description of the market risk governance structure established to implement the strategies and processes of the bank discussed in row (a) above.(c) The scope and nature of risk reporting and/or measurement systems.
Table MR1: Market risk under the standardised approachPurpose: Provide the components of the capital requirements under the standardised approach for market risk. Scope of application: The template is mandatory for banks having part or all of their market risk capital requirements measured according to the standardised approach. For banks that use the internal models approach (IMA), the standardised approach capital requirement in this template must be calculated based on the portfolios in trading desks that do not use the IMA (ie trading desks that are not deemed eligible to use the IMA per the terms of SMAR10.4). Content: Capital requirements (as defined in SMAR6 to SMAR9). Frequency: Semiannual. Format: Fixed. Additional rows can be added for the breakdown of other risks. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant change over the reporting period and the key drivers of such changes. In particular, the narrative should inform about changes in the scope of application, including changes due to trading desks for which capital requirements are calculated using the standardised approach. a Capital requirement in standardised approach 1 General interest rate risk 2 Equity risk 3 Commodity risk 4 Foreign exchange risk 5 Credit spread risk - non-securitisations 6 Credit spread risk - securitisations (non-correlation trading portfolio) 7 Credit spread risk - securitisation (correlation trading portfolio) 8 Default risk - non-securitisations 9 Default risk - securitisations (non-correlation trading portfolio) 10 Default risk - securitisations (correlation trading portfolio) 11 Residual risk add-on 12 Total
Linkages across templates
[MR1 12/a] is equal to [OV1 21/c] 22.2.2 Market risk under the internal models approach (IMA):
Table MRB: Qualitative disclosures for banks using the IMA Purpose: Provide the scope, main characteristics and key modelling choices of the different models used for the capital requirement computation of market risks using the IMA. Scope of application: The table is mandatory for all banks using the IMA to calculate the market risk capital requirements. To provide meaningful information to users on a bank’s use of internal models, the bank must describe the main characteristics of the models used at the group-wide level (according to the scope of regulatory consolidation) and explain the extent to which they represent all the models used at the group-wide level. The commentary must include the percentage of capital requirements covered by the models described for each of the regulatory models (expected shortfall (ES), default risk capital (DRC) requirement and stressed expected shortfall (SES) for non-modellable risk factors (NMRFs)). Content: Quantitative information. Frequency: Annual. Format: Flexible.
(A)
Banks must provide a general description of the trading desk structure (as defined in SMAR4) and types of instruments included in the IMA trading desks.
(B)
For ES models, banks must provide the following information:
(a)
A description of trading desks covered by the ES models. Where applicable, banks must also describe the main trading desks not included in ES regulatory calculations (due to lack of historical data or model constraints) and treated under other measures (such as specific treatments allowed in some jurisdictions).(b) The soundness criteria on which the internal capital adequacy assessment is based (eg forward-looking stress testing) and a description of the methodologies used to achieve a capital adequacy assessment that is consistent with the soundness standards. (c) A general description of the ES model(s). For example, banks may describe whether the model(s) is (are) based on historical simulation, Monte Carlo simulations or other appropriate analytical methods and the observation period for ES based on stressed observations (ESR,S). (d) The frequency by which model data is updated. (e) A description of the ES calculation based on current and stressed observations. For example, banks should describe the reduced set of risk factors used to calibrate the period of stress the share of the variations in the full ES that is explained by the reduced set of risk factors, and the observation period used to identify the most stressful 12 months.
(C)
SES
(a)
A general description of each methodology used to achieve a capital assessment for categories of NMRFs that is consistent with the required soundness standard.
(D)
Banks using internal models to determine the DRC must provide the following information:
(a)
A general description of the methodology: Information about the characteristics and scope of the value-at-risk (VaR) and whether different models are used for different exposure classes. For example, banks may describe the range of probability of default (PD) by obligors on the different types of positions, the approaches used to correct market-implied PDs as applicable, the treatment of netting, basis risk between long and short exposures of different obligors, mismatch between a position and its hedge and concentrations that can arise within and across product classes during stressed conditions.(b) The methodology used to achieve a capital assessment that is consistent with both the required soundness standard and SMAR13.18 to SMAR13.39.
(E)
Validation of models and modelling processes
(a)
The approaches used in the validation of the models and modelling processes, describing general approaches used and the types of assumptions and benchmarks on which they rely.Table MR2: Market risk for banks using the IMA Purpose: Provide the components of the capital requirement under the IMA for market risk. Scope of application: The template is mandatory for banks using the IMA for part or all of their market risk for regulatory capital calculations. Content: Capital requirement calculation (as defined in SMAR13) at the group-wide level (according to the scope of regulatory consolidation). Frequency: Quarterly. Format: Fixed. Accompanying narrative: Banks must report the components of their total capital requirement that are included for their most recent measure and the components that are included for their average of the previous 60 days for ES, IMCC and SES, and 12 weeks for DRC. Banks must also provide a comparison of VaR estimates with actual gains/losses experienced by the bank, with analysis of important “outliers” in backtest results. Banks are also expected to include the corresponding figures at the previous quarter in this template and explain any significant changes in the current figures in the narrative section. a b c d e f g At the current quarter At the previous quarter Risk measure: for previous 60 days / 12 weeks: Number of backtesting exceptions Risk measure: for previous 60 days / 12 weeks Most recent Average High Low VaR measure 99.0% Most recent Average 1 Unconstrained expected shortfall 2 ES for the regulatory risk classes General interest rate risk 3 Equity risk 4 Commodity risk 5 Foreign exchange risk 6 Credit spread risk 7 Constrained expected shortfall 8 IMCC (0.5*Unconstrained ES+0.5*constrained risk class ES) 9 Capital requirement for non-modellable risk factors; SES 10 Default risk capital requirement 11 Capital surcharge for amber trading desks 12 Capital requirements for green and amber trading desks (including capital surcharge) 13 Total SA capital requirements for trading desks ineligible to use the IMA as reported in MR1 (CU) 14 Difference in capital requirements under the IMA and SA for green and amber trading desks 15 SA capital requirement for all trading desks (including those subject to IMA) 16 Total market risk capital requirement: min(12+13; 15)+max(0, 14) Definitions and instructions
Row Number Explanation 1 Unconstrained expected shortfall: Expected shortfall (ES) as defined in SMAR13.1 to SMAR13.12, calculated without supervisory constraints on cross-risk factor correlations. 7 Constrained expected shortfall: ES as defined in SMAR13.1 to SMAR13.12, calculated in accordance with SMAR13.14. The constrained ES disclosed should be the sum of partial expected shortfall capital requirements (ie all other risk factors should be held constant) for the range of broad regulatory risk factor classes (interest rate risk, equity risk, foreign exchange risk, commodity risk and credit spread risk). 9 Capital requirement for non-modellable risk factors: aggregate regulatory capital measure calculated in accordance with SMAR13.16 and SMAR13.17, for risk factors in model-eligible trading desks that are deemed non-modellable in accordance with SMAR10.4. 10 Default risk capital (DRC) requirement: in accordance with SMAR13.18, measure of the default risk of trading book positions, except those subject to standardised capital requirements. This covers, inter alia, sovereign exposures (including those denominated in the sovereign's domestic currency), equity positions and defaulted debt positions. 11 Capital surcharge for amber trading desks: capital surcharge for eligible trading desks that is in the P&L attribution test “amber zone”, calculated in accordance with SMAR13.45. 12 Subtotal for green and amber trading desks: (CA+DRC) + Capital surcharge, in accordance with SMAR13.41 to SMAR13.43; SMAR13.22; and SMAR13.45. Row 12= max[8/a+9/a; multiplier*8/b+9/b]+max[10/a; 10/b]+11. 13 Total SA capital requirements for trading desks ineligible to use the IMA (CU): standardised approach (SA) capital requirements for trading desks that are either out of scope for model approval or that have been deemed ineligible to use the IMA, corresponding to the total capital requirement under the SA as reported in row 12 of Template MR1. 14 Difference in capital requirements under the IMA and SA for green and amber trading desks: capital requirements for green and amber trading desks under the IMA (IMAG,A) – capital requirements for green and amber trading desks under SA (SAG,A) in accordance with SMAR13.45). 15 SA capital requirement for all trading desks (including those subject to the IMA): the most recent standardised approach capital requirement for all instruments across all trading desks, regardless of whether those trading desks are eligible for the IMA, as set out in SMAR13.43 and SMAR3.10(1). 16 Total market risk capital requirement: the total capital requirement is calculated as set out in SMAR13.43
Linkages across templates
[MR2:16 minus MR2:13] is equal to [OV1 22/c]
[MR2:16 minus MR2:13] x 12.5 is equal to [CMS1 5/a] (The linkage to “Template CMS1: Comparison of modelled and standardised RWA at risk level” will not hold if a bank using the standardised approach for market risk also uses SEC-IRBA and/or SEC-IAA when determining the default risk charge component for securitisations held in the trading book.)
[MR2:13] x 12.5 is equal to [CMS1 5/b] (The linkage to “Template CMS1: Comparison of modelled and standardised RWA at risk level” will not hold if a bank using the standardised approach for market risk also uses SEC-IRBA and/or SEC-IAA when determining the default risk charge component for securitisations held in the trading book.)
[MR2:16] x 12.5 is equal to [CMS1 5/c]
[MR2:15] x 12.5 is equal to [CMS1 5/d] (The linkage to “Template CMS1: Comparison of modelled and standardised RWA at risk level” will not hold if an AI using the standardised approach for market risk also uses SEC-IRBA and/or SEC-IAA when determining the default risk charge component for securitisations held in the trading book.)
22.2.3 Market risk under the simplified standardised approach (SSA)Table MR3: Market risk under the simplified standardised approach Purpose: Provide the components of the capital requirement under the simplified standardised approach for market risk. Scope of application: The template is mandatory for banks that use the simplified standardised approach to determine market risk capital requirements. Content: Capital requirement (as defined in SMAR14 of the market risk framework). Frequency: Semiannual. Format: Fixed. Additional rows can be added for the breakdown of other risks. Accompanying narrative: a b c d Outright products Options Simplified approach Delta-plus method Scenario approach 1 Interest rate risk 2 Equity risk 3 Commodity risk 4 RWA at end of day previous current quarter 5 Securitisation 6 Total Definitions and instructions
Row Number Explanation 5 Securitisation: specific capital requirement under SMAR14.14 a Outright products: positions in products that are not optional. This includes the capital requirement under SMAR14.3 to SMAR14.40 (interest rate risk); the capital requirement under SMAR14.41 to SMAR14.52 (equity risk); the capital requirement under SMAR14.63 to SMAR14.73 (commodities risk); and the capital requirement under SMAR14.53 to SMAR14.62 (FX risk). b Options under the simplified approach: capital requirements for option risks (non-delta risks) under SMAR14.76 from debt instruments, equity instruments, commodities instruments and foreign exchange instruments. c Options under the delta-plus method: capital requirements for option risks (non-delta risks) under SMAR14.77 to SMAR14.80 from debt instruments, equity instruments, commodities instruments and foreign exchange instruments. d Options under the scenario approach: capital requirements for option risks (non-delta risks) under SMAR14.81 to SMAR14.86 from debt instruments, equity instruments, commodities instruments and foreign exchange instruments. 23. Credit Valuation Adjustment Risk
23.1 The disclosure requirements related in this section are required to be completed by banks when the materiality threshold stated on SAMA's Revised Risk-based Capital Charge for Counterparty Credit Risk (CCR) issued as part of its adoption of Basel III post-crisis final reforms, paragraph (11.9) is satisfied.
23.2 The disclosure requirements under this section are:
23.2.1 General information about CVA risk:
a. Table CVAA - General qualitative disclosure requirements related to CVA
23.2.2 CVA risk under the basic approach (BA-CVA):
a. Template CVA1 - The reduced basic approach for CVA (BA-CVA)
b. Template CVA2 - The full basic approach for CVA (BA-CVA)
23.2.3 CVA risk under the standardised approach (SA-CVA).
a. Table CVAB - Qualitative disclosures for banks using the SA-CVA
b. Template CVA3 - The standardised approach for CVA (SA-CVA)
c. Template CVA4 - RWA flow statements of CVA risk exposures under SA-CVA
23.2.1 General information about CVA risk:
Table CVAA: General qualitative disclosure requirements related to CVA Purpose: To provide a description of the risk management objectives and policies for CVA risk. Scope of application: The table is mandatory for all banks that are subject to CVA capital requirements, including banks which are qualified and have elected to set its capital requirement for CVA at 100% of its counterparty credit risk charge. Content: Quantitative information. Frequency: Annual. Format: Flexible.
Banks must describe their risk management objectives and policies for CVA risk as follows:
(a) An explanation and/or a description of the bank’s processes implemented to identify, measure, monitor and control the bank’s CVA risks, including policies for hedging CVA risk and the processes for monitoring the continuing effectiveness of hedges. (b) Whether the bank is eligible and has chosen to set its capital requirement for CVA at 100% of the bank's capital requirement for counterparty credit risk as applicable under SMAR14.
23.2.1 CVA risk under the basic approach (BA-CVA):
Template CVA1: The reduced basic approach for CVA (BA-CVA) Purpose: To provide the components used for the computation of RWA under the reduced BA-CVA for CVA risk. Scope of application: The template is mandatory for banks having part or all of their RWA for CVA risk measured according to the reduced BACVA. The template should be completed with only the amounts obtained from the netting sets which are under the reduced BA-CVA. Content: RWA. Frequency: Semiannual. Format: Fixed. Accompanying narrative: Banks must describe the types of hedge they use even if they are not taken into account under the reduced BA-CVA. a b Components BA-CVA RWA 1 Aggregation of systematic components of CVA risk 2 Aggregation of idiosyncratic components of CVA risk 3 Total
Definitions and instructions
Row Number Explanation 1 Aggregation of systematic components of CVA risk: RWA under perfect correlation assumption (Σc SCVA c)as per SCCR11.14. 2 Aggregation of idiosyncratic components of CVA risk: RWA under zero correlation assumption (sqrt(∑c SCVAc 2 )) as per SCCR11.14. 3 Total: Kreduced as per SCCR11.14 multiplied by 12.5.
Linkages across templates
[CVA1:3/b] is equal to [OV1:10/a] if the bank only uses the reduced BA-CVA for all CVA risk exposures. Template CVA2: The full basic approach for CVA (BA-CVA) Purpose: To provide the components used for the computation of RWA under the full BA-CVA for CVA risk. Scope of application: The template is mandatory for banks having part or all of their RWA for CVA risk measured according to the full version of the BA-CVA. The template should be fulfilled with only the amounts obtained from the netting sets which are under the full BA-CVA. Content: RWA. Frequency: Semiannual. Format: Fixed. Additional rows can be inserted for the breakdown of other risks. a BA-CVA RWA 1 K Reduced 2 K Hedged 3 Total
Definitions and instructions
Row Number Explanation 1 K Reduced: Kreduced as per SCCR11.14. 2 K Hedged: Khedged as per SCCR11.21. 3 Total: Kfull as per SCCR11.20 multiplied by 12.5.
Linkages across templates:
[CVA2:3/a] is equal to [OV1:10/a] if the bank only uses the full BA-CVA for all CVA risk exposures. 23.2.1 CVA risk under the standardised approach (SA-CVA):
Table CVAB: Qualitative disclosures for banks using the SA-CVA Purpose: To provide the main characteristics of the bank's CVA risk management framework. Scope of application: The table is mandatory for all banks using the SA-CVA to calculate their RWA for CVA risk. Content: Qualitative information. Frequency: Annual. Format: Flexible.
Banks must provide the following information on their CVA risk management framework:
(a) A description of the bank's CVA risk management framework. (b) A description of how senior management is involved in the CVA risk management framework. (c) An overview of the governance of the CVA risk management framework (eg documentation, independent control unit, independent review, independence of the data acquisition from the lines of business). Template CVA3: The standardised approach for CVA (SA-CVA) Purpose: To provide the components used for the computation of RWA under the SA-CVA for CVA risk. Scope of application: The template is mandatory for banks having part or all of their RWA for CVA risk measured according to the SA-CVA. Content: RWA. Frequency: Semiannual. Format: Fixed. Additional rows can be inserted for the breakdown of other risks. a b SA-CVA RWA Number of counterparties 1 Interest rate risk 2 Foreign exchange risk 3 Reference credit spread risk 4 Equity risk 5 Commodity risk 6 Counterparty credit spread risk 7 Total (sum of rows 1 to 6)
Linkages across templates
[CVA3:7/a] is equal to [OV1:10/a] if the bank only uses the SA-CVA for all CVA risk exposures. Template CVA4: RWA flow statements of CVA risk exposures under SA-CVA Purpose: Flow statement explaining variations in RWA for CVA risk determined under the SA-CVA. Scope of application: The template is mandatory for banks using the SA-CVA. Content: RWA for CVA risk. Changes in RWA amounts over the reporting period for each of the key drivers should be based on a bank's reasonable estimation of the figure. Frequency: Quarterly. Format: Fixed. Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes. Factors behind changes could include movements in risk levels, scope changes (eg movement of netting sets between SA-CVA and BA-CVA), acquisition and disposal of business/product lines or entities or foreign currency translation movements. a 1 Total RWA for CVA at previous quarter-end 2 Total RWA for CVA at end of reporting period
Linkages across templates
[CVA4:1/a] is equal to [OV1:10/b]
[CVA4:2/a] is equal to [OV1:10/a] 24. Operational Risk
24.1 The disclosure requirements under this section are:
24.1.1 Table ORA - General qualitative information on a bank's operational risk framework
24.1.2 Template OR1 - Historical losses
24.1.3 Template OR2 - Business indicator and subcomponents
24.1.4 Template OR3 - Minimum required operational risk capital
Table ORA: General qualitative information on a bank’s operational risk framework Purpose: To describe the main characteristics and elements of a bank’s operational risk management framework. Scope of application: The table is mandatory for all banks Content: Qualitative information. Frequency: Annual. Format: Flexible. Banks must describe
a)
Their policies, frameworks and guidelines for the management of operational risk.b) The structure and organisation of their operational risk management and control function. c) Their operational risk measurement system (ie the systems and data used to measure operational risk in order to estimate the operational risk capital charge). d) The scope and main context of their reporting framework on operational risk to executive management and to the board of directors. e) The risk mitigation and risk transfer used in the management of operational risk. This includes mitigation by policy (such as the policies on risk culture, risk appetite, and outsourcing), by divesting from high-risk businesses, and by the establishment of controls. The remaining exposure can then be absorbed by the bank or transferred. For instance, the impact of operational losses can be mitigated with insurance.
Template OR1: Historical lossesPurpose: To disclose aggregate operational losses incurred over the past 10 years, based on the accounting date of the incurred losses. This disclosure informs the operational risk capital calculation. The general principle on retrospective disclosure set out in section 8.2 does not apply for this template. From the implementation date of the template onwards, disclosure of all prior periods is required, unless firms have been permitted by SAMA to use fewer years in their capital calculation on a transitional basis. Scope of application: The table is mandatory for: (i) all banks that are in the second or third business indicator (BI) bucket, regardless of whether SAMA has exercised the national discretion to set the internal loss multiplier (ILM) equal to one; and (ii) all banks in the first BI bucket which have received SAMA approval to include internal loss data to calculate their operational risk capital requirements. Content: Qualitative information. Frequency: Annual. Format: Fixed. Accompanying narrative: Banks are expected to supplement the template with narrative commentary explaining the rationale in aggregate, for new loss exclusions since the previous disclosure. Banks should disclose any other material information, in aggregate, that would help inform users as to its historical losses or its recoveries, with the exception of confidential and proprietary information, including information about legal reserves. a b c d e f g h i j k T T-1 T-2 T-3 t-4 t-5 t-6 t-7 t-8 t-9 Ten-year average Using 44,600 SAR threshold 1 Total amount of operational losses net of recoveries (no exclusions) 2 Total number of operational risk losses 3 Total amount of excluded operational risk losses 4 Total number of exclusions 5 Total amount of operational losses net of recoveries and net of excluded losses Using 446,000 SAR threshold 6 Total amount of operational losses net of recoveries (no exclusions) 7 Total number of operational risk losses 8 Total amount of excluded operational risk losses 9 Total number of exclusions 10 Total amount of operational losses net of recoveries and net of excluded losses Details of operational risk capital calculation 11 Are losses used to calculate the ILM (yes/no)? 12 If “no” in row 11, is the exclusion of internal loss data due to non-compliance with the minimum loss data standards (yes/no)? 13 Loss event threshold: 44,600 SAR or 446,000 SAR for the operational risk capital calculation if applicable
Definitions
Row 1: Based on a loss event threshold of 44,600 SAR, the total loss amount net of recoveries resulting from loss events above the loss event threshold for each of the last 10 reporting periods. Losses excluded from the operational risk capital calculation must still be included in this row.
Row 2: Based on a loss event threshold of 44,600 SAR, the total net loss amounts above the loss threshold excluded (eg due to divestitures) for each of the last 10 reporting periods.
Row 3: Based on a loss event threshold of 44,600 SAR, the total number of operational risk losses.
Row 4: Based on a loss event threshold of 44,600 SAR, the total number of exclusions.
Row 5: Based on a loss event threshold of 44,600 SAR, the total amount or operational risk losses net of recoveries and excluded losses.
Row 6: Based on a loss event threshold of 446,000 SAR, the total loss amount net of recoveries resulting from loss events above the loss event threshold for each of the last 10 reporting periods. Losses excluded from the operational risk capital calculation must still be included in this row.
Row 7: Based on a loss event threshold of 446,000 SAR, the total net loss amounts above the loss threshold excluded (eg due to divestitures) for each of the last 10 reporting periods.
Row 8: Based on a loss event threshold of 446,000 SAR, the total number of operational risk losses.
Row 9: Based on a loss event threshold of 446,000 SAR, the total number of exclusions.
Row 10: Based on a loss event threshold of 446,000 SAR, the total amount or operational risk losses net of recoveries and excluded losses.
Row 11: Indicate whether the bank uses operational risk losses to calculate the ILM. Banks using ILM=1 due to national discretion should answer no.
Row 12: Indicate whether internal loss data are not used in the ILM calculation due to non-compliance with the minimum loss data standards as referred to by SOPE7.4.1 and SOPE7.4.2. The application of any resulting multipliers must be disclosed in row 2 of Template OR3 and accompanied by a narrative.
Row 13: The loss event threshold used in the actual operational risk capital calculation (ie 44,600 SAR or 446,000 SAR) if applicable.
Columns: For rows 1 to 10, T denotes the end of the annual reporting period, T–1 the previous year-end, etc. Column (k) refers to the average annual losses net of recoveries and excluded losses over 10 years.
Notes:
Loss amounts and the associated recoveries should be reported in the year in which they were recorded in financial statements Template OR2: Business Indicator and subcomponents Purpose: To disclose the business indicator (BI) and its subcomponents, which inform the operational risk capital calculation. The general principle on retrospectiveظ disclosure set out in section 8.2 does not apply for this template. From the implementation date of this template onwards, disclosure of all prior periods is required. Scope of application: The table is mandatory for all banks. Content: Qualitative information. Frequency: Annual. Format: Fixed. Accompanying narrative: Banks are expected to supplement the template with narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes. Additional narrative is required for those banks that have received SAMA approval to exclude divested activities from the calculation of the BI. a b c BI and its subcomponents T T-1 T-2 1 Interest, lease and dividend component 1a Interest and lease income 1b Interest and lease expense 1c Interest earning assets 1d Dividend income 2 Services component 2a Fee and commission income 2b Fee and commission expense 2c Other operating income 2d Other operating expense 3 Financial component 3a Net P&L on the trading boo 3b Net P&L on the banking boo 4 BI 5 Business indicator component (BIC)
Disclosure on BI:
a 6a BI gross of excluded divested activities 6b Reduction in BI due to excluded divested activities
Definitions
Row 1: The interest, leases and dividend component (ILDC) = Min [Abs (Interest income – Interest expense); 2.25%* Interest-earning assets] + Dividend income. In the formula, all the terms are calculated as the average over three years: T, T–1 and T–2.
The interest-earning assets (balance sheet item) are the total gross outstanding loans, advances, interest-bearing securities (including government bonds) and lease assets measured at the end of each financial year.
Row 1a: Interest income from all financial assets and other interest income (includes interest income from financial and operating leases and profits from leased assets).
Row 1b: Interest expenses from all financial liabilities and other interest expenses (includes interest expense from financial and operating leases, losses, depreciation and impairment of operating leased assets)
Row 1c: Total gross outstanding loans, advances, interest-bearing securities (including government bonds) and lease assets measured at the end of each financial year.
Row 1d: Dividend income from investments in stocks and funds not consolidated in the bank’s financial statements, including dividend income from nonconsolidated subsidiaries, associates and joint ventures.
Row 2: Service component (SC) = Max (Fee and commission income; Fee and commission expense) + Max (Other operating income; Other operating expense). In the formula, all the terms are calculated as the average over three years: T, T–1 and T–2.
Row 2a: Income received from providing advice and services. Includes income received by the bank as an outsourcer of financial services.
Row 2b: Expenses paid for receiving advice and services. Includes outsourcing fees paid by the bank for the supply of financial services, but not outsourcing fees paid for the supply of non-financial services (eg logistical, IT, human resources).
Row 2c: Income from ordinary banking operations not included in other BI items but of a similar nature (income from operating leases should be excluded).
Row 2d: Expenses and losses from ordinary banking operations not included in other BI items but of a similar nature and from operational loss events (expenses from operating leases should be excluded)
Row 3: Financial component (FC) = Abs (Net P&L Trading Book) + Abs (Net P&L Banking Book). In the formula, all the terms are calculated as the average over three years: T, T–1 and T–2.
Row 3a: This comprises (i) net profit/loss on trading assets and trading liabilities (derivatives, debt securities, equity securities, loans and advances, short positions, other assets and liabilities); (ii) net profit/loss from hedge accounting; and (iii) net profit/loss from exchange differences.
Row 3b: This comprises (i) net profit/loss on financial assets and liabilities measured at fair value through profit and loss; (ii) realised gains/losses on financial assets and liabilities not measured at fair value through profit and loss (loans and advances, assets available for sale, assets held to maturity, financial liabilities measured at amortised cost); (iii) net profit/loss from hedge accounting; and (iv) net profit/loss from exchange differences.
Row 4: The BI is the sum of the three components: ILDC, SC and FC.
Row 5: Calculated by multiplying the BI by a set of regulatory determined marginal coefficients or percentages specified in section SOPE7.1.
Disclosure on BI should be reported by banks that have received SAMA approval to excluded divested activities from the calculation of the BI.
Row 6a: The BI reported in this row includes divested activities.
Row 6b: Difference between BI gross of divested activities (row 6a) and BI net of divested activities (row 4).
Columns: T denotes the end of the annual reporting period, T–1 the previous year-end, etc.
Linkages across templates
[OR2:5/a] is equal to [OR3:1/a] Template OR3: Minimum required operational risk capital Purpose: To disclose operational risk regulatory capital requirements. Scope of application: The table is mandatory for all banks. Content: Qualitative information. Frequency: Annual. Format: Fixed. a 1 Business indicator component (BIC) 2 Internal loss multiplier (ILM) 3 Minimum required operational risk capital (ORC) 4 Operational risk RWA
Definitions
Row 1: The BIC used for calculating minimum regulatory capital requirements for operational risk.
Row 2: The ILM used for calculating minimum regulatory capital requirements for operational risk (refer to SOPE7.3.4)
Row 3: Minimum Pillar 1 operational risk capital requirements. For banks using operational risk losses to calculate the ILM, this should correspond to the BIC times the ILM. For banks not using operational risk losses to calculate the ILM, this corresponds to the BIC.
Row 4: Converts the minimum Pillar 1 operational risk capital requirement into RWA. 25. Interest Rate Risk in the Banking Book
25.1 The disclosure requirements set out in this chapter are:
25.1.1 Table IRRBBA - Interest rate risk in the banking book (IRRBB) risk management objective and policies
25.1.2 Template IRRBB1 - Quantitative information on IRRBB
25.2 Table IRRBBA provides information on a bank's IRRBB risk management objective and policy. Template IRRBB1 provides quantitative IRRBB information, including the impact of interest rate shocks on their change in economic value of equity and net interest income, computed based on a set of prescribed interest rate shock scenarios.
25.3 Banks must disclose the measured changes in economic value of equity (ΔEVE) and changes in net interest income (ΔNII) under the prescribed interest rate shock scenarios set out in Basel Framework “Supervisory review process” (Interest rate risk in the banking book). In disclosing Table IRRBBA and Template IRRBB1, banks should use their own internal measurement system (IMS) to calculate the IRRBB exposure values refer to SAMA circular No. 381000040243 date 12/04/1438H on Interest Rating Risk in The Banking Book (IRRBB). Basel Framework “Supervisory review process” (Interest rate risk in the banking book) provides a standardised framework that banks may adopt as their IMS. In addition to quantitative disclosure, banks should provide sufficient qualitative information and supporting detail to enable the market and wider public to:
25.3.1 Monitor the sensitivity of the bank's economic value and earnings to changes in interest rates;
25.3.2 Understand the primary assumptions underlying the measurement produced by the bank's IMS; and
25.3.3 Have an insight into the bank's overall IRRBB objective and IRRBB management.
25.4 For the disclosure of ΔEVE:
25.4.1 Banks should exclude their own equity from the computation of the exposure level;
25.4.2 Banks should include all cash flows from all interest rate-sensitive assets, liabilities and off-balance sheet items in the banking book in the computation of their exposure.13 Banks should disclose whether they have excluded or included commercial margins and other spread components in their cash flows;
25.4.3 Cash flows should be discounted using either a risk-free rate or a risk-free rate including commercial margins and other spread components (only if the bank has included commercial margins and other spread components in its cash flows).14 Banks should disclose whether they have discounted their cash flows using a risk-free rate or a risk-free rate including commercial margins and other spread components; and
25.4.4 ΔEVE should be computed with the assumption of a run-off balance sheet, where existing banking book positions amortise and are not replaced by any new business.
25.5 In addition to the required disclosures in Table IRRBBA and Template IRRBB1, banks are encouraged to make voluntary disclosures of information on internal measures of IRRBB that would assist the market in interpreting the mandatory disclosure numbers. Table IRRBBA - IRRBB risk management objectives and policies Purpose: Provide a description of the risk management objectives and policies concerning IRRBB. Scope of application: Mandatory for all banks within the scope of application set out in Basel Framework “Supervisory review process” (Interest rate risk in the banking book). Content: Qualitative and quantitative information. Quantitative information is based on the daily or monthly average of the year or on the data as at the reporting date. Frequency: Annual. Format: Flexible. Qualitative disclosure a A description of how the bank defines IRRBB for purposes of risk control and measurement. b A description of the bank's overall IRRBB management and mitigation strategies. Examples are: monitoring of economic value of equity (EVE) and net interest income (NII) in relation to established limits, hedging practices, conduct of stress testing, outcome analysis, the role of independent audit, the role and practices of the asset and liability management committee, the bank's practices to ensure appropriate model validation, and timely updates in response to changing market conditions. c The periodicity of the calculation of the bank's IRRBB measures, and a description of the specific measures that the bank uses to gauge its sensitivity to IRRBB. d A description of the interest rate shock and stress scenarios that the bank uses to estimate changes in the economic value and in earnings. e Where significant modelling assumptions used in the bank's internal measurement systems (IMS) (ie the EVE metric generated by the bank for purposes other than disclosure, eg for internal assessment of capital adequacy) are different from the modelling assumptions prescribed for the disclosure in Template IRRBB1, the bank should provide a description of those assumptions and their directional implications and explain its rationale for making those assumptions (eg historical data, published research, management judgment and analysis). f A high-level description of how the bank hedges its IRRBB, as well as the associated accounting treatment. g A high-level description of key modelling and parametric assumptions used in calculating ΔEVE and ΔNII in Template IRRBB1, which includes:
- For ∆EVE, whether commercial margins and other spread components have been included in the cash flows used in the computation and discount rate used.
- How the average repricing maturity of non-maturity deposits has been determined (including any unique product characteristics that affect assessment of repricing behaviour).
- The methodology used to estimate the prepayment rates of customer loans, and/or the early withdrawal rates for time deposits, and other significant assumptions.
- Any other assumptions (including for instruments with behavioural optionalities that have been excluded) that have a material impact on the disclosed ΔEVE and ΔNII in Template IRRBB1, including an explanation of why these are material.
- Any methods of aggregation across currencies and any significant interest rate correlations between different currencies.
h (Optional) Any other information which the bank wishes to disclose regarding its interpretation of the significance and sensitivity of the IRRBB measures disclosed and/or an explanation of any significant variations in the level of the reported IRRBB since previous disclosures. Quantitative disclosures 1 Average repricing maturity assigned to non-maturity deposits (NMDs). 2 Longest repricing maturity assigned to NMDs. Template IRRBB1 - Quantitative information on IRRBB Purpose: Provide information on the bank's changes in economic value of equity and net interest income under each of the prescribed interest rate shock scenarios. Scope of application: Mandatory for all banks within the scope of application set out in Basel Framework “Supervisory review process” (Interest rate risk in the banking book) Content: Quantitative information. Frequency: Annual Format: Fixed. Accompanying narrative: Commentary on the significance of the reported values and an explanation of any material changes since the previous reporting period.
In reporting currency ΔEVE ΔNII Period T T-1 T T-1 Parallel up Parallel down Steepener Flattener Short rate up Short rate down Maximum Period T T-1 Tier 1 capital Definitions
For each of the supervisory prescribed interest rate shock scenarios, the bank must report for the current period and for the previous period:
(i) the change in the economic value of equity based on its IMS, using a run-off balance sheet and an instantaneous shock or based on the result of the standardised framework set on Basel Framework “Supervisory review process” (Interest rate risk in the banking book) refer to SAMA circular No. 381000040243 date 12/04/1438H on Interest Rating Risk in The Banking Book (IRRBB), and SAMA circular No. 321000027835 date 14/12/1432H on Enhancements to the ICAAP Document at end of 2011; and (ii) the change in projected NII over a forward-looking rolling 12-month period compared with the bank's own best estimate 12-month projections, using a constant balance sheet assumption and an instantaneous shock. 13 Interest rate-sensitive assets are assets which are not deducted from Common Equity Tier 1 capital and which exclude (i) fixed assets such as real estate or intangible assets as well as (ii) equity exposures in the banking book.
14 The discounting factors must be representative of a risk-free zero coupon rate. An example of an acceptable yield curve is a secured interest rate swap curve.26. Macroprudential Supervisory Measures
26.1 The disclosure requirements set out in this chapter are:
26.1.1 Template GSIB1 - Disclosure of global systemically important bank (G- SIB) indicators
26.1.2 Template CCyB1 - Geographical distribution of credit exposures used in the calculation of the bank-specific countercyclical capital buffer requirement
26.2 Template GSIB1 provides users of Pillar 3 data with details of the indicators used to assess how a G-SIB has been determined. Template GSIB1 is not required to be completed by banks unless SAMA identify the bank as G-SIB.
26.3 Template CCyB1 provides details of the calculation of a bank's countercyclical capital buffer, including details of the geographical breakdown of the bank's private sector credit exposures. Template GSIB1 - Disclosure of G-SIB indicators Purpose: Provide an overview of the indicators that feed into the Committee's methodology for assessing the systemic importance of global banks. Scope of application: The template is mandatory for banks which in the previous year have either been classified as G-SIBs, have a leverage ratio exposure measure exceeding EUR 200 billion or were included in the assessment sample by supervisory judgment (see Basel Framework “Scope and definitions” Global systemically important Banks).
For G-SIB assessment purposes, the applicable leverage ratio exposure measure definition is contained in the SLEV.
For application of this threshold, banks should use the applicable exchange rate information provided on the Basel Committee website at www.bis.org/bcbs/gsib/ . The disclosure itself is made in the bank's own currency.Content: At least the 12 indicators used in the assessment methodology of the G-SIB framework (see Basel Framework “Scope and definitions” Global systemically important Banks). Frequency: Annual. Format: Flexible. Accompanying narrative: Banks should indicate the annual reference date of the information reported as well as the date of first public disclosure. Banks should include a web link to the disclosure of the previous G-SIB assessment exercise.
Banks may supplement the template with a narrative commentary to explain any relevant qualitative characteristic deemed necessary for understanding the quantitative data. This information may include explanations about the use of estimates with a short explanation as regards the method used, mergers or modifications of the legal structure of the entity subjected to the reported data, the bucket to which the bank was allocated and changes in higher loss absorbency requirements, or reference to the Basel Committee website for data on denominators, cutoff scores and buckets.
Regardless of whether Template GSIB1 is included in the annual Pillar 3 report, a bank's annual Pillar 3 report as well as all the interim Pillar 3 reports should include a reference to the website where current and previous disclosures of Template GSIB1 can be found.
Category Individual indicator Values 1 Cross-jurisdictional activity Cross-jurisdictional claims 2 Cross-jurisdictional liabilities 3 Size Total exposures 4 Interconnectedness Intra-financial system assets 5 Intra-financial system liabilities 6 Securities outstanding 7 Substitutability/ Financial institution infrastructure Assets under custody 8 Payment activity 9 Underwritten transactions in debt and equity markets 10 Complexity Notional amount of over-the-counter derivatives 11 Level 3 assets 12 Trading and available for sale securities Definitions and instructions
The template must be completed according to the instructions and definitions for the corresponding rows in force at the disclosure's reference date, which is based on the Committee's G-SIB identification exercise.Template CCyB1 - Geographical distribution of credit exposures used in the calculation of the bank-specific countercyclical capital buffer requirement Purpose: Provide an overview of the geographical distribution of private sector credit exposures relevant for the calculation of the bank's countercyclical capital buffer. Scope of application: The template is mandatory for all banks subject to a countercyclical capital buffer requirement based on the jurisdictions in which they have private sector credit exposures subject to a countercyclical capital buffer requirement compliant with the Basel standards. Only banks with exposures to jurisdictions in which the countercyclical capital buffer rate is higher than zero should disclose this template. Content: Private sector credit exposures and other relevant inputs necessary for the computation of the bank-specific countercyclical capital buffer rate. Frequency: Semiannual. Format: Flexible. Columns and rows might be added or removed to fit with the domestic implementation of the countercyclical capital buffer and thereby provide information on any variables necessary for its computation. A column or a row may be removed if the information is not relevant to the domestic implementation of the countercyclical capital buffer framework. Accompanying narrative: For the purposes of the countercyclical capital buffer, banks should use, where possible, exposures on an "ultimate risk" basis. They should disclose the methodology of geographical allocation used, and explain the jurisdictions or types of exposures for which the ultimate risk method is not used as a basis for allocation. The allocation of exposures to jurisdictions should be made taking into consideration the clarifications provided by Basel Framework “Risk-based capital requirements” (Buffers above the regulatory minimum). Information about the drivers for changes in the exposure amounts and the applicable jurisdiction-specific rates should be summarised.
a b c d e Geographical breakdown Countercyclical capital buffer rate Exposure values and/or risk-weighted assets (RWA) used in the computation of the countercyclical capital buffer Bank-specific countercyclical capital buffer rate Countercyclical capital buffer amount Exposure values RWA (Home) Country 1 Country 2 Country 3 ⋮ Country N Sum Total Definitions and instructions
Unless otherwise provided for in the domestic implementation of the countercyclical capital buffer framework, private sector credit exposures relevant for the calculation of the countercyclical capital buffer (relevant private sector credit exposures) refer to exposures to private sector counterparties which attract a credit risk capital charge in the banking book, and the risk-weighted equivalent trading book capital charges for specific risk, the incremental risk charge and securitisation. Interbank exposures and exposures to the public sector are excluded, but non-bank financial sector exposures are included.
Country: Country in which the bank has relevant private sector credit exposures, and which has set a countercyclical capital buffer rate greater than zero that was applicable during the reporting period covered by the template.
Sum: Sum of private sector credit exposures or RWA for private sector credit exposures, respectively, in jurisdictions with a non-zero countercyclical capital buffer rate.Total: Total of private sector credit exposures or RWA for private sector credit exposures, respectively, across all jurisdictions to which the bank is exposed, including jurisdictions with no countercyclical capital buffer rate or with a countercyclical capital buffer rate set at zero, and value of the bank-specific countercyclical capital buffer rate and resulting countercyclical capital buffer amount.
Countercyclical capital buffer rate: Countercyclical capital buffer rate set by SAMA in question and in force during the period covered by the template or, where applicable, the higher countercyclical capital buffer rate set for the country in question by SAMA. Countercyclical capital buffer rates that were set by SAMA, but are not yet applicable in the country in question at the disclosure reference date (pre-announced rates) must not be reported.
Total exposure value: If applicable, total private sector credit exposures across all jurisdictions to which the bank is exposed, including jurisdictions with no countercyclical capital buffer rate or with a countercyclical capital buffer rate set at zero.
Total RWA: If applicable, total value of RWA for relevant private sector credit exposures, across all jurisdictions to which the bank is exposed, including jurisdictions with no countercyclical capital buffer rate or with a countercyclical capital buffer rate set at zero.
Bank-specific countercyclical capital buffer rate: Countercyclical capital buffer that varies between zero and 2.5% or, where appropriate, above 2.5% of total RWA calculated in accordance with SACAP9.2 (B) and (C) as a weighted average of the countercyclical capital buffer rates that are being applied in jurisdictions where the relevant credit exposures of the bank are located and reported in rows 1 to N. This figure (ie the bank-specific countercyclical capital buffer rate) may not be deduced from the figures reported in this template as private sector credit exposures in jurisdictions that do not have a countercyclical capital buffer rate, which form part of the equation for calculating the figure, are not required to be reported in this template.
Countercyclical capital buffer amount: Amount of Common Equity Tier 1 capital held to meet the countercyclical capital buffer requirement determined in accordance with SACAP9.2 (B) and (C).
Linkages across templates
[CCyB1:Total/d] is equal to [KM1:9/a] for the semiannual disclosure of KM1, and [KM1:9/b] for the quarterly disclosure of KM1
[CCyB1:Total/d] is equal to [CC1:66/a] (for all banks) or [TLAC1:30/a] (for G-SIBs)27. Leverage Ratio
27.1 The disclosure requirements set out in this chapter are:
27.1.1 Template LR1 - Summary comparison of accounting assets vs leverage ratio exposure measure
27.1.2 Template LR2 - Leverage ratio common disclosure template
27.2 Template LR1 provides a reconciliation of a bank's total assets as published in its financial statements to the leverage ratio exposure measure, and Template LR2 provides a breakdown of the components of the leverage ratio exposure measure. Template LR1- Summary comparison of accounting assets vs leverage ratio exposure measure Purpose: To reconcile the total assets in the published financial statements with the leverage ratio exposure measure. Scope of application: The table is mandatory for all banks. Content: Quantitative information. The leverage ratio standard of the Basel framework (SLEV) follows the same scope of regulatory consolidation as used for the risk-based capital requirements standard Basel Framework “Risk-based capital requirements”). Disclosures should be reported on a quarter- end basis. However, banks may, subject to approval from or due to requirements specified by SAMA, use more frequent calculations (eg daily or monthly averaging). Banks are required to include the basis for their disclosures (eg quarter-end, daily averaging or monthly averaging, or a combination thereof). Frequency: Quarterly. Format: Fixed. Accompanying narrative: Banks are required to disclose and detail the source of material differences between their total balance sheet assets, as reported in their financial statements, and their leverage ratio exposure measure. a 1 Total consolidated assets as per published financial statements 2 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation 3 Adjustment for securitised exposures that meet the operational requirements for the recognition of risk transference 4 Adjustments for temporary exemption of central bank reserves (if applicable) 5 Adjustment for fiduciary assets recognised on the balance sheet pursuant to the operative accounting framework but excluded from the leverage ratio exposure measure 6 Adjustments for regular-way purchases and sales of financial assets subject to trade date accounting 7 Adjustments for eligible cash pooling transactions 8 Adjustments for derivative financial instruments 9 Adjustment for securities financing transactions (ie repurchase agreements and similar secured lending) 10 Adjustment for off-balance sheet items (ie conversion to credit equivalent amounts of off-balance sheet exposures) 11 Adjustments for prudent valuation adjustments and specific and general provisions which have reduced Tier 1 capital 12 Other adjustments 13 Leverage ratio exposure measure Definitions and instructions
Row Number Explanation 1 The bank's total consolidated assets as per published financial statements. 2 Where a banking, financial, insurance or commercial entity is outside the regulatory scope of consolidation, only the amount of the investment in the capital of that entity (ie only the carrying value of the investment, as opposed to the underlying assets and other exposures of the investee) shall be included in the leverage ratio exposure measure. However, investments in those entities that are deducted from the bank's CET1 capital or from Additional Tier 1 capital in accordance with SACAP4.3 to SACAP4.4 may also be deducted from the leverage ratio exposure measure. As these adjustments reduce the total leverage ratio exposure measure, they shall be reported as a negative amount. 3 This row shows the reduction of the leverage ratio exposure measure due to the exclusion of securitised exposures that meet the operational requirements for the recognition of risk transference according SCRE18.24. As these adjustments reduce the total leverage ratio exposure measure, they shall be reported as a negative amount. 4 Adjustments related to the temporary exclusion of central bank reserves from the leverage ratio exposure measure, if enacted by SAMA to facilitate the implementation of monetary policies as per SLEV6.6. As these adjustments reduce the total leverage ratio exposure measure, they shall be reported as a negative amount. 5 This row shows the reduction of the consolidated assets for fiduciary assets that are recognised on the bank's balance sheet pursuant to the operative accounting framework and which meet the de-recognition criteria of IAS 39 / IFRS 9 or the IFRS 10 de-consolidation criteria. As these adjustments reduce the total leverage ratio exposure measure, they shall be reported as a negative amount. 6 Adjustments for regular-way purchases and sales of financial assets subject to trade date accounting. The adjustment reflects (i) the reverse- out of any offsetting between cash receivables for unsettled sales and cash payables for unsettled purchases of financial assets that may be recognised under the applicable accounting framework, and (ii) the offset between those cash receivables and cash payables that are eligible per the criteria specified in SLEV7.1.4 (i), (ii). If this adjustment leads to an increase in exposure, it shall be reported as a positive amount. If this adjustment leads to a decrease in exposure, it shall be reported as a negative amount. 7 Adjustments for eligible cash-pooling transactions. The adjustment is the difference between the accounting value of cash-pooling transactions and the treatments specified in SLEV7.1.5. If this adjustment leads to an increase in exposure, it shall be reported as a positive amount. If this adjustment leads to a decrease in exposure, it shall be reported as a negative amount. 8 Adjustments related to derivative financial instruments. The adjustment is the difference between the accounting value of the derivatives recognised as assets and the leverage ratio exposure value as determined by application of SLEV7.2.1 to SLEV7.2.2 ((i) to (v)) and SLEV7.2.3 to SLEV7.2.15. If this adjustment leads to an increase in exposure, institutions shall disclose this as a positive amount. If this adjustment leads to a decrease in exposure, institutions shall disclose this as a negative amount. 9 Adjustments related to Securities Financing Transactions (SFTs) (ie repurchase agreements and other similar secured lending). The adjustment is the difference between the accounting value of the SFTs recognised as assets and the leverage ratio exposure value as determined by application of SLEV7.3.1, SLEV7.3.3 and SLEV7.3.4 to SLEV7.3.5. If this adjustment leads to an increase in the exposure, institutions shall disclose this as a positive amount. If this adjustment leads to a decrease in exposure, institutions shall disclose this as a negative amount. 10 The credit equivalent amount of off-balance sheet items determined by applying the relevant credit conversion factors to the nominal value of the off-balance sheet item, as specified in SLEV7.4.2. (iii), (iv), and SLEV7.4.3 (x) As these amounts increase the total leverage ratio exposure measure, they shall be reported as a positive amount. 11 Adjustments for prudent valuation adjustments and specific and general provisions that have reduced Tier 1 capital. This adjustment reduces the leverage ratio exposure measure by the amount of prudent valuation adjustments and by the amount of specific and general provisions that have reduced Tier 1 capital as determined by SLEV6.2 and SLEV7.1.2 and SLEV7.4.2 (iv), respectively. This adjustment shall be reported as a negative amount. 12 Any other adjustments. If these adjustments lead to an increase in the exposure, institutions shall report this as a positive amount. If these adjustments lead to a decrease in exposure, the institutions shall disclose this as a negative amount. 13 The leverage ratio exposure, which should be the sum of the previous items. Linkages across templates[LR1:13/a] is equal to [LR2:24/a] (depending on basis of calculation)
Template LR2- Leverage ratio common disclosure templatePurpose: To provide a detailed breakdown of the components of the leverage ratio denominator, as well as information on the actual leverage ratio, minimum requirements and buffers. Scope of application: The table is mandatory for all banks. Content: Quantitative information. Disclosures should be on a quarter-end basis except where explicitly noted in the instructions for certain rows. However, banks may, subject to approval from or due to requirements specified by SAMA, use more frequent calculations (eg daily or monthly averaging). Banks are required to include the frequency of calculation for their disclosures (eg quarter-end, daily averaging or monthly averaging, or a combination thereof). Frequency: Quarterly. Format: Fixed. Accompanying narrative: Banks must describe the key factors that have had a material impact on the leverage ratio for this reporting period compared with the previous reporting period. Banks must also describe the key factors that explain any material differences between the amounts of securities financing transactions (SFTs) that are included in the bank's Pillar 1 leverage ratio exposure measure and the mean values of SFTs that are disclosed in row 28.
a b T T-1 On-balance sheet exposures 1 On-balance sheet exposures (excluding derivatives and securities financing transactions (SFTs), but including collateral) 2 Gross-up for derivatives collateral provided where deducted from balance sheet assets pursuant to the operative accounting framework 3 (Deductions of receivable assets for cash variation margin provided in derivatives transactions) 4 (Adjustment for securities received under securities financing transactions that are recognised as an asset) 5 (Specific and general provisions associated with on-balance sheet exposures that are deducted from Basel III Tier 1 capital) 6 (Asset amounts deducted in determining Basel III Tier 1 capital and regulatory adjustments) 7 Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of rows 1 to 6) Derivative exposures 8 Replacement cost associated with all derivatives transactions (where applicable net of eligible cash variation margin and/or with bilateral netting) 9 Add-on amounts for potential future exposure associated with all derivatives transactions 10 (Exempted central counterparty (CCP) leg of client-cleared trade exposures) 11 Adjusted effective notional amount of written credit derivatives 12 (Adjusted effective notional offsets and add-on deductions for written credit derivatives) 13 Total derivative exposures (sum of rows 8 to 12) Securities financing transaction exposures 14 Gross SFT assets (with no recognition of netting), after adjustment for sale accounting transactions 15 (Netted amounts of cash payables and cash receivables of gross SFT assets) 16 Counterparty credit risk exposure for SFT assets 17 Agent transaction exposures 18 Total securities financing transaction exposures (sum of rows 14 to 17) Other off-balance sheet exposures 19 Off-balance sheet exposure at gross notional amount 20 (Adjustments for conversion to credit equivalent amounts) 21 (Specific and general provisions associated with off-balance sheet exposures deducted in determining Tier 1 capital) 22 Off-balance sheet items (sum of rows 19 to 21) Capital and total exposures 23 Tier 1 capital 24 Total exposures (sum of rows 7, 13, 18 and 22) Leverage ratio 25 Leverage ratio (including the impact of any applicable temporary exemption of central bank reserves) 25a Leverage ratio (excluding the impact of any applicable temporary exemption of central bank reserves) 26 National minimum leverage ratio requirement 27 Applicable leverage buffers Disclosures of mean values 28 Mean value of gross SFT assets, after adjustment for sale accounting transactions and netted of amounts of associated cash payables and cash receivables 29 Quarter-end value of gross SFT assets, after adjustment for sale accounting transactions and netted of amounts of associated cash payables and cash receivables 30 Total exposures (including the impact of any applicable temporary exemption of central bank reserves) incorporating mean values from row 28 of gross SFT assets (after adjustment for sale accounting transactions and netted of amounts of associated cash payables and cash receivables) 30a Total exposures (excluding the impact of any applicable temporary exemption of central bank reserves) incorporating mean values from row 28 of gross SFT assets (after adjustment for sale accounting transactions and netted of amounts of associated cash payables and cash receivables) 31 Basel III leverage ratio (including the impact of any applicable temporary exemption of central bank reserves) incorporating mean values from row 28 of gross SFT assets (after adjustment for sale accounting transactions and netted of amounts of associated cash payables and cash receivables) 31a Basel III leverage ratio (excluding the impact of any applicable temporary exemption of central bank reserves) incorporating mean values from row 28 of gross SFT assets (after adjustment for sale accounting transactions and netted of amounts of associated cash payables and cash receivables) Definitions and instructionsSFTs: transactions such as repurchase agreements, reverse repurchase agreements, securities lending and borrowing, and margin lending transactions, where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements.Capital measure: The capital measure for the leverage ratio is the Tier 1 capital of the risk-based capital framework as defined in the definition of capital standard (SACAP) taking account of the transitional arrangements.Row Number Explanation 1 Banks must include all balance sheet assets in their exposure measure, including on balance sheet derivatives collateral and collateral for SFTs, with the exception of on balance sheet derivative and SFT assets that are included in rows 8 to 18. Derivatives and SFTs collateral refer to either collateral received or collateral provided (or any associated receivable asset) accounted as a balance sheet asset. Amounts are to be reported in accordance with SLEV7.1.1 to SLEV7.1.4 and, where applicable, SLEV6.4 and SLEV6.6. 2 Grossed-up amount of any collateral provided in relation to derivative exposures where the provision of that collateral has reduced the value of the balance sheet assets under the bank's operative accounting framework, in accordance with SLEV7.2.3(ii). 3 Deductions of receivable assets in the amount of the cash variation margin provided in derivatives transactions where the posting of cash variation margin has resulted in the recognition of a receivable asset under the bank's operative accounting framework. As the adjustments in this row reduce the exposure measure, they shall be reported as negative figures. 4 Adjustment for securities received under a securities financing transaction where the bank has recognised the securities as an asset on its balance sheet. These amounts are to be excluded from the exposure measure in accordance with SLEV7.3.3(i).As the adjustments in this row reduce the exposure measure, they shall be reported as negative figures.5 Amounts of general and specific provisions that are deducted from Tier 1 capital which may be deducted from the exposure measure in accordance with SLEV7.1.2.As the adjustments in this row reduce the exposure measure, they shall be reported as negative figures.6 All other balance sheet asset amounts deducted from Tier 1 capital and other regulatory adjustments associated with on-balance sheet assets as specified in SLEV6.2.As the adjustments in this row reduce the exposure measure, they shall be reported as negative figures.7 Sum of rows 1 to 6. 8 Replacement cost (RC) associated with all derivatives transactions (including exposures resulting from direct transactions between a client and a CCP where the bank guarantees the performance of its clients' derivative trade exposures to the CCP). Where applicable, this amount should be net of cash variation margin received (as set out in SLEV7.2.4(ii), and with bilateral netting (as set out in SLEV7.2.2(vi) to (vii). This amount should be reported with the 1.4 alpha factor applied as specified in SLEV7.2.2 (ii) and (v) 9 Add-on amount for the potential future exposure (PFE) of all derivative exposures calculated in accordance with SLEV7.2.2 (ii) and (v). This amount should be reported with the 1.4 alpha factor applied as specified in SLEV7.2.2 (ii) and (v). 10 Trade exposures associated with the CCP leg of derivatives transactions resulting from client-cleared transactions or which the clearing member, based on the contractual arrangements with the client, is not obligated to reimburse the client in respect of any losses suffered due to changes in the value of its transactions in the event that a qualifying central counterparty (QCCP) defaults.
As the adjustments in this row reduce the exposure measure, they shall be reported as negative figures.11 The effective notional amount of written credit derivatives which may be reduced by the total amount of negative changes in fair value amounts that have been incorporated into the calculation of Tier 1 capital with respect to written credit derivatives according to SLEV7.2.9. 12 This row comprises:- The amount by which the notional amount of a written credit derivative is reduced by a purchased credit derivative on the same reference name according to SLEV7.2.9.
- The deduction of add-on amounts for PFE in relation to written credit derivatives determined in accordance with SLEV7.2.15.
As the adjustments in this row reduce the exposure measure, they shall be reported as negative figures.13 Sum of rows 8 to 12. 14 The gross amount of SFT assets without recognition of netting, other than novation with QCCPs, determined in accordance with SLEV7.3.3, adjusted for any sales accounting transactions in accordance with SLEV7.3.4. 15 The cash payables and cash receivables of gross SFT assets with netting determined in accordance with SLEV7.3.3(i)(b). As these adjustments reduce the exposure measure, they shall be reported as negative figures. 16 The amount of the counterparty credit risk add-on for SFTs determined in accordance with SLEV7.3.3(ii). 17 The amount for which the bank acting as an agent in a SFT has provided an indemnity or guarantee determined in accordance with SLEV7.3.5. 18 Sum of rows 14 to 17. 19 Total off-balance sheet exposure amounts (excluding off-balance sheet exposure amounts associated with SFT and derivative transactions) on a gross notional basis, before any adjustment for credit conversion factors (CCFs). 20 Reduction in gross amount of off-balance sheet exposures due to the application of CCFs as specified in SLEV7.4.3(iv) to (x). As these adjustments reduce the exposure measure, they shall be reported as negative figures. 21 Amounts of specific and general provisions associated with off-balance sheet exposures that are deducted from Tier 1 capital, the absolute value of which is not to exceed the sum of rows 19 and 20. As these adjustments reduce the exposure measure, they shall be reported as negative figures. 22 Sum of rows 19 to 21. 23 The amount of Tier 1 capital of the risk-based capital framework as defined in the definition of capital standard (SACAP) taking account of the transitional arrangements. 24 Sum of rows 7, 13, 18 and 22. 25 The leverage ratio is defined as the Tier 1 capital measure divided by the exposure measure, with this ratio expressed as a percentage. 25a If a bank's leverage ratio exposure measure is subject to a temporary exemption of central bank reserves, this ratio is defined as the Tier 1 capital measure divided by the sum of the exposure measure and the amount of the central bank reserves exemption, with this ratio expressed as a percentage.
If the bank's leverage ratio exposure measure is not subject to a temporary exemption of central bank reserves, this ratio will be identical to the ratio reported in row 25.26 The minimum leverage ratio requirement applicable to the bank. 27 Total applicable leverage buffers. To include the G-SIB leverage ratio buffer requirement and any other applicable buffers. 28 Mean of the sums of rows 14 and 15, based on the sums calculated as of each day of the reporting quarter 29 If rows 14 and 15 are based on quarter-end values, this amount is the sum of rows 14 and 15.
If rows 14 and 15 are based on averaged values, this amount is the sum of quarter-end values corresponding to the content of rows 14 and 15.30 Total exposure measure (including the impact of any applicable temporary exemption of central bank reserves), using mean values calculated as of each day of the reporting quarter for the amounts of the exposure measure associated with gross SFT assets (after adjustment for sale accounting transactions and netted of amounts of associated cash payables and cash receivables). 30a Total exposure measure (excluding the impact of any applicable temporary exemption of central bank reserves), using mean values calculated as of each day of the reporting quarter for the amounts of the exposure measure associated with gross SFT assets (after adjustment for sale accounting transactions and netted of amounts of associated cash payables and cash receivables). If the bank's leverage ratio exposure measure is not subject to a temporary exemption of central bank reserves, this value will be identical to the value reported in row 30. 31 Tier 1 capital measure divided by the exposure measure (including the impact of any applicable temporary exemption of central bank reserves), using mean values calculated as of each day of the reporting quarter for the amounts of the exposure measure associated with gross SFT assets (after adjustment for sale accounting transactions and netted of amounts of associated cash payables and cash receivables). 31a Tier 1 capital measure divided by the exposure measure (excluding the impact of any applicable temporary exemption of central bank reserves), using mean values calculated as of each day of the reporting quarter for the amounts of the exposure measure associated with gross SFT assets (after adjustment for sale accounting transactions and netted of amounts of associated cash payables and cash receivables). If the bank's leverage ratio exposure measure is not subject to a temporary exemption of central bank reserves, this ratio will be identical to the ratio reported in row 31.
Linkages across templates (valid only if the relevant rows are all disclosed on a quarter-end basis) [LR2:23/a] is equal to [KM1:2/a]
[LR2:24/a] is equal to [KM1:13/a]
[LR2:25/a] is equal to [KM1:14/a]
[LR2:25a/a] is equal to [KM1:14b/a]
[LR2:31/a] is equal to [KM1:14c/a]
[LR2:31a/a] is equal to [KM1:14d/a]28. Liquidity
28.1 The disclosure requirements set out in this chapter are:
28.1.1 Table LIQA - Liquidity risk management
28.1.2 Template LIQ1 - Liquidity coverage ratio (LCR)
28.1.3 Template LIQ2 - Net stable funding ratio (NSFR)
28.2 Table LIQA provides information on a bank's liquidity risk management framework which it considers relevant to its business model and liquidity risk profile, organisation and functions involved in liquidity risk management. Template LIQ1 presents a breakdown of a bank's cash outflows and cash inflows, as well as its available high-quality liquid assets under its LCR. Template LIQ2 provides details of a bank's NSFR and selected details of its NSFR components. Table LIQA - Liquidity risk management Purpose: Enable users of Pillar 3 data to make an informed judgment about the soundness of a bank's liquidity risk management framework and liquidity position. Scope of application: The table is mandatory for all banks. Content: Qualitative and quantitative information. Frequency: Annual. Format: Flexible. Banks may choose the relevant information to be provided depending upon their business models and liquidity risk profiles, organisation and functions involved in liquidity risk management.
Below are examples of elements that banks may choose to describe, where relevant:
Qualitative disclosures (a) Governance of liquidity risk management, including: risk tolerance; structure and responsibilities for liquidity risk management; internal liquidity reporting; and communication of liquidity risk strategy, policies and practices across business lines and with the board of directors. (b) Funding strategy, including policies on diversification in the sources and tenor of funding, and whether the funding strategy is centralised or decentralised. (c) Liquidity risk mitigation techniques. (d) An explanation of how stress testing is used. (e) An outline of the bank's contingency funding plans. Quantitative disclosures (f) Customised measurement tools or metrics that assess the structure of the bank's balance sheet or that project cash flows and future liquidity positions, taking into account off-balance sheet risks which are specific to that bank. (g) Concentration limits on collateral pools and sources of funding (both products and counterparties). (h) Liquidity exposures and funding needs at the level of individual legal entities, foreign branches and subsidiaries, taking into account legal, regulatory and operational limitations on the transferability of liquidity. (i) Balance sheet and off-balance sheet items broken down into maturity buckets and the resultant liquidity gaps.
Template LIQ1: Liquidity Coverage Ratio (LCR)Purpose: Present the breakdown of a bank's cash outflows and cash inflows, as well as its available high-quality liquid assets (HQLA), as measured and defined according to the LCR standard. Scope of application: The template is mandatory for all banks. Content: Data must be presented as simple averages of daily observations over the previous quarter (ie the average calculated over a period of, typically, 90 days) in the local currency. Frequency: Quarterly. Format: Fixed. Accompanying narrative: Banks must publish the number of data points used in calculating the average figures in the template.
In addition, a bank should provide sufficient qualitative discussion to facilitate users' understanding of its LCR calculation. For example, where significant to the LCR, banks could discuss:
- the main drivers of their LCR results and the evolution of the contribution of inputs to the LCR's calculation over time;
- intra-period changes as well as changes over time;
- the composition of HQLA;
- concentration of funding sources;
- currency mismatch in the LCR; and
- other inflows and outflows in the LCR calculation that are not captured in the LCR common template but which the institution considers to be relevant for its liquidity profile.
a b Total unweighted value
(average)Total weighted value
(average)High-quality liquid assets 1 Total HQLA Cash outflows 2 Retail deposits and deposits from small business customers, of which: 3 Stable deposits 4 Less stable deposits 5 Unsecured wholesale funding, of which: 6 Operational deposits (all counterparties) and deposits in networks of cooperative banks 7 Non-operational deposits (all counterparties) 8 Unsecured debt 9 Secured wholesale funding 10 Additional requirements, of which: 11 Outflows related to derivative exposures and other collateral requirements 12 Outflows related to loss of funding on debt products 13 Credit and liquidity facilities 14 Other contractual funding obligations 15 Other contingent funding obligations 16 TOTAL CASH OUTFLOWS Cash inflows 17 Secured lending (eg reverse repos) 18 Inflows from fully performing exposures 19 Other cash inflows 20 TOTAL CASH INFLOWS Total adjusted value 21 Total HQLA 22 Total net cash outflows 23 Liquidity Coverage Ratio (%) General explanations
Figures entered in the template must be averages of the observations of individual line items over the financial reporting period (ie the average of components and the average LCR over the most recent three months of daily positions, irrespective of the financial reporting schedule). The averages are calculated after the application of any haircuts, inflow and outflow rates and caps, where applicable. For example:
where T equals the number of observations in period Qi.
Weighted figures of HQLA (row 1, third column) must be calculated after the application of the respective haircuts but before the application of any caps on Level 2B and Level 2 assets. Unweighted inflows and outflows (rows 2-8, 11-15 and 17-20, second column) must be calculated as outstanding balances. Weighted inflows and outflows (rows 2-20, third column) must be calculated after the application of the inflow and outflow rates.
Adjusted figures of HQLA (row 21, third column) must be calculated after the application of both (i) haircuts and (ii) any applicable caps (ie cap on Level 2B and Level 2 assets). Adjusted figures of net cash outflows (row 22, third column) must be calculated after the application of both (i) inflow and outflow rates and (ii) any applicable cap (ie cap on inflows).
The LCR (row 23) must be calculated as the average of observations of the LCR:
Not all reported figures will sum exactly, particularly in the denominator of the LCR. For example, "total net cash outflows" (row 22) may not be exactly equal to "total cash outflows" minus "total cash inflows" (row 16 minus row 20) if the cap on inflows is binding. Similarly, the disclosed LCR may not be equal to an LCR computed on the basis on the average values of the set of line items disclosed in the template.
Definitions and instructions:
Columns
Unweighted values must be calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows).
Weighted values must be calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates (for inflows and outflows).
Adjusted values must be calculated after the application of both (i) haircuts and inflow and outflow rates and (ii) any applicable caps (ie cap on Level 2B and Level 2 assets for HQLA and cap on inflows).
Row number Explanation Relevant paragraph(s) of SLCR, refer to Illustrative Summary of the Amended LCR for the Factors of each item. 1 Sum of all eligible HQLA, as defined in the standard, before the application of any limits, excluding assets that do not meet the operational requirements, and including, where applicable, assets qualifying under alternative liquidity approaches. SLCR28 to SLCR48, SLCR55, SLCR58 to SLCR62, SLCR57 2 Retail deposits and deposits from small business customers are the sum of stable deposits, less stable deposits and any other funding sourced from (i) natural persons and/or (ii) small business customers (as defined by SCRE10.18 and SCRE10.19). SLCR73 to SLCR84, SLCR89 to SLCR92 3 Stable deposits include deposits placed with a bank by a natural person and unsecured wholesale funding provided by small business customers, defined as "stable" in the standard. SLCR73 to SLCR78, SLCR89 to SLCR90 4 Less stable deposits include deposits placed with a bank by a natural person and unsecured wholesale funding provided by small business customers, not defined as "stable" in the standard. SLCR73 and SLCR74, SLCR79 to SLCR81, SLCR89 to SLCR90 5 Unsecured wholesale funding is defined as those liabilities and general obligations from customers other than natural persons and small business customers that are not collateralised. SLCR93 to SLCR111 6 Operational deposits include deposits from bank clients with a substantive dependency on the bank where deposits are required for certain activities (ie clearing, custody or cash management activities). Deposits in institutional networks of cooperative banks include deposits of member institutions with the central institution or specialised central service providers. SLCR93 to SLCR106 7 Non-operational deposits are all other unsecured wholesale deposits, both insured and uninsured SLCR107 to SLCR109 8 Unsecured debt includes all notes, bonds and other debt securities issued by the bank, regardless of the holder, unless the bond is sold exclusively in the retail market and held in retail accounts. SLCR110 9 Secured wholesale funding is defined as all collateralised liabilities and general obligations. SLCR112 to SLCR114 10 Additional requirements include other off-balance sheet liabilities or obligations SLCR112 and SLCR Attachment#2 row 228 to 238. 11 Outflows related to derivative exposures and other collateral requirements include expected contractual derivatives cash flows on a net basis. These outflows also include increased liquidity needs related to: downgrade triggers embedded in financing transactions, derivative and other contracts; the potential for valuation changes on posted collateral securing derivatives and other transactions; excess non-segregated collateral held at the bank that could contractually be called at any time; contractually required collateral on transactions for which the counterparty has not yet demanded that the collateral be posted; contracts that allow collateral substitution to non-HQLA assets; and market valuation changes on derivatives or other transactions. SLCR112 to SLCR Attachment#2 row 221 12 Outflows related to loss of funding on secured debt products include loss of funding on: asset-backed securities, covered bonds and other structured financing instruments; and asset-backed commercial paper, conduits, securities investment vehicles and other such financing facilities. SLCR Attachment#2 row 222 and 223. 13 Credit and liquidity facilities include drawdowns on committed (contractually irrevocable) or conditionally revocable credit and liquidity facilities. The currently undrawn portion of these facilities is calculated net of any eligible HQLA if the HQLA have already been posted as collateral to secure the facilities or that are contractually obliged to be posted when the counterparty draws down the facility. SLCR page 64 to SLCR Attachment#2 row 228 to 238. 14 Other contractual funding obligations include contractual obligations to extend funds within a 30-day period and other contractual cash outflows not previously captured under the standard. SLCR Attachment#2 row 240, 241, and 265. 15 Other contingent funding obligations, as defined in the standard. SLCR Attachment#2 page 69 to 71. 16 Total cash outflows: sum of rows 2-15. 17 Secured lending includes all maturing reverse repurchase and securities borrowing agreements. SLCR Attachment#2 a) page 71 to 72. 18 Inflows from fully performing exposures include both secured and unsecured loans or other payments that are fully performing and contractually due within 30 calendar days from retail and small business customers, other wholesale customers, operational deposits and deposits held at the centralised institution in a cooperative banking network. SLCR Attachment#2 row 301, 303, 306, and 307. 19 Other cash inflows include derivatives cash inflows and other contractual cash inflows. SLCR Attachment#2 row 316, to 317. 20 Total cash inflows: sum of rows 17-19 21 Total HQLA (after the application of any cap on Level 2B and Level 2 assets). SLCR28 to SLCR46, SLCR47 to SLCR annex 1(4), SLCR49 to SLCR54 22 Total net cash outflows (after the application of any cap on cash inflows). SLCR69 23 Liquidity Coverage Ratio (after the application of any cap on Level 2B and Level 2 assets and caps on cash inflows). SLCR22 Template LIQ2: Net Stable Funding Ratio (NSFR) Purpose: Provide details of a bank's NSFR and selected details of its NSFR components. Scope of application: The template is mandatory for all banks. Content: Data must be presented as quarter-end observations in the local currency. Frequency: Semiannual (but including two data sets covering the latest and the previous quarter-ends). Format: Fixed. Accompanying narrative: Banks should provide a sufficient qualitative discussion on the NSFR to facilitate an understanding of the results and the accompanying data. For example, where significant, banks could discuss:
(a) drivers of their NSFR results and the reasons for intra-period changes as well as the changes over time (eg changes in strategies, funding structure, circumstances); and (b) composition of the bank's interdependent assets and liabilities (as defined in SNSF8) and to what extent these transactions are interrelated. a b c d e (In currency amount) Unweighted value by residual maturity Weighted value No maturity < 6 months 6 months to < 1 year ≥ 1 year Available stable funding (ASF) item 1 Capital: 2 Regulatory capital 3 Other capital instruments 4 Retail deposits and deposits from small business customers: 5 Stable deposits 6 Less stable deposits 7 Wholesale funding: 8 Operational deposits 9 Other wholesale funding 10 Liabilities with matching interdependent assets 11 Other liabilities: 12 NSFR derivative liabilities 13 All other liabilities and equity not included in the above categories 14 Total ASF Required stable funding (RSF) item 15 Total NSFR high-quality liquid assets (HQLA) 16 Deposits held at other financial institutions for operational purposes 17 Performing loans and securities: 18 Performing loans to financial institutions secured by Level 1 HQLA 19 Performing loans to financial institutions secured by non-Level 1 HQLA and unsecured performing loans to financial institutions 20 Performing loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and PSEs, of which: 21 With a risk weight of less than or equal to 35% under the Basel II standardised approach for credit risk 22 Performing residential mortgages, of which: 23 With a risk weight of less than or equal to 35% under the Basel II standardised approach for credit risk 24 Securities that are not in default and do not qualify as HQLA, including exchange-traded equities 25 Assets with matching interdependent liabilities 26 Other assets: 27 Physical traded commodities, including gold 28 Assets posted as initial margin for derivative contracts and contributions to default funds of central counterparties 29 NSFR derivative assets 30 NSFR derivative liabilities before deduction of variation margin posted 31 All other assets not included in the above categories 32 Off-balance sheet items 33 Total RSF 34 Net Stable Funding Ratio (%) General instructions for completion of the NSFR disclosure template
Rows in the template are set and compulsory for all banks. Key points to note about the common template are:
- Dark grey rows introduce a section of the NSFR template.
- Light grey rows represent a broad subcomponent category of the NSFR in the relevant section.
- Unshaded rows represent a subcomponent within the major categories under ASF and RSF items. As an exception, rows 21 and 23 are
- subcomponents of rows 20 and 22, respectively. Row 17 is the sum of rows 18, 19, 20, 22 and 24.
- No data should be entered for the cross-hatched cells.
- Figures entered in the template should be the quarter-end observations of individual line items.
- Figures entered for each RSF line item should include both unencumbered and encumbered amounts.
- Figures entered in unweighted columns are to be assigned on the basis of residual maturity and in accordance with SNSF5.
Items to be reported in the "no maturity" time bucket do not have a stated maturity. These may include, but are not limited to, items such as capital with perpetual maturity, non-maturity deposits, short positions, open maturity positions, non-HQLA equities and physical traded commodities.
Explanation of each row of the common disclosure template Row number Explanation Relevant paragraph(s) of SNSF 1 Capital is the sum of rows 2 and 3. 2 Regulatory capital before the application of capital deductions, as defined in SACAP2.1.
Capital instruments reported should meet all requirements outlined in SACAP2 and should only include amounts after transitional arrangements in SACAP5 have expired under fully implemented Basel III standards (ie as in 2022).SNSF6: - Receiving a 100% ASF (a).
- Receiving a 50% ASF (d).
- Receiving a 0% ASF (a).3 Total amount of any capital instruments not included in row 2. SNSF6: - Receiving a 100% ASF (b).
- Receiving a 50% ASF (d).
- Receiving a 0% ASF (a).4 Retail deposits and deposits from small business customers, as defined in the SLCR73-82 and SLCR89-92, are the sum of row 5 and 6. 5 Stable deposits comprise "stable" (as defined in SLCR75 to SLCR78) non-maturity (demand) deposits and/or term deposits provided by retail and small business customers. SNSF6: - Receiving a100% ASF (c).
- Receiving a 95% ASF.6 Less stable deposits comprise "less stable" (as defined in SLCR79 to SLCR81) non-maturity (demand) deposits and/or term deposits provided by retail and small business customers. SNSF6: - Receiving a 100% ASF (c).
- Receiving a 90% ASF.7 Wholesale funding is the sum of rows 8 and 9. 8 Operational deposits: as defined in SLCR93 to SLCR104, including deposits in institutional networks of cooperative banks. SNSF6: - Receiving a 100% ASF (c).
- Receiving a 50% ASF (b).
- Receiving a 0% ASF (a).
- Including footnote 17.9 Other wholesale funding includes funding (secured and unsecured) provided by non-financial corporate customer, sovereigns, public sector entities (PSEs), multilateral and national development banks, central banks and financial institutions. SNSF6: - Receiving a 100% ASF (c).
- Receiving a 50% ASF (a).
- Receiving a 50% ASF (c).
- Receiving a 50% ASF (d).
- Receiving a 0% ASF (a).10 Liabilities with matching interdependent assets. SNSF8 11 Other liabilities are the sum of rows 12 and 13. 12 In the unweighted cells, report NSFR derivatives liabilities as calculated according to NSFR paragraphs 19 and 20. There is no need to differentiate by maturities.
[The weighted value under NSFR derivative liabilities is cross-hatched given that it will be zero after the 0% ASF is applied.]SNSF5(A), SNSF6: - Receiving a 0% ASF (c). 13 All other liabilities and equity not included in above categories. SNSF6: - Receiving a 0% ASF (a).
- Receiving a 0% ASF (b).
- Receiving a 0% ASF (d).14 Total available stable funding (ASF) is the sum of all weighted values in rows 1, 4, 7, 10 and 11. 15 Total HQLA as defined in SLCR45, SLCR50] to SLCR54, SLCR55, SLCR63, SLCR65, SLCR58, SLCR62, SLCR67, (encumbered and unencumbered), without regard to LCR operational requirements and LCR caps on Level 2 and Level 2B assets that might otherwise limit the ability of some HQLA to be included as eligible in calculation of the LCR:
ncumbered assets including assets backing securities or covered bonds. (b)Unencumbered means free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell, transfer or assign the asset.SNSF Footnote 9, SNSF7: - Assigned a 0% ASF (a).
- Assigned a 0% ASF (b).
- Assigned a 5% ASF.
- Assigned a 15% ASF (a).
- Assigned a 50% ASF (a).
- Assigned a 50% ASF (b).
- Assigned a 85% ASF (a).
- Assigned a 100% ASF (a).16 Deposits held at other financial institutions for operational purposes as defined in SLCR93 to SLCR104. SNSF7: - Assigned a 50% ASF (d). 17 Performing loans and securities are the sum of rows 18, 19, 20, 22 and 24. 18 Performing loans to financial institutions secured by Level 1 HQLA, as defined in the SLCR50(c) to SLCR50(e). SNSF7: - Assigned a 10% ASF.
- Assigned a 50% ASF (c).
- Assigned a 100% ASF (c).19 Performing loans to financial institutions secured by non-Level 1 HQLA and unsecured performing loans to financial institutions. SNSF7: - Assigned a 50% ASF (b).
- Assigned a 50% ASF (c).
- Assigned a 100% ASF (c).20 Performing loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and PSEs. SNSF7: - Assigned a 0% ASF (c).
- Assigned a 50% ASF (d).
- Assigned a 65% ASF (b).
- Assigned a 85% ASF (b).
- Assigned a 65% ASF (a).21 Performing loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns, central banks and PSEs with risk weight of less than or equal to 35% under the Standardised Approach. SNSF7: - Assigned a 0% ASF (c).
- Assigned a 50% ASF (d).
- Assigned a 65% ASF (b).
- Assigned a 100% ASF (a).22 Performing residential mortgages. SNSF7: - Assigned a 50% ASF (e).
- Assigned a 65% ASF (a).
- Assigned a 85% ASF (b).
- Assigned a 100% ASF (a).23 Performing residential mortgages with risk weight of less than or equal to 35% under the Standardised Approach. SNSF7: - Assigned a 50% ASF (e).
- Assigned a 65% ASF (a). - Assigned a 100% ASF (a).24 Securities that are not in default and do not qualify as HQLA including exchange-traded equities. SNSF7: - Assigned a 50% ASF (e).
- Assigned a 85% ASF (c).
- Assigned a 100% ASF (a).25 Assets with matching interdependent liabilities. SNSF8 26 Other assets are the sum of rows 27-31. 27 Physical traded commodities, including gold. SNSF7: - Assigned a 85% ASF (d) 28 Cash, securities or other assets posted as initial margin for derivative contracts and contributions to default funds of central counterparties. SNSF7: - Assigned a 50% ASF (a) 29 In the unweighted cell, report NSFR derivative assets, as calculated according to SNSF5 (B) “Calculation of derivative asset amounts”. There is no need to differentiate by maturities.
In the weighted cell, if NSFR derivative assets are greater than NSFR derivative liabilities, (as calculated according to SNSF5 (A) “Calculation of derivative liability amounts”, report the positive difference between NSFR derivative assets and NSFR derivative liabilities.SNSF5 (B) “Calculation of derivative asset amounts” and SNSF7: - Assigned a 100% ASF (b). 30 In the unweighted cell, report derivative liabilities as calculated according to SNSF5 (A) “Calculation of derivative liability amounts”, ie before deducting variation margin posted. There is no need to differentiate by maturities.
In the weighted cell, report 20% of derivatives liabilities' unweighted value (subject to 100% RSF).SNSF5 (A) “Calculation of derivative liability amounts” and SNSF7: - Assigned a 100% ASF (d). 31 All other assets not included in the above categories. SNSF7: - Assigned a 0% ASF (d).
- Assigned a 100% ASF (c).32 Off-balance sheet items. SNSF9 33 Total RSF is the sum of all weighted value in rows 15, 16, 17, 25, 26 and 32. 34 Net Stable Funding Ratio (%), as stated SNSF SNSF4 29. Worked Examples
Interpretation of the effective date - illustration
29.1 The following table illustrates the application of paragraph section 3.2 by specifying the first applicable fiscal period for disclosure requirements according to their frequency, using as example a bank with a fiscal year coinciding with the calendar year (case 1), a bank with a fiscal year ending in October of the same calendar year (case 2), and a bank with a fiscal year ending in March of the following calendar year (case 3).
29.1.1 Banks with fiscal year from 1 January to 31 December:
a. The first fiscal quarter subject to quarterly disclosure requirements with an "effective as of" date of 1 January of a given year will be the first fiscal quarter, ending in 31 March of that calendar year. The first fiscal quarter subject to quarterly disclosure requirements with an "effective as of" date of 31 December of a given year will be the fourth fiscal quarter, ending in 31 December of that calendar year.
b. The first fiscal semester subject to semi-annual disclosure requirements with an "effective as of" date of 1 January of a given year will be the first fiscal semester, ending in 31 June of that calendar year. The first fiscal semester subject to semiannual disclosure requirements with an "effective as of" date of 31 December of a given year will be the second fiscal semester, ending in 31 December of that calendar year.
c. The first fiscal year subject to annual disclosure requirements with an "effective as of" date of 1 January of a given year will be the fiscal year starting in 1 January of that calendar year. The first fiscal year subject to annual disclosure requirements with an "effective as of" date of 31 December of a given year will be the fiscal year ending in that same 31 December of that calendar year.
29.1.2 Banks with fiscal year from 1 November of the previous calendar year to 31 October:
a. The first fiscal quarter subject to quarterly disclosure requirements with an "effective as of" date of 1 January of a given year will be the first fiscal quarter, ending in 31 January of that calendar year. The first fiscal quarter subject to quarterly disclosure requirements with an "effective as of" date of 31 December of a given year will be the first fiscal quarter, ending in 31 January of the following calendar year.
b. The first fiscal semester subject to semiannual disclosure requirements with an "effective as of" date of 1 January of a given year will be the first fiscal semester, ending in 31 April of that calendar year. The first fiscal semester subject to semiannual disclosure requirements with an "effective as of" date of 31 December of a given year will be the first fiscal semester, ending in 31 April of the following calendar year.
c. The first fiscal year subject to annual disclosure requirements with an "effective as of" date of 1 January of a given year will be the fiscal year starting in 1 November of the previous calendar year. The first fiscal year subject to annual disclosure requirements with an "effective as of" date of 31 December of a given year will be the fiscal year ending in 31 October of the following calendar year.
29.1.3 Banks with fiscal year from 1 April to 31 March of the next calendar year:
a. The first fiscal quarter subject to quarterly disclosure requirements with an "effective as of" date of 1 January of a given year will be the fourth fiscal quarter, ending in 31 March of that calendar year. The first fiscal quarter subject to quarterly disclosure requirements with an "effective as of" date of 31 December of a given year will be the third fiscal quarter, ending in 31 December of that calendar year.
b. The first fiscal semester subject to semiannual disclosure requirements with an "effective as of" date of 1 January of a given year will be the second fiscal semester, ending in 31 March of that calendar year. The first fiscal semester subject to semiannual disclosure requirements with an "effective as of" date of 31 December of a given year will be the second fiscal semester, ending in 31 March of the following calendar year.
c. The first fiscal year subject to annual disclosure requirements with an "effective as of" date of 1 January of a given year will be the fiscal year starting in 1 April of the previous calendar year. The first fiscal year subject to annual disclosure requirements with an "effective as of" date of 31 December of a given year will be the fiscal year ending in 31 March of the following calendar year.
Template CR3 – illustration
29.2 The following scenarios illustrate how Template CR3 should be completed.
a b c d e Unsecured exposures: carrying amount Exposures to be secured Exposures secured by collateral Exposures secured by financial guarantees Exposures secured by credit derivatives (i) One secured loan of 100 with collateral of 120 (after haircut) and guarantees of 50 (after haircut), if bank expects that guarantee would be extinguished first 0 100 50 50 0 (ii) One secured loan of 100 with collateral of 120 (after haircut) and guarantees of 50 (after haircut), if bank expects that collateral would be extinguished first 0 100 100 0 0 (iii) Secured exposure of 100 partially secured: 50 by collateral (after haircut), 30 by financial guarantee (after haircut), none by credit derivatives 0 100 50 30 0 (iv) One unsecured loan of 20 and one secured loan of 80. The secured loan is over-collateralised: 60 by collateral (after haircut), 90 by guarantee (after haircut), none by credit derivatives. If bank expects that collateral would be extinguished first. 20 80 60 20 0 (v) One unsecured loan of 20 and one secured loan of 80. The secured loan is under-collaterised: 50 by collateral (after haircut), 20 by guarantee (after haircut), none by credit derivatives. 20 80 50 20 0
Definitions
Exposures unsecured- carrying amount: carrying amount of exposures (net of allowances/impairments) that do not benefit from a credit risk mitigation technique.
Exposures to be secured: carrying amount of exposures which have at least one credit risk mitigation mechanism (collateral, financial guarantees, credit derivatives) associated with them. The allocation of the carrying amount of multi-secured exposures to their different credit risk mitigation mechanisms is made by order of priority, starting with the credit risk mitigation mechanism expected to be called first in the event of loss, and within the limits of the carrying amount of the secured exposures.
Exposures secured by collateral: carrying amount of exposures (net of allowances/impairments) partly or totally secured by collateral. In case an exposure is secured by collateral and other credit risk mitigation mechanism(s), the carrying amount of the exposures secured by collateral is the remaining share of the exposure secured by collateral after consideration of the shares of the exposure already secured by other mitigation mechanisms expected to be called beforehand in the event of a loss, without considering overcollateralisation.
Exposures secured by financial guarantees: carrying amount of exposures (net of allowances/impairments) partly or totally secured by financial guarantees. In case an exposure is secured by financial guarantees and other credit risk mitigation mechanism, the carrying amount of the exposure secured by financial guarantees is the remaining share of the exposure secured by financial guarantees after consideration of the shares of the exposure already secured by other mitigation mechanisms expected to be called beforehand in the event of a loss, without considering overcollateralisation.
Exposures secured by credit derivatives: carrying amount of exposures (net of allowances/impairments) partly or totally secured by credit derivatives. In case an exposure is secured by credit derivatives and other credit risk mitigation mechanism(s), the carrying amount of the exposure secured by credit derivatives is the remaining share of the exposure secured by credit derivatives after consideration of the shares of the exposure already secured by other mitigation mechanisms expected to be called beforehand in the event of a loss, without considering overcollateralisation.
Template CCR5 - illustration
29.3 The case below illustrates the cash and security legs of two securities lending transactions in Template CCR5:
29.3.1 Repo on foreign sovereign debt with 50 SAR cash received and 55 SAR collateral posted
29.3.2 Reverse repo on domestic sovereign debt with 80 SAR cash paid and 90 SAR collateral received
e f Collateral used in securities financing transactions (SFTs) Fair value of collateral received Fair value of posted collateral Cash - domestic currency 80 Cash - other currencies 50 Domestic sovereign debt 90 Other sovereign debt 55 - Total 140 135
Template MR2 - illustration
29.4 The paragraphs below describe the relevant provisions for components of IMA capital requirement calculations.
29.4.1 The aggregate capital requirement for approved and eligible trading desks (TDs) (IMAG,A) according to SMAR13.43 is defined as: CA + DRC + Capital surcharge.
29.4.2 According to SMAR13.41 CA is defined as:
29.4.3
According to SMAR13.22 DRC is defined as the greater of: (1) the average of the DRC requirement model measures over the previous 12 weeks; or (2) the most recent DRC requirement model measure.
29.4.4 According to SMAR13.45 Capital surcharge: is calculated as the difference between the aggregated standardised capital charges (SAG,A) and the aggregated internal models-based capital charges (IMA G,A = CA + DRC) multiplied by a factor k. k and SAG,A are only recent while IMAG,A is average or recent -> Surcharge is average or recent.
Example: illustration of the correct specification for row 12 in template MR2
29.5 Applying the formulae set out in SMAR13.22, SMAR13.41, SMAR13.43, and SMAR13.45 (marked in blue below), the relevant components for CA [either most recent (8+9) or average 1.5*8 +9] and DRC should take the respectively greater value of the “most recent” and “average” (marked in red). This results in the green and amber trading desks total capital requirements (including capital surcharge) of 485.
a b Template MR2 Most recent Average 8 IMCC 100 130 *1.5 9 SES 130 100 (CA = max [IMCCt-1+SESt-1; mc*IMCCavg+SESavg] (230) (295) 10 DRC 100 90 11 Capital surcharge for amber TD 90 12 Capital requirements for green and amber TDs (including capital surcharge) max[a=(8+9);b=(multiplier*8+9)]+max[a=10; b=10]+ 11485 13 SA Capital requirements for TD ineligible to use IMA CU 20 30. Annexure 1: Frequently Asked Questions (FAQ)
Article # Question Answer Overview of risk management, key prudential metrics and RWA 12 For counterparty credit risk (CCR) (rows 6-9), the split requested is by the exposure at default (EAD) methodology classification used to determine exposure levels rather than the risk- weighted asset (RWA) methodology classification used to determine risk weights. This contradicts the presentation for credit risk (rows 1–5) and securitisation (rows 16-19). Should line items be added (where necessary) to reconcile the disclosure to the total RWA? Template OV1 does not request CCR to be split by risk weighting methodology, but by EAD methodology. Nevertheless, banks should add extra rows, as appropriate, to split the exposures by risk weighting methodology*, in order to facilitate the reconciliation with the RWA changes in Template CCR7.
* RWA and capital requirements under the Standardised Approach for credit risk weighting are to be subdivided in the standardised approach for counterparty credit risk (SA-CCR) and the internal models method (IMM), and the same for RWA and capital requirements under the internal ratings-based (IRB) approach for credit risk weighting.Composition of capital TLAC 14 For the disclosure requirements under section 14 in the event a bank restates its prior year accounting balance sheet, does the bank restate the archived prior year reconciliation templates? The requirement to keep an archive of a minimum period also applies to the reconciliation template. As such, any prospective/retrospective restatement of the balance sheet would require similar amendments to be reflected in the reconciliation templates within the archive with a clear indication that such a revision has been made. Links between financial statements and regulatory exposures 16 In Template LI1, are assets deducted from regulatory capital in accordance with Basel III (eg goodwill and intangible assets) disclosed in column (g)? Elements which are deducted from a bank's regulatory capital (eg goodwill and intangible assets and deferred tax assets) should be included in column (g), taking into consideration the different thresholds that apply where relevant. Assets should be disclosed for the amount that is actually deducted from capital. Some examples are shown below:
- Goodwill and intangible assets: the amount to be disclosed in column (g) is the amount of any goodwill or intangibles,* including any goodwill included in the valuation of significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation. The amount disclosed in the assets rows is net of any associated deferred tax liability which would be extinguished if the intangible assets become impaired or derecognised under the relevant accounting standards. The associated deferred tax liability is also to be disclosed in the liabilities rows of column (g).
- Deferred tax assets: for all types of deferred tax assets to be deducted from own funds, the amount to be disclosed in column (g) is net of associated deferred tax liabilities that are eligible for netting. The associated deferred tax liabilities are to be disclosed in the liabilities rows of column (g). For deferred tax assets, for which the deduction is subject to a threshold, the amount disclosed in column (g) in the assets rows is the amount, net of any eligible deferred tax liability, above the threshold. The associated deferred tax liabilities are also to be disclosed in the liabilities rows of column (g).
- Defined benefit pension fund assets: the amount disclosed is net of any deferred tax liabilities which would be extinguished if the asset should become impaired or derecognised under the relevant accounting standards. These deferred tax liabilities are also to be disclosed in the liabilities rows of column (g).
- Investments in own shares (treasury stock) or own instruments of regulatory capital: when investments in own shares or own instruments of regulatory capital are not already derecognised under the relevant accounting standards, the deducted amount disclosed is net of short positions in the same underlying exposure or in the same underlying index allowed to be netted under the Basel framework. These short positions are also to be disclosed in the liabilities rows of column (g).
* Under SACAP4.1.1, subject to SAMA approval, IFRS definition of intangible assets to determine which assets are classified as intangible and are thus required to be deducted.In Template LI1, are exposures required to be 1,250% risk-weighted to be disclosed in column (g)? 1,250% risk-weighted exposures should be disclosed in the relevant credit risk or securitisation risk templates. Template LI1: Considering that the risk weighting framework bears on assets rather than liabilities, should all the liabilities be disclosed in column (g)? Should in any case deferred tax liabilities and defined benefit pension fund liabilities be included in column (g)? The liabilities disclosed in column (g) are all liabilities under the regulatory scope of consolidation, except for the following, which are disclosed in columns (c), (d), (e) and (f) as applicable: liabilities that are included in the determination of the exposure values in the market risk or the counterparty credit risk framework; and liabilities that are eligible under the Basel netting rules. What is the difference in Template LI2 between the required disclosure in row 2 (Liabilities carrying value amount under regulatory scope of consolidation) and row 6 (Differences due to different netting rules, other than those already included in row 2). Row 2 refers to balance sheet netting, while row 6 refers to incremental netting in application of the Basel rules (when not already covered by balance sheet netting). The netting rules under the Basel framework are different from the rules under the applicable accounting frameworks. The incremental netting in row 6 could represent an additional deduction from the net exposure value before application of the Basel netting rules (when those rules lead to more netting than the balance sheet netting in row 2) or a gross-up of the net exposure value when the off-balance sheet netting operated in row 2 is broader than what the Basel netting rules allow. How does the disclosure in Template LI2, in particular row 3 (total net amount under regulatory scope of consolidated) relate to accounting equity? The netting between assets and liabilities in Template LI2 does not lead to accounting equity under a regulatory scope of consolidation being disclosed in row 3. Assets and liabilities included in rows 1 and 2 are limited to those assets and liabilities that are taken into consideration in the regulatory framework. Other assets and liabilities not considered in the regulatory framework are to be disclosed in column (g) in Template LI1 and are consequently excluded from rows 1 and 2 of Template LI2. For Template LI2, how would the entry in row 10 (exposure amounts considered for regulatory purpose) differ from the balance sheet values under a regulatory scope of consolidation? Is it correct that there would be no differences to be explained, given that market risk does not have exposure values and the linkage for the other risk categories does not apply? In general, under a regulatory scope of consolidation, the accounting carrying amount and the regulatory exposure value would vary due to the incidence of off-balance sheet elements, provisions, and different netting and measurement rules. Under market risk, the regulatory exposure value will also differ from the accounting carrying amount. Differences could be due to off- balance sheet items, netting rules and different measurement rules of market risk positions via prudent valuation (as opposed to fair valuation in the applicable accounting framework). Credit risk 19 How should the disclosure be made in Template CR3, in an example where a loan has multiple types of credit risk mitigation and is overcollateralised (eg a loan of 100 with land collateral of 120 as well as guarantees of 50)? When an exposure benefits from multiple types of credit risk mitigation mechanisms, the exposure value should be allocated to each mechanism by order of priority based on the credit risk mitigation mechanism which banks would apply in the event of loss. Disclosure should be limited to the value of the exposure (ie the amount of overcollateralisation does not need to be disclosed in the table). If the bank wishes to disclose information regarding the over-collateralisation, it may do so in the accompanying narrative. Refer to example in section 28.3. What are the values to be ascribed to collateral, guarantees and credit derivatives in Template CR3? Banks should disclose the amount of credit risk mitigation calculated according to the regulatory framework, including both the costs to sell and of haircut. Where should exposures to central counterparties (CCPs) be included? Exposures for trades, initial margins and default fund contributions are included in Template CCR8. Exposures stemming from loans to CCPs excluding initial margins and default fund contributions should be included within the credit risk framework considering the CCP as an asset class item. These loans should be included in the exposure class where the national implementation of the Basel framework allows exposures to CCPs to be included. In Template CR7, what is the required disclosure if an exposure is only partially hedged by a credit derivative? For instance, consider a loan with nominal exposure of 100 SAR, risk weight of 150% and therefore RWA of 150 SAR. The bank buys a credit default swap with a 30 SAR nominal amount, and the risk weight of the protection provider is 50%. Which values should be entered in columns (a) and (b)? Under the IRB approach, credit derivatives are recognised as CRM techniques for the F-IRB and A-IRB. In both cases, banks can reflect the risk mitigating effect of credit derivatives on an exposure by adjusting their PD or loss-given-default (LGD). Banks should disclose in column (a), the RWA of an exposure secured by a credit derivative calculated without reflecting the risk mitigating effect of credit derivatives (in the example, banks would disclose 150 SAR). In column (b), the RWA of the same exposure calculated reflecting the risk mitigating effect of credit derivatives (in the example, banks would disclose 30*50% + 70*150% = 120) should be disclosed. Is the “weighted average PD” in column (d) of Template CR9 to be calculated based on the formula ∑(PDί *EADί)/(∑EADί)? “Weighted” means exposure at default (EAD)-weighted. For this purpose, the formula in the question is correct since the data will be comparable to those reported in column (i). How should “defaulted obligors” be defined, for the purpose of Template CR9? For column (f) (number of obligors), please clarify how “obligors” are defined from a retail perspective. Should “end of the previous year” include only non-defaulted accounts at the beginning of the year, or both defaulted and non-defaulted accounts? Should “end of the year” include all active accounts at the end of the year? For column (g) (defaulted obligors in the year), please clarify whether it is related to accounts that defaulted during the year or from inception. The definition of obligors or retail obligors is the same as for other obligors; any individual person or persons, or a small or medium- sized entity. Furthermore, where banks apply the “transaction approach”, each transaction shall be considered as a single obligor. A defaulted obligor is an obligor that meets the conditions set out in SCRE16.67 to SCRE16.74.
For column (f), the “end of the previous year” includes non- defaulted accounts at the beginning of the year of reference for disclosure. The “end of the year” includes all the non-defaulted accounts related to obligors already included in the “end of the previous year” plus all the new obligors acquired during the year of reference for disclosure which did not go into default during the year. Banks have discretion as to whether to include obligors who left during the year within the “end of the year” number.
For column (g), “defaulted obligors” includes: (i) obligors not in default at the beginning of the year who went into default during the year; and (ii) new obligors acquired during the year– through origination or purchase of loans, debt securities or off-balance sheet commitments – that were not in default, but which went into default during the year. Obligors under (ii) are also separately disclosed in column (h). The PD or PD range to be included in columns (d) and (e) is the one assigned at the beginning of the period for obligors that are not in default at the beginning of the period.What considerations can institutions reference when disclosing a model performance test (backtesting) when the test is not aligned to the year- end disclosure timetable? The frequency of the disclosure is not linked to the timing of the bank's backtesting. The annual disclosure frequency does not require a timetable of model backtesting that is calibrated on a calendar year basis. When the backtesting reference period is not calibrated on a calendar year basis, but on another time interval (for instance, a 12- month interval), “year” as used in columns (f), (g) and (h) of Template CR9 means “over the period used for the backtesting of a model”. Banks must, however, disclose the time horizon (observation period /timetable) they use for their backtesting. Counterparty credit risk 20 The “purpose” of Template CCR5 asks for a breakdown of all types of collateral posted or received. The content section, however, asks for collateral used. These numbers differ as certain transactions are over-collateralised (ie >100% of exposure) and therefore not all collateral would be used for risk mitigation. Should the template include all collateral posted/received or just collateral that is applied? The numbers reported in Template CCR5 should be the total collateral posted/received (ie not limited to the collateral that is applied/used for risk mitigation). The purpose of the template is to provide a view on the collateral posted/received rather than the value accounted for within the regulatory computation. If the bank wishes to disclose the collateral eligible for credit mitigation, it may do so using an accompanying narrative. Template CCR7 refers to an RWA flow on internal models method (IMM) exposures. Row 4 (Model updates – IMM only) and row 5 (Methodology and policy – IMM only) are specifically to include only model and methodology/policy changes relating to the IMM exposures model. Where in the template would changes to the internal-ratings based (IRB) models that result in changes in risk weights for positions under the IMM be reported? Template CCR7 is consistent with Template OV1, which requests a split by exposure at default (EAD) methodology and not by risk weighting methodology. Banks are recommended to add rows to report any changes relating to risk weighting methodology if they deem them useful. The row breakdown is flexible and intends to depict all the significant drivers of changes for the risk-weighted assets (RWA) under counterparty credit risk. Specific rows should be inserted when changes to the IRB model result in changes to the RWA of instruments under counterparty credit risk whose exposure value is determined based on the IMM. Securitisation 21 Template SEC1 requires the disclosure of “carrying values”. Is there a direct link between columns (d), (h) and (l) of Template SEC1 and column (e) of Template LI1? Reconciliation is not possible when Template SEC1 presents securitisation exposures within and outside the securitisation framework together. However, when banks choose to disclose Template SEC1 and SEC2 separately for securitisation exposures within the securitisation framework and outside that framework, the following reconciliation is possible: the sum of on-balance sheet assets and liabilities included in columns (d), (h) and (l) of Template SEC1 is equal to the amounts disclosed in column (e) of Template LI1. Should institutions disclose RWA before or after the application of the cap? RWA figures disclosed in Templates SEC3 and SEC4 should be before application of the cap, as it is useful for users to compare exposures and risk-weighted assets (RWA) before application of the cap. Columns (a)–(m) in Templates SEC3 and SEC4 should be reported prior to application of the cap, while columns (n)–(q) should be reported after application of the cap. RWA after application of the cap are disclosed in Template OV1. 31. Annexure 2: Frequency and Timing of Disclosures
Section Template Applicability Format Frequency Fixed Flexible Quarterly Semiannual Annual Overview of risk management, key prudential metrics and RWA KM1 Applicable √ √ KM2 Not required to be completed by the bank unless otherwise specified by SAMA. √ √ OVA Applicable √ √ OV1 √ √ Comparison of modelled and standardised RWA CMS1 Not required to be completed by the bank unless SAMA approve the bank to use the IRB or IMA approach. √ √ CMS2 √ √ Composition of capital and TLAC CCA Applicable √ √ CC1 √ √ CC2 √ √ TLAC1 Not required to be completed by the bank unless otherwise specified by SAMA. √ √ TLAC2 √ √ TLAC3 √ √ Capital distribution constraints CDC Applicable √ √ Links between financial statements and regulatory exposures LIA Applicable √ √ LI1 √ √ LI2 √ √ PV1 √ √ Asset encumbrance ENC Applicable √ √ Remuneration REMA Applicable √ √ REM1 √ √ REM2 √ √ REM3 √ √ Credit risk CRA Applicable √ √ CR1 √ √ CR2 √ √ CRB √ √ CRB_A √ √ CRC √ √ CR3 √ √ CRD √ √ CR4 √ √ CR5 √ √ CRE Not required to be completed by the bank unless SAMA approve the bank to use the IRB approach. √ √ CR6 √ √ CR7 √ √ CR8 √ √ CR9 √ √ CR10 √ √ Counterparty credit risk CCRA Applicable √ √ CCR1 √ √ CCR3 √ √ CCR4 Not required to be completed by the bank unless SAMA approve the bank to use the IRB or IMM approach. √ √ CCR5 Applicable √ √ CCR6 √ √ CCR7 Not required to be completed by the bank unless SAMA approve the bank to use the IRB or IMM approach. √ √ CCR8 Applicable √ √ Securitisation SECA Applicable √ √ SEC1 √ √ SEC2 √ √ SEC3 √ √ SEC4 √ √ Market Risk MRA Applicable √ √ MR1 √ √ MRB Not required to be completed by the bank unless SAMA approve the bank to use the IMA approach. √ √ MR2 √ √ MR3 √ √ Credit valuation adjustment risk CVAA The disclosure requirements related in this section are required to be completed by the bank when the materiality threshold stated on SAMA's Revised Risk-based Capital Charge for Counterparty Credit Risk (CCR) issued as part of its adoption of Basel III post-crisis final reforms, paragraph (11.9) is satisfied. √ √ CVA1 √ √ CVA2 √ √ CVAB √ √ CVA3 √ √ CVA4 √ √ Operational risk ORA Applicable √ √ OR1 √ √ OR2 √ √ OR3 √ √ Interest rate risk in the banking book IRRBBA Applicable √ √ IRRBB1 √ √ Macroprudential supervisory measures GSIB1 Not required to be completed by the bank unless SAMA identify the bank as G-SIB. √ √ CCYB1 Applicable √ √ Leverage ratio LR1 Applicable √ √ LR2 √ √ Liquidity LIQA √ √ LIQ1 √ √ LIQ2 √ √ Trade Repository Reporting and Risk Mitigation Requirements for Over-the-Counter (OTC) Derivatives Contracts
No: 42056371 Date(g): 23/3/2021 | Date(h): 10/8/1442 Status: In-Force Refer to the Trade Repository Reporting and Risk Mitigation Requirements for Over-the-Counter (OTC) Derivatives Contracts issued by SAMA under Circular No. 67/16278, dated 13/03/1441H.
We inform you of the update to the Trade Repository Reporting and Risk Mitigation Requirements for Over-the-Counter (OTC) Derivatives Contracts. The updated requirements are attached, and SAMA emphasizes that all banks must comply with them starting from the 01/06/2021G.
1. Introduction
1. These Requirements are issued by Saudi Central Bank (SAMA) in exercise of the powers vested upon it under its Law issued by the Royal Decree No. (M/36) on 11-04-1442H, and the Banking Control Law issued by the Royal Decree No. (M/5) on 22-02-1386H, and the rules for Enforcing its Provisions issued by Ministerial Decision No. 3/2149 on 14-10-1406H.
2. These requirements are divided into two Sections;
3. Section A sets out the requirements for the reporting of over-the-counter (OTC) derivative transactions to the SAMA authorized Trade Repository (TR) Operator.
4. Section B requires banks, which enter into non-centrally cleared OTC derivative transactions to implement specified risk mitigation requirements. These risk mitigation requirements will apply to a bank, which is a contracting party to OTC derivative transactions that are not centrally cleared, irrespective of the bank’s outstanding notional amount of non-centrally cleared OTC derivatives or whether or not the transaction is executed for hedging purposes. OTC derivatives, which are centrally cleared, either directly or indirectly, are not subject to the risk mitigation requirements. Indirect clearing is an arrangement whereby a bank provides client-clearing services by clearing a client’s OTC derivative transactions through another clearing intermediary.
5. These updated requirements shall supersede SAMA circular No. 16278/67 dated 13-03-1441AH. The changes from the previous version are underlined. Reporting requirements for Equity, Credit and Commodity along with the updated requirements will take effect by June 1st 2021.
2. Section A
2.1 Trade Reporting Requirements for Over-the-Counter (OTC) Derivatives Contracts
2.1.1 Application
6. The reporting requirements are applicable to all banks in the Kingdom of Saudi Arabia (KSA) with OTC derivative transactions.
2.1.2 Scope of Reporting
7. OTC derivative transactions that fall within the scope of “reportable transactions” described in paragraph 8 to 12 below are required to be reported to the SAMA authorised Trade Repository Operator.
8. Reportable transactions are derivative transactions that meet the following criteria:
a. The transaction is traded over the counter cleared or non-cleared (i.e. exchange traded transactions are excluded) or is novated from an OTC transaction to a central counterparty (CCP);
b. The transactions are an interest rate derivative, a foreign exchange (FX) derivative, an equity derivative, a credit derivative and a commodity derivative supported by the SAMA authorised Trade Repository;
c. The transaction is conducted by a counterparty which is a licensed bank in Kingdom of Saudi Arabia (KSA) (in the case of a locally incorporated bank) or a KSA branch (in the case of a foreign bank) or by its financial subsidiaries or branches (including SPVs).
d. The other counterparty to the transaction is:
i. A licensed bank in KSA (in the case of a locally incorporated bank) or a KSA branch (in the case of a foreign bank);
ii. A foreign financial counterparty;
iii. A KSA or a foreign non-financial counterparty; or
iv. A CCP if the transaction is novated from an OTC transaction to a CCP.
9. If a reportable transaction is, for example, entered into between a KSA branch bank X and the USA Head Office of bank Y, Bank X falls within paragraph 8(c) while Bank Y falls within paragraph 8(d). The transaction is reportable by Bank X but not by Bank Y. If however the transaction is booked in KSA branch of bank Y, reporting obligation rules must be applied to determine the reporting counterparty as per the single sided reporting obligation approach as mentioned in APPENDIX C.
10. The transactions referred to in paragraph 8(c) above include those that are booked in KSA office/branch of a licensed bank as a result of transfer of booking (i.e. through novation) of contracts entered into with external parties by the head office or overseas branches of the bank. If such novated transactions are reportable (i.e. the criteria set out in paragraph 8 above are also met after novation), the reporting bank should report the external counterparty (another licensed bank) who has originally entered into contract with the bank, instead of the office/branch from which the contract is transferred, as its counterparty to the transaction.
11. Reportable transactions do not include interbranch transactions (except those that fall within paragraph 9 above) and interbranch transactions (e.g. transactions between different desks of the treasury function). An interbranch transaction refers to a principal-to-principal transaction (or a back-to-back transaction) conducted between different branches of the same bank, including any transaction undertaken to transfer the risk of the transaction (or portfolio transactions) from one branch to another.
12. For the avoidance of doubt, reportable transactions:
A. Exclude “spot” FX transactions, which refer in this context to FX transactions that are settled via an actual delivery of the relevant currencies within two business days;
B. Exclude, from the perspective of a reporting bank, those transactions booked in its local or overseas subsidiaries (unless those subsidiaries are licensed banks and reporting criteria set out in these requirements are met, where in such case, they need to report to KSA TR regardless of their location);
C. Include, in the case of reportable transactions which are novated for central clearing, those new transactions entered into by reporting banks with CCPs ; and
D. Exclude, transactions in which any of the following institutions participate as counterparty:
i. The Government of the Kingdom of Saudi Arabia (those risk weighted at zero under the capital adequacy rules).
ii. SAMA
iii. The Saudi Stock Exchange
iv. The Saudi Depository Center
v. A Supranational Authority
vi. Multilateral Development Banks
2.1.3 Manner of Reporting
13. All reporting banks are required to directly report to the SAMA authorised TR Operator. Banks are not allowed to report through agents or outsource their reporting requirements to third party service providers.
14. All reporting banks are required to enter into a reporting service agreement with SAMA authorised TR Operator.
15. The reporting service agreement signed by each reporting bank with SAMA authorised TR Operator must contain a clause providing consent for the bank for the reporting of trade data to the SAMA authorised TR Operator by its counterparties. This consent is essential to alleviate any potential concern on data confidentiality from bank counterparties, which may need to report trade data to the SAMA authorised TR Operator relating to other counterparties that do not themselves have any such reporting obligation under the reporting requirements.
16. Since reporting has to be made to the SAMA authorised TR Operator by electronic means, reporting banks are required to set up systems linkages and conduct user tests with the SAMA authorised TR Operator. Reporting banks must complete the user tests to the satisfaction of the SAMA authorised TR Operator before they will be accepted for reporting.
17. The SAMA authorised TR Operator has designed specific templates for reporting the details of the reportable transactions. A reporting bank is required to complete all the fields in the templates, which primarily relate to the economic terms of a transaction and information essential for administrative purposes. A list of fields on the templates for reporting transactional data is attached as APPENDIX A.
18. Reporting to the SAMA authorised TR Operator is compulsory:
A. When a reportable transaction is executed by a reporting bank for the first time; and
B. Whenever there are subsequent reportable business events until the transaction is fully terminated (which includes termination due to novation). A list of reportable events is set out in APPENDIX B for reference.
19. A reporting bank may report changes in the economic details of a reportable transaction by submitting amendments to update the transaction records of the SAMA authorised TR Operator. Alternatively, the bank may update the records of the SAMA authorised TR Operator by submitting specific templates designated for reporting individual business events (APPENDIX B).
20. Reportable business events shall be reported by adopting a life cycle approach. Under the life cycle approach, each business event will be reported according to the T+1 reporting timeline referred to in paragraph 22 below.
21. After an original trade is novated for central clearing, the reporting bank should report the open trade as an early termination business events and open a new one with the reference to the old trade identifier in the field “Linked UTI” (table 3 item 47) as specified in the APPENDIX B
2.1.4 Timing of Reporting
22. The reporting bank will have to ensure that it reports to the SAMA authorised TR Operator reportable transactions (including where appropriate any subsequent business events) before 23:59:59 of the next business day (T+1). For the purpose of these reporting requirements, Fridays and Saturdays and general KSA holidays do not count as business days.
23. Reporting is not required if a reportable transaction that has yet to be reported to the SAMA authorized TR is cancelled or fully terminated within the T+1 reporting timeline. This, however, does not apply to the cancellation or full termination of a transaction for the sake of subjecting the transaction to central clearing. In such cases, the original reportable transaction pending central clearing (and the business events arising from the central clearing) should be reported according to the T+1 timeline, unless the transaction is cancelled or fully terminated before it is reported to the SAMA authorized TR Operator with T+1 timeline.
2.1.5 Reporting Error Amendments
24. Guidance on reporting error amendment can be found in APPENDIX B.
2.1.6 Keeping of Records
25. A reporting bank must keep records that enable the reporting bank to demonstrate it has complied with these requirements.
26. A reporting bank must keep the records for a period of at least ten (10) years from the date the record is made or amended.
2.1.7 Technical Support
27. The SAMA authorised TR Operator will provide the reporting banks with technical reporting guidelines/manual for its systems/reporting tools. All enquiries relating to technical support should be directed to the SAMA authorised TR Operator.
3. Section B
3.1 Risk Mitigation Requirements for Non-Centrally Cleared Over-the-Counter (OTC) Derivative Contracts
3.1.1 Trading Relationship Documentation
1. The trading relationship documentation should:
a) Provide legal certainty for non-centrally cleared over-the-counter derivatives contracts;
b) Include all material rights and obligations of counterparties concerning their trading relationship with regard to non-centrally cleared over-the-counter derivatives contracts. Such rights and obligations of the counterparties may be incorporated by reference to other documents in which they are specified; and
c) Be executed in writing or through other equivalent non-rewritable, nonerasable electronic means (without prejudice to subparagraph (b) above).
2. The material rights and obligations referred to in paragraph 1(b), where relevant, may include:
a) Payment obligation;
b) Netting of payments;
c) Events of default or other termination events (For instance, any rights to early termination)
d) Calculation and any netting of obligations upon termination;
e) Transfer of rights and obligations;
f) Governing law;
g) Processes for confirmations, valuation, portfolio reconciliation and dispute resolution; and
h) Matters related to credit support arrangements (e.g. initial and variation margin requirements, types of assets that may be used for satisfying such margin requirements and any asset valuation haircuts, investment and rehypothecation terms for assets posted to satisfy such margin requirements, guarantees and custodial arrangements for margin assets such as whether margin assets are to be segregated with a third party custodian).
3. The retention period for trading relationship documentation should be a minimum of ten (10) years after the termination, maturity or assignment of any non-centrally cleared over-the-counter derivatives contracts.
3.1.2 Trade Confirmation
4. Banks are required to confirm the material terms of a non-centrally cleared over-the- counter derivatives transaction as soon as practicable after execution of the transaction, including a new transaction resulting from novation. Banks are also required to adopt policies and procedures to confirm material changes to the legal terms of, or rights and obligations under, the non-centrally cleared over-the-counter derivatives contract, such as those relating to termination prior to scheduled maturity date, assignment, amendment or extinguishing of rights or obligations.
5. The material terms confirmed should include terms necessary to promote legal certainty to the non-centrally cleared over-the-counter derivatives transaction, including incorporating by reference, the trading relationship documentation or any other documents that govern or otherwise form part of the trading relationship documentation.
6. The confirmation should be executed in writing through:
A. Non-rewritable, non-erasable automated methods where it is reasonably practicable for the bank to do so;
B. Manual means; or
C. Other non-rewritable, non-erasable electronic means (such as email).
7. Banks are required to implement appropriate policies and procedures to ensure a two-way confirmation is executed with a counterparty (financial and non-financial).
8. For non-centrally cleared over-the-counter derivatives transactions concluded after the bank’s dealing system cut off time, or with a counterparty located in a different time zone, banks are required to execute the confirmation as soon as practicable.
3.1.3 Valuation
9. Banks are required to agree with their counterparties the process for determining the values of the non-centrally cleared over-the-counter derivatives transactions in a predictable and objective manner. The process should cover the entire duration of the non-centrally cleared over the-counter derivatives transaction, at any time from the execution of the contract to the termination, maturity, or expiration thereof. All agreements on valuation process should be documented in the trading relationship documentation or trade confirmation and may include matters such as the approach to valuation, the key parameters and the data sources for such parameters.
10. The valuation determinations should be based on economically similar transactions or other objective criteria. Banks should be able to compute the valuation internally and be able to corroborate any valuations done by their counterparts or third parties. Where a bank uses a proprietary valuation model, it must use a model employing valuation methodologies with mainstream acceptance. If new methodologies are used, these should have a sound theoretical basis and the bank will need to justify their use, e.g. by showing that the new methodology addresses a limitation of an existing methodology or improves the reliability of the valuation.
11. Banks are required to perform periodic review of the agreed upon valuation process to take into account any changes in market conditions. Where changes are made as a result of the review, the relevant documentation must be updated to reflect such changes.
12. Banks are required to agree on and document:
A. The alternative process or approach by which the bank and its counterparty will determine the value of a non-centrally cleared over-the counter derivatives transaction in the event of the unavailability, or other failure, of any inputs required to value the transaction;
B. Any changes or procedures for modifying the valuation process at any time so long as the agreements remain consistent with the applicable law; and
C. How a dispute on valuation, if it arises, should be resolved.
3.1.4 Portfolio Reconciliation
13. Banks are required to include in their policies and procedures –
A. The process or method for portfolio reconciliation that it has agreed with its financial counterparties; and
B. The process or method that reflects its efforts to conduct portfolio reconciliation with its non-financial counterparties, e.g. by providing, on a periodic basis, a non-financial counterparty with a statement on the material terms and valuations of the non-centrally cleared over-the-counter derivatives contracts entered into with that non-financial counterparty.
14. The process or method of portfolio reconciliation should be designed to ensure an accurate record of the material terms and valuations of the non-centrally cleared over- the-counter derivatives contracts, and identify and resolve discrepancies in the material terms and valuations in a timely manner with the counterparty.
15. Banks are required to determine the scope and frequency of portfolio reconciliation with a counterparty, taking into account the risk exposure profile, size, volatility and number of non-centrally cleared over-the-counter derivatives transactions which the bank has with that counterparty. Portfolio reconciliation should be carried out more frequently where the bank has a higher number of outstanding transactions with its counterparty.
16. Banks are required to establish and implement policies and procedures to ensure that the material terms are exchanged and valuations (including variation margin) are reconciled with counterparties, at regular intervals. The frequency of portfolio reconciliation with each counterparty should be commensurate with the counterparty’s risk exposure profile and the number of outstanding transactions.
3.1.5 Portfolio Compression
17. Banks are required to consider factors such as the risk exposure profile, size, volatility and number of outstanding transactions in assessing whether to conduct a portfolio compression with one or more counterparties. Banks are required to establish and implement policies and procedures to regularly assess and engage in portfolio compression as appropriate in respect of non-centrally cleared OTC derivative portfolios. This should be proportionate to the level of exposure or activity of the bank.
3.1.6 Dispute Resolution
18. Banks are required to agree and document with their counterparties the mechanism or process for determining when discrepancies in material terms or valuations should be considered disputes and how such disputes should be resolved as soon as practicable.
19. Material disputes should be escalated to senior management and the Board of the bank. There should be clear criteria used by the bank to determine when a dispute is considered material.
20. Banks are required to promptly report to SAMA material disputes (as determined by the bank in 19 above) which remains unresolved beyond 15 business days.
3.1.7 Governance
21. The policies and procedures governing trading relationship documentation, trade confirmation, valuation, portfolio reconciliation, portfolio compression, and dispute resolution should be approved by the board of directors or its delegated authority, and be subject to periodic independent review.
Appendix A
1) Counterparty data
Table Item Section Field Details to be reported Format 1
1
Parties to the contract
Reporting Counterparty ID
Unique code identifying the reporting counterparty of the contract.
ISO 17442 Legal Entity Identifier (LEI) 20 alphanumerical character code.
1
2
Parties to the contract
ID of the other Counterparty
Unique code identifying the other counterparty of the contract.
This field shall be filled from the perspective of the reporting counterparty. In case of a private individual a client code shall be used in a consistent manner.
ISO 17442 Legal Entity Identifier (LEI) 20 alphanumerical character code.CLC = Client code (up to 100 alphanumerical digits, spaces allowed):
- For local natural persons (including foreigners residents in KSA): CLC- National Identification Number (NIN). Example: CLC-4046403927
- For foreign natural persons: CLC- ISO 3166 - 2 character country code + Applicable national ID number. Example: CLC-ES53085141M
-For Corporate Customer in KSA without LEI: “CLC-”+ country code as per ISO 3166 + Commercial registration number+ “CR”. Example: CLC-US123456789CR
1
3
Parties to the contract
Country of the other Counterparty
The code of country where the registered office of the other counterparty is located or country of residence in case that the other counterparty is a natural person.
ISO 3166 - 2 character country code.
1
4
Parties to the contract
Corporate sector of the reporting counterparty
Nature of the reporting counterparty's company activities.
If the Reporting Counterparty is a Financial Counterparty, this field shall contain all necessary codes included in the Taxonomy for Financial Counterparties and applying to that Counterparty.Where more than one activity can be reported, only one code shall be populated using the one of the activity that weights most in relation to the company´s global turnover.
Taxonomy for Financial Counterparties :B = Banks
K =Authorized person
L = Legal Persons engaged in the business of extending credit (mortgage lending companies and Auto Lease companies)
I = Insurance companies
F = Finance companies
A = Affiliate of any of the above
1
5
Parties to the contract
Nature of the reporting counterparty
Indicate if the reporting counterparty is a financial or a non-financial counterparty.
F = Financial Counterparty
N = Non financial counterparty (this value is not valid until the reporting obligation is extended to non- financial counterparties)
1
6
Parties to the contract
Reporting counterparty broker ID
In the case a broker (as defined in article 32 of Royal Decree (M/30) Capital Market Law of the Kingdom of Saudi Arabia) acts as intermediary for the reporting counterparty without becoming a counterparty himself, the reporting counterparty shall identify this broker by a unique code.
ISO 17442 Legal Entity Identifier (LEI) 20 alphanumerical character code
1
7
Parties to the contract
Other counterparty broker ID
In the case a broker (as defined in article 32 of Royal Decree (M/30) Capital Market Law of the Kingdom of Saudi Arabia) acts as intermediary for the other counterparty without becoming a counterparty himself, the reporting counterparty shall identify this broker by a unique code.
ISO 17442 Legal Entity Identifier (LEI) 20 alphanumerical character code
1
8
Parties to the contract
Clearing member ID of the reporting counterparty
In the case where the derivative contract is cleared and the reporting counterparty is not a clearing member itself, the clearing member through which the derivative contract is cleared shall be identified in this field by a unique code.
ISO 17442 Legal Entity Identifier (LEI) 20 alphanumerical character code
1
9
Parties to the contract
Clearing member ID of the other counterparty
In the case where the derivative contract is cleared and the other counterparty is not a clearing member itself, the clearing member through which the derivative contract is cleared shall be identified in this field by a unique code.
ISO 17442 Legal Entity Identifier (LEI) 20 alphanumerical character code
1
10
Parties to the contract
Beneficiary ID 1
The party subject to the rights and obligations arising from the contract for counterparty 1.
Where the transaction is executed via a structure, such as a trust or fund, representing a number of beneficiaries, the beneficiary should be identified as that structure.
Where the beneficiary of the contract is not a counterparty to this contract, the reporting counterparty has to identify this beneficiary by an unique code or, in case of a private individuals, by a client code used in a consistent manner as assigned by the legal entity used by the private individual.
In the case where the entity is acting as a principal, this field must be left blank. Otherwise, if it is acting as an agent, this field must be populated.
ISO 17442 Legal Entity Identifier (LEI) 20 alphanumerical character code.CLC = Client code (up to 100 alphanumerical digits, spaces allowed):
- For local natural persons (including foreigners residents in KSA): CLC- National Identification Number (NIN). Example: CLC-4046403927
- For foreign natural persons: CLC- ISO 3166 - 2 character country code + Applicable national ID number. Example: CLC-ES53085141M
1
11
Parties to the contract
Beneficiary ID 2
The party subject to the rights and obligations arising from the contract for counterparty 2.
Where the transaction is executed via a structure, such as a trust or fund, representing a number of beneficiaries, the beneficiary should be identified as that structure.
Where the beneficiary of the contract is not a counterparty to this contract, the reporting counterparty has to identify this beneficiary by an unique code or, in case of a private individuals, by a client code used in a consistent manner as assigned by the legal entity used by the private individual.
In the case where the entity is acting as a principal, this field must be left blank. Otherwise, if it is acting as an agent, this field must be populated.
ISO 17442 Legal Entity Identifier (LEI) 20 alphanumerical character code.CLC = Client code (up to 100 alphanumerical digits, spaces allowed):
- For local natural persons (including foreigners residents in KSA): CLC- National Identification Number (NIN). Example: CLC-4046403927
- For foreign natural persons: CLC- ISO 3166 - 2 character country code + Applicable national ID number. Example: CLC-ES53085141M
1
12
Parties to the contract
Trading capacity of the reporting counterparty
Identifies whether the reporting counterparty has concluded the contract as principal on own account (on own behalf or behalf of a client) or as agent for the account of and on behalf of a client.
P = Principal
A = Agent
1
13
Parties to the contract
Trading capacity of the other counterparty
Identifies whether the other counterparty has concluded the contract as principal on own account (on own behalf or behalf of a client) or as agent for the account of and on behalf of a client.
P = Principal
A = Agent
1
14
Parties to the contract
Counterparty side
Identifies whether the reporting counterparty is a buyer or a seller.
B = Buyer
S = Seller
1
15
Parties to the contract
Value of contract
Mark to market valuation of the contract, or mark to model valuation where applicable.
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
The negative symbol, if populated, is not counted as a numerical character.
1
16
Parties to the contract
Currency of the value
The currency used for the valuation of the contract
ISO 4217 Currency Code, 3 alphabetical characters
1
17
Parties to the contract
Valuation timestamp
Date and time of the last valuation. For mark-to-market valuation the date and time of publishing of reference prices shall be reported.
ISO 8601 date in the UTC time format YYYY-MM-DDThh:mm:ssZ
1
18
Parties to the contract
Valuation type
Indicate whether valuation was performed mark to market, mark to model.
M = Mark-to-market O = Mark-to-model
2)
Common data
Table Item Section Field Details to be reported Format 2
1
Section 2a - Contract type
Instrument type
Each reported contract shall be classified according to its type
CD = Financial contracts for difference
FR = Forward rate agreements
FU = Futures
FW = Forwards
OP = Option
SB = Spreadbet
SW = Swap
ST = Swaption
OT = Other
2
2
Section 2a - Contract type
Asset class
Each reported contract shall be classified according to the asset class it is based on
CO = Commodity and emission allowances
CR = Credit
CU = Currency
EQ = Equity
IR = Interest Rate
2
3
Section 2b – Contract information
Product classification type
The type of relevant product classification
C = CFI
U = UPI (Once made available by the authorized UPI service provider)Until UPI is made available by the authorized UPI service provider this field shall only be populated with the value “C" (1 alphabetical character).
2
4
Section 2b – Contract information
Product classification
Applicable product classification code: CFI or UPI. Until UPI is made available by the authorized UPI service provider this field shall always be populated with CFI.
When dealing with hybrid options, exotic products or any other OTC derivative with different components, the basic one (i.e. the component which weights more in the derivative) must be taken into account for CFI population purposes.
In case of waad OTC derivatives, the CFI must be determined on the assumption that the buyer is binding to the contract and the contract will be settled.
ISO 10692 CFI, 6 characters alphabetical code
UPI format will be as per the required format by the Authorized UPI service provider
2
5
Section 2b – Contract information
Product identification type
The type of relevant product identification
Specify the applicable identification:• I = For products for which an ISO 6166 ISIN code is available
• U = UPI
• N = Not available for products for which an ISIN is not available
2
6
Section 2b – Contract information
Product identification
The product shall be identified through ISIN or UPI when the OTC derivative is not identified by an ISIN
For product identifier type I: ISO 6166 ISIN 12 character alphanumerical codeFor product identifier type U: UPI code (format to be defined once UPI is made available by the authorized UPI service provider)For product identifier type N: Blank
2
7
Section 2b – Contract information
Underlying identification type
The type of relevant underlying identifier
I = ISIN
C = CFI
U = UPI
B = Basket
X = Index
N = Not available
2
8
Section 2b – Contract information
Underlying identification
The direct underlying shall be identified by using a unique identification for this underlying based on its type.For derivatives which underlying is a currency (foreign exchange rate), in the absence of an endorsed UPI, the underlying currency must be indicated under the notional currency.In case of baskets composed, among others, of financial instruments traded in a trading venue, only financial instruments traded in a trading venue with a valid ISIN shall be specified.
For underlying identification type I: ISO 6166 ISIN 12 character alphanumerical codeFor underlying identification type C: ISO 10692 CFI 6 character alphanumerical codeFor underlying identification type U: UPIFor underlying identification type B: all individual components identification through ISO 6166 ISIN Identifiers of individual components shall be separated with a dash “-“. In any other case, this field shall be populated NA.For underlying identification type X: ISO 6166 ISIN if available, otherwise full name of the index as assigned by the index provider.For underlying identification type N: Blank
2
9
Section 2b – Contract information
Country of the underlying
The code of country where the underlying is located
ISO 3166 - 2 character country code.
2
10
Section 2b – Contract information
Complex trade component ID
Identifier, internal to the reporting firm, to identify and link all the reports related to the same derivative structured product composed of a combination of derivative contracts. The code must be unique at the level of the counterparty to the group of transaction reports resulting from the derivative contract. Field applicable only where a firm executes a derivative contract composed of two or more derivative contracts and where this contract cannot be adequately reported in a single report.
An alphanumeric field up to 35 characters.
2
11
Section 2b – Contract information
Notional currency 1
The currency of the notional amount.
In the case of an interest rate or currency derivative contract, this will be the notional currency of leg 1.
ISO 4217 Currency Code, 3 alphabetical characters
2
12
Section 2b – Contract information
Notional currency 2
The other currency of the notional amount. In the case of an interest rate or currency derivative contract, this will be the notional currency of leg 2.
ISO 4217 Currency Code, 3 alphabetical characters
2
13
Section 2b – Contract information
Deliverable currency
The currency to be delivered
ISO 4217 Currency Code, 3 alphabetical characters
2
14
Section 2c - Details on the transaction
Internal unique trade ID
Until a global Unique transaction identifier (UTI) is available, an internal unique trade identifier code shall be generated. This means that only one trade identifier should be applicable to every single OTC derivative contract that is reported to SATR and that the same trade identifier is not used for any other derivative contract, even in transactions between local obliged entities and foreign (non-Saudi) counterparties. In this respect, certain rules must be defined in order to determine the entity responsible of generating this unique trade identifier (hereinafter, the generating entity).
In general terms, the generating entity will be the reporting counterparty in accordance with the rules defined in section Business Rules of this document.
Up to 52 alphanumerical character code using exclusively upper-case alphabetical characters (A-Z) and digits (0-9), four special characters are allowed, the special characters not being allowed at the beginning or at the end of the code. No spaces allowed. There is no requirement to pad out Internal unique trade ID values to make them 52 characters long.This trade id will be a concatenation of the following:
• The characters ‘E02’.
• The (20 character) Legal Entity Identifier of the generating entity.
• A unique code generated by the generating entity.
2
15
Section 2c - Details on the transaction
Unique trade ID
The UTI ID could be the same as the "Internal unique trade id" except in those trades in which the other counterparty is an international counterparty or counterparties agree that it shall be the other counterparty the UTI generating entity. In this respect, when such transactions are centrally cleared through a CCP (also under indirect clearing agreements reached with a clearing house member) or when they are electronically confirmed, counterparties can agree that the CCP (or when applicable the clearing member through which the transaction is cleared) or the electronic platform through which the trade is confirmed become the unique trade identifier generating entity.In these cases the international generating entity shall communicate the unique trade identifier to the reporting counterparty in a timely manner so that the latter is able to meet its reporting obligation.If the international generating entity informs the "Unique trade ID" before the reporting deadline, this field shall be populated with the ID informed by the international generating entity. On the contrary, if the international generating entity does not inform the "Unique trade ID" before the T+1 deadline, this field can be left blank until the "Unique trade ID is informed". In such cases, once the ID is informed, a Modification report must be submitted by the reporting counterparty in order to populate the "Unique trade id" informed by the international generating entity.
Up to 52 alphanumerical character code using exclusively upper-case alphabetical characters (A-Z) and digits (0-9). No spaces allowed. There is no requirement to pad out Internal unique trade ID values to make them 52 characters long.
2
16
Section 2c - Details on the transaction
Price / rate
The price per derivative excluding, where applicable, commission and accrued interest
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
The negative symbol, if populated, is not counted as a numerical character.
In case the price is reported in percent values, it should be expressed as percentage where 100% is represented as “100” "999999999999999.99999" is accepted when the actual value is not available.
2
17
Section 2c - Details on the transaction
Price notation
The manner in which the price is expressed
U = Units/Monetary amount
P = Percentage
Y = Yield/Decimal
X = Not applicable
2
18
Section 2c - Details on the transaction
Currency of price
The currency in which the Price / rate is denominated
ISO 4217 Currency Code, 3 alphabetic characters
2
19
Section 2c - Details on the transaction
Notional
The reference amount from which contractual payments are determined. In case of partial terminations, amortizations and in case of contracts where the notional, due to the characteristics of the contract, varies over time, it shall reflect the remaining notional after the change took place.
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
2
20
Section 2c - Details on the transaction
Price multiplier
The number of units of the financial instrument which are contained in a trading lot; for example, the number of derivatives represented by the contract
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
2
21
Section 2c - Details on the transaction
Quantity
Number of contracts included in the report. For spread bets, the quantity shall be the monetary value agreed per point movement in the direct underlying financial instrument.
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
2
22
Section 2c - Details on the transaction
Up-front payment
Amount of any up-front payment the reporting counterparty made or received
Up to 20 numerical characters including up to 5 decimals.
The negative symbol to be used to indicate that the payment was made, not received.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
The negative symbol, if populated, is not counted as a numerical character.
2
23
Section 2c - Details on the transaction
Delivery type
Indicates whether the contract is settled physically or in cash
C = Cash
P = Physical
O = Optional for counterparty or when determined by a third party
2
24
Section 2c - Details on the transaction
Execution timestamp
Date and time when the contract was initially executed, resulting in the generation of a new trade id.
ISO 8601 date in the UTC time format YYYY-MM-DDThh:mm:ssZ
2
25
Section 2c - Details on the transaction
Effective date
Unadjusted date when obligations under the contract come into effect.
ISO 8601 date in the format YYYY- MM-DD
2
26
Section 2c - Details on the transaction
Expiration date
Original date of expiry of the reported contract.
An early termination shall not be reported in this field.
ISO 8601 date in the format YYYY- MM-DD
2
27
Section 2c - Details on the transaction
Early termination date
Termination date in the case of an early termination of the reported contract.
ISO 8601 date in the format YYYY- MM-DD
2
28
Section 2c - Details on the transaction
Settlement date
Date of settlement of the underlying. Date, as per the contract, by which all transfer of cash or assets should take place and the counterparties should no longer have any outstanding obligations to each other under that contract
If more than one, further fields may be used.
ISO 8601 date in the format YYYY- MM-DD
This field is repeatable.
2
29
Section 2c - Details on the transaction
Master Agreement type
Reference to any master agreement, if existent (e.g. ISDA Master Agreement; Master Power Purchase and Sale Agreement; International ForEx Master Agreement; European Master Agreement or any local Master Agreements).
Free Text, field of up to 50 characters, identifying the name of the Master Agreement used, if any. If no Master agreement exists, this field shall be left blank.
2
30
Section 2c - Details on the transaction
Master Agreement version
Reference to the year of the master agreement version used for the reported trade, if applicable (e.g. 1992, 2002, etc.)
ISO 8601 date in the format YYYY
2
31
Section 2d - Risk mitigation / Reporting
Confirmation timestamp
Date and time of the confirmation.
ISO 8601 date in the UTC time format YYYY-MM-DDThh:mm:ssZ
2
32
Section 2d - Risk mitigation / Reporting
Confirmation means
Whether the contract was electronically confirmed, non-electronically confirmed or remains unconfirmed
Y = Non-electronically confirmed
N = Non-confirmed
E = Electronically confirmed
2
33
Section 2e - Clearing
Cleared
Indicates, whether the transaction has been cleared in a CCP or not.
Y = Yes
N = No
2
34
Section 2e - Clearing
Clearing timestamp
Time and date when clearing took place
ISO 8601 date in the UTC time format YYYY-MM-DDThh:mm:ssZ
2
35
Section 2e - Clearing
CCP
In the case of a contract that has been cleared, the unique code for the CCP that has cleared the contract.
ISO 17442 Legal Entity Identifier (LEI)
20 alphanumerical character code.
2
36
Section 2e - Clearing
Intragroup
Indicates whether the counterparty to the contract is an intragroup entity.
Y = Yes
N = No
2
37
Section 2f - Interest Rates
Fixed rate of leg 1
An indication of the fixed rate leg 1 used, if applicable+
Up to 10 numerical characters including up to 5 decimals expressed as percentage where 100% is represented as “100”.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
The negative symbol, if populated, is not counted as a numerical character.
2
38
Section 2f - Interest Rates
Fixed rate of leg 2
An indication of the fixed rate leg 2 used, if applicable
Up to 10 numerical characters including up to 5 decimals expressed as percentage where 100% is represented as “100”.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
The negative symbol, if populated, is not counted as a numerical character.
2
39
Section 2f - Interest Rates
Fixed rate day count leg 1
For leg 1 of the transaction, where applicable: day count convention (often also referred to as day count fraction or day count basis or day count method) that determines how interest payments are calculated. It is used to compute the year fraction of the calculation period, and indicates the number of days in the calculation period divided by the number of days in the year.
ISO 20022 Interest Calculation/day Count Basis.
The following values will be admitted: A001 to A020 and NARR.
2
40
Section 2f - Interest Rates
Fixed rate day count leg 2
For leg 2 of the transaction, where applicable: day count convention (often also referred to as day count fraction or day count basis or day count method) that determines how interest payments are calculated. It is used to compute the year fraction of the calculation period, and indicates the number of days in the calculation period divided by the number of days in the year.
ISO 20022 Interest Calculation/day Count Basis.
The following values will be admitted: A001 to A020 and NARR.
2
41
Section 2f - Interest Rates
Fixed rate payment frequency leg 1 –time period
Time period describing frequency of payments for the fixed rate leg 1, if applicable
Time period describing how often the counterparties exchange payments, whereby the following abbreviations apply:
Y = Year
S = Semester
Q = Quarter
M = Month
W = Week
D = Day
A = Ad hoc which applies when payments are irregular
T = payment at term
2
42
Section 2f - Interest Rates
Fixed rate payment frequency leg 2 – time period
Time period describing frequency of payments for the fixed rate leg 2, if applicable
Time period describing how often the counterparties exchange payments, whereby the following abbreviations apply:
Y = Year
S = Semester
Q = Quarterly
M = Month
W = Week
D = Day
A = Ad hoc which applies when payments are irregular
T = payment at term
2
43
Section 2f - Interest Rates
Floating rate payment frequency leg 1 – time period
Time period describing frequency of payments for the floating rate leg 1, if applicable
Time period describing how often the counterparties exchange payments, whereby the following abbreviations apply:
Y = Year
S = Semester
Q = Quarter
M = Month
W = Week
D = Day
A = Ad hoc which applies when payments are irregular
T = payment at term
2
44
Section 2f - Interest Rates
Floating rate payment frequency leg 2 – time period
Time period describing frequency of payments for the floating rate leg 2, if applicable
Time period describing how often the counterparties exchange payments, whereby the following abbreviations apply:
Y = Year
S = Semester
Q = Quarterly
M = Month
W = Week
D = Day
A = Ad hoc which applies when payments are irregular
T = payment at term
2
45
Section 2f - Interest Rates
Floating rate reset frequency leg 1 – time period
Time period describing frequency of floating rate leg 1 resets, if applicable
Time period describing how often the leg 1 floating rate resets, whereby the following abbreviations apply:
Y = Year
S = Semester
Q = Quarter
M = Month
W = Week
D = Day
A = Ad hoc which applies when payments are irregular
2
46
Section 2f - Interest Rates
Floating rate reset frequency leg 2- time period
Time period of frequency of floating rate leg 2 resets, if applicable
Time period describing how often the leg 2 floating rate resets, whereby the following abbreviations apply:
Y = Year
S = Semester
Q = Quarterly
M = Month
W = Week
D = Day
A = Ad hoc which applies when payments are irregular
2
47
Section 2f - Interest Rates
Floating rate of leg 1
An indication of the interest rates used which are reset at predetermined intervals by reference to a market reference rate, if applicable
The name of the floating rate index
‘EONA’ - EONIA
‘EONS’ - EONIA SWAP
‘EURI’ - EURIBOR
‘EUUS’ – EURODOLLAR
‘EUCH’ - EuroSwiss
‘GCFR’ - GCF REPO
‘ISDA’ - ISDAFIX
’LIBI’ - LIBID
‘LIBO’ - LIBOR
‘MAAA’ – Muni AAA
‘PFAN’ - Pfandbriefe
‘TIBO’ - TIBOR
‘STBO’ - STIBOR
‘BBSW’ - BBSW
‘JIBA’ - JIBAR
‘BUBO’ - BUBOR
‘CDOR’ - CDOR
‘CIBO’ - CIBOR
‘MOSP’ - MOSPRIM
‘NIBO’ - NIBOR
‘PRBO’ - PRIBOR
‘SAIB’ - SAIBOR
‘TLBO’ - TELBOR
‘WIBO’ – WIBOR
‘TREA’ – Treasury
‘SWAP’ – SWAP
‘FUSW’ – Future SWAP
Or up to 25 alphanumerical characters if the reference rate is not included in the above list
2
48
Section 2f - Interest Rates
Floating rate of leg 2
An indication of the interest rates used which are reset at predetermined intervals by reference to a market reference rate, if applicable
The name of the floating rate index
‘EONA’ - EONIA
‘EONS’ - EONIA SWAP
‘EURI’ - EURIBOR
‘EUUS’ – EURODOLLAR
‘EUCH’ - EuroSwiss
‘GCFR’ - GCF REPO
‘ISDA’ - ISDAFIX
’LIBI’ - LIBID
‘LIBO’ - LIBOR
‘MAAA’ – Muni AAA
‘PFAN’ - Pfandbriefe
‘TIBO’ - TIBOR
‘STBO’ - STIBOR
‘BBSW’ - BBSW
‘JIBA’ - JIBAR
‘BUBO’ - BUBOR
‘CDOR’ - CDOR
‘CIBO’ - CIBOR
‘MOSP’ - MOSPRIM
‘NIBO’ - NIBOR
‘PRBO’ - PRIBOR
‘SAIB’ - SAIBOR
‘TLBO’ - TELBOR
‘WIBO’ – WIBOR
‘TREA’ – Treasury
‘SWAP’ – SWAP
‘FUSW’ – Future SWAP
Or up to 25 alphanumerical characters if the reference rate is not included in the above list
2
49
Section 2g – Foreign Exchange
Delivery currency 2
The cross currency, if different from the currency of delivery
ISO 4217 Currency Code, 3 alphabetical character code
2
50
Section 2g – Foreign Exchange
Exchange rate 1
The exchange rate as of the date and time when the contract was concluded. It shall be expressed as a price of base currency in the quoted currency. In the example 0.9426 USD/EUR, USD is the unit currency and EUR is the quoted currency; USD 1 = EUR 0.9426.
Up to 10 numerical digits including decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
The negative symbol, if populated, is not counted as a numerical character.
2
51
Section 2g – Foreign Exchange
Forward exchange rate
Forward exchange rate as agreed between the counterparties in the contractual agreement It shall be expressed as a price of base currency in the quoted currency. In the example 0.9426 USD/EUR, USD is the unit currency and EUR is the quoted currency; USD 1 = EUR 0.9426.
Up to 10 numerical digits including decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
The negative symbol, if populated, is not counted as a numerical character.
2
52
Section 2g – Foreign Exchange
Exchange rate basis
Currency pair and order in which the exchange rate is denominated, expressed as unit currency/quoted currency. In the example 0.9426 USD/EUR, USD is the unit currency and EUR is the quoted currency, USD 1 = EUR 0.9426.
Two ISO 4217 currency codes separated by “/”. First currency code shall indicate the base currency, and the second currency code shall indicate the quote currency.
2
53
Section 2k - Modifications to the contract
Action type
Whether the report contains:
— a derivative contract for the first time, in which case it will be identified as ‘new’;
— a modification to the terms or details of a previously reported derivative contract, but not a correction of a report, in which case it will be identified as ‘modify’. This includes an update to a previous report that is showing a position in order to reflect new trades included in that position.;
— a cancellation of a wrongly submitted entire report in case the contract never came into existence or it was reported to a Trade Repository by mistake, in which case, it will be identified as ‘error’;
— an early termination of an existing contract, in which case it will be identified as ‘early termination’;
— a previously submitted report contains erroneous data fields, in which case the report correcting the erroneous data fields of the previous report shall be identified as ‘correction’;
— a compression of the reported contract, in which case it will be identified as ‘compression’;
— an update of a contract valuation or collateral, in which case it will be identified as ‘valuation update’;
N = New
M = Modify
E = Error
C = Early Termination
R = Correction
Z = Compression
V = Valuation update
3)
Evolutive Field - Common Data
Table Item Section Field Details to be reported Format 3
1
Parties to the contract - Collateral
Collateralisation
Indicate whether a collateral agreement between the counterparties exists.
U = uncollateralised
PC = partially collateralised
OC = one way collateralised
FC = fully collateralised
3
2
Parties to the contract - Collateral
Collateral portfolio
Whether the collateralisation was performed on a portfolio basis.
Portfolio means the collateral calculated on the basis of net positions resulting from a set of contracts, rather than per trade.
Y = Yes
N = No
3
3
Parties to the contract - Collateral
Collateral portfolio code
If collateral is reported on a portfolio basis, the portfolio should be identified by a unique code determined by the reporting counterparty
Up to 52 alphanumerical characters including four special characters : ". - _."
Special characters are not allowed at the beginning and at the end of the code. No space allowed.
3
4
Parties to the contract - Collateral
Initial margin posted
Value of the initial margin posted by the reporting counterparty to the other counterparty.
Where initial margin is posted on a portfolio basis, this field should include the overall value of initial margin posted for the portfolio.
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
3
5
Parties to the contract - Collateral
Currency of the initial margin posted
Specify the currency of the initial margin posted
ISO 4217 Currency Code, 3 alphabetical characters
3
6
Parties to the contract - Collateral
Variation margin posted
Value of the variation margin posted, including cash settled, by the reporting counterparty to the other counterparty. Where variation margin is posted on a portfolio basis, this field should include the overall value of variation margin posted for the portfolio.
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
3
7
Parties to the contract - Collateral
Currency of the variation margins posted
Specify the currency of variation margin posted
ISO 4217 Currency Code, 3 alphabetical characters
3
8
Parties to the contract - Collateral
Initial margin received
Value of the initial margin received by the reporting counterparty from the other counterparty.
Where initial margin is received on a portfolio basis, this field should include the overall value of initial margin received for the portfolio.
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
3
9
Parties to the contract - Collateral
Currency of the initial margin received
Specify the currency of the initial margin received
ISO 4217 Currency Code, 3 alphabetical characters
3
10
Parties to the contract - Collateral
Variation margin received
Value of the variation margin received, including cash settled, by the reporting counterparty from the other counterparty. Where variation margin is received on a portfolio basis, this field should include the overall value of variation margin received for the portfolio.
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
3
11
Parties to the contract - Collateral
Currency of the variation margins received
Specify the currency of the variation margin received
ISO 4217 Currency Code, 3 alphabetical characters
3
12
Parties to the contract - Collateral
Excess collateral posted
Value of collateral posted in excess of the required collateral
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
3
13
Parties to the contract - Collateral
Currency of the excess collateral posted
Specify the currency of the excess collateral posted
ISO 4217 Currency Code, 3 alphabetical characters
3
14
Parties to the contract - Collateral
Excess collateral received
Value of collateral received in excess of the required collateral
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
3
15
Parties to the contract - Collateral
Currency of the excess collateral received
Specify the currency of the excess collateral received
ISO 4217 Currency Code, 3 alphabetical characters
3
16
Section 2c - Details on the transaction
Venue of execution
The venue of execution of the derivative contract shall be identified by a unique code for this venue.
Where a contract was concluded OTC and the respective instrument is admitted to trading or traded on a trading venue, MIC code ‘ XOFF’ shall be used.
Where a contract was concluded OTC and the respective instrument is not admitted to trading or traded on a trading venue, MIC code ‘XXXX’ shall be used.
ISO 10383 Market Identifier Code (MIC), 4 alphanumerical characters
3
17
Section 2c - Details on the transaction
Compression
Identify whether the contract results from a compression operation as defined in Article 3.1.5 of the Trade Repository (TR) Reporting & Risk Mitigation Requirements for Over-The-Counter (OTC) Derivatives Contracts Rules
Y = a new contract arising from compression
N = contract does not result from compression
T = contract results from a novation
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Section 2c - Details on the transaction
Notional Unitary Notation
The unit in which the notional is expressed
U = Units amount
H = Hundreds
T = Thousands
M = Millions
3
19
Parties to the contract
Valuation Unitary Notation
The unit in which the notional is expressed
U = Units amount
H = Hundreds
T = Thousands
M = Millions
3
20
Section 2f - Interest Rates
Floating rate reference period leg 1 – time period
Time period describing the reference period for the floating rate of leg 1
Time period describing reference period of the floating rate of leg 1, whereby the following abbreviations apply:
Y = Year
S = Semester
Q = Quarterly
M = Month
W = Week
D = Day
3
21
Section 2f - Interest Rates
Floating rate reference period leg 2 – time period
Time period describing the reference period for the floating rate of leg 2
Time period describing reference period of the floating rate of leg 2, whereby the following abbreviations apply:
Y = Year
S = Semester
Q = Quarterly
M = Month
W = Week
D = Day
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22
Section 2i - Options
Option type
Indication as to whether the derivative contract is a call (right to purchase a specific underlying asset) or a put (right to sell a specific underlying asset) or whether it cannot be determined whether it is a call or a put at the time of execution of the derivative contract.
In case of swaptions it shall be:
- “Put”, in case of receiver swaption, in which the buyer has the right to enter into a swap as a fixed-rate receiver.
-“Call”, in case of payer swaption, in which the buyer has the right to enter into a swap as a fixed-rate payer. In case of Caps and Floors it shall be:
-“Put”, in case of a Floor.
-“Call”, in case of a Cap.
P = Put
C = Call
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23
Section 2i - Options
Option exercise style
Indicates whether the option may be exercised only at a fixed date (European, and Asian style), a series of pre-specified dates (Bermudan) or at any time during the life of the contract (American style)
A = American
B = Bermudan
E = European
S = Asian
More than one value is allowed
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24
Section 2i - Options
Strike price (cap/floor rate)
The strike price of the option.
Up to 20 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
The negative symbol, if populated, is not counted as a numerical character.
Where the strike price is reported in percent values, it should be expressed as percentage where 100% is represented as “100”
3
25
Section 2i - Options
Strike price notation
The manner in which the strike price is expressed
U = Units/Monetary amount
P = Percentage
Y = Yield/Decimal
X = Not applicable
3
26
Section 2i - Options
Maturity date of the underlying
In case of swaptions, maturity date of the underlying swap
ISO 8601 date in the format
YYYY-MM-DD
3
27
Section 2h - Commodities and emission allowances (General)
Commodity base
Indicates the type of commodity underlying the contract
AG = Agricultural
EN = Energy
FR = Freights
ME = Metals
IN = Index
EV = Environmental
EX = Exotic
OT = Other
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28
Section 2h - Commodities and emission allowances (General)
Commodity details
Details of the particular commodity beyond field 65
Agricultural
GO = Grains oilseeds
DA = Dairy
LI = Livestock
FO = Forestry
SO = Softs
SF = Seafood
OT = Other
Energy
OI = Oil
NG = Natural gas
CO = Coal
EL = Electricity
IE = Inter-energy
OT = Other
Freights
DR = Dry
WT = Wet
OT = Other
Metals
PR = Precious
NP = Non-precious
Environmental
WE = Weather
EM = Emissions
OT = Other
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Section 2j – Credit derivatives
Seniority
Information on the seniority in case of contract on index or on a single name entity
SNDB = Senior, such as Senior Unsecured Debt
(Corporate/Financial), Foreign Currency Sovereign Debt (Government),
SBOD = Subordinated, such as Subordinated or Lower Tier 2 Debt (Banks), Junior Subordinated or Upper Tier 2 Debt (Banks),
OTHR = Other, such as Preference Shares or Tier 1 Capital (Banks) or other credit derivatives
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30
Section 2j – Credit derivatives
Reference entity
Identification of the underlying reference entity (issuer of the debt that uderlines a credit derivative)
ISO 3166 - 2 character country code or
ISO 17442 Legal Entity Identifier (LEI) 20 alphanumerical character code
or
For Corporate Customer in KSA without LEI: “CLC-”+ country code as per ISO 3166 + Commercial registration number+ “CR”.
Example: CLC-SA123456789CR
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Section 2j – Credit derivatives
Frequency of payment
The frequency of payment of the interest rate or coupon
Time period describing how often the interest rate or coupon is settle, whereby the following abbreviations apply:
Y = Year
S = Semester
Q = Quarterly
M = Month
W = Week
D = Day
A = Ad hoc which applies when payments are irregular
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Section 2j – Credit derivatives
The calculation basis
The calculation basis of the interest rate
Numerator/Denominator where both, Numerator and Denominator are numerical characters or alphabetic expression ‘Actual’, e.g. 30/360 or Actual/365
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33
Section 2j – Credit derivatives
Series
The series number of the composition of the index if applicable
Integer field up to 5 characters
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34
Section 2j – Credit derivatives
Version
A new version of a series is issued if one of the constituents defaults and the index has to be re-weighted to account for the new number of total constituents within the index
Integer field up to 5 characters
3
35
Section 2j – Credit derivatives
Index factor
The factor to apply to the Notional (Field 20) to adjust it to all the previous credit events in that Index series.
The figure varies between 0 and 100.
Up to 10 numerical characters including up to 5 decimals.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
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36
Section 2j – Credit derivatives
Tranche
Indication whether a derivative contract is tranched.
T= Tranched
U=Untranched
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37
Section 2j – Credit derivatives
Attachment point
The point at which losses in the pool will attach to a particular tranche
Up to 10 numerical characters including up to 5 decimals expressed as a decimal fraction between 0 and 1.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
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Section 2j – Credit derivatives
Detachment point
The point beyond which losses do not affect the particular tranche
Up to 10 numerical characters including up to 5 decimals expressed as a decimal fraction between 0 and 1.
The decimal mark is not counted as a numerical character. If populated, it shall be represented by a dot.
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Section 2f - Interest Rates
Fixed rate payment frequency leg 1 – multiplier
Multiplier of the time period describing frequency of payments for the fixed rate leg 1, if applicable
Integer multiplier of the time period describing how often the counterparties exchange payments. Up to 3 numerical characters.
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40
Section 2f - Interest Rates
Fixed rate payment frequency leg 2 - multiplier
Multiplier of the time period describing frequency of payments for the fixed rate leg 2, if applicable
Integer multiplier of the time period describing how often the counterparties exchange payments. Up to 3 numerical characters.
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41
Section 2f - Interest Rates
Floating rate payment frequency leg 1 – multiplier
Multiplier of the time period describing frequency of payments for the floating rate leg 1, if applicable
Integer multiplier of the time period describing how often the counterparties exchange payments. Up to 3 numerical characters.
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42
Section 2f - Interest Rates
Floating rate payment frequency leg 2 – multiplier
Multiplier of the time period describing frequency of payments for the floating rate leg 2, if applicable
Integer multiplier of the time period describing how often the counterparties exchange payments. Up to 3 numerical characters.
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43
Section 2f - Interest Rates
Floating rate reset frequency leg 1 - multiplier
Multiplier of the time period describing frequency of floating rate leg 1 resets, if applicable
Integer multiplier of the time period describing how often the counterparties reset the floating rate.
Up to 3 numerical characters.
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44
Section 2f - Interest Rates
Floating rate reset frequency leg 2 - multiplier
Multiplier of the time period describing frequency of floating rate leg 2 resets, if applicable
Integer multiplier of the time period describing how often the counterparties reset the floating rate.
Up to 3 numerical characters.
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45
Section 2f - Interest Rates
Floating rate reference period leg 1 – multiplier
Multiplier of the time period describing the reference period for the floating rate of leg 1
Integer multiplier of the time period describing the reference period.
Up to 3 numerical characters.
3
46
Section 2f - Interest Rates
Floating rate reference period leg 2 – multiplier
Multiplier of the time period describing the reference period for the floating rate of leg 2
Integer multiplier of the time period describing the reference period.
Up to 3 numerical characters.
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47
Section 2b – Contract information
Linked UTI
Identifier to link the related UTI from a novation or a compression of the contract.
Up to 52 alphanumerical character code using exclusively alphabetical characters (A-z) and digits (0-9), including four special characters, the special characters not being allowed at the beginning or at the end of the code. No spaces allowed. There is no requirement to pad out Internal unique trade ID values to make them 52 characters long.This trade id will be a concatenation of the following:
• The characters ‘E02’.
• The (20 character) Legal Entity Identifier of the generating entity.
• A unique code generated by the generating entity.
Appendix B
List of reportable life cycle events for OTC derivative transactions:
Action type
Description
New (N)
A derivative contract is entered into for the first time.
Modify (M)
A modification to the terms or details of a previously reported derivative contract, but not a correction of a report. Modifications can only affect new trades.
Error (E)
A cancellation of a wrongly submitted entire report in case, among others, the contract never came into existence or was submitted by mistake by a non-obliged counterparty.
Early Termination (C)
An early termination of an existing contract.
Correction (R)
A previously submitted report contains erroneous data fields, in which case the report correcting the erroneous data fields of the previous report.
Valuation update (V)
A daily update of a contract valuation.
Compression (Z)
A compression of the reported contract.
Depending on the action type that is reported and populated in table 2: item 52 “Action type”, fields may have adopted any of the following status:
• Mandatory (M): the field is strictly required and validations of format and content are applied.
• Conditionally mandatory (C): the field is required if the specific conditions set out in the validation rules are met. Format and content validations are applied as well.
• Potential (P): the field shall be populated if applicable depending on the transaction characteristics or to the reported life cycle event (for modifications and or corrections all fields, except those that are mandatory regardless the reported life cycle event, could potentially be modified or corrected and therefore populated). Only format and content validations are applied when the field is populated.
• Not relevant (-): the field shall be left blank.
List of life cycle events reporting scenarios for OTC derivative transactions:
1. Submission of a new trade with no available “Unique trade ID” generated by the international generating entity
In cases of a transaction between a KSA Bank and a foreign counterparty, if at the regulatory deadline to submit a new trade (T+1), table 2 item 15 “Unique trade ID” is not informed by the international generating entity, the field can be provisionally left blank. In such cases, once the Trade ID is informed, a Modification report (table 2 item 53 “Action type” populated with “M”) must be submitted by the reporting counterparty in order to populate the "Unique trade ID" informed by the international generating entity.
2. Modifications to the terms of a contract
When both counterparties agree to modify any of the terms of an OTC derivative contract, the reporting counterparty shall submit a modification report (table 2 item 53 “Action type” populated with the value “M”) in which, besides additional applicable validation rules described in this document, table 2 item 14 “Internal unique trade ID” shall be populated with a code that is fully coincident with a previously reported “Internal unique trade ID”. The “Internal unique trade ID” cannot be subject to modification.
In cases where the aim of the modification is to turn blank a previously populated field, the field in question shall be populated with the value “null”.
3. Novations
For reporting purposes, in cases of novations to the original report relating to the existing derivative, the reporting counterparty should send a termination report (table 2 item 53“Action type” populated with the value “C”). The reporting counterparty should then send a new report with table 2 item 53 “Action type” populated with the value “N” relating to the new derivative contract arisen from the novation.
This is applicable to trades that are novated for the purpose of clearing a certain trade in a CCP. In such case, the original trade (pre-novation) shall be reported in T+1 with table 2 item 53 “Action type” populated with the value “N” and once it is novated the reporting counterparty should send a termination report (table 2 item 53 “Action type” populated with the value “C”) and submit a new report with table 2 item 53 “Action type” populated with the value “N” relating to the new derivative contract arisen from the novation. In the case that the novation takes place before T+1, the reporting counterparty shall only submit a single report (post-novation) with table 2 item 53 “Action type” populated with the value “N” and table 1 item 2 “ID of the other Counterparty” populated with the LEI of the CCP.
4. Detection of an error in an already submitted report
If the reporting counterparty (or the other counterparty upon communication to the reporting counterparty) detects that a report (no matter its nature or “Action type”) was submitted by error, the reporting counterparty is required to submit an error report (table 2 item 53 “Action type” populated with the value “E”) in order to eliminate the erroneous report. besides mandatory fields described in the first bullet of this paragraph, table 2 item 14 “Internal unique trade ID” shall be populated with a code that is fully coincident with a previously reported “Internal unique trade ID”.
5. Submission of an early termination report
In the case that a trade ends before reaching its original maturity date, the reporting counterparty shall submit an early termination report (table 2 item 53 “Action type” populated with value C”). Besides mandatory fields described in bullet 1 of this paragraph, table 2 item 27 “Early termination date” shall be populated. Furthermore, table 2 item 14 “Internal unique trade ID” shall be populated with a code that is fully coincident with a previously reported “Internal unique trade ID”. The “Internal unique trade ID” cannot be subject to correction.
6. Notional increase or decrease
For reporting purposes, in the event of an increase or decrease in the notional amount of an existing contract (partial termination but not fully close-out), the reporting counterparty shall submit a modification report (table 2 item 53 “Action type” populated with the value “M”) modifying the “Notional” (table 2 item 19).
7. Correction of a previously submitted report
If the reporting counterparty (or the other counterparty upon communication to the reporting counterparty) detects an incorrectly reported field, the reporting counterparty shall submit a correction report (table 2: item 53 “Action type” populated with the value “R”) in which, besides additional applicable validation rules described in this document, Table 2 item 14 “Internal unique trade ID” shall be populated with a code that is fully coincident with a previously reported “Internal unique trade ID”. Only mandatory and the corrected fields shall be populated.
8. Valuation update
Valuation update reports shall be submitted on a daily basis. Besides additional applicable validation rules described throughout this document, Table 2 item 14 “Internal unique trade ID” shall be populated with a code that is fully coincident with a previously reported “Internal unique trade ID”.
9. FX Overnight trades
FX spot (D+2) and FX overnight trades (D+1) are not considered OTC derivatives, so they are not required to be reported.
10. Backloading requirement for reporting entities
In order to meet regulatory needs and to reduce the substantial and costly adjustments that reporting entities need to make to comply with the backloading requirement, OTC derivatives transactions on Equity, Credit and Commodity asset classes that are still outstanding as of the effective date (June 1st 2021), will need to be submitted through new reports (table 2 item 53 “Action type” populated with value “N”). For Backloading purposes, reporting Bank must also report transactions which matured between January 1st 2021 and May 31st 2021. Reporting must be completed by the effective date.
After the submission of each new report, the updated valuation of the contract (table 2 item 53 “Action type” populated with value “V”) should start to be reported on a daily basis as well. See applicable rules described in the “Scope of Reporting” in this document in order to identify the counterparty of the transaction that is subject to the reporting-backloading obligation for each legacy trade.
OTC derivatives transactions on Equity, Credit and Commodity asset classes whose maturity date had been reached before December 31st 2020, will not be subject to the backloading obligation.
11. Reporting of Waad OTC derivatives
"Arbun" derivatives should be identified and reported like a call/put option.
Any Waad OTC derivative must be reported to SATR on the agreement date as a Forward, informing about the expected “effective date”, “settlement date” and “expiration date”. If the transaction is not to be settled an early termination (“C”) event must be reported as soon as the reporting counterparty is certain of it. If the transaction is finally settled but with a different “effective date”, ”settlement date” or “expiration date” or any other previously reported field, a modification (“M”) event must be reported.
Appendix C
The following rules are required to be defined in order to identify the counterparty that is subject to the reporting obligation in the different types of transactions to be reported:
• Local financial counterparty vs Local non-financial counterparty: Under the assumption that one of the counterparties is categorized as a non-financial counterparty, the financial counterparty of the transaction shall be responsible of submitting the transaction report.
• Local financial counterparty vs International financial counterparty / Qualified Non - financial counterparty: Under the assumption that the other counterparty is an international financial counterparty or international qualified non-financial counterparty, the local financial counterparty shall be subject to the local reporting obligation. The international counterparty will report to its competent authority depending on its home jurisdiction requirements.
• Local financial counterparty vs CCP: If a transaction is novated from an OTC transaction to a CCP, the local financial counterparty shall be subject to the local reporting obligation, provided that the original transaction was reportable.
• Local financial counterparty vs Local financial counterparty: Under the assumption that both counterparties are categorized as financial counterparties established in Saudi Arabia, both of them will be responsible of submitting its own report, in which it should properly be identified one counterparty as the seller and the other as the buyer in accordance to what is reflected in the OTC derivative contract agreed between both counterparties or otherwise in accordance to the agreement reached between counterparties at the moment of execution of the trade. In the event that both counterparties identify themselves as the seller of the transaction and assuming that both reports are submitted with the same Internal Unique Trade ID (Table 2 Item 14), the TR will not accept the second report received from one of the counterparties and will submit to this entity an error, in which it will be indicated that the report has already been submitted by another counterparty.
• In intragroup transactions the reporting entity will always be the obliged entity unless both intragroup counterparties are obliged in which case the aforementioned rules would be applicable.
Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools - BCBS
List of Abbreviations
ABCP Asset-backed commercial paper
ALA Alternative Liquidity Approaches
CD Certificate of deposit
CDS Credit default swap
CFP Contingency Funding Plan
CP Commercial paper
ECAI External credit assessment institution
HQLA High quality liquid assets
IRB Internal ratings-based
LCR Liquidity Coverage Ratio
LTV Loan to Value Ratio
NSFR Net Stable Funding Ratio
OBS Off-balance sheet
PD Probability of default
PSE Public sector entity
RMBS Residential mortgage backed securities
SIV Structured investment vehicle
SPE Special purpose entity
Introduction
1. This document presents one of the Basel Committee’s1 key reforms to develop a more resilient banking sector: the Liquidity Coverage Ratio (LCR). The objective of the LCR is to promote the short-term resilience of the liquidity risk profile of banks. It does this by ensuring that banks have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately in private markets into cash to meet their liquidity needs for a 30 calendar day liquidity stress scenario. The LCR will improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy. This document sets out the LCR standard and timelines for its implementation.
2. During the early “liquidity phase” of the financial crisis that began in 2007, many banks – despite adequate capital levels – still experienced difficulties because they did not manage their liquidity in a prudent manner. The crisis drove home the importance of liquidity to the proper functioning of financial markets and the banking sector. Prior to the crisis, asset markets were buoyant and funding was readily available at low cost. The rapid reversal in market conditions illustrated how quickly liquidity can evaporate, and that illiquidity can last for an extended period of time. The banking system came under severe stress, which necessitated central bank action to support both the functioning of money markets and, in some cases, individual institutions.
3. The difficulties experienced by some banks were due to lapses in basic principles of liquidity risk management. In response, as the foundation of its liquidity framework, the Committee in 2008 published Principles for Sound Liquidity Risk Management and Supervision (“Sound Principles”).2 The Sound Principles provide detailed guidance on the risk management and supervision of funding liquidity risk and should help promote better risk management in this critical area, but only if there is full implementation by banks and supervisors. As such, the Committee will continue to monitor the implementation by supervisors to ensure that banks adhere to these fundamental principles.
4. To complement these principles, the Committee has further strengthened its liquidity framework by developing two minimum standards for funding liquidity. These standards have been developed to achieve two separate but complementary objectives. The first objective is to promote short-term resilience of a bank’s liquidity risk profile by ensuring that it has sufficient HQLA to survive a significant stress scenario lasting for one month. The Committee developed the LCR to achieve this objective. The second objective is to promote resilience over a longer time horizon by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The Net Stable Funding Ratio (NSFR), which is not covered by this document, supplements the LCR and has a time horizon of one year. It has been developed to provide a sustainable maturity structure of assets and liabilities.
5. These two standards are comprised mainly of specific parameters which are internationally “harmonised” with prescribed values. Certain parameters, however, contain elements of national discretion to reflect jurisdiction-specific conditions. In these cases, the parameters should be transparent and clearly outlined in the regulations of each jurisdiction to provide clarity both within the jurisdiction and internationally.
6. It should be stressed that the LCR standard establishes a minimum level of liquidity for internationally active banks. Banks are expected to meet this standard as well as adhere to the Sound Principles. Consistent with the Committee’s capital adequacy standards, national authorities may require higher minimum levels of liquidity. In particular, supervisors should be mindful that the assumptions within the LCR may not capture all market conditions or all periods of stress. Supervisors are therefore free to require additional levels of liquidity to be held, if they deem the LCR does not adequately reflect the liquidity risks that their banks face.
7. Given that the LCR is, on its own, insufficient to measure all dimensions of a bank’s liquidity profile, the Committee has also developed a set of monitoring tools to further strengthen and promote global consistency in liquidity risk supervision. These tools are supplementary to the LCR and are to be used for ongoing monitoring of the liquidity risk exposures of banks, and in communicating these exposures among home and host supervisors.
8. The Committee is introducing phase-in arrangements to implement the LCR to help ensure that the banking sector can meet the standard through reasonable measures, while still supporting lending to the economy.
9. The Committee remains firmly of the view that the LCR is an essential component of the set of reforms introduced by Basel III and, when implemented, will help deliver a more robust and resilient banking system. However, the Committee has also been mindful of the implications of the standard for financial markets, credit extension and economic growth, and of introducing the LCR at a time of ongoing strains in some banking systems. It has therefore decided to provide for a phased introduction of the LCR, in a manner similar to that of the Basel III capital adequacy requirements.
10. Specifically, the LCR will be introduced as planned on 1 January 2015, but the minimum requirement will be set at 60% and rise in equal annual steps to reach 100% on 1 January 2019. This graduated approach, coupled with the revisions made to the 2010 publication of the liquidity standards,3 are designed to ensure that the LCR can be introduced without material disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity.
1 January 2015 1 January 2016 1 January 2017 1 January 2018 1 January 2019 Minimum LCR 60% 70% 80% 90% 100% 11. The Committee also reaffirms its view that, during periods of stress, it would be entirely appropriate for banks to use their stock of HQLA, thereby falling below the minimum. Supervisors will subsequently assess this situation and will give guidance on usability according to circumstances. Furthermore, individual countries that are receiving financial support for macroeconomic and structural reform purposes may choose a different implementation schedule for their national banking systems, consistent with the design of their broader economic restructuring programme.
12. The Committee is currently reviewing the NSFR, which continues to be subject to an observation period and remains subject to review to address any unintended consequences. It remains the Committee’s intention that the NSFR, including any revisions, will become a minimum standard by 1 January 2018.
13. This document is organised as follows:
• Part 1 defines the LCR for internationally active banks and deals with application issues.
• Part 2 presents a set of monitoring tools to be used by banks and supervisors in their monitoring of liquidity risks.
1 The Basel Committee on Banking Supervision consists of senior representatives of bank supervisory authorities and central banks from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. It usually meets at the Bank for International Settlements (BIS) in Basel, Switzerland, where its permanent Secretariat is located.
2 The Sound Principles are available at The BIS Website.
3 The 2010 publication is available at The BIS Website.Part 1: The Liquidity Coverage Ratio
14. The Committee has developed the LCR to promote the short-term resilience of the liquidity risk profile of banks by ensuring that they have sufficient HQLA to survive a significant stress scenario lasting 30 calendar days.
15. The LCR should be a key component of the supervisory approach to liquidity risk, but must be supplemented by detailed supervisory assessments of other aspects of the bank’s liquidity risk management framework in line with the Sound Principles, the use of the monitoring tools included in Part 2, and, in due course, the NSFR. In addition, supervisors may require an individual bank to adopt more stringent standards or parameters to reflect its liquidity risk profile and the supervisor’s assessment of its compliance with the Sound Principles.
I. Objective of the LCR and Use of HQLA
16. This standard aims to ensure that a bank has an adequate stock of unencumbered HQLA that consists of cash or assets that can be converted into cash at little or no loss of value in private markets, to meet its liquidity needs for a 30 calendar day liquidity stress scenario. At a minimum, the stock of unencumbered HQLA should enable the bank to survive until Day 30 of the stress scenario, by which time it is assumed that appropriate corrective actions can be taken by management and supervisors, or that the bank can be resolved in an orderly way. Furthermore, it gives the central bank additional time to take appropriate measures, should they be regarded as necessary. As noted in the Sound Principles, given the uncertain timing of outflows and inflows, banks are also expected to be aware of any potential mismatches within the 30-day period and ensure that sufficient HQLA are available to meet any cash flow gaps throughout the period.
17. The LCR builds on traditional liquidity “coverage ratio” methodologies used internally by banks to assess exposure to contingent liquidity events. The total net cash outflows for the scenario are to be calculated for 30 calendar days into the future. The standard requires that, absent a situation of financial stress, the value of the ratio be no lower than 100%4 (ie the stock of HQLA should at least equal total net cash outflows) on an ongoing basis because the stock of unencumbered HQLA is intended to serve as a defence against the potential onset of liquidity stress. During a period of financial stress, however, banks may use their stock of HQLA, thereby falling below 100%, as maintaining the LCR at 100% under such circumstances could produce undue negative effects on the bank and other market participants. Supervisors will subsequently assess this situation and will adjust their response flexibly according to the circumstances.
18. In particular, supervisory decisions regarding a bank’s use of its HQLA should be guided by consideration of the core objective and definition of the LCR. Supervisors should exercise judgement in their assessment and account not only for prevailing macro financial conditions, but also consider forward-looking assessments of macroeconomic and financial conditions. In determining a response, supervisors should be aware that some actions could be procyclical if applied in circumstances of market-wide stress. Supervisors should seek to take these considerations into account on a consistent basis across jurisdictions.
(a) Supervisors should assess conditions at an early stage, and take actions if deemed necessary, to address potential liquidity risk.
(b) Supervisors should allow for differentiated responses to a reported LCR below 100%. Any potential supervisory response should be proportionate with the drivers, magnitude, duration and frequency of the reported shortfall.
(c) Supervisors should assess a number of firm- and market-specific factors in determining the appropriate response as well as other considerations related to both domestic and global frameworks and conditions. Potential considerations include, but are not limited to:
(i) The reason(s) that the LCR fell below 100%. This includes use of the stock of HQLA, an inability to roll over funding or large unexpected draws on contingent obligations. In addition, the reasons may relate to overall credit, funding and market conditions, including liquidity in credit, asset and funding markets, affecting individual banks or all institutions, regardless of their own condition;
(ii) The extent to which the reported decline in the LCR is due to a firm-specific or market-wide shock;
(iii) A bank’s overall health and risk profile, including activities, positions with respect to other supervisory requirements, internal risk systems, controls and other management processes, among others;
(iv) The magnitude, duration and frequency of the reported decline of HQLA;
(v) The potential for contagion to the financial system and additional restricted flow of credit or reduced market liquidity due to actions to maintain an LCR of 100%;
(vi) The availability of other sources of contingent funding such as central bank funding,5 or other actions by prudential authorities.
(d) Supervisors should have a range of tools at their disposal to address a reported LCR below 100%. Banks may use their stock of HQLA in both idiosyncratic and systemic stress events, although the supervisory response may differ between the two.
(i) At a minimum, a bank should present an assessment of its liquidity position, including the factors that contributed to its LCR falling below 100%, the measures that have been and will be taken and the expectations on the potential length of the situation. Enhanced reporting to supervisors should be commensurate with the duration of the shortfall.
(ii) If appropriate, supervisors could also require actions by a bank to reduce its exposure to liquidity risk, strengthen its overall liquidity risk management, or improve its contingency funding plan.
(iii) However, in a situation of sufficiently severe system-wide stress, effects on the entire financial system should be considered. Potential measures to restore liquidity levels should be discussed, and should be executed over a period of time considered appropriate to prevent additional stress on the bank and on the financial system as a whole.
(e) Supervisors’ responses should be consistent with the overall approach to the prudential framework.
4 The 100% threshold is the minimum requirement absent a period of financial stress, and after the phase-in arrangements are complete. References to 100% may be adjusted for any phase-in arrangements in force.
5 The Sound Principles require that a bank develop a Contingency Funding Plan (CFP) that clearly sets out strategies for addressing liquidity shortfalls, both firm-specific and market-wide situations of stress. A CFP should, among other things, “reflect central bank lending programmes and collateral requirements, including facilities that form part of normal liquidity management operations (eg the availability of seasonal credit).”II. Definition of the LCR
19. The scenario for this standard entails a combined idiosyncratic and market-wide shock that would result in:
(a) the run-off of a proportion of retail deposits;
(b) a partial loss of unsecured wholesale funding capacity;
(c) a partial loss of secured, short-term financing with certain collateral and counterparties;
(d) additional contractual outflows that would arise from a downgrade in the bank’s public credit rating by up to and including three notches, including collateral posting requirements;
(e) increases in market volatilities that impact the quality of collateral or potential future exposure of derivative positions and thus require larger collateral haircuts or additional collateral, or lead to other liquidity needs;
(f) unscheduled draws on committed but unused credit and liquidity facilities that the bank has provided to its clients; and
(g) the potential need for the bank to buy back debt or honour non-contractual obligations in the interest of mitigating reputational risk.
20. In summary, the stress scenario specified incorporates many of the shocks experienced during the crisis that started in 2007 into one significant stress scenario for which a bank would need sufficient liquidity on hand to survive for up to 30 calendar days.
21. This stress test should be viewed as a minimum supervisory requirement for banks. Banks are expected to conduct their own stress tests to assess the level of liquidity they should hold beyond this minimum, and construct their own scenarios that could cause difficulties for their specific business activities. Such internal stress tests should incorporate longer time horizons than the one mandated by this standard. Banks are expected to share the results of these additional stress tests with supervisors.
22. The LCR has two components:
(a) Value of the stock of HQLA in stressed conditions; and
(b) Total net cash outflows, calculated according to the scenario parameters outlined below.
Stock of HQLA ≥ 100% Total net cash outflows over the next 30 calendar days A. Stock of HQLA
23. The numerator of the LCR is the “stock of HQLA”. Under the standard, banks must hold a stock of unencumbered HQLA to cover the total net cash outflows (as defined below) over a 30-day period under the prescribed stress scenario. In order to qualify as “HQLA”, assets should be liquid in markets during a time of stress and, ideally, be central bank eligible. The following sets out the characteristics that such assets should generally possess and the operational requirements that they should satisfy.6
6 Refer to the sections on “Definition of HQLA” and “Operational requirements” for the characteristics that an asset must meet to be part of the stock of HQLA and the definition of “unencumbered” respectively.
1. Characteristics of HQLA
24. Assets are considered to be HQLA if they can be easily and immediately converted into cash at little or no loss of value. The liquidity of an asset depends on the underlying stress scenario, the volume to be monetised and the timeframe considered. Nevertheless, there are certain assets that are more likely to generate funds without incurring large discounts in sale or repurchase agreement (repo) markets due to fire-sales even in times of stress. This section outlines the factors that influence whether or not the market for an asset can be relied upon to raise liquidity when considered in the context of possible stresses. These factors should assist supervisors in determining which assets, despite meeting the criteria from paragraphs 49 to 54, are not sufficiently liquid in private markets to be included in the stock of HQLA.
(i) Fundamental Characteristics
• Low risk: assets that are less risky tend to have higher liquidity. High credit standing of the issuer and a low degree of subordination increase an asset’s liquidity. Low duration,7 low legal risk, low inflation risk and denomination in a convertible currency with low foreign exchange risk all enhance an asset’s liquidity.
• Ease and certainty of valuation: an asset’s liquidity increases if market participants are more likely to agree on its valuation. Assets with more standardised, homogenous and simple structures tend to be more fungible, promoting liquidity. The pricing formula of a high-quality liquid asset must be easy to calculate and not depend on strong assumptions. The inputs into the pricing formula must also be publicly available. In practice, this should rule out the inclusion of most structured or exotic products.
• Low correlation with risky assets: the stock of HQLA should not be subject to wrong-way (highly correlated) risk. For example, assets issued by financial institutions are more likely to be illiquid in times of liquidity stress in the banking sector.
• Listed on a developed and recognised exchange: being listed increases an asset’s transparency.
7 Duration measures the price sensitivity of a fixed income security to changes in interest rate.
(ii) Market-Related Characteristics
• Active and sizable market: the asset should have active outright sale or repo markets at all times. This means that:
- There should be historical evidence of market breadth and market depth. This could be demonstrated by low bid-ask spreads, high trading volumes, and a large and diverse number of market participants. Diversity of market participants reduces market concentration and increases the reliability of the liquidity in the market.
- There should be robust market infrastructure in place. The presence of multiple committed market makers increases liquidity as quotes will most likely be available for buying or selling HQLA.
• Low volatility: Assets whose prices remain relatively stable and are less prone to sharp price declines over time will have a lower probability of triggering forced sales to meet liquidity requirements. Volatility of traded prices and spreads are simple proxy measures of market volatility. There should be historical evidence of relative stability of market terms (eg prices and haircuts) and volumes during stressed periods.
• Flight to quality: historically, the market has shown tendencies to move into these types of assets in a systemic crisis. The correlation between proxies of market liquidity and banking system stress is one simple measure that could be used.
25. As outlined by these characteristics, the test of whether liquid assets are of “high quality” is that, by way of sale or repo, their liquidity-generating capacity is assumed to remain intact even in periods of severe idiosyncratic and market stress. Lower quality assets typically fail to meet that test. An attempt by a bank to raise liquidity from lower quality assets under conditions of severe market stress would entail acceptance of a large fire-sale discount or haircut to compensate for high market risk. That may not only erode the market’s confidence in the bank, but would also generate mark-to-market losses for banks holding similar instruments and add to the pressure on their liquidity position, thus encouraging further fire sales and declines in prices and market liquidity. In these circumstances, private market liquidity for such instruments is likely to disappear quickly.
26. HQLA (except Level 2B assets as defined below) should ideally be eligible at central banks8 for intraday liquidity needs and overnight liquidity facilities. In the past, central banks have provided a further backstop to the supply of banking system liquidity under conditions of severe stress. Central bank eligibility should thus provide additional confidence that banks are holding assets that could be used in events of severe stress without damaging the broader financial system. That in turn would raise confidence in the safety and soundness of liquidity risk management in the banking system.
27. It should be noted however, that central bank eligibility does not by itself constitute the basis for the categorisation of an asset as HQLA.
8 In most jurisdictions, HQLA should be central bank eligible in addition to being liquid in markets during stressed periods. In jurisdictions where central bank eligibility is limited to an extremely narrow list of assets, a supervisor may allow unencumbered, non-central bank eligible assets that meet the qualifying criteria for Level 1 or Level 2 assets to count as part of the stock (see Definition of HQLA beginning from paragraph 45).
2. Operational Requirements
28. All assets in the stock of HQLA are subject to the following operational requirements. The purpose of the operational requirements is to recognise that not all assets outlined in paragraphs 49-54 that meet the asset class, risk-weighting and credit-rating criteria should be eligible for the stock as there are other operational restrictions on the availability of HQLA that can prevent timely monetisation during a stress period.
29. These operational requirements are designed to ensure that the stock of HQLA is managed in such a way that the bank can, and is able to demonstrate that it can, immediately use the stock of assets as a source of contingent funds that is available for the bank to convert into cash through outright sale or repo, to fill funding gaps between cash inflows and outflows at any time during the 30-day stress period, with no restriction on the use of the liquidity generated.
30. A bank should periodically monetise a representative proportion of the assets in the stock through repo or outright sale, in order to test its access to the market, the effectiveness of its processes for monetisation, the availability of the assets, and to minimise the risk of negative signalling during a period of actual stress.
31. All assets in the stock should be unencumbered. “Unencumbered” means free of legal, regulatory, contractual or other restrictions on the ability of the bank to liquidate, sell, transfer, or assign the asset. An asset in the stock should not be pledged (either explicitly or implicitly) to secure, collateralise or credit-enhance any transaction, nor be designated to cover operational costs (such as rents and salaries). Assets received in reverse repo and securities financing transactions that are held at the bank, have not been rehypothecated, and are legally and contractually available for the bank's use can be considered as part of the stock of HQLA. In addition, assets which qualify for the stock of HQLA that have been pre-positioned or deposited with, or pledged to, the central bank or a public sector entity (PSE) but have not been used to generate liquidity may be included in the stock.9
32. A bank should exclude from the stock those assets that, although meeting the definition of “unencumbered” specified in paragraph 31, the bank would not have the operational capability to monetise to meet outflows during the stress period. Operational capability to monetise assets requires having procedures and appropriate systems in place, including providing the function identified in paragraph 33 with access to all necessary information to execute monetisation of any asset at any time. Monetisation of the asset must be executable, from an operational perspective, in the standard settlement period for the asset class in the relevant jurisdiction.
33. The stock should be under the control of the function charged with managing the liquidity of the bank (eg the treasurer), meaning the function has the continuous authority, and legal and operational capability, to monetise any asset in the stock. Control must be evidenced either by maintaining assets in a separate pool managed by the function with the sole intent for use as a source of contingent funds, or by demonstrating that the function can monetise the asset at any point in the 30-day stress period and that the proceeds of doing so are available to the function throughout the 30-day stress period without directly conflicting with a stated business or risk management strategy. For example, an asset should not be included in the stock if the sale of that asset, without replacement throughout the 30-day period, would remove a hedge that would create an open risk position in excess of internal limits.
34. A bank is permitted to hedge the market risk associated with ownership of the stock of HQLA and still include the assets in the stock. If it chooses to hedge the market risk, the bank should take into account (in the market value applied to each asset) the cash outflow that would arise if the hedge were to be closed out early (in the event of the asset being sold).
35. In accordance with Principle 9 of the Sound Principles a bank “should monitor the legal entity and physical location where collateral is held and how it may be mobilised in a timely manner”. Specifically, it should have a policy in place that identifies legal entities, geographical locations, currencies and specific custodial or bank accounts where HQLA are held. In addition, the bank should determine whether any such assets should be excluded for operational reasons and therefore, have the ability to determine the composition of its stock on a daily basis.
36. As noted in paragraphs 171 and 172, qualifying HQLA that are held to meet statutory liquidity requirements at the legal entity or sub-consolidated level (where applicable) may only be included in the stock at the consolidated level to the extent that the related risks (as measured by the legal entity’s or sub-consolidated group’s net cash outflows in the LCR) are also reflected in the consolidated LCR. Any surplus of HQLA held at the legal entity can only be included in the consolidated stock if those assets would also be freely available to the consolidated (parent) entity in times of stress.
37. In assessing whether assets are freely transferable for regulatory purposes, banks should be aware that assets may not be freely available to the consolidated entity due to regulatory, legal, tax, accounting or other impediments. Assets held in legal entities without market access should only be included to the extent that they can be freely transferred to other entities that could monetise the assets.
38. In certain jurisdictions, large, deep and active repo markets do not exist for eligible asset classes, and therefore such assets are likely to be monetised through outright sale. In these circumstances, a bank should exclude from the stock of HQLA those assets where there are impediments to sale, such as large fire-sale discounts which would cause it to breach minimum solvency requirements, or requirements to hold such assets, including, but not limited to, statutory minimum inventory requirements for market making.
39. Banks should not include in the stock of HQLA any assets, or liquidity generated from assets, they have received under right of rehypothecation, if the beneficial owner has the contractual right to withdraw those assets during the 30-day stress period.10
40. Assets received as collateral for derivatives transactions that are not segregated and are legally able to be rehypothecated may be included in the stock of HQLA provided that the bank records an appropriate outflow for the associated risks as set out in paragraph 116.
41. As stated in Principle 8 of the Sound Principles, a bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems. Banks and regulators should be aware that the LCR stress scenario does not cover expected or unexpected intraday liquidity needs.
42. While the LCR is expected to be met and reported in a single currency, banks are expected to be able to meet their liquidity needs in each currency and maintain HQLA consistent with the distribution of their liquidity needs by currency. The bank should be able to use the stock to generate liquidity in the currency and jurisdiction in which the net cash outflows arise. As such, the LCR by currency is expected to be monitored and reported to allow the bank and its supervisor to track any potential currency mismatch issues that could arise, as outlined in Part 2. In managing foreign exchange liquidity risk, the bank should take into account the risk that its ability to swap currencies and access the relevant foreign exchange markets may erode rapidly under stressed conditions. It should be aware that sudden, adverse exchange rate movements could sharply widen existing mismatched positions and alter the effectiveness of any foreign exchange hedges in place.
43. In order to mitigate cliff effects that could arise, if an eligible liquid asset became ineligible (eg due to rating downgrade), a bank is permitted to keep such assets in its stock of liquid assets for an additional 30 calendar days. This would allow the bank additional time to adjust its stock as needed or replace the asset.
9 If a bank has deposited, pre-positioned or pledged Level 1, Level 2 and other assets in a collateral pool and no specific securities are assigned as collateral for any transactions, it may assume that assets are encumbered in order of increasing liquidity value in the LCR, ie assets ineligible for the stock of HQLA are assigned first, followed by Level 2B assets, then Level 2A and finally Level 1. This determination must be made in compliance with any requirements, such as concentration or diversification, of the central bank or PSE.
10 Refer to paragraph 146 for the appropriate treatment if the contractual withdrawal of such assets would lead to a short position (eg because the bank had used the assets in longer-term securities financing transactions).3. Diversification of the Stock of HQLA
44. The stock of HQLA should be well diversified within the asset classes themselves (except for sovereign debt of the bank’s home jurisdiction or from the jurisdiction in which the bank operates; central bank reserves; central bank debt securities; and cash). Although some asset classes are more likely to remain liquid irrespective of circumstances, ex-ante it is not possible to know with certainty which specific assets within each asset class might be subject to shocks ex-post. Banks should therefore have policies and limits in place in order to avoid concentration with respect to asset types, issue and issuer types, and currency (consistent with the distribution of net cash outflows by currency) within asset classes.
4. Definition of HQLA
45. The stock of HQLA should comprise assets with the characteristics outlined in paragraphs 24-27. This section describes the type of assets that meet these characteristics and can therefore be included in the stock.
46. There are two categories of assets that can be included in the stock. Assets to be included in each category are those that the bank is holding on the first day of the stress period, irrespective of their residual maturity. “Level 1” assets can be included without limit, while “Level 2” assets can only comprise up to 40% of the stock.
47. Supervisors may also choose to include within Level 2 an additional class of assets (Level 2B assets - see paragraph 53 below). If included, these assets should comprise no more than 15% of the total stock of HQLA. They must also be included within the overall 40% cap on Level 2 assets.
48. The 40% cap on Level 2 assets and the 15% cap on Level 2B assets should be determined after the application of required haircuts, and after taking into account the unwind of short-term securities financing transactions and collateral swap transactions maturing within 30 calendar days that involve the exchange of HQLA. In this context, short term transactions are transactions with a maturity date up to and including 30 calendar days. The details of the calculation methodology are provided in Annex 1.
(i) Level 1 Assets
49. Level 1 assets can comprise an unlimited share of the pool and are not subject to a haircut under the LCR.11 However, national supervisors may wish to require haircuts for Level 1 securities based on, among other things, their duration, credit and liquidity risk, and typical repo haircuts.
50. Level 1 assets are limited to:
(a) coins and banknotes;
(b) central bank reserves (including required reserves),12 to the extent that the central bank policies allow them to be drawn down in times of stress;13
(c) marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs, the Bank for International Settlements, the International Monetary Fund, the European Central Bank and European Community, or multilateral development banks,14 and satisfying all of the following conditions:
• assigned a 0% risk-weight under the Basel II Standardised Approach for credit risk;15
• traded in large, deep and active repo or cash markets characterised by a low level of concentration;
• have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions; and
• not an obligation of a financial institution or any of its affiliated entities.16
(d) where the sovereign has a non-0% risk weight, sovereign or central bank debt securities issued in domestic currencies by the sovereign or central bank in the country in which the liquidity risk is being taken or in the bank’s home country; and
(e) where the sovereign has a non-0% risk weight, domestic sovereign or central bank debt securities issued in foreign currencies are eligible up to the amount of the bank’s stressed net cash outflows in that specific foreign currency stemming from the bank’s operations in the jurisdiction where the bank’s liquidity risk is being taken.
11 For purpose of calculating the LCR, Level 1 assets in the stock of HQLA should be measured at an amount no greater than their current market value.
12 In this context, central bank reserves would include banks’ overnight deposits with the central bank, and term deposits with the central bank that: (i) are explicitly and contractually repayable on notice from the depositing bank; or (ii) that constitute a loan against which the bank can borrow on a term basis or on an overnight but automatically renewable basis (only where the bank has an existing deposit with the relevant central bank). Other term deposits with central banks are not eligible for the stock of HQLA; however, if the term expires within 30 days, the term deposit could be considered as an inflow per paragraph 154.
13 Local supervisors should discuss and agree with the relevant central bank the extent to which central bank reserves should count towards the stock of liquid assets, ie the extent to which reserves are able to be drawn down in times of stress.
14 The Basel III liquidity framework follows the categorisation of market participants applied in the Basel II Framework, unless otherwise specified.
15 Paragraph 50(c) includes only marketable securities that qualify for Basel II paragraph 53. When a 0% risk-weight has been assigned at national discretion according to the provision in paragraph 54 of the Basel II Standardised Approach, the treatment should follow paragraph 50(d) or 50(e).
16 This requires that the holder of the security must not have recourse to the financial institution or any of the financial institution's affiliated entities. In practice, this means that securities, such as government-guaranteed issuance during the financial crisis, which remain liabilities of the financial institution, would not qualify for the stock of HQLA. The only exception is when the bank also qualifies as a PSE under the Basel II Framework where securities issued by the bank could qualify for Level 1 assets if all necessary conditions are satisfied.(ii) Level 2 Assets
51. Level 2 assets (comprising Level 2A assets and any Level 2B assets permitted by the supervisor) can be included in the stock of HQLA, subject to the requirement that they comprise no more than 40% of the overall stock after haircuts have been applied. The method for calculating the cap on Level 2 assets and the cap on Level 2B assets is set out in paragraph 48 and Annex 1.
52. A 15% haircut is applied to the current market value of each Level 2A asset held in the stock of HQLA. Level 2A assets are limited to the following:
(a) Marketable securities representing claims on or guaranteed by sovereigns, central banks, PSEs or multilateral development banks that satisfy all of the following conditions:17
• assigned a 20% risk weight under the Basel II Standardised Approach for credit risk;
• traded in large, deep and active repo or cash markets characterised by a low level of concentration;
• have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions (ie maximum decline of price not exceeding 10% or increase in haircut not exceeding 10 percentage points over a 30-day period during a relevant period of significant liquidity stress); and
• not an obligation of a financial institution or any of its affiliated entities.18
(b) Corporate debt securities (including commercial paper)19 and covered bonds20 that satisfy all of the following conditions:
• in the case of corporate debt securities: not issued by a financial institution or any of its affiliated entities;
• in the case of covered bonds: not issued by the bank itself or any of its affiliated entities;
• either (i) have a long-term credit rating from a recognised external credit assessment institution (ECAI) of at least AA-21 or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating; or (ii) do not have a credit assessment by a recognised ECAI but are internally rated as having a probability of default (PD) corresponding to a credit rating of at least AA-;
• traded in large, deep and active repo or cash markets characterised by a low level of concentration; and
• have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions: ie maximum decline of price or increase in haircut over a 30-day period during a relevant period of significant liquidity stress not exceeding 10%.
17 Paragraphs 50(d) and (e) may overlap with paragraph 52(a) in terms of sovereign and central bank securities with a 20% risk weight. In such a case, the assets can be assigned to the Level 1 category according to Paragraph 50(d) or (e), as appropriate.
18 Refer to footnote 16.
19 Corporate debt securities (including commercial paper) in this respect include only plain-vanilla assets whose valuation is readily available based on standard methods and does not depend on private knowledge, ie these do not include complex structured products or subordinated debt.
20 Covered bonds are bonds issued and owned by a bank or mortgage institution and are subject by law to special public supervision designed to protect bond holders. Proceeds deriving from the issue of these bonds must be invested in conformity with the law in assets which, during the whole period of the validity of the bonds, are capable of covering claims attached to the bonds and which, in the event of the failure of the issuer, would be used on a priority basis for the reimbursement of the principal and payment of the accrued interest.
21 In the event of split ratings, the applicable rating should be determined according to the method used in Basel II’s standardised approach for credit risk. Local rating scales (rather than international ratings) of a supervisor-approved ECAI that meet the eligibility criteria outlined in paragraph 91 of the Basel II Capital Framework can be recognised if corporate debt securities or covered bonds are held by a bank for local currency liquidity needs arising from its operations in that local jurisdiction. This also applies to Level 2B assets.(iii) Level 2B Assets
53. Certain additional assets (Level 2B assets) may be included in Level 2 at the discretion of national authorities. In choosing to include these assets in Level 2 for the purpose of the LCR, supervisors are expected to ensure that such assets fully comply with the qualifying criteria.22 Supervisors are also expected to ensure that banks have appropriate systems and measures to monitor and control the potential risks (eg credit and market risks) that banks could be exposed to in holding these assets.
54. A larger haircut is applied to the current market value of each Level 2B asset held in the stock of HQLA. Level 2B assets are limited to the following:
(a) Residential mortgage backed securities (RMBS) that satisfy all of the following conditions may be included in Level 2B, subject to a 25% haircut:
• not issued by, and the underlying assets have not been originated by the bank itself or any of its affiliated entities;
• have a long-term credit rating from a recognised ECAI of AA or higher, or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating;
• traded in large, deep and active repo or cash markets characterised by a low level of concentration;
• have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, ie a maximum decline of price not exceeding 20% or increase in haircut over a 30-day period not exceeding 20 percentage points during a relevant period of significant liquidity stress;
• the underlying asset pool is restricted to residential mortgages and cannot contain structured products;
• the underlying mortgages are “full recourse’’ loans (ie in the case of foreclosure the mortgage owner remains liable for any shortfall in sales proceeds from the property) and have a maximum loan-to-value ratio (LTV) of 80% on average at issuance; and
• the securitisations are subject to “risk retention” regulations which require issuers to retain an interest in the assets they securitise.
(b) Corporate debt securities (including commercial paper)23 that satisfy all of the following conditions may be included in Level 2B, subject to a 50% haircut:
• not issued by a financial institution or any of its affiliated entities;
• either (i) have a long-term credit rating from a recognised ECAI between A+ and BBB- or in the absence of a long term rating, a short-term rating equivalent in quality to the long-term rating; or (ii) do not have a credit assessment by a recognised ECAI and are internally rated as having a PD corresponding to a credit rating of between A+ and BBB-;
• traded in large, deep and active repo or cash markets characterised by a low level of concentration; and
• have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, ie a maximum decline of price not exceeding 20% or increase in haircut over a 30-day period not exceeding 20 percentage points during a relevant period of significant liquidity stress.
(c) Common equity shares that satisfy all of the following conditions may be included in Level 2B, subject to a 50% haircut:
• not issued by a financial institution or any of its affiliated entities;
• exchange traded and centrally cleared;
• a constituent of the major stock index in the home jurisdiction or where the liquidity risk is taken, as decided by the supervisor in the jurisdiction where the index is located;
• denominated in the domestic currency of a bank’s home jurisdiction or in the currency of the jurisdiction where a bank’s liquidity risk is taken;
• traded in large, deep and active repo or cash markets characterised by a low level of concentration; and
• have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, ie a maximum decline of share price not exceeding 40% or increase in haircut not exceeding 40 percentage points over a 30-day period during a relevant period of significant liquidity.
22 As with all aspects of the framework, compliance with these criteria will be assessed as part of peer reviews undertaken under the Committee’s Regulatory Consistency Assessment Programme.
23 Refer to footnote 19.(iv) Treatment for Jurisdictions with Insufficient HQLA
(a) Assessment of Eligibility for Alternative Liquidity Approaches (ALA)
55. Some jurisdictions may have an insufficient supply of Level 1 assets (or both Level 1 and Level 2 assets24) in their domestic currency to meet the aggregate demand of banks with significant exposures in this currency. To address this situation, the Committee has developed alternative treatments for holdings in the stock of HQLA, which are expected to apply to a limited number of currencies and jurisdictions. Eligibility for such alternative treatment will be judged on the basis of the qualifying criteria set out in Annex 2 and will be determined through an independent peer review process overseen by the Committee. The purpose of this process is to ensure that the alternative treatments are only used when there is a true shortfall in HQLA in the domestic currency relative to the needs in that currency.25
56. To qualify for the alternative treatment, a jurisdiction should be able to demonstrate that:
• there is an insufficient supply of HQLA in its domestic currency, taking into account all relevant factors affecting the supply of, and demand for, such HQLA;26
• the insufficiency is caused by long-term structural constraints that cannot be resolved within the medium term;
• it has the capacity, through any mechanism or control in place, to limit or mitigate the risk that the alternative treatment cannot work as expected; and
• it is committed to observing the obligations relating to supervisory monitoring, disclosure, and periodic self-assessment and independent peer review of its eligibility for alternative treatment.
All of the above criteria have to be met to qualify for the alternative treatment.
57. Irrespective of whether a jurisdiction seeking ALA treatment will adopt the phase-in arrangement set out in paragraph 10 for implementing the LCR, the eligibility for that jurisdiction to adopt ALA treatment will be based on a fully implemented LCR standard (ie 100% requirement).
24 Insufficiency in Level 2 assets alone does not qualify for the alternative treatment.
25 For member states of a monetary union with a common currency, that common currency is considered the “domestic currency”.
26 The assessment of insufficiency is only required to take into account the Level 2B assets if the national authority chooses to include them within HQLA. In particular, if certain Level 2B assets are not included in the stock of HQLA in a given jurisdiction, then the assessment of insufficiency in that jurisdiction does not need to include the stock of Level 2B assets that are available in that jurisdiction.(b) Potential Options for Alternative Treatment
58. Option 1 – Contractual committed liquidity facilities from the relevant central bank, with a fee: For currencies that do not have sufficient HQLA, as determined by reference to the qualifying principles and criteria, Option 1 would allow banks to access contractual committed liquidity facilities provided by the relevant central bank (ie relevant given the currency in question) for a fee. These facilities should not be confused with regular central bank standing arrangements. In particular, these facilities are contractual arrangements between the central bank and the commercial bank with a maturity date which, at a minimum, falls outside the 30-day LCR window. Further, the contract must be irrevocable prior to maturity and involve no ex-post credit decision by the central bank. Such facilities are only permissible if there is also a fee for the facility which is charged regardless of the amount, if any, drawn down against that facility and the fee is set so that banks which claim the facility line to meet the LCR, and banks which do not, have similar financial incentives to reduce their exposure to liquidity risk. That is, the fee should be set so that the net yield on the assets used to secure the facility should not be higher than the net yield on a representative portfolio of Level 1 and Level 2 assets, after adjusting for any material differences in credit risk. A jurisdiction seeking to adopt Option 1 should justify in the independent peer review that the fee is suitably set in a manner as prescribed in this paragraph.
59. Option 2 – Foreign currency HQLA to cover domestic currency liquidity needs: For currencies that do not have sufficient HQLA, as determined by reference to the qualifying principles and criteria, Option 2 would allow supervisors to permit banks that evidence a shortfall of HQLA in the domestic currency (which would match the currency of the underlying risks) to hold HQLA in a currency that does not match the currency of the associated liquidity risk, provided that the resulting currency mismatch positions are justifiable and controlled within limits agreed by their supervisors. Supervisors should restrict such positions within levels consistent with the bank’s foreign exchange risk management capacity and needs, and ensure that such positions relate to currencies that are freely and reliably convertible, are effectively managed by the bank, and would not pose undue risk to its financial strength. In managing those positions, the bank should take into account the risks that its ability to swap currencies, and its access to the relevant foreign exchange markets, may erode rapidly under stressed conditions. It should also take into account that sudden, adverse exchange rate movements could sharply widen existing mismatch positions and alter the effectiveness of any foreign exchange hedges in place.
60. To account for foreign exchange risk associated with foreign currency HQLA used to cover liquidity needs in the domestic currency, such liquid assets should be subject to a minimum haircut of 8% for major currencies that are active in global foreign exchange markets.27 For other currencies, jurisdictions should increase the haircut to an appropriate level on the basis of historical (monthly) exchange rate volatilities between the currency pair over an extended period of time.28 If the domestic currency is formally pegged to another currency under an effective mechanism, the haircut for the pegged currency can be lowered to a level that reflects the limited exchange rate risk under the peg arrangement. To qualify for this treatment, the jurisdiction concerned should demonstrate in the independent peer review the effectiveness of its currency peg mechanism and assess the long-term prospect of keeping the peg.
61. Haircuts for foreign currency HQLA used under Option 2 would apply only to HQLA in excess of a threshold specified by supervisors which is not greater than 25%.29 This is to accommodate a certain level of currency mismatch that may commonly exist among banks in their ordinary course of business.
62. Option 3 – Additional use of Level 2 assets with a higher haircut: This option addresses currencies for which there are insufficient Level 1 assets, as determined by reference to the qualifying principles and criteria, but where there are sufficient Level 2A assets. In this case, supervisors may choose to allow banks that evidence a shortfall of HQLA in the domestic currency (to match the currency of the liquidity risk incurred) to hold additional Level 2A assets in the stock. These additional Level 2A assets would be subject to a minimum haircut of 20%, ie 5% higher than the 15% haircut applicable to Level 2A assets that are included in the 40% cap. The higher haircut is used to cover any additional price and market liquidity risks arising from increased holdings of Level 2A assets beyond the 40% cap, and to provide a disincentive for banks to use this option based on yield considerations.30 Supervisors have the obligation to conduct an analysis to assess whether the additional haircut is sufficient for Level 2A assets in their markets, and should increase the haircut if this is warranted to achieve the purpose for which it is intended. Supervisors should explain and justify the outcome of the analysis (including the level of increase in the haircut, if applicable) during the independent peer review assessment process. Any Level 2B assets held by the bank would remain subject to the cap of 15%, regardless of the amount of other Level 2 assets held.
27 These refer to currencies that exhibit significant and active market turnover in the global foreign currency market (eg the average market turnover of the currency as a percentage of the global foreign currency market turnover over a ten-year period is not lower than 10%).
28 As an illustration, the exchange rate volatility data used for deriving the FX haircut may be based on the 30- day moving FX price volatility data (mean + 3 standard deviations) of the currency pair over a ten-year period, adjusted to align with the 30-day time horizon of the LCR.
29 The threshold for applying the haircut under Option 2 refers to the amount of foreign currency HQLA used to cover liquidity needs in the domestic currency as a percentage of total net cash outflows in the domestic currency. Hence under a threshold of 25%, a bank using Option 2 will only need to apply the haircut to that portion of foreign currency HQLA in excess of 25% that are used to cover liquidity needs in the domestic currency.
30 For example, a situation to avoid is that the opportunity cost of holding a portfolio that benefits from this option would be lower than the opportunity cost of holding a theoretical compliant portfolio of Level 1 and Level 2 assets, after adjusting for any material differences in credit risk.(c) Maximum Level of Usage of Options for Alternative Treatment
63. The usage of any of the above options would be constrained by a limit specified by supervisors in jurisdictions whose currency is eligible for the alternative treatment. The limit should be expressed in terms of the maximum amount of HQLA associated with the use of the options (whether individually or in combination) that a bank is allowed to include in its LCR, as a percentage of the total amount of HQLA the bank is required to hold in the currency concerned.31 HQLA associated with the options refer to: (i) in the case of Option 1, the amount of committed liquidity facilities granted by the relevant central bank; (ii) in the case of Option 2, the amount of foreign currency HQLA used to cover the shortfall of HQLA in the domestic currency; and (iii) in the case of Option 3, the amount of Level 2 assets held (including those within the 40% cap).
64. If, for example, the maximum level of usage of the options is set at 80%, it means that a bank adopting the options, either individually or in combination, would only be allowed to include HQLA associated with the options (after applying any relevant haircut) up to 80% of the required amount of HQLA in the relevant currency.32 Thus, at least 20% of the HQLA requirement will have to be met by Level 1 assets in the relevant currency. The maximum usage of the options is of course further constrained by the bank’s actual shortfall of HQLA in the currency concerned.
65. The appropriateness of the maximum level of usage of the options allowed by a supervisor will be evaluated in the independent peer review process. The level set should be consistent with the projected size of the HQLA gap faced by banks subject to the LCR in the currency concerned, taking into account all relevant factors that may affect the size of the gap over time. The supervisor should explain how this level is derived, and justify why this is supported by the insufficiency of HQLA in the banking system. Where a relatively high level of usage of the options is allowed by the supervisor (eg over 80%), the suitability of this level will come under closer scrutiny in the independent peer review.
31 The required amount of HQLA in the domestic currency includes any regulatory buffer (ie above the 100% LCR standard) that the supervisor may reasonably impose on the bank concerned based on its liquidity risk profile.
32 As an example, if a bank has used Option 1 and Option 3 to the extent that it has been granted an Option 1 facility of 10%, and held Level 2 assets of 55% after haircut (both in terms of the required amount of HQLA in the domestic currency), the HQLA associated with the use of these two options amount to 65% (ie 10%+55%), which is still within the 80% level. The total amount of alternative HQLA used is 25% (ie 10% + 15% (additional Level 2A assets used)).(d) Supervisory Obligations and Requirements
66. A jurisdiction with insufficient HQLA must, among other things, fulfil the following obligations (the detailed requirements are set out in Annex 2):
• Supervisory monitoring: There should be a clearly documented supervisory framework for overseeing and controlling the usage of the options by its banks, and for monitoring their compliance with the relevant requirements applicable to their use of the options;
• Disclosure framework: The jurisdiction should disclose its framework for applying the options to its banks (whether on its website or through other means). The disclosure should enable other national supervisors and stakeholders to gain a sufficient understanding of its compliance with the qualifying principles and criteria and the manner in which it supervises the use of the options by its banks;
• Periodic self-assessment of eligibility for alternative treatment: The jurisdiction should perform a self-assessment of its eligibility for alternative treatment every five years after it has adopted the options, and disclose the results to other national supervisors and stakeholders.
67. Supervisors in jurisdictions with insufficient HQLA should devise rules and requirements governing the use of the options by their banks, having regard to the guiding principles set out below. (Annex 3 includes additional guidance on banks’ usage of ALA.)
• Principle 1: Supervisors should ensure that banks’ use of the options is not simply an economic choice that maximises the profits of the bank through the selection of alternative HQLA based primarily on yield considerations. The liquidity characteristics of an alternative HQLA portfolio must be considered to be more important than its net yield.
• Principle 2: Supervisors should ensure that the use of the options is constrained, both for all banks with exposures in the relevant currency and on a bank-by-bank basis.
• Principle 3: Supervisors should ensure that banks have, to the extent practicable, taken reasonable steps to use Level 1 and Level 2 assets and reduce their overall level of liquidity risk to improve the LCR, before the alternative treatment can be applied.
• Principle 4: Supervisors should have a mechanism for restraining the usage of the options to mitigate risks of non-performance of the alternative HQLA.
(v) Treatment for Shari’ah Compliant Banks
68. Shari’ah compliant banks face a religious prohibition on holding certain types of assets, such as interest-bearing debt securities. Even in jurisdictions that have a sufficient supply of HQLA, an insurmountable impediment to the ability of Shari’ah compliant banks to meet the LCR requirement may still exist. In such cases, national supervisors in jurisdictions in which Shari’ah compliant banks operate have the discretion to define Shari’ah compliant financial products (such as Sukuk) as alternative HQLA applicable to such banks only, subject to such conditions or haircuts that the supervisors may require. It should be noted that the intention of this treatment is not to allow Shari’ah compliant banks to hold fewer HQLA. The minimum LCR standard, calculated based on alternative HQLA (post-haircut) recognised as HQLA for these banks, should not be lower than the minimum LCR standard applicable to other banks in the jurisdiction concerned. National supervisors applying such treatment for Shari’ah compliant banks should comply with supervisory monitoring and disclosure obligations similar to those set out in paragraph 66 above.
B. Total Net Cash Outflows
69. The term total net cash outflows33 is defined as the total expected cash outflows minus total expected cash inflows in the specified stress scenario for the subsequent 30 calendar days. Total expected cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by the rates at which they are expected to run off or be drawn down. Total expected cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in under the scenario up to an aggregate cap of 75% of total expected cash outflows.
Total net cash outflows over the next 30 calendar days = Total expected cash outflows – Min {total expected cash inflows; 75% of total expected cash outflows} 70. While most roll-off rates, draw-down rates and similar factors are harmonised across jurisdictions as outlined in this standard, a few parameters are to be determined by supervisory authorities at the national level. Where this is the case, the parameters should be transparent and made publicly available.
71. Annex 4 provides a summary of the factors that are applied to each category.
72. Banks will not be permitted to double count items, ie if an asset is included as part of the “stock of HQLA” (ie the numerator), the associated cash inflows cannot also be counted as cash inflows (ie part of the denominator). Where there is potential that an item could be counted in multiple outflow categories, (eg committed liquidity facilities granted to cover debt maturing within the 30 calendar day period), a bank only has to assume up to the maximum contractual outflow for that product.
33 Where applicable, cash inflows and outflows should include interest that is expected to be received and paid during the 30-day time horizon.
1. Cash Outflows
(i) Retail Deposit Run-Off
73. Retail deposits are defined as deposits placed with a bank by a natural person. Deposits from legal entities, sole proprietorships or partnerships are captured in wholesale deposit categories. Retail deposits subject to the LCR include demand deposits and term deposits, unless otherwise excluded under the criteria set out in paragraphs 82 and 83.
74. These retail deposits are divided into “stable” and “less stable” portions of funds as described below, with minimum run-off rates listed for each category. The run-off rates for retail deposits are minimum floors, with higher run-off rates established by individual jurisdictions as appropriate to capture depositor behaviour in a period of stress in each jurisdiction.
(a) Stable Deposits (Run-Off Rate = 3% and Higher)
75. Stable deposits, which usually receive a run-off factor of 5%, are the amount of the deposits that are fully insured34 by an effective deposit insurance scheme or by a public guarantee that provides equivalent protection and where:
• the depositors have other established relationships with the bank that make deposit withdrawal highly unlikely; or
• the deposits are in transactional accounts (eg accounts where salaries are automatically deposited).
76. For the purposes of this standard, an “effective deposit insurance scheme” refers to a scheme (i) that guarantees that it has the ability to make prompt payouts, (ii) for which the coverage is clearly defined and (iii) of which public awareness is high. The deposit insurer in an effective deposit insurance scheme has formal legal powers to fulfil its mandate and is operationally independent, transparent and accountable. A jurisdiction with an explicit and legally binding sovereign deposit guarantee that effectively functions as deposit insurance can be regarded as having an effective deposit insurance scheme.
77. The presence of deposit insurance alone is not sufficient to consider a deposit “stable”.
78. Jurisdictions may choose to apply a run-off rate of 3% to stable deposits in their jurisdiction, if they meet the above stable deposit criteria and the following additional criteria for deposit insurance schemes:35
• the insurance scheme is based on a system of prefunding via the periodic collection of levies on banks with insured deposits;36
• the scheme has adequate means of ensuring ready access to additional funding in the event of a large call on its reserves, eg an explicit and legally binding guarantee from the government, or a standing authority to borrow from the government; and
• access to insured deposits is available to depositors in a short period of time once the deposit insurance scheme is triggered.37
Jurisdictions applying the 3% run-off rate to stable deposits with deposit insurance arrangements that meet the above criteria should be able to provide evidence of run-off rates for stable deposits within the banking system below 3% during any periods of stress experienced that are consistent with the conditions within the LCR.
34 “Fully insured” means that 100% of the deposit amount, up to the deposit insurance limit, is covered by an effective deposit insurance scheme. Deposit balances up to the deposit insurance limit can be treated as “fully insured” even if a depositor has a balance in excess of the deposit insurance limit. However, any amount in excess of the deposit insurance limit is to be treated as “less stable”. For example, if a depositor has a deposit of 150 that is covered by a deposit insurance scheme, which has a limit of 100, where the depositor would receive at least 100 from the deposit insurance scheme if the financial institution were unable to pay, then 100 would be considered “fully insured” and treated as stable deposits while 50 would be treated as less stable deposits. However if the deposit insurance scheme only covered a percentage of the funds from the first currency unit (eg 90% of the deposit amount up to a limit of 100) then the entire 150 deposit would be less stable.
35 The Financial Stability Board has asked the International Association of Deposit Insurers (IADI), in conjunction with the Basel Committee and other relevant bodies where appropriate, to update its Core Principles and other guidance to better reflect leading practices. The criteria in this paragraph will therefore be reviewed by the Committee once the work by IADI has been completed.
36 The requirement for periodic collection of levies from banks does not preclude that deposit insurance schemes may, on occasion, provide for contribution holidays due to the scheme being well-funded at a given point in time.
37 This period of time would typically be expected to be no more than 7 business days.(b) Less Stable Deposits (Run-Off Rates = 10% and Higher)
79. Supervisory authorities are expected to develop additional buckets with higher run-off rates as necessary to apply to buckets of potentially less stable retail deposits in their jurisdictions, with a minimum run-off rate of 10%. These jurisdiction-specific run-off rates should be clearly outlined and publicly transparent. Buckets of less stable deposits could include deposits that are not fully covered by an effective deposit insurance scheme or sovereign deposit guarantee, high-value deposits, deposits from sophisticated or high net worth individuals, deposits that can be withdrawn quickly (eg internet deposits) and foreign currency deposits, as determined by each jurisdiction.
80. If a bank is not able to readily identify which retail deposits would qualify as “stable” according to the above definition (eg the bank cannot determine which deposits are covered by an effective deposit insurance scheme or a sovereign deposit guarantee), it should place the full amount in the “less stable” buckets as established by its supervisor.
81. Foreign currency retail deposits are deposits denominated in any other currency than the domestic currency in a jurisdiction in which the bank operates. Supervisors will determine the run-off factor that banks in their jurisdiction should use for foreign currency deposits. Foreign currency deposits will be considered as “less stable” if there is a reason to believe that such deposits are more volatile than domestic currency deposits. Factors affecting the volatility of foreign currency deposits include the type and sophistication of the depositors, and the nature of such deposits (eg whether the deposits are linked to business needs in the same currency, or whether the deposits are placed in a search for yield).
82. Cash outflows related to retail term deposits with a residual maturity or withdrawal notice period of greater than 30 days will be excluded from total expected cash outflows if the depositor has no legal right to withdraw deposits within the 30-day horizon of the LCR, or if early withdrawal results in a significant penalty that is materially greater than the loss of interest.38
83. If a bank allows a depositor to withdraw such deposits without applying the corresponding penalty, or despite a clause that says the depositor has no legal right to withdraw, the entire category of these funds would then have to be treated as demand deposits (ie regardless of the remaining term, the deposits would be subject to the deposit run-off rates as specified in paragraphs 74-81). Supervisors in each jurisdiction may choose to outline exceptional circumstances that would qualify as hardship, under which the exceptional term deposit could be withdrawn by the depositor without changing the treatment of the entire pool of deposits.
84. Notwithstanding the above, supervisors may also opt to treat retail term deposits that meet the qualifications set out in paragraph 82 with a higher than 0% run-off rate, if they clearly state the treatment that applies for their jurisdiction and apply this treatment in a similar fashion across banks in their jurisdiction. Such reasons could include, but are not limited to, supervisory concerns that depositors would withdraw term deposits in a similar fashion as retail demand deposits during either normal or stress times, concern that banks may repay such deposits early in stressed times for reputational reasons, or the presence of unintended incentives on banks to impose material penalties on consumers if deposits are withdrawn early. In these cases supervisors would assess a higher run-off against all or some of such deposits.
38 If a portion of the term deposit can be withdrawn without incurring such a penalty, only that portion should be treated as a demand deposit. The remaining balance of the deposit should be treated as a term deposit.
(ii) Unsecured Wholesale Funding Run-Off
85. For the purposes of the LCR, "unsecured wholesale funding” is defined as those liabilities and general obligations that are raised from non-natural persons (ie legal entities, including sole proprietorships and partnerships) and are not collateralised by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution. Obligations related to derivative contracts are explicitly excluded from this definition.
86. The wholesale funding included in the LCR is defined as all funding that is callable within the LCR’s horizon of 30 days or that has its earliest possible contractual maturity date situated within this horizon (such as maturing term deposits and unsecured debt securities) as well as funding with an undetermined maturity. This should include all funding with options that are exercisable at the investor’s discretion within the 30 calendar day horizon. For funding with options exercisable at the bank’s discretion, supervisors should take into account reputational factors that may limit a bank's ability not to exercise the option.39 In particular, where the market expects certain liabilities to be redeemed before their legal final maturity date, banks and supervisors should assume such behaviour for the purpose of the LCR and include these liabilities as outflows.
87. Wholesale funding that is callable40 by the funds provider subject to a contractually defined and binding notice period surpassing the 30-day horizon is not included.
88. For the purposes of the LCR, unsecured wholesale funding is to be categorised as detailed below, based on the assumed sensitivity of the funds providers to the rate offered and the credit quality and solvency of the borrowing bank. This is determined by the type of funds providers and their level of sophistication, as well as their operational relationships with the bank. The run-off rates for the scenario are listed for each category.
39 This could reflect a case where a bank may imply that it is under liquidity stress if it did not exercise an option on its own funding.
40 This takes into account any embedded options linked to the funds provider’s ability to call the funding before contractual maturity.(a) Unsecured Wholesale Funding Provided by Small Business Customers: 5%, 10% and Higher
89. Unsecured wholesale funding provided by small business customers is treated the same way as retail deposits for the purposes of this standard, effectively distinguishing between a "stable" portion of funding provided by small business customers and different buckets of less stable funding defined by each jurisdiction. The same bucket definitions and associated run-off factors apply as for retail deposits.
90. This category consists of deposits and other extensions of funds made by non-financial small business customers. “Small business customers” are defined in line with the definition of loans extended to small businesses in paragraph 231 of the Basel II framework that are managed as retail exposures and are generally considered as having similar liquidity risk characteristics to retail accounts provided the total aggregated funding41 raised from one small business customer is less than €1 million (on a consolidated basis where applicable).
91. Where a bank does not have any exposure to a small business customer that would enable it to use the definition under paragraph 231 of the Basel II Framework, the bank may include such a deposit in this category provided that the total aggregate funding raised from the customer is less than €1 million (on a consolidated basis where applicable) and the deposit is managed as a retail deposit. This means that the bank treats such deposits in its internal risk management systems consistently over time and in the same manner as other retail deposits, and that the deposits are not individually managed in a way comparable to larger corporate deposits.
92. Term deposits from small business customers should be treated in accordance with the treatment for term retail deposits as outlined in paragraph 82, 83, and 84.
41 “Aggregated funding” means the gross amount (ie not netting any form of credit extended to the legal entity) of all forms of funding (eg deposits or debt securities or similar derivative exposure for which the counterparty is known to be a small business customer). In addition, applying the limit on a consolidated basis means that where one or more small business customers are affiliated with each other, they may be considered as a single creditor such that the limit is applied to the total funding received by the bank from this group of customers.
(b) Operational Deposits Generated by Clearing, Custody and Cash Management Activities: 25%
93. Certain activities lead to financial and non-financial customers needing to place, or leave, deposits with a bank in order to facilitate their access and ability to use payment and settlement systems and otherwise make payments. These funds may receive a 25% run-off factor only if the customer has a substantive dependency with the bank and the deposit is required for such activities. Supervisory approval would have to be given to ensure that banks utilising this treatment actually are conducting these operational activities at the level indicated. Supervisors may choose not to permit banks to utilise the operational deposit runoff rates in cases where, for example, a significant portion of operational deposits are provided by a small proportion of customers (ie concentration risk).
94. Qualifying activities in this context refer to clearing, custody or cash management activities that meet the following criteria:
• The customer is reliant on the bank to perform these services as an independent third party intermediary in order to fulfil its normal banking activities over the next 30 days. For example, this condition would not be met if the bank is aware that the customer has adequate back-up arrangements.
• These services must be provided under a legally binding agreement to institutional customers.
• The termination of such agreements shall be subject either to a notice period of at least 30 days or significant switching costs (such as those related to transaction, information technology, early termination or legal costs) to be borne by the customer if the operational deposits are moved before 30 days.
95. Qualifying operational deposits generated by such an activity are ones where:
• The deposits are by-products of the underlying services provided by the banking organisation and not sought out in the wholesale market in the sole interest of offering interest income.
• The deposits are held in specifically designated accounts and priced without giving an economic incentive to the customer (not limited to paying market interest rates) to leave any excess funds on these accounts. In the case that interest rates in a jurisdiction are close to zero, it would be expected that such accounts are non-interest bearing. Banks should be particularly aware that during prolonged periods of low interest rates, excess balances (as defined below) could be significant.
96. Any excess balances that could be withdrawn and would still leave enough funds to fulfil these clearing, custody and cash management activities do not qualify for the 25% factor. In other words, only that part of the deposit balance with the service provider that is proven to serve a customer’s operational needs can qualify as stable. Excess balances should be treated in the appropriate category for non-operational deposits. If banks are unable to determine the amount of the excess balance, then the entire deposit should be assumed to be excess to requirements and, therefore, considered non-operational.
97. Banks must determine the methodology for identifying excess deposits that are excluded from this treatment. This assessment should be conducted at a sufficiently granular level to adequately assess the risk of withdrawal in an idiosyncratic stress. The methodology should take into account relevant factors such as the likelihood that wholesale customers have above average balances in advance of specific payment needs, and consider appropriate indicators (eg ratios of account balances to payment or settlement volumes or to assets under custody) to identify those customers that are not actively managing account balances efficiently.
98. Operational deposits would receive a 0% inflow assumption for the depositing bank given that these deposits are required for operational reasons, and are therefore not available to the depositing bank to repay other outflows.
99. Notwithstanding these operational categories, if the deposit under consideration arises out of correspondent banking or from the provision of prime brokerage services, it will be treated as if there were no operational activity for the purpose of determining run-off factors.42
100. The following paragraphs describe the types of activities that may generate operational deposits. A bank should assess whether the presence of such an activity does indeed generate an operational deposit as not all such activities qualify due to differences in customer dependency, activity and practices.
101. A clearing relationship, in this context, refers to a service arrangement that enables customers to transfer funds (or securities) indirectly through direct participants in domestic settlement systems to final recipients. Such services are limited to the following activities: transmission, reconciliation and confirmation of payment orders; daylight overdraft, overnight financing and maintenance of post-settlement balances; and determination of intra-day and final settlement positions.
102. A custody relationship, in this context, refers to the provision of safekeeping, reporting, processing of assets or the facilitation of the operational and administrative elements of related activities on behalf of customers in the process of their transacting and retaining financial assets. Such services are limited to the settlement of securities transactions, the transfer of contractual payments, the processing of collateral, and the provision of custody related cash management services. Also included are the receipt of dividends and other income, client subscriptions and redemptions. Custodial services can furthermore extend to asset and corporate trust servicing, treasury, escrow, funds transfer, stock transfer and agency services, including payment and settlement services (excluding correspondent banking), and depository receipts.
103. A cash management relationship, in this context, refers to the provision of cash management and related services to customers. Cash management services, in this context, refers to those products and services provided to a customer to manage its cash flows, assets and liabilities, and conduct financial transactions necessary to the customer’s ongoing operations. Such services are limited to payment remittance, collection and aggregation of funds, payroll administration, and control over the disbursement of funds.
104. The portion of the operational deposits generated by clearing, custody and cash management activities that is fully covered by deposit insurance can receive the same treatment as “stable” retail deposits
42 Correspondent banking refers to arrangements under which one bank (correspondent) holds deposits owned by other banks (respondents) and provides payment and other services in order to settle foreign currency transactions (eg so-called nostro and vostro accounts used to settle transactions in a currency other than the domestic currency of the respondent bank for the provision of clearing and settlement of payments). Prime brokerage is a package of services offered to large active investors, particularly institutional hedge funds. These services usually include: clearing, settlement and custody; consolidated reporting; financing (margin, repo or synthetic); securities lending; capital introduction; and risk analytics.
(c) Treatment of Deposits in Institutional Networks of Cooperative Banks: 25% or 100%
105. An institutional network of cooperative (or otherwise named) banks is a group of legally autonomous banks with a statutory framework of cooperation with common strategic focus and brand where specific functions are performed by central institutions or specialised service providers. A 25% run-off rate can be given to the amount of deposits of member institutions with the central institution or specialised central service providers that are placed (a) due to statutory minimum deposit requirements, which are registered at regulators or (b) in the context of common task sharing and legal, statutory or contractual arrangements so long as both the bank that has received the monies and the bank that has deposited participate in the same institutional network’s mutual protection scheme against illiquidity and insolvency of its members. As with other operational deposits, these deposits would receive a 0% inflow assumption for the depositing bank, as these funds are considered to remain with the centralised institution.
106. Supervisory approval would have to be given to ensure that banks utilising this treatment actually are the central institution or a central service provider of such a cooperative (or otherwise named) network. Correspondent banking activities would not be included in this treatment and would receive a 100% outflow treatment, as would funds placed at the central institutions or specialised service providers for any other reason other than those outlined in (a) and (b) in the paragraph above, or for operational functions of clearing, custody, or cash management as outlined in paragraphs 101-103.
(d) Unsecured Wholesale Funding Provided by Non-Financial Corporates and Sovereigns, Central Banks, Multilateral Development Banks, and PSEs: 20% or 40%
107. This category comprises all deposits and other extensions of unsecured funding from non-financial corporate customers (that are not categorised as small business customers) and (both domestic and foreign) sovereign, central bank, multilateral development bank, and PSE customers that are not specifically held for operational purposes (as defined above). The run-off factor for these funds is 40%, unless the criteria in paragraph 108 are met.
108. Unsecured wholesale funding provided by non-financial corporate customers, sovereigns, central banks, multilateral development banks, and PSEs without operational relationships can receive a 20% run-off factor if the entire amount of the deposit is fully covered by an effective deposit insurance scheme or by a public guarantee that provides equivalent protection.
(e) Unsecured Wholesale Funding Provided by Other Legal Entity Customers: 100%
109. This category consists of all deposits and other funding from other institutions (including banks, securities firms, insurance companies, etc), fiduciaries,43 beneficiaries,44 conduits and special purpose vehicles, affiliated entities of the bank45 and other entities that are not specifically held for operational purposes (as defined above) and not included in the prior three categories. The run-off factor for these funds is 100%.
110. All notes, bonds and other debt securities issued by the bank are included in this category regardless of the holder, unless the bond is sold exclusively in the retail market and held in retail accounts (including small business customer accounts treated as retail per paragraphs 89-91), in which case the instruments can be treated in the appropriate retail or small business customer deposit category. To be treated in this manner, it is not sufficient that the debt instruments are specifically designed and marketed to retail or small business customers. Rather there should be limitations placed such that those instruments cannot be bought and held by parties other than retail or small business customers.
111. Customer cash balances arising from the provision of prime brokerage services, including but not limited to the cash arising from prime brokerage services as identified in paragraph 99, should be considered separate from any required segregated balances related to client protection regimes imposed by national regulations, and should not be netted against other customer exposures included in this standard. These offsetting balances held in segregated accounts are treated as inflows in paragraph 154 and should be excluded from the stock of HQLA.
43 Fiduciary is defined in this context as a legal entity that is authorised to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles.
44 Beneficiary is defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract.
45 Outflows on unsecured wholesale funding from affiliated entities of the bank are included in this category unless the funding is part of an operational relationship, a deposit in an institutional network of cooperative banks or the affiliated entity of a non-financial corporate.(iii) Secured Funding Run-Off
112. For the purposes of this standard, “secured funding” is defined as those liabilities and general obligations that are collateralised by legal rights to specifically designated assets owned by the borrowing institution in the case of bankruptcy, insolvency, liquidation or resolution.
113. Loss of secured funding on short-term financing transactions: In this scenario, the ability to continue to transact repurchase, reverse repurchase and other securities financing transactions is limited to transactions backed by HQLA or with the bank’s domestic sovereign, PSE or central bank.46 Collateral swaps should be treated as repurchase or reverse repurchase agreements, as should any other transaction with a similar form. Additionally, collateral lent to the bank’s customers to effect short positions47 should be treated as a form of secured funding. For the scenario, a bank should apply the following factors to all outstanding secured funding transactions with maturities within the 30 calendar day stress horizon, including customer short positions that do not have a specified contractual maturity. The amount of outflow is calculated based on the amount of funds raised through the transaction, and not the value of the underlying collateral.
114. Due to the high-quality of Level 1 assets, no reduction in funding availability against these assets is assumed to occur. Moreover, no reduction in funding availability is expected for any maturing secured funding transactions with the bank’s domestic central bank. A reduction in funding availability will be assigned to maturing transactions backed by Level 2 assets equivalent to the required haircuts. A 25% factor is applied for maturing secured funding transactions with the bank’s domestic sovereign, multilateral development banks, or domestic PSEs that have a 20% or lower risk weight, when the transactions are backed by assets other than Level 1 or Level 2A assets, in recognition that these entities are unlikely to withdraw secured funding from banks in a time of market-wide stress. This, however, gives credit only for outstanding secured funding transactions, and not for unused collateral or merely the capacity to borrow.
115. For all other maturing transactions the run-off factor is 100%, including transactions where a bank has satisfied customers’ short positions with its own long inventory. The table below summarises the applicable standards:
Categories for outstanding maturing secured funding transactions Amount to add to cash outflows • Backed by Level 1 assets or with central banks. 0% • Backed by Level 2A assets. 15% • Secured funding transactions with domestic sovereign, PSEs or multilateral development banks that are not backed by Level 1 or 2A assets. PSEs that receive this treatment are limited to those that have a risk weight of 20% or lower. 25% • Backed by RMBS eligible for inclusion in Level 2B • Backed by other Level 2B assets 50% • All others 100% 46 In this context, PSEs that receive this treatment should be limited to those that are 20% risk weighted or better, and “domestic” can be defined as a jurisdiction where a bank is legally incorporated.
47 A customer short position in this context describes a transaction where a bank’s customer sells a security it does not own, and the bank subsequently obtains the same security from internal or external sources to make delivery into the sale. Internal sources include the bank’s own inventory of collateral as well as rehypothecatable collateral held in other customer margin accounts. External sources include collateral obtained through a securities borrowing, reverse repo, or like transaction.
(iv) Additional Requirements
116. Derivatives cash outflows: the sum of all net cash outflows should receive a 100% factor. Banks should calculate, in accordance with their existing valuation methodologies, expected contractual derivative cash inflows and outflows. Cash flows may be calculated on a net basis (ie inflows can offset outflows) by counterparty, only where a valid master netting agreement exists. Banks should exclude from such calculations those liquidity requirements that would result from increased collateral needs due to market value movements or falls in value of collateral posted.48 Options should be assumed to be exercised when they are ‘in the money’ to the option buyer.
117. Where derivative payments are collateralised by HQLA, cash outflows should be calculated net of any corresponding cash or collateral inflows that would result, all other things being equal, from contractual obligations for cash or collateral to be provided to the bank, if the bank is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the collateral is received. This is in line with the principle that banks should not double count liquidity inflows and outflows.
118. Increased liquidity needs related to downgrade triggers embedded in financing transactions, derivatives and other contracts: (100% of the amount of collateral that would be posted for, or contractual cash outflows associated with, any downgrade up to and including a 3-notch downgrade). Often, contracts governing derivatives and other transactions have clauses that require the posting of additional collateral, drawdown of contingent facilities, or early repayment of existing liabilities upon the bank’s downgrade by a recognised credit rating organisation. The scenario therefore requires that for each contract in which “downgrade triggers” exist, the bank assumes that 100% of this additional collateral or cash outflow will have to be posted for any downgrade up to and including a 3-notch downgrade of the bank’s long-term credit rating. Triggers linked to a bank’s short-term rating should be assumed to be triggered at the corresponding long-term rating in accordance with published ratings criteria. The impact of the downgrade should consider impacts on all types of margin collateral and contractual triggers which change rehypothecation rights for non-segregated collateral.
119. Increased liquidity needs related to the potential for valuation changes on posted collateral securing derivative and other transactions: (20% of the value of non-Level 1 posted collateral). Observation of market practices indicates that most counterparties to derivatives transactions typically are required to secure the mark-to-market valuation of their positions and that this is predominantly done using cash or sovereign, central bank, multilateral development banks, or PSE debt securities with a 0% risk weight under the Basel II standardised approach. When these Level 1 liquid asset securities are posted as collateral, the framework will not require that an additional stock of HQLA be maintained for potential valuation changes. If however, counterparties are securing mark-to-market exposures with other forms of collateral, to cover the potential loss of market value on those securities, 20% of the value of all such posted collateral, net of collateral received on a counterparty basis (provided that the collateral received is not subject to restrictions on reuse or rehypothecation) will be added to the stock of required HQLA by the bank posting such collateral. This 20% will be calculated based on the notional amount required to be posted as collateral after any other haircuts have been applied that may be applicable to the collateral category. Any collateral that is in a segregated margin account can only be used to offset outflows that are associated with payments that are eligible to be offset from that same account.
120. Increased liquidity needs related to excess non-segregated collateral held by the bank that could contractually be called at any time by the counterparty: 100% of the non-segregated collateral that could contractually be recalled by the counterparty because the collateral is in excess of the counterparty’s current collateral requirements.
121. Increased liquidity needs related to contractually required collateral on transactions for which the counterparty has not yet demanded the collateral be posted: 100% of the collateral that is contractually due but where the counterparty has not yet demanded the posting of such collateral.
122. Increased liquidity needs related to contracts that allow collateral substitution to non-HQLA assets: 100% of the amount of HQLA collateral that can be substituted for non-HQLA assets without the bank’s consent that have been received to secure transactions that have not been segregated.
123. Increased liquidity needs related to market valuation changes on derivative or other transactions: As market practice requires collateralisation of mark-to-market exposures on derivative and other transactions, banks face potentially substantial liquidity risk exposures to these valuation changes. Inflows and outflows of transactions executed under the same master netting agreement can be treated on a net basis. Any outflow generated by increased needs related to market valuation changes should be included in the LCR calculated by identifying the largest absolute net 30-day collateral flow realised during the preceding 24 months. The absolute net collateral flow is based on both realised outflows and inflows. Supervisors may adjust the treatment flexibly according to circumstances.
124. Loss of funding on asset-backed securities,49 covered bonds and other structured financing instruments: The scenario assumes the outflow of 100% of the funding transaction maturing within the 30-day period, when these instruments are issued by the bank itself (as this assumes that the re-financing market will not exist).
125. Loss of funding on asset-backed commercial paper, conduits, securities investment vehicles and other such financing facilities: (100% of maturing amount and 100% of returnable assets). Banks having structured financing facilities that include the issuance of short-term debt instruments, such as asset backed commercial paper, should fully consider the potential liquidity risk arising from these structures. These risks include, but are not limited to, (i) the inability to refinance maturing debt, and (ii) the existence of derivatives or derivative-like components contractually written into the documentation associated with the structure that would allow the “return” of assets in a financing arrangement, or that require the original asset transferor to provide liquidity, effectively ending the financing arrangement (“liquidity puts”) within the 30-day period. Where the structured financing activities of a bank are conducted through a special purpose entity50 (such as a special purpose vehicle, conduit or structured investment vehicle - SIV), the bank should, in determining the HQLA requirements, look through to the maturity of the debt instruments issued by the entity and any embedded options in financing arrangements that may potentially trigger the “return” of assets or the need for liquidity, irrespective of whether or not the SPV is consolidated.
Potential Risk Element HQLA Required Debt maturing within the calculation period
Embedded options in financing arrangements that allow for the return of assets or potential liquidity support
100% of maturing amount
100% of the amount of assets that could potentially be returned, or the liquidity required
126. Drawdowns on committed credit and liquidity facilities: For the purpose of the standard, credit and liquidity facilities are defined as explicit contractual agreements or obligations to extend funds at a future date to retail or wholesale counterparties. For the purpose of the standard, these facilities only include contractually irrevocable (“committed”) or conditionally revocable agreements to extend funds in the future. Unconditionally revocable facilities that are unconditionally cancellable by the bank (in particular, those without a precondition of a material change in the credit condition of the borrower) are excluded from this section and included in “Other Contingent Funding Liabilities”. These off- balance sheet facilities or funding commitments can have long or short-term maturities, with short-term facilities frequently renewing or automatically rolling-over. In a stressed environment, it will likely be difficult for customers drawing on facilities of any maturity, even short-term maturities, to be able to quickly pay back the borrowings. Therefore, for purposes of this standard, all facilities that are assumed to be drawn (as outlined in the paragraphs below) will remain outstanding at the amounts assigned throughout the duration of the test, regardless of maturity.
127. For the purposes of this standard, the currently undrawn portion of these facilities is calculated net of any HQLA eligible for the stock of HQLA, if the HQLA have already been posted as collateral by the counterparty to secure the facilities or that are contractually obliged to be posted when the counterparty will draw down the facility (eg a liquidity facility structured as a repo facility), if the bank is legally entitled and operationally capable to re-use the collateral in new cash raising transactions once the facility is drawn, and there is no undue correlation between the probability of drawing the facility and the market value of the collateral. The collateral can be netted against the outstanding amount of the facility to the extent that this collateral is not already counted in the stock of HQLA, in line with the principle in paragraph 72 that items cannot be double-counted in the standard.
128. A liquidity facility is defined as any committed, undrawn back-up facility that would be utilised to refinance the debt obligations of a customer in situations where such a customer is unable to rollover that debt in financial markets (eg pursuant to a commercial paper programme, secured financing transactions, obligations to redeem units, etc). For the purpose of this standard, the amount of the commitment to be treated as a liquidity facility is the amount of the currently outstanding debt issued by the customer (or proportionate share, if a syndicated facility) maturing within a 30 day period that is backstopped by the facility. The portion of a liquidity facility that is backing debt that does not mature within the 30-day window is excluded from the scope of the definition of a facility. Any additional capacity of the facility (ie the remaining commitment) would be treated as a committed credit facility with its associated drawdown rate as specified in paragraph 131. General working capital facilities for corporate entities (eg revolving credit facilities in place for general corporate or working capital purposes) will not be classified as liquidity facilities, but as credit facilities.
129. Notwithstanding the above, any facilities provided to hedge funds, money market funds and special purpose funding vehicles, for example SPEs (as defined in paragraph 125) or conduits, or other vehicles used to finance the banks own assets, should be captured in their entirety as a liquidity facility to other legal entities.
130. For that portion of financing programs that are captured in paragraphs 124 and 125 (ie are maturing or have liquidity puts that may be exercised in the 30-day horizon), banks that are providers of associated liquidity facilities do not need to double count the maturing financing instrument and the liquidity facility for consolidated programs.
131. Any contractual loan drawdowns from committed facilities51 and estimated drawdowns from revocable facilities within the 30-day period should be fully reflected as outflows.
(a) Committed credit and liquidity facilities to retail and small business customers: Banks should assume a 5% drawdown of the undrawn portion of these facilities.
(b) Committed credit facilities to non-financial corporates, sovereigns and central banks, PSEs and multilateral development banks: Banks should assume a 10% drawdown of the undrawn portion of these credit facilities.
(c) Committed liquidity facilities to non-financial corporates, sovereigns and central banks, PSEs, and multilateral development banks: Banks should assume a 30% drawdown of the undrawn portion of these liquidity facilities.
(d) Committed credit and liquidity facilities extended to banks subject to prudential supervision: Banks should assume a 40% drawdown of the undrawn portion of these facilities.
(e) Committed credit facilities to other financial institutions including securities firms, insurance companies, fiduciaries,52 and beneficiaries53 Banks should assume a 40% drawdown of the undrawn portion of these credit facilities.
(f) Committed liquidity facilities to other financial institutions including securities firms, insurance companies, fiduciaries, and beneficiaries: Banks should assume a 100% drawdown of the undrawn portion of these liquidity facilities.
(g) Committed credit and liquidity facilities to other legal entities (including SPEs (as defined on paragraph 125), conduits and special purpose vehicles,54 and other entities not included in the prior categories): Banks should assume a 100% drawdown of the undrawn portion of these facilities.
132. Contractual obligations to extend funds within a 30-day period. Any contractual lending obligations to financial institutions not captured elsewhere in this standard should be captured here at a 100% outflow rate.
133. If the total of all contractual obligations to extend funds to retail and non-financial corporate clients within the next 30 calendar days (not captured in the prior categories) exceeds 50% of the total contractual inflows due in the next 30 calendar days from these clients, the difference should be reported as a 100% outflow.
134. Other contingent funding obligations: (run-off rates at national discretion). National supervisors will work with supervised institutions in their jurisdictions to determine the liquidity risk impact of these contingent liabilities and the resulting stock of HQLA that should accordingly be maintained. Supervisors should disclose the run-off rates they assign to each category publicly.
135. These contingent funding obligations may be either contractual or non-contractual and are not lending commitments. Non-contractual contingent funding obligations include associations with, or sponsorship of, products sold or services provided that may require the support or extension of funds in the future under stressed conditions. Non-contractual obligations may be embedded in financial products and instruments sold, sponsored, or originated by the institution that can give rise to unplanned balance sheet growth arising from support given for reputational risk considerations. These include products and instruments for which the customer or holder has specific expectations regarding the liquidity and marketability of the product or instrument and for which failure to satisfy customer expectations in a commercially reasonable manner would likely cause material reputational damage to the institution or otherwise impair ongoing viability.
136. Some of these contingent funding obligations are explicitly contingent upon a credit or other event that is not always related to the liquidity events simulated in the stress scenario, but may nevertheless have the potential to cause significant liquidity drains in times of stress. For this standard, each supervisor and bank should consider which of these “other contingent funding obligations” may materialise under the assumed stress events. The potential liquidity exposures to these contingent funding obligations are to be treated as a nationally determined behavioural assumption where it is up to the supervisor to determine whether and to what extent these contingent outflows are to be included in the LCR. All identified contractual and non-contractual contingent liabilities and their assumptions should be reported, along with their related triggers. Supervisors and banks should, at a minimum, use historical behaviour in determining appropriate outflows.
137. Non contractual contingent funding obligations related to potential liquidity draws from joint ventures or minority investments in entities, which are not consolidated per paragraph 164 should be captured where there is the expectation that the bank will be the main liquidity provider when the entity is in need of liquidity. The amount included should be calculated in accordance with the methodology agreed by the bank’s supervisor.
138. In the case of contingent funding obligations stemming from trade finance instruments, national authorities can apply a relatively low run-off rate (eg 5% or less). Trade finance instruments consist of trade-related obligations directly underpinned by the movement of goods or the provision of services, such as:
• documentary trade letters of credit, documentary and clean collection, import bills, and export bills; and
• guarantees directly related to trade finance obligations, such as shipping guarantees.
139. Lending commitments, such as direct import or export financing for non-financial corporate firms, are excluded from this treatment and banks will apply the draw-down rates specified in paragraph 131.
140. National authorities should determine the run-off rates for the other contingent funding obligations listed below in accordance with paragraph 134. Other contingent funding obligations include products and instruments such as:
• unconditionally revocable "uncommitted" credit and liquidity facilities;
• guarantees and letters of credit unrelated to trade finance obligations (as described in paragraph 138);
• non-contractual obligations such as:
- potential requests for debt repurchases of the bank's own debt or that of related conduits, securities investment vehicles and other such financing facilities;
- structured products where customers anticipate ready marketability, such as adjustable rate notes and variable rate demand notes (VRDNs); and
- managed funds that are marketed with the objective of maintaining a stable value such as money market mutual funds or other types of stable value collective investment funds etc.
• For issuers with an affiliated dealer or market maker, there may be a need to include an amount of the outstanding debt securities (unsecured and secured, term as well as short-term) having maturities greater than 30 calendar days, to cover the potential repurchase of such outstanding securities.
• Non contractual obligations where customer short positions are covered by other customers’ collateral: A minimum 50% run-off factor of the contingent obligations should be applied where banks have internally matched client assets against other clients’ short positions where the collateral does not qualify as Level 1 or Level 2, and the bank may be obligated to find additional sources of funding for these positions in the event of client withdrawals.
141. Other contractual cash outflows: (100%). Any other contractual cash outflows within the next 30 calendar days should be captured in this standard, such as outflows to cover unsecured collateral borrowings, uncovered short positions, dividends or contractual interest payments, with explanation given as to what comprises this bucket. Outflows related to operating costs, however, are not included in this standard.
48 These risks are captured in paragraphs 119 and 123, respectively.
49 To the extent that sponsored conduits/SPVs are required to be consolidated under liquidity requirements, their assets and liabilities will be taken into account. Supervisors need to be aware of other possible sources of liquidity risk beyond that arising from debt maturing within 30 days.
50 A special purpose entity (SPE) is defined in the Basel II Framework (paragraph 552) as a corporation, trust, or other entity organised for a specific purpose, the activities of which are limited to those appropriate to accomplish the purpose of the SPE, and the structure of which is intended to isolate the SPE from the credit risk of an originator or seller of exposures. SPEs are commonly used as financing vehicles in which exposures are sold to a trust or similar entity in exchange for cash or other assets funded by debt issued by the trust.
51 Committed facilities refer to those which are irrevocable.
52 Refer to footnote 43 for definition.
53 Refer to footnote 44 for definition.
54 The potential liquidity risks associated with the bank's own structured financing facilities should be treated according to paragraphs 124 and 125 of this document (100% of maturing amount and 100% of returnable assets are included as outflows).2. Cash Inflows
142. When considering its available cash inflows, the bank should only include contractual inflows (including interest payments) from outstanding exposures that are fully performing and for which the bank has no reason to expect a default within the 30-day time horizon. Contingent inflows are not included in total net cash inflows.
143. Banks and supervisors need to monitor the concentration of expected inflows across wholesale counterparties in the context of banks’ liquidity management in order to ensure that their liquidity position is not overly dependent on the arrival of expected inflows from one or a limited number of wholesale counterparties.
144. Cap on total inflows: In order to prevent banks from relying solely on anticipated inflows to meet their liquidity requirement, and also to ensure a minimum level of HQLA holdings, the amount of inflows that can offset outflows is capped at 75% of total expected cash outflows as calculated in the standard. This requires that a bank must maintain a minimum amount of stock of HQLA equal to 25% of the total cash outflows.
(i) Secured Lending, Including Reverse Repos and Securities Borrowing
145. A bank should assume that maturing reverse repurchase or securities borrowing agreements secured by Level 1 assets will be rolled-over and will not give rise to any cash inflows (0%). Maturing reverse repurchase or securities lending agreements secured by Level 2 HQLA will lead to cash inflows equivalent to the relevant haircut for the specific assets. A bank is assumed not to roll-over maturing reverse repurchase or securities borrowing agreements secured by non-HQLA assets, and can assume to receive back 100% of the cash related to those agreements. Collateralised loans extended to customers for the purpose of taking leveraged trading positions (“margin loans”) should also be considered as a form of secured lending; however, for this scenario banks may recognise no more than 50% of contractual inflows from maturing margin loans made against non-HQLA collateral. This treatment is in line with the assumptions outlined for secured funding in the outflows section.
146. As an exception to paragraph 145, if the collateral obtained through reverse repo, securities borrowing, or collateral swaps, which matures within the 30-day horizon, is re-used (ie rehypothecated) and is used to cover short positions that could be extended beyond 30 days, a bank should assume that such reverse repo or securities borrowing arrangements will be rolled-over and will not give rise to any cash inflows (0%), reflecting its need to continue to cover the short position or to re-purchase the relevant securities. Short positions include both instances where in its ‘matched book’ the bank sold short a security outright as part of a trading or hedging strategy and instances where the bank is short a security in the ‘matched’ repo book (ie it has borrowed a security for a given period and lent the security out for a longer period).
Maturing secured lending transactions backed by the following asset category: Inflow rate (if collateral is not used to cover short positions): Inflow rate (if collateral is used to cover short positions): Level 1 assets 0% 0% Level 2A assets 15% 0% Level 2B assets Eligible RMBS 25% 0% Other Level 2B assets 50% 0% Margin lending backed by all other collateral 50% 0% Other collateral 100% 0% 147. In the case of a bank’s short positions, if the short position is being covered by an unsecured security borrowing, the bank should assume the unsecured security borrowing of collateral from financial market participants would run-off in full, leading to a 100% outflow of either cash or HQLA to secure the borrowing, or cash to close out the short position by buying back the security. This should be recorded as a 100% other contractual outflow according to paragraph 141. If, however, the bank’s short position is being covered by a collateralised securities financing transaction, the bank should assume the short position will be maintained throughout the 30-day period and receive a 0% outflow.
148. Despite the roll-over assumptions in paragraphs 145 and 146, a bank should manage its collateral such that it is able to fulfil obligations to return collateral whenever the counterparty decides not to roll-over any reverse repo or securities lending transaction.55 This is especially the case for non-HQLA collateral, since such outflows are not captured in the LCR framework. Supervisors should monitor the bank's collateral management.
55 This is in line with Principle 9 of the Sound Principles.
(ii) Committed Facilities
149. No credit facilities, liquidity facilities or other contingent funding facilities that the bank holds at other institutions for its own purposes are assumed to be able to be drawn. Such facilities receive a 0% inflow rate, meaning that this scenario does not consider inflows from committed credit or liquidity facilities. This is to reduce the contagion risk of liquidity shortages at one bank causing shortages at other banks and to reflect the risk that other banks may not be in a position to honour credit facilities, or may decide to incur the legal and reputational risk involved in not honouring the commitment, in order to conserve their own liquidity or reduce their exposure to that bank.
(iii) Other Inflows by Counterparty
150. For all other types of transactions, either secured or unsecured, the inflow rate will be determined by counterparty. In order to reflect the need for a bank to conduct ongoing loan origination/roll-over with different types of counterparties, even during a time of stress, a set of limits on contractual inflows by counterparty type is applied.
151. When considering loan payments, the bank should only include inflows from fully performing loans. Further, inflows should only be taken at the latest possible date, based on the contractual rights available to counterparties. For revolving credit facilities, this assumes that the existing loan is rolled over and that any remaining balances are treated in the same way as a committed facility according to paragraph 131.
152. Inflows from loans that have no specific maturity (ie have non-defined or open maturity) should not be included; therefore, no assumptions should be applied as to when maturity of such loans would occur. An exception to this would be minimum payments of principal, fee or interest associated with an open maturity loan, provided that such payments are contractually due within 30 days. These minimum payment amounts should be captured as inflows at the rates prescribed in paragraphs 153 and 154.
(a) Retail and Small Business Customer Inflows
153. This scenario assumes that banks will receive all payments (including interest payments and instalments) from retail and small business customers that are fully performing and contractually due within a 30-day horizon. At the same time, however, banks are assumed to continue to extend loans to retail and small business customers, at a rate of 50% of contractual inflows. This results in a net inflow number of 50% of the contractual amount.
(b) Other Wholesale Inflows
154. This scenario assumes that banks will receive all payments (including interest payments and instalments) from wholesale customers that are fully performing and contractually due within the 30-day horizon. In addition, banks are assumed to continue to extend loans to wholesale clients, at a rate of 0% of inflows for financial institutions and central banks, and 50% for all others, including non-financial corporates, sovereigns, multilateral development banks, and PSEs. This will result in an inflow percentage of:
• 100% for financial institution and central bank counterparties; and
• 50% for non-financial wholesale counterparties.
155. Inflows from securities maturing within 30 days not included in the stock of HQLA should be treated in the same category as inflows from financial institutions (ie 100% inflow). Banks may also recognise in this category inflows from the release of balances held in segregated accounts in accordance with regulatory requirements for the protection of customer trading assets, provided that these segregated balances are maintained in HQLA. This inflow should be calculated in line with the treatment of other related outflows and inflows covered in this standard. Level 1 and Level 2 securities maturing within 30 days should be included in the stock of liquid assets, provided that they meet all operational and definitional requirements, as laid out in paragraphs 28-54.
156. Operational deposits: Deposits held at other financial institutions for operational purposes, as outlined in paragraphs 93-103, such as for clearing, custody, and cash management purposes, are assumed to stay at those institutions, and no inflows can be counted for these funds – ie they will receive a 0% inflow rate, as noted in paragraph 98.
157. The same treatment applies for deposits held at the centralised institution in a cooperative banking network, that are assumed to stay at the centralised institution as outlined in paragraphs 105 and 106; in other words, the depositing bank should not count any inflow for these funds – ie they will receive a 0% inflow rate.
(iv) Other Cash Inflows
158. Derivatives cash inflows: the sum of all net cash inflows should receive a 100% inflow factor. The amounts of derivatives cash inflows and outflows should be calculated in accordance with the methodology described in paragraph 116.
159. Where derivatives are collateralised by HQLA, cash inflows should be calculated net of any corresponding cash or contractual collateral outflows that would result, all other things being equal, from contractual obligations for cash or collateral to be posted by the bank, given these contractual obligations would reduce the stock of HQLA. This is in accordance with the principle that banks should not double-count liquidity inflows or outflows.
160. Other contractual cash inflows: Other contractual cash inflows should be captured here, with explanation given to what comprises this bucket. Inflow percentages should be determined as appropriate for each type of inflow by supervisors in each jurisdiction. Cash inflows related to non-financial revenues are not taken into account in the calculation of the net cash outflows for the purposes of this standard.
III. Application Issues for the LCR
161. This section outlines a number of issues related to the application of the LCR. These issues include the frequency with which banks calculate and report the LCR, the scope of application of the LCR (whether they apply at group or entity level and to foreign bank branches) and the aggregation of currencies within the LCR.
A. Frequency of Calculation and Reporting
162. The LCR should be used on an ongoing basis to help monitor and control liquidity risk. The LCR should be reported to supervisors at least monthly, with the operational capacity to increase the frequency to weekly or even daily in stressed situations at the discretion of the supervisor. The time lag in reporting should be as short as feasible and ideally should not surpass two weeks.
163. Banks are expected to inform supervisors of their LCR and their liquidity profile on an ongoing basis. Banks should also notify supervisors immediately if their LCR has fallen, or is expected to fall, below 100%.
B. Scope of Application
164. The application of the requirements in this document follow the existing scope of application set out in Part I (Scope of Application) of the Basel II Framework.56 The LCR standard and monitoring tools should be applied to all internationally active banks on a consolidated basis, but may be used for other banks and on any subset of entities of internationally active banks as well to ensure greater consistency and a level playing field between domestic and cross-border banks. The LCR standard and monitoring tools should be applied consistently wherever they are applied.
165. National supervisors should determine which investments in banking, securities and financial entities of a banking group that are not consolidated per paragraph 164 should be considered significant, taking into account the liquidity impact of such investments on the group under the LCR standard. Normally, a non-controlling investment (eg a joint-venture or minority-owned entity) can be regarded as significant if the banking group will be the main liquidity provider of such investment in times of stress (for example, when the other shareholders are non-banks or where the bank is operationally involved in the day-to-day management and monitoring of the entity’s liquidity risk). National supervisors should agree with each relevant bank on a case-by-case basis on an appropriate methodology for how to quantify such potential liquidity draws, in particular, those arising from the need to support the investment in times of stress out of reputational concerns for the purpose of calculating the LCR standard. To the extent that such liquidity draws are not included elsewhere, they should be treated under “Other contingent funding obligations”, as described in paragraph 137.
166. Regardless of the scope of application of the LCR, in keeping with Principle 6 as outlined in the Sound Principles, a bank should actively monitor and control liquidity risk exposures and funding needs at the level of individual legal entities, foreign branches and subsidiaries, and the group as a whole, taking into account legal, regulatory and operational limitations to the transferability of liquidity.
167. To ensure consistency in applying the consolidated LCR across jurisdictions, further information is provided below on two application issues.
1. Differences in Home / Host Liquidity Requirements
168. While most of the parameters in the LCR are internationally “harmonised”, national differences in liquidity treatment may occur in those items subject to national discretion (eg deposit run-off rates, contingent funding obligations, market valuation changes on derivative transactions, etc) and where more stringent parameters are adopted by some supervisors.
169. When calculating the LCR on a consolidated basis, a cross-border banking group should apply the liquidity parameters adopted in the home jurisdiction to all legal entities being consolidated except for the treatment of retail / small business deposits that should follow the relevant parameters adopted in host jurisdictions in which the entities (branch or subsidiary) operate. This approach will enable the stressed liquidity needs of legal entities of the group (including branches of those entities) operating in host jurisdictions to be more suitably reflected, given that deposit run-off rates in host jurisdictions are more influenced by jurisdiction-specific factors such as the type and effectiveness of deposit insurance schemes in place and the behaviour of local depositors.
170. Home requirements for retail and small business deposits should apply to the relevant legal entities (including branches of those entities) operating in host jurisdictions if: (i) there are no host requirements for retail and small business deposits in the particular jurisdictions; (ii) those entities operate in host jurisdictions that have not implemented the LCR; or (iii) the home supervisor decides that home requirements should be used that are stricter than the host requirements.
2. Treatment of Liquidity Transfer Restrictions
171. As noted in paragraph 36, as a general principle, no excess liquidity should be recognised by a cross-border banking group in its consolidated LCR if there is reasonable doubt about the availability of such liquidity. Liquidity transfer restrictions (eg ring-fencing measures, non-convertibility of local currency, foreign exchange controls, etc) in jurisdictions in which a banking group operates will affect the availability of liquidity by inhibiting the transfer of HQLA and fund flows within the group. The consolidated LCR should reflect such restrictions in a manner consistent with paragraph 36. For example, the eligible HQLA that are held by a legal entity being consolidated to meet its local LCR requirements (where applicable) can be included in the consolidated LCR to the extent that such HQLA are used to cover the total net cash outflows of that entity, notwithstanding that the assets are subject to liquidity transfer restrictions. If the HQLA held in excess of the total net cash outflows are not transferable, such surplus liquidity should be excluded from the standard.
172. For practical reasons, the liquidity transfer restrictions to be accounted for in the consolidated ratio are confined to existing restrictions imposed under applicable laws, regulations and supervisory requirements.57 A banking group should have processes in place to capture all liquidity transfer restrictions to the extent practicable, and to monitor the rules and regulations in the jurisdictions in which the group operates and assess their liquidity implications for the group as a whole.
SAMA is aware that Saudi banks with overseas branches and subsidiaries have to meet LCR requirements of their host jurisdictions. However, these requirements concerning haircuts on level 1 HQLA or related repo facility may not be totally in sync with SAMA requirements. Consequently in view of the section as stated below:
Scope Of Application (paragraphs 164 to 172) of the Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tool dated January 2013
Note: SAMA would like Saudi banks to apply the more conservative treatment of the rules of SAMA or host jurisdiction for level 1 HQLA and its repo facility for the purpose of consolidated LCR calculation.
57 There are a number of factors that can impede cross-border liquidity flows of a banking group, many of which are beyond the control of the group and some of these restrictions may not be clearly incorporated into law or may become visible only in times of stress.
C. Currencies
173. As outlined in paragraph 42, while the LCR is expected to be met on a consolidated basis and reported in a common currency, supervisors and banks should also be aware of the liquidity needs in each significant currency. As indicated in the LCR, the currencies of the stock of HQLA should be similar in composition to the operational needs of the bank. Banks and supervisors cannot assume that currencies will remain transferable and convertible in a stress period, even for currencies that in normal times are freely transferable and highly convertible.
Part 2: Monitoring Tools
174. In addition to the LCR outlined in Part 1 to be used as a standard, this section outlines metrics to be used as consistent monitoring tools. These metrics capture specific information related to a bank’s cash flows, balance sheet structure, available unencumbered collateral and certain market indicators.
175. These metrics, together with the LCR standard, provide the cornerstone of information that aid supervisors in assessing the liquidity risk of a bank. In addition, supervisors may need to supplement this framework by using additional tools and metrics tailored to help capture elements of liquidity risk specific to their jurisdictions. In utilising these metrics, supervisors should take action when potential liquidity difficulties are signalled through a negative trend in the metrics, or when a deteriorating liquidity position is identified, or when the absolute result of the metric identifies a current or potential liquidity problem. Examples of actions that supervisors can take are outlined in the Committee’s Sound Principles (paragraphs 141-143).
176. The metrics discussed in this section include the following:
I. Contractual maturity mismatch;
II. Concentration of funding;
III. Available unencumbered assets;
IV. LCR by significant currency; and
V. Market-related monitoring tools
I. Contractual Maturity Mismatch
A. Objective
177. The contractual maturity mismatch profile identifies the gaps between the contractual inflows and outflows of liquidity for defined time bands. These maturity gaps indicate how much liquidity a bank would potentially need to raise in each of these time bands if all outflows occurred at the earliest possible date. This metric provides insight into the extent to which the bank relies on maturity transformation under its current contracts.
B. Definition and Practical Application of the Metric
Contractual cash and security inflows and outflows from all on- and off-balance sheet items, mapped to defined time bands based on their respective maturities. 178. A bank should report contractual cash and security flows in the relevant time bands based on their residual contractual maturity. Supervisors in each jurisdiction will determine the specific template, including required time bands, by which data must be reported. Supervisors should define the time buckets so as to be able to understand the bank’s cash flow position. Possibilities include requesting the cash flow mismatch to be constructed for the overnight, 7 day, 14 day, 1, 2, 3, 6 and 9 months, 1, 2, 3, 5 and beyond 5 years buckets. Instruments that have no specific maturity (non-defined or open maturity) should be reported separately, with details on the instruments, and with no assumptions applied as to when maturity occurs. Information on possible cash flows arising from derivatives such as interest rate swaps and options should also be included to the extent that their contractual maturities are relevant to the understanding of the cash flows.
179. At a minimum, the data collected from the contractual maturity mismatch should provide data on the categories outlined in the LCR. Some additional accounting (non-dated) information such as capital or non-performing loans may need to be reported separately.
1. Contractual Cashflow Assumptions
180. No rollover of existing liabilities is assumed to take place. For assets, the bank is assumed not to enter into any new contracts.
181. Contingent liability exposures that would require a change in the state of the world (such as contracts with triggers based on a change in prices of financial instruments or a downgrade in the bank's credit rating) need to be detailed, grouped by what would trigger the liability, with the respective exposures clearly identified.
182. A bank should record all securities flows. This will allow supervisors to monitor securities movements that mirror corresponding cash flows as well as the contractual maturity of collateral swaps and any uncollateralised stock lending/borrowing where stock movements occur without any corresponding cash flows.
183. A bank should report separately the customer collateral received that the bank is permitted to rehypothecate as well as the amount of such collateral that is rehypothecated at each reporting date. This also will highlight instances when the bank is generating mismatches in the borrowing and lending of customer collateral.
C. Utilisation of the Metric
184. Banks will provide the raw data to the supervisors, with no assumptions included in the data. Standardised contractual data submission by banks enables supervisors to build a market-wide view and identify market outliers vis-à-vis liquidity.
185. Given that the metric is based solely on contractual maturities with no behavioural assumptions, the data will not reflect actual future forecasted flows under the current, or future, strategy or plans, ie, under a going-concern view. Also, contractual maturity mismatches do not capture outflows that a bank may make in order to protect its franchise, even where contractually there is no obligation to do so. For analysis, supervisors can apply their own assumptions to reflect alternative behavioural responses in reviewing maturity gaps.
186. As outlined in the Sound Principles, banks should also conduct their own maturity mismatch analyses, based on going-concern behavioural assumptions of the inflows and outflows of funds in both normal situations and under stress. These analyses should be based on strategic and business plans and should be shared and discussed with supervisors, and the data provided in the contractual maturity mismatch should be utilised as a basis of comparison. When firms are contemplating material changes to their business models, it is crucial for supervisors to request projected mismatch reports as part of an assessment of impact of such changes to prudential supervision. Examples of such changes include potential major acquisitions or mergers or the launch of new products that have not yet been contractually entered into. In assessing such data supervisors need to be mindful of assumptions underpinning the projected mismatches and whether they are prudent.
187. A bank should be able to indicate how it plans to bridge any identified gaps in its internally generated maturity mismatches and explain why the assumptions applied differ from the contractual terms. The supervisor should challenge these explanations and assess the feasibility of the bank’s funding plans.
II. Concentration of Funding
A. Objective
188. This metric is meant to identify those sources of wholesale funding that are of such significance that withdrawal of this funding could trigger liquidity problems. The metric thus encourages the diversification of funding sources recommended in the Committee’s Sound Principles.
B. Definition and Practical Application of the Metric
A. Funding liabilities sourced from each significant counterparty as a % of total liabilities
B. Funding liabilities sourced from each significant product/instrument as a % of total liabilities
C. List of asset and liability amounts by significant currency
1. Calculation of the Metric
189. The numerator for A and B is determined by examining funding concentrations by counterparty or type of instrument/product. Banks and supervisors should monitor both the absolute percentage of the funding exposure, as well as significant increases in concentrations.
(i) Significant Counterparties
190. The numerator for counterparties is calculated by aggregating the total of all types of liabilities to a single counterparty or group of connected or affiliated counterparties, as well as all other direct borrowings, both secured and unsecured, which the bank can determine arise from the same counterparty58 (such as for overnight commercial paper / certificate of deposit (CP/CD) funding).
191. A “significant counterparty” is defined as a single counterparty or group of connected or affiliated counterparties accounting in aggregate for more than 1% of the bank's total balance sheet, although in some cases there may be other defining characteristics based on the funding profile of the bank. A group of connected counterparties is, in this context, defined in the same way as in the “Large Exposure” regulation of the host country in the case of consolidated reporting for solvency purposes. Intra-group deposits and deposits from related parties should be identified specifically under this metric, regardless of whether the metric is being calculated at a legal entity or group level, due to the potential limitations to intra-group transactions in stressed conditions.
58 For some funding sources, such as debt issues that are transferable across counterparties (such as CP/CD funding dated longer than overnight, etc), it is not always possible to identify the counterparty holding the debt.
(ii) Significant Instruments / Products
192. The numerator for type of instrument/product should be calculated for each individually significant funding instrument/product, as well as by calculating groups of similar types of instruments/products.
193. A “significant instrument/product” is defined as a single instrument/product or group of similar instruments/products that in aggregate amount to more than 1% of the bank's total balance sheet.
(iii) Significant Currencies
194. In order to capture the amount of structural currency mismatch in a bank’s assets and liabilities, banks are required to provide a list of the amount of assets and liabilities in each significant currency.
195. A currency is considered “significant” if the aggregate liabilities denominated in that currency amount to 5% or more of the bank's total liabilities.
(iv) Time Buckets
196. The above metrics should be reported separately for the time horizons of less than one month, 1-3 months, 3-6 months, 6-12 months, and for longer than 12 months.
C. Utilisation of the Metric
197. In utilising this metric to determine the extent of funding concentration to a certain counterparty, both the bank and supervisors must recognise that currently it is not possible to identify the actual funding counterparty for many types of debt.59 The actual concentration of funding sources, therefore, could likely be higher than this metric indicates. The list of significant counterparties could change frequently, particularly during a crisis. Supervisors should consider the potential for herding behaviour on the part of funding counterparties in the case of an institution-specific problem. In addition, under market-wide stress, multiple funding counterparties and the bank itself may experience concurrent liquidity pressures, making it difficult to sustain funding, even if sources appear well diversified.
198. In interpreting this metric, one must recognise that the existence of bilateral funding transactions may affect the strength of commercial ties and the amount of the net outflow.60
199. These metrics do not indicate how difficult it would be to replace funding from any given source.
200. To capture potential foreign exchange risks, the comparison of the amount of assets and liabilities by currency will provide supervisors with a baseline for discussions with the banks about how they manage any currency mismatches through swaps, forwards, etc. It is meant to provide a base for further discussions with the bank rather than to provide a snapshot view of the potential risk.
59 For some funding sources, such as debt issues that are transferable across counterparties (such as CP/CD funding dated longer than overnight, etc), it is not always possible to identify the counterparty holding the debt.
60 Eg where the monitored institution also extends funding or has large unused credit lines outstanding to the “significant counterparty”.III. Available Unencumbered Assets
A. Objective
201. These metrics provide supervisors with data on the quantity and key characteristics, including currency denomination and location, of banks’ available unencumbered assets. These assets have the potential to be used as collateral to raise additional HQLA or secured funding in secondary markets or are eligible at central banks and as such may potentially be additional sources of liquidity for the bank.
B. Definition and Practical Application of the Metric
Available unencumbered assets that are marketable as collateral in secondary markets
and
Available unencumbered assets that are eligible for central banks’ standing facilities
202. A bank is to report the amount, type and location of available unencumbered assets that could serve as collateral for secured borrowing in secondary markets at prearranged or current haircuts at reasonable costs.
203. Likewise, a bank should report the amount, type and location of available unencumbered assets that are eligible for secured financing with relevant central banks at prearranged (if available) or current haircuts at reasonable costs, for standing facilities only (ie excluding emergency assistance arrangements). This would include collateral that has already been accepted at the central bank but remains unused. For assets to be counted in this metric, the bank must have already put in place the operational procedures that would be needed to monetise the collateral.
204. A bank should report separately the customer collateral received that the bank is permitted to deliver or re-pledge, as well as the part of such collateral that it is delivering or re-pledging at each reporting date.
205. In addition to providing the total amounts available, a bank should report these items categorised by significant currency. A currency is considered “significant” if the aggregate stock of available unencumbered collateral denominated in that currency amounts 5% or more of the associated total amount of available unencumbered collateral (for secondary markets or central banks).
206. In addition, a bank must report the estimated haircut that the secondary market or relevant central bank would require for each asset. In the case of the latter, a bank would be expected to reference, under business as usual, the haircut required by the central bank that it would normally access (which likely involves matching funding currency – eg ECB for euro-denominated funding, Bank of Japan for yen funding, etc).
207. As a second step after reporting the relevant haircuts, a bank should report the expected monetised value of the collateral (rather than the notional amount) and where the assets are actually held, in terms of the location of the assets and what business lines have access to those assets.
C. Utilisation of the Metric
208. These metrics are useful for examining the potential for a bank to generate an additional source of HQLA or secured funding. They will provide a standardised measure of the extent to which the LCR can be quickly replenished after a liquidity shock either via raising funds in private markets or utilising central bank standing facilities. The metrics do not, however, capture potential changes in counterparties’ haircuts and lending policies that could occur under either a systemic or idiosyncratic event and could provide false comfort that the estimated monetised value of available unencumbered collateral is greater than it would be when it is most needed. Supervisors should keep in mind that these metrics do not compare available unencumbered assets to the amount of outstanding secured funding or any other balance sheet scaling factor. To gain a more complete picture, the information generated by these metrics should be complemented with the maturity mismatch metric and other balance sheet data.
IV. LCR by Significant Currency
A. Objective
209. While the LCR is required to be met in one single currency, in order to better capture potential currency mismatches, banks and supervisors should also monitor the LCR in significant currencies. This will allow the bank and the supervisor to track potential currency mismatch issues that could arise.
B. Definition and Practical Application of the Metric
Foreign Currency LCR = Stock of HQLA in each significant currency / Total net cash outflows over a 30-day time period in each significant currency
(Note: Amount of total net foreign exchange cash outflows should be net of foreign exchange hedges)
210. The definition of the stock of high-quality foreign exchange assets and total net foreign exchange cash outflows should mirror those of the LCR for common currencies.61
211. A currency is considered “significant” if the aggregate liabilities denominated in that currency amount to 5% or more of the bank's total liabilities.
212. As the foreign currency LCR is not a standard but a monitoring tool, it does not have an internationally defined minimum required threshold. Nonetheless, supervisors in each jurisdiction could set minimum monitoring ratios for the foreign exchange LCR, below which a supervisor should be alerted. In this case, the ratio at which supervisors should be alerted would depend on the stress assumption. Supervisors should evaluate banks’ ability to raise funds in foreign currency markets and the ability to transfer a liquidity surplus from one currency to another and across jurisdictions and legal entities. Therefore, the ratio should be higher for currencies in which the supervisors evaluate a bank’s ability to raise funds in foreign currency markets or the ability to transfer a liquidity surplus from one currency to another and across jurisdictions and legal entities to be limited.
61 Cash flows from assets, liabilities and off-balance sheet items will be computed in the currency that the counterparties are obliged to deliver to settle the contract, independent of the currency to which the contract is indexed (or "linked"), or the currency whose fluctuation it is intended to hedge.
C. Utilisation of the Metric
213. This metric is meant to allow the bank and supervisor to track potential currency mismatch issues that could arise in a time of stress.
V Market-Related Monitoring Tools
A. Objective
214. High frequency market data with little or no time lag can be used as early warning indicators in monitoring potential liquidity difficulties at banks.
B. Definition and Practical Application of the Metric
215. While there are many types of data available in the market, supervisors can monitor data at the following levels to focus on potential liquidity difficulties:
1. Market-wide information
2. Information on the financial sector
3. Bank-specific information
1. Market-Wide Information
216. Supervisors can monitor information both on the absolute level and direction of major markets and consider their potential impact on the financial sector and the specific bank. Market-wide information is also crucial when evaluating assumptions behind a bank’s funding plan.
217. Valuable market information to monitor includes, but is not limited to, equity prices (ie overall stock markets and sub-indices in various jurisdictions relevant to the activities of the supervised banks), debt markets (money markets, medium-term notes, long term debt, derivatives, government bond markets, credit default spread indices, etc); foreign exchange markets, commodities markets, and indices related to specific products, such as for certain securitised products (eg the ABX).
2. Information on the Financial Sector
218. To track whether the financial sector as a whole is mirroring broader market movements or is experiencing difficulties, information to be monitored includes equity and debt market information for the financial sector broadly and for specific subsets of the financial sector, including indices.
3. Bank-Specific Information
219. To monitor whether the market is losing confidence in a particular institution or has identified risks at an institution, it is useful to collect information on equity prices, CDS spreads, money-market trading prices, the situation of roll-overs and prices for various lengths of funding, the price/yield of bank debenture or subordinated debt in the secondary market.
C. Utilisation of the Metric/Data
220. Information such as equity prices and credit spreads are readily available. However, the accurate interpretation of such information is important. For instance, the same CDS spread in numerical terms may not necessarily imply the same risk across markets due to market-specific conditions such as low market liquidity. Also, when considering the liquidity impact of changes in certain data points, the reaction of other market participants to such information can be different, as various liquidity providers may emphasise different types of data.
Annex 1: Calculation of the Cap on Level 2 Assets with Regard to Short-Term Securities Financing Transactions
1. This annex seeks to clarify the appropriate method for the calculation of the cap on Level 2 (including Level 2B) assets with regard to short-term securities financing transactions.
2. As stated in paragraph 36, the calculation of the 40% cap on Level 2 assets should take into account the impact on the stock of HQLA of the amounts of Level 1 and Level 2 assets involved in secured funding,62 secured lending63 and collateral swap transactions maturing within 30 calendar days. The maximum amount of adjusted Level 2 assets in the stock of HQLA is equal to two-thirds of the adjusted amount of Level 1 assets after haircuts have been applied. The calculation of the 40% cap on Level 2 assets will take into account any reduction in eligible Level 2B assets on account of the 15% cap on Level 2B assets.64
3. Further, the calculation of the 15% cap on Level 2B assets should take into account the impact on the stock of HQLA of the amounts of HQLA assets involved in secured funding, secured lending and collateral swap transactions maturing within 30 calendar days. The maximum amount of adjusted Level 2B assets in the stock of HQLA is equal to 15/85 of the sum of the adjusted amounts of Level 1 and Level 2 assets, or, in cases where the 40% cap is binding, up to a maximum of 1/4 of the adjusted amount of Level 1 assets, both after haircuts have been applied.
4. The adjusted amount of Level 1 assets is defined as the amount of Level 1 assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 1 assets (including cash) that meet, or would meet if held unencumbered, the operational requirements for HQLA set out in paragraphs 28 to 40. The adjusted amount of Level 2A assets is defined as the amount of Level 2A assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 2A assets that meet, or would meet if held unencumbered, the operational requirements for HQLA set out in paragraphs 28 to 40. The adjusted amount of Level 2B assets is defined as the amount of Level 2B assets that would result after unwinding those short-term secured funding, secured lending and collateral swap transactions involving the exchange of any HQLA for any Level 2B assets that meet, or would meet if held unencumbered, the operational requirements for HQLA set out in paragraphs 28 to 40. In this context, short-term transactions are transactions with a maturity date up to and including 30 calendar days. Relevant haircuts would be applied prior to calculation of the respective caps.
5. The formula for the calculation of the stock of HQLA is as follows:
Stock of HQLA = Level 1 + Level 2A + Level 2B – Adjustment for 15% cap – Adjustment for 40% cap
Where:
Adjustment for 15% cap = Max (Adjusted Level 2B – 15/85*(Adjusted Level 1 + Adjusted Level 2A), Adjusted Level 2B - 15/60*Adjusted Level 1, 0)
Adjustment for 40% cap = Max ((Adjusted Level 2A + Adjusted Level 2B – Adjustment for 15% cap) - 2/3*Adjusted Level 1 assets, 0)
6. Alternatively, the formula can be expressed as:
Stock of HQLA = Level 1 + Level 2A + Level 2B – Max ((Adjusted Level 2A+Adjusted Level 2B) – 2/3*Adjusted Level 1, Adjusted Level 2B – 15/85*(Adjusted Level 1 + Adjusted Level 2A), 0)
62 See definition in paragraph 112.
63 See definition in paragraph 145.
64 When determining the calculation of the 15% and 40% caps, supervisors may, as an additional requirement, separately consider the size of the pool of Level 2 and Level 2B assets on an unadjusted basis.Annex 2: Principles for Assessing Eligibility for Alternative Liquidity Approaches (ALA)
1. This Annex presents a set of principles and criteria for assessing whether a currency is eligible for alternative treatment under the LCR (hereinafter referred to as the “Principles”). All of the Principles have to be satisfied in order to qualify for alternative treatment. Supplementary guidance is provided to elaborate on how a jurisdiction seeking alternative treatment should demonstrate its compliance with the Principles, including any supporting information (qualitative and quantitative) to justify its case. The Principles will be the main source of reference upon which self-assessments or independent peer reviews should be based. Unless otherwise specified, all references in the Principles are to the liquidity standard.
2. The Principles may not, in all cases, be able to capture specific circumstances or unique factors affecting individual jurisdictions in respect of the issue of insufficiency in HQLA. Hence, a jurisdiction will not be precluded from providing any additional information or explaining any other factor that is relevant to its compliance with the Principles, even though such information or factor may not be specified in the Principles.
3. Where a jurisdiction uses estimations or projections to support its case, the rationale and basis for those estimations or projections should be clearly set out. In order to support its case and facilitate independent peer review, the jurisdiction should provide information, to the extent possible, covering a long enough time series (eg three to five years depending on data availability).
Principle 1
The use of alternative treatment under the LCR is only available to the domestic currency of a jurisdiction which can demonstrate and justify that an issue of insufficiency in HQLA denominated in that currency genuinely exists, taking into account all relevant factors affecting the supply of, and demand for, such HQLA.
4. In order to qualify for alternative treatment, the jurisdiction must be able to demonstrate that there is “a true shortfall in HQLA in the domestic currency as relates to the needs in that currency” (see paragraph 55). The jurisdiction must demonstrate this with due regard to the three criteria set out below.
Criterion (a): The supply of HQLA in the domestic currency of the jurisdiction is insufficient, in terms of Level 1 assets only or both Level 1 and Level 2 assets, to meet the aggregate demand for such assets from banks operating in that currency. The jurisdiction must be able to provide adequate information (quantitative and otherwise) to demonstrate this.
5. This criterion requires the jurisdiction to provide sufficient information to demonstrate the insufficiency of HQLA in its domestic currency. This insufficiency must principally reflect a shortage in Level 1 assets, although Level 2 assets may also be insufficient in some jurisdictions.
6. To illustrate that a currency does not have sufficient HQLA, the jurisdiction will need to provide all relevant information and data that have a bearing on the size of the HQLA gap faced by banks operating in that currency that are subject to LCR requirements (“LCR banks”). These should, to the extent practicable, include the following information:
(i) Supply of HQLA
The jurisdiction should provide the current and projected stock of HQLA denominated in its currency, including:
• the supply of Level 1 and Level 2 assets broken down by asset classes;
• the amounts outstanding for the last three to five years; and
• the projected amounts for the next three to five years.
The jurisdiction may provide any other information in support of its stock and projection of HQLA. Should the jurisdiction feel that the true nature of the supply of HQLA cannot be simply reflected by the numbers provided, it should provide further information to sufficiently explain the case.
To avoid doubt, if the jurisdiction is a member of a monetary union operating under a single currency, debt or other assets issued in other members of the union in that currency is considered available for all jurisdictions in that union (see paragraph 55). Hence, the jurisdiction should take into account the availability of such assets which qualify as HQLA in its analysis.
(ii) Market for HQLA
The jurisdiction should provide a detailed analysis of the nature of the market for the above assets. Information relating to the market liquidity of the assets would be of particular importance. The jurisdiction should present its views on the liquidity of the HQLA based on the information presented.
Details of the primary market for the above assets should be provided, including:
• the channel and method of issuance;
• the issuers;
• the past issue tenor, denomination and issue size for the last three to five years; and
• the projected issue tenor, denomination and issue size for the next three to five years.
Details of the secondary market for the above assets should also be provided, including:
• the trading size and activity;
• types of market participants; and
• the size and activity of its repo market.
Where possible, the jurisdiction should provide an estimate of the amount of the above assets (Level 1 and Level 2) required to be in free circulation for them to remain genuinely liquid, as well as any justification for these figures.
(iii) Demand for HQLA by LCR banks
The jurisdiction should provide:
• the number of LCR banks under its purview;
• the current demand (ie net 30-day cash outflows) for HQLA by these LCR banks65 for meeting the LCR or other requirements (eg collateral for intraday repo);
• the projected demand for the next three to five years based on banks’ business growth and strategy; and
• an estimate of the percentage of total HQLA already in the hands of banks.
The jurisdiction should provide commentaries on cash flow projections where appropriate to improve their persuasiveness. The projections should take into account observed behavioural changes of the LCR banks and any other factors that may result in a reduction of their 30-day cash outflows.
(iv) Demand for HQLA by other entities
There are other potential holders of Level 1 and Level 2 assets that are not subject to the LCR, but will likely take up, or hold onto, a part of the outstanding stock of HQLA. These include:
• banks, branches of banks, and other deposit-taking institutions which conduct bank-like activity (such as building societies and credit unions) in the jurisdiction but are not subject to the LCR;
• other financial institutions which are normally subject to prudential supervision, such as investment or securities firms, insurance or reinsurance companies, pension/superannuation funds, mortgage funds, and money market funds; and
• other significant investors which have demonstrated a track record of strategic ”buy and hold” purchases which can be presumed to be price insensitive. This would include foreign sovereigns, foreign central banks and foreign sovereign /quasi-sovereign funds, but not hedge funds or other private investment management vehicles.
The jurisdiction may provide information on the demand for Level 1 and Level 2 assets by the above HQLA holders in support of its application. Historical demand for such assets by these holders is not sufficient. The alternate holders of HQLA must at least exhibit the following qualities:
• Price inelastic: the holders of HQLA are unlikely to switch to alternate assets unless there is a significant change in the price of these assets.
• Proven to be stable: the demand for HQLA by the holders should remain stable over the next three years as they require these assets to meet specific purposes, such as asset-liability matching or other regulatory requirements.
7. The jurisdiction should be able to come up with a reasonable estimate of the HQLA gap faced by its LCR banks (current and over the next three to five years), based on credible information. In deriving the HQLA gap, the jurisdiction should first compare (i) the total outstanding stock of its HQLA in domestic currency with (ii) the total liquidity needs of its LCR banks in domestic currency. The jurisdiction should then explain the method of deriving the high quality liquid asset gap, taking into account all relevant factors, including those set out in criterion (b), which may affect the size of the gap. A detailed analysis of the calculations should be provided (eg in the form of a template), explaining any adjustments to supply and demand and justifications for such adjustments.66 The jurisdiction should demonstrate that the method of defining insufficiency is appropriate for its circumstances, and that it can truly reflect the HQLA gap faced by LCR banks in the currency.
Criterion (b): The determination of insufficiency in HQLA by the jurisdiction under criterion (a) should address all major factors relevant to the issue. These include, but are not limited to, the expected supply of HQLA in the medium term (eg three to five years), the extent to which the banking sector can and should run less liquidity risk, and the competing demand from banks and non-bank investors for holding HQLA for similar or other purposes.
8. This criterion builds on the information provided by the jurisdiction under criterion (a), and requires the jurisdiction to further explain the manner in which the insufficiency issue is determined, by listing all major factors that affect the HQLA gap faced by its LCR banks under criterion (a). There should be a commentary for each of the factors, explaining why the factor is relevant, the impact of the factor on the HQLA gap, and how such impact is incorporated into the analysis of insufficiency in HQLA. The jurisdiction should be able to demonstrate that it has adequately considered all relevant factors, including those that may improve the HQLA gap, so as to ascertain that the insufficiency issue is fairly stated.
9. On the supply of HQLA, there should be due consideration of the extent to which the insufficiency issue may be alleviated by estimated medium term supply of such assets, as well as the factors restricting the availability of HQLA to LCR banks. In the case of government debt, relevant information on availability can be reflected, for example, from the size and nature of other users of government debt in the jurisdiction; holdings of government debt which seldom appear in the traded markets; and the amount of government debt in free circulation for the assets to remain truly liquid.
10. On the demand of HQLA, there should be due consideration of the potential liquidity needs of the banking sector, taking into account the scope for banks to reduce their liquidity risk (and hence their demand for HQLA) and the extent to which banks can satisfy their demand through the repo market (rather than through outright purchase of HQLA). Other needs for maintaining HQLA (eg for intraday repo purposes) may also increase banks’ demand for such assets.
11. The jurisdiction should also include any other factors not mentioned above that are relevant to its case.
Criterion (c): The issue of insufficiency in HQLA faced by the jurisdiction is caused by structural, policy and other constraints that cannot be resolved within the medium term (eg three to five years). Such constraints may relate to the fiscal or budget policies of the jurisdiction, the infrastructural development of its capital markets, the structure of its monetary system and operations (eg the currency board arrangements for jurisdictions with pegged exchange rates), or other jurisdiction-specific factors leading to the shortage or imbalance in the supply of HQLA available to the banking sector.
12. This criterion is to establish that the insufficiency issue is caused by constraints that are not temporary in nature. The jurisdiction should provide a list of such constraints, explain the nature of the constraints and how the insufficiency issue is affected by the constraints, as well as whether there is any prospect of change in the constraints (eg measures taken to address the constraints) in the next three to five years. To demonstrate the significance of the constraints, the jurisdiction should support the analysis with appropriate quantitative information.
13. A jurisdiction may have fiscal or budget constraints that limit its ability or need to raise debt. To support this, the following information should, at a minimum, be provided:
(i) Fiscal position for the past ten years: Consistent fiscal surpluses (eg at least six out of the past ten years or at least two out of the past three years)67 can be an indication that the jurisdiction does not need to raise debt (or a lot of debt). On the contrary, it is unlikely that jurisdictions with persistent deficits (eg at least six out of the past ten years) will have a shortage in government debt issued.
(ii) Fiscal position as % of GDP (ten-year average): This is another way of looking at the fiscal position. A positive ten-year average will likely suggest that the need for debt issuance is low. Similarly, a negative ten-year average will suggest otherwise.
(iii) Issue of government / central bank debt in the past ten years and the reasons for such issue (eg for market operations / setting the yield curve, etc.). This is to assess the level of, and consistency in, debt issuance.
14. The jurisdiction should also provide the ratio of its government debt to total banking assets denominated in domestic currency (for the past three to five years) to facilitate trend analysis of the government debt position versus a proxy indicator for banking activity (ie total banking assets), as well as comparison of the position across jurisdictions (including those that may not have the insufficiency issue). While this ratio alone cannot give any conclusive view about the insufficiency issue, a relatively low ratio (eg below 20%) may support the case if the jurisdiction also performs similarly under other indicators.
15. A jurisdiction may have an under-developed capital market that has resulted in limited availability of corporate / covered bonds to satisfy market demand. Information to be provided includes the causes of this situation, measures that are being taken to develop the market, the expected effect of such measures, and other relevant statistics showing the state of the market.
16. There may also be other structural issues affecting the monetary system and operations. For example, the currency board arrangements for jurisdictions with pegged exchange rates could potentially constrain the issue of central bank debt and cause uncertainty or volatility in the availability of such debt to the banking sector. The jurisdiction should explain such arrangements and their effects on the supply of central bank debt (supported by relevant historical data in the past three to five years).
Principle 2
A jurisdiction which intends to adopt one or more of the options for alternative treatment must be capable of limiting the uncertainty of performance, or mitigating the risks of non-performance, of the option(s) concerned.
17. This Principle assesses whether and how the jurisdiction can mitigate the risks arising from the adoption of any of the options, based on the requirements set out in the three criteria mentioned below. The assessment will also include whether the jurisdiction’s approach to adopting the options is in line with the alternative treatment set out in the Basel III liquidity framework (see paragraphs 55 to 62).
18. To start with, the jurisdiction should explain its policy towards the adoption of the options, including which of the options will be used and the estimated (and maximum allowable) extent of usage by the banking sector. The jurisdiction is also expected to justify the appropriateness of the maximum level of usage of the options to its banking system, having regard to the relevant guidance set out in the Basel III liquidity framework (see paragraphs 63 to 65).
Criterion (a): For Option 1 (ie the provision of contractual committed liquidity facilities from the relevant central bank at a fee), the jurisdiction must have the economic strength to support the committed liquidity facilities granted by its central bank. To ensure this, the jurisdiction should have a process in place to control the aggregate of such facilities within a level that can be measured and managed by it.
19. A jurisdiction intending to adopt Option 1 must demonstrate that it has the economic and financial capacity to support the committed liquidity facilities that will be granted to its banks.68 The jurisdiction should, for example, have a strong credit rating (such as AA-69) or be able to provide other evidence of financial strength, with no adverse developments (eg a looming crisis) that may heavily impinge on the domestic economy in the near term.
20. The jurisdiction should also demonstrate that it has a process in place to control the aggregate facilities granted under Option 1 within a level that is appropriate for its local circumstances. For example, the jurisdiction may limit the amount of Option 1 commitments to a certain level of its GDP and justify why this level is suitable for its banking system. The process should also cater for situations where the aggregate facilities are approaching the limit, or have indeed breached, the limit, as well as how the limit interplays with other restrictions for using the options (eg maximum level of usage for all options combined).
21. To facilitate assessment of compliance with requirements in paragraph 58, the jurisdiction should provide all relevant details associated with the extension of the committed facility, covering:
(i) the commitment fee (including the basis on which it is charged,70 the method of calculation71 and the frequency of re-calculating or varying the fee). The jurisdiction should, in particular, demonstrate that the calculation of the commitment fee is in line with the conceptual framework set out in paragraph 58.
(ii) the types of collateral acceptable to the central bank for securing the facility and respective collateral margins or haircuts required;
(iii) the legal terms of the facility (including whether it covers a fixed term or is renewable or evergreen, the notice of drawdown, whether the contract will be irrevocable prior to maturity,72 and whether there will be restrictions on a bank’s ability to draw down on the facility);73
(iv) the criteria for allowing individual banks to use Option 1;
(v) disclosure policies (ie whether the level of the commitment fee and the amount of committed facilities granted will be disclosed, either by the banks or by the central bank); and
(vi) the projected size of committed liquidity facilities that may be granted under Option 1 (versus the projected size of total net cash outflows in the domestic currency for Option 1 banks) for each of the next three to five years and the basis of projection.
Criterion (b): For Option 2 (ie use of foreign currency HQLA to cover domestic currency liquidity needs), the jurisdiction must have a mechanism in place that can keep under control the foreign exchange risk of the holdings of its banks in foreign currency HQLA.
22. A jurisdiction intending to adopt Option 2 should demonstrate that it has a mechanism in place to control the foreign exchange risk arising from banks’ holdings in foreign currency HQLA under this Option. This is because such foreign currency asset holdings to cover domestic currency liquidity needs may be exposed to the risk of decline in the liquidity value of those foreign currency assets should exchange rates move adversely when the assets are converted into the domestic currency, especially in times of stress.
23. This control mechanism should, at a minimum, cover the following elements:
(i) The jurisdiction should ensure that the use of Option 2 is confined only to foreign currencies that can provide a reliable source of liquidity in the domestic currency in case of need. In this regard, the jurisdiction should specify the currencies (and broad types of HQLA denominated in those currencies74) allowable under this option, based on prudent criteria. The suitability of the currencies should be reviewed whenever significant changes in the external environment warrant a review.
(ii) The selection of currencies should, at a minimum, take into account the following aspects:
• the currency is freely transferable and convertible into the domestic currency;
• the currency is liquid and active in the relevant foreign exchange market (the methodology and basis of assessment should be provided);
• the currency does not exhibit significant historical exchange rate volatility against the domestic currency;75 and
• in the case of a currency which is pegged to the domestic currency, there is a formal mechanism in place for maintaining the peg rate (relevant information about the mechanism and past ten-year statistics on exchange rate volatility of the currency pair showing the effectiveness of the peg arrangement should be provided).
The jurisdiction should explain why each of the allowable currencies is selected, including an analysis of the historical exchange rate volatility, and turnover size in the foreign exchange market, of the currency pair (based on statistics for each of the past three to five years). In case a currency is selected for other reasons,76 the justifications should be clearly stated to support its inclusion for Option 2 purposes.
(iii) HQLA in the allowable currencies used for Option 2 purposes should be subject to haircuts as prescribed under this framework (ie at least 8% for major currencies77). The jurisdiction should set a higher haircut for other currencies where the exchange rate volatility against the domestic currency is much higher, based on a methodology that compares the historical (monthly) exchange rate volatilities between the currency pair concerned over an extended period of time.
Where the allowable currency is formally pegged to the domestic currency, a lower haircut can be used to reflect limited exchange rate risk under the peg arrangement. To qualify for this treatment, the jurisdiction should demonstrate the effectiveness of its currency peg mechanism and the long-term prospect of keeping the peg.
Where a threshold for applying the haircut under Option 2 is adopted (see paragraph 61), the level of the threshold should not be more than 25%.
(iv) Regular information should be collected from banks in respect of their holding of allowable foreign currency HQLA for LCR purposes to enable supervisory assessment of the foreign exchange risk associated with banks’ holdings of such assets, both individually and in aggregate.
(v) There should be an effective means to control the foreign exchange risk assumed by banks. The control mechanism, and how it is to be applied to banks, should be elaborated. In particular,
• there should be prescribed criteria for allowing individual banks to use Option 2;
• the approach to assessing whether the estimated holdings of foreign currency HQLA by individual banks using Option 2 are consistent with their foreign exchange risk management capacity (re paragraph 59) should be explained; and
• there should be a system for setting currency mismatch limits to control banks’ maximum foreign currency exposures under Option 2.
Criterion (c): For Option 3 (ie use of Level 2A assets beyond the 40% cap with a higher haircut), the jurisdiction must only allow Level 2 assets that are of a quality (credit and liquidity) comparable to that for Level 1 assets in its currency to be used under this option. The jurisdiction should be able to provide quantitative and qualitative evidence to substantiate this.
24. With the adoption of Option 3, the increase in holdings of Level 2A assets within the banking sector (to substitute for Level 1 assets which are of higher quality but in shortage) may give rise to additional price and market liquidity risks, especially in times of stress when concentrated asset holdings have to be liquidated. In order to mitigate this risk, the jurisdiction intending to adopt Option 3 should ensure that only Level 2A assets that are of comparable quality to Level 1 assets in the domestic currency are allowed to be used under this option (ie to exceed the 40% cap). Level 2B assets should remain subject to the 15% cap. The jurisdiction should demonstrate how this can be achieved in its supervisory framework, having regard to the following aspects:
(i) the adoption of higher qualifying standards for additional Level 2A assets. Apart from fulfilling all the qualifying criteria for Level 2A assets, additional requirements should be imposed. For example, the minimum credit rating of these additional Level 2A assets should be AA or AA+ instead of AA-, and other qualitative and quantitative criteria could be made more stringent. These assets may also be required to be central bank eligible. This will provide a backstop for ensuring the liquidity value of the assets; and
(ii) the inclusion of a prudent diversification requirement for banks using Option 3. Banks should be required to allocate its portfolio of Level 2 assets among different issuers and asset classes to the extent feasible in a given national market. The jurisdiction should illustrate how this diversification requirement is to be applied to banks.
25. The jurisdiction should provide statistical evidence to substantiate that Level 2A assets (used under Option 3) and Level 1 assets in the domestic currency are generally of comparable quality in terms of the maximum decline in price during a relevant period of significant liquidity stress in the past.
26. To facilitate assessment, the jurisdiction should also provide all relevant details associated with the use of Option 3, including:
(i) the standards and criteria for allowing individual banks to use Option 3;
(ii) the system for monitoring banks’ additional Level 2A asset holding under Option 3 to ensure that they can observe the higher requirements;
(iii) the application of higher haircuts to additional Level 2A assets (and whether this is in line with paragraph 62);78 and
(iv) the existence of any restriction on the use of Level 2A assets (ie to what extent banks will be allowed to hold such assets as a percentage of their liquid asset stock).
Principle 3
A jurisdiction which intends to adopt one or more of the options for alternative treatment must be committed to observing all of the obligations set out below.
27. This Principle requires a jurisdiction intending to adopt any of the options to indicate expressly the jurisdiction’s commitment to observing the obligations relating to supervisory monitoring, disclosure, periodic self-assessment, and independent peer review of its eligibility for adopting the options, as set out in the criteria below. Whether these commitments are fulfilled in practice should be assessed in subsequent periodic self-assessments and, where necessary, in subsequent independent peer reviews.
Criterion (a): The jurisdiction must maintain a supervisory monitoring system to ensure that its banks comply with the rules and requirements relevant to their usage of the options, including any associated haircuts, limits or restrictions.
28. The jurisdiction should demonstrate that it has a clearly documented framework for monitoring the usage of the options by its banks as well as their compliance with the relevant rules and requirements applicable to them under the supervisory framework. In particular, the jurisdiction should have a system to ensure that the rules governing banks’ usage of the options are met, and that the usage of the options within the banking system can be monitored and controlled. To achieve this, the framework should be able to address the aspects mentioned below.
Supervisory requirements
29. The jurisdiction should set out clearly the requirements that banks should meet in order to use the options to comply with the LCR. The requirements may differ depending on the option to be used as well as jurisdiction-specific considerations. The scope of these requirements will generally cover the following areas:
(i) Rules governing banks’ usage of the options
The jurisdiction should devise the supervisory requirements governing banks’ usage of the options, having regard to the guidance set out in Annex 3. Any bank-specific requirements should be clearly communicated to the affected banks.
(ii) Minimum amount of Level 1 asset holdings
Banks using the options should be informed of the minimum amount of Level 1 assets that they are required to hold in the relevant currency. The jurisdiction is expected to set a minimum level for banks in the jurisdiction. This should complement the requirement under (iii) below.
(iii) Maximum amount of usage of the options
In order to control the usage of the options within the banking system, banks should be informed of any supervisory restriction applicable to them in terms of the maximum amount of alternative HQLA (under each or all of the options) they are allowed to hold. For example, if the maximum usage level is 70%, a bank should maintain at least 30% of its high quality liquid asset stock in Level 1 assets in the relevant currency.
The maximum level of usage of the options set by the jurisdiction should be consistent with the calculations and projections used to support its compliance with Principle 1 and Principle 2.
(iv) Relevant haircuts for using the options
The jurisdiction may apply additional haircuts to banks that use the options to limit the uncertainty of performance, or mitigate the risks of non-performance, of the options used (see Principle 2). These should be clearly communicated to the affected banks.
For example, a jurisdiction that relies heavily on Option 3 may observe that a large amount of Level 2A assets will be held by banks to fulfil their LCR needs, thereby increasing the market liquidity risk of these assets. This may necessitate increasing the Option 3 haircut for banks that rely heavily on these Level 2A assets.
(v) Any other restrictions
The jurisdiction may choose to apply further restrictions to banks that use the options, which must be clearly communicated to them.
Reporting requirements
30. The jurisdiction should demonstrate that through its data collection framework (eg as part of regular banking returns), sufficient data can be obtained from its banks to ascertain compliance with the supervisory requirements as communicated to the banks. The jurisdiction should determine the reporting requirements, including the types of data and information required, the manner and frequency of reporting, and how the data and information collected will be used.
Monitoring approach
31. The jurisdiction should also indicate how it intends to monitor banks’ compliance with the relevant rules and requirements. This may be performed through a combination of off-site analysis of information collected, prudential interviews with banks and on-site examinations as necessary. For example, an on-site review may be necessary to determine the quality of a bank’s foreign exchange risk management in order to assess the extent which the bank should be allowed to use Option 2 to satisfy its LCR requirements.
Supervisory toolkit and powers
32. The jurisdiction should demonstrate that it has sufficient supervisory powers and tools at its disposal to ensure compliance with the requirements governing banks’ usage of the options. These will include tools for assessing compliance with specific requirements (eg foreign exchange risk management under Option 2 and price risk management under Option 3) as well as general measures and powers available to impose penalties should banks fail to comply with the requirements applicable to them. The jurisdiction should also demonstrate that it has sufficient powers to direct banks to comply with the general rules and/or specific requirements imposed on them. Examples of such measures are the power to issue directives to the banks, restriction of financial activities, financial penalties, increase of Pillar 2 capital, etc.
33. The jurisdiction should also be prepared to restrict a bank from using the options should it fail to comply with the relevant requirements.
Criterion (b): The jurisdiction must document and update its approach to adopting an alternative treatment, and make that explicit and transparent to other national supervisors. The approach should address how it complies with the applicable criteria, limits and obligations set out in the qualifying principles, including the determination of insufficiency in HQLA and other key aspects of its framework for alternative treatment.
34. The jurisdiction should demonstrate that it has a clearly documented framework that will be disclosed (whether on its website or through other means) upon the adoption of the options for alternative treatment. The document should contain clear and transparent information that will enable other national supervisors and stakeholders to gain a sufficient understanding of its compliance with the qualifying principles for adoption of the options and the manner in which it supervises the use of the options by its banks.
35. The disclosure should cover, at a minimum, the following:
(i) Assessment of insufficiency in HQLA: the jurisdiction’s self-assessment of insufficiency in HQLA in the domestic currency, including relevant data about the supply of, and demand for, HQLA, and major factors (eg structural, cyclical or jurisdiction-specific) influencing the supply and demand. This assessment should correspond with the self-assessment required under criterion 3(c) below;
(ii) Supervisory framework for adoption of alternative treatment: the jurisdiction’s approach to applying the alternative treatment, including the option(s) allowed to be used by banks, any guidelines, requirements and restrictions associated with the use of such option(s) by banks, and approach to monitoring banks’ compliance with them;
(iii) Option 1-related information: if Option 1 will be adopted, the terms of the committed liquidity facility, including the maturity of the facility, the commitment fee charged (and the approach adopted for setting the fee), securities eligible as collateral for the facility (and margins required), and other terms, including any restrictions on banks’ usage of this option;
(iv) Option 2-related information: if Option 2 will be adopted, the foreign currencies (and types of securities under those currencies) allowed to be used, haircuts applicable to the foreign currency HQLA, and any restrictions on banks’ usage of this option;
(v) Option 3-related information: if Option 3 will be adopted, the Level 2A assets allowed to be used in excess of the 40% cap (and the associated criteria), haircuts applicable to Level 2A assets (within and above the 40% cap), and any restrictions on banks’ usage of this option.
36. The jurisdiction should update the disclosed information whenever there are changes to the information (eg updated self-assessment of insufficiency in HQLA performed).
Criterion (c): The jurisdiction must review periodically the determination of insufficiency in HQLA at intervals not exceeding five years, and disclose the results of review and any consequential changes to other national supervisors and stakeholders.
37. The jurisdiction should perform a review of its eligibility for alternative treatment every five years after it has adopted the options. The primary purpose of this review is to determine that there remains an issue of insufficiency in HQLA in the jurisdiction. The review should be in the form of a self-assessment of the jurisdiction’s compliance with each of the Principles set out in this Annex.
38. The jurisdiction should have a credible process for conducting the self-assessment, and should provide sufficient information and analysis to support the self-assessment. The results of the self-assessment should be disclosed (on its website or through other means) and accessible by other national supervisors and stakeholders.
39. Where the self-assessment reflects that the issue of insufficiency in HQLA no longer exists, the jurisdiction should devise a plan for transition to the standard HQLA treatment under the LCR and notify the Basel Committee accordingly. If the issue of insufficiency remains but weaknesses in the jurisdiction’s relevant supervisory framework are identified from the self-assessment, the jurisdiction should disclose its plan to address those weaknesses within a reasonable period.
40. If the jurisdiction is aware of circumstances (eg relating to fiscal conditions, market infrastructure or availability of liquidity, etc.) that have radically changed to an extent that may render the issue of insufficiency in HQLA no longer relevant to the jurisdiction, it will be expected to conduct a self-assessment promptly (ie without waiting until the next self-assessment is due) and notify the Basel Committee of the result as soon as practicable. The Basel Committee may similarly request the jurisdiction to conduct a self-assessment ahead of schedule if the Committee is aware of changes that will significantly affect the jurisdiction’s eligibility for alternative treatment.
Criterion (d): The jurisdiction must permit an independent peer review of its framework for alternative treatment to be conducted as part of the Basel Committee’s work programme and address the comments made.
41. The Basel Committee will oversee the independent peer review process for determining the eligibility of its member jurisdictions to adopt alternative treatment. Hence, any member jurisdiction of the Committee that intends to adopt the options for alternative treatment will permit an independent peer review of its eligibility to be performed, based on a self-assessment report prepared by the jurisdiction to demonstrate its compliance with the Principles. The independent peer review will be conducted in accordance with paragraphs 55 to 56 of the Basel III liquidity framework. The jurisdiction will also permit follow-up review to be conducted as necessary.
42. The jurisdiction will be expected to adopt a proactive attitude to responding to the outcome of the peer review and comments made.
65 Use QIS data wherever possible. Supervisors should be collecting data on LCR from 1 January 2012.
66 For HQLA that are subject to caps or haircuts (eg Level 2 assets), the effects of such constraints should be accounted for.
67 Some deficits during economic downturns need to be catered for. Moreover, the recent surplus/deficit situation is relevant for assessment.
68 This is to enhance market confidence rather than to query the jurisdiction’s ability to honour its commitments.
69 This is the minimum sovereign rating that qualifies for a 0% risk weight under the Basel II Standardised Approach for credit risk.
70 Paragraph 58 requires the fee to be charged regardless of the amount, if any, drawn down against the facility.
71 Paragraph 58 presents the conceptual framework for setting the fee.
72 Paragraph 58 requires the maturity date to at least fall outside the 30-day LCR window and the contract to be irrevocable prior to maturity.
73 Paragraph 58 requires the contract not to involve any ex-post credit decision by the central bank.
74 For example, clarification may be necessary in cases where only central government debt will be allowed, or Level 1 securities issued by multilateral development banks in some currencies will be allowed.
75 This is relative to the exchange rate volatilities between the domestic currency and other foreign currencies with which the domestic currency is traded.
76 For example, the central banks of the two currencies concerned may have entered into special foreign exchange swap agreements that facilitate the flow of liquidity between the currencies.
77 These currencies refer to those that exhibit significant and active market turnover in the global foreign currency market (eg the average market turnover of the currency as a percentage of the global foreign currency market turnover over a ten-year period is not lower than 10%).
78 Under paragraph 62, a minimum higher haircut of 20% should be applied to additional Level 2A assets used under this option. The jurisdiction should conduct an analysis to assess whether the 20% haircut is sufficient for Level 2A assets in its market, and should increase the haircut to an appropriate level if this is warranted in order to achieve the purpose of the haircut. The relevant analysis should be provided for independent peer review during which the jurisdiction should explain and justify the outcome of its analysis.Annex 3: Guidance on Standards Governing Banks’ Usage of the Options for Alternative Liquidity Approaches (ALA) Under LCR
1. The following general and specific rules governing banks’ usage of the options are for the guidance of supervisors in developing relevant standards for their banks:
1. General Rules
(i) A bank that needs to use an alternative treatment to meet its LCR must report its level of usage to the bank supervisor on a regular basis.
2. A bank is required to keep its supervisor informed of its usage of the options so as to enable the supervisor to manage the aggregate usage of the options in the jurisdiction and to monitor, where necessary, that banks using such options observe the relevant supervisory requirements.
3. While bank-by-bank approval by the supervisor is not required for use of the ALA options, this will not preclude individual supervisors from considering specific approval for banks to use the options should this be warranted based on their jurisdiction-specific circumstances. For example, use of Option 1 will typically require central bank approval of the committed facility.
(ii) A bank should not use an alternative treatment to meet its LCR more than its actual need as reflected by the shortfall of eligible HQLA to cover its HQLA requirements in the relevant currency.
4. A bank that needs to use the options should not be allowed to use such options above the level required to meet its LCR (including any reasonable buffer above the 100% standard that may be imposed by the supervisor). Banks may wish to do so for a number of reasons. For example, they may want to have an additional liquidity facility in anticipation of tight market conditions. However, supervisors may consider whether this should be accommodated. Supervisors should also have a process (eg through periodic reviews) for ensuring that the alternative HQLA held by banks are not excessive compared with their actual need. In addition, banks should not intentionally replace its stock of Level 1 or Level 2 assets with ineligible HQLA to create a larger liquidity shortfall for economic reasons or otherwise.
(iii) A bank must demonstrate that it has taken reasonable steps to use Level 1 and Level 2 assets and reduce the amount of liquidity risk (as measured by reducing net cash outflows in the LCR) to improve its LCR, before applying an alternative treatment.
5. Holding a HQLA portfolio is not the only way to mitigate a bank’s liquidity risk. A bank must show that it has taken concrete steps to improve its LCR before it applies an alternative treatment. For example, a bank could improve the matching of its assets and liabilities, attract stable funding sources, or reduce its longer term assets. Banks should not treat the use of the options simply as an economic choice.
(iv) A bank must use Level 1 assets to a level that is consistent with the availability of the assets in the market. The minimum level will be set by the bank supervisor for compliance.
6. In order to ensure that banks’ usage of the options is not out of line with the availability of Level 1 assets within the jurisdiction, the bank supervisor may set a minimum level of Level 1 assets to be held by each bank that is consistent with the availability of Level 1 assets in the market. A bank must then ensure that it is able to hold and maintain Level 1 assets not less than the minimum level when applying the options.
II. Specific Standards for Option 2
(v) A bank using Option 2 must demonstrate that its foreign exchange risk management system is able to measure, monitor and control the foreign exchange risk resulting from the currency-mismatched HQLA positions. In addition, the bank must show that it can reasonably convert the currency-mismatched HQLA to liquidity in the domestic currency when required, particularly in a stress scenario.
7. To mitigate the risk that excessive currency mismatch may interfere with the objectives of the framework, the bank supervisor should only allow banks that are able to measure, monitor and control the foreign exchange risk arising from the currency mismatched HQLA positions to use this option. As the HQLA that are eligible under Option 2 can be denominated in different foreign currencies, banks must assess the convertibility of those foreign currencies in a stress scenario. As participants in the foreign exchange market, they are in the best position to assess the depth of the foreign exchange swap or spot market for converting those assets to the required liquidity in the domestic currency in times of stress. The supervisor is also expected to restrict the currencies of the assets that are eligible under Option 2 to those that have been historically proven to be convertible into the domestic currency in times of stress.
III. Specific Standards for Option 3
(vi) A bank using Option 3 must be able to manage the price risk associated with the additional Level 2A assets. At a minimum, they must be able to conduct stress tests to ascertain that the value of its stock of HQLA remains sufficient to support its LCR during a market-wide stress event. The bank should take a higher haircut (ie higher than the supervisor-imposed Option 3 haircut) on the value of the Level 2A assets if the stress test results suggest that they should do so.
8. As the quality of Level 2A assets is lower than that for Level 1 assets, increasing its composition would increase the price risk and hence the volatility of the bank’s stock of HQLA. To mitigate the uncertainty of performance of this option, banks are required to show that the values of the assets under stress are sufficient. They must, therefore, be able to conduct stress tests to this effect. If there is evidence to suggest that the stress parameters are more severe than the haircuts set by bank supervisors, the bank should adopt the more prudent parameters and consequently increase HQLA as necessary.
(vii) A bank using Option 3 must show that it can reasonably liquidate the additional Level 2A assets in a stress scenario.
9. With additional reliance on Level 2A assets, it is essential to ensure that the market for these assets has sufficient depth. This standard can be implemented in several ways. The supervisor can:
• require Level 2A assets that can be allowed to exceed the 40% cap to meet higher qualifying criteria (eg minimum credit rating of AA+ or AA instead of AA-, central bank eligible, etc.);
• set a limit on the minimum issue size of the Level 2A assets which qualifies for use under this option;
• set a limit on the bank’s maximum holding as a percentage of the issue size of the qualifying Level 2A asset;
• set a limit on the maximum bid-ask spread, minimum volume, or minimum turnover of the qualifying Level 2A asset; and
• any other criteria appropriate for the jurisdiction.
These requirements should be more severe than the requirements associated with Level 2 assets within the 40% cap. This is because the increased reliance on Level 2A assets would increase its concentration risk on an aggregate level, thus affecting its market liquidity.
Annex 4: Illustrative Summary of the LCR
(percentages are factors to be multiplied by the total amount of each item)
Item Factor Stock of HQLA A. Level 1 assets: • Coins and bank notes 100% • Qualifying marketable securities from sovereigns, central banks, PSEs, and multilateral development banks • Qualifying central bank reserves • Domestic sovereign or central bank debt for non-0% risk-weighted sovereigns B. Level 2 assets (maximum of 40% of HQLA): Level 2A assets • Sovereign, central bank, multilateral development banks, and PSE assets qualifying for 20% risk weighting 85% • Qualifying corporate debt securities rated AA- or higher • Qualifying covered bonds rated AA- or higher Level 2B assets (maximum of 15% of HQLA) • Qualifying RMBS 75% • Qualifying corporate debt securities rated between A+ and BBB- 50% • Qualifying common equity shares 50% Total value of stock of HQLA Cash Outflows A. Retail deposits: Demand deposits and term deposits (less than 30 days maturity) • Stable deposits (deposit insurance scheme meets additional criteria) 3% • Stable deposits 5% • Less stable retail deposits 10% Term deposits with residual maturity greater than 30 days 0% B. Unsecured wholesale funding: Demand and term deposits (less than 30 days maturity) provided by small business customers:
• Stable deposits 5% • Less stable deposits 10% Operational deposits generated by clearing, custody and cash management activities 25% • Portion covered by deposit insurance 5% Cooperative banks in an institutional network (qualifying deposits with the centralised institution) 25% Non-financial corporates, sovereigns, central banks, multilateral development banks, and PSEs 40% • If the entire amount fully covered by deposit insurance scheme 20% Other legal entity customers 100% C. Secured funding: • Secured funding transactions with a central bank counterparty or backed by Level 1 assets with any counterparty. 0% • Secured funding transactions backed by Level 2A assets, with any counterparty 15% • Secured funding transactions backed by non-Level 1 or non-Level 2A assets, with domestic sovereigns, multilateral development banks, or domestic PSEs as a counterparty 25% • Backed by RMBS eligible for inclusion in Level 2B 25% • Backed by other Level 2B assets 50% • All other secured funding transactions 100% D. Additional requirements: Liquidity needs (eg collateral calls) related to financing transactions, derivatives and other contracts 3 notch downgrade Market valuation changes on derivatives transactions (largest absolute net 30-day collateral flows realised during the preceding 24 months) Look back approach Valuation changes on non-Level 1 posted collateral securing derivatives 20% Excess collateral held by a bank related to derivative transactions that could contractually be called at any time by its counterparty 100% Liquidity needs related to collateral contractually due from the reporting bank on derivatives transactions 100% Increased liquidity needs related to derivative transactions that allow collateral substitution to non-HQLA assets 100% ABCP, SIVs, conduits, SPVs, etc: • Liabilities from maturing ABCP, SIVs, SPVs, etc (applied to maturing amounts and returnable assets) 100% • Asset Backed Securities (including covered bonds) applied to maturing amounts. 100% Currently undrawn committed credit and liquidity facilities provided to: • retail and small business clients 5% • non-financial corporates, sovereigns and central banks, multilateral development banks, and PSEs 10% for credit
30% for liquidity• banks subject to prudential supervision 40% • other financial institutions (include securities firms, insurance companies) 40% for credit
100% for liquidity• other legal entity customers, credit and liquidity facilities 100% Other contingent funding liabilities (such as guarantees, letters of credit, revocable credit and liquidity facilities, etc) National discretion • Trade finance 0-5% • Customer short positions covered by other customers’ collateral 50% Any additional contractual outflows 100% Net derivative cash outflows 100% Any other contractual cash outflows 100% Total cash outflows Cash Inflows Maturing secured lending transactions backed by the following collateral: Level 1 assets 0% Level 2A assets 15% Level 2B assets • Eligible RMBS 25% • Other assets 50% Margin lending backed by all other collateral 50% All other assets 100% Credit or liquidity facilities provided to the reporting bank 0% Operational deposits held at other financial institutions (include deposits held at centralised institution of network of co-operative banks) 0% Other inflows by counterparty: • Amounts to be received from retail counterparties 50% • Amounts to be received from non-financial wholesale counterparties, from transactions other than those listed in above inflow categories 50% • Amounts to be received from financial institutions and central banks, from transactions other than those listed in above inflow categories. 100% Net derivative cash inflows 100% Other contractual cash inflows National discretion Total cash inflows Total net cash outflows = Total cash outflows minus min [total cash inflows, 75% of gross outflows] LCR = Stock of HQLA / Total net cash outflows Interest Rates on Assets and Liabilities Reporting Guidelines
No: 420092840000 Date(g): 6/10/2020 | Date(h): 19/2/1442 Status: In-Force With reference to SAMA Circular No. 391000006126 dated 18/01/1439 H and Circular No. 33788/67 dated 30/05/1440 H, which issued the Prudential Reporting Form for commissions on deposits, loans, bonds and other instruments.
we would like to inform you that it has been decided to update the instructions and forms of the Return on Assets and Liabilities (attached) which cancel and replace the guidelines and forms issued under the two circulars referred to above. SAMA emphasizes the obligation of all banks to submit the report to SAMA on a quarterly basis and within thirty days from the end of each quarter, and to be certified by the Chief Financial Officer (CFO) of the bank.
For your information, and to be implemented starting from the fourth quarter of 2020 G.
General
The objective of these guidelines is to facilitate the preparation of the reports on Assets and Liabilities Interest Rates.
These Guidelines shall supersede Saudi Arabian Monetary Authority (SAMA) Guidance note for Quarterly Prudential Returns on Loans and Deposits Commissions issued vide SAMA circular no. 33788/67 dated 30/05/1440H. The changes from the previous version are underlined.
Scope and Submission
All banks operating in Saudi Arabia including foreign banks’ branches must submit the reports to SAMA quarterly within 30 calendar days following the quarter end. Reports should be completed at a domestic level only, and must be signed off by the Chief Finance Officer (CFO) before submission to SAMA.
The report should be submitted in excel format via Email.
Reporting Guidance
Banks should comply with the following in completing the report related to Assets and Liabilities interest rates:
A. Assets and Liabilities Weighted Average (W.A) rates and balances should be submitted as following:
• Template (1) - by Product:
Categorization based on product type for example: loans, investments, placement with SAMA, bonds and deposits.
• Template (2) - by Sector:
Categorization based on the International Standard Industrial Classification (ISIC4).
• Template (3) - by Type Sharia-compliant or Conventional:
Categorization based on the bank’s classification of each product Sharia- compliant or conventional.
B. Assets and liabilities W.A Rates , Balances and Maturity should be reported as follows:
• W.A Rates:
Include annual contractual rates on Assets and Liabilities outstanding at the end of the quarter.
• Balances:
Current Quarter Balance: Includes balance sheet exposure amount booked during the quarter and still outstanding at the quarter end.
Outstanding Balance: Includes total outstanding balances at the end of the quarter including the current quarter balance.
• Maturity:
Includes contractual maturity used to populate the Current Quarter W.A rates and Outstanding W.A rates columns. The movement between buckets is not allowed.
Banks should calculate the W.A rate as described in Annexure -1.
C. All classifications of Assets and Liabilities are mutually exclusive.
D. Benchmark rates must be included in the rate calculation based on booking value.
E. For example: SAIBOR rate on booking date + 3% per annum.
F. Local and Foreign Currency Balance amount should be reported/calculated in SAR 000's and W.A rates in percentage terms.
G. All data for calculating the W.A rate should be related to M1 Domestic (Resident by Local and Foreign Currency) as described in Annexure- 2.
Reporting Categories
A. Assets: Accrued Rates Receivable.
1. Loans to Governments and Quasi Government
Loans to all Sovereign Governments and Quasi Government. An example guidance list in Annexure - 3.
2. Loans to Financial Institutions (Excluding Banks)
Loans to Insurance companies, Finance companies. Authorized Persons, Exchange companies and any other financial institution excluding Banks.
3. Loans to Corporates
3.1 Public Non- Financial Corporates:
Loans to commercial entities in which the Saudi Government or Entities Connected with Saudi Government owns (directly or indirectly) 50% or more of shareholdings. An example guidance list in Annexure - 3.
3.2 Large Corporates, 3.3 Medium, 3.4 Small and 3.5 Micro Enterprises:
Defined as per SAMA circular No.381000064902 dated 16/06/1438 or any subsequent definition by SAMA.
3.6 Kafalah Guaranteed Loans:
Loan to enterprises guaranteed by Kafalah fund and must be excluded from being reported in Medium, Small and Micro Enterprises rows.
3.7 Commercial Real Estate:
Commercial mortgage or commercial real estate loan to finance a commercial real estate asset. These must be excluded from being reported in Large Corporates, Medium, Small and Micro Enterprises Loans rows.
3.8 Other Businesses:
Includes any other loans not already classified in above categories.
4. Retail Loans
4.1 Consumer Loans:
Loans to individuals and households, granted on the following basis:
• Granted by the creditor to a borrower as a secondary activity for the borrower, i.e. outside the scope of the borrower's principal commercial or professional activity. It would generally include personal loans, overdraft facilities, car loans, payment card loans, etc.
• To finance purchase of goods and services for consumption and other such requirements of individuals as identified above e.g. to purchase furniture, household items, home improvement, vacations, education, etc.
4.2 Credit Cards:
Outstanding credit card balances. W.A rate must reported based on contractual Annual Percentage Rate (APR) for this category.
4.3 Mortgages or Housing Loans:
Mortgage or Housing loan to finance a real estate asset. These must be excluded from being reported in Consumer Loans rows.
4.4 Other Loans:
Any other loan not already classified in above categories.
5. Loans to Banks
5.1 Interbank Loans:
Bank-to-bank loan placement in the Money Market only.
5.2 Vostro and Nostro Accounts:
NOSTRO and VOSTRO accounts with debit balances.
5.3 Other banks Loans:
Any other loan between banks not already classified in the above category such as secured loans between banks.
6. Investments
Investments in T-Bills (SAMA Bills and other T-bills), Bonds, fixed and floating rate securities issued by Government and quasi government, corporate, banks and other financial institutions and other counterparties.
7. Placements with SAMA
Reverse repo placements with SAMA.
B. Liabilities: Accrued Rates Payable.
8. By Product Type
8.1 Demand Deposits:
Represent non-special commission bearing customer deposits that have no maturity and can be withdrawn without prior notice. These deposits also include current accounts. If a bank does not pay any commission rate on the demand deposits, the balance should be calculated with 0% rate.
8.2 Saving Deposits:
Represent non-checking special commission bearing customer deposits with no defined maturity.
8.3 Time Deposits:
Represent special commissions bearing customer deposits with a defined maturity.
8.4 Other Deposits:
Any other deposits not already classified in the above category such as Repos, Swaps transaction with SAMA and other.
9. By Counterparties
9.1 Deposits from Government and Quasi Government, 9.2 Deposits from SAMA, 9.3 Deposits from Financial Institutions (Excluding Banks), 9.4 Deposits from Corporates (excluding MSMEs), 9.5 Deposits from MSMEs and 9.6 Deposits from Retail customers:
Total Deposits by Product Type (Total Balances and W.A rates) should equal to Total Deposits by Counterparties (Total Balances and W.A rates).
10. Margin Deposits
Including all deposits received in relation to transaction in exchanges.
11. Bonds and Debt Securities:
Issued by banks
12. Deposits from Banks
12.1 Interbank deposits:
Deposit received from other banks in the Money Market only.
12.2 Vostro and Nostro Accounts:
NOSTRO and VOSTRO accounts with credit balances.
12.3 Other Deposits:
Any other deposits between banks not already classified in the above category such as Repos.
Annexure - 1: Example of Calculating Weighted Average Rates
Below is an example of computing the weighted average rate for a given period end balance amount of SAR 360 Million.
1 2 3=(1*2) Rates Balance in 000’s Rates multiplied by Balance 0% 30,000 - 1% 50,000 500 2% 60,000 1,200 4% 80,000 3,200 5% 90,000 4,500 8% 20,000 1,600 10% 30,000 3,000 Total 360,000 14,000 WA Rates=(3/2)*100 (14000/360000)*100 Weighted Average Rate 3.89% Annexure - 2: Validation Table
The Table explains each item on the interest rates report on assets and liabilities and its Match in M1. Also it indicates in which template each item would be reported.
• Assets
Item from Interest Rates on Assets report M1 match Template(1) Template(2)* Template(3) 1. Loans to Governments & Quasi Government 9. Credit Facilities (9.12, 9.22 and 9.32 Govt. & Quasi-Govt.) excluding public non-financial corporates √ √ √ 2. Loans to Financial Institutions (Excluding Banks) 6. Due From Other Financial Institutions √ √ √ 3. Loans to Corporates 9. Credit Facilities ( 9.11,9.21 and 9.31 Private) including Public non-financial corporates √ √ √ 4. Retail Loans 9. Credit Facilities (9.11,9.21 and 9.31 Private) √ √ √ 5.Loans to Banks 4. Due From Commercial Banks
5. Due From Specialized Banks
8. Due From OBU's√ √ √ 6. Investments 10.1 Marketable Securities
10.2 Govt. Bonds & Govt. Gteed Bonds
10.312 Trading
10.322 Investments√ √ 7. Placements with SAMA 2.6 Others √ √ Notes:
* Assets on Template (2) should be allocated based on the sector.• Liabilities
Item from Interest Rates on Liabilities report M1 match Template(1) Template(2)** Template(3) 8. Total Deposits (By Product Type) 15. Due to SAMA*
21. Govt. & Quasi-Govt. Deposits and 22. Private Sector Deposits√ √ √ 9. Total Deposits (By Counterparties) 15. Due to SAMA
18. Due to Other Financial Institutions
21. Govt. & Quasi-Govt. Deposits and 22. Private Sector Deposits√ √ √ 10. Margin Deposits 23. Marginal Cash-Deposits √ 11. Bonds/ debt securities Issued by Banks 28. Subordinated Loans √ √ 12. Deposits from Banks 16. Due to Commercial Banks
17. Due to Specialized Banks
20. Due To OBU’s√ √ √ Notes:
*Due to SAMA are not included in Template (2).** Liabilities on Template (2) should be allocated based on the sector.
Annexure - 3: Examples of Governments and Quasi Government and Public Non-Financial Corporates
• Governments and Quasi Government :
- Government Universities
- Ministries
- Municipalities
- Government Authorities
- General Organization for Social Insurance (GOSI)
- Social Development Bank
- Public Investment Fund (PIF)
• Public Non- Financial Corporates:
- SABIC- Saudi Arabian Basic Industries
- Saudi Arabian Airlines
- Saudi Arabian Minings (Ma'aden)
- Saudi Electricity Corporations
- Saudi Telecom Company
Central Bank
INTEREST RATES ON ASSETS AND LIABILITIES (V3)
By Product
Current Quarter WA rates Total current amount on Balance Sheet (SAR 000‘s) Outstanding WA Rates Total outstanding amount on Balance Sheet (SAR 000‘s) Local Currency Foreign Currency Total Local Currency Foreign Currency Total Local Currency Foreign Currency Total Local Currency Foreign Currency Total Assets 1. Loans to Governments & Quasi Government - - 2. Loans to Financial Institutions (Excluding Banks) - - 3. Loans to Corporates - - - - - - 3.1 Public Non Financial Corporates - - 3.2 Large Corporates - - 3.3 Medium Enterprises - - 3.4 Small Enterprises - - 3.5 Micro Enterprises - - 3.6 Kafalah Guaranteed Loans - - 3.7 Commercial real estate - - 3.8 Other Businesses - - 4. Retail Loans - - - - - - 4.1 Consumer Loans - - 4.2 Credit Cards - - 4.3 Mortgages or Housing loans - - 4.4 Other Loans - - 5.Loans to Banks - - - - - - 5.1 Inter Bank Loans - - - - - - 5.1.1 Overnight - - 5.1.2 Upto 1 week - - 5.1.3 week to 1 month - - 5.1.4 1 month to 3 months - - 5.1.5 3 months to 6 months - - 5.1.6 6 months to 12 months - - 5.1.7 Over 1 year - - 5.2 Vostro and Nostro Accounts - - 5.3 Other Banks loans - - 6. Investments - - - - - - 6.1 Tbills - - - - - - 6.1.1 SAMA Bills - - 6.1.2 Other Bills - - 6.2 Government bonds and Govt guaranteed bonds - - 6.3 Non Government bonds - - 7. Placements with SAMA - - Liabilities 8. Total Deposits (By Product Type) - - - - - - 8.1 Demand Deposits (including Shariah compliant) - - 8.2 Savings Deposits (including Shariah compliant) - - 8.3 Time Deposits (including Shanah compliant) - - - - - - 8.3.1 Less than 1 month - - 8.3.2 1 - 3 months - - 8.3.3 3 - 6 months - - 8.3.4 6 - 12 months - - 8.3.5 1 year - 2 years - - 8.3.6 2 years - 3 years - - 8.3.7 Over 3 years - - 8.4 Other Deposits - - 9. Total Deposits (By Counterparties) - - - - - - 9.1 Deposits from Government & Quasi Government - - 9.2 Deposits from SAMA - - 9.3 Deposits from Financial Institutions (excluding Banks) - - 9.4 Deposits from Corporates (excluding MSMEs) - - 9.5 Deposits from MSMEs - - 9.6 Deposits from Retail customers - - 10. Margin deposits - - 11. Bonds/ Debt securities - - - - 11.1 Less than 1 year - - 11.2 1-5 years - - 11.3 Over 5 years - - 12. Deposits from Banks - - - - - - 12.1 Inter Bank Deposits - - - - - - 12.1 Overnight - - 12.2 Upto 1 week - - 12.3 1 week to 1 month - - 12.4 1 month to 3 months - - 12.5 3 months to 6 months - - 12.6 6 months to 12 months - - 12.7 Over 1 year - - 12.2 Vostro and Nostro Accounts - - 12.3 Other Deposits - - * Weighted AverageCentral Bank
INTEREST RATES ON ASSETS AND LIABILITIES (V3)
By Sector
Sectors Current Quarter WA rates Total current amount on Balance Sheet (SAR 000‘s) Outstanding WA Rates Total outstanding amount on Balance Sheet (SAR 000‘s) Local Currency Foreign Currency Total Local Currency Foreign Currency Total Local Currency Foreign Currency Total Local Currency Foreign Currency Total Assets 1. Agriculture, forestry and Fishing - - 2. Mining and Quarrying - - 3. Manufacturing - - 4. Electricity, gas, steam and air conditioning supply - - 5. Water supply, sewerage, waste management and remediation activities - - 6. Construction - - 7. Wholesale and retail trade, repair of motor vehicles and motorcycles - - 8. Transportation and storage - - 9. Accommodation and food service activities - - 10. Information and communication - - 11. Financial and insurance activities - - 12. Real estate activities - - 13. Professional, scientific and technical activities - - 14. Administrative and support service activities - - 15. Public administration and defense, compulsory social security - - 16. Education - - 17. Human health and social work activities - - 18. Arts, entertainment and recreation - - 19. Activities of extraterritorial organizations and bodies - - 20. Household (Personal) - - 21. Other Activities - - Liabilities 1. Agriculture, forestry and Fishing - - 2. Mining and Quarrying - - 3. Manufacturing - - 4. Electricity, gas. steam and air conditioning supply - - 5. Water supply, sewerage, waste management and remediation activities - - 6. Construction - - 7. Wholesale and retail trade, repair of motor vehicles and motorcycles - - 8. Transportation and storage - - 9. Accommodation and food service activities - - 10. Information and communication - - 11. Financial and insurance activities - - 12. Real estate activities - - 13. Professional, scientific and technical activities - - 14. Administrative and support service activities - - 15. Public administration and defense, compulsory social security - - 16. Education - - 17. Human health and social work activities - - 18. Arts, entertainment and recreation - - 19. Activities of extraterritorial organizations and bodies - - 20. Household (Personal) - - 21. Other Activities - - Central Bank
INTEREST RATES ON ASSETS AND LIABILITIES (V3)
By Type
Current Quarter WA rates Total current amount on Balance Sheet (SAR 000‘s) Outstanding WA Rates Total outstanding amount on Balance Sheet (SAR 000‘s) Local Currency Foreign Currency Total Local Currency Foreign Currency Total Local Currency Foreign Currency Total Local Currency Foreign Currency Total Assets Loans to Governments & Quasi Government - - - - - - Sharia-compliant - - Conventional - - 2. Loans to Financial Institutions (Excluding Banks) - - - - - - Sharia-compliant - - Conventional - - 3. Loans to Corporates - - - - - - Sharia-compliant - - Conventional - - 4. Retail Loans - - - - - - Sharia-compliant - - Conventional - - 5. Loans to Banks - - - - - - Sharia-compliant - - Conventional - - 6. Investments - - - - - - Sharia-compliant - - Conventional - - 7. Placements with SAMA - - - - - - Sharia-compliant - - Conventional - - Liabilities 8. Total Deposits (By Type) - - - - - - Demand Deposits - - - - - - Sharia-compliant - - Conventional - - Savings Deposits - - - - - - Sharia-compliant - - Conventional - - Time Deposits - - - - - - Sharia-compliant - - Conventional - - Other Deposits - - - - - - Sharia-compliant - - Conventional - - 9. Bonds/ debt securities Issued by Banks - - - - - - Sharia-compliant - - Conventional - - 10. Bank Deposits - - - - - - Sharia-compliant - - Conventional - - Deposit Protection, Recovery and Resolution
Macroprudential Policy
Countercyclical Capital Buffer (CCyB) in Saudi Arabia
History and background
In 2010, the Basel Committee on Banking Supervision (BCBS) released the Basel III capital standards, which contained detailed information about CCyB. This was followed by additional information on procedures for operating this buffer.
The CCyB aims to ensure that banking sector's capital requirements take account of the macro-financial environment in which the banks operate. Its primary objective is to achieve a broader macro prudential goal of protecting the banking sector from periods of excessive aggregate credit growth that have often been associated with the build-up of system-wide risk. In downturn environment, the release of this buffer should help to reduce the risk of undermining the performance of the real economy and additional credit losses in the banking system.
Calculation
The Countercyclical Capital Buffer varies between 0% and 2.5% to total risk weighted assets and is calculated as the weighted average of the buffers in effect in the jurisdictions in which the banks have a credit exposure.
Timeline
All banks in Saudi Arabia should use the buffer rate for each country (including Saudi Arabia) for the calculation of CCyB from 1 January 2016.
Periodic announcement
Countercyclical buffer rate for Saudi Arabia will be pre-announced by SAMA at least one year in advance. While increases in buffer rate becomes effective one year after the date of announcement of the increase, decreases will take effect immediately as of the date of announcement. However, in case of any immediate changes foreseen, SAMA will make the changes in the buffer rate more frequently.
Methodology
Credit-to-GDP gap (point in time and longer term trend) as proposed by the Basel Committee has been taken by SAMA as the main indicator for the calculation of countercyclical buffer rate. However, in future, SAMA could also include additional indicators relating to the financial system and may revise the current methodology, if needed.
Calculation of bank-specific countercyclical capital buffer
1) Reciprocity is an important basis for the calculation of bank-specific countercyclical capital buffer based on location of exposures in different countries. However, this arrangement is valid mainly for Basel Committee member countries and countercyclical capital buffer rates implemented in those countries. These rates (along with countercyclical capital buffer for Saudi Arabia) will be available on the Basel Committee website, and should be taken by the banks for the calculations. However, SAMA could determine a more prudent rate for certain countries, if needed. 2) In case, if there is no rate published by the Basel Committee for the country in which the banks have a presence or a position, a maximum buffer rate of 2.5% should be used for that country. 3) Banks should take into account exposures to private sector counterparties, which attract a credit risk capital charge in the banking book, and the risk-weighted equivalent trading book capital charges for specific risk, the incremental risk charge, and securitization. Interbank exposures and exposures to the public sector are excluded while non-bank financial sector exposures should be included in the calculation. 4) Banks should make classification of geographic location according to the criteria of "ultimate risk" i.e. where the final risk lies. 5) Banks should take into account the geographic location of their private sector credit exposures (as explained in 4 above) and calculate their countercyclical capital buffer requirement as a weighted average of the buffers that are being applied in various jurisdictions where they have an exposure. The weighting applied to the buffer in place in each jurisdiction will be the bank's total credit risk charge (as explained in 3 above) that relates to private sector credit exposures in that jurisdiction, divided by the bank's total credit risk charge that relates to private sector credit exposures across all jurisdictions.
Principles and procedures on profit distribution
Banks should continue to seek permission from SAMA before making dividend distribution. In the permission applications, SAMA will also consider Capital Conservation Buffer, Countercyclical Capital Buffers and Domestic Systemically Important Banks Buffer (if applicable).
Buffer rate for Saudi Arabia
For the year 2016, SAMA has computed 0% as a buffer rate for Saudi Arabia based on the methodology as already explained, which will also be published on the dedicated Basel webpage. Banks will be notified a year in advance if there were any changes in the future.
For further details, banks should access the BCBS document on Countercyclical Capital Buffer from BIS website.
A Framework for Dealing with Domestic Systemically Important Banks in Saudi Arabia
No: 351000138356 Date(g): 6/9/2014 | Date(h): 12/11/1435 Status: In-Force In order to identify and designate D-SIBs in Saudi Arabia, SAMA has developed the enclosed assessment methodology providing for an indicator-based measurement approach. This methodology takes into account the size, interconnectedness, substitutability and complexity of a bank while determining its systemic importance. The enclosed methodology will be implemented effective from 1st January 2016. Accordingly, banks designated as D-SIBs will be required to meet additional Higher Loss Absorbency(HLA) capital requirements as prescribed in the enclosed methodology.
I. Introduction
1. The Basel Committee on Banking Supervision (BCBS) in November 2011 issued the rules text on the assessment methodology for global systemically important banks (G-SIBs) and the additional loss absorbency requirements over and above the Basel III requirements that have been introduced for all internationally active banks. The G20 leaders also asked the BCBS and the Financial Stability Board (FSB) to work on modalities to extend expeditiously the G-SIFI framework to domestic systemically important banks (D-SIBs).
2. Accordingly, the BCBS developed assessment methodology to identify and designate D-SIB banks in the domestic economies of National Jurisdictions. In this context, the assessment methodology for D-SIB should reflect the potential impact of, or externality imposed by, a bank’s failure on the domestic economy and potentially any impact on cross-border externalities posed by the institution.
3. In this regard, SAMA has developed an assessment methodology based on an indicator-based measurement approach for assessing and designating D-SIBs in Saudi Arabia that is consistent with the BCBS D- SIB assessment methodology. The selected indicators are chosen and calibrated to reflect the different aspects and operational dynamics of the Saudi Arabian Banking System that generates negative externalities and makes a bank critical for the stability of the financial system. Further. SAMA's assessment considers bank-specific characteristics of systemic importance such as size, interconnectedness, substitutability, and complexity, which are correlated with the systemic impact of failure.
II. The Assessment Methodology
4. The assessment methodology for D-SIBs reflects the potential impact of, or externality imposed by, a bank's failure. Thus, the reference system for assessing the impact of failure by D-SIBs is the domestic economy.
5. The impact of a D-SIB's failure on the domestic economy, or the assessment and designation of D-SIBs in Saudi Arabia should, in principle, be assessed annually having regard to bank-specific factors combined with SAMA's discretion (based on supervisory judgment). Thus, the assessment and designation process for D-SIB’s by SAMA will take place in February of each year based on end year data.
6. D-SIB’s identified and designated by SAMA under this methodology will be required to comply with the Higher Loss Absorbency (HLA) measures with effect from January 2016.
7. The bank’s degree of systemic importance should be assessed at a consolidated level. The methodology of designation for the D-SIBs in Saudi Arabia is based on four categories with different weights, and each category weight differs, based on the sub-category that has the:
I. Size of the bank as total exposures, as measured in the leverage ratio under Basel III.
II. Interconnectedness of the bank vis-à-vis other financial institutions; the three indicators are used to measure interconnectedness: (i) intra-financial system assets, (ii) intra-financial system liabilities, and (iii) total marketable securities.
III. Complexity of the bank by measuring the notional amount of over-the-counter derivatives (OTC).
IV. Substitutability which relates to the bank’s activities and implications of its failure.
Below is a table that shows each category with its sub-category and weights:
Category (and weighting) Individual Indicator Indicator weighting Size (30%) Total exposure as defined for use in the Basel III leverage ratio 30% Intra-financial system assets: due from commercial banks, specialized banks, and other financial institutions. 10% Interconnectedness (30%) Intra-financial system liabilities: due to commercial banks, specialized banks, and other financial institutions. 10% Total Marketable securities 10% Complexity (10%) OTC derivatives notional value 10% Substitutability (30%) Payments cleared and settled 30 through payment system 30% 4 categories 6 indicators 100% III. The Scoring and Bucketing
8. After calculating scores for banks, banks with a score above a certain level (the cut-off score) will automatically be classified as D-SIBs. Also, SAMA at its discretion and using supervisory judgment may decide to add banks with scores below the cut-off score to the list of D-SIBs.
9. There will be four buckets between the cut-off score and one more bucket on top (4+1). D-SIB's will be allocated to a bucket based on their scores.
Bucket Bucket Scoring 1 X*~15.0% 2 15.1%~20.0% 3 20.1%~25.0% 4 20.1%~25.0% 5 30.1%~100% *X: refer to the cut-off score and equal to 10%.
IV. Higher Loss Absorbency (HLA)
10. The purpose of an HLA requirement for D-SIBs is to reduce further the probability of failure compared to non-systemic institutions, reflecting the greater impact a D-SIB failure is expected to have on the domestic financial system and economy.
11. The HLA requirement imposed on a bank is commensurate with the degree of systemic importance, as identified under the assessment and designation process. Also, the HLA requirement should be met fully by common equity Tier 1 (CET1).
12. The HLA requirement imposed on a bank will be in addition to the target CAR determined by SAMA based on the risk profile of the concerned bank. The HLA capital charge will be calculated by SAMA based on the bank's degree of systemic importance determined in the scoring exercise and each bank will be allocated to a bucket based on its scores.
13. In addition, SAMA may put in place any additional requirements and other policy measures it considers to be appropriate to address the risks posed by a D-SIB including Recovery and Resolution Plans and other measures as deemed appropriate. Accordingly, SAMA will ensure that banks with same degree of systemic importance in Saudi Arabia are subject to the same HLA requirements.
V. Buckets and HLA Requirements
Bucket Bucket Score Higher Loss Absorbency requirement (common equity tier 1 as percentage of Risk-Weighted Assets) 1 10.0%~15.0% 0.5% 2 15.1%~20.0% 1.0% 3 20.1%~25.0% 1.5% 4 25.1%~30.0% 2.0% 5 30.1%~100% 2.5% Domestic Systemically Important Banks (D-SIBs)
In reference to SAMA circular No. (351000138356), dated 12/11/1435H, regarding the methodology to identifying Domestic Systemically Important Banks (D-SIBs) and their capital requirements, below is the list of domestic systemically important banks (D-SIBs) which has been identified in accordance with the approved methodology as per the aforementioned circular. Four indicators with different weights were used: Size, Interconnectedness, Complexity, and Substitutability.
List of Domestic Systemically Important Banks (D-SIBs) for the year 2024.No. Bank 1 Saudi National Bank 2 Al Rajhi Bank 3 Riyad Bank 4 Saudi Awwal Bank (SAB) 5 Bank Saudi Fransi (BSF) In Accordance with circular No. (45056508), dated 02/09/1445H.
List of Domestic Systemically Important Banks (D-SIBs) for the year 2023.No. Bank 1 Saudi National Bank 2 Al Rajhi Bank 3 Riyad Bank 4 Saudi British Bank (SABB) 5 Bank Saudi Fransi (BSF) In Accordance with circular No. (44062624), dated 06/08/1444H.
List of Domestic Systemically Important Banks (D-SIBs) for the year 2022.No. Bank 1 Saudi National Bank 2 Al Rajhi Bank 3 Riyad Bank 4 Saudi British Bank (SABB) 5 Bank Saudi Fransi (BSF) In Accordance with circular No. (43077421), dated 05/09/1443H.
List of Domestic Systemically Important Banks (D-SIBs) for the year 2021.No. Bank 1 Saudi National Bank 2 Al Rajhi Bank 3 Riyad Bank 4 Saudi British Bank (SABB) 5 Bank Saudi Fransi (BSF) In Accordance with circular No. (43001662), dated 07/01/1443H.
List of Domestic Systemically Important Banks (D-SIBs) for the year 2020.No. Bank 1 National Commercial bank 2 Samba Financial Group 3 Al Rajhi Bank 4 Saudi British Bank (SABB) 5 Riyad Bank 6 Bank Saudi Fransi (BSF) In Accordance with circular No. (41062602), dated 04/11/1441H.
List of Domestic Systemically Important Banks (D-SIBs) for the year 2019.No. Bank 1 National Commercial bank 2 Samba Financial Group 3 Al Rajhi Bank 4 Bank Saudi Fransi (BSF) 5 Riyad Bank 6 Saudi British Bank (SABB) In Accordance with circular No. (67/56165), dated 09/09/1440H.
List of Domestic Systemically Important Banks (D-SIBs) for the year 2018.No. Bank 1 National Commercial bank 2 Samba Financial Group 3 Riyad Bank 4 Bank Saudi Fransi (BSF) 5 Saudi British Bank (SABB) 6 Al Rajhi Bank In Accordance with circular No. (391000089191), dated 17/08/1439H.
List of Domestic Systemically Important Banks (D-SIBs) for the year 2017.No. Bank 1 National Commercial bank 2 Samba Financial Group 3 Al Rajhi Bank 4 Bank Saudi Fransi (BSF) 5 Riyad Bank 6 Saudi British Bank (SABB) In Accordance with circular No. (381000082448), dated 06/08/1438H.
Statutory Deposit Recognition in Liquidity Reserves Ratio
In reference to Article 7 of Banking Control Law, which states that every bank is required to maintain with SAMA, at all times, a statutory deposit of a sum not less than fifteen percent of its deposit liabilities, which has been reduced to (4%) for time and savings deposits and (7%) for demand deposits. Article 7 also introduced liquidity reserve ratio which is currently at (20%) of deposit liabilities.
To better align liquidity reserve ratio with Basel's Liquidity Coverage Ratio, SAMA is requiring the recognition of the statutory deposit in the calculation of the liquidity reserve ratio. The Statutory Reserves balance should be reported in line item "Due from SAMA- other up to 30 days" of M6-2 return, effective immediately.
Please be advised this requirement is effective immediately. Shariah Compliance Banking
Foreign Banks Branches
Foreign Bank Branch Instructions
No: 4922/67 Date(g): 24/9/2019 | Date(h): 25/1/1441 The English version displayed herein is not the last updated version. Please refer to the Arabic version to read the last updated version.1. SAMA Approach to Foreign Banks Branches (FBB) Regulation
1. These SAMA regulations are applicable to all FBBs operating in the Kingdom of Saudi Arabia (KSA).
2. The regulations are issued in accordance with the authority vested in SAMA under the Charter of Saudi Arabian Monetary Authority -issued via Royal Decree No. 23 dated 23/5/1377 H, which entrusts SAMA to supervise and regulate commercial banks, and to set relevant rules whenever deemed necessary; and the Banking Control Law - issued via Royal Decree No. M/5 dated 22/2/1386 H Article 16 (3), which sets SAMA as the legislative body responsible for exercising regulatory and supervisory control over banks, issuing general rules and overseeing that all banks comply and effectively implement the relevant laws and regulations.
3. SAMA requires all FBBs to comply with the Banking Control Law (BCL), its prudential requirements, and other relevant laws and regulations as applicable to all local and foreign banks.
4. In addition to these FBB-specific prudential requirements, FBBs are also required to comply with the requirements of SAMA circulars covering conduct regulations and standards as issued by SAMA, for all banks.
1.1. Significant Retail Activities
5. SAMA has additional requirements for FBBs that take significant retail-banking deposits.
6. SAMA considers retail banking activities to be significant where an FBB:
i. Has more than SAR 5 billion of retail and Micro, Small and Medium-sized enterprises (MSME)1 account balances or more than 1,000 retail and MSME account holders; or
ii. Undertakes deposit activity where the total number of branches exceeds five (5).
1 As per SAMA MSME definition
1.2 Wholesale Activities
7. SAMA has additional requirements where wholesale only foreign bank branches are systemically important. Wholesale only foreign bank branches are those that are not engaged in significant retail activities as defined in 6 above.
8. In assessing whether a branch is systemically important, SAMA looks at whether the overall KSA footprint of the branch exceeds an average of SAR 10 billion total gross assets. The SAR 10 billion threshold is only indicative and SAMA will also take into account the scale of provision of Critical Economic Functions (CEFs) the branch undertakes in KSA.
9. For the purpose of these regulations, CEFs are defined as activities, services or operations the discontinuance of which is likely to lead to the disruption of services that are essential to the real economy due to the size, market share, external and internal interconnectedness, complexity or crossborder activities of the FBB, with particular regard to the substitutability of those activities, services or operations.
10. Wholesale only FBBs will be considered as being systemically important if they undertake the CEFs under A and B below. SAMA may also designate a Wholesale only FBB if its activities under C below are considered systematically important by SAMA. (A) Payments, Cash, Settlement, Clearing, Custody Payment services Cash services (B) Lending Securities settlement services CCP clearing services Custody services (C) Capital Markets Derivatives held for trading – OTC Derivatives held for trading – non-OTC Secondary markets / trading ( held-for-trading-only) Primary Markets / underwriting 2. Corporate Governance and Risk Management
2.1. Introduction
11. These regulatory requirements are relevant to all Foreign Bank Branches (FBBs) in respect of their operations in the Kingdom of Saudi Arabia (KSA). It sets out SAMA’s requirements for the internal governance and risk management of the FBBs and how they should comply with these regulations. These regulations cover the following areas:
i. General requirements;
ii. Senior Management Function & Responsibilities;
iii. Segregation of Functions;
iv. Compliance and Internal Audit;
v. Risk Management and Control;
vi. Outsourcing; and
vii. Record keeping and Retention Requirements.
2.2. General Requirements
12. SAMA requires that the governance and risk management arrangements, processes and mechanisms implemented by a FBB should be proportionate to the nature, scale and complexity of the risks inherent in its business and its activities.
2.3. Requirements in Relation to the Senior Management and their Responsibilities
13. SAMA requires a FBB to have robust governance and risk management arrangements, which includes a clear organizational structure with well-defined, transparent and consistent lines of responsibility. All FBBs are required to put in place a Job description (JD) for each member of the senior management. More specifically, JDs must:
i. Clearly set out the areas of the FBB’s activities for which the senior manager is responsible;
ii. Be included in every application to SAMA for pre-approval as a senior manager as per SAMA’s fit and proper regulations; and
iii. Be updated and resubmitted if there is a significant change to the senior manager’s responsibilities as per SAMA’s fit and proper regulations.
14. A FBB is also required to produce and maintain a Governance Policy, which is a single, up-to-date document setting out the branch’s management, governance and risk management arrangements. The Governance Policy should be proportionate and include information about the business relationship with the Head Office and the group.
2.4. Senior Management Function (SMF) and Responsibilities
15. SAMA requires all FBBs to have at least one individual approved as a bespoke Senior Management Function (SMF) known as the General Manager (GM)/Chief Executive Officer (CEO) or any other title as appropriate. The GM/CEO should have the highest degree of individual decision-making authority within the FBB over activities and areas subject to KSA regulations.
16. SAMA looks to the GM/CEO to oversee the management of the branch, including matters of a corporate governance nature that relate to the branch. As such, SAMA requires that the GM/CEO will be accountable for the FBB’s operations.
17. While the GM/CEO may not conduct all responsibilities or activities directly, SAMA requires the GM/CEO to retain his or her overall accountability for the operations of the FBB. Regardless of who conducts the various functions, SAMA requires the GM/CEO to:
i. Ensure that business objectives, strategies, and plans set for the FBB are prudent in the context of the FBB. Recognizing that FBBs are an extension of the parent, the GM/CEO is required to advise the parent should any planned activities for the FBB not be considered suitable;
ii. Be satisfied that appropriate policies and procedures (i.e. control systems) are in place to manage the risks regardless of where the controls may reside;
iii. Receive sufficiently comprehensive and frequent reports to understand and monitor the business of the FBB; and
iv. Undertake or obtain, periodically, an independent assessment of the adequacy and effectiveness of the controls. Independent assessment may be obtained from individuals or groups designated with that role, such as internal audit or risk management (either at the branch or Head Office), or qualified third parties.
18. The GM/CEO is required to ensure that there are robust policies and procedures to manage the assets and liabilities recorded on the FBB’s books and records and related accounts (e.g. deposit, loan, investment, etc.).
19. The GM/CEO should ensure the FBB is in compliance with all applicable legislation and regulations, and is conducting its business and affairs in a manner that is consistent with applicable SAMA requirements.
20. While the GM/CEO may delegate responsibility for day-to-day management to others, SAMA requires the GM/CEO to be in a position to verify the FBB’s regulatory returns. Therefore, SAMA would expect the GM/CEO to have, or to ensure the individuals undertaking activities with respect to the FBB have, a good understanding of applicable legislation, regulations and guidelines, as well as the activities and related records of the branch, including its assets, liabilities, revenues and expenses. SAMA would also expect the GM/CEO to be satisfied with any work performed by others (e.g., Head Office or another entity within the group) and should ensure any deficiencies are corrected.
2.5. Segregation of Functions
21. A FBB should ensure that the performance of multiple functions by its relevant persons does not and is not likely to prevent those persons from discharging any particular functions soundly, honestly and professionally. The senior personnel within the FBB should define arrangements concerning the segregation of duties within the branch and the prevention of conflicts.
22. A FBB should ensure that no single individual has unrestricted authority to do all of the following:
i. Initiate a transaction;
ii. Bind the FBB;
iii. Make payments; and
iv. Account for it.
23. Where a FBB is unable to ensure the complete segregation of duties because the branch has a limited number of staff, it should ensure that there is adequate compensating controls in place such as frequent review of an area by relevant branch senior managers.
2.6. Mechanisms and Procedures
24. SAMA requires that, taking into account the nature, scale and complexity of the business of the FBB, the FBB should establish, implement and maintain:
i. Decision-making procedures and an organizational structure which clearly and in a documented manner specifies reporting lines and allocates functions and responsibilities and governance of the branch,
ii. Effective internal reporting and communication of information at all relevant levels of the branch and;
iii. Effective reporting and communication with the Head Office of the branch.
2.7. Business Continuity Management (BCM) & Disaster Recovery Planning (DRP)
25. SAMA requires FBBs to take reasonable steps to ensure continuity and regularity in the performance of its activities. SAMA requires FBB to comply with the requirements of SAMA’s Business Continuity Management (BCM) and Disaster Recovery Planning (DRP) as per SAMA’s SAMA Cyber Security and BCM frameworks regulations.
2.8. Regular Monitoring
26. A FBB should monitor and, at least on annual basis and using a risk based approach, evaluate the adequacy and effectiveness of its systems, internal control mechanisms and arrangements and take appropriate measures to address any deficiencies.
2.9. Compliance and Internal Audit Functions
2.9.1. Compliance & Anti Money Laundering and Combating Terrorism Financing (AML/CTF)
27. All FBBs are required to have a separate compliance function which is permanent, effective, and operates independently. The compliance and AML/CTF/Legal function/s should have the responsibility to monitor and, on a regular basis, to assess the adequacy and effectiveness of the policy measures and procedures put in place in accordance with;
(a) SAMA’s Rules Governing Anti-Money Laundering & Combating Terrorist Financing
(b) SAMA’s Compliance Manual for Banks Working in Saudi Arabia and;
(c) Other Kingdom of Saudi Arabia regulatory and legal requirements.
28. In order to enable the FBB’s compliance/AML/CTF functions to discharge their responsibilities properly and independently SAMA requires that the FBB should ensure these functions have the necessary authority, resources, expertise and access to all relevant information.
29. In addition, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of its activities, SAMA requires a FBB to ensure at least the following conditions are met:
i. The relevant persons involved in the FBB’s compliance team should not be involved in the performance of services or activities they monitor. In other words, compliance department’s officers and staff, especially the compliance officer, should not also be entrusted with functions that may expose them to a conflict of interest in their compliance responsibilities and the compliance work; and
ii. The method of determining the remuneration of the relevant persons involved in the FBB’s compliance function do not compromise their objectivity.
2.9.2. Internal Audit Function (IAF)
30. SAMA requires that a FBB should, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of its activities, establish an independent IAF. The IAF should, at a minimum, have the following responsibilities:
i. To ensure the FBB meets all SAMA Audit requirements;
ii. To establish, implement and maintain an audit plan
iii. To examine and evaluate the adequacy and effectiveness of the FBB’s governance, systems, internal control mechanisms and arrangements (or alternatively, to assess the extent to which the parent’s audit plan meets local regulatory requirements and make any modifications that may be necessary);
iv. To issue recommendations based on the result of work carried out in accordance with the audit plan;
v. To verify compliance with those recommendations; and
vi. To report in relation to Internal Audit matters.
31. Where a FBB has an individual performing the role of Head of Internal Audit, he or she will need to be pre-approved as the Head of IAF in line with SAMA Fit and Proper requirements.
2.10. Risk Management and Control
32. A FBB is required to have effective processes to identify, classify, manage, monitor and report all the risks it is or might be exposed to.
33. A FBB should establish, implement and maintain adequate risk management policies and procedures, including effective procedures for risk assessment, which identify all the risks relating to the FBB’s activities, processes and systems, and where appropriate, set its risk appetite or the level of risk tolerated by the FBB.
34. A FBB should adopt effective arrangements, processes and mechanisms to identify and manage the risk relating to its activities, processes and systems, in the light of that level of risk tolerance.
35. A FBB’s senior management should approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the FBB is or might be exposed to.
36. A FBB should, as a minimum, monitor the following:
i. The adequacy and effectiveness of its risk management function, policies and procedures;
ii. The level of compliance by the FBB and its staff with the risk control arrangements, processes and mechanisms; and
iii. The adequacy and effectiveness of measures taken to address any deficiencies in those policies, procedures, arrangements, processes and mechanisms, including failures by the relevant persons to comply with such arrangements, processes and mechanisms or follow such policies and procedures.
37. A FBB is expected to, where appropriate and proportionate in view of the nature, scale and complexity of its business and the nature and range of activities, establish and maintain a risk management function that operates independently and carries out the following tasks:
i. Implementation of risk management policies and procedures; and
ii. Provision of risk management reports and advice to its senior management.
38. Where a FBB does not maintain a local risk management function, it should nevertheless be able to demonstrate that the risk management policies and procedures which it has adopted are robust and are consistently effective.
39. SAMA requires that the risk control arrangements of an FBB that has significant retail activities or is a systemically important wholesale FBB, to include:
i. The appointment of a branch Head of Risk Management; and
ii. The Establishment of a branch risk management oversight team whose role includes giving risk oversight under an effective risk management structure and framework.
2.11. Branch Head of Risk Management
40. Where a FBB has an individual performing the role of Head of Risk Management, he or she will need to be pre-approved as the Head of Risk Management function in line with SAMA Fit and Proper regulations. SAMA also requires that such a position should, at a minimum;
i. Be accountable to the FBB’s Head Office for oversight of branch-wide risk management;
ii. Be fully independent of a branch’s individual business units;
iii. Have sufficient authority, stature and resources for the effective execution of his/her responsibilities;
iv. Have unfettered access to any parts of the branch’s business capable of having an impact on the branch’s risk profile;
v. Ensure that the data used by the branch to assess its risks are fit for purpose in terms of quality, quantity and breadth;
vi. Provide oversight and challenge of the branch’s systems and controls in respect of risk management;
vii. Provide oversight and validation of the branch’s reporting of risk;
viii. Ensure the adequacy of risk information, risk analysis and risk training provided to members of the branch’s management team;
ix. Report to the branch’s management team (and, if appropriate, to that of the parent) on the branch’s risk exposures relative to its risk appetite and tolerance, and the extent to which the risks inherent in any proposed business strategy and plans are consistent with the branch’s risk appetite and tolerance. The branch Head of Risk Management should also alert the branch’s management team and provide challenge on, any business strategy or plans that exceed the branch’s risk appetite and tolerance.
41. SAMA requires that a FBB will structure its arrangements so that senior management personnel at an appropriate level in the Head Office will exercise functions in taking into account group-wide risks.
2.12. Reporting Lines of FBB’s Head of Risk Management
42. Where a FBB has an individual performing the role of Head of Risk Management, he or she should be accountable to a branch’s GM/CEO and, in most cases, to the head of the parent’s or group risk management function.
43. SAMA recognises that, in addition, a reporting line should be established for operational purposes. Accordingly, to the extent necessary for effective operational management, the branch Head of Risk Management should report into the GM/CEO.
2.13. Branch Risk Oversight Team
44. SAMA requires that, while a branch’s GM/CEO is ultimately responsible for risk governance throughout the business, a FBB that is involved in significant retail business or is a systemically important wholesale FBB should establish a mechanism for providing risk oversight to the branch’s business activities to provide focused support and advice on risk governance. The responsibilities of the Risk Oversight Team should, at minimum, include the following;
i. Providing advice to the branch’s management team on risk strategy, including the oversight of current risk exposures of the branch, with particular, but not exclusive, emphasis on prudential risks;
ii. Development of proposals for consideration by the branch management team in respect of overall risk appetite and tolerance, as well as the metrics to be used to monitor the branch’s risk management performance;
iii. Oversight and challenge of the day-to-day risk management and oversight arrangements of the branch management team;
iv. Oversight and challenge of due diligence on risk issues relating to material transactions and strategic proposals that are subject to approval by the branch management team; and
v. Providing advice, oversight and challenge necessary to embed and maintain a supportive risk culture throughout the branch.
45. In carrying out their risk governance responsibilities, a FBB’s management team and branch risk oversight function covering the branch should have regard to any relevant advice from the parent’s risk and audit committees concerning the effectiveness of its control framework.
2.14. Outsourcing
46. SAMA outsourcing rules require a FBB to have effective outsourcing processes to identify, manage, monitor and report risks and internal control mechanisms. A FBB should ensure that, when relying on its Head/Regional Office or a third party for the performance of any functions which are critical for the performance of its activities, on a continuous and satisfactory basis, it takes reasonable steps to avoid undue additional operational risks.
47. A FBB should not undertake the outsourcing of important functions in such a way as to impair materially:
i. The quality of its internal control; and
ii. The ability of SAMA to monitor the branch’s compliance with all its regulatory obligations.
48. Any planned outsourcing of processes, people and systems must satisfy SAMA’s outsourcing rules as set out in SAMA’s Instructions for Outsourcing as applicable to FBBs. All outsourcing activities must also be reported using the FBB Return Form (Attachment A).
2.15. Record Keeping and Retention Requirements
49. FBBs are required to maintain all records (both electronic and physical) at their KSA principal office. In addition, FBBs are required to maintain and process in KSA information and data relating to the preparation and maintenance of these records unless they obtain an exemption from SAMA or where the outsourcing rules permits this. SAMA’s requirements in evaluating a request for approval to process records outside KSA are set out in SAMA’s outsourcing rules.
50. Where processing of records related to the FBB’s business occurs at a location other than the KSA principal office, it is required that they are backed up as appropriate, confidentiality maintained and provided to the FBB to ensure that records maintained in KSA are up to date at the end of each business day. SAMA requires records maintained in KSA will be of sufficient detail to:
i. Enable the GM/CEO to fulfill his or her accountabilities with respect to the FBB’s business; and
ii. Enable SAMA to conduct an examination and inquiry into the business and affairs of the FBB.
51. Where sufficient information is not available, SAMA may request it as necessary.
52. SAMA requires records to be capable of being reproduced in Arabic and in English languages. Where a FBB is required to retain a record of a communication that was not made in Arabic or English, it may retain it in that language. However, it should be able to provide a translation upon request.
53. A FBB should have appropriate systems and controls in place with respect to the adequacy of, access to, and the security of its records so that the FBB may fulfil its regulatory and statutory obligations. With respect to retention periods, SAMA requires that records should be retained in accordance with SAMA records retention requirements.
2.16. Foreign Bank Branch (FBB) Reporting Requirements
54. FBBs must ensure that the arrangements for reporting to SAMA and the parent foreign bank or Head Office are adequate and in compliance with applicable laws and regulations.
55. All FBBs must provide SAMA with information in accordance with the FBB Return A (Attachment A) accompanying these regulations. The information must be provided as at end of quarter each year and provided, by electronic means, within 30 days of the date to which the information relates. This should be sent to the FBB’s relevant relationship manager.
3. Funding Ratio (FR) Requirements
3.1. Introduction
56. Foreign Bank Branches (FBBs) are not required to maintain capital in Kingdom of Saudi Arabia although a quasi-capital in the form of a Funding Ratio requirement may be set on a case-by-case basis, for example, those intending to conduct high-risk businesses and/or wanting to specialise in particular business lines such as significant retail business operations that require specific level of capacity or competence.
57. These requirements are applicable to FFBs that are engaged in significant retail activities in respect of their business in the Kingdom of Saudi Arabia (KSA).
58. A significant retail FBB is, at a minimum, required to maintain at the greater of SAR one (1) billion or eight (8) per cent of FBB’s Total Risk Weighted Assets (Pillar 1 and Pillar 2 risks). The FBB must maintain the required Funding Ratio at all times, regardless of reporting frequency.
59. The Pillar 1 Risk Weighted Assets shall be that of the KSA branch. The Pillar 2 RWAs shall be that assigned for the KSA business by the Head Office.
60. SAMA may require a FBB to maintain additional assets where in the opinion of SAMA they are necessary to protect retail depositors of the FBB.
3.2. Pre-Approved Assets for the Funding Ratio (FR)
61. Only Securities issued or guaranteed by the Government of Saudi Arabia are pre-approved as qualifying assets for the Funding Ratio determination.
3.3. Calculating the Funding Ratio (FR)
62. The Funding Ratio is determined by total RWA. Total RWA is defined as Pillar 1 plus Pillar 2 RWAs (both on and off-balance sheet) of the FBB in respect of its business in KSA.
3.4. Reporting
63. At each quarter end, the FBBs that are subject to FR requirements are required to calculate and report to SAMA its Funding Ratio (FR) during the period using the attached Attachment D.The Returns should be submitted to SAMA (to relevant relationship manager of the FBB) by end of the month following the quarter end.
4. Liquidity Requirements
4.1. Introduction
64. These liquidity requirements outlines SAMA’s requirements for liquidity risk management and reporting by FBBs.
4.2. Liquidity Risk Governance - Senior Management Responsibilities
65. A FBB’s senior management is ultimately responsible for the sound and prudent management of the liquidity risk of the FBB. An FBB must maintain a liquidity risk management framework commensurate with the level and extent of liquidity risk to which the FBB is exposed from its activities.
66. The liquidity risk management framework must, at a minimum, include the following;
i. A statement of the FBB’s liquidity risk appetite and tolerance, approved by the GM/CEO in charge of the FBB;
ii. The liquidity management strategy and policy of the FBB, approved by the GM/CEO in charge of the FBB;
iii. The FBB’s operating standards (e.g. in the form of policies, procedures and controls) for identifying, measuring, monitoring and controlling its liquidity risk in accordance with its liquidity risk tolerance;
iv. The FBB’s funding strategy, approved by the GM/CEO in charge of the FBB; and
v. A Contingency Funding Plan (CFP).
67. The FBB must ensure that:
i. Senior management and other relevant personnel have the necessary experience to manage liquidity risk; and
ii. The FBB’s liquidity risk management framework and liquidity risk management practices are documented and reviewed at least annually.
68. The senior management of the FBB must review regular reports on the liquidity position of the FBB and, where necessary, information on new or emerging liquidity risks.
69. An FBB’s senior management must, at a minimum;
i. Develop a liquidity management strategy, policies and processes in accordance with the Head Office-approved liquidity tolerance;
ii. Ensure that the FBB maintains sufficient liquidity at all times;
iii. Determine the structure, responsibilities and controls for managing liquidity risk and for overseeing the liquidity positions of the FBB, and outline these elements clearly in the FBB’s liquidity policies;
iv. Ensure that the FBB has adequate internal controls to ensure the integrity of its liquidity risk management processes;
v. Ensure that stress tests, contingency funding plans and holdings of liquid assets are effective and appropriate for the FBB;
vi. Establish a set of reporting criteria specifying the scope, manner and frequency of reporting for various recipients including the parties responsible for preparing the reports;
vii. Establish specific procedures and approvals necessary for exceptions to policies and limits, including escalation procedures and follow-up actions to be taken for breaches of limits;
viii. Closely monitor current trends and potential market developments that may present significant, unprecedented and complex challenges for managing liquidity risk so that appropriate and timely changes to the liquidity management strategy may be made as needed; and
ix. Continuously review information on the FBB’s liquidity developments and report to the senior management on a regular basis.
70. Senior management must be able to demonstrate a thorough understanding of the links between funding liquidity risk (the risk that an FBB may not be able to meet its financial obligations as they fall due) and market liquidity risk (the risk that liquidity in financial markets, such as the market for debt securities, may reduce significantly), as well as how other risks, including credit, market, operational and reputation risks, affect the FBB’s overall liquidity risk management strategy.
4.3. Liquidity Risk Management Framework
71. An FBB’s liquidity risk tolerance defines the level of liquidity risk that the FBB is willing to assume. An FBB’s liquidity risk tolerance must be documented and appropriate for the FBB’s operations and strategy.
72. The liquidity risk tolerance must be reviewed, at least annually, to reflect the FBB’s financial condition and funding capacity.
73. In setting the liquidity risk tolerance, the senior management must ensure that the risk tolerance allows the FBB to effectively manage its liquidity position in such a way that it is able to withstand a prolonged period of stress.
74. The liquidity risk tolerance must be articulated in such a way that clearly states the trade-off between risks and profits.
75. An FBB’s liquidity risk management framework must be formulated to ensure that the FBB maintains sufficient liquidity, including a cushion of unencumbered liquid assets, to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. The source of liquidity stress could be specific to the FBB or market-wide or a combination of the two.
76. An FBB’s liquidity risk management framework must be well integrated into the FBB’s overall risk management process.
77. An FBB’s liquidity risk management oversight function must be operationally independent and staffed with personnel who have the skills and authority to challenge the FBB’s treasury and other liquidity risk management businesses.
78. The liquidity management strategy must include specific policies on liquidity management, such as:
i. The composition and maturity of assets and liabilities;
ii. The diversity and stability of funding sources;
iii. The approach to managing liquidity in different currencies, across borders, and across business lines; and
iv. The approach to intraday liquidity management.
79. The liquidity management strategy must take account of the FBB’s liquidity needs under normal conditions as well as periods of liquidity stress. The strategy must include quantitative and qualitative targets.
80. The liquidity management strategy must be appropriate for the nature, scale and complexity of the FBB’s operations. In formulating this strategy, the FBB must consider its key business lines, the breadth and diversity of markets, products and home and host regulatory requirements.
81. The liquidity management strategy, key policies for implementing the strategy and the liquidity risk management structure must be communicated throughout the organisation by senior management.
82. An FBB must have adequate policies, procedures and controls in place to ensure that the senior management are informed immediately of new and emerging liquidity concerns. These include increasing funding costs or concentrations, increases in any funding requirements, the lack of availability of alternative sources of liquidity, material and/or persistent breaches of limits, a significant decline in the cushion of unencumbered liquid assets or changes in external market conditions that could signal future difficulties.
83. Senior management must be satisfied that it is fully aware of all activities that have an impact on liquidity and that it operates in accordance with approved policies, procedures, limits and controls.
84. The liquidity risk management framework must be subject to effective review on an ongoing basis.
4.4. Management of Liquidity Risk
85. An FBB must have a sound process for identifying, measuring, monitoring and controlling liquidity risk. This process must include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off- balance sheet items over an appropriate set of time horizons.
86. An FBB must set limits to control its liquidity risk exposure and vulnerabilities. Limits and corresponding escalation procedures must be reviewed regularly. Limits must be relevant to the business in terms of its complexity of activity, nature of products, currencies and markets served. Where a liquidity risk limit is breached, an FBB must implement a plan of action to review the exposure and reduce it to a level that is within the limit.
87. An FBB must actively manage its collateral positions, differentiating between encumbered and unencumbered assets.
88. An FBB must design a set of early warning indicators to aid its daily liquidity risk management processes in identifying the emergence of increased risk or vulnerabilities in its liquidity risk position or potential funding needs. Such early warning indicators must be structured so as to assist in the identification and escalation of any negative trends in the FBB’s liquidity position and lead to an assessment and potential response by management to mitigate the FBB’s exposure to these trends.
89. An FBB must have a reliable management information system that provides the senior management and other appropriate personnel with timely and forward-looking information on the liquidity position of the FBB.
90. An FBB must actively manage its intraday liquidity positions and risks in order to meet payment and settlement obligations on a timely basis under both normal and stressed conditions, thus contributing to the orderly functioning of payment and settlement systems.
91. An FBB must develop and implement a costs and benefits allocation process for funding and liquidity that appropriately apportions the costs of prudent liquidity management to the sources of liquidity risk and provides appropriate incentives to manage liquidity risk.
92. An FBB active in multiple currencies must:
i. Maintain liquid assets consistent with the distribution of its liquidity needs by currency;
ii. Assess its aggregate foreign currency liquidity needs and determine an acceptable level of currency mismatches; and
iii. Undertake a separate analysis of its strategy for each currency in which it has material activities, considering potential constraints in times of stress.
4.5. Funding Strategy
93. An FBB must;
i. Develop and document a three-year funding strategy, which must be provided to SAMA on request;
ii. Maintain an ongoing presence in its chosen funding markets and strong relationships with funds providers; and
iii. Regularly gauge its capacity to raise funds quickly. It must identify the main factors that affect its ability to raise funds and monitor those factors closely to ensure that estimates of fund-raising capacity remain valid.
94. The funding strategy must be reviewed and approved by the GM/CEO of the FBB, at least annually, and supported by robust assumptions in line with the FBB’s liquidity management strategy and business objectives.
95. The funding strategy must be reviewed and updated, at least annually, to account for, at a minimum, changed funding conditions and/or a change in the FBB’s strategy. An FBB must advise SAMA of any material changes to the FBB’s funding strategy.
4.6. Contingency Funding Plan (CFP)
96. An FBB must have a formal Contingency Funding Plan (CFP) that clearly sets out the strategies for addressing liquidity shortfalls in stressed situations. The plan must outline policies to manage a range of stress environments, establish clear lines of responsibility and include clear invocation and escalation procedures.
97. An FBB’s CFP must be commensurate with its complexity, risk profile, scope of operations and role in the financial systems. The plan must articulate available contingency funding sources and the amount of funds an FBB estimates can be derived from these sources, clear escalation/prioritisation procedures detailing when and how each of the actions can and must be activated and the lead time needed to tap additional funds from each of the contingency sources. The CFP must provide a framework with a high degree of flexibility so that an FBB can respond quickly in a variety of situations.
98. The plan’s design, scope and procedures must be closely integrated with the FBB’s ongoing analysis of liquidity risk and with the assumptions used in its stress tests and the results of those stress tests. As such, the plan must address issues over a range of different time horizons, including intraday.
99. For an FBB that has significant retail deposits, the plan must address a retail deposit run and must include measures to repay retail depositors as soon as practicable. The retail run contingency plan must not rely upon closing distribution channels to retail depositors. The retail run contingency plan must seek to ensure that, in the event of a loss of market confidence in the FBB, retail depositors wishing to retrieve their deposits may do so as quickly and as conveniently as is practicable in the circumstances, and within the contractual terms and conditions applicable to the relevant deposit products.
100. An FBB’s CFP must be reviewed and tested, at least annually, to ensure its effectiveness and operational feasibility. An FBB’s GM/CEO must review and approve the contingency funding plan, at least annually, or more often as changing business or market circumstances require.
4.7. Liquidity Coverage Ratio (LCR)
101. A FBB that takes significant retail deposits or is a systematically important wholesale FBB shall be subject to minimum LCR requirements and shall be referred to as an LCR FBB. Such FBBs are required to report their LCR position in accordance with Attachment B. FBBs should refer to SAMA’s general guidance concerning ammended LCR that can be found in SAMA’s website.
102. An LCR FBB must maintain an adequate level of unencumbered high-quality liquid assets (HQLA) to meet its liquidity needs for a 30 calendar day period under a severe stress scenario, in accordance with (Attachment B):
103. For an LCR FBB, the ratio of the LCR must not be less than 100 percent on an all currencies basis.
104. SAMA may require an LCR FBB to maintain a higher minimum LCR if it has concerns about the FBB’s liquidity risk profile or the quality of its liquidity risk management.
4.8. SAMA Statutory Liquidity and Reserve Ratios
105. All FBBs must maintain the required statutory reserves and a minimum holding of its liabilities in specified liquid assets, in accordance with Article 7 of the Banking Control Law and in line with SAMA reserving requirements.
106. SAMA may require an FBB to maintain higher minimum liquidity holdings if it has concerns about the FBB’s liquidity risk profile or the quality of its liquidity risk management.
4.9. Net Stable Funding Ratio (NSFR)
107. An FBB with significant retail activities or is a systemically important wholesale FBB must meet minimum NSFR requirements and shall be referred to as an NFSR FBB. Such FBBs are required to report their NSFR position in accordance with Attachment B. FBBs should refer to SAMA’s guidance document concerning Basel III: NSFR- based on BCBS document of October 2014 that can be found in SAMA’s website.
108. An NFSR FBB must maintain an NSFR of at least 100 percent at all times.
109. SAMA may require an FBB with significant retail activities to maintain a higher minimum NSFR where SAMA considers it appropriate to do so, including if it has concerns about the FBB’s funding or liquidity risk profile or the quality of its liquidity risk management.
4.10. Liquidity Risk Stress Testing
110. A FBB must conduct stress tests on a regular basis for a variety of short-term and protracted institution-specific and market-wide stress scenarios (individually and in combination) to identify sources of potential liquidity strain and to ensure that current exposures remain in accordance with the FBB’s liquidity risk tolerance.
111. The stress test outcomes must be used to adjust the FBB’s liquidity management strategy, policies and positions and to develop effective contingency plans to deal with events of liquidity stress.
112. Stress tests must enable the FBB to analyse the impact of stress scenarios on its overall liquidity positions, as well as on the liquidity positions of individual business lines.
113. An FBB’s stress test scenarios and related assumptions must be well documented and reviewed together with the stress test results. Stress test results and vulnerabilities and any resulting actions must be reported to, and discussed with, the FBB’s Senior Management. Results of the stress tests must be integrated into the FBB’s strategic planning process and its day-to-day risk management practices. The results of the stress tests must be explicitly considered in the setting of internal limits.
114. An FBB must decide how to incorporate the results of stress tests in assessing and planning for related potential funding shortfalls in its CFP.
4.11. Local Operational Capacity (LOC)
115. A foreign FBB must perform an assessment of its Local Operational capacity (LOC) to liquidate assets and make or receive payments without assistance from staff located outside KSA, at least annually, and provide the results of the assessment to SAMA upon request.
116. An FBB, in performing a LOC assessment, must ensure at a minimum, it considers a scenario involving a combination of time zones, different public holidays and an offshore operational risk event under which the foreign FBB would operate, including making and receiving payments, for a minimum of three business days without assistance from staff located outside KSA.
5. Large Exposures
117. FBBs are required to comply with the relevant clauses (reporting) of SAMA’s Large Exposure Limit (LEL) rules as issued to all banks.
Attachment A
Main Details - Foreign Bank Branches (FBBs) FBB Number Reporting Date (DD/MM/YYYY) FBB Name Currency1 SAR'000 Total SAR USD EUR Others Total Assets as at reporting date2 Of which: Originated from/managed outside of KSA3 Total Assets originated by branch but booked outside of KSA4 SAR'0005 Total SAR USD EUR Others Total Liabilities as at reporting date of which: Total intra group In the event of a query, SAMA may contact
Name Email Any FBB Notes
1: Currency the Branch uses for normal reporting purposes - Should be SAR
2: Total and currency breakdowns should be reported on a SAR equivalent basis, using exchange rate at reporting date.
3: Activity managed outside KSA and booked in KSA - assets that are originated or managed from outside of the KSA but booked in the KSA Branch.
4: Activity managed in KSA and booked outside KSA - assets that are originated or managed in the KSA but booked outside of the KSA
5: Total assets and total liabilities are required to balance.Deposit Taking SAR’000 Total value of RETAIL deposits1 Total value of NON -RETAIL deposits1 Item no 1 Retail Accounts SAR'000 A Total value of retail deposit accounts B Of which: Held in transactional accounts2 C Of which: Held in savings / term accounts D Total number of retail accounts E Of which: Held in transactional accounts3 F Of which: Held in savings / term accounts 2 MSME Accounts SAR'000 A Total value of SME accounts4 B Of which: Held in transactional current accounts C Of which: Held in savings/term accounts D Total number of SME accounts 3 All Other Non-Financial Corporate & Government Accounts SAR'000 A Total value of non-Financial Corporate & Central Government Accounts B Total number of non-Financial Corporate & Central Government accounts 4 Financial Institutions (Gross) SAR'000 A Deposits from Financial Institutions, including money market loans 5 Specific Accounts: Charities, trusts, schools & colleges, religious establishments etc SAR'000 A Total value of Specific Accounts B Total number of Specific Accounts 1: The total value of deposits covered by deposit insurance and not covered by deposit insurance should balance with items 1 - 5 below
2: All current accounts and instant access accounts (including non-term savings accounts)
3: All current accounts and instant access accounts (including non-term savings accounts)
4: Use SAMA's definition of MSMELending Total lending facilities, drawn & undrawn SAR'000 Of which: To KSA domiciled borrowers
SAR'000Total lending facilities Drawn facilities1 Undrawn facilities 1 Retail Secured SAR'000 A Total value of outstanding retail mortgage loans B Total value of other retail secured loans C Total value of secured loans to retail customers (a+b) D Total number of outstanding mortgage loans E Total number of other retail secured loans F Total number of secured loans to retail customers (d+e) 2 Retail Unsecured Personal Lending (Other Than Credit Cards) SAR'000 A Total value of outstanding unsecured retail loans B Total number of unsecured retail loans 3 Retail & MSME/Corporate Credit Cards SAR'000 A Total drawn value of credit cards outstanding B Total undrawn value of credit cards outstanding C Total notional value of credit card lending (a+b) D Total number of credit card accounts 4 MSME Lending (Gross) SAR'000 A Total drawn value of outstanding loans & facilities to MMSME's B Total undrawn value of outstanding loans & facilities to MSME's C Total notional value of outstanding loans & facilities to MSME's D Total number of outstanding loans & facilities to MSME's 5 Corporate Lending (Gross) SAR'000 A Total drawn value of bilateral loans to corporates B Total undrawn value of bilateral loans to corporates C Total value of drawn syndicated loans/facilities to corporates D Total value of undrawn syndicated loans/facilities to corporates E Total value of syndicated loans/facilities for which acting as agent F Total number of bilateral loans to corporates G Total number of syndicated loans/facilities to corporates H Total number of syndicated loans/facilities for which acting as agent 6 Financial Institutions (Gross) SAR'000 A Total drawn value of money market / loans to Financial Institutions 7 Group Funding SAR'000 a Amounts lent to head office, branches and group companies2 b Amounts borrowed from head office, branches and group companies 8 Governments & Central Banks SAR'000 A Amounts lent to Governments & Central Banks 1: NB: The amounts contained here should total to items 1 to 5 below.
2: Amounts to include any inter-office account, dotation and profit / LossTrade Finance and other off balance sheet commitments 1 Direct Credit Substitutes1 SAR'000 A Total notional value of client facilities B Total number of client accounts 2 Transaction-related contingents2 SAR'000 A Total notional value of client facilities B Total number of client accounts 3 Trade-related contingents3 SAR'000 A Total outstanding value of client loans B Total number of client accounts 1: Report here those direct credit substitutes which do not appear on the face of the balance sheet.
2: Report here those transaction-related contingents which do not appear on the face of the balance sheet.
3: Report here those trade-related contingents which do not appear on the face of the balance sheet.Capital Markets & Investments1 SAR m Derivatives 1A Foreign exchange - Notional contract amount 1B Foreign exchange - Assets (Reporting date value) 1C Foreign exchange - Liabilities (Reporting date value) 2A Interest Rate - Notional contract amount 2B Interest Rate - Assets (Reporting date value) 2C Interest Rate - Liabilities (Reporting date value) 3A Credit - Notional contract amount 3B Credit - Assets (Reporting date value) 3C Credit - Liabilities (Reporting date value) 4A Equity & Stock Index - Notional contract amount 4B Equity & Stock Index - Assets (Reporting date value) 4C Equity & Stock Index - Liabilities (Reporting date value) 5A Commodity - Notional contract amount 5B Commodity - Assets (Reporting date value) 5C Commodity - Liabilities (Reporting date value) 6A Other - Notional contract amount 6B Other - Assets (Reporting date value) 6C Other - Liabilities (Reporting date value) 7A Total - Notional contract amount 7B Total - Assets (Reporting date value) 7C Total - Liabilities (Reporting date value) 1 This provides information on derivatives. FBBs should allocate the contracts to the bands as accurately as possible but, if some of the breakdowns are not available, they should report on the basis of the predominant type of derivative. A – Notional contract amount: FBBs should provide this amount, if available, or their best estimate of it from internal sources. B – Assets: FBBs should use the value placed on these contracts in the balance sheet, before accounting netting. C – Liabilities: FBBs should use the value placed on these contracts in the balance sheet, before accounting netting. 7B/7C Total after netting
Other Assets and Liabilities SAR m 8 Debt Securities1 9 Equity Shares2 10 Reverse repurchase agreements and cash collateral on securities borrowed3 11 Other trading book assets4 12 Trading liabilities5 13 Debt securities in issue6 14 Liabilities in respect of sale and repurchase agreements, and cash collateral received for securities lent7 1: All long positions in debt securities, with the exception of bonds issued by KSA government, should be reported If there is an overall short position, it should be reported in 12 Trading liabilities.
2: This comprises long holdings of securities. If there is an overall short position, it should be reported in 12 Trading liabilities.
3: Report here any reverse repos or stock borrowing.
4: Include any assets in respect of trading settlement accounts and exchange traded margins.
5: Include here any short positions in equities or debt securities.
6: Report all certificates of deposit issued by the FBB, whether at fixed or floating rates, and still outstanding. Also report negotiable deposits taken on terms in all respects identical to those on which a certificate of deposit would have been issued, but for which it has been mutually convenient not to have issued certificates. If a FBB holds certificates of deposits which it has itself issued, these should not be reported. Also report promissory notes, bills and other negotiable paper issued (including commercial paper) by the reporting institution including bills drawn under an acceptance credit facility provided by another firm. Include unsubordinated FRNs and other unsubordinated market instruments issued by the firm.
7: This entry applies to the cash liability on sale and repurchase and stock lending agreements. Where the FBB reports assets reversed in on the balance sheet, the liability under such agreements should be reported here. Stock borrowing that is reported on balance sheet should also be included here.3rd Party Services Provided & Received 1 3rd Party Services Provided Service Description Service Provided to which group company and / or third party a Please provide details of all outsourcing services provided by the FBB to the group and / or third parties. - - 1 2 3 4 5 3rd Party Services Provided & Received1 2 3rd Party Services Received Service Description Service Provided to which group company and / or third party a Please provide details of all outsourcing services provided to the FBB by the group and / or third parties - - 1 2 3 4 5 1: This should include all outsourcing contracts that the FBB has entered into with a third-party or with an intra-group entity, including under SLAs, and covering IT systems, back office arrangements, Disaster Recovery, SWIFT housing, etc.
Attachment B
Foreign Branch 
Q-A4
LCR for the quarter ending A) Stock of high quality liquid assets (HQLA) a) Level 1 assets Paragraph no. in SAMA standards doc Amount/ market value Weight Weighted amount Coins and banknotes 50 (a) 1.00 Total central bank reserves; of which: - part of central bank reserves that can be drawn in times of stress 50 (b), 1.00 Check: row 8 ≤ row 7 - - Securities with a 0% risk weight: 50 (c) - - issued by sovereigns 50 (c) - 1.00 - guaranteed by sovereigns 50 (c) - 1.00 - issued or guaranteed by central banks 50 (c) - 1.00 - issued or guaranteed by PSEs 50 (c) - 1.00 issued or guaranteed by BIS, IMF, ECB and European Community, or 50 (c) - 1.00 - For non-0% risk-weighted sovereigns: - 1.00 - sovereign or central bank debt securities issued in domestic currencies by the sovereign or central bank in the country in which the liquidity risk is being taken or in the bank’s home country 50 (d) - 1.00 - domestic sovereign or central bank debt securities issued in foreign currencies, up to the amount of the bank’s stressed net cash outflows in that specific foreign currency stemming from the bank’s operations 50 (e) - 1.00 - Total stock of Level 1 assets 49 - Adjustment to stock of Level 1 assets Annex 1 - Adjusted amount of Level 1 assets Annex 1 - b) Level 2A assets Paragraph no. in SAMA standards doc Amount/market value Weight Weighted amount Securities with a 20% risk weight: 52 (a) 0.85 - issued by sovereigns 52 (a) - 0.85 - guaranteed by sovereigns 52 (a) - 0.85 - issued or guaranteed by central banks 52 (a) - 0.85 - issued or guaranteed by PSEs 52 (a) - 0.85 - issued or guaranteed by MDBs 52 (a) - 0.85 - Non-financial corporate bonds, rated AA- or better 52 (b) - 0.85 - Covered bonds, not self-issued, rated AA- or better 52 (b) - 0.85 - Total stock of Level 2A assets 52 (a),(b) - - Adjustment to stock of Level 2A assets Annex 1 - - Adjusted amount of Level 2A assets Annex 1 - 0.85 - d) Total stock of HQLA Weighted amount Total stock of HQLA B) Net cash outflows 1) Cash outflows a) Retail deposit run-off Paragraph no. in SAMA standards doc Amount Weight Weighted amount Total retail deposits; of which: Insured deposits; of which: in transactional accounts; of which: 75, 78 eligible for a 3% run-off rate; of which: 78 are in the reporting bank's home jurisdiction 78 0.03 are not in the reporting bank's home jurisdiction 78 0.03 eligible for a 5% run-off rate; of which: 75 are in the reporting bank's home jurisdiction 75 0.05 are not in the reporting bank's home jurisdiction 75 0.05 in non-transactional accounts with established relationships that make deposit withdrawal highly unlikely; of which: 75, 78 eligible for a 3% run-off rate; of which: 78 are in the reporting bank's home jurisdiction 0.03 are not in the reporting bank's home jurisdiction 0.03 eligible for a 5% run-off rate; of which: 75 are in the reporting bank's home jurisdiction 0.05 are not in the reporting bank's home jurisdiction 0.05 in non-transactional and non-relationship accounts 79 0.10 Uninsured deposits 79 0.10 Additional deposit categories with higher run-off rates as specified by supervisor 79 Category 1 0.00 Category 2 0.00 Category 3 0.00 Term deposits (treated as having >30 day remaining maturity); of which: 82-84 With a supervisory run-off rate 84 0.0 Without a supervisory run-off rate 82 0.0 Total retail deposits run-off b) Unsecured wholesale funding run-off Paragraph no. in SAMA standards doc Amount Weight Weighted amount Total unsecured wholesale funding 85-111 Total funding provided by small business customers; of which: 89-92 Insured deposits; of which: 89, 75-78 in transactional accounts; of which: 89, 75, 78 eligible for a 3% run-off rate; of which: 89, 78 are in the reporting bank's home jurisdiction 89, 78 - 0.03 are not in the reporting bank's home jurisdiction 89, 78 - 0.03 eligible for a 5% run-off rate; of which: 89, 75 are in the reporting bank's home jurisdiction 89, 75 - 0.05 are not in the reporting bank's home jurisdiction 89, 75 - 0.05 in non-transactional accounts with established relationships that make deposit withdrawal highly unlikely; of which: 89, 75, 78 eligible for a 3% run-off rate; of which: 89, 78 are in the reporting bank's home jurisdiction 89, 78 - 0.03 are not in the reporting bank's home jurisdiction 89, 78 - 0.03 eligible for a 5% run-off rate; of which: 89, 75 are in the reporting bank's home jurisdiction 89, 75 - 0.05 are not in the reporting bank's home jurisdiction 89, 75 - 0.05 in non-transactional and non-relationship accounts 89, 79 - 0.10 Uninsured deposits 89, 79 - 0.10 Additional deposit categories with higher run-off rates as specified by supervisor 89, 79 Category 1 - 0.00 Category 2 - 0.00 Category 3 - 0.00 Term deposits (treated as having >30 day maturity); of which: 92, 82-84 With a supervisory run-off rate 92, 84 - 0.00 Without supervisory run-off rate 92, 82 - 0.00 Total operational deposits; of which: 93-104 provided by non-financial corporates 93-104 insured, with a 3% run-off rate 104 - 0.03 insured, with a 5% run-off rate 104 - 0.05 uninsured 93-103 0.25 provided by sovereigns, central banks, PSEs and MDBs 93-104 insured, with a 3% run-off rate 104 - 0.03 insured, with a 5% run-off rate 104 - 0.05 Uninsured 93-103 - 0.25 provided by banks 93-104 insured, with a 3% run-off rate 104 - 0.03 insured, with a 5% run-off rate 104 - 0.05 Uninsured 93-103 - 0.25 provided by other financial institutions and other legal entities 93-104 insured, with a 3% run-off rate 104 - insured, with a 5% run-off rate 104 - 0.20 Uninsured 93-103 - 0.40 Total non-operational deposits; of which 105-109 provided by non-financial corporates; of which: 107-108 0.20 where entire amount is fully covered by an effective deposit insurance scheme 108 - 0.40 where entire amount is not fully covered by an effective deposit insurance scheme 107 0.25 provided by sovereigns, central banks, PSEs and MDBs; of which: 107-108 1.00 where entire amount is fully covered by an effective deposit insurance scheme 108 1.00 where entire amount is not fully covered by an effective deposit insurance scheme 107 1.00 provided by members of the institutional networks of cooperative (or otherwise named) banks 105 - 1.00 provided by other banks 109 provided by other financial institutions and other legal entities 109 Unsecured debt issuance 110 - Additional balances required to be installed in central bank reserves - Total unsecured wholesale funding run-off Of the non-operational deposits reported above, amounts that could be considered operational in nature but per the Basel III LCR standards have been excluded from receiving operational deposit treatment due to: correspondent banking activity 99, footnote Check: row 169 ≤ sum of rows 162 and 163 prime brokerage services 99, footnote Check: row 171 ≤ sum of rows 162 and 163 excess balances in operational accounts that could be withdrawn and would leave enough funds to fulfil the clearing, custody and cash 96 Check: row 173 ≤ sum of rows 155 to 163 c) Secured funding run-off Paragraph no. in SAMA standards doc ount recei Market value of extended collateral Weight Weighted amount Transactions conducted with the bank's domestic central bank; of which: 114-115 Backed by Level 1 assets; of which: 114-115 0.00 Transactions involving eligible liquid assets – see instructions for more 114-115 Check: row 179 ≤ row 178 Backed by Level 2A assets; of which: 114-115 0.00 Transactions involving eligible liquid assets – see instructions for more 114-115 Check: row 182 ≤ row 181 Backed by Level 2B RMBS assets; of which: 114-115 0.00 Transactions involving eligible liquid assets – see instructions for more 114-115 Check: row 185 ≤ row 184 Backed by Level 2B non-RMBS assets; of which: 114-115 0.00 Transactions involving eligible liquid assets – see instructions for more 114-115 Check: row 188 ≤ row 187 Backed by other assets 114-115 0.00 Transactions not conducted with the bank's domestic central bank and backed by Level 1 assets; of which: 114-115 0.00 Transactions involving eligible liquid assets – see instructions for more 114-115 Check: row 192 ≤ row 191 Transactions not conducted with the bank's domestic central bank and backed by Level 2A assets; of which: 114-115 0.15 Transactions involving eligible liquid assets – see instructions for more 114-115 Check: row 195 ≤ row 194 Transactions not conducted with the bank's domestic central bank and backed by Level 2B RMBS assets; of which: 114-115 0.25 Transactions involving eligible liquid assets – see instructions for more 114-115 Check: row 198 ≤ row 197 Transactions not conducted with the bank's domestic central bank and backed by Level 2B non-RMBS assets; of which: 114-115 Counterparties are domestic sovereigns, MDBs or domestic PSEs with a 20% risk weight; of which: 114-115 0.25 Transactions involving eligible liquid assets – see instructions for more 114-115 Check: row 202 ≤ row 201 Counterparties are not domestic sovereigns, MDBs or domestic PSEs with a 20% risk weight; of which: 114-115 0.50 Transactions involving eligible liquid assets – see instructions for more 114-115 Check: row 205 ≤ row 204 Transactions not conducted with the bank's domestic central bank and backed by other assets (non-HQLA); of which: 114-115 Counterparties are domestic sovereigns, MDBs or domestic PSEs with a 114-115 0.25 Counterparties are not domestic sovereigns, MDBs or domestic PSEs with a 114-115 1.00 Total secured wholesale funding run-off d) Additional requirements Paragraph nr in standards doc Amount Weight Weighted amount Derivatives cash outflow 116,117 1.00 Increased liquidity needs related to downgrade triggers in derviatives and other financing transactions 118 1.00 Increased liquidity needs related to the potential for valuation changes on posted collateral securing derivative and other transactions: 119 Cash and Level 1 assets 0.00 For other col lateral (Ie all non-Level 1 collateral) 0.20 Increased liquidity needs related to excess non-segregated collateral held by the bank that could contractually he called at any time by the counterparty no 120 1.00 Increased liquidity needs related to contractually required collateral on transactions for which the counterparty has not yet demanded the collateral 121 1.00 Increased liquidity needs related to contracts that allow col lateral substitution to non-HQLA assets 122 1.00 Increased liquidity needs related to market valuation changes on derivative or other trans actions 123 1.00 Loss of funding on ABS and other structured financing instruments issued by the hank, excluding cowered bonds 124 1.00 Loss of funding on ABCP, conduits, SIVs and other such financing activities; of 125 debt maturing ? 30 days 125 1.00 with embedded options in financing arrangements 125 1.00 other potential loss of such finding 125 1.00 Loss of funding on covered bonds issued by the hank 124 1.00 Undrawn committed credit and liquidity facilities to retail and small business
131(a) 0.05 Undrawn committed credit facilities to non-financial corporates 131(b) 594,516 0.10 59,452 sovereigns, central banks, PSEs and MDBS Undrawn committed liquidity facilities to 131(b) 0.10 Undrawn committed liquidity facilities to non-financial corporates 131(c) 0.30 sovereigns, central banks, PSEs and MDBS 131(c) 0.30 Undrawn committed credit and liquicity facilities provided to hanks subject to prudential supervision 131(d) 0.40 Undrawn committed credit facilities provided to other FIs 131(e) 0.40 Undrawn committed credit facilities provided to other FIs 131(f) 1.00 Undrawn committed credit and liquidity facilities to other legal entities 131(g) 1.00 Other contractual obligations to ext end funds to Paragraph no. in SAMA standards doc
Amount roll-over of inflows Excess outflows Weight Weighted amount financial institutions 132 1.00 retail clients 133 small business customers 133 non-financial corporates 133 other clients 133 retail, small business customers, non-financials and other clients 1.00 Total contractual obligations to extend funds in excess of 50% roll-over Weighted amount Total additional requirements run-off Other contingent funding obligations Paragraph no. in SAMA standards doc Amount Weight Weighted amount Non-contractual obligations related to potential liquidity draws from joint ventures or minority investments in entities 137 0.00 Unconditionally revocable "uncommitted" credit and liquidity facilities 140 0.03 Trade finance-related obligations (including guarantees and letters of credit) 138, 139 0.02 Guarantees and letters of credit unrelated to trade finance obligations 140 0.02 Non-contractual obligations: 0.01 Debt-buy back requests (incl related conduits) 140 0.00 Structured products 140 0.00 Managed funds 140 0.00 Other non-contractual obligations 140 0.00 Outstanding debt securities with remaining maturity > 30 days 140 0.00 Non contractual obligations where customer short positions are covered by other customers’ collateral 140 0.50 Bank outright short positions covered by a collateralised securities financing 147 0.00 Other contractual cash outflows (including those related to unsecured collateral borrowings and uncovered short positions) 141, 147 1.00 Total run-off on other contingent funding obligations e) Total cash outflows Total cash outlfows 2) Cash inflows a) Secured lending including reverse repo and securities borrowing Paragraph no. in SAMA standards doc Amount extende d Market value of received colllateral Weight Weighted amount Reverse repo and other secured lending or securities borrowing transactions maturing ? 30 days 145-146 Of which collateral is not re-used (ie is not rehypothecated) to cover the reporting institution's outright short positions 145-146 Transactions backed by Level 1 assets; of which: 145-146 0 0 0.00 Transactions involving eligible liquid assets – see instructions for more 145-146 Check: row 276 ≤ row 275 Transactions backed by Level 2A assets; of which: 145-146 0.15 Transactions involving eligible liquid assets – see instructions for more 145-146 Check: row 279 ≤ row 278 Transactions backed by Level 2B RMBS assets; of which: 145-146 0.25 Transactions involving eligible liquid assets – see instructions for more 145-146 Check: row 282 ≤ row 281 Transactions backed by Level 2B non-RMBS assets; of which: 145-146 0.50 Transactions involving eligible liquid assets – see instructions for more 145-146 Check: row 285 ≤ row 284 Margin lending backed by non-Level 1 or non-Level 2 collateral 145-146 0.50 Transactions backed by other collateral 145-146 1.00 Of which collateral is re-used (ie is rehypothecated) in transactions to cover the reporting insitution's outright short positions 145-146 Transactions backed by Level 1 assets 145-146 0.00 Transactions backed by Level 2A assets 145-146 0.00 Transactions backed by Level 2B RMBS assets 145-146 0.00 Transactions backed by Level 2B non-RMBS assets 145-146 0.00 Margin lending backed by non-Level 1 or non-Level 2 collateral 145-146 0.00 Transactions backed by other collateral 145-146 0.00 Total inflows on reverse repo and securities borrowing transactions b) Other inflows by counterparty Paragraph no. in SAMA standards doc Amount Weigh Weighted amount Contractual inflows due in ? 30 days from fully performing loans, not reported in lines 275 to 295, from: Retail customers 153 0.50 Small business customers 153 0.50 Non-financial corporates 154 0.50 Central banks 154 1.00 Financial institutions, of which 154 operational deposits 156 0.00 deposits at the centralised institution of an institutional network that receive 157 0.00 all payments on other loans and deposits due in ? 30 days 154 1.00 Other entities 154 0.50 - Total of other inflows by counterparty c) Other cash inflows Paragraph no. in SAMA standards doc Amount Weigh Weighted amount Other cash inflows Derivatives cash inflow 158, 159 1.00 Contractual inflows from securities maturing ? 30 days, not included anywhere 155 1.00 Other contractual cash inflows 160 0.00 Total of other cash inflows d) Total cash inflows Paragraph no. in SAMA standards doc Amount Weigh Weighted amount Total cash inflows before applying the cap 144 Cap on cash inflows 69, 144 Total cash inflows after applying the cap 69, 144 0.75 D) LCR Total stock of high quality liquid assets plus usage of alternative treatment Net cash outflows LCR Attachment C
Foreign Branc Q-A5 NSFR For the quarter ending __________ Components of ASF category ASF factor Unadjusted amount Amount of Available Additional instructions by 1 Total longer term funding or quasi capital 100% - If funding provided by parent bank is longer term (greater than 2 Other funding with effective residual maturity of one year or more 100% 3 Stable non-maturity (demand) deposits and term deposits with residual maturity of less than one year provided by retail and small business customers 95% - 4 Less stable non-maturity deposits and term deposits with residual maturity of less than one year provided by retail and small business customers 90% - 5 Funding with residual maturity of less than one year provided by non-financial corporate customers 50% - 6 Operational deposits 50% - 7 Funding with residual maturity of less than one year from sovereigns, PSEs, and multilateral and national development banks 50% - 8 Other funding with residual maturity between six months and less than one year not included in the above categories, including funding provided by central banks and financial institutions 50% - f funding provided by parent bank is shorter term (less than 1 year), then report it in this row 9 All other liabilities and funding not included in the above categories, including liabilities without a stated maturity (with a specific treatment for deferred tax liabilities and minority interests) 0% - 10 NSFR derivative liabilities net of NSFR derivative assets if NSFR derivative liabilities are greater than NSFR derivative assets 0% - 11 “Trade date” payables arising from purchases of financial instruments, foreign currencies and commodities 0% - Total Amount of Available Stable Funding - - Components of RSF category categoryRSF factor Unadjusted amount Required Stable Funding Amount 1 Coins and banknotes 0% - 2 Al l central bank reserves 0% - 3 Al l claims on central banks with residual maturities of less than six months 0% - 4 “Trade date” receivables arising from sales of financial instruments, foreign currencies and commodities. 0% - 5 Unencumbered Level 1 assets, excluding coins, banknotes and central bank reserves 5% - 6 Unencumbered loans to financial institutions with residual maturities of less than six months, where the loan is secured against Level 1 assets as defined in LCR paragraph 50, and where the bank has the ability to freely rehypothecate the received collateral for the life of the loan 10% - 7 Al l other unencumbered loans to financial institutions with residual maturities of less than six months not included in the above categories 15% - 8 Unencumbered Level 2A assets 15% - 9 Unencumbered Level 2B assets 50% - 10 HQLA encumbered for a period of six months or more and less than one year 50% - 11 Loans to financial institutions and central banks with residual maturities between six months and less than one year 50% - 12 Deposits held at other financial for operational purposes 50% - 13 Al l other assets not included in the above categories with residual maturity of less than one year, including loans to non-financial corporate clients, loans to retail and small business customers, and loans to sovereigns and PSEs 50% - 15 Other unencumbered loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more and with a risk weight of less than or equal to 35% under the standardized approach 65% - 16 Cash, securities or other assets posted as initial margin for derivative contracts and cash or other assets provided to contribute to the default fund of a CCP 85% - 17 Other unencumbered performing loans with risk weights greater than 35% under the standardized approach and residual maturities of one year or more, excluding loans to financial institutions 85% - 18 Unencumbered securities that are not in default and do not qualify as HQLA with a remaining maturity of one year or more and exchange-traded equities 85% - 19 Physical traded commodities, including gold 85% - 20 Al l assets that are encumbered for a period of one year or more 100% - 21 NSFR derivative assets net of NSFR derivative liabilities if NSFR derivative assets are greater than NSFR derivative liabilities. 100% - 22 20% of derivative liabilities as calculated according to paragraph 19 100% - 23 All other assets not included in the above categories, including non-performing loans, loans to financial institutions with a residual maturity of one year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, retained interest, insurance assets, subsidiary interests and defaulted securities 100% - Total Amount of Required Stable Funding - - RSF category RSF factor Unadjusted amount Amount of Required Stable Funding Irrevocable and conditionally revocable credit and liquidity facilities to any client - 5% of the currently undrawn portion 5% - Other contingent funding obligations, including products and instruments such as: - • Unconditionally revocable credit and liquidity facilities 3% - • Trade finance-related obligations
(including guarantees and letters of credit)2% - • Guarantees and letters of credit unrelated to trade finance obligations - • Non-contractual obligations such as: 0% - - potential requests for debt repurchases of the bank’s own debt or that of related conduits, securities investment vehicles and other such financing facilities 0% - - structured products where customers anticipate ready marketability, such as adjustable rate notes and variable rate demand notes (VRDNs) 0% - - managed funds that are marketed with the objective of maintaining a stable value 0% - Total Amount of Required Stable Funding - NSFR Attachment D
BASEL III Risk Weighted Assets (RWA) and Funding M ___________ For the Quarter Ending _______________ 
(All Amounts in SR 000's) A. PILLAR 1 RWA RWA I. Credit RWA - Credit risk Standardized approach or Advanced approach Sovereign and Central Banks SAMA and Saudi Government Others Multilateral Development Banks Public Sector Entities Banks and Securities Firms Corporates Retail – Non Mortgages SBFEs Other Retail Non- Mortgages Mortgages Residential Commercial Securitized assets Equity Others Past Dues II. Market RWA Standardized Approach - Traded debt instruments Equity Foreign Exchange Commodities Internal Models Traded debt instruments Equity Foreign Exchange Commodities Trading book settlement RWA III. Operational (OPR) RWA - OPR Basic Indicator Approach OPR Standardized Approach OPR Alternative Standardized Approach B. Pillar 2 RWA - Residual Credit risk Residual Market risk Residual Operational risk Securitization risk Liquidity risk Interest rate risk in Banking Book Concentration risk Macroeconomic and business cycle risk Strategic risk Reputational risk Global risk Other risks Total Pillar 1 RWA - Total Pillar 1 and Pillar 2 RWA - Securities issued or guaranteed by the Government of Saudi Arabia Funding adequacy ratio (Pillar 1 and Pillar 2) #DIV/0! Financial Reporting, Disclosures, and External Audit
Business Activities and Financial Conduct
Banknotes, Currency, and Cash Movement
Cash Center Operations
Policy for Handling Saudi Banknotes Marked with Security Inks and Compensation
No: 120172/329 Date(g): 12/7/2023 | Date(h): 24/12/1444 Status: In-Force Translated Document
First: Introduction
General framework:
The “Policy for Dealing with and Compensating for Security Marked Banknotes” sets out the rules and controls necessary to organize the mechanism for dealing with and compensating for banknotes marked with security protection inks. The general framework of this policy is summarized in the following main points:
- General controls and specifications for security inks, cash transportation bags and ATM boxes.
- Controls for approving the specifications of cash transportation bags and ATM boxes for service providers.
- Controls for reporting and raising awareness on how to deal with banknotes marked with security inks.
- Controls for receiving seized banknotes.
- Controls for dealing with unseized banknotes.
- Controls for examining and replacing the security-marked banknote.
- Operational cost controls.
- Document retention controls.
Objective:
This policy aims to define the controls and guidelines necessary to organize and control the procedures for handling and replacing Saudi currency banknotes marked with security inks, as well as the general controls and specifications for security inks, cash transport bags and ATM boxes.
Scope:
This policy applies to the Currency Department and all related administrative units, and to dealing with cases of requesting the approval of the specifications of cash transportation bags and ATM boxes, as well as Saudi currency banknotes marked with security inks received by the Central Bank, regardless of whether they are seized or unseized.
Updating and inquiries:
The Currency Department is responsible for updating this policy periodically in coordination with the Center of Excellence, or when there are changes that may impact the policy, as well as responding to any inquiries about it. This policy supersedes any policy or circular related to the content of the policy that was issued prior to the adoption of this policy.
Second: Definitions
Term
Definition
Central Bank Saudi Central Bank. Management Currency management. Marking banknotes Covering some features of Saudi Arabian currency banknotes by self-destructing security ink through self-destruct devices in cash transportation bags or ATM boxes, and the banknotes are considered damaged and unfit for circulation. Seized banknotes Uncirculated banknotes seized subsequent to being marked and identified. Unseized banknotes Banknotes that were circulated among the public after being marked and subsequently seized, but their owner is not identified. Money Carrier Bag A sophisticated bag designed for the secure transportation of money, which facilitates automatic tracking and incorporates a self-destruction mechanism for marking banknotes. Automated teller machine (ATM) boxes Smart boxes are used for the replenishment currency into ATMs and allow for self-destruction by marking the banknotes. The Service Provider the company that imports the cash transportation bags or ATM boxes. The User the organization utilizing the cash bag or ATM box. The Laboratory The laboratory authorized by the authority to test samples of banknotes marked with security inks. The Committee Damaged banknotes compensation committee. DNA Fingerprinting The chemical component in the ink used to mark banknotes and are machine-readable. Third: Policy Content
General Controls and Specifications for Security Inks, Money Bags and ATM Boxes
3.1
Security inks should include the following specifications:
1.1 Have a certificate from an internationally accredited laboratory. 1.2 Must be certified by the Saudi Standards, Metrology, and Quality Organization (SASO). 1.3 It must contain DNA (Taggant). 1.4 Have an integrated Infra-Red (IR) marker. 1.5 Have a dark green color. 1.6 Not being toxic or dangerous to humans. 1.7 Highly stable and impossible to remove with any substance such as: Water, fuel, bleach or cleaning agents. 1.8 Cash Deposit Machines (CDMs), Cash Recyclers (TCRs), self-service machines, and counting and sorting machines should be able to detect and reject counterfeit currency. Cash carriers and ATM boxes must meet the following specifications:
2.1 The materials used in security inkjet technology should not include any materials employed in the production of explosives (according to the requirements of the Ministry of Interior, represented by the Higher Authority for Industrial Security). 2,2 Incorporate a tracking features utilizing satellite or mobile network technology (GPS/GPR Tracking). 2.3 The ability to cover all banknotes with security inks in cash transportation bags and ATM boxes without exception, with a minimum of 20% per banknote once the security inks are activated and dispensed.
Regulations for the approval of specifications for service providers' cash bags and ATM boxes
3.2
- When a service provider applies to the General Directorate of Branches and Cash Centers for a letter of approval regarding the specifications of cash transport cases and ATM boxes, the Directorate must verify the following before granting the approval letter:
1,1 Cash transportation bags and ATM boxes shall use inks in accordance with the specifications for security inks referred to in paragraph (1) of clause (1.3), and cash transportation bags and ATM boxes shall contain the specifications referred to in paragraph (2) of clause (1.3). 1.2 Inform the service provider to bear the operational costs of examining the samples of marked banknotes during the examination. Reporting and Awareness Controls on How to Handle Banknotes Marked with Security Inks
3,3
- The department, in coordination with the Bank Policy Department, must inform the user in a one-time official letter of the following:
1,1 Handing over the seized banknotes to the Central Bank to complete the compensation procedures in accordance with the regulations and procedures approved by the Central Bank. 1.2 Retaining the unseized banknotes, fill out the “Report of a report or seizure of banknotes marked with security inks” form (Annex 3) and send the form with the marked banknotes to the police, and send a copy of the form to the administration. 1.3 Prohibit the circulation of marked banknotes. - The administration must coordinate with the Communication Department to educate the community - in accordance with the approved policies, procedures, and instructions - not to accept marked banknotes, and the need to report any information related to them to the police.
- The administration must take the necessary measures to raise user awareness; to train its employees to identify banknotes marked with security inks and the mechanism for detecting and reporting them.
Controls for Receiving Seized Banknotes
3.4
- Central Bank branches must collect the seized banknotes from the user and hand them over to the administration, and treat them as a cash consignment according to the “Internal and External Cash shipment Policy”.
- The administration must collect the seized banknotes from the user or Central Bank branches and refer them to the committee.
- After submitting an official letter from the user to request compensation for the seized banknotes, the user is required to fill out the “Request for Compensation for Security Marked Banknotes" Form (Annex 1) and the “Declaration of Banknotes for Compensation” form (Annex 2), and the person responsible for receiving the seized banknotes (the cashier) must adhere with the following:
3.1 He shall not receive any controlled banknotes except those of specified number and value. 3.2 Identify the user's name and contact information. 3,3 Receive a copy of the approval letter issued by the Central Bank to the service provider on the conformity of the cash transportation bag or ATM box with the required specifications mentioned in clause (1.3). 3.4 Note the information of manufacturer of the self-destruct device used to mark the seized banknotes and the circumstances under which it was activated. 3.5 Record the serial number of the cash-carrying bag or ATM boxes. 3.6 Request all supporting videos/photos, if any, to be submitted, and a copy of the relevant police report in the event of an attempted takeover. - The seized banknotes shall be presented to the committee to take the necessary measures in accordance with its jurisdiction.
Controls for Dealing with Unseized Banknotes
3.5 - If unseized banknotes are presented to the central bank by:
1,1 The User:
The user is instructed to fill out the form “Banknotes marked with security inks” (Annex 3) and submit the form along with the banknotes to the police, and a copy of the form is sent to the administration.
1.2 Security agencies:
The value of the banknotes should not be reimbursed.
1.3 Individuals:
The value of these banknotes should not be compensated, and they are referred by the administration to the security authorities to ensure that they are not related to a seizure case.
- If unseized banknotes are presented to the central bank by:
Controls for Examining and Replacing Banknotes Marked with Security Inks
3.6
- When the administration receives samples of marked banknotes from the committee for the purpose of examining them, the administration must send the samples to the laboratory to obtain the concentrations of security inks and a detailed report on the results of the examination, and return the samples after completion, and the administration must submit the technical report to the committee.
- The user shall be compensated for banknotes marked with security inks based on the committee's recommendation and the authorization holder's approval of the compensation. Without prejudice to the provisions of this policy, the seized banknotes to be compensated shall be considered as damaged banknotes and compensation shall be subject to the controls contained in the “Damaged Banknotes Compensation Policy".
Operational Cost Controls
3.7
- The Administration shall inform the Service Provider or the User, as the case may be, to bear the cost of examining the samples of the marked banknotes.
- The Administration shall inform the User of the operational costs of replacing the seized banknotes according to the following:
2.1 The value specified in the approval of the authorizing authority for each marked banknote in cases of proven negligence in handling cash transport bags and ATM boxes. 2,2 The cost of transporting the seized banknotes to be compensated in case the user wants the Central Bank to transport them from one of its branches to the main center. Document Retention Controls
8,3
- The original “Request for Compensation for Banknotes Marked with Security Inks” form (Annex 1), “Declaration of Banknotes for which Compensation is requested” form (Annex 2), copies of the rest of the documents, the committee's recommendation for compensation, and the approval of the authority holder thereof shall be retained by the administration for one year in paper form, and then destroyed after being archived in a content management system.
Fourth: References
Reference
Reference Details
Banking Control Law Issued by Royal Decree No. (M/5) dated 22/02/1386 H Mechanism for Compensating Damaged Cash Marked with Security Inks No. (41025174) dated 12/04/1441 H Minister of Finances approval on considering the banknotes marked with private security inks as non-compensable Approval No. (5002) issued on 13/06/1439 H Governor's approval on the circular and compensation No. (43459/80) dated 17/03/1441 H. Damaged Banknote Replacement Policy Version No. 2.0 dated 06/08/1439 H. Criteria and Requirements for Operating a Money Transportation Service No. (53506/198) dated 13/04/1440 H. Fifth: Adjusting the Document
Relevant Department
Related Departments
Advisory Departments
Director of the Department
Currency management
- General Administration of Branches and Cash Centers.
- General Administration of Bank Supervision.
- Communication Department.
- General Department of Legal Affairs.
- Risk and Compliance Department.
- Internal Audit Department.
Dr. Naif bin Abdullah Al-Sharaan
17/03/2023 G
Recommendation of the General Department of Legal Affairs
Signature
Date
Mohammed bin Othman Al-Abduljabbar
18/01/1445 H
Recommendation of the Deputy Governor for Finance and Administrative Affairs
Signature
Date
Abdul Elah bin Abdulaziz Al-Duhaim
11/02/1445 H
Approval of the Governor
Signature
Date
Ayman bin Mohammed al-Siyari
12/02/45 H
List of Releases
Previous Release Date
New Release Date
Original Release Number
New Release Number
Policy for handling and replacing security-marked Saudi Arabian currency banknotes -
12/02/1445 H
-
1,0
Scope of Distribution
Archiving
√ Currency Management
√ General Administration of Branches and Cash Centers.
√ General Directorate of Banking Supervision.
√ Communication Management
√ Central Bank Branches.
√ The original document: To be kept at the Support Services Division.
√ The original document: To be kept at the Center of Excellence.
- General Administration of Branches and Cash Centers.
Annexures
Annexure (1): Form for Requesting Compensation for Banknotes Marked with Security Inks
نموذج طلب تعويض عن الأوراق النقدية الموسومة بالأحبار الأمنية
اسم المستخدم/_________________________________ممثل المستخدم________________________________
رقم الهوية__________________________________________رقم الهاتف___________________________________
رقم الجوال _______________________البريد الإلكتروني_________________ص:ب_________________
الرمز البريدي_______________________ المدينة_______________________
رقم الوكالة وتاريخها ومصدرها_______________________________________________________
ملاحظات: يجب أن تكون الأوراق النقدية الموسومة جافة ومرتبة حسب الفنة، وأن تحتوي كل رزمة على مئة ورقة من الفئة نفسها. مصنع جهاز الإتلاف الذاتي___________________________________________
رقم الحقيبة التسلسلي________________________________
الفئة_______________________________________
عدد الأوراق النقدية______________________________________________________
قيمة المبلغ كتابة____________________________________________________________________________________
أسباب تلف الأوراق النقدية المطلوب التعويض عنها:
• محاولة سرقة • سوء استخدام حقيبة نقل النقود/صندوق أجهزة الصرف الآلي
• أسباب تقنية • أخرى/.....................................
المرفقات المطلوبة:
• تقرير/مشهد من الدفاع المدني- إن وجدت
• تقرير من مزود الخدمة في حال أن التلف ناتج من خلل فني في حقيبة
نقل النقود/صندوق أجهزة الصرف الآل • تقرير/مشهد من الشرطة-إن وجدت
• كل ما يدعم من مقاطع فيديو/صور-إن وجدت • إقرار عن أوراق نقدية مطلوب التعويض عنها
• استلام صورة خطاب الموافقة الصادرة من البنك المركزي لمزود • وكالة
الخدمة على مطابقة حقيبة نقل النقود أو صندوق أجهزة الصرف
الآلي للمواصفات المطلوبة
أرغب في أن يكون تحويل قيمة التعويض المعتمد من صاحب الصلاحية:
للحساب البنكي (رقم آيبان)__________________________________________________________________
لدى مصرف/بنك_________________________________________________________________________
وسيلة أخرى______________________________________________________________________________
أتعهد بتحمل فيمة فحص عيّنات الأوراق النقدية الموسومة بالأحبار الأمنية في المختبر، وقيمة التكاليف التشغيلية لتعويض الأوراق النقدية الموسومة بالأحبار الأمنية. وفق الضوابط التي يضعها البنك المركزي في هذا الشأن.
اسم المستخدم/ الوكيل__________________________________ توقيعه__________________________________
اسم وتوقيع أمين الصرف اسم وتوقيع رئيس العمليات النقدية
________________________________ _____________________________
رقم العملية في النظام الآلي:______________________________________________________________________ الإجراء بالفرع / خزينة المركز بعد اعتماد صاحب الصلاحية لقيمة مبلغ التعويض تم السداد للمستفيد
• التحويل للحساب • أخرى
رقم العملية (الحوالة) الآلية
_________________________________________
اسم أمين الصندوق وتوقيعه ______________________________________________________________
الإجراء في خزينة المركز الرئيسي بعد مرور سنة مالية على اعتماد قيمة المبلغ المعوض لعدم التمكن من التواصل مع المستفيد _______________________________
رقم العملية من النظام الألي ______________________________________________________________________
مستلم النموذج من شعبة العمليات المصرفية ____________________________________________________________
الاسم _______________________________________ التوقيع___________________________________________________
Annexure (2): Declaration of Banknotes to be Compensated
إقرار عن أوراق نقدية مطلوب التعويض عنها
معلومات مندوب المستخدم
الاسم:............................................... رقم الهوية:.....................................
رقم الجوال:........................................ جهة العمل:.....................................................
موقع المراجعة:...................................
تاريخ المراجعة: يوم الموافق / /١٤هـ أتعهد أنا............................................................................................................................. أن بيانات المبلغ النقدي المطلوب التعويض عنه صحيحة حسب الموضح أدناه: مصدر النقد: ..................................................................................................................... ملكية النقد: ................................................................................................... المبلغ التقريبي: ............................................................................................................ الفئات النقدية:............................................................................................................... سبب تلف النقد: ........................................................................................ كما أتعهد بمعرفتي أن تعمد إتلاف العملة السعودية يتم المعاقبة عليها وإذا كانت تحتوي على نقد مزيف فسيتم تطبيق الأنظمة والتعليمات ذات الصلة، وأتعهد بدفع أي تكاليف تشغيلية تفرض وفق تعليمات البنك المركزي. الاسم: ..........................................................................التوقيع,............................................... : خاص بموظفي الخزينة
اسم المسئول: ...............................................................................................................
وظيفة المسئول:.............................................................................................................
التوقيع:................................................................................
Annexure (3): Reporting and Seizure of Banknotes Marked with Security Inks
محضر إبلاغ أوضبط أوراق نقدية موسومة بالأحبار الأمنية
رقم الصادر
/ / 20م
لموافق
/ / 143هـ
التاريخ
ضبط
بلاغ
الحصول على الأوراق النقدية الموسومة عن طريق
أخرى
شخص
مركز الشرطة
الشرطة
محل تجاري
مصرف
بنك
مكان الحصول على الأوراق النقدية الموسومة
الجنسية
البلد
مكان الولادة
العائلة
اسم الجد
اسم الأب
الاسم الأول
مقدم الأوراق النقدية الموسومة
مصدرها
تاريخها
رقمها
نوعها
الهوية
المهنة
التعليم
الحالة الإجتماعية
أنثى
ذكر
الجنس
هاتف
العمل
العنوان
هاتف
السكن
هاتف
الاسم
الكفيل
هاتف
العنوان
وصف الأوراق النقدية الموسومة بالأحبار الامنية
الرقم التسلسلي
العدد
الفئة
نوع العملة (الإصدار)
المبلغ
مستقبل البلاغ
التوقيع
الاسم
الرتبة
الوظيفة
الاسم
البصمة
التوقيع
صورة / لملف القضية.
صورة / للأمن العام / الامن الجنائي / إدارة التحريات والبحث الجنائي - فاكس (0114054216).
صورة / للبنك المركزي السعودي إدارة العملة - Currency@Sama.gov.sa
Providing Small Denominations and Coins
Referring to the instructions of SAMA communicated under Circular No. 341000111354 dated 15/09/1434 H regarding the acceptance and exchange of banknotes and coins by banks operating in the Kingdom to meet public demand.
Accordingly, SAMA emphasizes the need of having sufficient quantities of small denomination banknotes and coins to meet the public's requests for obtaining or exchanging them. This should be made available to everyone at all branches.
For your information and action accordingly, please note that SAMA will conduct field visits to cash centers and bank branches to ensure the availability of various small denominations and coins for individual and corporate customers.
Replacing Damaged Saudi Banknotes
Further to the instructions of SAMA communicated under Circular No. 34734, dated 10/7/1432 H regarding exchanging damaged banknotes from beneficiaries (torn, burned, eroded, incomplete edges or parts, or any of the main features missing due to dirt, adhesive materials, or inappropriate inscriptions, ...).
And based on SAMA's commitment to providing intact banknotes and suitable for circulation, SAMA affirms the acceptance and exchange of various currency denominations after verifying their authenticity with the adoption of the specific mechanism for accepting and compensating damaged currency presented by the public.
1 The replaced banknote must be clearly visible and its area shall not be less than 60% of the size of the original banknote. 2 The two signatures (Minister of Finance and Governor of SAMA) or the two serial numbers must not be missing. 3 If the banknote is not clearly visible due to exposure to fire or other natural factors such as corrosion, the holder must present it to one of the branches of SAMA For your information and action accordingly, and to emphasize to all bank branches, cash centers to circulate intact banknotes and withdraw damaged and invalid cash from circulation, and to coordinate with SAMA's branches to supply it.
Commitment to Employing Citizens in Cash Centers
Further to SAMA Circular No. 341000068320 dated 03/06/1434 H concerning the Compliance with Employing Citizens and the Requirements for Contracting with Recruitment Service Companies, and as stated in clause one, Paragraph (2), which specifies that all positions in branches, remittance centers, and cash centers should be exclusively occupied by Saudis, with the aim of completing the Saudization process by 31/12/2013, it has come to our attention that there are still non-Saudi employees working in cash centers, whether as bank staff or employees of contracted companies, which is a violation to the regulations and exposes banks and companies to severe penalties.
Therefore, we hope you will provide us with proof of compliance with the aforementioned instructions and submit a detailed list of employees working in the bank's cash units and centers, as well as those in exchange companies or centers affiliated with contracted companies, including the following information:
Name Nationality National ID/Residence Number Job Title Name of the Cash Center
Please send the completed form to the Cash Centers and Operations Supervision Department at SAMA within a maximum one week from its date.Techniques to Identify Banknotes
No: 281000041965 Date(g): 4/11/2007 | Date(h): 24/10/1428 Status: In-Force Translated Document
Based on the requirements of Article 4 and Article 5 of The Money Counterfeiting Law 1379H issued by Royal Decree No. (12) dated 21/7/1379H, regarding the establishment of regulations for issuing licenses for currency reproduction in a manner that ensures measures for preventing counterfeiting and protecting it from similar-looking papers and coinages. To ensure the circulation of only genuine currency in the Kingdom of Saudi Arabia, you will find attached the updated regulations for currency reproduction in the Kingdom of Saudi Arabia. We hope that you will act according to them and revoke any previous directives issued in this regard. Applications for obtaining reproduction licenses can be submitted through the central bank's website.
First: General Instructions
- It is prohibited for any natural or legal person to clone, photograph, or use images or designs of any Saudi or foreign currency circulated within the Kingdom for commercial, media, or cultural purposes without obtaining prior authorization from the Saudi Central Bank.
- It is strictly prohibited to use images, replicas, or designs of Saudi and foreign currencies circulated within the Kingdom in the form of paintings, crafts, models, product packaging, or in the shape of money and others.
- Anyone who violates the instructions shall be punished in accordance with the provisions of Money Counterfeiting Law issued by Royal Decree No. (12) dated 02/07/1379 H and according to the Anti-Counterfeiting Law issued by Royal Decree No. 114 dated 26/11/1380 H.
The Anti-Counterfeiting Law issued by Royal Decree No. (114) dated 26/11/1380 H. was replaced by The Penal Code for Forgery Offences, issued by Royal Decree No. (M/11), dated 18/02/1435 H.
Second: Controls for Replicating Foreign Currency Legally Circulated within the Kingdom of Saudi Arabia
- To reproduce images of foreign currency that is legally circulated within the Kingdom of Saudi Arabia for use in printed or electronic (digital) media, an application must be submitted to the Central Bank to obtain a currency reproduction license.
- To obtain the license, the instructions and regulations issued by the authorities responsible for the issuance of the foreign currency to be reproduced must be followed.
Third: Controls for Replicating Saudi Currency Legally Circulated within the Kingdom of Saudi Arabia
- To reproduce images of Saudi currency in circulation within the Kingdom of Saudi Arabia in printed or electronic (digital) media, an application must be submitted to the Central Bank to obtain a currency reproduction license.
- To obtain a license to reproduce Saudi currency in circulation inside the Kingdom of Saudi Arabia for use in printed media, the following instructions and controls must be observed:
O Attach the material intended for publication or printing with the request for a currency reproduction license, specifying the technical specifications in terms of shape, color, and size, along with the purpose of publishing the images of the Saudi currency (commercial / media / cultural).
O Do not distort the image of the king in any way (whether by enlarging, shrinking, or changing its coordinates).
O The lack of risk of deceiving the public into thinking it is a genuine currency.
O Images can be of one side of the coin, provided that:
▪ The size of the image should not exceed 75% of the length and width of the original paper, or
▪ The size of the image should not be less than 150% of the length and width of the original document.
O The images can be of both sides of the coin provided that:
▪ The size of the image should not exceed 50% of the length and width of the original paper, or
▪ The size of the image must not be less than 200% of the length and width of the original paper.
▪ Do not display the front side of the banknote against the back side of the same banknote.
O All materials used in the process of producing images from films (negative and positive) and plates must be destroyed immediately after use.
- To obtain a reproduction license Saudi currency Circulated systematically within the Kingdom of Saudi Arabia for use in electronic (digital) means, the following instructions and regulations must be observed:
O Clarify the purpose of using images of the Saudi currency (commercial/media/cultural).
O The image of the king should not be distorted in any way (whether by enlarging, reducing, or altering its coordinates).
O The non-use of images of the Saudi currency in an inappropriate context.
O The resolution should be 72 pixels per inch or less.
O The word "SAMPLE" should be printed diagonally and clearly on the image of the banknote in a different color.
O All materials used in the process of issuing images from digital storage media, such as files and others, must be destroyed or removed immediately after their use is complete.
Instructions to Be Followed When Opening, Relocating or Closing Bank Branches, Instant Remittance Centers and ATMs, Whether Operational or Non-Operational
SAMA has recently observed an increase in violations committed by several banks, where certain measures were taken before obtaining prior approval from SAMA. The most significant of these violations include the following:
- Setting up headquarters for main administrations or operational branches, and then writing to SAMA to obtain approval for the move from the original licensed location to the newly prepared site.
2. Opening offices in different locations for specific purposes and for a limited period, or at exhibitions or festivals.
3. Closing operational branches, converting them into offices, or downsizing banking operations within them.
4. Setting up, installing, or operating ATMs without a license.
5. Relocating or deactivating operational or non-operational ATMs without obtaining approval from SAMA.
6. Engaging in speculative activities and bidding on certain locations that have already been licensed to a bank, thereby depriving the location of banking services.
7. Merging ATM licenses with licenses for active or inactive branches.
8. Failure to follow through with the process of opening branches and machines within the nine-month licensing period, and not providing an explanation when requested for renewal about the reasons that prevented the bank from opening the branch or installing the ATM.
And since the banks' adherence to these procedures constitutes a clear violation to The Banking Control Law in accordance with the current applicable regulations in this regard, we hope that you will inform your relevant specialists about the necessity to follow and adhere to the following instructions:
a) No bank may open new branches, other offices, or ATMs in any region of the Kingdom without first obtaining an official prior license from SAMA.
b) When the bank obtains a license from SAMA to open a branch or install an ATM, it is not permissible to relocating it from one location to another without obtaining written approval from SAMA. This applies whether the branch is operational or non-operational, or whether the ATM machine is operational or non-operational.
c) When the bank obtains approval from SAMA to open a branch at any location, installing an ATM at the branch is covered under the branch's license. There is no need to obtain a separate license for the ATM, however SAMA must be informed about it.
d) The license for an independent ATM (outside branch premises) cannot be merged with any branch, regardless of whether it is operational or non-operational.
e) The duration of the license is nine months from the date of approval issuance, and the bank must follow up to complete the opening within this period. If the opening cannot be completed within this time frame, the bank must inform SAMA of the reasons that led to this before expiry of the license period.
f) The licenses for non-operating branches are extended every six months to provide the bank with the opportunity to prepare the site.
g) The bank must provide SAMA at the end of every six months with a report that includes its position regarding the opening of branches or the installation of ATMs.
c) Every bank must attach the following information when requesting approval to open a branch or install an ATM:
- Feasibility study for opening a branch or installing an ATM.
- A sketch drawing showing the exact location of the desired branch or the ATM.
t) SAMA must be notified of the actual opening date of the branch and the commencement of its operations or the date the ATM becomes operational.
Automated Teller Machines
Procedures And Controls to Be Observed in Maintaining ATM Machines
We wish to inform you that SAMA receives from time to time reports from Saudi police about the bank's maintenance of ATM machines. In view of the fact that maintenance workers are sometimes caught without having a permit which indicates their identity and the nature of the work they are doing; and since there are instructions and controls adopted by General Security and communicated to SAMA regarding the maintenance of ATM machines; and in our desire to see the ATM machines well maintained and smoothly operating all the time and the maintenance workers are not subject to questioning and arrest by the police, the banks must abide by the following instructions:
- The police operation room must be advised of the location of the ATM machine to be maintained, the day and hour of the maintenance job so that the police patrol in the area will provide needed protection.
- Maintenance workers must carry permits showing their name and photo stamped by the official stamp of their employer to be presented lo security when requested.
- An office must be assigned and operating around the clock with a Saudi employee in charge and its phone number be communicated to the operation room in case of suspicion.
- The maintenance hours must be fixed between 8:00 A.M and 11:00 PM.
- Maintenance companies and establishments must be required to have a special logo attached to their vehicles and worker uniforms so that the maintenance team is clearly identified by the security patrols.
We further wish to remind you of SAMA's circular No.485/BC/36 dated 7/1/1416, with a copy of the Security guide attached thereto, which includes, in several parts, thereof, the procedures and controls which cover all aspects of ATM safety and security as follows:
- The part related to physical security requirements (P 10 and 11)
- The part related to security and safety requirements (P 16, 17, 18, 25 & 26)
- The part related to internal procedures for the transport of cash (P 10 & 11)
- The part related lo establishments security guide (P14)
The above-mentioned parts included the location of ATM machines and the specifications of protection, feeding and alarm that have to be complied with.
Please be informed, advice same to your departments that are involved in feeding and maintaining the ATM machines and acknowledge receipt.
Cash Feeding Requirements for ATMs
Further to SAMA's instructions issued under Circular No. 361000064350 dated 03/05/1436 H regarding to the procedures for reversal of cash transactions in Automated Teller Machines (ATMs), as well as Circular No. 351000009927 dated 22/01/1435 H concerning the reconciliation and replenishment timelines for banks' ATMs, and Circular No. 27027/Akh dated 19/12/1424 H regarding the distribution of cash denominations in ATMs.
We hereby inform you that, in accordance to the Saudi Arabian Monetary Authority Law issued by Royal Decree No. (23) dated 23/05/1377 H, and the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386 H, the following has been decided:
- ATM shall be replenished and extension of the period of reconciliation every ten business days, considering cash flow projections, the characteristics of the location, and associated operational risks.
- The Dispense Logic is determined at the bank's discretion, taking into account the characteristics of the location and the needs of the customers. All ATMs situated within bank branches and transfer centers shall be replenished with a minimum of three cash denominations: five hundred, one hundred, and fifty. This arrangement ensures that customers have the option to withdraw cash in any combination of these three denominations. Outdoor ATMs situated in various locations such as roadways and shopping malls are designed to accept a minimum of two different denominations of currency, ensuring that both denominations can be dispensed to the customer during cash withdrawal transactions. The General Administration of Branches and Cash Centers will conduct a reassessment of the distribution of cash denominations six months following its implementation.
- The responsibility for determining the cash replenishment method of ATM lies with the banks. They have the discretion to decide whether to replace all denomination cassettes simultaneously when the machine requires cash or to replace only the denomination box that has been depleted. The box or cassettes shall be prepared at the cash center and maintained under dual surveillance and monitoring via cameras, subsequent to the bank determination of the requisite accounting mechanisms and procedures.
- Banks must automate ATM replenishment procedures by having an automated system to replenish the ATMs. In the absence of such systems, it is advisable to utilize test cards, which enable the replenishment team to conduct a test withdrawal following each replenishment. This procedure is essential to verify that the appropriate cash denominations have been correctly placed within the ATM. Supervisor cards must be utilized to enable the replenishment team at the cash centers to reconcile ATMs in real time, thereby eliminating the need to wait for reconciliation by the bank's support departments.
- Banks shall rectify discrepancies associated with the reversal of denomination cassettes that arise from the replenishment of ATMs. Additionally, they must manage instances where a customer inadvertently receives funds due to either a technical malfunction or human error. The banks bear the responsibility to substantiate the error in the event the customer disputes their actions.
For your information and action accordingly as of its date. SAMA will undertake field visits to verify compliance with these instructions, and in case of any inquiries in this regard, the Advisor to the Deputy Governor for Financial Sector Development can be contacted.
- ATM shall be replenished and extension of the period of reconciliation every ten business days, considering cash flow projections, the characteristics of the location, and associated operational risks.
Requirements for ATM Cash Feeding with Sixth Issuance Currency and Inclusion of 200 Riyal Denomination
Referring to Circular No. 27027/Akh dated 19/12/1424 H regarding the distribution of cash denominations in ATMs local banks, and Circular No. 30902/227 dated 26/08/1440H regarding cash feeding requirements for ATMs, and based on SAMA’s commitment to enhancing the efficiency and quality of circulating cash, and to meet the needs of ATM users with different cash denominations, SAMA emphasizes to all operating banks the importance of ensuring the proper replenishment and safety of cash in the bank’s ATMs and to adhere to the following:
First: Effective January 1, 2022G, ATMs shall be exclusively replenished by sixth-issue denominations.
Second: The SAR 200 denomination from the sixth issue will be added into all internal ATMs situated within branches and transfer centers. The determination to add this denomination into external ATMs will be made at the bank's discretion, considering the unique attributes of the location and the needs of customers, prior to February 2, 2022G.
The Central Bank emphasizes the importance of adhering to the above, and providing the Cash Supervision Department with the bank's plan to insert the (200) riyal denomination in ATMs via e-mail, within two weeks from its date.
Declined Bank Card Transactions at ATMs
We would like to emphasize the role played by the Saudi banking network in providing advanced banking services to citizens and residents facilitating their access to cash easily and conveniently, which enhanced customers' trust and reliance on the banking sector. The Central Bank appreciates the efforts of Saudi banks in providing these services, whether by issuing cards or installing ATMs and POS terminals. The Central Bank is currently studying the Saudi network fees in order to establish a mutually agreeable resolution for all stakeholders involved.
Although the Central Bank had previously issued Circular No. BCT/4593 dated 05/08/1420 H, a copy of which is attached, which stipulates the prohibition of imposing restrictions on the issuance or utilization of Saudi Payments Network cards, it was noticed that certain banks have imposed restrictions on the use of the network, which impacted the network's credibility and led to numerous complaints from customers.
Therefore, we inform you that the bank shall eliminate any restrictions on network usage and remove any current restrictions, noting that as of 05/12/1420 H, the Central Bank will implement a fee of 6.4 riyals for each transaction that is declined beyond the standard rate established by the Central Bank, should the bank fail to comply with the directive to remove the existing restrictions.
Annual Plans to Install ATMs
Referring to the future plans of banks to provide ATM services for customers in all regions of the Kingdom, and the importance of early planning and coordination among the relevant parties in this regard, SAMA will provide the necessary support for banks to implement these plans.
We hope to provide SAMA by the annual plans for installing ATMs in September of each calendar year, along with the plans to benefit from the temporarily suspended site licenses, according to the current requirements among the categories, for review and approval by SAMA.
For inquiries, you can contact specialists in the Currency Supervision Department via email.
Requirements for ATM Receipts Initiative
No: 43067037 Date(g): 6/3/2022 | Date(h): 3/8/1443 Status: In-Force Based on the powers granted to the Saudi Central Bank under its Law issued by Royal Decree No. (M/36) dated 11/4/1442 AH, and the Banking Control Law issued by Royal Decree No. (M/5) dated 22/2/1386 H, and referring to the ATM Service Level Agreement (Version 2) issued under Central Bank Circular No. (41932/227) dated 15/3/1441 H, and in continuation of the efforts made to develop the payment system infrastructure in the Kingdom.
Attached is the Requirements for ATM Receipts Initiative issued by Saudi Payments, which banks are required to implement on ATMs. The initiative aims to reduce customer requests for paper receipts in ATM transactions by standardizing the workflow across all machines to ensure the following:
- Preserving the environment and the overall appearance.
- Standardizing the user experience across all ATMs.
- The importance of maintaining data privacy for cardholders.
- Reducing costs for service providers.
Accordingly, the Central Bank emphasizes that all banks operating in the Kingdom and members of the Saudi Payments Network must comply with the provisions of the attached initiative. Coordination in this regard can be made with specialists at Saudi Payments via email (onboarding@saudipayments.com).
For your information and action accordingly, effective from 30/06/2022 G.
1. Introduction
In line with SAMA’s and Saudi Payments’ vision to make continuous improvements in payment infrastructure of the Kingdom, ATM Receipts initiative aims to minimize Cardholders’ dependency on paper receipts for ATM transactions.
The sole objectives of this initiative are to:
√ Enable cost efficiency for Acquirers
√ Maximize customer data privacy and protection
√ Save environment and go green!
1.1 Purpose of Document
The purpose of this document is to assign rules and requirements related to ATM Receipts to external stakeholders who play significant roles in the success of this change. This document is intended to govern the responsibilities of mada Members from multiple aspects for the purpose of ensuring the quality of the solution.
1.2 Scope of Document
This document covers the rules and requirements for ATM Receipts initiative. It also contains detailed workflows of the new enhancements on ATM screens. This document, however, does not contain certification procedures nor terms and conditions.
1.3 Audience of Document
The intended audience of this document is mada Members who are familiar with the basic guidelines of ATM functionalities, and who must comply with these rules at all times.
2. Overview
ATM Receipts is an enhancement initiative that drives the market to minimize dependency on receipts for the four (4) most commonly performed transactions on ATMs.
This initiative focusses on improving and unifying the screen workflow across all ATMs (off-us and on-us) in an attempt to unify user experience and reduce demand on receipts as a result. However, paper receipts shall still be available and provided to Cardholders whenever requested.
Currently, the Home page on ATMs-after inserting the card and entering the PIN-displays the four major transactions (Cash Withdrawal, Balance Inquiry, Mini Statement, and Cash Deposit if available). As part of this initiative, the Home page will be limited to whatever is available of those four transactions and must be fixed and unified across all ATMs (including on-us and off-us). In addition to the four transactions, the Home page also provides an 'Others’ option which opens up to any other transaction(s) and/or service(s) (i.e. PIN Change, Transfer...etc.).
The new enhancement on ATM screen flow runs into two streams: (1) Cash Withdrawal transaction stream, and (2) *Non-cash transactions stream. Each of which has its own mechanism to achieve the same goal of receipt reduction.
*Non-cash transactions include (1) Balance Enquiry, (2) Mini Statement, and (3) Cash Deposit -which is currently available for on-us only.
3. New ATM Screen Workflows
3.1 Cash Withdrawal Transaction Stream
Since Cash Withdrawal is the top transaction in terms of initiation and receipt requests, there will be two separate transactions for Cash Withdrawal:
(1) The first transaction is “Cash Withdrawal" which is presented within the Home page on the ATM. This transaction should not provide a receipt upon completion.
(2) The second transaction is "Cash Withdrawal with Receipt” which will be added inside the 'Others' page from the Home page. This transaction should provide a receipt upon completion.
More importantly, after choosing either of the two transactions, if Cardholder selects one of the listed amounts on the screen, card and cash should be collected immediately and without displaying the account balance. However, in case Cardholder chooses "Another amount” and manually enters the amount, an option to "Confirm and Display Balance” will be given to the Cardholder in addition to the default option(s). The new workflow for Cash withdrawal transactions will be as follows:
A detailed workflow for the Cash Withdrawal transactions stream can be found in the Appendix.
3.2 Non-Cash Transactions Stream
As mentioned earlier, non-cash transactions include Balance Enquiry, Mini Statement, and Cash Deposit. There will be two changes (or additions) to enhance the screen flow and reduce receipt demand for this stream:
First, upon choosing Balance Enquiry or Mini Statement, the account balance or mini statement, respectively, will be shown on the screen. And upon choosing Cash Deposit, the deposited amount as well as the new balance will be shown on the screen.
Second, at the end of either of the three transactions, a receipt will not be automatically printed. However, an option to "collect a receipt and exit’’ will be given to the Cardholder in addition to the default option(s) - if chosen, the process should be ended and the card should be collected along with the receipt. The new workflow for the non-cash transactions will be as follows:
A detailed workflow for the non-cash transactions stream can be found in the Appendix.
4. Appendix
4.1 Workflows for Cash Withdrawal Transactions Stream
4.1.1 Workflow for Cash Withdrawal (without Receipt)
4.1.2 Workflow for Cash Withdrawal with Receipt
4.2 Workflows for Non-Cash Transactions Stream
4.2.1 Workflow for Balance Enquiry
4.2.2 Workflow for Mini Statement
4.2.3 Workflow for Cash Deposit
Adoption of ATM's Electronic Journals
Referring to the discussions held in the Banking Operations Managers Committee (BOOC) regarding the request to cancel the use of paper journals from ATMs and to adopt electronic journals.
We inform you that SAMA has no objection to the adoption of the outputs of the Electronic Data Capture (EDC) for banks wishing to do so when addressing customer claims and complaints, as well as for reconciling and settling ATM transactions instead of using paper journals. It should be noted that in the event of customer claims or complaints and if the bank is unable to obtain a copy of the transaction from either the electronic or paper journal, the bank will bear any resulting responsibilities.
Immediate Response to Any Sudden Power or Communication Disruption in ATMs
Referring to what SAMA recently observed regarding the weak response of some banks to reports of malfunctions related to sudden power or communication disruption in ATMs, and the cash remaining inside the machines for long periods.
Accordingly, SAMA stresses to all banks to respond immediately to any of these cases, and to work on the safety of cash and not to leave it in ATMs for more than 24 hours in the event that it is not possible to resolve problems related to electricity, communications and technical malfunctions.
We also hope that you will inform the relevant departments and your affiliated entities to implement this, act accordingly and include it in your internal procedures as of this date.
SAMA will verify the extent of compliance with these instructions.
Time Out Cash Retract on ATMs
Referring to the Time out-Cash retract in Automated Teller Machines (ATMs), which returns the amount to the ATM in case it is not collected.
We inform you that, due to the emergence of several negative aspects in this feature, banks are required to stop the service as of 1/1/2015.
Maintenance and Feeding of ATMs
Referring to SAMA Circular No. 4567/BCI/123 dated 27/02/1429 H, supplementary to Circular No. 6898/BCI/287 dated 1420 H regarding the procedures and controls to be observed in maintaining ATM machines, including the requirement for ATM maintenance workers to carry permits showing their names and photos, stamped with the official stamp of their organization, and for the companies and institutions performing maintenance to display a specific logo on their vehicles and uniforms. SAMA has observed, during its monitoring of certain ATMs belonging to banks and based on reports from security agencies to SAMA, that some maintenance and feeding workers are using private vehicles and wearing inappropriate clothing that does not comply with the regulations.
Therefore, we hope to confirm adherence to the instructions mentioned in the above circular and inform the contracted companies to comply accordingly. SAMA will monitor compliance with these instructions and apply regulations against any violating banks.
Safety of Cash in ATMs
Based on SAMA's keenness and role in ensuring the safety of cash in circulation and the banks' responsibility for cash in ATMs, SAMA emphasizes to all local banks the necessity of paying sufficient attention to the safety of cash in the ATMs under the bank's jurisdiction, and adhering to the following:
First: Provision of necessary money counting and inspection machines at cash centers, and periodic assurance of the efficiency of these machines and the correctness of their setup (programming).
Second: Compliance With SAMA circular No. 23782/BC/251 dated 14/09/1414 H, and No. 422/M/T and the date 8/11/1413 H, and circular No. 400/B/C/241 and date 21/10/1413 H regarding the inspection of cash and ensuring its safety and quality before feeding it into ATMs.
Third: Increasing bank tellers' awareness of banknotes and their embedded security features, and providing all necessary equipment to verify the safety of the banknotes that are dealt with.
Fourth: ATMs should be fed under dual control and surveillance cameras with TV recording features, with the recorded material retained for at least six months for future reference if needed.
Fifth: Supervision, monitoring, and follow-up by bank officials on the process of feeding ATMs by cash transport companies, and not leaving this to companies only.
SAMA emphasizes the importance of adhering to what has been mentioned above.
ATM Maintenance Procedures
Further to SAMA Circular No. 6898 /BCI/ 287, dated 04/05/1420 H, which outlines the procedures and controls to be observed in maintaining ATM machine, including the requirement for maintenance workers to carry permits with their names and photos stamped with their organization's official stamp, and for maintenance companies and establishments to display a specific logo on their vehicles and uniforms. SAMA has observed, during its monitoring of certain ATM machines belonging to banks and through reports from security agencies, that maintenance and feeding workers have been using their private vehicles and some have not adhered to the regulations.
Therefore, please ensure strict adherence to the instructions outlined in the aforementioned circular and inform your contracted companies of the necessity to comply with these requirements. SAMA will continue to monitor compliance with these instructions and apply regulatory measures against non-compliant banks.
Extension of the Period for Making Inventories of ATMs and Feeding them With Cash
Referring to SAMA Circular No. 2193/BCI/102 dated 13/2/1419 H, which includes internal controls on ATMs and POSs on a daily basis, whether these ATM's are outside the branches or inside them, according to the instructions issued in this regard in the rules and procedures of the Saudi Payments Network (SPAN Business Book) circulated by Circular No. 341000076614 dated 20/6/1434 H. Based on the request submitted by the Bank Operating Officers Committee (BOOC) regarding the extension of the current ATM audit period, and considering the technological advancements in systems and ATMs that support their monitoring and remote access to withdrawal transaction documents, SAMA has decided to extend the scheduled period for making inventory and feeding of ATMs as follows:
• Banks must immediately feed the ATM's when the cash in the ATM reaches 20% of the total cash across all denominations.
• When there are complaints or claims from customers that require the bank to conduct a physical inventory, the bank must do so immediately regardless of the bank's schedule in normal cases.
To review and act accordingly and inform SAMA of what has been done in this regard within a month from its date.
ATM Service Level Agreement (Second Edition)
Based on the Saudi Arabian Monetary Authority Law issued by Royal Decree No. 23 dated 23/05/1377 H and the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386 H, and with reference to Central Bank Circular No. 341000110148 dated 10/09/1434 H on issuing and signing the ATM Service Level Agreement.
We attach to you the ATM Service Level Agreement (second version) approved by the Central Bank, which aims to enhance and elevate the qualiy of ATM services recognizing their significance as a critical electronic channel for facilitating a wide array of banking services. Consequently, the revised agreement will be applied to all ATM services starting from January 1, 2021G. It is imperative to comply with this agreement and any subsequent updates. Therefore, we kindly request that it be signed and returned to the Central Bank within a maximum timeframe of two weeks from the date of receipt.
Note that the bank must send monthly reports in line with the new mechanisms and clauses in the agreement (second version) as of 01/04/2020 G, while continuing to send the current agreement reports as usual until the beginning of the full implementation of the new agreement at the beginning of 2021 G.
Instructions on Forms for Straps of Banknote Stacks of Sixth Edition
No: 42065141 Date(g): 25/4/2021 | Date(h): 14/9/1442 Status: In-Force Translated Document
Referring to the third edition of the instructions for the models of cards for tying the denominations of the sixth series of banknotes, communicated under Circular No. 42018358 dated 22/03/1442 H, and to the issuance of the 200-riyal denomination for circulation on 13/09/1442 H, in order to ensure consistency in the color of the banknote tying cards among banks, and SAMA's branches with the current and previous issues.
Attached is the fourth edition of the instructions for the models of cards for tying the denominations of the sixth series of banknotes, which includes the addition of the card model for tying the 200-riyal denomination, replacing the third edition referenced above.
Please take note and implement this within three months from the date of this notice.
1. General Instructions
1-1 Approve the printing of tying cards for the sixth series of banknotes according to the designs and colour specifications outlined in these instructions.
1-2 These cards must be used for tying the denominations of the sixth series when supplying them to SAMA branches.
2. Requirements to be Included in the Cards
A. The bank's name and logo at the top of the card.
B. The names and signatures of the first and second employees at the bottom of the card.
C. The number of notes and denomination in the center of the card, with the denomination in a larger font size.
D. The issue of the currency in the corner of the card.
3. Colors of the Cards
Distinguish each denomination by printing it in specific colors as follows:
Denomination
Color Value (RGB)
Color Model (RGB)
Color Model (CMYK)
Blue
Green
Red
K
Y
M
C
500 Riyals
230
195
157
10%
0%
15%
32%
100 Riyals
77
77
253
1%
70%
70%
0%
50 Riyals
80
208
146
18%
62%
0%
30%
10 Riyals
131
177
244
4%
46%
27%
0%
5 Riyals
255
204
255
0%
0%
20%
0%
5 Riyals (Polymer)
169
93
211
17%
20%
56%
0%
20 Riyals
202
108
133
21 %
0%
47%
34%
200 Riyals
166
166
166
35%
0%
0%
0%
4. Card Models
No: 42065141 Date(g): 25/4/2021 | Date(h): 14/9/1442 Status: In-Force Translated Document
Attached are the card models for compliance.
Attachments
Compliance with Employing Citizens and the Requirements for Contracting with Recruitment Service Companies
Reference to SAMA Circular No. 1712/BC/88 dated 6/2/1416 H and No. 3851/BC/124 dated 2/4/1410 H and other circulars regarding the implementation of Saudization in jobs within banks, and in continuation of the efforts made by SAMA and the banks in localizing jobs and qualifying Saudis to fill them, and due to the importance of intensifying efforts to achieve the desired goals in line with general directions, SAMA emphasizes the necessity of adhering to the following:
First) Citizens Employment
- The goal is to localize all jobs, of various types and levels, including top leadership and supervisory positions, and not to limit Saudization to certain jobs only. Employment contracts with non-Saudi employees should be considered only if a qualified Saudi candidate is not available at the time, while taking into consideration the stipulations stated in The Labor Law issued by the Royal Decree No. M/51 dated 23/8/1426 H In this regard.
- Appointment and employment in all positions at branches, remittance centers, and cash centers are restricted to Saudis only, without specifying the type of job. Efforts should be made to completely replace non-Saudi employees with Saudi employees by a maximum date of 31/12/2013 G. It is allowed to hire one non-Saudi employee at remittance centers if the bank or money exchange deems the presence of such an employee necessary, provided that their role is limited to assisting and serving customers without having access to the bank's data and automated systems, or conducting banking operations, or opening customer accounts*.
- The appointment to all positions involving financial transactions, the transfer of money, and related roles, as well as positions related to information security and those concerning the combating of money laundering and the financing of terrorism, is restricted to Saudi nationals only across all departments of the bank, exchange offices, branches, and affiliated remittance centers.
- Develop programs and specific timelines for the Saudization of all jobs and provide them to SAMA within three months from this date. Work on recruiting, training, and qualifying national cadres to replace non-Saudis in these positions within a specified period.
- Prohibition of direct and indirect dealings with any entities or individuals working as marketers of banking services within the Kingdom on behalf of foreign banks or financial entities and banning the presence of representatives of such entities within the bank, exchange office, or any of its branches or affiliated centers.
- Develop plans and schedules for training and qualifying Saudis in accordance with the aforementioned instructions and provide them to SAMA within two months from this date.
Second) Adherence to the requirements of contracting with employment service companies
- Selecting companies specialized in providing employment, support services, and verifying the integrity of the contracts concluded with them, as well as ensuring their compliance with and fulfillment of the requirements of SAMA and relevant authorities.
- Ensuring that all employees are working legally and that their job roles correspond to the tasks assigned to them, as well as matching what is recorded in their work permits and residence permits.
Third) Assign the Human Resources Department to develop a plan for the localization of jobs, to train and qualify their occupants, and to begin its implementation. Also, assign the Compliance Department to monitor and oversee its implementation according to the above requirements and to prepare reports at the end of each quarter on the progress of job localization and training until the end of the period.
*According to Circular No. (21755/41) dated 6/4/1440 H, SAMA emphasizes the restriction of all currency exchange business roles (category (A, B)) to Saudis and the necessity of training Saudi employees and enrolling them in suitable training programs that match the nature of their work. Currency exchange institutions and companies must take the necessary measures to ensure full compliance, provided that the time period for Saudization of jobs does not exceed a maximum of January 29, 2020 G. Note that SAMA will take all regulatory measures against exchange institutions and companies that do not adhere to this directive.
According to Circular No. (18910/41) dated 21/03/1440 H, the categories that are treated equivalent to Saudis must be counted in the Saudization rates, in accordance with what is issued by the Ministry of Labor and Social Development and disclosed in the data submitted to SAMA.
Contract with Cash Transfer Companies and Using High-Specification Security Bags
Referring to the letter from His Royal Highness the Crown Prince, Deputy Prime Minister, and Minister of Interior, "may God protect him," No. 225703 dated 28/08/1438 H, regarding the recommendations from the Crime Research Center to require large companies and commercial establishments to contract with cash transfer companies and to use high-specification security bags, and to SAMA Circular No. 371000093183 dated 22/08/1437 H based on the letter from His Royal Highness the Crown Prince, Deputy Prime Minister, and Minister of Interior, "may God protect him," No. 126563 dated 14/05/1437 H, regarding the approval of the results of the security committee formed by the General Security, the Ministry of Finance, and SAMA to review and update the necessary standards and conditions and impose strict and precise controls for conducting the activity of transporting cash, precious metals, and valuable documents to require all companies operating in this field to comply with them. This includes the adoption of using containers for transporting cash, which enable automated tracking and self-destruction of cash if diverted from the proposed route, instead of the current fabric containers.
Therefore, compliance with the instructions mentioned above is required, and cash should only be transported for large companies and commercial establishments through licensed cash transfer companies, using security bags approved by SAMA. Please note that SAMA will conduct field visits to ensure the implementation of these recommendations and impose penalties against violators.
Prohibition on Dealing with Representatives of Private Security Companies and Cash Transport Companies that are non-Saudis
Due to the availability of information regarding certain representatives of private security companies and cash transport companies from non-Saudis negotiating with local banks when seeking to provide security services or cash transport.
SAMA emphasizes to all banks the importance of not engaging or negotiating with any non-Saudi representative of these companies and institutions. They must also inform the relevant authority in the region about the company or institution employing the non-Saudi representative to take the necessary legal actions against them. Furthermore, SAMA reiterates the importance of full compliance with its issued directives regarding compliance with The Law of Private Security Services and its Implementing Regulations, as well as The Law of Transporting Cash, Precious Metals, and Valuable Documents and its Implementing Regulations.
Recommendations for the Cash Transfer System
Referring to the telegram from His Royal Highness the Crown Prince, Deputy Prime Minister, and Minister of Interior (may God protect him), No. 126563, dated 14/05/1437H, which includes the approval of the results of the security committee formed by (Public Security - Ministry of Finance - and SAMA) to review and update the necessary standards and conditions, and to impose strict and precise regulations for practicing the activity of transporting cash, precious metals, and negotiable instruments, requiring all companies operating in this field to comply with them.
Based on this, the committee concluded with a number of recommendations concerning banks and cash transport companies, as follows:
- Require banks to enhance oversight of the performance of contracted companies inside cash centers, adhere to specific procedures and mechanisms for receiving and delivering cash, and impose necessary penalties on violating banks.
- Separate the tasks and responsibilities related to cash transportation from those related to replenishing ATMs:
- Companies must adhere to the regulations and guidelines for the transport vehicle crew involved in cash transportation, consisting of three members (driver, guard, and companion). The guard and companion should be equipped with the necessary firearms.
- When using a transport vehicle for ATM replenishment, the two-person replenishment team (supervisor and replenisher) should never accompany the armored vehicle crew. Instead, they should travel in a civilian vehicle displaying the company logo, following the armored vehicle’s route. This setup will result in a five-person ATM replenishment team (three inside the armored vehicle and two in the civilian vehicle).
- Cash replenishment boxes for ATMs must be filled, secured inside specialized containers, and sealed by an independent team from the cash transport company. This process should be under dual supervision and monitored by CCTV inside cash centers. The ATM replenishment team’s role should be limited to transporting the secured containers and replenishing ATMs according to a preassigned route provided at the start of the workday.
- A separate team (from the bank or the company) at the cash center should be responsible for counting and reconciling the returned cash from ATMs according to the readings from the ATM counters and the bank’s system.
- Companies must adhere to the regulations and guidelines for the transport vehicle crew involved in cash transportation, consisting of three members (driver, guard, and companion). The guard and companion should be equipped with the necessary firearms.
- Implement the use of high-standard cash transport containers as practiced in developed countries, which enable automatic tracking and self-destruction of the cash if the proposed route is altered, replacing the current fabric containers.
- Leverage credit information from the Credit Information Company (SIMAH) to review the credit history of individuals applying for jobs at cash transport companies and other legitimate sources to assess the suitability of employees in this field.
- Provide SAMA with the procedures and mechanisms followed by the bank to monitor the performance of companies contracted for cash transport and ATM replenishment. This includes doubling supervision and monitoring the movement of cash transport vehicles, precious metals, and negotiable instruments, as well as tracking the time allocated for cash transport and ATM replenishment to and from the bank premises. Additionally, review the rotation of employees in cash centers, cash transport, and ATM replenishment, and work on improving training programs to enhance the performance and efficiency of employees in both the contracted companies and banks.
Therefore, we request that you proceed with the swift implementation of the above-mentioned recommendations and provide us with an update within two weeks from this date. It is worth noting that arrangements are currently being made to allow licensed cash transport companies to establish their own cash processing units to serve the ATMs of all the banks they contract with, following the necessary approvals from SAMA and the Ministry of Interior. These units will be governed by unified security standards, procedures, and requirements. The license for operating such cash processing units will be granted for a maximum of three years, renewable, with the aim of improving service levels and preparing local companies to manage and operate unified cash centers, which will be established by SAMA.
- Require banks to enhance oversight of the performance of contracted companies inside cash centers, adhere to specific procedures and mechanisms for receiving and delivering cash, and impose necessary penalties on violating banks.
Mechanism for the Entry and Exit of Saudi and Foreign Currency via King Fahd Causeway
No: 371000035276 Date(g): 3/1/2016 | Date(h): 24/3/1437 Status: In-Force Translated Document
Referring to the agreement with the Customs Authority regarding the mechanism related to handling the entry and exit of Saudi and foreign currency through the King Fahd Causeway customs, please adhere to and implement the following directives:
First: Mechanism for the Entry and Exit of Saudi Currency through King Fahd Causeway Customs
The current mechanism for handling Saudi currency, as agreed upon between the General Customs Authority and SAMA in the coordination and cooperation record dated 10/4/1435H, shall continue. According to this mechanism, customs employees at King Fahd Causeway are responsible for sealing the Saudi currency transported through the customs for banks and exchange companies, and then sending it to SAMA branch in Dammam for inspection, as follows:
- A financial declaration form for the cash amounts (entry) is filled out electronically using the automated financial declaration system. The form indicates the number of containers or packages received, the sequence of their seal numbers, and the total amount sent.
- The financial declaration form is faxed from the King Fahd Causeway customs to SAMA branch in Dammam, and a copy is handed over to the bank representative or the exchange company.
- Upon deposit at SAMA branch, the number of packages and the customs seal numbers provided in the letter of King Fahd Causeway customs is verified by the Treasury Division at SAMA branch in Dammam. The cash packages are then reviewed and accepted under counting and are set aside with the customs letter until they are counted and verified for accuracy.
- King Fahd Causeway customs will be notified by SAMA branch in Dammam in the event of any unusual discrepancy, such as a mismatch between the declared amount and the received funds, concerns about the currency's condition, the failure of the funds to arrive as per the customs letter sent by fax to SAMA branch, or delays in delivering the funds to SAMA.
Additionally, King Fahd Causeway customs will receive a letter from SAMA branch when local banks request to export financial amounts abroad after sealing them in a container or package, detailing the amount and seal numbers. A copy of this letter will be faxed simultaneously to King Fahd Causeway customs and the bank representative.
- A financial declaration form for the cash amounts (entry) is filled out electronically using the automated financial declaration system. The form indicates the number of containers or packages received, the sequence of their seal numbers, and the total amount sent.
Second: Mechanism for the Entry and Exit of Foreign Currency through King Fahd Causeway
After completing the approved immediate clearance procedures at King Fahd Causeway Customs, the following steps are taken:
- The Gulf vehicles transporting foreign currency are sealed with a metal seal by the customs officer.
- A letter is signed by King Fahd Causeway Customs addressed to SAMA branch in Dammam, with a copy sent to the benefiting bank or exchange company.
- The vehicles are allowed to depart to the cash centers of banks and exchange offices. If the vehicle is armored, approval from the General Customs Authority is required, as its entry is restricted.
- In the case of discovering counterfeit currency, SAMA branch in Dammam is notified, which in turn informs King Fahd Causeway Customs and returns the counterfeit amounts to the customs for necessary legal procedures.
- SAMA branch in Dammam is notified, and it will officially inform King Fahd Causeway Customs in case of any unusual violation, such as a discrepancy between the declared and received amounts, the condition of the currency, failure of the amounts to arrive as indicated in the customs letter sent by fax to SAMA, delays in receiving the amounts, or any other reasons.
- The Gulf vehicles transporting foreign currency are sealed with a metal seal by the customs officer.
Third: Regulations for the Entry of Gulf Cash Transport Vehicles into Saudi Arabia
- Gulf vehicles transporting foreign currency into the Kingdom must comply with the technical specifications for the armoring of cash transport vehicles as outlined in the implementing regulations issued by Ministerial Decision No. (4814) dated 09/10/1433H. These specifications pertain to the Transporting Cash, Precious Metals, and Negotiable Instruments Law, issued under Royal Decree No. (81/M) dated 18/10/1428H.
- Entities importing Saudi and foreign currencies (banks/exchange offices) are required to deploy an armed security escort vehicle to accompany the Gulf vehicle transporting foreign currency. The security vehicle must belong to an entity licensed to operate in transporting cash, precious metals, and negotiable instruments, and should be stationed outside the customs area awaiting the foreign currency transport vehicles for escort.
- Gulf vehicles transporting foreign currency into the Kingdom must comply with the technical specifications for the armoring of cash transport vehicles as outlined in the implementing regulations issued by Ministerial Decision No. (4814) dated 09/10/1433H. These specifications pertain to the Transporting Cash, Precious Metals, and Negotiable Instruments Law, issued under Royal Decree No. (81/M) dated 18/10/1428H.
Cash Transfers must be Coordinated with Security Authorities Well Enough in Advance
Further to SAMA's circular No. 5922/BCI/62 dated 08/04/1421H, which includes specific guidelines for feeding ATMs, particularly the paragraph concerning the necessity of coordination and notification of security authorities during the cash transfer, we inform you that SAMA has received a letter from its branch in Buraidah containing observations from the Qassim Region Police on the reporting process. These reports are being received upon the arrival of the feeding officials at the ATMs, which disrupts the work of the security authorities and results in delays in the security agencies carrying out their duties.
Therefore, we hope to inform and ensure coordination with the security authorities for transportation operations in a timely manner so that the security authorities can perform their duties as required in various regions and governorates of the Kingdom.
Internal Controls on ATMs and POSs
In Reference to our previous circulars No. BC/588 dated 24-9-1415, No. BC/353 dated 10-7-1415 and No. BC 214 dated 1-8-1414, regarding internal controls presently applied on ATMs and POSs and the procedures and problems connected therewith; and
In view of the increase of complaints by some people who insist that they are not receiving the money they ask for from ATM; and
In view of the importance of this matter in enhancing public confidence in the banking sector in general and the ATM and POS services in particular,
SAMA would like to emphasize the following:
Banks must conduct a daily inventory of all ATMs, whether inside or outside branch premises.
Banks must use SAMA's ATM Balancing Sheet by those in charge of feeding the ATM, signed by the teller and approved by the section head or the cashier.
Cash surplus found in the ATM (resulting from the daily inventory and belonging to the clients who did not cash it for technical reasons) must be paid immediately to the client without his request. Claims among banks should be settled within one week from the date of the claim through CAPS.
Banks must settle such claims with their clients (debits or credits) within one week from the date of the claim. If the claim is rejected the bank has to explain the reasons.
If requested by SAMA, the bank has to submit the operation receipt, the journal tape and the daily inventory minutes in one week at the latest in order to settle these claims the soonest possible.
In addition to the daily inventory made by those in charge of ATMs, the internal auditors of the bank must conduct monthly surprise inventory of ATMs and keep a record which can be referred to, if needed.
The bank must periodically test and maintain ATMs and POSs to avoid reverse operations and any other technical problems which increase client and bank claims, in view of the negative effects on the services of ATMs and POSs.
The treasury and secret numbers of the ATM should be under dual control and the secret number is disclosed only by management approval.
The bank that issues the card must pay the amount of reverse claims caused by insufficient balance in the account of the card holder at the time of the claim without asking for the receipt of the purchase operation at POS, in order to settle the claims of merchants and banks together and enhance their faith in the POS service. The bank will then follow up with the card holder to recover its money.
One of the bank employees must be appointed as a liaison officer responsible for following up on ATM and POS cases. His name and phone number must be passed on to SAMA within one week.
Please be informed and comply as of this date. In case of a violation of any of these instructions the bank shall be responsible for consequences.
Criteria and Requirements for Operating a Cash Transportation Service
Referring to the telegram of His Royal Highness Prince Abdulaziz bin Saud bin Nayef bin Abdulaziz, Minister of Interior and Chairman of the Supreme Commission for Industrial Security No. 54033 dated 10/3/1440 H, which included the approval of the recommendations of the committee formed by specialists from the Ministry of Interior, the Ministry of Finance and SAMA to review and update the standards and conditions necessary for practicing the activity of transferring cash, precious metals and valuable documents, and to SAMA’s circular No. 371000093183 dated 22/8/1437 H, which included recommendations for the cash transfer law.
Accordingly, His Highness’s telegram included a number of final recommendations and specified the tasks required of the parties concerned with this activity, as follows:
- All licensed cash and precious metals transport companies and institutions are required to have their vehicles fully armored, including sides and roofs, and with standard bulletproof armor of type (Vpam6) as a minimum issued by the European Committee for Standardisation and in accordance with the approved technical terms and specifications attached to the circular. Note that armoring of cash transport vehicles is optional if the feature of using high-specification containers and security inks for transporting cash is available, after obtaining the approval of the General Secretariat of the Supreme Commission for Industrial Security.
- Cash transport vehicles must have an independent security permit issued by the General Secretariat of the Supreme Authority for Industrial Security (Central Security Licensing Unit). The Secretariat also issues permits for armoring vehicles, establishing factories and importing requests for armored vehicles through its electronic portal. Cash transport companies must submit a license renewal request three months before its expiration. It is prohibited to practice the activity with an expired license. Cash transport companies must carry out periodic preventive maintenance on their vehicles on an ongoing basis, and the expected life of cash transport vehicles must not exceed five years from the date of their entry into service.
- Banks, currency exchangers and Cash Transfer Companies are committed to strengthening control over the work of companies contracted to transport cash within cash centers and to inform the security authority (Public Security) of any company that violates the application of the law against it, and to adhere to the procedures and mechanisms for receiving and delivering cash.
- Banks, currency exchangers and cash transfer companies and institutions are committed to the laws and regulations specified for the cash transfer vehicle crew, which consists of only three individuals (driver - guard - companion), provided that the guard and companion are armed. In the event that cash transfer vehicles are used in the activity of replenishment ATMs, the companion who works within the armored vehicle crew is responsible for replenishment the ATMs, and this requires the availability of electronic locks on the device safes.
- It is necessary for workers on cash transfer vehicles to use encrypted communication devices that are difficult to hack.
- Cash transfer companies are obligated to register cash transfer contracts and employees at the Central Security Licensing Unit at the General Secretariat of the Supreme Authority for Industrial Security and to screen employees for security.
- Banks, and Currency Exchangers are obligated to install surveillance cameras covering all facades of their sites, customer parking lots, the delivery and receipt area for cash transfer vehicles and all sensitive areas such as ATMs, and to connect them to the television camera recording unit so that the recording is kept for a period of no less than six months.
- When receiving and delivering shipments, the vehicle must be stopped in the closest place to the receiving and delivery point, so that the vehicle door is in front of the bank or merchant.
- The ATM replenishment cassettes must be filled and placed in the designated containers and secured by an independent work team under dual supervision and under the recording of the television cameras inside the cash centers, so that the role of the field replenishment team is limited to transporting the cash containers for the ATM and replenishment them to the machine according to a route given to them at the beginning of the work day and the security authorities are informed of the route. The aforementioned independent work team shall undertake to reconciliation and verification the ATM's with the cash returned from the ATM's according to the readings of the ATM meters and the bank law, and this shall be under the recording of the television cameras.
- The ATM replenishment process should be limited to replacing the cassettes equipped with cash only, and no transfer of currency from one box to another should be carried out during the ATM replenishment process, regardless of any cash amounts in the replaced box, and ATM maintenance should not be linked to the teller replenishment process, while emphasizing to workers the need to quickly complete the replenishment task as quickly as possible.
- Cash transfer companies, banks, Currency Exchangers are committed to using high-specification containers for cash transfers when receiving and delivering cash to and from branches, cash centers, remittances, Currency Exchangers and the retail sector, which allow automatic tracking and self-destruction with security inks for cash in the event of changing the specified route, or attempting to forcefully open it, tampering with it or vandalizing it in an irregular manner according to the approved technical terms and specifications attached to the circular, within six months from its date.
- Working hours for replenishment and maintaining ATMs are throughout the week, including official holidays and weekends, and around the clock for the main cities (Makkah, Madinah, Riyadh, Jeddah, Dammam and Khobar), commercial centers, airports and train stations, while the rest of the cities of the Kingdom are from seven in the morning until ten in the evening, except for what is specified by the security authorities.
Attached are the terms, requirements and technical standards for the design and manufacture of armored vehicles for transporting cash, precious metals and valuable documents, specifications for inks and security cash transport containers, and general requirements.
We hope to work quickly to implement the recommendations, terms, requirements and technical standards attached to you, and in the event of any difficulties you may face, we hope to coordinate this with the Advisor to the Deputy Governor for Banking Operations.
Follow-up circular on Instructions to Be Followed When Opening, Relocating or Closing Bank Branches, Instant Remittance Centers and ATMs, Whether Operational or Non-Operational
Further to the Central Bank Circular No. BCP/214 dated 25/4/1416 H regarding the Central Bank's observations made by various banks, as well as Central Bank Circular No. (485/BC/36) dated 07/01/1416 H attached to the Security Safety Manual, the Central Bank emphasizes the necessity of compliance with all outlined directives.
1-The bank must adhere to the security safety requirements outlined in the aforementioned guide for all new branches, offices, or ATMs and provide the Central Bank with a certificate from the security consultant confirming compliance with these requirements.
2-No bank is allowed to open new branches, offices or ATMs in any region of the Kingdom without obtaining an official license from the Central Bank.
3-Upon obtaining the Central Bank's license to open a branch or install an ATM, any relocation of the branch or ATM, regardless of its operational status or non-operational, is prohibited without obtaining a written approval from the Central Bank.
4-When the bank obtains the Central Bank's approval to open a branch in any location, the installation of the ATM in the branch is subordinate to the branch license, and there is no requirement to secure a separate license for the ATM; however, it is necessary to notify the Central Bank of this installation.
5-It is not permissible to merge an independent ATM license (outside the branch premises) with any branch, whether operational or non-operational.
6-The license is valid for a period of nine months from the date of its approval. The bank shall ensure the completion of the opening process within this period. Should the bank be unable to finalize the opening within the stipulated period, it shall notify the Central Bank of the reasons for the delay prior to the expiration of the license.
7-Licenses for non-operational branches are extended every six months to allow the bank to equipe the location.
8-A bank shall submit a report to the central bank biannually, detailing its status regarding the establishment of new branches and the installation of ATMs.
9-When requesting approval to open a branch or install an ATM, each bank must attach the following data
- A feasibility study for opening a branch or installing an ATM.
- A blueprint or showing the exact location of the requested branch or the exact location of the ATM.
10-The Central Bank must be notified of the actual date on which the branch opens and begins operations, or the date on which the ATM becomes operational.
Operational Rules
Account Opening Rules
No: 65681/67 Date(g): 3/7/2019 | Date(h): 1/11/1440 Status: In-Force Arabic shall be the language used in construing these Rules.Chapter I. Definitions
The following terms and phrases, wherever mentioned herein, shall have the meanings
assigned thereto unless the context otherwise requires:1. SAMA:
The Saudi Central Bank
2. Rules:
Rules for Bank Accounts.
3. Bank Account:
An accounting record maintained by a bank licensed to operate in Saudi Arabia. Such a record is generated under a contract called "Account Opening Agreement" between the bank and the account holder (the Customer) or its representative. The Agreement sets out the rights and obligations of each party including accounting entries posted by the bank in accordance with the applicable regulations and the acceptable rules and practices agreed upon under the account opening agreement, other agreements signed by the two parties, and other instructions given by the account holder to the bank.
4. Freezing of Account:
A temporary suspension of withdrawal/transfer or the like from a bank account/relationship due to the expiration of the customer’s ID; non update by the customer or his representative of KYC data or violation of any provision of the Account Opening Agreement.
5. Bank Verification:
Placing the bank official stamp or the like in addition to the bank employee signature and stamp on a copy of a document or ID card to confirm that it is a copy of the original.
6. Special Purposes Entities
Entities established and licensed under Rules for Special Purposes Entities, issued by the Capital Market Authority.
7. Government Entities:
Government entities, public institutions, authorities, funds and the like, whether they have appropriations in the State general budget or not.
8. Foreign Schools:
Schools licensed by the Ministry of Education that apply non-Saudi curriculum and are subject to the Regulation for Foreign Schools in Saudi Arabia. They are different from educational institutions of foreign embassies.
9. International Multilateral Organizations:
International organizations in Saudi Arabia that exist under a headquarters agreement (license), signed by Saudi government, such as the Muslim World League, World Assembly of Muslim Youth and the like.
10. Chambers of Commerce and Industry:
Non-profit organizations that represent commercial and industrial interests before public entities and protect and develop such interests. They have their own Boards of Directors.
11. Freelancer:
A self-employed person (who gets paid per hour, day, or work) rather than working for an employer in exchange for a monthly salary.
12. Minor:
A male or female under the age of 18 Hijri years.
13. Curator:
A person appointed by a Guardianship Deed issued by the competent courts to be a guardian of a minor.
14. Guardian:
The father of a minor or a person appointed by the court under a Guardianship Deed.
15. Custodial Person:
A person appointed by the court under a Custody Deed authorizing him/her to receive the allowances provided by public or private entities to a child in his/her custody.
16. Legally Incompetent Person:
A person not allowed to manage his/her money under a court deed that proves the lack or loss of mental capacity.
17. Private Associations and Foundations:
Associations and foundations as defined in the Civil Associations and Foundations Law.
18. Philanthropic/Charitable Committees:
Committees licensed by local government entities to serve the public, such as Patients’ Friends Committee and Disabled Persons Committee and the like.
19. National Societies and Committees:
Societies and committees established pursuant to a royal approval or a resolution by the Council of Ministers to perform specialized roles to serve the public interests.
20. Cooperative Associations and Funds:
- Cooperative associations:
An associations formed by individuals in accordance with the provisions of the Law of Cooperative Associations to improve the social and economic conditions of its members in production, consumption, marketing or services through the joint efforts of the members using cooperative principles.
- Cooperative funds:
Funds established by the employees of a government agency or a company in accordance with the provisions of Cooperative Funds. The source of funding is member contributions. Such funding is mainly used to cover social, cultural and sport activities of the Fund's members.
21. Foreign Endowment(2):
Endowment for specific Saudi individuals or Saudi charities inside Saudi Arabia owned by natural or juristic non-Saudi persons with one or more Saudi legal agents.
22. Escrow accounts for off-plan sale or rental real estate projects (6):
A bank account for depositing the amounts paid by financiers, buyers or tenants for the project.
23. Escrow Accounts for Real Estate Contributions Project (7):
A bank account for depositing real estate contribution funds.
24. Scientific Societies (3):
Societies established in Saudi universities under their direct management and supervision in accordance with the Rules for Scientific Societies in Saudi universities.
25. Professional Associations (3):
Juristic and financially independent associations established to improve specific professions and work under the supervision of a government entity authorized to do so.
26. Payment Service Providers (1):
Any entity qualified and licensed by SAMA to provide one or more payment services in the Kingdom in accordance with SAMA'S relevant instructions.
27. Debt-Based Crowdfunding Company (4) (5):
a joint-stock company licensed to engage in Debt-Based Crowdfunding activity.
28. Finance Amount (4) (5):
funds raised from Participants via a Debt-Based Crowdfunding Platform to be provided for an Institutional Beneficiary.
(1) This paragraph has been added pursuant to the circular No. (42073085), Dated 21/10/1442H, corresponding to 01/06/2021G.
(2) This paragraph has been amended according to the circular No. (41042946), Dated 19/06/1441H, corresponding to 13/02/2020G.
(3) This paragraph has been added pursuant to the circular No. (41039895), Dated 08/06/1441H, corresponding to 02/02/2020G.
(4) This paragraph has been added pursuant to the circular No. (42075950), Dated 29/10/1442H, corresponding to 09/06/2021G.
(5) This paragraph has been amended according to the circular No. (000046024651), Dated 19/04/1446H, corresponding to 22/10/2024G.
(6) This paragraph has been amended according to the circular No. (46028059), Dated 08/05/1446H, corresponding to 09/11/2024G.
(7) This paragraph has been added pursuant to the circular No. (46028059), Dated 08/05/1446H, corresponding to 09/11/2024G..
Chapter II. Supervisory Rules and Controls
1. Electronic Record
For the purpose of setting up a unified electronic database for bank accounts, all banks shall establish an electronic registration system in accordance with the classification set forth in Appendix (C) and its updates and based on the information provided in the approved IDs. This system serves as an electronic record, and should include the requirements provided in the paragraphs below as well as the detailed requirements provided in Chapters III and IV herein, as a basis for opening, operating, and following up bank accounts.
1.1 Saudi Natural Persons
- Banks must have in place an electronic record for all Saudi nationals having, as a minimum, the following:
a. The full name (first, second, third and family name) as shown in the ID.
b. ID number.
c. ID expiry date.
d. National address and contact information.
e. Employer (if any).
- Information used shall be based on the national ID, family register for minors, or birth certificate for people of special circumstances staying at housing centers of the Ministry of Human Resources and Social Development and shall be obtained from reliable sources.
1.2 GCC Natural Persons
- Banks must maintain an electronic record for all GCC nationals having, as a minimum, the following:
a. The full name as shown in the national ID.
b. National ID number.
c. National ID expiration date.
d. Nationality.
e. Address and contact information.
f. employer (if any).
- Information shall be obtained from the national ID and from reliable sources.
1.3 Non-Saudi Natural Persons
- Banks must maintain an electronic record for all non-Saudi natural persons having, as a minimum, the following:
a. The full name as in the passport or Iqama and in the same language according to the following priority (Arabic - English- Latin alphabets). If the name is in any other language, the name provided in the entry visa granted by Saudi embassies and consulates should be used.
b. Nationality.
c. Iqama No. and validity date.
d. National address and contact information.
e. Employer (if any).
- For persons holding Iqama cards with five-year validity period that is given to some tribe members, the full name, number and validity date of the card shall be written.
- No accounts may be opened for expatriates holding Saudi passports except with the approval of the Ministry of Interior through SAMA.
1.4 Juristic Persons
- Banks must maintain an electronic record for all juristic persons having, as a minimum, the following:
a. The official full name of the juristic person as per official documents.
b. Commercial register number or license number if the activity does not require a CR, (if the account is opened for the main commercial register, the main commercial register number shall be written. However, it the account is opened for a subsidiary commercial register, the subsidiary commercial register number shall be written. The main commercial register accounts shall be electronically linked with the subsidiary commercial register accounts).
c. The ID numbers of the owners as indicated in the last update of memorandum of association and persons authorized to manage the accounts (owners of joint stock companies are exempted from providing their ID numbers).
d. Signature of the person authorized to manage the account.
e. The national address of the juristic person.
f. Tax No. (if any).
g. Legal Entity Identifier (if any).
- For accounts opened pursuant to official approvals or applications, the reference number, date and name of body issuing such approval or making such application shall be recorded.
2. Requirements for Inspection Purposes
Banks shall use an electronic search system to perform the routine search according to information required in the electronic records under each category. Such search shall cover all transactions, relationships, products and services offered to customers in addition to express transfers and investment deposits.
3. Freezing of Bank Accounts Upon Expiration of Identification Documents
3.1 Freezing of Bank Accounts
As a rule between banks and customers, the relationship must start and continue under valid identification documents and IDs for all transactions, whether those covered by the definition of bank account in Chapter I or other contractual relations or account-related services.
3.1.1 Saudi Natural Persons
Banks must freeze all accounts held by Saudi natural persons upon the expiration of the documents provided below unless the account holder presents a renewed document or a valid ID card. A bank may verify ID renewal without requiring the customer attendance via trusted and independent source and it shall document that. The following are the documents to be presented by Saudi customers prior to opening or maintaining a bank account:
- National ID Card: The account opened by an ID card shall be frozen after the elapse of (90) days from expiry date and shall not be reactivated except after renewal.
- Family Register for Minors: An account opened for a minor under a family register shall be frozen upon the elapse of five years from the account opening date or five years from last account update. Presence of the minor is not required as the presence of his/her guardian or curator will suffice. The bank shall inform the guardian or curator, (90) calendar days prior to the minor reaching the age of (15) Hijri years, to update such account and present a valid national ID of the minor.
- Birth Certificate of Children of Special Circumstances: The account must be frozen when the minor reaches the age of (15) Hijri years and may be reactivated when he/she is issued a valid ID card or when a letter is received from the Ministry of Human Resources and Social Development requesting continuation of the account until the minor reaches (18) Hijri years.
3.1.2 Non-Saudi Natural Persons
Banks shall freeze all accounts and transactions of all non-Saudi natural persons after (90) days of the expiration of the documents mentioned below. After (180) days of the expiration of the ID, the account balance shall be transferred to an unified account created by the bank for such cases. After 5 years from the date of last transaction/dealing carried out by the customer in his/her account, the balance shall be transferred to the suspense account created for unclaimed accounts and all outstanding obligations of the customer during and after this period shall be met. Also, all accounts of expatriates must be closed upon their final exit. The documents are as follows:
- National ID Card for GCC citizens.
- Iqama for expatriates.
- Diplomatic card for diplomats.
3.1.3 Juristic Persons
All banks must:
- Freeze all accounts of juristic entities after (90) days from the expiration date of the respective authorization to practice their activity (license, commercial registration, etc.) unless the customer provides a renewed authorization or any document valid for (90) days from a the responsible authority proving that it is being renewed.
- Freeze all accounts of juristic persons and organizations whose documents of opening their accounts do not contain a validity date, such as the accounts of charity and welfare societies or organizations, government accounts and licensed schools and the like upon the lapse of five years from the date of opening the account or the date of last update to the account until the account data is updated.
- Freeze the relationship with correspondent banks upon the end of the period specified in Rule (4) and until all requirements of KYC and AML/CFT are fulfilled.
- Monitor the ID validity of the directors and authorized signatories of juristic person accounts and freeze and suspend their powers to operate the account only, depending if they are Saudis or non-Saudis, until the renewal of IDs. This shall also be applicable to sole proprietorship owners.
3.2 General Instructions for Freezing of Bank Accounts
- The bank must ensure that the account opening agreement, contractual relationships and services state that the bank has the right to freeze the account upon the expiration of the customer’s ID and/or when the customer does not update his/her personal and financial data and addresses.
- The bank must notify the customer of the account freezing date at least (30) days in advance, and must have adequate processes in place to ensure the same with respect to each customer or authorized person acting on his behalf and such processes should be documented.
- A joint account with a single or joint signature must be frozen upon the expiration of the ID card of either of the account holders.
- Freezing order issued due to the expiry of identification documents other than the national ID may be lifted upon presentation of a valid national ID. However, banks shall not lift freezing order on accounts opened by a national ID if other identification document is presented.
- Natural or juristic persons shall have the right to close their own accounts or any accounts they are authorized to operate (only single transaction) that are frozen due to the expiry of IDs or failure to update their data, provided that the customer completes a form prepared by the bank for this purpose and that the procedures stated in account closure instructions are applied.
- If the request to freeze the account of an expatriate is made after his final exit from Saudi Arabia, and if the account balance is less than SAR (50,000), banks may transfer the money to the owner with the approval of the bank's compliance department, according to procedures set by the bank depending on the customers, their countries and signature checks. However, if the account balance is over SAR (50,000), the money shall only be transferred to the owner upon a request approved by the correspondent bank of the local bank or the branch of the resident foreign bank. Banks are not allowed to transfer only part of the balance. The balance shall only be transferred abroad to the account holder or the legal agent of his/her heirs upon the approval of the compliance department.
- In case an expatriate customer requests the bank to transfer the balance of his/her account immediately after his/her previous final exit and presents a visa other than the work visa, the balance exceeding SAR (50,000) may only be paid upon the approval of the compliance department after evaluating the account. If such a customer directly applies to the bank and submits a new Iqama issued under the same passport or a new passport, the frozen account shall be closed if it is still within the freezing duration, before (180) days, and a new account shall be opened for him/her and the amount shall be transferred to the new account, and thereafter he/she shall be allowed to deal on such account.
3.3 Freezing Exceptions
Banks shall not allow a customer or its authorized person to carry out transactions from his/her accounts after the expiration of his/her ID, unless upon renewal thereof or updating his/her KYC data. The following shall be exempted from freezing:
- Personal deposits or deposits received through clearing and local and international transfers, SARIE payments/ collections and salaries of employees.
- The customer existing obligations already effected by the bank with or on behalf of the customer in favor of the bank or third parties (government or non-government) before the expiration of the ID of account holder or authorized representative. Such obligations include, but are not limited to, payment of credit cards, loans, direct debit payments, standing regular instructions for payments such as payment of utility bills, letters of credit and letters of guarantee etc. These also include high risk investment transactions due to price fluctuations that are likely to inflict damages to the customer, in which case the customer would be called upon by a bank officer and given a maximum period of (60) days from the date of executing the transaction to have his ID renewed.
- Standing instructions governing Saudi account not related to outstanding obligations are allowed to continue after the freezing of the account subject to the approval of the operation manager at the bank's Head Office, for a limited number of times and for a maximum period of (180) days as of the ID's expiry date. The bank should lay down the procedures and the policies which ensure control and activation of these cases in terms of limits and number of times.
- Accounts of Saudi (male and female) diplomats, students on scholarship abroad, patients with chronic diseases staying at hospitals or other places and their accompanying family members, prisoners and the like, soon after the bank becomes aware of them, in which case they may be given (180) days from the date of expiration of ID for unlimited number of times after obtaining the approval of the bank’s compliance department manager. In order to extend the period specified, an approval from the bank’s CEO/general manager and the compliance department must be obtained. Banks shall contact their customers using the preferred method of contact according to their files or the procedures banks deem appropriate to encourage customers to renew their IDs.
- For the accounts of the State employees whose salaries are delivered through banks and whose accounts are frozen and are not able to present national IDs because of certain formality problem in respect therewith, they shall be allowed a 180 days' delay period after the date of expiration of their identification documents or updating due date, after presenting the official employment card or an official reference letter.
4. Updating Account Data
Customer identification must be established at the outset of relationship. As a measure of control, banks must require all their customers to update the database of their accounts with the bank according to the cases and the periods provided in these Rules. The updating process must include the customer ID, personal information, national address, financial information including personal information of the customer’s authorized representatives/agents and information of the beneficiary of legal persons. Banks shall establish permanent procedures and policies for the updating process which shall be carried out as follows:
4.1 Updating the Customer’s ID
a. Updating official identification cards and documents by type/duration.
- Identification cards and documents that are valid for less than five years shall be updated upon expiration, such as commercial register or license.
- Identification cards and documents that are valid for more than five years shall be updated every 5 years or upon expiration, whichever comes first.
- Accounts opened under official approvals or letters, such as accounts of government entities, embassies and the like and international organizations and the like, or under open-term licenses and registrations, such as accounts of private associations, foundations and schools, shall be updated every 5 years maximum.
b. Updating identity information online:
- Banks, at their discretion, may update identity information online for customers*.
- Incompetent persons or the like shall not be allowed to use this service.
- Banks shall check the validity of and document the identification documents by using documents, data or information obtained from reliable and independent sources.
* This paragraph has been amended according to the circular No. (42033441), Dated 20/05/1442H, corresponding to 03/01/2021G.
4.2 Updating Customer Information
a. Banks may update the customer information in any of the following cases:
- The customer information is outdated (the period specified has ended), or there is a change in the customer information, for example, a change in the commercial entity’s board of directors;
- The customer's behavior in executing financial transactions on the account has changed.
- The bank performs due diligence in case of ML/FT risks.
b. Banks shall understand that official identification documents and approvals can be used to update account approvals; however, using such documents only is not sufficient to update the customer information.
c. Accounts of correspondent banks shall be updated every three years maximum.
d. Banks may accept updating the information of the customer via electronic banking services (e.g. online or phone banking) for those subscribing to such services, provided that the identification information is verified and documented using documents, data or information obtained from reliable and independent sources*.
* This paragraph has been amended according to the circular No. (42033441), dated 20/05/1442H, corresponding to 03/01/2021G.
5. Inoperative Accounts
This rule has been respectively amended according to the circular No. (44071426), Dated 07/09/1444H, corresponding to 28/03/2023G, and circular No. (46015210), Dated 06/03/1446H, corresponding to 09/09/2024G.Accounts, relationships and transactions shall be considered non-moving after two calendar years from the date of the last financial transaction carried out by the customer, his/her authorized representative, or his/her heirs. Inoperative accounts are divided into three types as described in this Rule. The purpose of this Rule is to keep accounts active, save the customer assets (money) that have not been used for a financial transaction (withdrawal or deposit – depending on the nature of the relationship), recorded debit transactions, or documented correspondences during the period specified in Article (5.2). The Rule also supports communicating with customers, returning the rights to their owners upon request immediately after the completion of documents and necessary procedures, changing account status to abandoned if banks are unable to reach the account holder after using all methods of contact. Accounts of government entities shall be excluded from the provisions of this Rule in respect of the phase of abandoned accounts only as set forth in paragraph (5.2.4), and the bank accounts for enforcement courts that are established for the purpose of collecting enforcement amounts are excluded from all three stages of classification outlined in Article (5.2). Accounts of statutory reserve deposited by financial institutions supervised by SAMA, whose balances are not allowed to be disposed of without prior written permission from SAMA, shall also be excluded from the provisions of this Rule.
5.1 Transactions Subject to this Rule
This Rule applies to all assets (accounts, banking relationships, transactions, etc.) in cash and in-kind for natural and juristic persons which are deposited in banks operating in Saudi Arabia. Such assets include the following:
1. Inoperative current and saving accounts on which no financial transaction (withdrawal or deposit) has been carried out by the customer, his/her authorized representative, or his/her heirs*.
2. Automatically renewed investment deposits whose owners do not visit the bank after the completion of the agreed-upon period and cannot be reached by the bank.
3. Bank transfers (SARIE, Swift, remittance membership, etc.) that have not been settled, deducted or received from the date they are made.
4. Shares, bonds and title deeds of properties pledged against banking facilities that are fully paid by their owners, but they do not contact the bank to regain their ownership.
5. Safe deposit boxes (lockers) rented by banks to customers with contracts that have not been renewed from the date of the customer’s last visit, and banks were unable to reach the owners by using direct contact or other methods of contact or checking the customer’s other accounts and information in the bank. SAMA instructions on safe deposit boxes shall be applicable.
6. Unpaid amounts and profits due to customers on their investments in different types of investment funds managed, or was managed, or held by the bank for customers whose investment periods have expired and their owners have not received the amounts due because they do not visit the bank to receive such amounts and profits, they do not have active accounts for the bank to deposit such amounts and profits, or they can not be reached by the bank after they have been notified in writing.
7. Prepaid services accounts, in a way that does not conflict with the Regulatory Rules for the Prepaid Payment Services.
8. Amounts on credit cards that are not used or claimed by customers.
9. Leasing finance settlement accounts.
10. Amounts held against letters of guarantee and letters of credit as of their expiry date.
11. Other amounts due to customers and the accruals related thereof.
* This paragraph has been amended according to the circular No. (44071426), Dated 07/09/1444H, corresponding to 28/03/2023G. Please refer to the Arabic version of this paragraph to read the last updated version.
5.2 Durations, Periods and Requirements for Dealing with Inoperative Accounts
5.2.1 Active Accounts
This rule has been amended according to the circular No. (44071426), Dated 07/09/1444H, corresponding to 28/03/2023G. Please refer to the Arabic version of this rule to read the last updated version.Accounts shall be considered active if no more than (24) calendar months have passed since the last recorded financial transaction (withdrawal or deposit, depending on the nature of the relationship) carried out by the customer, his/her authorized representative, or his/her heirs, or since the last reliable and documented correspondence.
5.2.2 Dormant Accounts
This rule has been amended according to the circular No. (44071426), Dated 07/09/1444H, corresponding to 28/03/2023G. Please refer to the Arabic version of this rule to read the last updated version.Accounts shall be considered dormant after completing (24) calendar months from the date of the last recorded financial transaction (withdrawal or deposit, depending on the nature of the relationship) carried out by the customer, his/her authorized representative, or his/her heirs, or the last reliable and documented correspondence.
Requirements for dealing with dormant accounts:
- Activation of dormant accounts shall be subject to double supervision with higher authority, one of which includes the branch manager or the branch operation manager.
- Withdrawal and transfer transactions on a dormant account shall only be accepted in the presence of the customer (natural person), the customer’s legal agent holding a deed allowing him/her to operate the account, the agent of the customer’s heirs or the person authorized to operate the account if the account is for a juristic person. As an exception, fax number or e-mail address registered in the bank records shall be accepted. In addition, carrying out financial transactions using electronic services, such as online services and phone banking, shall also be accepted. The status of the account and the nature of the executed transaction shall be clear to the customer.
- Dormant accounts shall be allowed to accept all deposits, domestic and international transfers and dividends made by another person other than the account holder. The account status shall not be changed from dormant to active due to carrying out such transactions.
- This shall be applied to all customers, including those who have other active accounts. Banks are required to contact customers and inform them of the action to be taken on his/her account before completing five years if such customers have other active accounts. Customers shall also be asked to activate the account by carrying out a transaction. If the account is not activated during the specified period, the requirements of unclaimed accounts shall be applied.
5.2.3 Unclaimed Accounts
This rule has been amended according to the circular No. (44071426), Dated 07/09/1444H, corresponding to 28/03/2023G. Please refer to the Arabic version of this rule to read the last updated version.Accounts shall be considered unclaimed after completing five years (60 months), including the dormant phase, from the date of the last recorded financial transaction (withdrawal or deposit, depending on the nature of the relationship) carried out by the customer, his/her authorized representative, or his/her heirs, or the last reliable and documented correspondence, and the bank becoming unable to reach the customer after using all methods of contact.
Requirements for dealing with unclaimed accounts:
- Banks shall transfer the balance of the account within the month following the five-year period to the bank’s suspense account created for unclaimed accounts.
- Such accounts shall be classified in the suspense account to be easy to deal with and manage according to the different communication policies and procedures and supervision aspects.
- Unclaimed accounts shall be allowed to accept all deposits, domestic and international transfers and dividends made by another person other than the account holder.
- Banks shall completely conceal the customer signature and balance from the branch screens during this phase. Supervision on such accounts shall be limited to the Head Office.
- If the customer visits the bank to activate the account or withdraw the balance, the customer may open a new account to which the outstanding balance in the bank’s records can be transferred, or may receive the balance by check or bank transfer after confirming the identity of the customer; legal agent; the agent of the customer’s heirs or the person authorized to manage and operate the account (as the case may be).
- Banks shall establish policies and procedures to ensure double supervision over the files of such accounts, with a supervision level higher than that applied to the other files. Banks shall also save such files separately from the other files and provide the necessary safety tools to protect the files from recordkeeping risks.
- Balances of such accounts shall be recorded as liabilities in the bank balance sheet. Banks shall not take any action regarding the balances regardless of the balance limit, the subsequent period and the account type.
- Outstanding debt obligations on such accounts shall be deducted before transferring the balance to the suspense account.
- The bank may close customer accounts whose balances are equal to (1,000) riyals and less, provided that the customer is notified a month prior to the date of closing, and notifies him when closing, document the notices and save them in his file. The bank must keep all the data of these customers and the amounts of their balances in the combined account; to hand it over to them when they go back to the bank.
5.2.4 Abandoned Accounts
Accounts shall be considered abandoned after completing the periods specified in this paragraph from the date of classifying the accounts as unclaimed, and the banks becoming unable to reach the customer after observing the account movements and his/her other transactions with the bank and using all methods of contact according to the communication policies and procedures provided in the Rules. The periods of such accounts shall be as follows:
- Unclaimed for a period of ten years (total of 15 years as of the last transaction) for current accounts, saving accounts, investment deposits, balances of deceased persons and credit amounts in credit cards.
- Unclaimed for a period of five years (total of ten years as of the last transaction) for bank transfers, safe deposit boxes, retained earnings, unpaid amounts and profits due to customers on their investments, shares; bonds and title deeds of properties pledged against banking facilities that are fully paid by their owners, but they do not contact the bank to regain their ownership, amounts held against letters of guarantee and letters of credit as of their expiry date, leasing finance settlement accounts, prepaid services accounts, and other amounts due to customers and the accruals related thereof
Requirements for dealing with abandoned accounts:
- Banks shall change the account status to abandoned within the month following the completion of the periods specified.
- Such accounts shall be under direct supervision of an authorized official from the bank senior management.
5.3 General Requirements
For inoperative accounts:
a. Account commissions and profits shall continue to be calculated as agreed upon or at market rates.
b. Accounts shall be checked and classified and the procedures stipulated in the Rules thereon shall be taken according to the periods specified for each.
c. Copies of documents and records of all the amounts and dues shall be kept as per the regulatory period of record-keeping.
d. Detailed records of accounts shall be kept. Such records must include, as a minimum, the following:
- Customer full name as shown in the identification document.
- Customer ID number as shown in bank records.
- Amount of assets and time periods related thereto.
- Nature of customer assets (current accounts, investment deposits, remittances, etc.).
- The national address, residence address and contact numbers, if any.
- Bank account number, relationship number or the serial number in safe records, if any.
- Ownership certificate numbers, if any or relevant.
- Any other data about the customer, if available or necessary.
e. Personal and financial data shall be kept by the bank in electronic records according to the technical specifications set by SAMA for easy future reference. A copy of such data shall be submitted to SAMA.
f. Provisions containing the periods and procedures for freezing accounts and other funds mentioned in these Rules shall be added to contracts, agreements, account opening forms signed by customers, as well as account statements sent to customers.
g. The role of the compliance department shall be supervisory at all phases and periods stated to ensure the fulfillment of the requirements of such accounts. In addition, rights shall be returned by the bank operation department.
5.4 Communication Policy and Procedures for Inoperative Account Holders
5.4.1 The Communication Policy and Procedures Shall Be Implemented in Accordance with the Customer Classification and Legal Nature, as a Minimum, as Follows
- Resident natural persons, including Saudis, GCC nationals, expatriates and politically exposed persons residing in Saudi Arabia.
- Non-resident natural persons, including Saudis, GCC nationals and foreigners not residing in Saudi Arabia, including those who leave Saudi Arabia and still have balances in their accounts.
- Resident juristic persons.
- Non-resident juristic persons.
- Commercial banks, including international accounts.
- Correspondent banks.
- Accounts of government entities.
5.4.2 Methods of Contact
Banks shall communicate with and try to reach customers, without disclosing any financial data, in all time periods specified by all possible legal means, for example:
- SMS.
- Email.
- Available phone numbers.
- Official letter sent by the mail to customers inside and outside Saudi Arabia.
- On-site visits by the bank relation staff.
- Messages on bank statements showing the account status and the actions required from the customer.
- Available public search tools and official information centers that help reaching customers by providing banks with the customer new contact numbers not registered with the bank, or informing banks of the customer status if alive, left Saudi Arabia, or if his/her business and financial activity was terminated.
- Media awareness advertisements explaining the relevant regulations, the actions required from dormant account holders, and balance search procedures.
- Inquiries to competent official authorities.
- Banks shall communicate with customers using the above mentioned methods during the different phases of inoperative accounts at intervals. Therefore, customers shall be contacted, at least, two times during each phase. If the customer is not responding and cannot be reached, banks shall stop communication a year after each stage and document the methods of contact used.
5.4.3 Bank Communication Unit
Banks shall establish a unit (formally established or defined) to implement the communication policy effectively. The tasks of the unit shall include implementing communication procedures and documentation, taking all related responsibilities and preparing periodic reports on communication and the results thereof.
5.4.4 Stages and Steps of Implementing Communication Policy and Procedures for Inoperative Account Holders
Banks shall comply with the following when communicating with customers according to each phase:
a. Dormant accounts:
- Banks shall inform customers, using their preferred methods of contact, of their account status, the required actions, and the procedure that will be taken by the bank in case customers fail to cooperate, including changing the account status to unclaimed.
- Government entities and private associations shall be officially informed, a year before changing the account status from dormant to unclaimed, without prejudice to the provisions of paragraph (4.2), of the procedures to be taken if there are no transactions in the account.
- Embassies, consulates, their educational institutions, and resident diplomats shall be officially informed, a year before changing the account status from dormant to unclaimed, of the procedures to be taken if there are no transactions in the account.
b. Unclaimed accounts:
- A bank check shall be issued with the unclaimed account balance of the government entity to the Ministry of Finance's account with SAMA. The check shall be sent to SAMA under an official letter and a copy of the check to the government entity and the Deputy Ministry for Financial and Accounts Affairs.
- Banks shall inform customers, using the preferred methods of contact based on the results of communication in the previous phase, of the unclaimed account status and that they are required to contact the bank to receive the balance and open alternative new accounts.
- A bank check shall be sent to embassies, consulates and their educational institutions with the account balance. Such procedure shall be documented.
c. Abandoned accounts:
- Banks shall inform customers, using the preferred methods of contact based on the results of communication in the previous phase, of the abandoned account status.
5.5 Internal Audit Control and Reports
Unclaimed and abandoned accounts shall be subject to the internal audit program once every two years, as a maximum. In addition, audit reports shall be submitted to the Audit Committee and the annual audit program shall not be linked to any other periodic programs related to such accounts.
5.6 Annual Statistical Reports Required by SAMA
Banks shall submit an annual report to SAMA at the end of March in accordance with the schedule sent by SAMA. The report shall cover all unclaimed and abandoned accounts, including the nature, type and number of the account as of the end of December of the previous year, without disclosing any personal information.
6. Application of KYC Principle and AML/CFT Requirements
- Banks shall fully apply the KYC principle, provided that the primary purpose of the application is for the bank to be fully aware and have a complete picture of the customer and the nature of his/her activities and transactions, prior to or during the business relationship or the process of opening the account, or prior to carrying out a transaction to a customer with whom it has no business relationship, by assessing the risks that the customer may impose on the bank and the level of such risks. The identification of customers and assessment of risks shall be made while ensuring the fulfillment of all statutory requirements of opening accounts or starting business relationship.
- Banks shall establish, define, review and update the necessary procedures for the application of the KYC principle in accordance with the relative significance and degree of risk assessment made by the bank.
- Banks shall ensure that staff has the experience and training required to identify and assess the customer’s level of risks.
- These Rules shall be read in conjunction with the requirements of the Anti-Money Laundering Law and its Implementing Regulations, the Law on Terrorism Crimes and Financing and the Guidelines issued thereunder.
- The Compliance Department shall have the authority and right to timely access the customer identification data, due diligence information, transaction records and other relevant data.
7. Curators, Legal Agents, Custodians and Authorized Persons (Natural or Juristic)
Banks shall ascertain the nature of the relationship for natural curators, legal agents, custodians and authorized persons when opening accounts and check the validity of the documents submitted.
8. On-Going Monitoring of Accounts and Transactions
- Without prejudice to the provisions of the Anti-Money Laundering Law and its Implementing Regulations, the Law on Terrorism Crimes and Financing and the Guidelines issued thereunder, Banks should have appropriate systems in place to monitor the customer’s transactions and activities and identify any suspicious or wrong behavior. Manual transaction monitoring is not sufficient and banks shall invest in developing electronic systems in accordance with the best standards in monitoring and information security and protection to continuously monitor customers’ transactions.
- Banks shall continuously assess internal risk-based controls in order to benefit from unusual activities that have been detected.
- The electronic systems used in banks should be suitable for the nature of the bank's risk profile, and the monitoring system should be integrated with the bank's core systems. In case of incompatibility between the two systems due to integration, the bank shall be prepared to take the necessary precautions and manual procedures to address the incompatibility.
- If the bank suspects that banking accounts are being used illegally or that the source of the money deposited is found to be earned from illegal business, the bank must notify the Saudi Arabia Financial Investigation Unit of such case.
9. Training as a Key Principle for these Rules
- Banks should not assign any teller or customer service staff before attending courses on KYC, AML/CFT measures, and ethical and professional behavior of bankers.
- Banks should put in place continued training programs to provide on-job training to employees in these areas. Banks should include extensive training on the contents of these Rules and their applications in their training programs.
10. Disclosure of and Enforcement on Bank Accounts, Balances and Relationships
- Subject to SAMA’s instructions on providing government and non-government entities with documents, information and data of customer bank accounts, the disclosure of and enforcement on bank balances, accounts and relationships (such as, blocking and compulsory deduction) shall be made by an order from SAMA upon the request of the competent authorities.
- Enforcement on banking relationships means blocking, compulsory deduction, check issuance and money transfer from the bank's customer accounts.
- Procedures taken for the disclosure of and enforcement on bank balances, accounts and relationships at all stages shall be strictly confidential. Such requests shall be received only by SAMA except for cases stated in SAMA’s instructions.
- Banks shall carry out requests for disclosure and enforcement according to the form, manner and period specified by SAMA.
10.1 Disclosure of Bank Balances, Accounts and Relationships
For the purpose of disclosing bank balances, accounts and relationships upon SAMA’s request and according to the relevant instructions, banks shall search for all relationships between the bank and the customer, including all active; closed and suspended accounts, inoperative accounts, deposits, valuable boxes, credit cards, remittance accounts (remittance membership) and any other relationships or products offered by the bank. Banks shall ensure that the search is made based on the customer name, ID or the document under which the account is opened according to the following:
- The search shall include sole proprietorships owned by the person inquired about and his/her participation in companies. Banks shall state in the statements submitted to SAMA that the search included such accounts and transactions. However, if the disclosure is requested for a certain relationship/transaction, banks shall only include the requested relationship/transaction in the statement.
- The validity of information sent to SAMA in compliance with the requirements of this Rule shall be checked.
- In case of requesting the disclosure of balances, accounts and relationships of a natural person, the disclosure shall include all the information required above in this Rule, in addition to institutions and stores owned by the natural person pursuant to the principle of full financial disclosure. If disclosure is requested for a specific institution or store, disclosure shall include the relationships related to such institution or store not the owner.
- In case of requesting the disclosure of balances, accounts and relationships of a natural person, disclosure shall be limited to the name of the company and the percentage of ownership. The accounts and balances of companies the natural person co-owns or in which he/she owns shares shall not be disclosed. The same shall apply to joint accounts by disclosing only the number of the account and the percentage of ownership of the customer subject of the disclosure request, unless otherwise provided in SAMA's request.
10.1.1 Attachment of Bank Balances, Accounts and Relationships
Banks shall comply with the following when attaching bank accounts, balances and relationships upon the request of SAMA in accordance with the relevant instructions:
- If a specific amount of money is requested to be attached from the customer’s account, the bank shall, from the receipt of the request, commit to attaching only the amount of money specified from the outstanding balance if the amount is available. In case the amount is not available, the bank shall not allow the customer to make debit transactions from the outstanding balance in the customer’s accounts (withdrawal, transfer, etc.) or open new accounts. Only credit transactions shall be allowed until the amount is available again in the account.
- Attachment shall include all credit balances in the bank accounts and relationships, except the accounts of the companies that the customer co-owns directly or indirectly, and the joint accounts, unless otherwise provided in SAMA's request.
- If the request includes precautionary or executive attachment of a specific amount of money, attachment shall be enforced only on the amount specified. Once the amount requested to be attached is available, SAMA shall be informed and attachment of other accounts and amounts of money shall be lifted.
- If attachment is requested for a specific period of time, attachment shall be automatically lifted upon the expiry of the period.
- Banks shall, when imposing attachment, comply with the instructions issued on deduction. If deducting from an employee, the amount of money seized shall not exceed one third of the net monthly salary, except for the alimony debt if provided for in SAMA’s instructions. If deducting from a retiree, the amount of money seized shall not exceed one quarter of the net monthly pension, except for the alimony debt if provided for in SAMA’s instructions. Banks shall also comply with the instructions issued on bank accounts opened for or receive government compensation and subsidy for citizens, as well as any other instructions on the amounts excluded from attachment. In addition, banks shall allow the withdrawal of such amounts form ATMs.
10.1.2 Instructing Banks to Stop Dealing with Customers
- Upon receipt of requests to stop dealing with customers, banks shall ban such customers from managing their existing banking relationships and shall not
- be allowed to establish new relationships or carry out debit transactions. The ban shall be imposed in respect of the customer’s funds and in his/her personal capacity only,
- and shall not include the fact that the customer is a guardian, curator, legal agent or a person authorized to manage accounts not opened in his/her name, unless otherwise provided in SAMA's request.
- If the stop dealing order is issued for a specific period of time, the order shall be automatically lifted upon the expiry of the period.
- If the stop dealing order is issued with an attachment order, the stop dealing order shall be automatically lifted upon lifting the attachment order by the bank.
10.1.3 Compulsory Deduction from Accounts
- Compulsory deduction shall be enforced by an order issued from SAMA to the bank at the request of the authorized entities. Upon the request, the bank shall deduct a specified amount on a monthly basis from the bank's customer account to a specific beneficiary account.
- Compulsory deductions and expenses are considered priority and must be carried out or deducted before any other debts. Necessary steps shall be taken by banks to ensure the execution of such action.
- SAMA’s deduction request for expenses or debts is to be made on the customer bank account to which salary payments are credited. The deduction shall be made promptly upon crediting such payments to the account. Necessary steps shall also be taken to ensure the execution of such action. The only exception here, however, is when SAMA’s request states that such deductions shall be made from another bank account.
10.2 Freezing in the Event of Death, Bankruptcy or Loss of Legal Competence
10.2.1 Official Notice on Freezing by Reason of Death, Loss of Legal Competence, Starting Any Liquidation or Administrative Liquidation Procedures Under the Bankruptcy Law, or Going into Liquidation Under Companies Law
I. In accordance with the applicable laws, the bank must stop all dealings related to the account and freeze the balance therein if it becomes aware of, or receives official notification from a competent authority about, any of the following:
a. Death of the account holder or one of the account holders.
b. Restriction on the legal competence of the account holder or one of the account holders.
c. Issuance of a judicial order or a decision from the company’s general assembly or partners to liquidate the company that owns the account.
d. Starting any liquidation or administrative liquidation procedures under the Bankruptcy Law for the account holder.
II. When carrying out the above, the following shall be considered.
- The absence of a provision in the company’s memorandum of association and articles of association that allows the company to continue if any of the cases mentioned in Paragraphs (a) and (b) of Item (I) stated above occurs.
- The account must be operated in accordance with Paragraph (c) of Item (I) stated above by the liquidator appointed by a judicial liquidation decision or a decision of the company’s general assembly or partners. The decision should include the appointment of the liquidator, restrictions imposed on its power and the period needed for liquidation (provided that such period shall not exceed five years if the decision is issued by the company’s general assembly or partners). The exception to the provisions of this paragraph and Paragraph (c) of Item (I) above is when the company’s memorandum of association, its articles of association, or partners’ agreement contain(s) a provision on how to liquidate the company. In such case, the liquidation should be performed thereby, as the case may be.
- The account shall be operated in accordance with Paragraph (d) of Item (I) above by the liquidator or bankruptcy committee as determined in the decision of the competent court.
- Checks issued before the occurrence of any of the cases mentioned in Item (I) above should be considered, unless otherwise stated by a court order issued thereon.
10.2.2 Request of Heirs, Guardians and Curators to Banks to Disclose Transactions and Account Balances of their Deceased or Incompetent Persons and the Like
10.2.2.1 Inquiring About and Operation of a Deceased’s Account
- If any person requests a bank to disclose transactions, accounts’ balances or banking relationships of his/her legator, the bank must respond to the request after verifying the existence of the necessary documents, which empower him/her to act so, including, as a minimum, the death certificate and determination of heirs deed (or an original copy thereof) that defines the names of heirs, including the person requesting the disclosure. If the requesting person is a legal agent of all the heirs or of one of them, he should produce the original power of attorney of his heirs or any of them that gives him the right to inquire about the legator's balances. The inquirer should be provided with the answer in a written form. The statement provided should be accurate and should include all banking relationships pertaining to the deceased. The Bank should keep a copy of the statement after being signed by the recipient.
- To operate the accounts of a deceased after freezing balances and stopping dealings because of death, the bank must verify the persons who have the right to the account of the deceased. Disbursement should be made based on legal practices and documents, including, as a minimum, the provision of the determination of heirs deed (or an original copy thereof) and the presence of heirs or their representatives collectively or individually, provided that such representatives have a power of attorney thereon. In addition, the decision of disbursement or distribution made by mutual agreement or by the competent court should be presented to the bank. If it is impossible to provide any of the required documents in connection with the deceased expatriate, the bank, after obtaining an attested death certificate, should issue a banking check with the amount of the balance in the name of the deceased’s country’s embassy to hand it to his/her heirs. The bank must comply with the requirements and procedures for heirs’ accounts set forth in Rule (200.1.1).
- Providing heirs or their representative with the deceased’s account statements or account activity for the period preceding the date of death is prohibited unless SAMA informs the bank of the issuance of a judicial order requiring so.
10.2.2.2 Inquiring About Incompetent Persons’ Accounts
If any person contacts a bank to inquire about or require disclosing of transactions, accounts’ balances or banking relationships of an incompetent person, the bank must respond to the request after verifying the existence of the necessary empowering documents, including, as a minimum, a legal document that proves the person’s guardianship or custody over the incompetent person. The inquirer should be provided with the answer in a written form. The statement provided should be accurate and should include all banking relationships pertaining to the incompetent person. The bank should keep a copy of the statement after being signed by the recipient. Providing curators or guardians with the incompetent person’s account statements or account activity information for the period preceding the issuance of the custody or guardianship deed is prohibited. For account operation, the provisions of the related rules should be applied on a case-by-case basis (interdicted, disabled, etc.).
11. Providing Services to Customers with Disabilities and Giving them Priority
The bank should give the optimum priority and care to customers with disabilities in a way that facilitates the procedures of providing banking services thereto.
Chapter III. Procedural Rules
100. General Instructions for Opening Bank Accounts
1. Customer ID
- The bank must obtain copies of all required documents and compare them with their originals in order to ensure conformity and authenticity. All copies of documents must also be stamped to confirm their authenticity.
- The bank must obtain customer’s signature on the photocopy of his/her ID, confirming the authenticity of the photocopy and the original. The bank must ensure that no transaction shall be carried out for any customers before examining the customer’s ID and verifying its validity as prescribed for the identification documents of customers set forth herein.
- The bank must identify and examine persons authorized to sign for bank accounts.
2. Documents Required to Open a Bank Account are as Follows
a. An original copy of the ID of natural or juristic customer.
b. Account opening agreement form which is prepared according to the requirements hereof. The agreement should include, as a minimum, the following:
- Customer's personal data: Name, nationality, ID number, validity date of ID, national address, occupation, and contact details.
- Financial information: Source of income (primary/additional), the expected size of financial movement on the account (deposits/withdrawals), and the purpose of opening the account.
- Terms and conditions of the agreement between the two parties (i.e. the bank and the account holder), along with customer signature thereon placed in the designated space.
- A specimen signature (personal signature, thumbprint, or personal stamp) which the customer will use for his/her transactions with the bank.
- Details and identity document of the guardian or representative and the like, and their signatures.
- A declaration by the customer of the following:
■ That he/she is not legally prohibited to be dealt with, that all information and data he/she has given is true and reliable, and that he/she has understood the terms, conditions and other provisions of the account opening agreement.
■ That he/she would be liable before the competent authorities for the funds deposited in his/her account by him/her personally or deposited by others with or without his/her knowledge, whether or not he/she used such funds, and when he/she failed to formally report to the bank the existence of such funds. That the funds deposited are from legal sources, that he/she is liable for their being free from any forgery or counterfeiting, and that if the bank receives from him/her (the customer) any illegal or counterfeit notes, he/she will not be refunded or compensated.
■ That he/she commits himself/herself to updating his/her personal data when requested by the bank or from time to time (as specified by the bank), provided that the interval shall not exceed 5 years. The customer also undertakes to provide a renewed ID before the expiration of its existing validity, and he/she acknowledges that if he/she fails to do so, the bank will freeze his/her account.
■ That the bank reserves the right to freeze the account or an amount of money credited to the account if the bank suspects that the bank account is being used illegally or that the amounts deposited are from financial fraud.
■ That he/she is the real beneficiary. The bank should verify such information.
- The bank must ensure that the account opening agreement (for juristic persons) contains, at a minimum, the following information:
■ Information on members of the board of directors.
■ Information on managers of the juristic person as per its status.
■ Information on authorized signatories, and their specimen signatures.
■ Verification of the ownership structure to identify the actual beneficiary, in addition to the structure of control and ownership.
3. Rules for Remote Opening of Bank Accounts for Natural Persons
This rule has been amended according to the circular No. (42009017), Dated 18/02/1442H, corresponding to 05/10/2020G.1. Opening bank accounts remotely for customers with existing accounts in the same bank is not allowed.
2. The service is provided for individual citizens (national ID holders) and residents (Iqama holders).
3. The bank is responsible for verifying the identity of customers by using documents, data or information acquired from a reliable and independent source.
4. Risks associated with such accounts shall be assessed, policies and procedures for mitigating the associated risks shall be established periodically, and preventive measures to mitigate risks commensurate with the risk assessment results shall be developed and implemented.
5. The bank must set a clear and secure mechanism to activate the ATM card used for the bank account.
6. Documents and requirements referred to in Paragraph (2) above must be submitted and fulfilled by the customer, except the following:
■ An original copy of the ID of the natural or juristic customer.
■ A specimen signature (personal signature, thumbprint, or personal stamp) that the customer will use for his/her transactions with the bank.
4. Rules for Remote Opening of Bank Accounts for Sole Proprietorships
This rule has been added pursuant to the circular No. (41027515), Dated 20/04/1441H, corresponding to 17/12/2019G, and amended according to the circular No. (42009017), Dated 18/02/1442H, corresponding to 05/10/2020G.1. The bank is responsible for verifying the identity of the enterprise and its owner by using documents, data or information acquired from a reliable and independent source.
2. Risks associated with such accounts shall be assessed, policies and procedures for mitigating the associated risks shall be established periodically, and preventive measures to mitigate risks commensurate with the risk assessment results shall be developed and implemented.
3. The bank must set a clear and secure mechanism to activate ATM card used for the bank account.
5. Rules for Remote Opening of Bank Accounts for Resident Corporations
This rule has been amended according to the circular No. (42009017), Dated 18/02/1442H, corresponding to 05/10/2020G.1. The bank is responsible for verifying the identity of the corporation by using documents, data or information acquired from a reliable and independent source. The following at least shall be checked: The name and legal form of the corporation, the powers that regulate and govern its work, the corporation's capital, its owners and the ownership percentage of each owner (except for the partners of a listed joint-stock company), the members of the board of directors if any, the directors, and the persons authorized to open and operate the accounts.
2. Appropriate standards must be set to manage risks associated with these accounts before approving the opening of such accounts in order to avoid opening an account for a company or a person with whom dealing is prohibited, for an incompetent person or the like.
3. The bank must set a clear and secure mechanism to activate the ATM card used for the bank account.
6. Rules for Remote Opening of Bank Accounts for Foreign Companies According to Foreign Investment Law
This rule has been added pursuant to the circular No. (43058341), Dated 01/07/1443H, corresponding to 02/02/2022G.1. Verifying the identity of the company by using documents, data or information acquired from a reliable and independent source as follows: The commercial register and the license obtained from the Ministry of Investment (MISA), the name and legal form of the company, the powers that regulate and govern its work, the capital, the owners and the ownership percentage of each one, and the members of the board of directors/executives.
2. The service shall only be provided to the general director of the company whose name and powers are stated in the company’s memorandum of association, including the opening and managing of bank accounts. Additionally, the identity of the general director shall be verified by using documents, data or information acquired from a reliable and independent source.
3. As an exception to Chapter 4 requirements concerning the operation of bank accounts, the authorized general director may operate the account with the passport, provided that the Iqama is presented after (90) days from the account opening date.
4. Risks associated with such accounts shall be assessed, policies and procedures for mitigating the associated risks shall be established and reviewed periodically, and preventive risk mitigation measures commensurate with the assessment results shall be developed and implemented.
7. Account Information Card
The bank must provide the customer (using any appropriate means) with account information, including the customer's name, account number and IBAN as evidence of opening the account.
8. Opening an Account without Making a Deposit
This rule has been amended according to the circular No. (46015210), Dated 06/03/1446H, corresponding to 09/09/2024G.The bank must agree to open an account for any customer if the required documents and conditions are submitted and satisfied. The bank must not require the customer to deposit any amounts as a condition for opening the account. If no amount is deposited in the customer account within a period of 90 days, then the bank must close such account. The exception is being made to government entities’ accounts that the Ministry of Finance (MOF) approves opening without the need to deposit any amounts for a period specified by the MOF, As well as the bank accounts for enforcement courts that are established for the purpose of collecting enforcement amounts.
9. Blind and Illiterate Customer Service and Dealing
- The bank must open an account for any blind or illiterate customers who request so. The bank must also provide the blind or illiterate customer with an ATM card, in addition to a checkbook upon his/her request. The blind or illiterate customer has the right to obtain any banking services (telephone banking and/or Internet banking), provided he/she has been advised of the terms and conditions governing these services. Further, his/her signature must be obtained in this regard, confirming that such services are provided for him/her upon his/her request and choice, that he/she is aware of the risks associated with the use of such services, and that he/she is legally liable for all dealings being conducted through such type of services.
- Both the blind customer and illiterate customer must present a personal reference to introduce them to the banking procedures taken and documents and papers required by the bank. Such personal reference shall have an ID, be 15 years old or older, and be able to read out to the blind or the illiterate and to act as a witness. The bank must obtain from the personal reference a copy of his/her ID, in addition to his/her national address and signature.
- Should the blind or illiterate customer request to go through banking procedures without the presence of the personal reference, then the banking procedures will be introduced to him/her by one of the customer service representatives at the bank. Such introduction will be certified by one of the branch’s authorized signatories (branch/operations manager), confirming that the customer has been introduced to all necessary information and terms and conditions for the opening of accounts as well as the account management controls and that such terms and conditions and controls have been read out to him/her.
- Both the blind customer and illiterate customer must provide a thumbprint and a personal stamp as his/her specimen signature. Should either of them wish to use the (manual) personal signature as a specimen signature, he/she will be permitted to do so. In this case, it should be documented that this procedure has been taken at his request and choice and on his/her own responsibility.
10. Foreign Currency Accounts
Customers may open accounts in any available foreign currency. They may deposit and withdraw funds in a foreign currency. If such foreign currency is not available, payments can be made in Saudi riyal. Normal fees and expenses involved in such transactions will be borne by the customer.
11. Multiple Bank Accounts
The customer may have more than one account at the same bank, provided that all accounts bear one Customer Information File (CIF) number. Using the same account number for a new customer is not permitted.
12. Presence of Customer
Subject to the provisions hereof, as a basic rule, no account should be opened for new customers without their presence at the bank. The exception is being made to cases where there are powers of attorney explicitly authorizing the opening of bank accounts and containing the personal information of both parties. Furthermore, this rule (the presence of customer) shall also be applied when updating Know Your Customer (KYC) details for the account.
13. Visiting the Customers in Exceptional Cases
In exceptional cases where the customer is unable to visit the bank for reasons beyond his/her control, the bank may delegate two or more of its staff (with different powers) to meet the customer on-site and obtain relevant information and documents as required herein. The bank must develop the appropriate procedures and policies to ensure correct implementation.
14. Transfer and Check Services
14.1 Outgoing Transfers and Sold Checks
Banks are not allowed to render outgoing transfer and sold check service except to customers maintaining accounts therewith. Customer number is sufficient in the Express Transfers System as a substitute for bank account for customers of this service only, provided that the bank, upon the initiation of membership, obtains the personal data of customers on a special form designated for this service and uses a separate file. In addition, the bank must obtain the customer specimen signature and valid ID certified by both the customer and the bank employee pursuant to these Rules. Customer Number should be based on the ID number. Moreover, the Transfers System should be subject to regulatory procedures for accounts, such as freezing, verification of the ID validity and customer’s name, and limits placed on concerned customers. Membership account shall also be linked to transactions monitoring systems.
14.2 Incoming Transfers and Purchased Checks
Incoming transfers and purchased checks may be accepted in the following cases:
- If the transfer or check is made or issued from an account with the bank to a natural or juristic beneficiary account in one of the branches of the same bank, the transfer or check may be paid in cash to the beneficiary or his/her legal agent.
- If the transfer or check is from a local bank to another local bank, then payment shall be from the account of transferor to the account of the transferee.
- If the transfer is coming from outside Saudi Arabia in the personal name of the beneficiary, money transferred shall be paid through a bank account only.
15. Time Period for Opening the Bank Accounts
This rule has been added pursuant to the circular No. (75362/67), Dated 27/12/1440H, corresponding to 28/08/2019G.Banks shall open bank accounts for natural and juristic persons, for whom no approvals from bank’s concerned departments are required, within one business day if they meet all bank requirements and within two business days for those who need approvals. The applicant must be informed in writing of any missing or additional requirements upon application.
200. Rules for Opening Accounts for Natural Persons
200.1 Natural Persons Residing in Saudi Arabia
Natural persons are allowed to open accounts and use services provided by banks operating in Saudi Arabia pursuant to conditions regulating such services, as follows:
200.1.1 Saudi Natural Persons
• Male and female citizens:
Male and female citizens may open bank account by presenting their national ID (or family register for minors).
• Saudi natural persons exempted from personal photographs:
No accounts shall be opened by a national ID containing a statement on exempting its holder from providing personal photo, unless SAMA receives from the Ministry of Interior an official letter to this effect and informs the bank thereof.
• Minors:
Bank accounts may be opened for minors as follows:
1. The bank account shall be opened through the guardian, curator, or custodial person.
2. The account shall be in the name of the minor, while it is operated by the guardian, curator or custodial person.
3. The bank shall receive a copy of the custodianship deed issued by the competent court for the curator, or a copy of the guardianship deed where the guardian is not the father, or a copy of the custody deed for the custodial person.*
4. The bank shall obtain and verify the data of the family register to which the customer’s information is added, as well as the national identity information of the guardian, curator or custodial person.
5. When the minor reaches the age of (18) Hijri years and is still incompetent, the bank must receive a copy of the legal deed that proves the minor's condition as well as a copy of the guardianship continuation deed for the guardian or a copy of the custodianship deed for the curator.
6. As an exception of Paragraphs (1) and (2), a minor who has reached the age of (15) Hijri years and has a national ID may open and operate a bank account himself/herself, provided that the bank obtains the consent of the guardian or curator to open the account for the minor. In this case, no checkbook shall be issued until he/she reaches the age of (18) Hijri years.
• Bank accounts of people with disabilities-upper-limb disabled/ people with no upper limbs:
Bank accounts may be opened for upper-limb disabled people and people with no upper limbs, who cannot write or sign, subject to the following conditions and requirements:
1. A copy of the person’s national ID or Iqama must be submitted to the bank.
2. The bank should approve the customer’s seal instead of the personal signature on all documents and bank transactions.
3. Withdrawals from the account shall be made only in the presence of the customer personally at one of the bank's branches. If the customer requests an ATM card, e-banking service, telephone banking service, or/and a checkbook, the bank should provide him/her with these services, upon receiving the customer’s declaration and undertaking carrying his/her own seal and upon submission of a testimony by two of the bank branch’s employees (one of them should be the branch manager or his deputy) stating that the services are granted under the customer’s own responsibility.
4. Procedures should be introduced, if necessary, to the customer by two of the branch’s employees (one of them should be the branch manager or his deputy). Such employees should sign on each transaction, contractual relationship, or deposit or withdrawal document.
• Legally Incompetent Person:
A bank account may be opened for a legally incompetent person by his/her legal representative who shall be the one authorized to sign for and operate such account. The legal representative must present the original documents supporting the authority given to him/her, along with the originals of his/her own personal identification documents as well as those of the legally incompetent person.
• Children with special circumstances:
- These are children born in the Kingdom of Saudi Arabia from unknown parents, illegitimate children, and children deprived of care from parent(s) or relatives due to death, divorce of parents, imprisonment of mother, suffering of mother from mental illness or chronic or contagious physical illness, or any other similar reason that prevents the mother from properly looking after her children. Such children are staying at housing centers of the Ministry of Human Resources and Social Development (MHRSD), such as social nurseries, social education homes, model educational institutions, or charities caring for orphans, or living with substitute families as per a status letter from the MHRSD. Such children are Saudi and are given certificate of birth, in addition to the right to have a national ID when reaching the age of 15 Hijri years.
- A bank account may be opened for such children, upon a letter from the General Manager of Orphan Welfare or the General Manager of Social Affairs at the MHRSD. In addition, a copy of the child’s birth certificate authenticated by the housing center, the MHRSD or the bank (where the original is presented to the bank for verification) must be submitted. Drawing/disbursing funds from such account shall be made possible only by presenting a letter from either the Deputy Minister for Social Development or the Assistant Deputy Minster for Welfare Affairs. If the child is living with a foster family (substitute family sponsoring him/her) and the family requests opening a bank account for the child, an account may be opened in the child’s name after obtaining a letter from the MHRSD issued by the General Manager of Orphan Welfare or the General Manager of Social Affairs in the concerned region in Saudi Arabia. The letter should specify the name of the child and the names of both spouses of the family sponsoring the child. Additionally, certified copies of the child’s birth certificate and the sponsoring family’s identification documents as well as other relevant personal information of such family must be submitted to the bank. Such account shall be operated by the sponsoring family in all drawing and depositing transactions until the child reaches the legal age of 18 Hijri years. When the child reaches the age of (15) Hijri years, his/her national ID shall be accepted if presented instead of the birth certificate.
• Prisoners:
Bank accounts may be opened for prisoners if they approach banks escorted by officers of the General Directorate of Prisons. The bank must obtain from the accompanying officers a letter by the prison management in the city where the prison is located. The letter should be addressed to the bank branch, indicating the prisoner’s name and ID or Iqama number and the desire of the prisoner to open a bank account. The branch shall assign its senior teller, customer service representative or any other higher senior officer to receive the security car outside the premises of the branch, meet the prisoner, complete all regular procedures for opening the account as stipulated in Rule (100), and enable the prisoner to perform transactions and benefit from services offered by the bank. The prisoner shall also be permitted to operate his/her account following the same applicable manner and procedures. For female prisoners who do not present a national ID, the prison management’s letter introducing the female prisoner may be accepted.
• Prisoners’ trust accounts:
Opening of bank accounts for depositing and withdrawing of Prisoners’ Trusts shall be allowed according to the following controls:
1. The account shall be opened by a letter from the General Director of Prisons or his authorized representative. The letter shall be addressed to the bank branch at which the account will be opened, clearly indicating the purpose of opening the account.
2. The name of the account shall be “The General Directorate of Prisons, Prisons of (.....) Region, (name of) Prison-Holding Prisoners’ Trusts”. The same regular procedures for account updating shall be applied to this account.
3. The account shall be operated by a joint signature of at least two persons: the prison warden or his deputy and the officer in charge of the prisoners’ trusts or his deputy. Copies of the authorized signatories’ IDs and specimen signatures shall be obtained.
4. Withdrawal from the account shall be made only by checks signed by the authorized persons, by transfer from the prisoners’ trust account to the prisoner's own account, or to the enforcement court according to a court ruling**.
5. Deposit shall be made in cash through the bank branch or by a check if the trust is a check drawn to the order of the prisoner. Deposit shall be made by the authorized person or the person he/she may authorize. The cash deposit service can be offered by ATMs, if available at the prison department. Cash deposit card can be issued in the name of “(.....) Prison- Prisoners’ Trusts”. The PIN of the deposit card shall be handed to the of the prison warden. ATM cards and credit cards shall not be issued for such account**.
6. The bank may, at its discretion and upon its approval, offer online banking and telephone banking services, based on a formal letter from the entity operating the account, for only checking account balances and inquiring about transactions.
• Bank accounts of heirs:
If the bank receives an official notice of, or becomes aware of, the death of an account holder, it should apply the following measures based on the applicable regulations:
1. The provisions of the supervisory Rule (10.2) should be applied.
2. The name of the account should be changed to "Heirs of , or a new account should be opened under this name.
3. The determination of heirs deed (or an original copy thereof) should be accepted as, and considered, an ID for maintaining the existing account or for opening a new account for the balances.
4. In completing the account information, the ID number is the number of the determination of heirs deed, the date of the ID is the date of such deed, and the place of issue is the court issuing the deed.
5. The person authorized to sign shall be the heirs themselves or their agent(s), collectively or individually. The bank is required to register the personal data of heirs and authorized agent(s) as well as including copies of their respective IDs and the legal power(s) of attorney in the account file.
6. The account shall be valid for one year from the date of determining the authorized persons as per the abovementioned paragraphs. The account shall be annually updated. If the account has had no activity for five years starting from the date of death, the provisions set forth in Rule (5) of the Supervisory Rules and Controls shall be applied.
7. Only checkbooks can be issued for such accounts and not ATM cards or credit cards.
• Receiver:
Opening accounts for a receiver is permitted upon completing the following:
1. Submitting a copy of the court order appointing the receiver and stating his powers.
2. Submitting a copy of the national ID of the receiver.
3. Submitting a copy of the receiver’s license unless appointed by the concerned parties.
4. Submitting a copy of each document pertaining to the subject of dispute under receivership (for which the court order of receivership was issued). Such documents include the determination of heirs deed if the dispute is over an heirloom, or the memorandum of association and its annexes if the dispute is over a company. The document(s) required in other cases should be based on the distinction made in the previous point.
5. The name of the account should indicate its purpose, in addition to including the expression "Under Receivership”.
6. The court order should be used as an ID for opening the account or maintaining its use.
7. In completing the account information, the ID number is the number of the court order, the date of the ID is the order date, and the place of issue is the court issuing the order.
8. The authorized signatory for the account shall be the receiver or as specified by the court order.
9. The account shall be valid for one year from the date of the court order. The account shall be updated annually by the authorized signatory in accordance with Paragraph (8). If the account has had no activity for five years from the date of its opening, the provisions provided for in Rule (5) of the Supervisory Rules and Controls shall be applied.
10. Only checkbooks can be issued for such accounts and not ATM cards or credit cards.
* In accordance with circular No. (44086644), Dated 15/11/1444H, the Saudi Central Bank confirms that all banks must accept conciliation documents issued by the conciliation Center, including proof of custody, in banking transactions that the custodian conclude on behalf of the child. reconciliation documents can be verified electronically through the Taradi platform portal.
** Amended according to the circular No. (12426/67), Dated 25/02/1441H, corresponding to 24/10/2019G.
200.1.2 GCC Natural Persons
The bank may open accounts for GCC natural persons, after obtaining a copy of the customer’s national ID, his/her address in Saudi Arabia (proved by a service invoice, residential lease agreement, real estate ownership deed-or an original copy thereof, or a testimony by a Saudi person stating that the customer resides in the mentioned address), and his/her address in his/her home country. A GCC natural person is allowed to authorize a Saudi person or a another GCC citizen to open and operate his/her bank accounts.
200.1.3 Expatriates in Saudi Arabia
This rule has been amended according to the circular No.(42078428), Dated 10/11/1442H, corresponding to 19/06/2021G.• Expatriate holding residence permit (Iqama):
The bank may open bank accounts for expatriates holding residence permits (Iqama) after obtaining a copy of Iqama. Such Iqamas might be issued by the Passport Department against the applicable fees or free of charge, such as Iqamas issued to students of universities, students of military colleges, and students of institutes, who obtained scholarships or training approvals, or might be issued by the Protocol Affairs at the Ministry of Foreign Affairs or the like. In addition, the bank should obtain the expatriate’s address in Saudi Arabia as well as his/her address in his/her mother country.
• Expatriate dependents (whose Iqamas include a statement indicating that they are dependents and are “not authorized to work”):
The bank may open bank accounts for expatriate dependents whose Iqamas indicate that they are dependents and not authorized to work in Saudi Arabia. The bank shall comply with instructions related to expatriates’ bank accounts. If the bank suspects that the bank account is being used for illegal purposes or it finds out that the deposited funds are from the work of those dependents and not from their families, then the bank must inform the Saudi Arabia Financial Investigation Unit (SAFIU).
- If the expatriate whose Iqama indicates that he/she is a dependent and not authorized to work in Saudi Arabia is a son/daughter of a Saudi mother but a Non-Saudi father, then he/she is allowed to open a salary account, provided that he/she submits official documents proving that his/her mother is Saudi. The requirements mentioned above shall also be fulfilled.
- If the expatriate whose Iqama indicates that he/she is a dependent and not authorized to work in Saudi Arabia works for a licensed educational institution and wishes to open a salary account, then the bank account might be opened for him/her upon satisfying the following requirements:
1. Submitting a copy of Iqama.
2. Completing an account opening form by the customer for the purpose of receiving salary from the contracting institution.
3. Providing a written undertaking by the customer to notify the bank upon the expiration or termination of his/her contract.
4. Submitting a letter of employment from the general management of the educational institution contracting with the account applicant. Such letter should provide basic information about the expatriate and his/her salary and bonuses and should also state that he/she is currently employed by the educational institution by an “Ajeer” notice (work permit). Moreover, the letter should indicate that it is provided for the purpose of opening a salary account. Further, the following documents should be attached to the letter:
a. A copy of the valid Ajeer notice issued in the expatriate’s name and verified by the contracting institution.
b. A copy of the contracting institution’s license as issued by the supervising body.
c. A copy of the validity certificate issued in the expatriate’s name by the supervising body and verified by the contracting institution.
d. An undertaking to notify the bank upon expiration or termination of the account holder’s contract.
5. The bank account shall be valid for a period identical to the validity period of the account holder’s Iqama or Ajeer notice, whichever expires first.
6. The approval of compliance department for opening the bank account shall be obtained.
- If the expatriate whose Iqama indicates that he/she is a dependent and not authorized to work in Saudi Arabia is a minor (under the age of 15 years), then his/her account shall be operated by the main, sponsoring expatriate residing in Saudi Arabia. However, if the main expatriate is a woman and her husband is her escort, the minor’s account in this case shall be operated by his/her father since he is the legal guardian. If the minor reaches the age of 15 Hijri years, receives an independent Iqama, and applies directly for opening a bank account, the bank shall seek the approval of the guardian or curator for opening the account. In this case, no checkbook shall be issued until the minor reaches the age of 18 years.
- This type of bank accounts shall be classified as a high-risk account.
• Expatriate with a temporary (90-day) work visa in his/her passport:
Bank account may be opened for expatriates whose employers are individuals, institutions, official entities, or companies in order to transfer or deposit their salaries and financial entitlements during the temporary residence period in accordance with the following:
1. The account is to be opened for the expatriate employee upon receiving an official request from the employer. Such request shall state that the holder(s) of the account(s) works/work for the employer and that no Iqama was issued for the expatriate due to not completing 90 days from the date of arrival in Saudi Arabia. The request shall also specify the occupation and task of the expatriate, why the account is needed, sources of money to be deposited in the account, and his/her salary. The bank shall check the original passport(s) including work visa.
2. The employer shall undertake to notify the bank once the account holder leaves Saudi Arabia (on a final exit visa) during this period (the first three months of arrival in Saudi Arabia). Once notified, the bank must immediately freeze the account and contact the customer to submit to him/her the balance left and close the account. If the communication is not possible, the account freeze should continue and after the elapse of 90 days starting from the end of the 3-month period (the first three months from the date of expatriate’s arrival) or starting from the date of the account freeze due to the expatriate’s final exit, the account shall be dealt with according to the requirements of Rule (3) on Freezing of Bank Accounts.
3. The bank must meet the expatriate (account holder) in person and obtain his/her signature on an account opening agreement. The bank must also obtain documents and data needed to open the account (except Iqama). The customer shall sign an undertaking to submit his/her Iqama once issued (during the three legal months). The bank may also request the customer to agree on any other requirements the bank deems appropriate in relation to balance, transfer, and/or account closing. Additionally, the bank should inform the customer that his/her account will be frozen if his/her Iqama is not submitted during the first three months of arrival in Saudi Arabia.
4. Approval of the manager of compliance department at the bank shall be sought.
5. This type of bank accounts shall be classified as of high risk.
6. The bank account shall be valid for a period identical to the validity period of the visa. Only issuing an ATM card and performing transfer transactions are permitted for the account. No checkbooks, credit cards and/or any other services shall be issued or provided for this account during this period.
7. Operating the account after three months from the expatriate’s (account holder) arrival in Saudi Arabia is not allowed unless the bank meets the account holder and verifies his/her Iqama. After meeting the customer and verifying his/her Iqama, his/her account will have the same procedures implemented on other bank accounts.
• Expatriates with a visit visa to carry out certain assignments for entities in Saudi Arabia:
A bank account may be opened in Saudi riyal for an expatriate holding a government visit visa to carry out certain assignments for a government or quasi-government entity or for any other juristic entity contracting with a government or quasi-government entity in Saudi Arabia, for an expatriate holding a business visit visa (provided for employees of companies and institutions), or for an expatriate holding scientific or professional visit visa and the like after fulfilling the following requirements:
1. A copy of the valid passport including the visit visa should be submitted.
2. A letter from the inviting entity (endorsed by the Chamber of Commerce if it is a business visit visa) should be submitted. The letter should clarify the mission of the individual, the reasons for not issuing a residence permit for him/her, why the account is needed and its validity period, and sources and amounts of money to be deposited therein.
3. The account shall be valid for a period identical to the validity period of the visa. If the visa is for a single entry, the account shall be immediately closed once the visa expires. If the visa is for multiple entries, the account validity shall be for (6) months from the date of entry to Saudi Arabia and should be renewed for the same period or less, taking into consideration the validity of the visa. The bank must obtain a written undertaking from the inviting entity to inform the bank when the expatriate leaves Saudi Arabia permanently in order to close the account.
4. It is permitted to provide the expatriate with an ATM card that only operates on the Saudi Payment Network (MADA). However, no checkbook shall be provided for this account.
5. This type of accounts shall be classified as of high risk and shall be subject to the supervision of compliance officers.
6. Approval of the manager of compliance department for opening the account shall be sought.
7. If the expatriate leaves Saudi Arabia permanently and then comes back with a new visa to carry out any of the assignments mentioned above for the same entity or for any other entity, the bank shall apply all the requirements set forth in the paragraphs above. The old account shall be treated according to Rule (3.2) on General Instructions for Freezing of Bank Accounts stated in Chapter II on Supervisory Rules and Controls, taking into account the account balance.
• Foreign pilgrims:
A foreign natural person having a Hajj identification card issued by the Ministry of Hajj and Umrah, pilgrim guiding institutions, or others, permitting him/her to perform Hajj, is not allowed to open bank accounts.
• Transfer via bank account or transfer membership:
After the elapse of the first three months of the expatriate’s arrival in Saudi Arabia or after he/she obtains an Iqama during that period, all banks are prohibited from carrying out any transfers, issuing any checks or exchanging any currencies for the expatriate, except through a bank account opened in his/her name. Customer number is sufficient in the Express Transfers System as a substitute for bank account for customers of this service only, provided that the bank obtains the personal data and Iqama of customers. In addition, customer number should be based on Iqama number. Moreover, the Transfers System should be subject to regulatory procedures for accounts, such as freezing, verification of the ID validity, checking customer’s name against his/her passport for expatriates holding non-magnetic Iqama, limits placed on concerned customers, etc.
• Transfer limit during the 3-month work visa:
The maximum amount of a transfer or a check which banks may effect for an expatriate during the first three months of his/her arrival in Saudi Arabia for work and before obtaining an Iqama and opening an account in his/her name shall be ten thousand Saudi riyals (SAR 10,000). This limit is applicable to professionals, such as physicians, engineers and senior administrative officers whose salaries are commensurate with such limit or are above. For individuals in normal jobs or workers, the maximum limit of each transfer should be commensurate with the type of profession specified in the work visa placed in the passport. The bank shall use the passport number as a reference for the transactions executed during such period.
• Expatriates exempted from working for their sponsors:
An expatriate having a valid Iqama including a statement to the effect that its holder is exempted from working for his/her sponsor may open a bank account by providing his/her Iqama and an employment letter from the person or entity for which he/she works.
• Expatriates working in Saudi Arabia without Iqama:
No bank account may be opened for an expatriate working under (monthly or annual) employment contract for any entity in Saudi Arabia without a valid Iqama. In this case, an explicit approval from the Ministry of Interior must be obtained for each case and should then be communicated to the bank through SAMA along with any applicable procedures.
• Valid Iqama holders without passport:
Bank accounts may be opened and maintained for expatriates having valid Iqama including the word “without” next to the “nationality”, by providing their Iqama only. No passport, copy or number thereof, shall be required.
• Expatriates having Saudi passports
No bank account may be opened by presenting a Saudi passport issued to some expatriate individuals. Such an expatriate must present a valid Iqama, and the validity of his/her Saudi passport shall not be required. However, where the expatriate has no identification document except his/her Saudi passport, the approval of SAMA shall be obtained for opening the account. Such approval shall include a reference to the approval of the Ministry of Interior. Once the account is opened, SAMA shall be provided with the number of the account and address of the expatriate. The bank shall classify this type of accounts as of high risk to be subject to continuous monitoring.
• Authorization by expatriate to others, or opening joint accounts by expatriate:
An expatriate may neither authorize another person to open a bank account in his/her name, nor may he/she open a joint account with others, except in the following cases:
- The expatriate husband and his expatriate wife and vice versa, and their first-degree expatriate relatives.
- The female expatriate working in Saudi Arabia and her legal escort, provided that the Iqama of the legal escort or any other official document states that he is the legal escort of the female expatriate.
- The female expatriate and her Saudi husband.
- The female expatriate and her Saudi father, mother, son or daughter.
- The male expatriate and his Saudi wife.
- The male expatriate and his Saudi father, mother, son or daughter.
The male or female expatriate and his/her abovementioned relatives should hold valid Iqamas. The bank should record the number of Iqama for each male or female expatriate as an electronic reference number for the expatriate.
• Standing instructions on the account of an expatriate*:
Expatriates may set up and renew standing orders for one year only through e-banking services. The personal information of the client shall be verified using documents, data or information acquired from a reliable and independent source. Such information shall be documented as well. Expatriates may set up standing orders to make regular domestic or international money transfers. The standing order payment shall be made once a month only and the amount shall be determined by the bank according to the client’s risk assessment.
* This paragraph has been amended according to the circular No.(42078428), Dated 10/11/1442H, corresponding to 19/06/2021G.
200.1.4 Tribe Members: Displaced Tribes/Ar Rub' Al-Khali Tribes
The bank may open accounts for those tribal individuals residing in Saudi Arabia, and the validity of their accounts should be linked to the validity of their Iqamas. The bank must obtain the individual’s Iqama which has a statement in the “nationality” space that reads “tribe members”, “displaced tribes”, or “Ar Rub’ al-khali tribes”. The supervisory and control requirements implemented on expatriates residing in Saudi Arabia, stated herein, shall apply to this category of customers.
200.1.5 The Beluchis and Turkistanians
Bank accounts may be opened for Beluchis and Turkistanians by presenting a valid Iqama. The bank should not require such customers to present the original passport or a copy thereof. Before opening a new account, updating an existing one or effecting any other banking transactions, the bank shall require the customer to identify his/her address in Saudi Arabia and submit an employment letter. Such letter should be authenticated by the Chamber of Commerce or the official organization the customer is employed under its supervision. If the customer does not work and his/her Iqama has no employer mentioned, he/she shall be required to present a letter from the mayor of the area (district, governorate or town) where he/she lives, duly authenticated by the police station of the area of such mayor. In addition, the addresses mentioned in such letter should be clear enough to allow easy access to him/her when necessary. Such requirements shall be updated annually.
200.1.6 Expatriate Stewards and Stewardesses of the National Airlines, Expatriate Ship Crews and the Like
Bank accounts may be opened for expatriate stewards and stewardesses of the national airlines, expatriate ship crews and the like by presenting a valid visa included in the passport. The visa should be checked against the identification card provided to such individuals by their employers. The bank account validity shall be identical to the validity period of visa or renewal period thereof.
200.1.7 Bank Accounts for Employees of Enterprises Wishing to Pay Employee Salaries Through Prepaid Electronic Records
The bank may allow its customers to pay the salaries of their employees through prepaid electronic records. In doing so, the bank must comply with the provisions of the Regulatory Rules for the Prepaid Payment Services in the Kingdom of Saudi Arabia.
200.1.8 Credit Cards for Non-Resident Foreigners Employed by Resident Saudi Companies
The bank may issue credit cards to a selected, limited category of non-resident foreigners employed by a limited category of major Saudi companies having relationship with the bank. Such employees should have jobs that necessitate moving from a place or country to another (such as private airline pilots, stewards and stewardesses), and they do not have residence cards for any country where they go, including Saudi Arabia. The Saudi company hiring such employees is responsible for covering their local and international transportation expenses by credit cards. In this case, the bank shall observe the following conditions when issuing such credit cards for those employees:
1. The credit cards shall be issued through the resident Saudi company for which such employees work.
2. The Saudi company shall have good creditworthiness and a sound financial position.
3. All individuals, for whom credit cards or debit cards are required to be issued, shall be employed by the Saudi company, and documents proving such shall be obtained.
4. The Saudi company shall ensure in writing that the said cards will be properly used and that the company will bear all implications of use thereof by its employees.
5. The Saudi company, rather than the employees to whom the cards are delivered, shall pay all due payments related to the cards.
6. The maximum credit limit per card shall not exceed the limit allowed to other customers, corresponding to card category.
7. Dealing under this system shall be based on a formal agreement entered into between the bank and the company prior to the issuance of such cards.
8. The company shall provide the bank with the agreement, signed by the company and its employees, that determines the responsibility related to the issuance and use of such cards.
200.1.9 Opening Bank Accounts to Raise Blood Money to Be Paid for Reconciliation in Murder Cases
The bank must comply with the following when opening and operating such bank accounts:
I. Any activity aimed at raising funds for reconciliation shall not be undertaken without the consent of the Minister of Interior, after reporting of such activity by the emirate of the concerned region.
II. If the approval of the Minister of Interior is issued, the emirate of the region shall communicate with SAMA and request opening of a bank account at a specified bank to raise blood money. The following requirements shall be satisfied:
1. Approval of the Ministry of Interior for opening the bank account shall be obtained. The approval should indicate the period of the account validity.
2. A copy (or an original copy) of the legal deed indicating that the victim’s heirs waive the right of legal retribution (Qisas) and agree to receive the required amount of monetary compensation (Diyah), shall be submitted. Such legal deed shall indicate the time agreed upon to submit such compensation.
3. The bank account to raise blood money shall be subject to the supervision of the emirate of the concerned region, and no party of the case shall have any rights thereon, whatsoever.
4. The emirate of the concerned region shall specify the names of persons authorized to manage the account (supervision of the account and following-up of deposits); copies of their IDs, specimen signatures (joint signature) and contact details shall also be included.
5. The bank shall not issue checkbooks or ATM cards for the account. Further, no transfers from the account shall be allowed.
6. The name of the account shall be as follows (the Emirate of... Region, Diyah Money Raising for... (the full name of the murdered shall be written)”.
7. The bank shall stop the account automatically once the required amount of blood money is reached, and the account shall not accept any extra money.
8. The account shall be valid for one year, as a maximum, starting from the date of opening the account. After one year, it shall be deactivated. The account may continue to operate for another year by a letter from SAMA upon the request of the emirate of the concerned region.
9. If the amount of blood money is completely raised, the emirate of the concerned region should request a bank check and hand it to the beneficiary through the court.
10. If the victim’s heirs reduce the amount agreed upon in the original legal waiving deed, this reduction shall be recorded in a similar legal deed or expressly added to the original legal waiving deed that includes the previously agreed-upon amount.
11. If the amount of blood money is not completely raised and the victim’s heirs are not satisfied therewith, or if the victim’s heirs waive the amount, the funds raised shall be returned to their depositors whose names are known through deposit slips. As for anonymous deposits, the emirate of the concerned region shall present the case to the Mufti to give a formal legal opinion (Fatwa) regarding how to handle such funds. (The bank shall satisfy this requirement upon receiving the direction of the emirate of the concerned region, which is delivered to the bank by authorized individuals.)
12. Only one bank account shall be opened for each case involving raising blood money (Diyah). In addition, opening more accounts in other banks for the same case is not allowed.
13. The account shall be closed once the amount of the blood money is completely raised. Then a bank check of the amount shall be issued.
14. This rule also applies to bank accounts dedicated to raising funds to be paid as compensation in injury cases.
200.2 Natural Persons Outside Saudi Arabia
200.2.1 Saudi Citizens Residing Outside Saudi Arabia
Saudi citizens residing outside Saudi Arabia for study, medical treatment or official work (such as in embassies, consulates, or multilateral organizations) may open bank accounts upon the following:
1. Providing a copy of the passport.
2. Providing a copy of the national ID.
3. Submitting a specimen signature.
4. Completing the account opening form or authorizing a Saudi citizen to open the bank account.
5. Obtaining verification of such documents from the Saudi embassy or consulate in the foreign country.
- Saudi individuals residing in a GCC country may provide such data via the correspondent GCC bank for the bank operating in Saudi Arabia.
200.2.2 GCC Nationals Not Residing in Saudi Arabia
Bank accounts may be opened for GCC nationals who are not residing in Saudi Arabia, directly by themselves or by a Saudi or GCC citizen authorized by a power of attorney. The bank should obtain the following documents from such individuals:
1. A copy of the valid national ID.
2. A copy of the valid passport (if any).
3. An employment letter from the entity for which he/she works, or from his/her personal business.
4. A completed account opening form.
5. A specimen signature.
- Such documents shall be obtained by the employees of the local bank directly or by the correspondent GCC bank in the GCC country where such individual resides. The GCC bank shall authenticate all documents obtained, and all deposit, withdrawal and transfer transactions shall be effected through the correspondent bank. Receiving such documents and effecting deposit, withdrawal and transfer transactions are also possible through a correspondent bank in the GCC country where the GCC citizen resides. No cash deposits by third party shall be accepted.
- No checkbook, ATM card or credit card may be given to such individual unless he/she comes to Saudi Arabia and presents to the bank adequate data proving his/her residence in Saudi Arabia. In this case, Rule (200.1.2) shall be applied to such customer, and his/her account status shall be changed.
200.2.3 Non-Saudi and Non-GCC Natural Persons Not Residing in Saudi Arabia
The bank shall not open an account in Saudi riyal or in any foreign currencies, or any other account, for non-Saudi and non-GCC natural persons not residing in Saudi Arabia unless written approval from the Ministry of Interior or the Ministry of Foreign Affairs is received through SAMA. If so, the account may be opened by the passport of the individual.
300. Rules for Opening Bank Accounts for Juristic Persons
300.1 Resident Juristic Persons (Including Embassies and Multilateral Organizations)
300.1.1 Licensed Businesses and Shops
This rule has been respectively amended according to the circular No. (41042946), Dated 19/06/1441H, corresponding to 13/02/2020G ,and circular No. (42053614), Dated 02/08/1442H, corresponding to 15/03/2021G.The bank may open bank accounts for these licensed businesses and shops upon completing the following:
1. Obtaining a copy of the entity’s commercial register, or license if it is the only item required for practicing the entity's business without the need for a commercial register.
2. Verifying the identity of the owner of the entity against his/her name in the commercial register or license, and checking the information and validity of the owner’s ID.
3. Obtaining copies of the IDs of individuals authorized to mange and operate the accounts.
• If the owner of entity or shop is an endowment or private societies/foundations or cooperative associations, the bank must then request the following, in addition to the aforementioned requirements:
1. A copy of a valid endowment registration certificate issued by the General Authority of Awqaf, including at minimum the following: Name of endowment, endowment deed number and date, and names of administrators and their ID numbers (for endowments); or a copy of the license issued by the Ministry of Human Resources and Social Development, a copy of the decision of the board of directors of the society/foundation (meeting minutes) approving the establishment of the business, entity or shop, and the approval for the account’s authorized signatories (for private societies/foundations or cooperative associations).
2. Copies of the IDs of administrators whose names are stated in the endowment registration certificate (for endowments).
3. This type of accounts shall be classified as a high-risk account. 300.1.1.1 Special-Purpose Entities
The bank may open accounts for these special-purpose entities upon completing the following:
1. Obtaining a copy of the license of the special-purpose entity, issued by the Capital Market Authority (CMA).
2. Obtaining a copy of the license (if any) or commercial register of the owner, issued by the concerned authority.
3. Obtaining a copy of the entity’s articles of association.
4. Checking the IDs (for natural persons) and licenses or commercial registers (for juristic persons) of registered board members.
5. Obtaining a copy of the decision made by the authorized signatory in such entity, authorizing specific individuals to manage and operate the accounts.
6. Obtaining copies of the IDs of individuals authorized to mange and operate the accounts; and
7. Checking the IDs (for natural persons) and licenses or commercial registers (for juristic persons) of the special-purpose entity’s owners whose names are stated in its articles of association and amendments thereto.
300.1.1.2 Foreign Schools
The bank may open accounts for these resident foreign schools upon completing the following:
1. Receiving a letter from the board chairman or school principal, containing a request to open a bank account and the names of the account’s authorized signatories (a joint signature), along with copies of their IDs attached.
2. Receiving the approval of the Ministry of Education for opening the bank account and for the authorized signatories.
3. Obtaining a copy of the school’s license that is issued by the Ministry of Education.
4. Receiving a copy of the decision of forming the school board, approved by the Ministry of Education, and copies of members' Iqamas.
5. The account shall be valid for a period identical to the validity period of school license and the term specified for the school board as per its formation decision approved by the Ministry of Education.
6. The signatories shall be the school principal and its financial officer (who shall be employed in the same school), or one of them and a school board member, provided that such member is not a diplomat or an embassy employee. Such member may be from outside this school as an exemption from Paragraph (3) of Rule (4) of Chapter IV on the General Rules for Operation of Bank Accounts, regarding controls for authorizing non-Saudis.
7. Withdrawal from these accounts shall be as per dual control, and in case of withdrawal by checks, check shall be payable to the first beneficiary.
8. ATM cards or credit cards shall not be issued for such accounts.
300.1.1.3 E-Commerce Businesses with No Official Premises
This rule has been amended according to the circular No. (75357/67), Dated 27/12/1440H, corresponding to 28/08/2019G.The bank may open accounts for e-commerce businesses as per the requirements of Rule (300.1.1) on Licensed Businesses and Shops. The following shall also be observed:
1. The account name shall be as shown in the commercial register of the business, and the purpose of opening the account shall be “e-commerce”.
2. The e-platform of the business shall be as shown in the commercial register.
3. The national address of the entity or its owner shall be obtained.
4. This type of bank accounts shall be classified as of high risk and shall be updated every two years.
300.1.1.4 Freelance Job Permit Holder
The bank may open bank accounts for freelancers upon completing the following:
1. Obtaining a copy of the freelancer’s permit issued by the Ministry of Human Resources and Social Development.
2. Obtaining a copy of the national ID of the person holding the freelance job permit.
3. Obtaining the national address of the freelancer.
4. The bank account shall be in the name of the person holding the freelance job license. The work type stated in such license shall also be added to the name of the account.
5. The account shall be for one person only and shall not have signatories.
6. This type of accounts shall be classified as of high risk, and the purpose of opening such account shall be specified.
7. The account shall be valid for a period identical to the validity period of the freelance job license.
300.1.2 Licensed Money Changers
The bank may open accounts for licensed money changers upon completing the following:
1. Copies of licenses issued by SAMA shall be obtained. The account shall be valid for a period identical to the validity period of the license issued by SAMA.
2. A copy of the commercial register shall be obtained.
3. The bank shall verify the information contained in the commercial register or in the license issued by SAMA matches the information contained in the owner’s ID card.
4. A copy of the owner’s ID shall be obtained.
5. Copies of the IDs of individuals authorized to mange and operate the accounts shall be obtained.
300.1.3 Resident Companies
This rule has been respectively amended according to the circulars No. (41042946), Dated 19/06/1441H, corresponding to 13/02/2020G, circular No. (42053614), Dated 02/08/1442H, corresponding to 15/03/2021G, and circular No. (44061480), Dated 28/07/1444H, corresponding to 18/02/2023G.The bank may open accounts for companies residing in Saudi Arabia upon completing the following:
1. A copy of the commercial register shall be obtained.
2. Obtaining a copy of the memorandum of association or the articles of association and their annexes.
3. Obtaining a copy of the ID of the manager in charge.
4. Verifying the identity of board members.
5. Obtaining the power of attorney issued by a notary public or a notary (or the authorization made in the bank by the person/persons who, by virtue of memorandum of association, partners’ decision or board of directors’ decision, has/have the power to authorize), authorizing natural persons to sign for and operate the accounts.
6. Obtaining copies of the IDs of individuals authorized to sign for and operate the accounts.
7. Verifying the IDs of the owners of the company, whose names are included in the last update of the memorandum of association. Public joint-stock companies are excluded from this requirement.
• Where the owner or one of the owners of the company is an endowment, private society/foundation or cooperative association, according to the memorandum of association, the bank must then fulfill the following, in addition to the above requirements:
1. Obtaining a copy of a valid endowment registration certificate issued by the General Authority of Awqaf, including at minimum the following: Name of endowment, endowment deed number and date, and names of administrators and their ID numbers (for endowments); or a copy of the license issued by the Ministry of Human Resources and Social Development and the decision of the board of directors of the society/foundation (meeting minutes) approving the establishment of the company (for private societies/foundations or cooperative associations).
2. Obtaining copies of the IDs of administrators whose names are stated in the endowment registration certificate (for endowments).
3. This type of accounts shall be classified as of high risk if the ownership of endowments, private societies/foundations or cooperative associations exceeds 50% of the company's capital.
300.1.3.1 Joint-Stock and Simplified Joint-Stock Companies
This rule has been amended according to the circular No. (44061480), Dated 28/07/1444H, corresponding to 18/02/2023G, please refer to the Arabic version of this rule to read the last updated version.• Companies under formation:
The bank accounts for depositing and retaining the capital of these companies under formation shall be opened as follows:
1. A letter from the founders, including at a minimum: a request to open the account stating its purpose as "Depositing the capital of the company (…name of the company) Under Formation," the names of the founders, and the ownership percentage of each founder in the company's capital.
2. The name of the account shall be as follows :"Founders Account of the Company (name of the company) "
3. Verifying the identity of the company's founders.
4. Payment from the account shall only be allowed by the company's board of directors after its registration in the commercial register and the bank's completion of the required documents in accordance with the requirements of Rule (300-1-3) related to resident companies. In the event the company's formation is not completed, the bank must return the amounts to each founder according to their share of the capital.
• Licensed companies:
Documents required are as specified in (300.1.3) above.
300.1.3.2 Limited Liability Companies
Documents required are as specified in (300.1.3) above.
300.1.3.3 General Partnerships
Documents required are as specified in (300.1.3) above.
300.1.3.4 Limited Partnerships
Documents required are as specified in (300.1.3) above.
300.1.3.5 GCC Commercial Non-Banking Companies Residing in Saudi Arabia
Should a GCC company acquire a commercial register in Saudi Arabia (without investment license issued by the Ministry of Investment), such company shall be treated as a resident company, subject to the same requirements applicable to Saudi resident companies. Consequently, such GCC company shall submit the required documents specified in (300.1.3) above.
300.1.3.6 Rules for Opening Escrow Accounts for Real Estate Development Projects
This rule has been amended according to the circular No. (46028059), Dated 08/05/1446H, corresponding to 09/11/2024G.The bank may open escrow accounts for real estate projects (sale or rental of off-plan real estate projects or real estate contributions) after fulfilling the following documents and procedures:
1. Verifying and identifying of the real estate developer, consulting office/engineering consultant, and certified public accountant in the legal form for each of them.
2. A written undertaking shall be made by the real estate developer stating that no disbursement shall be made from the account for purposes other than those concerning the project determined or its returns in the escrow account.
3. A written undertaking shall be made by the real estate developer stating its consent to amend the escrow account agreement to comply with any relevant laws, regulations, or instructions.
- Controls related to Opening and Managing Escrow Accounts for Off-Plan Sale or Rental Real Estate Projects:
1. Only one account shall be opened for each individual project and shall be named as follows: "name of project" Project- Escrow Account for "name of real estate developer”. Sub-accounts linked to the main account of the project may be opened, such as administrative and marketing expenses account, savings account, construction cost account, incentives account and finance account.
2. Payment shall be made from the project's escrow account based on the payment document submitted by the real estate developer to the bank. Such documents shall be certified by the consulting office and the certified public accountant and shall include the required amounts and justifications for their expenditure. Payment documents may be processed through secure technological means.
3. By exception to the provision in paragraph (2) above, payment may be made from the escrow account upon request from the Real Estate General Authority. The bank shall be notified through the Saudi Central Bank.
4. Payment from the account shall be made by check or transfers only and shall be within the limits stated in Paragraphs (2) and (3) above.
5. Deposits in the account shall be made by buyers, tenants, or financiers via any means of payment accepted by the bank other than cash.
- Controls for Opening and Managing Escrow Accounts for Real Estate Contribution Projects:*
1. Only one account shall be opened for each individual project and shall be named as follows: "name of project" Project- Escrow Account for "Real Estate Contribution”. Sub-accounts linked to the main account of the contribution may be opened, such as: reserve account, revenue account, and any other sub-accounts for the purpose of the contribution project, such as a finance account.
2. Payment shall be made from the project's escrow account based on the payment document submitted by the real estate developer to the bank. Such documents shall be certified by the engineering consultant and the certified public accountant and shall include the required amounts and justifications for their expenditure. Payment documents may be processed through secure technological means.
3. Payment from the account shall be made by check or transfers only and shall be within the limits stated in Paragraph (2) above.
4. Payment shall be made from the reserve account based on the payment document submitted by the real estate developer to the bank. Such documents shall be certified by the engineering consultant and the certified public accountant and shall include the required amounts and justifications for their expenditure, along with the approval from the shareholders' association.
5. Payment shall be made from the revenue account based on the disbursement document submitted by the real estate developer, which must be recorded on the shareholders' register and certified by the certified public accountant. The document must include the required amounts and be accompanied by the completion certificate from the consultant or proof of the liquidation of the real estate contribution.
6. Deposits into the main and sub-accounts shall be made by the relevant financial market institution for issuing contribution certificates, financiers, or buyers, or from proceeds of the liquidation of the real estate contribution, by any accepted method, and cash deposits are not permitted.
- General Provisions:
1. The bank shall not activate the escrow account for the real estate project unless the license issued by the “Authority” to engage in the off-plan sale or rental of real estate projects or to offer the real estate contribution is submitted.
2. Project’s sub-accounts shall be used only for receiving/making deposits and transfers from and (in)to the main account.
3. No funds may be transferred from the escrow account to any other accounts other than that of its sub-accounts whose purposes are specified.
4. Checkbooks may be issued for this account at the request of the real estate developer. However, ATM cards and/or credit cards shall not be issued for this account.
5. The bank shall not attach the account for its own interest or that of the creditors of the real estate developer.
6. The bank shall not close the escrow account for the project except after obtaining approval from the relevant authority, without prejudice to the provisions of SAMA's instructions and the agreements in place.
* This rule has been added pursuant to the circular No. (46028059), Dated 08/05/1446H, corresponding to 09/11/2024G.
300.1.3.7 Collection Accounts for Depositing and Retaining the Funds of Payment Companies’* Clients
This rule has been added pursuant to the circular No. (42073085), Dated 21/10/1442H, corresponding to 01/06/2021G.The collection accounts for depositing and retaining the funds of payment companies’ clients shall be opened and managed in accordance with the following requirements:
1. A letter from the Chairperson of the Board of Directors of the company or their authorized representative to the bank, stating the purpose of opening the account under the name “Deposit and Retention of the Funds of (name of payment company)‘s Clients”, and identifying the persons authorized to manage the account.
2. A copy of SAMA’s non-objection letter to open a collection account for the company for the purpose of depositing and retaining the funds of their clients.
3. Copies of all the company’s incorporation documents, including the memorandum of association, articles of association and Board formation decision.
4. Copies of the IDs of persons authorized to manage the account.
5. The name of the account shall be “Deposit and Retention of the Funds of (name pf payment company)‘s Clients”.
6. The account shall be separate and independent from the accounts opened for managing the company’s business, including the fees and commissions collected by the company. The account shall not be used for any financial obligations or rights of the company.
7. Payment transactions and transfer of money to other accounts, other than the payment orders made by clients, shall only be made after submitting SAMA’s non-objection for such transaction.
8. Cash deposits to or withdrawals from the account shall not be allowed.
* Payment Service Providers
300.1.3.8 Collection Accounts for Managing the Finance Value of Debt-Based Crowdfunding Companies
This rule has been added pursuant to the circular No. (42075950), Dated 29/10/1442H, corresponding to 09/06/2021G, and amended by circular No. (000046024651), dated 19/04/1446H, corresponding to 22/10/2024G.The collection accounts for collecting funds from participants in order to extend credit to beneficiaries shall be opened and managed in accordance with the following requirements:
1. A letter from the Chairperson of the Board of Directors of the company or their authorized representative to the bank, stating the purpose of opening the account under the name “Management of the Finance Amount of (name of debt-based crowdfunding company)”, and identifying the persons authorized to manage the account.
2. Copies of all the company’s incorporation documents, including the memorandum of association, articles of association and Board formation decision.
3. Copies of the IDs of persons authorized to manage the account.
4. The name of the account shall be “Management of the Finance Amount of (name of debt-based crowdfunding company).”
5. The account shall be separate and independent from the accounts opened for managing the company’s business, including the fees and commissions collected by the company. The account shall not be used for any financial obligations or rights of the company.
6. Transfer of money to other accounts without the approval of the participants shall only be made after submitting SAMA’s non-objection for such transaction.
7. Cash deposits to or withdrawals from the account shall not be allowed.
300.1.3.9 Companies in the Special Logistics Zone
The bank may open accounts for companies that are established and registered in the Special Logistics Zone of the General Authority of Civil Aviation (GACA)- under Companies Regulations for the Special Integrated Logistics Zone- after submitting the following documents:
- A copy of the commercial register issued by the GACA.
- A copy of the company’s memorandum of association and appendixes.
- Verifying the IDs of the board members/executives.
- A power of attorney issued by a notary public or a notary or an authorization made in the bank by the person(s) who has the authority, by the memorandum of association or partners’ decision or board/executives’ decision, to authorize natural persons to sign and operate accounts.
- Copies of the IDs of individuals authorized to sign for and operate the accounts.
300.1.4 Residents Investing Under Foreign Investment Law
No: 65681/67 Date(g): 3/7/2019 | Date(h): 1/11/1440 Status: In-Force This rule has been respectively amended according to the circular No. (41029537), dated 27/04/1441H, corresponding to 24/12/2019G ,and circular No. (44082632), dated 28/10/1444H, corresponding to 18/05/2023G,please refer to the Arabic version of this rule to read the last updated version.The bank may open accounts for entities wholly owned by a foreign investor or jointly owned by a foreign investor and a Saudi investor upon receiving the following:
300.1.4.1 Joint-Venture Entities Owned by a Saudi Investor and a Foreign Investor
This rule has been respectively amended according to the circular No. (41029537), dated 27/04/1441H, corresponding to 24/12/2019G ,and circular No. (44082632), dated 28/10/1444H, corresponding to 18/05/2023G,please refer to the Arabic version of this rule to read the last updated version.• Joint-venture entity owned by a foreign investor (natural or juristic) and a Saudi investor (natural or juristic):
1. A copy of the license issued by the Ministry of Investment.
2. A copy of the commercial register without the need to acquire the business license, or a copy of the professional license of the entity if the entity is a service provider.
3. A copy of the memorandum of association or the articles of association and its annexes.
4. A copy of the ID of the manager in charge in the entity. A copy of the passport can be sufficient, provided that a copy of the Iqama is submitted (90) days after opening the account.
5. Copies of the IDs of persons authorized to operate and manage the account, and verification of their authorization by identifying them in the memorandum of association, the articles of association, or a decision from the board of directors or partners – or their equivalent. If the authorized person for the account is an agent acting on behalf of the principal, a copy of the power of attorney issued by a notary public or a notary in Saudi Arabia must be provided, or the power of attorney must be authenticated by the Saudi embassy or with an Apostille Authentication if issued outside Saudi Arabia.
6. Understanding the ownership structure and identifying the partners whose names are mentioned in the memorandum of association or the articles of association, and verifying them using documents, data, or information from a reliable and independent source. -In cases where money laundering risks are lower-, the verification process can be completed later, after the account is opened, provided that it is done as quickly as possible. Any delay in identity verification must be necessary to avoid disrupting normal business procedures, and appropriate and effective measures should be applied to control money laundering risks.
300.1.4.2 Entities Wholly Owned by a Foreign Investor
This rule has been respectively amended according to the circular No. (41029537), dated 27/04/1441H, corresponding to 24/12/2019G ,and circular No. (44082632), dated 28/10/1444H, corresponding to 18/05/2023G,please refer to the Arabic version of this rule to read the last updated version.• Branches of foreign corporations or companies:
1. A copy of the license issued by the Ministry of Investment.
2. A copy of the commercial register without the need to acquire the business license, or a copy of the professional license of the entity if the entity is a service provider.
3. A copy of the ID of the manager in charge in the entity. A copy of the passport can be sufficient, provided that the Iqama is submitted (90) days after opening the account.
4. A copy of the commercial register or professional license, as well as the memorandum of association or the articles of association of the entity in the home country, certified by the Saudi embassy or with an Apostille Authentication.
5. Copies of the IDs of persons authorized to operate and manage the account, along with verification of their authorization by identifying them in a mandate from the main office of the company or corporation in the home country. The authorization must name the persons authorized to sign on behalf of the company in Saudi Arabia regarding the bank accounts.
6. Understanding the ownership structure and identifying the partners of the entity in the home country, whose names are mentioned in the memorandum of association or the articles of association, and verifying them using documents, data, or information from a reliable and independent source. -In cases where money laundering risks are lower-, the verification process can be completed later, after the account is opened, provided that it is done as quickly as possible. Any delay in identity verification must be necessary to avoid disrupting normal business procedures, and appropriate and effective measures should be applied to control money laundering risks.
• An entity owned by a foreign investor or jointly owned by more than one foreign investor:
1. A copy of the license issued by the Ministry of Investment.
2. A copy of the commercial register without the need to acquire the business license, or a copy of the professional license of the entity if the entity is a service provider.
3. A copy of the memorandum of association or the articles of association and its annexes.
4. A copy of the ID of the manager in charge in the entity. A copy of the passport can be sufficient, provided that the Iqama is submitted (90) days after opening the account.
5. Copies of the IDs of persons authorized to operate and manage the account, and verification of their authorization by identifying them in the memorandum of association, the articles of association, or a decision from the board of directors or partners – or their equivalent. If the authorized person for the account is an agent acting on behalf of the principal, a copy of the power of attorney issued by a notary public or a notary in Saudi Arabia must be provided, or the power of attorney must be authenticated by the Saudi embassy or with an Apostille Authentication if issued outside outside Saudi Arabia.
6. Understanding the ownership structure and identifying the partners whose names are mentioned in the memorandum of association or the articles of association, and verifying them using documents, data, or information from a reliable and independent source. -In cases where money laundering risks are lower-, the verification process can be completed later, after the account is opened, provided that it is done as quickly as possible. Any delay in identity verification must be necessary to avoid disrupting normal business procedures, and appropriate and effective measures should be applied to control money laundering risks.
• Foreign individual investor (Sole proprietorships):
1. A copy of the license issued by the Ministry of Investment.
2. A copy of the commercial register without the need to acquire the business license.
3. A copy of the Iqama for the manager in charge and the investor, owner of the entity. A copy of the passport can be sufficient, provided that the Iqama is submitted (90) days after opening the account.
4. The full address of the investor in his/her home country.
5. Copies of the IDs of persons authorized to operate and manage the account, as identified in a power of attorney certified by a notary public or a notary if issued inside Saudi Arabia and by the Saudi embassy or Apostille Authentication if issued outside Saudi Arabia, in the case of an agent or authorized person other than the owner of the entity.
300.1.5 Rules for Non-Profit Sector, Hajj and Umrah Entities, and Public Entities
The bank may open accounts for non-profit sector, Hajj and Umrah entities, and public entities upon fulfilling the requirements set forth for each activity as outlined below. Only residents in Saudi Arabia are allowed to operate the accounts of these licensed entities, with the exception of individuals authorized to operate Hajj and Umrah accounts as per Rule (300.1.5.1). Copies of the IDs of such persons must be obtained for account opening.
300.1.5.1 Hajj, Umrah and Visiting the Prophet’s Mosque in Madinah
This rule has been amended according to the circular No. (46032385), Dated 29/05/1446H, corresponding to 30/11/2024G.• Pilgrim affairs offices:
a. Requirements for opening a bank account:
1. Bank accounts shall be opened in Saudi riyal only.
2. The Hajj organizer shall present to the bank a letter from the Saudi Ministry of Hajj and Umrah approving opening a bank account for the pilgrim affairs office and including the office’s information as follows:
■ The official name of the pilgrim affairs office.
■ Names of the persons authorized to sign for the account (joint signature), provided that they shall be members of the pilgrim affairs office or shall be officials in the embassy of the country of such office.
■ The position of each account signatory and his/her information as per his/her passport.
■ The bank account shall be limited to Hajj purposes only.
■ The office’s bank account number in its home country or in the country designated by the Saudi Ministry of Hajj and Umrah ,and the name of the bank transferring the money, which the office deals with in its home country or in the country designated by the Saudi Ministry of Hajj and Umrah, shall also be stated.
3. The bank shall conclude an account opening agreement with the authorized signatories specified in the letter of the Ministry of Hajj and Umrah, addressed to the bank.
4. The account signatories shall determine, in Saudi riyal, the approximate total amount that their respective office will transfer for Hajj purposes.
5. Upon meeting the above requirements by the bank, the bank’s compliance department shall submit an application to SAMA along with all necessary documents to obtain SAMA approval for opening the bank account.
6. The bank shall ensure that such accounts are subject to dual control.
7. The bank shall provide the pilgrim affairs office and the Saudi Ministry of Hajj and Umrah with the IBAN number of the office’s bank account.
8. If the requirements for opening a bank account are not met, the bank branch manager must inform the applicant of the necessary requirements for opening a bank account. Such process shall be documented in a special file designed for this purpose in the bank branch. In addition, measures taken in this regard shall be reported to the compliance department at the head office of the bank on the same day.
9. If the requirements for opening a bank account are met, the documents shall be submitted on the same day to the compliance department at the bank’s head office. Consequently, the compliance department, in turn, shall submit such documents to SAMA on the same day or at the beginning of the following working day, at the most.
10. The pilgrim affairs office may open multiple accounts, provided that these accounts are opened in the same bank only - with an explanation of the account's purpose -, The office may not open other accounts in other banks. If the office requests to transfer its accounts from one bank to another, it shall provide compelling justifications that are not related to meeting the requirements. Approval of the Ministry Hajj and Umrah and SAMA for that matter shall be secured.
b. Requirements for account operation and management:
1. The account shall be operated under a new approval letter from the Saudi Ministry of Hajj and Umrah to the bank on the account operation. The letter should specify the operation period, which should be from the beginning of Rabi II up till the end of Muharram of the following year. The letter shall be accompanied by a list provided by the pilgrim affairs office. This list shall include the names of Saudi natural persons, companies and establishments that the office will be dealing with for petty expenses, and it shall be attested by the Saudi Ministry of Hajj and Umrah.
2. Deposits shall be made in the accounts of the pilgrim affairs office via remittances from a bank in the office’s home country or countries designated by the Saudi Ministry of Hajj and Umrah, the purpose of such remittance shall be specified as “office’s expenses related to Hajj only”.
3. Deposits may be made in the account via checks under collection, drawn by the office itself on a bank in the office’s home country only.
4. Remittances, checks or cash deposits from entities inside Saudi Arabia shall not be accepted, except in the following cases:
■ By persons whose names are included in the list, submitted in advance to the Saudi Ministry of Hajj and Umrah by the pilgrim affairs office and attached to the ministry's letter to the bank. Such list should include the names of service providers dealing with the pilgrim affairs office. The amounts of such remittances, shall be less than or equal to the amounts stated in contracts concluded with each beneficiary (at the Saudi Ministry of Hajj and Umrah’s discretion).
■ By authorized persons, provided that such an amount is within normal limits, i.e. is less than or equal to the withdrawn amount as petty expenses (at the Saudi Ministry of Hajj and Umrah’s discretion).
■ The amounts (in SAR/foreign currencies) disclosed at ports of entry (land ports, seaports, or airports) shall be delivered to the bank branch at the port or the bank representative in the seasonal office at the port as per a document from the Saudi Zakat, Tax, and Customs Authority. Such document shall include the name of the pilgrim affairs office and its account number (IBAN) in Saudi Arabia, as well as the name of the cash carrier and a copy of his/her passport. The bank employee shall give the depositor a deposit or transfer receipt attested by the bank.
5. Transfers from the office’s account to the electronic pathway of the Ministry of Hajj and Umrah are made for services contracted through the electronic pathway. Direct transfers from the office’s account in its country—or in countries designated by the Saudi Ministry of Hajj and Umrah—to the electronic pathway account of the Saudi Ministry of Hajj and Umrah for external pilgrims are allowed for contracting purposes related to Hajj arrangements and any other purposes specified by the Saudi Ministry of Hajj and Umrah, in compliance with all requirements stated in this rule.
6. The organizer may pay authorized signatories by checks for petty expenses (within the estimated amounts approved by the Saudi Ministry of Hajj and Umrah).
7. The approval of the bank’s compliance department is required for the operation of the office’s account.
8. The office shall not use its account balances for investments.
c. Operating the pilgrim affairs office’s account after Hajj season:
1. At the end of the Hajj season (end of Muharram), amounts left in the account of the pilgrim affairs office shall be returned to a bank in the office’s home country or to a bank in one of the countries designated by the Saudi Ministry of Hajj and Umrah in case they were the source of these funds at the request of the authorized persons in the office. Such a request shall be indicated in the bank account opening agreement signed by the office.
2. If the office wants to keep the balance in the same account to be used in the subsequent Hajj year, the account will be frozen at the end of Muharram until the beginning of the subsequent Hajj season (which is to be specified by the Ministry of Hajj and Umrah).
3. In exceptional cases, operating the account of the pilgrim affairs office may be allowed during the period in which using the account is originally prohibited, provided that the bank obtains SAMA written approval therefor.
d. Reactivating and operating the pilgrim affairs office’s account in the following Hajj year:
To reactivate the pilgrim affairs office’s bank account in the following Hajj year, the bank shall obtain a letter from the Ministry of Hajj and Umrah, including the same information specified in the form filled out by the ministry when it first approved the account opening. In particular, the information should include the names of authorized persons and their information. The approval letter should be obtained along with the list provided by the pilgrim affairs office for the Ministry of Hajj and Umrah, stating the parties that the office has contracted with in the Hajj year and that the office will write checks and make payments for. This list shall be attested by the Ministry of Hajj and Umrah.
• Tourism companies and travel agencies organizing pilgrim arrival from outside Saudi Arabia:
a. Requirements for opening a bank account:
1. Bank accounts shall be opened in Saudi riyal only.
2. The Hajj organizer shall present to the bank a letter from the Ministry of Hajj and Umrah approving opening a bank account for the pilgrim affairs office and including the office’s information as follows:
■ Official name of the organizer (tourism company, agency or association approved to organize pilgrims’ arrival) in Arabic and English.
■ The computer number given to the organizer by the Ministry of Hajj and Umrah.
■ Name(s) of person(s) authorized to manage the bank account, provided that they are officials in the tourism company, agency or association approved to organize for pilgrim arrival. Full names shall be written in English and Arabic as shown in their passports, along with their passport number.
■ The authorized person’s title shall be a “Hajj organizer".
■ The bank account shall be limited to Hajj purposes only.
■ The organizer’s bank account number in its home country or or in the country designated by the Saudi Ministry of Hajj and Umrah, shall be specified, as well as the name of the bank transferring funds, which the organizer deals with in its home country or in the country designated by the Saudi Ministry of Hajj and Umrah.
3. A copy of the organizer’s commercial register and/or license issued for the organizer in its home country shall be submitted. Such commercial register and/or license shall be attested by the concerned Saudi embassy and/or the Ministry of Foreign Affairs.
4. The bank must obtain copies of the passports of person(s) authorized to operate the bank account for dual control.
5. The bank shall conclude an account opening agreement with the authorized signatories.
6. The organizer shall determine, in Saudi riyal, the approximate total amount that it will transfer for Hajj purposes.
7. Upon meeting all the above requirements by the bank, the bank’s compliance department shall submit an application to SAMA along with all necessary documents to obtain SAMA approval for opening the bank account.
8. The bank shall ensure that such accounts are subject to dual control.
9. The bank shall provide the organizer and the Ministry of Hajj and Umrah with the IBAN number of the organizer's account on a form designed for this purpose.
10. If the requirements for opening a bank account are not met, the bank branch manager must inform the applicant of the necessary requirements for opening a bank account. Such process shall be documented in a special file designed for this purpose in the bank branch. In addition, measures taken in this regard shall be reported to the compliance department at the head office of the bank on the same day.
11. If the requirements for opening a bank account are met, the documents shall be submitted on the same day to the compliance department at the bank’s head office. Consequently, the compliance department, in turn, shall submit such documents to SAMA on the same day or at the beginning of the following working day, at the most.
12. Where all requirements are met, the period for opening a bank account shall not exceed two working days.
13. The Hajj organizer may open multiple accounts, provided that these accounts are opened in the same bank only - with an explanation of the account's purpose - The organizer may not open other accounts in other banks. If the organizer requests to transfer its accounts from one bank to another, it shall provide compelling justifications that are not related to meeting the requirements. Approval of the Ministry Hajj and Umrah and SAMA for that matter shall be secured.
b. Requirements for account operation and management:
1. The account shall be operated under a new approval letter from the Ministry of Hajj and Umrah to the bank on the account operation. The letter should specify the operation period, which should be from the first day of Rabi I up till the last day of Muharram of the following year. The letter shall be accompanied by a list provided by the Hajj organizer. This list shall include the names of Saudi natural persons, companies and establishments that the organizer will be dealing with for petty expenses, and it shall be attested by the Ministry of Hajj and Umrah.
2. Deposits shall be made in the account of the Hajj organizer via remittances from a bank in the organizer’s home country or countries designated by the Saudi Ministry of Hajj and Umrah, the purpose of such remittance shall be specified as “organizer’s expenses related to Hajj only”.
3. Deposits may be made in the account via checks under collection, drawn by the organizer itself on a bank in the organizer’s home country only.
4. Remittances, checks or cash deposits from entities inside Saudi Arabia shall not be accepted, except in the following cases:
■ By persons whose names are included in the list, submitted in advance to the Ministry of Hajj and Umrah by the organizer and attached to the ministry's letter to the bank. Such list should include the names of service providers dealing with the organizer. The amounts of such remittances, checks or cash deposits shall be less than or equal to the amounts stated in contracts concluded with each beneficiary (at the Saudi Ministry of Hajj and Umrah’s discretion).
■ By authorized persons, provided that such an amount is within normal limits, i.e. is less than or equal to the withdrawn amount as petty expenses (at the Saudi Ministry of Hajj and Umrah’s discretion).
■ The amounts (in SAR/foreign currencies) disclosed at ports of entry (land ports, seaports, or airports) shall be delivered to the bank branch at the port or the bank representative in the seasonal office at the port as per a document from the Saudi Zakat, Tax, and Customs Authority. Such document shall include the name of the organizer and its account number (IBAN) in Saudi Arabia, as well as the name of the cash carrier and a copy of his/her passport. The bank employee shall give the depositor a deposit or transfer receipt attested by the bank.
5. Transfers from the office’s account to the electronic pathway of the Ministry of Hajj and Umrah are made for services contracted through the electronic pathway. Direct transfers from the office’s account in its country—or in countries designated by the Saudi Ministry of Hajj and Umrah—to the electronic pathway account of the Saudi Ministry of Hajj and Umrah for external pilgrims are allowed for contracting purposes related to Hajj arrangements and any other purposes specified by the Saudi Ministry of Hajj and Umrah, in compliance with all requirements stated in this rule.
6. The organizer may pay authorized signatories by checks for petty expenses (within the estimated amounts approved by the Saudi Ministry of Hajj and Umrah).
7. The approval of the bank’s compliance department is required for the operation of the organizer’s account.
8. The organizer shall not use its account balances for investments.
c. Operating the organizer’s account after Hajj season:
1. At the end of the Hajj season (end of Muharram), amounts left in the account of the organizer shall be returned to a bank in the office’s home country or to a bank in one of the countries designated by the Saudi Ministry of Hajj and Umrah in case they were the source of these funds at the request of the authorized persons. Such a request shall be indicated in the bank account opening agreement signed by the organizer.
2. If the organizer wants to keep the balance in the same account to be used in the subsequent Hajj year, the account will be frozen at the end of Muharram until the beginning of the subsequent Hajj season (which is to be specified by the Ministry of Hajj and Umrah).
3. In exceptional cases, operating the account of the organizer may be allowed during the period in which using the account is originally prohibited, provided that the bank shall obtain SAMA written approval therefor.
d. Reactivating and operating the organizer’s account in the following Hajj year:
To reactivate the organizer’s bank account in the following Hajj year, the bank shall obtain a letter from the Ministry of Hajj and Umrah, including the same information specified in the form filled out by the ministry when it first approved the account opening. In particular, the information should include the names of authorized persons and their information. The approval letter should be obtained along with the list provided by the organizer for the Ministry of Hajj and Umrah, stating the parties that the organizer has contracted with in the Hajj year and that the organizer will write checks and make payments for. This list shall be attested by the Ministry of Hajj and Umrah.
• Saudi establishments and companies organizing the arrival of Umrah performers and visitors of the Prophet's Mosque:
- Documents required from those Saudi establishments are as specified in Rule (300.1.1) above.
- Documents required from those Saudi companies are as specified in Rule (300.1.3) above.
- All bank accounts of Saudi establishments and companies licensed to offer Umrah and holy site visit services shall be separated from one another, in that bank accounts designated for Umrah and holy site visit services shall be separate from other bank accounts designated for other activities and services. In addition, all bank transactions related to Umrah services shall be separate from those related to other services and activities that such establishments and companies may carry out.
300.1.5.2 Private Associations
This rule has been amended according to the circular No. (106878603), Dated 01/07/1446H, corresponding to 31/12/2024H. Please refer to the Arabic version of this rule to read the last updated version.
The bank may open accounts only in Saudi riyal for private associations. The requirements are as follows:a. Requirements and controls for opening and managing main bank accounts:
- Requirements for opening main account:
1. A copy of the registration certificate issued by the National Center for the Development of the Non-Profit Sector (NCNP) (the Center).
2. A copy of the association's bylaws, approved by the Center.
3. A copy of the decision to form the board of directors and appoint the officials, which is approved by the Center, along with the verification of the board members' identities.
4. Copies of the IDs of persons authorized to operate and manage the account, and verification of their authorization by identifying them in the decision of the board of directors; such authorization shall allow for joint signature by two officials, and obtaining the approval of the Center when the authorized persons are from outside the board.
5. Approval of the bank’s senior management to open the account in cases where required -in accordance with the provisions of the Guidance of Anti Money Laundering and Combating Terrorist Financing-.
- Controls for managing the main account:
1. Cash donations or donations made via electronic channels may be accepted as long as these donations come from banking sources inside Saudi Arabia only, through which donor’s information can be retrieved.
2. If disbursement is made by a check, the check shall be payable to the first beneficiary.
3. ATM and/or credit cards shall not be issued for such accounts.
4. No transactions (e.g. remittance, collection of checks, etc.) from the association’s accounts to any beneficiaries outside Saudi Arabia shall be made, except for transferring money for the purpose of managing the association’s activities. For example, remittance for paying fees of consulting services or of participation in external symposiums, conferences and the like may be made after the bank obtains the official approval therefore from the Center (NCNP).
5. Remittances or checks coming from outside Saudi Arabia to the association’s account at the bank -or coming to other banks operating in Saudi Arabia via the bank- shall not be accepted, unless official approval therefore is obtained from the Center (NCNP).
6. Sub-accounts may be opened for investing the association’s funds in activities with financial returns that would help the association achieve its objectives. To do so, the bank must first obtain the association’s rules that govern the investment of its surplus funds, which are approved by its general assembly.
b. Requirements and controls for opening and managing sub-accounts:
Sub-accounts may be opened for the various purposes of the association, such as the collection of Zakat, as follows:
1. Only the documents for opening and managing the main account shall be required.
2. These accounts shall be used only for the purpose for which they were opened.
3. Cash donations or donations made via electronic channels may be accepted as long as these donations come from banking sources inside Saudi Arabia only, through which donor’s information can be retrieved.
4. In case there are branches of the association, one sub-account may be opened for each branch of the association, with the primary purpose being "Expenses-Branch Name", as follows: a. A copy of the approval of the Center (NCNP) for establishing the branch for which a sub-account is to be opened. b. A copy of the organizational structure decision for the branch and the names of the employees in its management, approved by the Center (NCNP), with Verifying their identities. c. Copies of the IDs of persons authorized to operate and manage the bank account, and verification of their authorization by identifying them in the decision of the association's board of directors; such authorization shall allow for joint signature by two officials, and obtaining the approval of the Center when the authorized persons are from outside the board. d. The sub-account shall be named “Branch of... Association/Office in (City)-Subaccount of Periodic Advance”. e. Disbursements from the account shall be limited to the following: - bank checks withdrawn only by the first beneficiary. - Transfers made to the bank accounts of beneficiaries of charity inside Saudi Arabia only. The transfer forms shall be filled out by the persons authorized to sign for the advances’ account. In addition, the transfers shall be monitored by the bank to ensure that they go in line with the nature of the branch’s activities. - Paying salaries of the association branch’s staff. - Paying utility bills and government invoices. f. ATM and/or credit cards shall not be issued for such accounts. g. Approval of the bank’s senior management to open the account in cases where required -in accordance with the provisions of the Guidance of Anti Money Laundering and Combating Terrorist Financing-. h. Cash donations or donations made via electronic channels may be accepted as long as these donations come from banking sources inside Saudi Arabia only, through which donor’s information can be retrieved. 300.1.5.3 Private Foundations
This rule has been amended according to the circular No. (106878603), Dated 01/07/1446H, corresponding to 31/12/2024H. Please refer to the Arabic version of this rule to read the last updated version.The bank may open accounts only in Saudi riyal for private Foundations. The requirements are as follows:
a. Requirements and controls for opening and managing main bank accounts:
- Requirements for opening main account:
1. A copy of the registration certificate issued by the National Center for the Development of the Non-Profit Sector (NCNP) (the Center).
2. A copy of the foundation's bylaws, approved by the Center.
3. A copy of the trustee board formation decision and verifying the identities of the members.
4. Copies of the IDs of persons authorized to operate and manage the bank account, and verification of their authorization by identifying them in the decision of the trustees board; such authorization shall allow for joint signature by two officials, and obtaining the approval of the Center when the authorized persons are from outside the board.
5. Approval of the bank’s senior management to open the account in cases where required -in accordance with the provisions of the Guidance of Anti Money Laundering and Combating Terrorist Financing-.
- Controls for managing the main account:
1. If disbursement is made by a check, the check shall be payable to the first beneficiary.
2. ATM and/or credit cards shall not be issued.
3. A prepaid card may be issued and funded based on the joint signature of the authorized persons on the account.
4. The foundation is not allowed to accept gifts, bequests, donations, endowments, grants, or Zakat from parties other than the founders specified in its bylaws, unless the approval of the Center is obtained. Additionally, private foundations are not allowed to carry out any cash dealings.
5. No transactions (e.g. remittance, collection of checks, etc.) to any beneficiaries outside Saudi Arabia shall be made, except for transferring money for the purpose of managing the foundation’s activities. For example, remittance for paying fees of consulting services or of participation in external symposiums, conferences and the like may be made after the bank obtains the official approval therefore from the Center (NCNP).
6. Remittances or checks coming from outside Saudi Arabia to the foundation’s account at the bank shall not be accepted, unless official approval therefore is obtained from the Center (NCNP).
7. Sub-accounts may be opened for investing the foundation’s funds in activities with financial returns that would help the foundation achieve its objectives, after obtaining approval from the Board of Trustees.
b. Requirements and controls for opening and managing sub-accounts:
Sub-accounts may be opened for the various purposes of the foundation, as follows:
1. Only the documents for opening and managing the main account shall be required.
2. These accounts shall be used only for the purpose for which they were opened.
3. In case there are branches of the foundation, one sub-account may be opened for each branch of the foundation, with the primary purpose being "Expenses-Branch Name", as follows:
a. A copy of the approval of the Center (NCNP) for establishing the branch for which a sub-account is to be opened.
b. A copy of the organizational structure decision for the branch and the names of the employees in its management, approved by the Center (NCNP), with Verifying their identities.
c. Copies of the IDs of persons authorized to operate and manage the account, and verification of their authorization by identifying them in the decision of the Board of Trustees of the Foundation; such authorization shall allow for joint signature by two officials, and obtaining the approval of the Center when the authorized persons are from outside the board.
e. Disbursements from the account shall be limited to the following:
- bank checks withdrawn only by the first beneficiary.
- Transfers made to the bank accounts of beneficiaries of material support inside Saudi Arabia only. The transfer forms shall be filled out by the persons authorized to sign for the expense sub-account. In addition, the transfers shall be monitored by the bank to ensure that they go in line with the nature of the branch’s activities.
- Paying salaries of the foundation branch’s staff.
- Paying utility bills and government invoices.
f. ATM cards and/or credit cards shall not be issued for such accounts.
g. A prepaid card may be issued and funded based on the joint signature of the authorized persons on the account.
h. Approval of the bank’s senior management to open the account in cases where required -in accordance with the provisions of the Guidance of Anti Money Laundering and Combating Terrorist Financing-.
- Civil Society Organizations established pursuant to royal orders:
This rule has been added pursuant to the circular No. (450651330000), dated 14/10/1445H, corresponding to 22/04/2024G. Please refer to the Arabic version of this rule to read the last updated version.
Bank accounts may be opened for Civil Society Organizations established pursuant to royal orders as follows:
1. A copy of the approval from His Majesty the King for the establishment of the civil society organization.
2. A copy of the articles of association of the organization.
3. A copy of the trustee board formation decision and verifying the identities of the members.
4. Copies of the IDs of persons authorized to manage and operate the bank account, with verification of their authorization by identifying them in a decision by the Board of Trustees. The signature should be joint for two officials, unless the organization's articles of association state otherwise.
5. Any transactions (e.g. remittance, collection of checks, etc.) outside Saudi Arabia may be made after verifying that these transactions align with the activity or main purpose for which the organization was established, as per its articles of association.
6. No transactions (e.g. remittance, collection of checks, etc.) outside Saudi Arabia shall be made for an organization if it is evident that the transaction does not align with its activity or main purpose under its articles of association, except for transferring money for the purpose of managing the organization’s activities. For example, remittance for paying fees of consulting services or of participation in external symposiums, conferences and the like may be made after obtaining approval from the National Center for Non-Profit Sector.
• Family funds:
This rule has been amended according to the circular No. (43074912), dated 26/08/1443H, corresponding to 29/03/2022G.and the circular No. (106878603), Dated 01/07/1446H, corresponding to 31/12/2024H. Please refer to the Arabic version of this rule to read the last updated version.The bank may open accounts only in Saudi riyal for family funds. The requirements are as follows:
a. Requirements and controls for opening and managing main bank accounts:
- Requirements for opening main account:
1. A letter from the chairman of the trustee board of the family fund (or their authorized representative) to the bank in which the account is to be opened clearly indicating the purpose of opening the account.
2. A copy of the registration certificate issued by the National Center for the Development of the Non-Profit Sector (NCNP).
3. A copy of the fund's bylaws, approved by the Center.
4. A copy of the trustee board formation decision approved by the Center, and verifying the identities of the members.
5. Copies of the IDs of persons authorized to operate and manage the bank account, and verification of their authorization by identifying them in the decision of the trustees board and the approval of the Center. The signature should be joint for two officials.
Controls for managing the main account: 1. disbursement from the fund shall be in accordance with the methods and conditions stipulated in the fund's bylaws.
2. The family fund may accept funds, gifts, bequests, Zakat and subscriptions (if any) from its founders and family members only, provided that the bank obtains a pledge from the chairman of the fund’s trustee board to comply with this requirement.
3. No transactions (e.g. remittance, collection of checks, etc.) to any beneficiaries outside Saudi Arabia shall be made, except for transferring money for the purpose of managing the fund’s activities. For example, remittance for paying fees of consulting services or of participation in external symposiums, conferences and the like may be made after obtains the official approval therefor from the Center.
4. The family fund is allowed to invest its money according to the provisions stipulated in the fund’s bylaws.
5. Approval of the bank’s senior management to open the account in cases where required -in accordance with the provisions of the Guidance of Anti Money Laundering and Combating Terrorist Financing-.
b. Requirements and controls for opening and managing sub-accounts:
Sub-accounts may be opened for the various purposes of the fund, such as the collection of Zakat, as follows:
1. Only the documents for opening and managing the main account shall be required.
2. These accounts shall be used only for the purpose for which they were opened.
3. Cash donations or donations made via electronic channels may be accepted as long as these donations come from banking sources inside Saudi Arabia only, through which donor’s information can be retrieved.
4. In case there are branches of the fund, one sub-account may be opened for each branch of the fund, with the primary purpose being "Expenses-Branch Name", as follows:
a. A copy of the approval of the Center (NCNP) for establishing the branch for which a sub-account is to be opened.
b. A copy of the organizational structure decision for the branch and the names of the employees in its management, approved by the Center (NCNP), with Verifying their identities.
c. Copies of the IDs of persons authorized to operate and manage the bank account, and verification of their authorization by identifying them in the decision of the fund's Board of Trustees; such authorization shall allow for joint signature by two officials, and obtaining the approval of the Center when the authorized persons are from outside the board.
d. The sub-account shall be named “Branch of... Fund/Office in (City)-Subaccount of Periodic Advance”.
e. Disbursements from the account shall be limited to the following:
- bank checks withdrawn only by the first beneficiary.
- Transfers made to the bank accounts of beneficiaries of charity inside Saudi Arabia only. The transfer forms shall be filled out by the persons authorized to sign for the advances’ account. In addition, the transfers shall be monitored by the bank to ensure that they go in line with the nature of the branch’s activities.
- Paying salaries of the fund branch’s staff.
- Paying utility bills and government invoices.
- Prepaid cards and deposits may be issued, provided that their issuance is based on a joint signature from the authorized persons on the bank account, and that the prepaid card is funded with a joint signature from the authorized persons
g. Approval of the bank’s senior management to open the account in cases where required -in accordance with the provisions of the Guidance of Anti Money Laundering and Combating Terrorist Financing-.
h. Cash donations or donations made via electronic channels may be accepted as long as these donations come from banking sources inside Saudi Arabia only, through which donor’s information can be retrieved.
• Charitable activities of (civil and military) government bodies:
The bank may open accounts only in Saudi riyal for charitable activities of (civil or military) government bodies. The following requirements and controls shall be met and applied:
1. The bank shall obtain, through SAMA, the approval of the Ministry of Finance for opening a bank account or for maintaining the operation of an existing account, if the account’s funds (or part of them) are from public funds.
2. The bank shall receive a request from the ultimate authority in the government body carrying out the charitable activity or the person he/she authorizes to open the account, if the account’s funds are not from public funds.
3. The bank shall receive from the ultimate authority or his/her authorized representative a letter containing the names of the persons authorized to manage the bank account (by joint signature), provided that such authorized persons are Saudi employees of the same government body.
4. Such government body shall not raise funds or accept donations, aids or gifts from anyone except from its staff.
5. Deposits are accepted in cash, by checks, and through domestic direct transfer. In addition, deposits can be carried out using ATMs, Internet or credit cards. In all deposits, depositor’s information shall be obtained.
6. No ATM cards and/or remittance membership shall be issued/granted for the account.
7. The government body wishing to open such bank account shall undertake that the beneficiaries of such account are from its staff and their families.
8. Disbursement from the account shall be made by checks payable to the first beneficiary, or via wire transfer from the main account to the first beneficiary’s account.
9. Sub-accounts under the main account may be opened. Sub-accounts shall be used only for receiving deposits and making transfers to the main account. Checkbooks shall not be issued for such sub-accounts. Moreover, neither withdrawal nor transfer from these sub-accounts shall be allowed except to the main account.
10. Approval of the manager of compliance department for opening the account shall be sought.
- Civil Society Organizations established pursuant to royal orders:
300.1.5.4 Public Welfare Committees (e.g. Committees of Patients’ Friends, Committees Caring for People with Disabilities or Blind People, Committees of Academic Excellence Awards, Charitable Warehouses Licensed by Regional Governors, and the Like)
- The bank may open accounts for these committees only in Saudi riyal upon obtaining a copy of the committee’s license issued by the concerned official authority as per its jurisdiction, such as the Ministry of Education, the concerned emirate of the region, etc. Bank accounts for such committees shall be opened and managed under a joint signature of the committee chairman (or secretary) and its financial manager. Further, the bank shall obtain copies of the IDs of those two officials (the committee chairman/secretary and the financial manger), along with copies of the IDs of the members of the board of directors (or board of trustees). Copies of the bylaws of the committee/organization shall also be submitted to the bank. Approval of the manager of compliance department for opening the account shall be sought. Additionally, SAMA shall be informed about opening such accounts.
- Bank accounts may be opened for annual or seasonal public welfare activities, such as festivals, celebrations and the like, whose funds are not from the state budget. In this case, the bank shall receive a formal request from the concerned official entity organizing such activity to open the bank account. Such bank account shall be opened and managed under a joint signature of the person authorized to manage the activity and the financial manager; copies of their IDs shall also be obtained. In addition, the bank shall obtain copies of the IDs of the activity committee members. Moreover, the validity period of the account shall be specified; after such period the account shall be closed. Further, approval of the manager of compliance department for opening the account shall be sought. SAMA shall be informed about opening the account.
- Transferring funds from such accounts to parties outside Saudi Arabia is not permitted.
300.1.5.5 Bank Accounts for Collection of Shoppers' Donations of Remaining Halalas (Change) in Favor of Charities
1. Donation collection service shall be restricted to commercial enterprises with commercial registers.
2. Charities that can benefit from such voluntary donation shall be licensed to operate in Saudi Arabia, and its articles of association or bylaws shall permit collection of donations.
3. No commercial enterprise shall be allowed to provide the voluntary donation service of remaining halalas (change) in favor of charities (whether societies, foundations, committees or others) wishing to receive such donations without official permission from the Ministry of Human Resources and Social Development or the authority supervising the charity.
4. The supervisory authority's permission shall include (or have enclosed therewith) the license number for collection of donations and its validity period, as well as the name of the commercial enterprise and its commercial register number.
5. Collection of donations of remaining halalas shall be subject to a two-party contract, i.e. a contract between the commercial enterprise collecting donations of remaining halalas and the charity receiving such donations. The contract shall state obligations of both parties, including that the commercial enterprise will not charge any fees for providing such service.
6. The contract may be extended for more than one period with the consent of the authority supervising the charity. In this case, all previous licenses of donation collection and their related accounts shall be revoked or settled prior to granting renewal approval at the end of the financial year.
7. Donations collected shall be submitted to the concerned charity by a crossed check or a bank transfer to its account at the end of each quarter of the Gregorian calendar year. In addition, the supervisory authority shall be furnished with copies of paid checks or bank transfer receipts.
8. The commercial enterprise shall state in the crossed check or transfer slip the name or account number of the charity and that the amount presented is the donation of remaining halalas by shoppers.
9. The halala-donation procedures, automatic system, and controls of the commercial enterprise shall consider the following:
■ Using a separate special payment means (e.g. cash/sale points) for donation of halalas.
■ Allocating a separate bank account under the name of the commercial enterprise with the clause "remaining halalas" for keeping amounts donated by costumers. This account shall include sub-accounts; each of which shall be designated for one charity with which the commercial enterprise has contracted.
300.1.5.6 Cooperative Associations and Funds
• Cooperative associations
a. Cooperative associations under establishment:
A Saudi Riyal trust account may be opened for a cooperative association under establishment for the purpose of capital raising. The following requirements shall be satisfied:
1. The bank shall receive a letter from the competent authority at the Ministry of Human Resources and Social Development (MHRSD), stating that the cooperative association is under establishment and that the MHRSD agrees on opening an account for the association to raise its capital. The letter shall specify the name of the cooperative association under establishment and the name and ID number of the founding committee’s chairman, who is in charge of communicating with the bank for the account opening. In addition, a copy of the association’s preliminary memorandum of association shall be submitted to the bank with the letter.
2. The trust account shall be opened only for six months. The bank may extend this period for another six months upon receiving a request from the concerned authority at the MHRSD.
3. If the association is not registered and established within the period specified in Paragraph (2) above, amounts deposited in the trust account shall be returned upon the approval of the concerned authority at the MHRSD. The approval shall specify the method of returning such amounts and their recipient.
4. If the association is registered and established, the bank shall fulfill the requirements of Paragraph (b) below and shall convert the trust account into a current account.
b. Licensed cooperative associations:
The bank may open a Saudi Riyal account for cooperative associations upon fulfilling the following conditions and requirements:
1. Receiving a request of the association’s board chairman to open a bank account; the account to be opened shall be managed under a joint signature of the board chairman (or his/her vice-chairman) and the treasurer (principal signatory).
2. Obtaining a copy of the association registration and establishment decision (the association registration certificate) issued by the MHRSD.
3. Obtaining a copy of the entity’s board formation decision that is issued, approved or attested by the MHRSD.
4. Obtaining a copy of the entity’s memorandum of association.
5. Obtaining a copy of the entity’s bylaws.
6. Obtaining copies of the board members’ IDs.
• Cooperative funds:
The bank may open accounts for the cooperative funds upon fulfilling the following conditions and requirements:
1. Obtaining a copy of the decision allowing or approving the establishment of the fund, issued by the concerned minister, general director or sector head.
2. Naming the fund after the organization establishing it.
3. Ensuring that the account is opened and operated by the manager and treasurer of the organization that owns the fund.
4. Obtaining a copy of the regulations governing the fund, issued by the concerned government body.
5. Obtaining a copy of the regulations governing the fund, issued by the concerned government body.
300.1.5.7 Homeowners’ Associations/Housing Societies Licensed by the Real Estate General Authority
This rule has been amended according to the circular No. (42003746), Dated 22/01/1442H, corresponding to 09/09/2020G.Banks may open bank accounts for homeowners’ associations/housing societies upon obtaining the following:
1. A letter from the real estate manager requesting the opening of the account, including the names of those authorized to manage and operate the account, certified by the chairman of the association/society.
2. A copy of the articles of association of the association/society.
3. A copy of the association/society registration certificate issued by the Real Estate General Authority.
4. Copies of the IDs of persons authorized to manage and operate the account.
300.1.5.8 Endowments and Bequests
This rule has been amended according to the circular No. (41042946), Dated 19/06/1441H, corresponding to 13/02/2020G.Without prejudice to Rules (300.1.1) and (300.1.3), bank accounts shall be opened in Saudi Riyal for endowments and bequests as follows:
1. Endowments:
a. Endowments under the administration of the General Authority for Awqaf:
1. A letter by the Governor of the General Authority for Awqaf, requesting the opening of a bank account under the name of “Revenues’’ shall be submitted. The persons authorized to operate the account shall be identified, and dual authorization shall be applied. The financial powers of or right to delegate for the persons authorized must be specified.
2. Copies of the IDs of persons authorized to operate the account shall be submitted.
b. Endowments not under the administration of the General Authority for Awqaf:
1. The bank shall receive a copy of the valid endowment registration certificate issued by the General Authority for Awqaf, including at minimum, the following: name of endowment, endowment deed number and date, and names of administrators and their ID numbers.
2. A copy of the legal deed of the endowment shall be submitted.
3. A letter from the authorized signatory under the endowment deed, specifying the persons authorized to operate the account, shall be submitted.
4. Copies of the IDs of persons authorized to operate the account shall be submitted.
5. Copies of the IDs of administrators whose names are stated in the endowment registration certificate shall be submitted.
6. No transactions (e.g. remittance, collection of checks, etc.) from the endowment accounts to any beneficiaries outside Saudi Arabia shall be made, except for transferring money for the purpose of managing the association’s activities. For example, remittance for paying fees of consulting services or of participation in external symposiums, conferences and the like may be made after the bank obtains the official approval therefor from the General Authority for Awqaf.
c. Foreign endowments:
1. The bank shall receive a copy of the valid endowment registration certificate issued by the General Authority for Awqaf, including at minimum, the following: name of endowment, endowment deed number and date, and names of administrators and their ID numbers.
2. The bank shall receive a letter from the endowment administrator or agent (Saudi national), requesting the opening of a bank account. The letter shall be accompanied by a request from the authority responsible for endowments in the home country of the foreign endowment (or by a request from the ambassador of that country) and by the approval of the General Authority for Awqaf.
3. The bank shall receive a copy of the endowment’s legal deed stating that the property is allocated as Waqf (endowment) and registered with the competent authority in Saudi Arabia.
4. The bank shall receive a copy of the administration deed/power of attorney issued by the competent authority in Saudi Arabia, which provides for the full right to handle endowment and fulfill the donor's conditions. The administration deed does need to contain a provision for opening bank accounts, as the endowment administration includes this authority.
5. The bank shall receive a copy of the national ID of the endowment administrator/agent.
6. The bank account shall be in the name of the endowment as stated in the endowment deed and the registration certificate issued by the General Authority for Awqaf.
7. SAMA must be informed when the account is opened.
8. Withdrawal from this account shall be made by checks.
9. Transferring funds or issuing personal/bank checks from this account to beneficiaries outside Saudi Arabia shall not be allowed.
10. ATM cards and/or credit cards shall not be issued for such accounts.
11. Receiving remittances or checks from beneficiaries outside Saudi Arabia shall not be permitted without written approval from the General Authority for Awqaf.
2. Bequests:
1. The bank shall receive a copy (or a certified copy) of the guardianship deed, which provides for the bequests.
2. The bank shall receive a copy of the national ID of the trustee(s).
3. The account shall be in the name of the bequest (Bequest of..).
300.1.5.9 Cultural, Sports and Social Clubs and Youth Hostels
• Sports clubs licensed by the General Sports Authority:
The bank may open Saudi Riyal accounts for sports clubs licensed by the General Sports Authority upon receiving the following documents:
1. The approval of the Ministry of Finance for opening the account.
2. A copy of the license issued by the General Sports Authority.
3. A copy of the decision to form the club’s board of directors.
4. A copy of the authorization letter by the board of directors (joint signature), allowing specific persons to open and operate the account.
5. Copies of the IDs of the authorized persons and board members.
- Bank accounts for contributions of the club's members of honor and fans may be opened without the approval of the Ministry of Finance. Such accounts may be opened in Saudi Riyal or foreign currencies, but they shall be separated from the government subsidy account.
• Youth hostels:
Requirements for the sports clubs licensed by the General Sports Authority shall also apply to youth hostels.
• Cultural and literary clubs supervised by the Ministry of Culture:
The bank may open Saudi Riyal accounts for cultural and literary clubs supervised by the Ministry of Culture upon receiving the following documents:
1. The approval of the Ministry of Finance for opening the account.
2. A copy of the license issued by the supervisory authority.
3. a copy of the decision to form the club’s board of directors;
4. The authorization letter by the board of directors, allowing specific persons to open and operate the account under a joint signature.
5. Copies of the IDs of the authorized persons and board members.
• Camel Club, and its branches and offices:
The bank may open Saudi Riyal accounts for camel club and its branches and offices upon receiving the following documents:
1. A copy of the decision to form the club’s board of directors, issued by the Council of Ministers.
2. A copy of the authorization letter by the board of directors, allowing specific persons to open and operate the account.
3. Copies of the authorized signatories’ IDs.
4. Copies of the board members’ IDs.
5. Payment from the main account shall be made only for the purposes for which the account was established.
300.1.5.10 Public Corporations and Public Sector Institutions
The bank may open accounts for public corporations and public institutions (see Appendix "B" for further information on such entities and their names) upon obtaining the following documents:
1. A copy of the decision to form the entity’s board of directors, issued by the Council of Ministers.
2. A copy of the authorization letter by the board of directors, allowing specific person(s) to operate the account, along with copies of those persons’ IDs and their specimen signatures.
300.1.5.11 Chambers of Commerce and Industry
The bank may open accounts for chambers of commerce and industry upon obtaining the following documents:
1. A copy of the decision to form the chamber’s board of directors.
2. A copy of the authorization letter by the board of directors, allowing specific person(s) to open and operate the account, along with copies of those persons’ IDs and their specimen signatures.
300.1.5.12 Building, Renovating or Expanding Small and Large Mosques
The bank may open bank accounts designated for building, renovating or expanding small or large mosques. The following requirements shall be fulfilled:
1. The bank shall receive a letter from the Ministry of Islamic Affairs, Dawah and Guidance (MoIA) or any of its branches in the concerned region, requesting the opening of a bank account and indicating its purpose.
2. The bank shall obtain a copy of the approval of the MoIA or any of its branches in the concerned region for building, renovating or expanding a small or large mosque.
3. The bank shall obtain the decision made by the MoIA or any of its branches in the concerned region to form a committee to supervise the mosque construction, renovation or expansion process. The committee formed shall be chaired personally by the branch manager of the MoIA and include two members of the officials of MoIA branch in the concerned region.
4. The account shall be named “Branch of the Ministry of Islamic Affairs, Dawah and Guidance in... (building, renovating or expanding) (name of the mosque)”.
5. The account shall be operated personally by the manager of MoIA branch in the concerned region (principal signatory) with one or both of the committee members indicated above.
6. The bank shall obtain copies of the IDs of committee members who are authorized to sign for the account.
7. If funds are donations, the approval of the concerned authority shall be submitted.
8. Disbursement from the account shall be made only by checks, under a joint signature. In addition, ATM cards and/or credit cards shall not be issued for this account.
9. The account shall be valid for a period identical to the period specified by the MoIA for the mosque construction, renovation or expansion. Should there be a need to extend the validity period of the account, a letter to this effect shall be submitted to the bank by the MoIA or its concerned branch.
10. If account funds are from the state budget, as per a request from the MoIA, the approval of the Ministry of Finance shall be communicated to the bank through SAMA.
11. Approval of the manager of compliance department for opening the account shall be sought.
300.1.5.13 National Societies and Committees
The bank may open accounts for national societies and committees, such as the National Society for Human Rights and the National Prevention of Blindness Committee, upon completing the following:
1. Receiving a request from the chairman of the society/committee for opening a bank account.
2. Obtaining a copy of the royal approval or the resolution of the Council of Ministers, allowing the society or committee to exercise its activities.
3. Obtaining a copy of the articles of association of the society/committee.
4. Obtaining a copy of the society’s/committee’s regulations governing its financial affairs.
5. Obtaining copies of the IDs of society’s/committee’s executive council members.
6. The names of authorized signatories shall be determined by the chairman of the society/committee. The bank shall obtain copies of those signatories’ IDs and their specimen signatures. Such copies shall be attested as true copies of the original by both the society/committee and the bank. Changing the authorized signatories requires sending a letter from the chairman of the society/committee to the bank where the account is opened.
7. Withdrawal from these accounts shall be as per dual control, and in case of withdrawal by checks, check shall be payable to the first beneficiary.
300.1.5.14 Trial and Enforcement Courts
This rule has been amended according to the circular No. (42036451), Dated 01/06/1442H, corresponding to 14/01/2021G.Bank accounts for trial courts, such as commercial courts and family courts, may be opened for the purpose of managing the cases pending before such courts and for the enforcement courts for the purpose of depositing execution funds as follows:
1. The bank shall receive a letter from the Deputy Minister of Justice for Enforcement or his authorized representative (for the bank accounts of enforcement courts), or a letter from the Deputy Minister of Justice for Judicial Affairs or his authorized representative (for the bank accounts of trial courts). The letter shall be addressed to the bank, requesting the opening of a bank account and stating the names of persons authorized to manage and operate the account under a joint signature (two signatories are required).
2. The bank shall obtain copies of the authorized signatories’ IDs and their specimen signatures.
3. The account shall be separate from other accounts of each court.
4. Disbursement from the account shall be made by checks payable to the first beneficiary, by transfers to the collection accounts such as the account opened under the name “Ministry of Justice/Deputyship for Enforcement) and designated for receiving funds via SADAD system, or by transfers to beneficiaries’ accounts. Where checks are used, the purpose of the check and the case number and date shall be written on the check.
5. ATM cards and/or credit cards shall not be issued for such accounts.
6. Transferring funds from these accounts to beneficiaries outside Saudi Arabia shall not be allowed. The exception to this rule is when the beneficiary is a foreign (natural or legal) person residing outside Saudi Arabia and the approval of the concerned deputy minister or the chief judge is obtained for the transfer.
300.1.5.15 Property Conveyancing Processes
The bank may open collection accounts for the purpose of property conveyancing and for enforcement of related decisions. The following requirements and controls shall be met and applied:
1. The bank shall receive a letter from the Minister of Justice or his delegate, specifying the names of persons (two as a minimum) authorized to manage the account under a joint signature.
2. The account shall be named “Property Conveyancing for....”. The account shall also be separate from the accounts of the Ministry of Justice.
3. The bank shall obtain copies of the authorized signatories’ IDs and specimen signatures.
4. Bank transfers related to the electronic property conveyancing, whether made to the collection accounts opened under the name (Property Conveyancing) or to the accounts of beneficiaries, shall be made using electronic banking services. Withdrawal from the account shall be made only by checks payable to the first beneficiary. The purpose of the check and the ID number of the payee shall be written on the check.*
5. ATM cards and/or credit cards shall not be issued for such accounts.
6. Transferring funds from these accounts to beneficiaries outside Saudi Arabia shall not be allowed.
This paragraph has been amended by circular No. (42009020), dated 18/02/1442H, corresponding to 27/09/2020G.
300.1.5.16 Civil Rights–Personal Debt Settlement Account
Bank accounts in Saudi Riyal only may be opened for any verdict execution administrations, divisions or sections, or for rights units at police centers. The following requirements shall be fulfilled:
1. The bank shall receive a letter from the head of the verdict enforcement administration, division or section, or from the head of the police center, requesting opening a bank account and specifying its purpose and authorized signatories.
2. The account name shall be “the Ministry of Interior, Public Security, Verdict Enforcement Administration in … (Region/City/Governorate)-Personal Debt Settlement Account”.
3. The account shall be operated under a joint signature of at least two persons. One of them shall be the head of the verdict enforcement administration, division or section (or the head of the police center) or his/her deputy. The other signatory shall be the treasurer or his/her deputy (principal signatory).
4. The bank shall obtain copies of the authorized signatories’ IDs and their specimen signatures.
5. Funds shall be deposited in the account only by the debtor, his/her family, and their representatives via the following means:
■ Bank checks in the following form: “Pay to the order of Civil Rights Department in … Region/ City/Governorate-Personal Debt Settlement Account”. The purpose of the check shall be written on it as follows: “Repaying the debt of... (debtor’s name and national ID number), Case/Verdict/Resolution No. ... dated ...”.
■ Bank transfers, provided that all the required information of the transferor and the transfer purpose are indicated.
■ Points of sale.
■ Cash acceptance machines.
6. Withdrawal from the account shall be made only by checks signed by the authorized persons mentioned in point (3) above. The check shall be in the following form: “Pay to... (name of the creditor)”. The purpose of the check shall also be written on it as follows: “Repaying the debt of ... (debtor’s name and national ID number), Case/Verdict/Resolution No. ... dated...”.
7. ATM cards and/or credit cards shall not be issued for this account. Moreover, fund transfer from such account shall not be allowed.
8. The compliance officer at the bank shall ensure that all the abovementioned requirements are fulfilled and documents are verified.
9. The bank shall send a free detailed account statement to the concerned civil rights department every month, or whenever requested.
300.1.5.17 Scientific Societies
This rule has been added pursuant to the circular No. (41039895), Dated 08/06/1441H, corresponding to 02/02/2020G.The bank accounts of scientific societies may be opened as follows:
1. The bank shall receive a letter from the chairman of the society’s board of directors requesting opening of the account. The letter must specify the persons authorized to manage and operate the account under a joint signature of the chairman (or his/her deputy) and the chief financial officer.
2. The bank shall receive a copy of the university council’s decision to form the society.
3. The bank shall receive a copy of the decision to form the board of directors approved by the university council.
4. The bank shall receive a copy of the society’s bylaws.
5. The bank shall receive copies of the IDs of the members of the board of directors and those authorized to manage and operate the account.
6. Acceptance of deposits shall be as determined by the bylaws (or financial regulations) of the society.
7. Transferring money to or receiving money from outside Saudi Arabia shall not be accepted, except for transferring money for the purpose of managing the society’s activities. For example, remittance for paying fees of consulting services or of participation in external symposiums, conferences and the like may be made after the bank obtains the official approval therefor from the university council.
8. ATM cards and/or credit cards shall not be issued for such accounts.
300.1.5.18 Professional Associations
This rule has been added pursuant to the circular No. (41039895), Dated 08/06/1441H, corresponding to 02/02/2020G.The bank accounts of professional associations may be opened as follows:
1. The bank shall receive a letter from the Secretary General of the association, requesting the opening of the account. The letter must specify the persons authorized to manage and operate the account under a joint signature of the chairman of the board (or his/her deputy) and the secretary general.
2. The bank shall receive a copy of the decision to form the board of directors approved by the government authority "competent authority” that supervises the work of the association.
3. The bank shall receive a copy of the association’s bylaws.
4. The bank shall receive copies of the IDs of the members of the board of directors and those authorized to manage and operate the account.
5. Acceptance of deposits shall be as determined by the bylaws (or financial regulations) of the association.
6. Transferring money to or receiving money from outside Saudi Arabia shall not be accepted, except for transferring money for the purpose of managing the association’s activities. For example, remittance for paying fees of consulting services or of participation in external symposiums, conferences and the like may be made after the bank obtains the official approval of the competent authority.
7. ATM cards and/or credit cards shall not be issued for such accounts.
300.1.6 Rules for Foreign Embassies, Consulates, Diplomats, Airlines, Multilateral Organizations, and their Employees
300.1.6.1 Embassies, Consulates, and their Educational Institutions and Employees
- Foreign embassies and consulates and educational institutions operating under their auspices are permitted to open bank accounts. However, they are not permitted to open accounts for or on behalf of other entities, including businesses and charities.
- The bank shall receive a letter from such diplomatic entities, requesting to open a bank account. The letter shall specify the name and nature of the account as well as names of residents authorized to operate the account. Copies of the diplomatic cards of such authorized residents and of the ambassador/consul shall be authenticated and stamped by the embassy/consulate and attached to the letter. Alternatively, the letter may be certified by the Ministry of Foreign Affairs, authenticating the identity of official in charge and the name of embassy. In either case, the entity shall also complete the account opening agreement and submit it to the bank. If the embassy is under formation in Saudi Arabia, the bank may open an account for it upon receiving a letter from the Ministry of Foreign Affairs. The letter shall specify the name of the embassy, the name of the person authorized to open the account, and the type and number of his/her ID. The bank shall update the information related to the embassy and its staff once the embassy/consulate is set up.
300.1.6.2 Resident Diplomats
Subject to the provisions of the Anti-Money Laundering Law and its Implementing Regulations, the Law of Terrorism Crimes and Financing and its Implementing Regulations, and the guidelines issued thereunder concerning politically exposed persons, bank accounts may be opened for resident diplomats working at foreign embassies and consulates. Such diplomats must present to the bank copies of their diplomatic cards, issued by the Ministry of Foreign Affairs, and copies of their diplomatic passports for verification. The bank shall keep such copies in the customer information file. Further, the bank may open accounts for diplomats whose embassies in Saudi Arabia are still under establishment upon receiving a letter from the Ministry of Foreign Affairs. The letter shall specify the name of the embassy, the name of the diplomat, and his/her ID information. A copy of his/her diplomatic passport shall also be submitted to the bank. Once the embassy is set up, the customer information file shall be updated.
300.1.6.3 Diplomats on Temporary Visit
The bank may open accounts for diplomats visiting Saudi Arabia to carry out official temporary tasks. In addition to obtaining documents indicated in Rule (300.1.6.2) above, the bank shall receive from or through the embassy a letter of the Ministry of Foreign Affairs, specifying the term of the diplomat’s task. Moreover, approval of the manager of the bank’s compliance department for opening the account shall be sought. SAMA must be informed about opening the account. Such accounts must be closed when the visit (the assignment) term expires. Upon the expiration of the visit term and if no extension is granted and the account balance remains unsettled, the bank shall then obtain a letter from the customer, addressed to the bank and attested by the concerned embassy. The letter shall indicate that the account holder has left Saudi Arabia and shall specify the suitable method to return the account balance to him/her. However, the bank is not permitted to open accounts for visitors coming for other purposes other than the official tasks or visitors coming to engage in official tasks but for a few days.
300.1.6.4 Foreign Airlines and their Employees
Foreign airlines can open bank accounts to serve their basic objectives. However, they are not permitted to open accounts for or on behalf of any other juristic entities, including corporations, organizations, businesses and charities. To open accounts for foreign airlines, the following requirements shall be met:
1. The person authorized to open the bank account for the airline shall be a resident of Saudi Arabia. If such person is non-Saudi, he/she must be under the sponsorship of the company or present the license of the agency (for agents).
2. The bank shall receive a copy of the approval or permission of the General Authority of Civil Aviation.
3. The bank shall receive a copy of the license issued by the Ministry of Investment to the company if the company directly undertakes its business without an agent, except GCC airlines.
4. The bank shall obtain a copy of the company’s commercial register according to which the business is performed.
5. The account shall be used only for receiving business proceeds and for paying expenses to agents and other suppliers.
- Accounts of airlines employees shall be subject to Rule (200.1).
300.1.6.5 Rules for International Multilateral Organizations
This rule has been amended according to the circular No. (41041589), Dated 15/06/1441H, corresponding to 09/02/2020G.
• The Muslim World League and its affiliated councils and organizations:
• The Muslim World League (MWL):
Banks accounts may be opened for the Muslim World League (MWL) as follows:
I. Main account:
a. Requirements for opening main account:
1. The bank shall receive a letter from the Secretary General or Vice Secretary General of the MWL, requesting opening of the account. The letter shall define the purpose of the account, provided that the persons authorized to operate it under a joint signature are the Secretary General or Vice Secretary General of the MWL and the chief financial officer (principal signatory).
2. The bank shall obtain a copy of the MWL Saudi Arabia Headquarters Agreement and the appended protocol.
3. The bank shall obtain a copy of the decision to form the MWL board of directors, appoint its executives and determine their powers.
4. The bank shall obtain copies of the IDs of the Secretary General of the MWL, Vice Secretary General, chief financial officer and board members. Such copies shall be attested by the MWL.
5. Only one main account shall be opened under the entity’s name as stated in its Headquarters Agreement for deposit, withdrawal and transfer.
6. Approval of the manager of compliance department at the bank for opening the account.
7. Telephone banking and e-banking services shall be limited to balance inquiry and transfer from sub-accounts to the main account only.
8. SAMA shall be informed when the account is opened.
b. Deposit controls:
1. Deposited cash amounts to the MWL main account and sub-accounts from MWL official staff may be accepted.
2. The bank may accept cash deposits, checks and transfers to the main account and sub-accounts from non-official staff of MWL or MWL branches inside Saudi Arabia only if they are gift, subsidy or endowment and not donation.
3. Amounts incoming to the MWL main account or sub-accounts from outside Saudi Arabia clearly stating their purpose as gifts, subsidy or donation may be accepted. Such amounts shall not be deposited in the MWL accounts unless after the MWL submits to the bank the approval of the competent authority in Saudi Arabia to deposit the amounts, whether they are, for example, transfers or checks under collection.
c. Withdrawal controls:
Disbursement from the main account shall be limited only to checks or transfers to entities inside or outside Saudi Arabia. Transactions (remittance, issuance of checks, etc.) made to outside Saudi Arabia shall be only for the purpose of managing the MWL or implementing its programs or projects.
d. Balance investment:
The MWL may open accounts to invest its excess funds in activities that have financial return to help achieving its objectives.
II. Sub-accounts for MWL branches and its various activities:
- Sub-accounts of or linked to the MWL main account for the same purposes of the branches or the activities of the MWL shall be opened after meeting and providing the following conditions and documents:
1. A letter from the MWL Chairman or the Vice Chairman to the bank to open the sub-account specifying the purpose and persons authorized to manage the account.
2. A copy of the official approval from the competent authority in Saudi Arabia to open a MWL branch or practice sub-activity.
3. Copies of the authorized signatories IDs attested by the MWL.
4. The MWL Chairman or the Vice Chairman may authorize members from the MWL staff to manage the account as the authorization shall be limited to making transfers from the sub-accounts to the main account.
- Documents required to open and update the main account shall be sufficient for sub-accounts as they are nested under the main account.
• Institutions and organizations affiliated with the MWL, including the International Organization for Relief, Welfare and Development:
Bank accounts may be opened for such entities as follows:
I. Main account:
a. Requirements for opening a main account:
1. A letter from the Chairman of the MWL affiliated entity to the bank requesting opening a main account or maintaining and updating the existing account specifying the purpose of the account, provided that the persons authorized to manage the account under a joint signature are the Chairman or the Vice Chairman of the entity and the chief financial officer (principal signatory).
2. A copy of the MWL Saudi Arabia Headquarters Agreement and the appended protocol.
3. A copy of the decision to form the Board of Directors of the entity and the appointment of its officials and their powers.
4. A copy of the by-law and procedures of the entity.
5. Copies of the IDs of the Chairman, Vice Chairman, Chief Financial Officer and the board members attested by the entity.
6. One main account only shall be opened under the entity’s name as stated in the license for deposit, withdrawal and transfer.
7. Approval of the manager of compliance department at the bank for opening the account.
8. Telephone banking and e-banking services shall be limited to balance inquiry and transfer from sub-accounts to the main account only.
9. SAMA shall be informed when the account is opened.
b. Deposit controls:
1. Deposited cash amounts to the entity’s main account and sub-accounts from MWL official staff may be accepted.
2. The bank may accept cash deposits, checks and transfers to the main account and sub-accounts from non-official staff of the entity or its branches inside Saudi Arabia only if they are gift, subsidy or endowment and not donation.
3. Amounts incoming to the entity main account or sub-accounts from outside Saudi Arabia clearly stating their purpose as gifts, subsidy or donation may be accepted. Such amounts shall not be deposited in the entity accounts unless after entity submits to the bank the approval of the competent authority in Saudi Arabia to deposit the amounts, whether they are, for example, transfers or checks under collection.
c. Withdrawal controls:
Disbursement from the main account shall be limited only to checks or transfers to entities inside or outside Saudi Arabia. Transactions (remittance, issuance of checks, etc.) made to outside Saudi Arabia shall be only for the purpose of managing the MWL or implementing its programs or projects.
d. Balance investment:
The entity may open accounts to invest its excess funds in activities that have financial return to help achieving its objectives.
II. Sub-accounts for the branches of the institution or organization and their various activities:
- Sub-accounts of or linked to the entity’s main account for the same purposes of the branches or the activities of the entity shall be opened after meeting the following conditions and documents:
1. A letter from the entity’s Chairman or the Vice Chairman to the bank to open the sub-account specifying the purpose and persons authorized to manage the account.
2. A copy of the official approval from the competent authority in Saudi Arabia to open a branch of the entity or practice sub-activity.
3. The entity’s Chairman or the Vice Chairman may authorize members from the entity staff to manage the account as the authorization shall be limited to making transfers from the sub-accounts to the main account.
4. Copies of the authorized signatories IDs attested by the entity.
- Documents required to open and update the main account shall be sufficient for sub-accounts as they are nested under the main account.
• World Assembly of Muslim Youth (WAMY):
Bank accounts shall be opened for the WAMY upon fulfilling the following conditions and procedures:
I. Main account:
a. Requirements for opening a bank account:
1. A letter from the president of the WAMY affiliated entity to the bank requesting opening a main account or maintaining and updating the existing account specifying the purpose of the account and that the persons authorized to manage the account are the Chairman or Secretary General with joint signature and the Chief Financial Officer with main signature.
2. A copy of the WAMY Saudi Arabia Headquarters Agreement.
3. A copy of the protocol appended to the WAMY Headquarters Agreement.
4. A copy of the decision to form WAMY Board of Trustees and the appointment of its officials and their powers.
5. A copy of the by-law and procedures of WAMY.
6. The authorized persons must fulfil the account opening agreement (contract) determining the purpose of the account, the sources of income and the real beneficiaries.
7. Copies of the IDs of the Chairman, Secretary General, Chief Financial Officer and the members of the Board of Trustees attested by the entity.
8. One main account only shall be opened under WAMY’s name as stated in Headquarters Agreement for deposit, withdrawal and transfer. The account shall be opened at the bank head office or main branch in the region.
9. Approval of the CEO/general director and the manager of compliance department of the bank to open the account or to maintain and update the existing account.
10. Telephone banking and e-banking services shall be limited to balance inquiry and transfer from sub-accounts to the main account only.
11. SAMA must be informed when the account is opened.
b. Deposit controls:
1. Deposited cash amounts to WAMY’s main account and sub-accounts from WAMY official staff may be accepted.
2. The bank may accept cash deposits, checks and transfers to the main account and sub-accounts from non-official staff of WAMY or WAMY branches inside Saudi Arabia only if they are gift or subsidy.
3. Deposits or transfers for donation incoming to the bank from inside Saudi Arabia shall not be accepted.
4. Amounts incoming to the WAMY’s main account or sub-accounts from outside Saudi Arabia clearly stating their purpose as gifts, subsidy or donation may be accepted. Amounts received by the bank to be transferred to other banks operating inside or outside Saudi Arabia may also be accepted. Such amounts shall not be deposited in the WAMY’s accounts or transferred to other banks unless after the WAMY submits to the bank the approval of the competent authority in Saudi Arabia to deposit the amounts, whether they are, for example, transfers or checks under collection.
c. Withdrawal controls:
Disbursement from the main account shall be limited only to checks or transfers to entities inside or outside Saudi Arabia through the main account or by the remittance membership linked to the main account for transfers.
d. Balance investment:
WAMY may open accounts to invest its excess funds in activities that have financial return to help achieving its objectives.
II. Sub-accounts for WAMY branches and their various activities:
Sub-accounts of or linked to WAMY’s main account for the same purposes of the branches or the activities of WAMY shall be opened after meeting and providing the following conditions and documents:
1. A copy of the official approval from the competent authority in Saudi Arabia to open a branch of WAMY or practice sub-activity.
2. A letter from WAMY Chairman or Secretary General to the bank to open the sub-account specifying the purpose and persons authorized to manage the account.
3. WAMY Chairman or Secretary General may authorize members from WAMY staff to manage the account as the authorization shall be limited to making transfers from the sub-accounts to the main account.
4. Copies of the authorized signatories IDs attested by WAMY.
5. Documents required to open and update the main account shall be sufficient for sub-accounts as they are nested under the main account.
• Islamic Development Bank (IsDB):
Current bank accounts shall be opened for IsDB upon fulfilling the following conditions and procedures:
1. Request to open the account by a letter from the President or Vice President of the bank.
2. A copy of the bank Saudi Headquarters Agreement (permission).
3. Signature shall be joint.
4. Copies of the IDs of the authorized persons, the bank President or Vice President according to the request submitted.
5. Check books may be provided to the bank and its employees to cover the administrative expenses. The bank accounts are not required to be correspondent.
6. A copy of the procedures of money laundry and terrorist financing applied in the bank.
• Organisation of Islamic Cooperation (OIC) and its affiliated entities:
Bank accounts shall be opened for OIC upon fulfilling the following conditions and procedures:
1. Obtain a request to open the account from OIC Secretary-General or Vice Secretary-General specifying the names and functions of the persons authorized to open and manage the account of OIC or the affiliated entity.
2. A copy of the OIC Saudi Arabia Headquarters Agreement (or any other document for this purpose).
3. Signature shall be joint.
4. Copies of the IDs of the authorized persons, OIC Chairman or Vice-Chairman according to the request submitted.
5. OIC may transfer money related to its programs or projects to accounts outside Saudi Arabia.
• Permanent Mission of the Russian Federation to the Organisation of Islamic Cooperation:
Bank accounts shall be opened for the Mission after meeting and providing the following conditions and documents:
1. Submit a request approved by OIC to open an account in SAR or other currency to the bank in which the account is to be opened.
2. A certified copy of the approval of opening the Mission Office in Saudi Arabia stating the purpose of the Mission to OIC.
3. A letter from the Chairman of the Mission approved by the OIC specifying the person or persons authorized to manage the account.
4. Copies of the diplomatic cards or residence cards (Iqama) of the authorized persons to open and manage the account according to the identity card issued to them in Saudi Arabia.
5. The Mission may only receive and transfer money related to its purposes and programs.
• Arab Red Crescent and Red Cross Organization (ARCO):
Bank accounts shall be opened for ARCO upon fulfilling the following conditions and procedures:
1. Obtain a request to open the account from the Secretary-General or Vice Secretary-General of ARCO, office or program in Saudi Arabia.
2. A copy of ARCO Saudi Headquarters Agreement (permission).
3. Signature shall be joint.
4. Copies of the IDs of the persons authorized to manage the account, in addition to the ID of the Chairman or Vice-Chairman of ARCO, office or program according to the request submitted.
5. Approval of the CEO/general director and the manager of compliance department to open the account.
6. SAMA must be informed when the account is opened.
7. OIC may transfer money related to its programs or projects to accounts outside Saudi Arabia.
• Other international multilateral organizations and funds:
Bank accounts shall be opened according to the following conditions for international multilateral organizations and funds of a political, developmental or service nature, such as the United Nations, the Islamic World Conference, the World Bank and its affiliates, the International Monetary Fund and its affiliates, the Gulf Cooperation Council, the Arab League and Arab satellite broadcasters:
1. Obtain a request to open the account from the Chairman, Deputy or Vice-Chairman.
2. A copy of ARCO Saudi Headquarters Agreement (permission).
3. Signature shall be joint.
4. Copies of the IDs of the organization/fund Chairman, Deputy or Vice-Chairman according to the request submitted.
• Personal accounts of staff of such organizations:
The bank shall not require SAMA approval for opening accounts for the permanent staff of such organizations as the conditions and procedures stated in Rule (200-1) shall be applicable. However, conditions stated in Rule (300-1-6) shall be applicable to diplomats.
300.1.6.6 Bank Accounts of Relief Committees and Campaigns
This rule has been amended according to the circular No. (42060703) Dated 25/08/1442H, corresponding to 07/04/2021G. Please refer to the Arabic version of this rule to read the last updated version.Bank accounts shall be opened for designated relief campaigns and committees, as well as for the King Salman Humanitarian Aid and Relief Center "the Center", for the purposes of managing its operations and humanitarian relief campaigns abroad as follows:
1. A copy of the approval from His Majesty the King for the establishment of the designated fundraising committee/campaign, and the approval of SAMA to open one main account under the name of the committee or campaign, after determining the persons authorized for the account (joint signatures) and providing copies of their IDs and specimen signatures. If the account is to be opened for the Center, a letter must be obtained from the General Supervisor of the Center addressed to the bank, determining the persons authorized to manage the account (at least two persons) with joint signatures, and providing copies of their IDs and specimen signatures. The request must specify that the sources of the account’s funds do not include amounts from the state budget or the Center’s budget.
2. Authorized persons in the center, or in the relief committees and campaigns are permitted to open sub-accounts linked to the main account for the purposes of collecting donations and conducting relief activities.
3. The bank accounts of the center for the purposes of employee salaries, operational expenses, or its humanitarian activities, which are funded by the state’s general budget or the center’s budget, shall be separated from the accounts of the center that are funded from sources other than the state’s budget or the center’s budget. The instructions outlined in Rule (500-1-1) regarding the opening and management of government entity accounts shall be applied to the center's accounts that are funded by the state’s budget or the center’s budget.
4. Deposits into such accounts may be accepted through all means, including cash, checks, or local transfers. The center is also permitted to accept electronic donations through electronic payment gateways via different methods, including credit cards (both domestically and internationally).
5. ATM or credit cards shall not be issued for such accounts.
6. Money transfer to accounts outside Saudi Arabia or receiving transfers from there shall not be accepted after obtaining approval from SAMA, except for the Center's accounts, to which this paragraph does not apply.
300.1.6.7 Bank Accounts of Committees of Friendship and Foreign Official Relationships of Saudi Arabia
Bank accounts shall be opened for such committees according the following controls:
1. An official directive from the Minister of Foreign Affairs approving the establishment of the committee.
2. A direction from SAMA to the bank, stating the name and purpose of the account and the names of persons authorized to manage the account.
3. Copies of the IDs of the authorized persons or a letter from the Ministry of Foreign Affairs containing their personal data.
300.1.6.8 Economic and Technical Liaison Offices in Saudi Arabia
Bank accounts shall be opened for foreign economic and technical liaison offices and their branches licensed by the Ministry of Investment in Saudi Arabia upon meeting and providing the following conditions and documents:
1. A request from the director of the office explaining the purpose of the account.
2. A copy of the license issued for the office by the Ministry of Investment.
3. Signatures of the persons authorized to manage the account and copies of their IDs.
4. The account name shall be (the economic/ technical liaison office of. ) and shall be linked to the validity of the license and renewable by a letter for extension or renewal issued by the Ministry of Investment.
5. The account shall be managed by Saudis who work at the office. If the account is managed by non-Saudis, they must be residing in Saudi Arabia under valid residence permits (Iqama).
6. The account shall be used only for the purposes specified in the license. Such offices shall not open accounts for or on behalf of other entities, such as companies or charities.
7. The persons authorized to manage the account shall only be replaced by the approval of the embassy of the office country and the approval of the Ministry of Investment.
8. Approval of the manager of compliance department for opening the account shall be sought.
9. SAMA must be informed when the account is opened.
300.1.7 Bank Accounts for Liquidation and Financial Restructuring
The bank may open bank accounts for liquidation, for depositing the proceeds of the sale of the bankruptcy assets covering the debtor’s debt in case of a financial restructuring under the Bankruptcy Law, or for liquidation under the Companies Law. The following conditions and documents shall be met and provided:
I. Commencement of any liquidation procedures under the provisions of Bankruptcy Law
1. The bank shall receive the court order that includes the following:
- Commencing any liquidation or administrative liquidation procedures against a natural or juristic person.
- Appointing one or more bankruptcy officeholder and specifying their names and powers, or forming a bankruptcy committee to manage the administrative liquidation procedures.
2. The bank shall receive a request to open the account from the liquidation officeholder or the representative of the bankruptcy committee, as the case may be, stating the purpose of the account.
3. The name of the account shall be (name of the natural or juristic person under liquidation... - Liquidation Account).
4. The bank shall receive copies of the commercial register and memorandum of association and its annexes for the juristic person under liquidation, and a copy of the national ID or Iqama for the natural person under liquidation.
5. The bank shall receive copies of the national ID and commercial register or license of the liquidation officeholder. In case of administrative liquidation, a letter shall be obtained from the bankruptcy committee that includes the data of the person authorized to manage the account and a copy of his/her national ID.
6. The account shall be operated by the liquidation officeholder or the representative of the bankruptcy committee, as the case may be, in accordance with the court order to commence any liquidation procedure.
7. Checkbooks may be issued for such accounts at the request of the liquidation officeholder or the representative of the bankruptcy committee, as the case may be. ATM cards and/or credit cards shall not be issued for such accounts unless the court order to commence the procedure otherwise provides.
8. The bank, the liquidation officeholder or the representative of the bankruptcy committee, as the case may be, must confirm that the IDs and documents are true copies of the originals.
9. Account validity:
a. Liquidation procedure: The account shall be valid until a court order to complete the procedure is issued. The account shall be closed by a letter from the liquidation officeholder based on the court order to complete the liquidation procedure.
b. Administrative liquidation procedure: The account shall continue to be valid according to the period stipulated in the Bankruptcy Law. Renewal shall be effected after the end of this period by a letter from the bankruptcy committee based on a court order, stating that the procedure is not completed and the period needed for completion. The account shall be closed upon the completion of the administrative liquidation procedure by a letter from the bankruptcy committee, stating that the committee has issued a decision to complete the procedure.
II. Liquidation for the termination reasons stated in Article 16 of Companies Law
1. The court order to liquidate a company shall be obtained. In case of a voluntary liquidation by partners, the decision issued by the partners or general assembly of the company to approve liquidation shall be obtained.
2. A request from the liquidator to open a bank account shall be obtained.
3. The liquidator (name and restrictions on powers) shall be appointed by a court order or decision of the company’s partners or general assembly.
4. The bank shall receive copies of the commercial register and memorandum of association and its annexes of the company under liquidation.
5. The bank shall receive copies of the IDs of the owners of the company under liquidation, whose names are mentioned in the memorandum of association and its annexes. Listed joint-stock companies are excluded from this requirement.
6. The bank shall receive copies of liquidator’s national ID and the commercial register or license.
7. The name of the account shall be (name of company under liquidation... -Liquidation Account).
8. The account shall be operated by the liquidator or as stated in the company liquidation decision.
9. Checkbooks may be issued for such accounts at the request of the liquidator. ATM cards and/or credit cards shall not be issued unless the company liquidation decision states otherwise.
10. The bank and the liquidator shall confirm that the IDs and documents are true copies of the originals.
11. The validity period of the account shall be as set forth in the court liquidation order. In case of voluntary liquidation, such period shall not exceed a maximum period of five years. Renewal shall be effected by a letter from the liquidator based on a court order, stating that liquidation procedure has not been completed and the period needed for completion.
12. The account shall be closed upon completion of liquidation procedure by a letter from the liquidator, to which a statement confirming the approval of the entity appointing the liquidator on the liquidation completion report is attached.
III. Accounts for proceeds from the sale of the bankruptcy assets covering the debtor's debt in case of financial restructuring
1. The bank shall receive the court order that includes the following:
- The commencement of the financial restructuring procedure “the procedure” for the natural or juristic person “the debtor”.
- The appointment of a financial restructuring officeholder “the officeholder".
2. The bank shall receive a request to open the account from the officeholder, stating the purpose of the account “Depositing the proceeds of selling the bankruptcy assets covering the debtor’s debt for which the procedure is commenced” and the validity period of the account. The account shall be closed based on the court order to complete the procedure.
3. The bank shall obtain a copy of and verify the national ID of the officeholder.
4. The name of the account shall be “Account of proceeds from sale of bankruptcy assets covering the debt of (name of the debtor) subject to financial restructuring”.
5. The account shall be operated by the officeholder specified in the court order in accordance with the provisions of Article 82 of the Bankruptcy Law. Checkbooks may be issued for such accounts at the request of the officeholder. ATM cards and/or credit cards shall not be issued for such accounts.
6. The bank shall receive an undertaking from the officeholder to notify the bank once a court order to dismiss him/her or accept his/her resignation request is issued. The bank must enable the new officeholder to manage the account in accordance with the provisions of this clause after receiving the court order appointing him/her. The bank must also obtain a copy of and verify the national ID of the new officeholder.
300.2 Non Resident Juristic Persons
300.2.1 Non-Banking GCC Companies Not Residing in Saudi Arabia
300.2.1.1 Current Accounts and Deposits for Business and Credit Purposes
Bank accounts shall be opened for GCC companies for business and credit purposes according to the following conditions and requirements:
1. A copy of the license/commercial register issued by the government authority in the GCC country of residence.
2. Submitting a request to open a bank account stating the business purpose of the account which should conform to the purposes of the company according to the memorandum of association and license.
3. Verifying the national ID(s) of the owner(s) of the GCC establishment (excluding listed joint stock companies).
4. The memorandum of association and its annexes which clearly indicate the composition of both the capital and the establishment’s management and that the ownership of GCC citizens (natural or juristic) exceeds 50% of the company's capital.
5. Verifying the IDs of the members of the board of directors, provided that the majority of members shall be GCC citizens or from GCC establishments.
6. Copies of IDs of the authorized managers and their nationalities.
7. A copy of the authorization issued by the board of directors authorizing persons to manage the bank account unless specified in the memorandum of association.
8. The person authorized to manage the bank account shall be a GCC citizen. If the purpose of the account is to receive facilities from a bank licensed to operate in Saudi Arabia, the person authorized may be a non-GCC individual working in the company and residing in the company's country.
9. Approval of the Saudi embassy in the company’s GCC country for all the above requirements.
10. The above documents shall be completed by the bank's employees directly by interviewing the clients personally (authorized persons) or by a national GCC correspondent bank residing in the country of the company. The correspondent bank shall verify that copies provided for all the required documents, even documents certified by the Saudi embassy, are true copies of the original documents. Deposit, withdrawal and transfer shall be carried out by the correspondent bank. Documents may be completed by a correspondent bank residing in the GCC country of the company that is one of the Saudi bank partners in capital and technical management or by the branches of Saudi banks in the GCC country. The final responsibility for the customer data shall rest with the bank operating in Saudi Arabia.
11. Once the above documents are provided and the requirements satisfied, the bank shall apply the KYC principle.
12. Approval of the CEO/general director and the manager of compliance department to open the account.
13. The permission to open accounts includes all GCC companies and those carrying out commercial, industrial, service, agricultural and real estate businesses.
14. Banks, money changers (other than correspondent accounts), investment companies, financial institutions, independent or affiliated investment funds, insurance companies, sole proprietorships and licensed shops are prohibited from opening bank accounts.
300.2.1.2 Bank Accounts of GCC Juristic Persons for the Purpose of Trading in Securities Listed in the Saudi Stock Exchange
Bank accounts may be opened for these juristic persons after carrying out and providing the following:
- An application for opening a bank account shall be submitted, specifying that it is for the purpose of investment in joint-stock companies shares or securities. The bank shall ascertain that the investment purpose conforms with the company’s objectives as specified in its memorandum of association and license. It shall also ensure that the company’s memorandum of association and articles of association are free of any restrictions that might prevent or limit the company’s ownership of shares of joint-stock companies.
a. GCC companies:
1. A copy of the license / commercial register issued by a competent government authority in the GCC country of residence and attested as a true copy of the original.
2. The company’s articles of association or memorandum of association, or the decision issued by a shareholders’ association or the company partners, must provide that the company is allowed to invest in securities.
3. Real beneficiaries holding ultimate control shall be identified and verified (as a minimum, a natural owner holding 25% as specified in the company’s memorandum of association and its annexes or according to the available data).
4. A copy of the company’s memorandum of association and its annexes clearly showing the company’s capital structure and management and that the share of GCC citizens (natural and juristic) shall exceed 50% of the company capital.
5. Verifying the identity of board members.
6. Copies of IDs of the authorized managers and their nationalities.
7. A copy of the authorization issued by the company’s board of directors empowering the persons concerned to manage accounts and investment portfolios, unless such authorization is included in the company’s memorandum of association.
b. GCC investment institution:
Documents of establishment which prove that the institution is owned by the government, including its memorandum of association, decision to form its board of directors, names of those authorized to manage the accounts and copies of their ID cards.
c. Pension and social insurance organizations:
Documents pertaining to the establishment of these organizations, board formation decision, names of those authorized to manage the accounts and their authorization decision as well as copies of their IDs.
d. Affiliated investment funds:
1. A copy of the fund’s or the managing fund’s articles of association or memorandum of association and any amendments thereto.
2. Documents relating to the license to establish the fund, received either from a capital market authority or a central bank in a GCC Country.
3. Names of the board members responsible for managing the fund and its policy.
4. The resolution nominating those empowered to operate the fund and copies of their IDs.
5. A copy of the fund’s or the managing fund’s memorandum of association and its annexes which clearly show the structure of its capital and its management and that the share of GCC citizens (natural or juristic) exceeds 50%.
- The documents mentioned in a, b, c and d shall be received by directly meeting the customers (authorized persons) in person or through a GCC agent.
- The AML/CFT form shall be completed by a GCC agent. However, when meeting customers (authorized persons) in person, in the case of a GCC company and an investment fund only, such form shall be completed by these two parties themselves as applicable.
- The bank shall apply the KYC principle and exercise due diligence.
- The bank shall obtain a declaration from a GCC agent in which the agent undertakes to provide the bank or the supervisory authorities in Saudi Arabia with any information about customer investors at any time upon request. This is in the case that the bank is dealing with a GCC customer through a GCC agent.
300.2.2 Non-Resident, Non-Banking (Non-GCC) Companies and Businesses with No Contracts or Projects in Saudi Arabia
Banks are not permitted to open any account for such companies and businesses, except for the intermediary accounts allowed under Rules (400.1) and (400.2). An exception is companies and institutions which have SAMA’s approval to obtain facilities, finance or loans from banks operating in Saudi Arabia according to the following conditions and controls:
1. Providing copies of the following documents:
a. License/commercial register issued by the government authority in the country of residence.
b. Memorandum of association and its annexes, clearly showing the structure of capital and company management.
c. Authorization issued by the company’s board for persons to handle credit processes and manage bank accounts, unless this is specified in the memorandum of association.
2. Providing a list of names and copies of the identities of board members and authorized managers showing their nationalities.
3. Determining the (natural) real beneficiary of ownership.
4. Verifying the ownership of any politically exposed person, if any, and verifying its source of funds.
5. Opening an intermediary account with the bank for the purpose intended, named (.........Company Loan Account).
6. The intermediary account shall be managed by officers from the executive level in the bank.
7. The account shall not provide any kind of services (checks, ATM cards, etc.)
8. Requests of a customer who obtains a finance loan (borrower) to withdraw from the account shall be made through any of the following:
- A SWIFT message from the customer through the correspondent bank which the customer deals with in its home country.
- Written instructions signed by two authorized persons in the company obtaining the finance, whose names are included in the finance request.
9. Repayment is made through remittances from the borrower’s country or from banks in the Kingdom by a resident customer specified in the loan agreement. Cash deposits, checks and transfers from domestic accounts with the same bank are not permitted.
300.2.3 Non-Resident and Non-Banking Companies and Businesses with Contracts or Projects in Saudi Arabia
When a non-resident business or company has a contract or a project in Saudi Arabia, it may have accounts with a bank in Saudi Arabia for the duration of the project or the contract according to the following conditions:
1. Obtaining permission from the Ministry of Commerce and/or a provisional license from the Ministry of Investment and approval from the company’s head office. This approval must be certified by the Saudi embassy in the company's country of origin.
2. A copy of company's memorandum of association duly attested by the Saudi embassy in the company's home country.
3. A recommendation from a bank rated by an approved rating agency with which it deals in the country of origin.
4. A copy of the authorization from the company’s head office certified by the Saudi embassy, nominating the persons authorized in Saudi Arabia to sign on behalf of the company for all financial transactions (including opening and operating accounts and checks), along with copies of their Iqamas.
5. Approval of the CEO/general director and the manager of compliance department to open the account.
- Banks must close all such accounts upon expiry of the contract. In order to manage post-project receivables and payables, including zakat and income tax payments, special accounts can be maintained specifically for this purpose until completion. After that, such accounts must be closed according to the following:
1. Considering such account as a trust account under the control of the operations manager at the bank's head office only.
2. Obtaining a letter from the company’s head office, duly attested by the Saudi embassy in its home country, identifying the authorized signatories to sign for the trust account after completion of the company’s business and specifying the method for transferring the remaining amounts and paying zakat or income tax.
3. Limiting deposits in such account to the amounts payable to the company by other parties such as the Ministry of Finance (government checks) or a private entity if the contract is made with a private or semi-government business sector.
4. Classifying this account as of high risk.
300.2.4 Non-Resident and Non-Banking Companies and Businesses Leasing Spaces in Deposit Areas in Saudi Arabia
Banks may open accounts for companies and institutions licensed to sell and reexport commodities in deposit areas at local ports in Saudi Arabia, whether leasing was directly through contracts with the Saudi Ports Authority or through concession. This shall be for a period equal to the duration of the lease contract and according to the following requirements:
1. A copy of the lease contract attested by the Chamber of Commerce and Industry and the port management.
2. A copy of the lessee’s commercial register issued by the country of origin and attested by the Saudi embassy in addition to the full address of the entity.
3. A letter from a bank in the lessee’s country of origin.
4. The persons authorized to manage the entity’s account must be Saudis or non-Saudis with valid Iqamas.
5. The purpose of the account must be specified through a letter from the lessee to the bank.
6. The account must be closed by the bank upon expiry of the lease period if a renewal notification is not received.
300.2.5 Non-Resident Commercial Banks (Including GCC Banks)
Correspondent accounts may be opened for non-resident commercial banks (including GCC banks), including correspondent accounts for central banks, in accordance with the following conditions:
1. Approval of the CEO/general director and the manager of compliance department to open the account.
2. SAMA must be informed when the account is opened.
3. Obtaining license documents (except for situations where the correspondent is the central bank itself) issued by the competent foreign licensing authority of the foreign correspondent bank, such as the central bank or the banking control commission in the country of origin.
4. Banks should refuse to enter into or continue a banking relationship with a correspondent bank in a country where it has no physical presence and which is not affiliated with a regulated financial group (e.g. shell banks).
5. Banks should select or approve correspondent banks whose countries apply strong measures to identify customers and cooperate in combating money laundering. These correspondent banks should be under the control of competent authorities. Moreover, it is possible to have an easy access to information related to such banks’ management, main line of business, locations, reputation and the level of control applied by their regulators.
6. Banks shall obtain a completed AML/CFT form from each correspondent bank, stating that such bank is committed to the AML/CFT policies and procedures regarding relations with new banks as well as existing relations. Banks shall also access the correspondent bank’s internal controls to combat these crimes and ensure their adequacy and effectiveness and that the correspondent bank does not allow shell banks to use its accounts.
7. Banks should ensure, through publicly available information and research (such as media), that the correspondent banks, which a bank plans to deal with or continue to deal with, are not subject to any investigation on money laundering or terrorist financing, involved in cases brought against them in this regard, or subject to any legal action.
8. Banks are not allowed to start new relations with any correspondent bank or open a correspondent account without the approval of their senior management.
9. Banks should ensure that operating these accounts is restricted to dealings among correspondent banks only. Such accounts shall not be used or treated as current accounts and no check books should be issued for them. Additionally, they may not be used for cash depositing or by a third party to conduct activities for its own account.
300.2.6 International Investment Companies and Mutual Funds and Other Nonresident Financial Institutions (Including GCC Institutions)
Banks may not open any bank account for foreign investment companies, mutual funds or financial institutions, including GCC investment companies and brokers who illegally sell their products in Saudi Arabia and raise funds in Saudi riyals and other foreign currencies. Saudi banks may not facilitate the business of such entities in any way. An exception to this is the cases and categories permitted by the CMA, in which investment in the shares of Saudi joint-stock companies is allowed.
300.2.7 Non-Resident Insurance Companies and Money Changers
Saudi banks may not open bank accounts for such juristic entities except in the following cases after obtaining approval of the CEO/general director and the manager of compliance department to open the account and informing SAMA when opening the account:
• A non-resident insurance company with an agreement with a Saudi bank to offer insurance products:
Such company may only open an escrow account in Saudi riyal and other foreign currencies with the partner bank to facilitate its business under the agreement.
• A non-resident money changer:
It may only open a correspondent account after providing the documents related to practicing (banking activities) currency exchange activities as specified in Rule (300.2.5).
300.2.8 Payment Card Companies Not Residing in Saudi Arabia and Not GCC Affiliated
Banks are not permitted to open accounts for such companies. However, after obtaining approval of the CEO/general director and the manager of compliance department to open a bank account and informing SAMA when opening such account, the bank may hold intermediary accounts in Saudi riyals for these companies to enable them to pay the value of customer purchases to the merchants in Saudi Arabia. Banks should also obtain authenticated licenses or registration documents from these companies in order to be able to identify them.
400. Rules for Opening Bank Accounts for Resident and Non-Resident Foreign Investors Not Covered by the Foreign Investment Law
400.1 Rules for Opening Bank Accounts for the Purpose of Linking Investment Deposits Only or Linking Investment Deposits for Issuing Letters of Guarantee to Non-Resident Juristic Persons
Banks may open accounts for non-resident juristic persons (for instance, sovereign wealth funds, mutual funds, cash funds, investment companies, and the like) for the purpose of linking investment deposits only or linking investment deposits for issuing letters of guarantee in banks operating in Saudi Arabia. Banks shall take into consideration the provisions of Article (11) of the Anti-Money Laundering Law and Article (66) of the Law of Terrorism Crimes and Financing. Non-resident foreign investors’ documents shall be obtained by the correspondent banks outside Saudi Arabia. The correspondent bank’s verification of all documents is required in addition to identifying the customer’s account number held by the bank. This should be subject to the following conditions:
1. Obtaining copies of the following documents:
a. License\commercial register issued by the competent authority in the country of origin.
b. Memorandum of association and its annexes or the founding document in the case of sovereign wealth funds and the like, clearly showing the structure of capital and management.
c. The authorization issued by the board for the persons authorized to open and operate the bank account, unless this is specified in the memorandum of association.
2. Obtaining a list of names and copies of the identities of board members and authorized managers showing their nationalities.
3. Identifying and assessing ML/TF risks, applying preventive measures, and exercising due diligence when handling such accounts.
4. Opening an intermediary account with the bank for the purpose intended, named (investment deposit account).
5. The account shall not allow any kind of services (checks, ATM cards, etc.).
6. The customer’s request to break the deposit or issue a bank guarantee shall be made through any of the following:
a. A SWIFT message from the customer through the correspondent bank which the customer deals with in its home country.
b. Written instructions signed by two authorized persons in the non-resident foreign company, whose names are included in the deposit request.
c. The beneficiary shall be the same juristic person.
7. Cash deposits, checks and transfers from domestic accounts with the same bank are not permitted.
8. The bank shall confirm that all IDs and documents are true copies of the originals, and documents issued outside Saudi Arabia shall be verified by relevant authorities, the Saudi Embassy in the relevant country and the Ministry of Foreign Affairs in Saudi Arabia.
9. Obtaining approval of the CEO and the manager of compliance department to open the account.
10. SAMA must be informed when the account is opened.
11. The account must only be used for purposes of deposits, and it is not allowed to be used to carry out any other transactions.
400.2 Rules for Opening Intermediary Investment Accounts
- A bank offering among its investment products and services pooled accounts managed by professional intermediaries or lawyers (such as mutual funds, cash funds, deposit funds, etc.) shall obtain from the intermediary ID documents of beneficiaries of the account where there are sub-accounts for each real beneficiary. The bank shall also ensure that the intermediary is subject to the same regulatory requirements applicable to banks pertaining to AML/CFT and KYC principle.
- Banks must obtain copies of the intermediary’s licenses to practice business attested by the correspondent bank or the Saudi Embassy.
- Approval of the CEO/general director and the manager of compliance department to open the account.
- SAMA must be informed when the account is opened.
400.3 Rules for Opening Bank Accounts for Juristic Persons (Licensed Companies, Institutions and Shops) Owned by Foreign Residents Permitted to Practice Business But Not Included in the Foreign Investment Law
Banks may open bank accounts for this category after obtaining the following:
1. A copy of the commercial register issued by the Ministry of Commerce.
2. A copy of the license if it is the only requirement or if it is required along with the commercial register.
3. A copy of the memorandum of association and its annexes (if any).
4. A copy of the business owner’s Iqama or national ID card (for GCC citizens). The information (name, ID number and expiry date) contained in the commercial register and/or license provided by a non-Saudi merchant must be verified.
5. A list of owners as mentioned in the memorandum of association (if any) as well as copies of their IDs.
6. Non-Saudi owner of an entity is not allowed to authorize others (Saudis or non-Saudis) to manage the accounts of the entity.
400.4 Rules for Opening Bank Accounts for Foreign Financial Institutions Qualified to Invest in Securities Listed in the Saudi Stock Exchange
Banks may open bank accounts for this category after the following is met:
1. An application is submitted by a person authorized by CMA or a qualified foreign investor in accordance with the Rules for Qualified Foreign Financial Institutions Investment in Listed Securities issued by CMA, in which it is specified that the account is for investment in the securities listed in the Saudi Stock Exchange.
2. Obtaining a copy of the foreign investor’s license or commercial register issued by a competent authority in the state of origin, where applicable.
3. Obtaining a copy of the foreign investor’s business license to practice the activity in the country of origin issued by a supervising body (CMA or SAMA counterpart), where applicable.
4. Obtaining a copy of the articles of association and its annexes and/or memorandum of association and its annexes, where applicable.
5. Real beneficiaries holding ultimate control shall be identified and verified (as a minimum, a natural owner holding 25% as specified in the memorandum of association and its annexes or according to the available data).
6. Identifying the control and ownership structure.
7. Obtaining a list of names and copies of ID cards of the legal entity managers and the persons authorized to sign on behalf of the foreign investor regarding account transactions.
8. Obtaining an authorization from the foreign investor’s board specifying the persons authorized to sign on his/her behalf regarding account transactions, where applicable.
9. Completing the KYC principle and AML/CFT form (prepared by SAMA).
10. Obtaining a declaration from the foreign investor and/or authorized person to provide the Saudi supervisory authorities with any information at any time upon request, in accordance with relevant laws and regulations.
11. A copy of the notice issued by the person authorized to confirm acceptance of the investor as a qualified customer.
12. Approval of the bank’s senior management to open the account for the foreign investor.
13. The account shall not provide any kind of services (checks, ATM cards, etc.).
14. Cash withdrawals and deposits shall not be accepted.
15. Banks may open accounts only for licensed foreign investors or foreign founders (where applicable) whose countries apply strong measures to identify customers and cooperate in combating money laundering and terrorist financing. Amounts transferred to accounts in Saudi Arabia’s banks must come from a foreign investor’s account in a country applying such measures (to be specified in the account opening agreement if possible) and be transferred again to the same account. Applications submitted by foreign investors whose countries never (or insufficiently) apply the FATF Recommendations, or some decisions have been issued against them by the Security Council, shall not be accepted.
500. Rules for Opening Bank Accounts for Government Entities
500.1 Rules for Opening Bank Accounts for Ministries and Saudi Government Entities
500.1.1 Ministries and Government Entities Listed in Appendix (A) and the Like
Banks may open Saudi riyal accounts for government entities subject to the following:
1. The government entity shall submit an account opening application to the Ministry of Finance (the Deputyship for Financial and Accounts Affairs). In order to complete the opening application process or activate the account, a list of existing bank accounts with SAMA and other banks must be attached so as to avoid replication of accounts with the same purpose. After considering the application, the Ministry of Finance shall inform SAMA about opening the account, and the government entity shall provide the bank with the names, specimen signatures and ID copies of the authorized persons.
2. Name of the beneficiary shall be included in the payment order related to deposits to the account (Due to the order of the bank, Account No…).
3. The bank account shall be in the name of the government entity, not a natural person or his/her position or job, and its purpose shall be specified in order to differentiate it from other accounts.
4. If a government entity wishes to change its account name, it shall submit an application in this regard to the Ministry of Finance (the Deputyship for Financial and Accounts Affairs) to make a decision of approval or disapproval and then notify SAMA of such decision to be communicated to the bank.
5. A checkbook shall be requested by an official letter signed by those authorized to withdraw funds.
6. Authorization to deposit and withdraw amounts shall be issued by the concerned party. Authorized persons may not delegate their power to others unless authorized to do so by the concerned party. Official letters addressed to the bank by authorized persons to issue bank checks or make internal or external transfers in the official entity’s forms or the approved bank forms may be accepted, provided that such letters are jointly signed by the authorized persons only.
7. Withdrawal from the account shall be as per dual control, and in the case of withdrawal by checks, the check shall be jointly signed by the authorized persons.
8. E-services provided to government entities must include the following: Viewing and extracting of account statements, internal and external transfers, and payment of bills.
9. A government entity may not open any account in a foreign currency unless this is included in an approval given by the Ministry of Finance and communicated to the bank by SAMA.
10. Banks may not extend to any government entity any loans or facilities or allow any overdraft of more than the amounts drawn under payment orders upon the Ministry of Finance, whether for salaries or for any other purposes, except on approval of the Council of Ministers.
11. Government accounts shall not be transferred from one bank to another unless the approval of the Ministry of Finance is obtained therefor and communicated to the bank through SAMA. In addition, there shall be cogent reasons supporting the transfer. If the purpose of the account is fulfilled and the account is no longer needed, the Deputyship for Financial and Accounts Affairs at the Ministry of Finance shall be informed in order to request SAMA to close the account.
12. Signatories of the accounts of Saudi government entities and agencies shall be Saudis only. No authorization shall be granted to no-Saudis in this regard.
500.1.2 Rules for Opening Bank Accounts for Government Entities to Receive Donations for their Own Account
The bank may open Saudi Riyal accounts for government entities to receive gifts and donations for their own account. The following requirements shall be met:
1. The request to open a bank account shall be submitted after obtaining the approval of the Ministry of Finance notified through SAMA. Such request shall indicate that the purpose of opening the account is to receive donations for the government entity.
2. Two signatories shall be determined by the concerned minister or the head of the entity, in addition to the financial controller in the government entity. The bank shall obtain IDs copies and specimen signatures of such authorized persons. Those copies shall be attested as true copies of the original by both the government entity and the bank. Changing the signatories or financial controller requires sending a letter from the concerned minister or the head of the entity or his authorized representative to the bank where the account is opened.
3. Deposit in the account shall be by checks only. The name of the payee shall be the government entity, and such checks shall be presented for deposit through the signatories.
4. A checkbook shall be requested by an official letter signed by those authorized to withdraw funds.
5. Withdrawal from the account shall be made only by checks signed jointly by the authorized signatories and the financial controller.
This rule has been amended according to the circular No. (45070397), Dated 13/11/1445H, corresponding to 20/05/2024G.500.1.2.1 Bank Accounts of Government Entities, Designated for Activities and Services Financed Through Sources Other Than the State Budget
The bank may open separate accounts for academic and specialized government entities (e.g. universities, institutes and research centers) for the purposes of research works, studies, consultation, specialized services and the like that are funded by beneficiaries (not through the state budget). The following requirements shall be met:
1. The bank shall receive a request from the rector/head of the entity (university, institute, scientific center, and the like) to open an account; such request shall indicate that the account is designated for an activity to be funded through sources other than the state budget.
2. The government entity shall specify the purpose of the account and, if possible, the reasons supporting being contracted with or assigned to carry out advisory or technical tasks.
3. The name of the account shall reflect its purpose.
4. Signatories shall be determined by the government entity’s rector/head. The bank shall obtain IDs copies and specimen signatures of such authorized persons. Those copies shall be attested as true copies of the original
5. by both the government entity and the bank. Changing the signatories requires sending a letter from the entity’s rector/head to the bank where the account is opened.
6. The bank shall obtain a copy of the government entity’s regulations governing the financial affairs of the financed activity (university, institute ...).
7. The account shall be opened for the duration of the project or for a period of one year where the duration is not defined. The validity of the account may be extended for another period/additional periods by a letter from the rector/head of the entity to the bank, requesting an extension and including supporting reasons.
500.1.3 Bank Accounts to Invest the Funds of Persons Covered by the Law of the General Commission for the Guardianship of Trust Funds for Minors and their Counterparts (Wilayah)
Bank accounts for these entities shall be opened after fulfilling the following requirements:
1. The bank shall receive a letter from SAMA, requesting the opening of a specific bank account for investing funds of those covered under Wilayah’s law (unknown persons, minors, mentally ill persons, etc).
2. The concerned division at Wilayah shall provide the bank with the names of persons authorized to operate the account under a joint signature, copies of their IDs and their specimen signatures. Further, the bank shall also ensure that the account opening agreement is completed and signed by such persons.
500.2 Bank Accounts of Countries and Non-Saudi and Non-Resident Government Entities
500.2.1 GCC Countries and GCC Government and Quasi-Government Entities
The bank may open accounts for GCC government and quasi-government entities. The following requirements shall be met:
1. The bank shall obtain a copy of the ministerial resolution issued by the GCC country, requesting opening of a bank account.
2. The concerned GCC entity shall send a letter to its Saudi counterpart, the Saudi Ministry of Finance or the Saudi Ministry of Foreign Affairs, requesting opening of a bank account.
3. The bank shall obtain copies of the IDs of persons authorized to sign jointly for the account.
4. The bank shall obtain the signatories’ specimen signatures.
5. The bank shall receive SAMA’s approval for opening the bank account.
500.2.2 Non-GCC Countries and Non-GCC, Non-Resident Government and Quasi-Government Entities, Except Hajj Missions
Banks operating in Saudi Arabia shall not open bank accounts for non-GCC countries and non-GCC, non-resident government and quasi-government entities, except Hajj missions, unless official approval of the Minister of Foreign Affairs is granted and communicated to the bank through SAMA. Such approval shall indicate the name of the account, sources of funds, names of signatories and how to change them. Changing the signatories requires the approval of the Ministry of Foreign Affairs unless the approval for opening the account as communicated through SAMA has clearly allowed changing such signatories by a specific person(s) or entity. The bank shall classify such accounts as of high risk.
600. Clearance Bank Accounts
The bank may open clearance accounts, which are designated for those wishing to discharge their liability toward public funds. The following requirements shall be met:
1. The account shall be named “Clearance Account for (name of the concerned entity shall be specified here)”.
2. The account shall be valid for one year only.
3. The account shall be monitored by the bank’s compliance officer and shall be classified as of high risk.
4. The bank shall present to SAMA a detailed report of the account at the end of the year.
5. Before operating the account, the bank shall coordinate with the entity requesting such account to provide SAMA with the mechanism that will be used for announcing the account creation.
6. To withdraw funds from the account, the entity shall submit a request thereon to the bank. Such request shall be signed, and one of the signatories shall be the chairman of the entity.
7. The bank shall obtain the necessary documents required for opening such accounts, as per the requirements of the rules for opening bank accounts and subject to the classification of the entity.
8. The bank shall submit to SAMA all the aforementioned documents to receive its approval for opening the account.
Chapter IV. General Rules for Operation of Bank Accounts
1. The bank account shall be operated originally by the account holder or other persons authorized by the account holder and approved by the bank. Where applied, the authorization remains valid until the account holder notifies the bank of its cancellation, it expires (after five years), or the authorized person’s ID expires and no renewed ID is presented to the bank. The authorization for operating and cancelling the bank account shall be granted through a power of attorney or an authorization letter prepared at the bank. E-services may be used to verify the authorization.
2. Saudi individuals (whether account holders or authorized to operate the account) are not allowed to operate bank accounts, encash personal checks, make transfers, or carry out any other credit transactions to their order or to the order of a third party unless their valid national IDs are registered in the bank’s automated system. The exceptions to this rule are customers of bank branches at airports, who are traveling abroad; in such case, the customer is required to present his/her passport and boarding pass, and the bank branch shall in turn check customer’s name against documents submitted.
3. The authorization to operate bank accounts on behalf of juristic entities shall be granted by competent individuals who are permitted to give such authorization. The official approval for such authorization shall be granted by the concerned public or private entity. The approval may come from the board of directors, the partners, the employer, any person designated by the owner (or the person in charge) of the entity, a party determined in the agreement concluded between the bank and the concerned entity, or other parties as per the jurisdiction.
4. Authorization by a Saudi (natural or juristic) person to a non-Saudi or non-GCC individual to manage his/her accounts shall be subject to the following conditions:
• Natural persons and their sole proprietorships:
Any authorization granted by a Saudi individual to a non-Saudi or a non-GCC individual to operate his/her personal accounts shall not be accepted by the bank. The only exception is when a Saudi individual authorizes his/her non-Saudi wife/husband, father, mother, son or daughter, provided that the authorized person has a valid Iqama.
• Companies, factories, joint ventures, international trademark agencies, and other similar institutions:
*Companies may authorize an expatriate employee who is under their sponsorship and residing in Saudi Arabia to manage their bank accounts. However, such expatriate employee may not be authorized to manage the accounts of another company, whether a subsidiary or sister company.
*Factories and trademark agencies wishing to authorize an expatriate employee working under their sponsorship shall be treated in accordance with their legal status indicated in their licenses/commercial registers issued by the concerned authority. Legal entities licensed as sole proprietorships shall be subject to the provisions of Paragraph (1) of Rule (4) on Natural Persons and their Sole Proprietorships while legal entities licensed as companies shall be subject to the provisions of Paragraph (2) of Rule (4) on Companies.
5. Management of investors' accounts under the Foreign Investment Law shall be subject to the following conditions:
- The Saudi investing partner may authorize his/her foreign investing partner holding a valid Iqama or any of the non-Saudi expatriate employees working for his/her entity to manage and operate the entity's bank accounts.
- The foreign investor may authorize a Saudi and/or a non-Saudi expatriate to manage the entity's bank accounts, provided that the non-Saudi expatriate is an employee of that entity and has a valid Iqama.
- The Saudi investor and his/her foreign partner may authorize any other resident party to manage the entity's bank accounts.
6. The bank shall not accept any authorization given by an expatriate coming for work or investment in Saudi Arabia to others to manage and operate his/her personal accounts, except in the following cases:
- The expatriate husband and his expatriate wife and vice versa, and their first-degree expatriate relatives.
- The female expatriate working in Saudi Arabia and her legal escort, provided that the Iqama of the legal escort or any other official document states that he is the legal escort of the female expatriate.
- The female expatriate and her Saudi husband.
- The female expatriate and her Saudi father, mother, son or daughter.
- The male expatriate and his Saudi wife.
- The male expatriate and his Saudi father, mother, son or daughter.
- The male or female expatriate and his/her abovementioned relatives should hold valid Iqamas. The bank should record the number of Iqama for each male or female expatriate as an electronic reference number for the expatriate.
7. As for companies, the account will be operational when the company becomes legal.
8. The following banking rules regarding checks shall be observed:
- The name of the beneficiary must match the name shown on his/her ID.
- Provisions of the Commercial Papers Law, including those related to payment term, shall be complied with.
- Crossing out, erasure, or using chemical materials on the check is not permitted.
- When amendment to a check is needed, the part that needs to be amended shall be crossed out, correction shall be written, and the signature of the drawer shall be placed next to the corrected mistake.
9. Rules for Deposits in Bank Accounts
9.1 Deposits Through Bank Tellers
The bank should give importance to cash and check deposits equal to that given to cash and check withdrawals. Aa a minimum requirement, the bank shall obtain full personal information of the depositor and his/her signature. A due consideration should be given to the volume and nature of other information that the bank should collect from depositors. Such information varies according to the type and nature of the deposited funds, deposit volume and recurrence, and the relationship between the depositor and the person/business receiving such deposit. Below are examples of different situations and how the bank should respond:
- When a natural person wants to deposit funds (personally in his/her name or in the name of another natural person) in his/her bank account, another natural person’s account or juristic person’s account, the bank in this case shall obtain the personal information of the depositor. Such information includes the depositor’s full name, address, telephone number, signature, and ID number in accordance with the provisions of Rule (3.1.1) and Rule (3.1.2) of Chapter II herein.
- When a natural person wants to deposit funds in a bank account on behalf of a juristic person (e.g. establishment, company, shop or any other entity) he/she does not own or is not authorized to manage its accounts, the bank shall then obtain the abovementioned information from the depositor in addition to the following:
■ The purpose of the deposit clearly identified in the deposit slip.
■ The name of the principal depositor (the juristic person) and the name and information of the representative (depositing on behalf of the juristic person) as stated above. Such information shall be contained in the deposit slip. The bank shall not limit the deposit slip information to only the names of the company and depositor.
■ A copy of the authorization granted to the depositor (natural person) by the principal depositor (juristic person), not by the beneficiary. The authorization may be attested by the chamber of commerce or made on the bank’s special form and the signature contained is certified by the bank. The authorization can also be in a form of a power of attorney issued by a notary public or a notary, permitting such natural person to deposit funds on behalf of the principal depositor (juristic person) in the bank account(s) of other natural or juristic persons. The authorization copy shall be certified by the bank as a true copy of the original and shall be kept in a separate file or attached to the deposit slip in the bank’s daily work record.
- Banks shall not continue to use the word “himself/herself next to the “customer’s name” if the depositor is the account holder. In such case, the bank shall write the full name of the depositor and all data contained in the deposit slip. However, the exception to this provision is when the depositor’s signature on the deposit slip is the same as that of the account holder, provided that the bank employee shall verify the authenticity of the depositor's signature and certify that he/she is the holder of the account.
9.2 Deposits Via Cash Acceptance Machines (CAM) and Automated Teller Machines (ATM)
9.2.1 Deposits Through ATMs, Using ATM Card and Personal Identification Number (PIN) Only
All banks shall comply with the following controls on the acceptance of cash deposits through ATMs:
1. Cash deposits through ATMs shall be accepted only when using an ATM card and the associated PIN or using a credit card. The exceptions to this rule are the payment of utility bills, payment made to government entities (whether by bank customers or others), and other payments approved officially by SAMA.
2. The bank shall comply with the instructions related to amount limits and number of banknotes and coins that can be deposited in one transaction or per day. In addition, the bank shall ensure that the procedures implemented are in line with data and results of customer risk assessment. Moreover, the bank shall adhere to controls and guidelines of the ATM operation manual.
3. ATMs used for deposits must support obtaining information on the source of cash deposited and the purpose of deposit. If envelope-free deposits are to be made, the ATM must be able to detect counterfeit banknotes through checking security features.
9.2.2 Deposits Through ATMs, Using Cash Deposit Card
Banks may issue smart cards to be used for cash deposit through the ATMs of the issuing bank. Such cards shall use PIN. The following controls shall be applied:
1. The purpose of deposit shall be identified.
2. The cash deposit cards shall be issued to a selected category of customers (companies and establishments) determined by the bank according to its risk assessment.
3. The business of such customers shall include sales or collections representatives. The bank shall be responsible for obtaining from such customers and checking the necessary documents proving their lines of business. The number of representatives shall be consistent with the entity’s business and size.
4. Such accounts shall be subject to constant monitoring by the compliance officer at the bank according to risk assessment. The monitoring process aims to ensure that the deposit transactions agree with the customer’s business. Through reports of internal audit and monitoring process, the bank can prevent any suspicious financial transactions.
5. The cash deposit card(s) shall be restricted to a single account. In case of multiple accounts for a company, the bank may, at the request of the customer, issue one cash deposit card or more for each account. The cash deposit card shall be used for its associated account only.
6. The cash deposit card service shall be provided upon an official request from the person authorized to manage the account or from the authorized person in the entity.
7. The cash deposit card shall be issued only to the representatives of the entity upon presenting valid IDs. The entity’s representative shall present his/her ID to the bank in person. If he/she is an expatriate, he/she shall be subject to expatriate authorization provisions. If he/she is Saudi, he/she shall present his/her employment card or an employment letter from the entity for which he/she works.
8. The cash deposit card shall be issued in the names of the entity and the representative who will use the card (...Company/representative’s name). Personal photo of the representative shall, as possible, be placed on the cash deposit card.
9. The cash deposit card shall be valid for a period identical to the validity period of the ID or the entity’s documents, whichever expires first. However, the validity period of the cash deposit card shall not exceed two years.
10. The bank shall obtain from both the entity and the cardholder a written undertaking that the card will be used only by the person to whom it is issued and only for cash deposits, but not for any other banking transactions.
11. Each cash deposit card held by each representative shall have a unique PIN.
12. The cash deposit card shall be used for deposits in the associated current account through the ATMs of the issuing bank only.
13. The cash deposit card shall be subject to the same procedures applied to other cards in terms of technical (in relation to deposit transactions only) and security specifications.
14. The cash deposit card shall not be used for deposits through the bank tellers.
15. The cash deposit card shall be used for direct cash deposit with no need to use sealed envelopes.
16. The cash deposit card and its associated PIN shall be delivered to the representative directly by the bank, and not through the entity.
17. The bank shall set procedures to change the card’s PIN periodically pursuant to the nature of the entity, potential risks, and discretion of the departments of compliance and risk management at the bank.
18. The bank shall, based on risk assessment in terms of customer’s activity and category, set a maximum limit for daily deposits for each account, taking into consideration the risks associated with carrying large amounts of cash.
19. The bank shall obtain SAMA preliminary approval for providing such product (service).
10. Account Closure
1. If the customer wishes to terminate his/her relationship with the bank, he/she should submit a request to the bank to close his/her account and should return checkbooks, the ATM card and the account information card. If the customer is unable to return them to the bank, the bank shall obtain a liability acknowledgement from the customer. The bank shall cut up the checkbooks and cards in the presence of the customer and return to him/her the account’s funds. The bank may decline the customer's request if there are outstanding financial liabilities associated with the account, such as letters of guarantee, letters of credit and discounted bills with financial significance and effects that necessitate the continuation of the account. In this case, the bank shall explain to the customer when he/she will be able to submit an account closing request.
2. If problems related to the verification of the banking relationship occur after opening the account and the problems are not solved or if the relationship with the bank is used for other purposes other than its intended one, the bank shall terminate the banking relationship with the customer and return the account’s funds to the source. If the verification problem or the misuse of the banking relationship is related to suspicious transactions carried out by the customer (such as money laundering, terrorism financing and the like), the bank shall implement the Rules Governing Anti-Money Laundering and Combating Terrorist Financing, including reporting suspicious transactions.
3. If the account is opened, the customer deposits funds into it and then reduces his/her balance to zero, and the account has remained inactive or with zero balance for 4 years, the bank shall then close the account after verifying that it has no related commitments or obligations. Prior to account closure, the bank shall send one month’s notice to the customer. Another notice shall be sent to the customer upon account closure. The bank must document and keep all notices sent in the customer’s file. Further, the bank shall include terms on bank account closure in the main body of the account opening agreement or add such terms as an attachment appended thereto if it is difficult to modify the account opening agreement.
Chapter V. Concluding Provisions
1. Any update to the Rules will be published immediately on SAMA’s website.
2. These Rules shall supersede the Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia (4th Update) and any supplementary circulars.
3. The Rules shall supersede any provisions to the contrary.
4. The Rules, and any updates thereto, shall enter into force as of the date of its publication on SAMA’s website.
Chapter VI. Appendices
Appendix (A)
Government Entities:
■ Public Prosecution ■ Control and Investigation Authority ■ General Auditing Bureau ■ Real Estate Development Fund (REDF) ■ General Authority of Zakat and Tax ■ King Faisal Specialist Hospital and Research Center ■ Specialized central councils and committees ■ Gov. Universities and Colleges ■ King Abdulaziz City for Science and Technology ■ National Cybersecurity Authority ■ Technical and Vocational Training Corporation ■ Any other similar government entities Appendix (B)
Legal Entities in Public Sector:
■ General Organization for Social Insurance (GOSI) ■ General Commission for the Guardianship of Trust Funds for Minors and their Counterparts (Wilayah) ■ Non-government universities and scientific institutes registered with the Ministry of Education ■ Public Investment Fund (PIF) ■ Saudi Arabian Airlines (Saudia) ■ Saudi Industrial Development Fund (SIDF) ■ Public Pension Agency ■ Saudi Arabian Oil Company (Saudi Aramco) ■ Any other similar legal entities Appendix (C)
Explanation of the Combination of the Ten-Digit Computer Number of the Ministry of Interior:
1 2 3 4 5 6 7 8 9 10 1. Digit number (1) on the left refers to the type of the computer number, and its value is as follows:
-The value is (1) for Saudi citizens. When a Saudi citizen is born, he/she is given a computer number (which is the number of his/her national ID). The computer number of an establishment of a Saudi natural person is the number of the owner’s ID.
-The value is (2) for foreign residents of all nationalities. The computer number for a resident is the same as that of his/her Iqama. Each foreign resident in Saudi Arabia has his/her own unique number regardless of him/her being a family head or a dependent. The computer number of an establishment of a foreign natural person permitted to own businesses is the number of his/her Iqama.
-The value is (3) or (5) for visitors coming to Saudi Arabia for the purpose of a temporary visit rather than residence, such as those coming for Umrah, on a special or business visit, etc. This value is also used for GCC citizens. The computer number is given to a GCC citizen coming to Saudi Arabia and is used in each visit to Saudi Arabia.
-The value is (6) for pilgrims. The number is given to a pilgrim upon his/her arrival in Saudi Arabia to perform Hajj.
-The value is (7) for government entities, joint-stock companies, privet entities, or any other entities, such as military missions, charities, international schools, sports clubs, or diplomatic bodies, etc.
2. The value from digit number (2) to digit number (9) is a serial number ranging from 00000000 to 99999999.
3. Digit number (10) is a “verification" digit. Its value ranges from (0) to (9) and is derived from the values of the other nine digits. It is used to check the correctness of the computer number. Any entity wishing to receive the formula applied to derive this digit for programming purposes, may contact the National Information Center of the Ministry of Interior..
Rules Governing Bancassurance Activities
No: 188/441 Date(g): 6/5/2020 | Date(h): 14/9/1441 Status: In-Force The Saudi Central Bank* has issued this Rules according to the Governor’s Decision number (188/441) dated 14/09/1441H, based on the powers vested to SAMA by the Cooperative Insurance Companies Control Law promulgated by Royal Decree No. (M/32) dated 02/06/1424H (corresponding to 31/07/2003), and its Implementing Regulation issued by the Decision of the Minister of Finance No. (1/596) dated 01/03/1425H (corresponding to 20/04/2004). And based on the Banking Control Law promulgated by Royal Decree No. (M/5) dated 11/06/1966.
* The "Saudi Arabian Monetary Agency" was replaced By the "Saudi Central Bank" in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding in 26/11/2020G.
Article One
Definitions:
The following terms and phrases, wherever mentioned herein, shall have the meanings assigned thereto unless the context otherwise requires:
1.1 SAMA: The Saudi Central Bank*. 1.2 Rules: The Rules Governing Bancassurance Activities. 1.3 Company: The insurance company licensed to practice insurance business in accordance with the provisions of the Cooperative Insurance Companies Control Law. 1.4 Bank: Any bank licensed to carry out banking business in the Kingdom of Saudi Arabia in accordance with the provisions of the Banking Control Law. 1.5 Bancassurance Activities: Marketing and distribution of insurance products by the Bank to its Clients according to the signed Agreement between the Bank and the Company. 1.6 Agreement: A contract by which the Company and the Bank agree that the Bank will carry out the Bancassurance Activities. 1.7 Authorised Employee: The Bank employee(s) assigned by the agreement with the Company to carryout Bancassurance Activities. 1.8 Client: a natural person or juristic entity who deals with the Bank. * The Saudi Arabian Monetary Agency was replaced By the name of Saudi Central Bank accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding in 26/11/2020AD.
Article Two Scope of Application
These Rules shall apply to all Bancassurance Activities. The Cooperative Insurance Companies Control Law, its Implementing Regulation, the Banking Control Law and SAMA’s relevant regulations, rules, and instructions, and relevant laws and regulations issued by other authorities shall govern whatever is not provided for therein and to the extent possible.
Article Three Objective
The objective of these Rules is to regulate Bancassurance Activities and practices in Saudi Arabia and the relationship between the Company and the Bank in this regard.
Article Four Requirements for Practicing Bancassurance Activities
- Bancassurance Activities shall be practiced directly through the Bank. By merely establishing a tool among other tools for marketing and distribution for the Company, the contractual relationship between the Company and the Bank- in the context of conducting Bancassurance Activities - shall not include insurance agency, insurance brokerage, insurance advisory, or any insurance related profession.
- The Company and the Bank shall sign the Agreement before the Bank starts practicing Bancassurance Activities.
- The Company and the Bank shall obtain SAMA’s prior approval before signing the Agreement.
The Agreement must include, at a minimum, the following:
a. Term of Agreement;
b. Agreement termination procedures;
c. List of the electronic and non electronic marketing and distribution channels; through which the Bancassurance Activities will be practiced.
d. Training plan for Authorised Employees;
e. Know Your Client (KYC) procedures;
f. Compliance procedures;
g. Insurance classes and products to be covered under the Bancassurance activities;
h. Marketing and distribution procedures;
i. Collection of premiums procedures;
j. Bank commission and its calculation mechanism, due date, and collection procedures;
k. Client care and complaints resolution procedures; and
l. Procedures of receiving and transferring the claims to the Company.
Article Five Bank Obligations
1. The Bank shall be fully responsible for the Authorised Employees’ practice of Bancassurance Activities. In order to ensure that the activities are carried out in line with SAMA's instructions and principles of transparency, the Bank shall: 1.1 Ensure compliance with the terms of the Agreement and the procedures contained therein in all marketing and distribution channels of the Bank, and set the appropriate internal controls and procedures to ensure compliance with the relevant laws, regulations and rules; 1.2 Maintain adequate records demonstrating the Bank's compliance with the provision (1.1); 1.3 Prepare compliance reports regarding the Bancassurance Activities as agreed with the Company; 1.4 Ensure compliance with the limits of insurance policies permitted to be marketed and distributed in accordance with the Agreement; 1.5 Maintain the confidentiality of data, records and information of the Company and its Clients; and 1.6 Allow the Company to view, review all Bank books and records related to Bancassurance Activities or obtain copies of them, and prepare the following records: 1- Communications record; 2- Internal records; and 3- Clients’ complaints record. 2. The Bank shall establish a Bancassurance unit to oversee the Bancassurance activities, and the Bank’s code of governance shall determine its operation procedures and shall include, at a minimum, the following responsibilities: A. Supervision of the Bank's electronic and non-electronic marketing and distribution channels. B. Holding training courses for Authorised Employees. C. Establish procedures to control and verify that the marketing and distribution of insurance products are carried out in an honest, transparent and fair manner. 3. The Bancassurance unit shall be under the management of an employee with sufficient experience who will be employed by the Bank to fill the position of director of the Bancassurance department, after obtaining SAMA’s non-objection. 4. Bancassurance Activities shall be practiced through the Bank’s marketing and distribution channels electronic and non electronic. 5. The Bank shall ensure that all Authorised Employees have the Insurance Foundations Professional Exam certificate (IFCE) and any other certificate specified by SAMA. 6. The Bank must obtain the Company’s approval to expand the marketing and distribution channels, electronic and non electronic; through which Bancassurance Activities are practiced, along with notifying SAMA's of such. 7. The Bank must not conduct Bancassurance Activities with other than his Clients. Article Six Company’s Obligations
The Company shall perform and not assign any of the following authorities to the Bank:
a. Make any amendments to the insurance policies or its annexes.
b. Settlement of claims.
c. Payment of compensation.
- Obtain SAMA’s approval before any material amendments to the Agreement between the Company and the Bank.
The Company shall provide SAMA with an annual training plan for the Authorised Employees, provided that it includes -at a minimum- the following:
a. Training on marketing and distribution techniques;
b. Workshops to introduce insurance products; and
c. Training on anti-money laundering and counterterrorist financing.
- Maintain the confidentiality of the data and information of the Bank and its Clients.
- The Company shall regularly review the Bank’s practice of Bancassurance Activities, whether through Bank’s electronic or non- electronic channels.
- The Company shall pay the Bank the marketing and distribution of insurance products’ commission as a result of carrying out Bancassurance Activities during the period specified in the Agreement, provided that the commission is in line with SAMA;s instruction.
Article Seven
The Bank is prohibited from requiring the Client to obtain banking products in order to get the insurance products or vice versa, unless the insurance coverage is binding by a competent authority.
Article Eight
The Company may sign an Agreement with one Bank or more, and the Bank may sign an Agreement with one Company or more.
Article Nine Rules of professional Conduct:
The Bank shall comply with the rules of professional conduct by fulfilling the following requirements:
Act in an honest, transparent and fair manner, and fulfill all of their obligations towards the Clients and the Company, as stipulated by Saudi Arabian laws and regulations.
Where these obligations have not been fully codified, internationally accepted best practices should be honored.
- Act within reasonable competence when dealing with Clients and the Company, which is acquired through training, experience, and consulting with experts when needed.
- Continuously enhance the skills and knowledge of the Authorised Employees in charge, along with the continuous follow up of the products and services available in the market.
- Take reasonable care in maintaining adequate managerial, financial, operational, and human resources to carry out their business and serve the Clients.
- Communicate all relevant information including coverage details, conditions, exceptions and restrictions of the insurance policy to the Clients in a timely manner, and ensure that the Clients are aware of the commitment they are about to make to enable them to make a suitable decision.
- Take reasonable measures to ensure the accuracy and clarity of the information provided to and from the Clients and make such information available in writing.
Treat all data and information acquired about the Company and the Clients with utmost confidentiality, and take appropriate measures to maintain the secrecy of confidential documents in their possession, along with taking the following actions:
- Obtain and use of data only for activities specified under these Rules and not to be used in a manner that is incompatible with those purposes.
- Keep the data secure and up-to date.
- Provide data about insurance coverage to the Clients upon their written request.
- Not to disclose the data to any third party without prior authorization from SAMA, with the exception of the Bank or the Company’s external auditors, or the authorised companies to collect insurance and credit data.
- Banks must not motivate the Clients to revoke a valid insurance policy, and must not motivate the Clients to refuse a quotation given by a competitor using false or unfair evaluation in order to merely increase commissions.
- Ensure that the Clients fully understand the Bancassurance services provided by the Banks and the nature of the relationship between the Bank and the Company.
- Notify the Company of all the insurance information or documents related to Clients which may affect the decision of the Company to provide the coverage and the rates and conditions which the insurance policy will be built upon.
- Immediately notify the Clients about the acceptance or rejection of the coverage by the Company.
- Explain to the Clients the mechanism of paying the insurance premiums and any other additional due to the Company.
- Clarifying to the Clients that the contractual relationship will be with the Company.
Article Ten Banks Dealing with Clients Requirements
1. Pre-marketing and distribution Communication with Clients:
1.1 Advertising:
a) Ensure that advertisements are not misleading, over-stated or offensive ; b) Ensure that advertisements does not breach the laws or omit any regulatory requirement; c) Ensure that advertisements does not damage Clients’ faith or exploit their lack of experience or knowledge. d) Obtain the approval from the Company if the Company is mentioned in the advertisement. 1.2 providing Advice:
Banks shall provide advice on matters within their field of expertise and seek or recommend the help of experts when necessary. 1.3 Client Service:
a. Understand all the terms and conditions of all policies offered to the Clients ; and b. Understand the Clients’ profile, coverage needs, and appetite for risk. 1.4 Regulatory Requirements:
a. The Bank shall ensure that all documents issued are consistent with the regulatory and supervisory requirements; 1.5 Documentation:
a. Ensure that all written terms and conditions are fair in substance and that the Clients' rights and responsibilities are set out, clearly and inplain understandable language.; b. Send policy documentation to the Clients without avoidable delay; c. Send a written advice along with the policy documentation stressing on the importance of reading it carefully ; and d. Ensure that instruction letters, policies and renewal documents contain details of complaints handling procedures. 2. Marketing and distribution of Insurance Products and Services
2.1 Marketing and distribution Practices:
a. Ensure that the Clients understand the type of service being offered. b. Ensure that the policy proposed is suitable for the Client’s needs; c. Provide the Clients with comparisons in terms of price, coverage and services offered when offering several products. d. Notify the Clients promptly if unable to obtain the requested insurance. e. State the validity period for quotation if the proposed contract was not signed immediately; and f. Explain to the Clients their obligations to file claims immediately and to disclose all material facts relevant to the insurance coverage. 2.2 Providing of Information:
a. Request the Clients to make true, fair and complete disclosure and ensure that the consequences of nondisclosure of information and inaccuracies are pointed out to clients. ; b. Avoid influencing and pressuring the Clients along with emphasizing that all acknowledges or statements given are his/her own responsibility. c. Require the Clients to carefully check the information given in the documents. ; d. Explain to the Clients the importance of disclosing all subsequent changes that might affect the coverage throughout the duration of the policy. ; and e. Disclose of all information required for the purpose of insurance on behalf of the Clients with the Client's written consent and provide aclear presentation to the Company about the Client's risk description. 2.3 Interpretation of Contracts:
a. Explain all the essential provisions of the coverage provided by the policy to Clients. ; b. Notify the Clients with the Company’s quotation exactly as provided; and c. Notify the Clients of any significant or unusual restrictions or exclusions in the insurance policy, and explain the termination procedures. 2.4 Charges:
a. Disclose to the Clients the amount with the profits and commissions they are receiving upon selling the policy. b. Inform the Clients in writing of any additional fees or charges for any related services. 3 Post marketing and distribution Client Service
3.1 Confidentiality of Information:
a. Ensure that Clients data and confidential documents are stored safely with restricted access. ; and b. Ensure that only relevant parties can obtain the Clients’ data such as the Company and external auditors of the Bank and the Company. 3.2 Clients Notification:
The Banks hall promptly communicate any notifications received from the Company to the Client related to his insurance policy, along with obtaining a receipt of acknowledgments. 3.3 Renewal of Insurance Policy:
a. Ensure that renewal notifications include Clients’ duties to disclose changes affecting the policy, which have occurred since the policy inception or the last renewal date ; b. Ensure that renewal notification contains a requirement for keeping records, including copies of letters, of all information supplied to the Company for the purpose of renewal of the contract ; c. Ensure that the Clients are aware of the expiry date of the policy even if the Company has no intention to renew. d. Ensure that the Clients receive the renewal notice of the policy issued by the Company before its expiration. 3.4 Claims handling :
The Bank shall not approve or settle claims. However, the Bank shall:
a. Immediately acknowledge filed claims; b. Provide claim forms along with clarifying the information or procedures needed to be done the Client to file the claim; c. Provide adequate instructions to the Clients on filing claims and information on claim handling; d. Provide the Clients with an acknowledgement of receipt or a notification of any missing information or documents, within seven days of receiving the claim; e. Notify the Clients of any development regarding the claim at least once every 15 working days; f. Notify the Clients in writing of claim acceptance or rejection; and g. Explain the method of filing complaints and procedures of dispute resolution if the Client is not satisfied with the settlement reached. 3.5 Client Complaints:
a. Receive complaints, by phone or in writing such as letters, e-mail or fax; b. Explain complaint filing procedures; c. Provide the Clients with the contact information of the Company to follow up on their complaints; d. Notify the Clients of the developments in their complaints; e. Respond to the complaints within (15) days of filing; and f. Maintain an electronic system to record and follow up on complaints. Article Eleven Agreement Termination Procedures
- The Company or the Bank shall submit to SAMA a request to terminate the Agreement along with the reasons of termination.
After obtaining SAMA’s approval, the Company and the Bank shall:
a) Sign a financial clearance between them;
b) Announce the termination of the Agreement on their official websites; and
c) Take all actions that indicate the termination of the Agreement, including removal of all advertisements and returning the usernames and passwords of the Company’s electronic systems
Article Twelve Control and Inspection
- SAMA shall supervise and conduct a periodic or surprise inspection of the Bank and the Company to ensure compliance to the Agreement and SAMA’s Bancassurance Rules, and investigate any violations detected by the inspection or from the complaints received by SAMA.
- SAMA may request all relevant information and documents to ensure the Bank and the Company’s compliance with the provisions of the Agreement and SAMA’s applicable instructions on conducting Bancassurance Activities.
Article Thirteen Consequences of Non-Compliance
Non-compliance with the requirements of these Rules shall be deemed a violation of the Cooperative Insurance Companies Control Law, its Implementing Regulation and the Banking Control Law, and may subject the Bank or the Company to legal penalties.
Profit Sharing Investment Accounts Rules
No: 44012303 Date(g): 11/9/2022 | Date(h): 15/2/1444 Status: In-Force Based on the powers granted to the Central Bank under its Law issued by the Royal Decree M/36, dated 11/04/1442 H, and related regulations. And in reference to the ongoing work to establish a supervisory framework for banks practicing Islamic banking, and in order to enhance the environment of compliance with the provisions and principles of Shariah.
Attached are the Rules on Profit Sharing Investment Accounts (PSIA) for banks practicing Islamic banking. These rules aim to establish minimum set of regulatory requirements that must be adhered to by banks offering such accounts, in addition to enhancing customer protection and increasing transparency in the banking sector.
For your information and action accordingly as of 1 March 2023 G.
1. Introduction
In exercise of the powers vested upon the Central Bank under the charter issued by the Royal Decree M/36 on 11-04-1442 H corresponding to 26 November 2020 G and the Banking Control Law issued by Royal Decree no. M/5 dated 22/2/1386AH corresponding to 11 June 1966 G and the rules for Enforcing its Provisions issued by Ministerial Decision no.3/2149 on 14-10-1406A H, SAMA is hereby issuing the enclosed Rules on Profit Sharing Investment Accounts (PSIA) aimed to develop the practices followed by banks operating PSIAs. These rules should be read in conjunction with the wider SAMA regulatory framework.
2. Objectives
The objectives of these rules are to provide the minimum requirements to be met by banks in Saudi Arabia that offer PSIA products. The rules aims to enhance consumer protection, transparency and financial stability in the banking sector whilst also ensuring compliance with Shari’ah principles in the operation of PSIAs.
3. Scope of Application
These rules are applicable for all local Saudi banks that conduct Shari'ah compliant banking and are licensed by SAMA under the Banking Control Law.
4. Definitions
The following words and phrases, wherever mentioned in these Rules will have the meanings assigned to them unless the context implies otherwise:
SAMA: Saudi Central Bank
Bank: Any local bank that is licensed to carry out banking business in Saudi Arabia in accordance with the provisions of the Banking Control Law and that conducts Shari'ah compliant banking.
Board: The Board of Directors appointed by the shareholders in line with applicable laws and regulations.
Executive Management (Senior Management): Persons entrusted with managing the daily activities of the bank, and proposing and implementing strategic decisions.
Shari’ah Committee: a Shari’ah Committee responsible for supervising compliance with Shari’ah principles and rules and their application in the bank.
Shari’ah Compliant: Compliance with Shari’ah decisions issued by the bank’s Shari’ah Committee.
Islamic Window: That part of a conventional bank (which may be a branch or a dedicated unit of that bank) that conducts Shari’ah compliant banking, finance and investment activities.
Investment Account Holders (or IAH): Bank clients who have Shari’ah compliant investment accounts.
A Profit Sharing Investment Account (or PSIA): an account that satisfies the following conditions:
a. It is managed by a bank in accordance with Shari’ah principles and is held as being Shari’ah compliant;
b. Under a management agreement with the bank, where the Investment Account Holder (IAH) concerned and the bank agree to share any profits generated from PSIAs assets in a specified ratio and the IAH agrees to bear any loss not caused by the bank’s negligence, misconduct, fraud or breach of contract.
Mudarabah: a partnership contract between the capital provider and a partner whereby the capital provider would contribute capital to an investment that is to be managed by the partner. Profits generated by the investment are shared in accordance with the agreement specified in the contract, while losses are borne by the capital provider unless the losses are due to misconduct, negligence or breach of contracted terms.
Musharakah: a partnership contract in which the partners agree to contribute capital to an enterprise, whether existing or new. Profits generated by that enterprise are shared in accordance with the agreement specified in the Musharakah contract, while losses are shared in proportion to each partner's share of capital.
Wakalah: an agency contract where the customer (principal) appoints an institution as agent (wakil) to carry out the business on his behalf. The contract can be for a fee or without a fee.
Unrestricted PSIA: is a PSIA for which the IAHs authorize the PSIA manager to invest the IAHs’ funds in a way that the manager considers appropriate, without any restriction as to where, how or for what purpose the funds may be invested. In an unrestricted PSIA, the bank can comingle the IAHs funds with its own funds or with other funds that the bank has the right to use.
Restricted PSIA: is a PSIA where the IAHs authorize the bank to invest the IAHs’ funds, with specified restrictions as to where, how and for what purpose the funds may be invested.
Profit Equalization Reserve (or PER): The amount appropriated out of the muḍarabah profits, in order to maintain a certain level of return on investment for the muḍarib and unrestricted investment account holders.
Investment Risk Reserve (or IRR): The amount appropriated out of the profit of investment account holders, after allocating the muḍarib’s share of profit, in order to cushion against future investment losses for investment account holders.
5. Operation of Profit Sharing Investment Accounts
Banks may raise funding through Profit Sharing Investment Accounts (PSIA) using, for example, Mudarabah and Wakalah contracts. In a Mudarabah arrangement, the bank acts as the Mudarib and the fund providers as the Rabb-ul-Mal, otherwise called Investment Account Holders (IAH). In a Wakalah arrangement, the bank acts as a Wakeel for the IAH.
Mudarabah contracts entail the sharing of profits between the contracting parties using a pre-agreed profit sharing ratio. IAHs are liable to bear losses arising from the investments managed by the bank except in case of proven fraud, negligence, misconduct or breach of contract.
Being an equity-based contract, IAH are expected to bear the credit risk of any counterparty to whom the funds are invested with as well as the market risk of the assets in which the funds were invested.
Banks may also in practice use profit smoothing techniques to mitigate against withdrawal risks associated with PSIAs. Profit smoothing can include the creation of reserve accounts such as the Profit Equalization Reserve (PER) and the Investment Risk Reserve (IRR) as per the discretion of the bank.
6. Responsibilities of the Board of Directors
A bank’s Board of Directors (or the delegated committee of the Board) must ensure that it approves policies that enable a prudent management of assets and risks associated with PSIAs.
The Board (or the delegated committee of the Board) is responsible to provide effective oversight and monitoring to ensure that PSIAs are managed in the best interests of the IAHs, in line with these Rules. In particular the Board must ensure there is effective oversight of:
a. Financing and investment activities undertaken on behalf of IAHs;
b. A sound risk management framework that adequately identifies, measures, monitors and controls risks that are funded by assets funded by PSIAs
c. The fiduciary duties performed by the bank to ensure that they are in accordance with the terms and conditions of the contracts between the bank and its IAHs
d. The level of reserves (PER/IRR), to ensure that the level is appropriate and as fair as possible to existing and new IAHs; and
e. The disclosure of relevant information to IAHs on a periodic basis
7. Responsibilities of the Senior Management
A bank's Senior Management must ensure it formulates policies which approved by the Board of Directors governing PSIAs which ensure their effective and prudent management, including the following:
a. Governance requirements including setting controls, responsibilities, and delegation of authority.
b. Guidelines to ensure PSIA funds are invested in accordance with the relevant terms and conditions of the PSIA contract
c. Guidelines to safeguarding the interests and rights of the IAHs
d. The basis for allocating expenses and profits or losses to IAHs
e. Guidelines on PER and IRR management, and to whom those reserves would revert in the event of a write-off or recovery
f. Monitoring liquidity mismatches
g. Valuation and monitoring of PSIA assets
h. Dealing with any losses incurred as a result of negligence, misconduct, fraud or breach of contract on the part of the bank
i. An acknowledgement of the right of the IAHs to monitor the performance of their investments and the associated risks, and how IAHs can exercise that right
8. Prudential Requirements
Banks must follow SAMA's prudential requirements pertaining to regulatory capital for the calculation of risk weights for assets funded by PSIAs and also ensure appropriate calculation of PSIA funds in their Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as per SAMA’s liquidity requirements.
PSIA funds and any associated reserve accounts (PER and IRR) are prohibited from being included in the calculation of a bank’s regulatory capital.
Banks must ensure that they manage concentration risks arising from PSIAs in line with SAMA's Large Exposure Rules.
If the management of IAH funds is outsourced to a 3rd party, Banks must ensure that such an arrangement is in compliance with all applicable outsourcing rules and regulations issued by SAMA.
SAMA may, by way of prudential assessment, direct a bank to treat, or not to treat, an arrangement between the bank and a client (for example by way of mudarabah, musharakah or wakalah) to be a PSIA.
9. Product Awareness
A bank must ensure prospective IAH are made aware, in writing, as part of the investor agreement that:
a. The IAH bears the risk of loss to the extent of the IAHs investment; and
b. The IAH would not be able to recover that loss from the bank, except in the case of negligence, misconduct, fraud or breach of contract on the part of the bank
10. Product Governance
SAMA emphasises that banks ensure compliance with relevant regulations and instructions pertaining to new products and services when considering PSIAs.
10.1 Terms & Conditions
The terms and conditions of a contract for a PSIA must be clear, concise and easily understandable by an IAH. The contract must state the type, purpose, terms and period of the contract and the profit-sharing ratio agreed at the time of the opening of the account. A bank must ensure that the following information is included in the terms and conditions given to an IAH:
a. How the funds of the IAH will be managed and invested;
b. The PSIA’s investment objectives;
c. The basis for allocating profits and losses;
d. A summary of the policies for valuing the PSIAs assets
e. If the bank uses PER/IRR reserves as a smoothing technique, a summary of the policies for transferring funds to and from the reserve
10.2 Contract Form
The following must be stated in the contract:
a. the rights and liabilities of both parties—in particular, the circumstances where losses are to be borne by the IAH;
b. the implications on the IAH’s contractual rights with regard to the early withdrawal, early redemption or other exit;
c. the duty of the bank to disclose accurate, relevant and timely information to the IAH on the investment of funds, including its performance, investment strategies, valuation, and frequency of valuation of the PSIA’s assets;
d. how any losses incurred as a result of negligence, misconduct, fraud or breach of contract on the part of the bank will be dealt with;
e. how any subsequent changes in the profit-sharing ratio will be disclosed;
f. any smoothing techniques that the bank uses
g. whether or not zakat is paid on behalf of the IAH by the bank
11. Disclosure Requirements
11.1 Financial Statements
A bank must ensure that its financial statements contain at minimum the following disclosures with regards to PSIA:
a. an analysis of its income according to types of investments and their financing;
b. the basis for calculating and allocating profits between the bank and the IAHs;
c. the equity of the IAHs at the end of the reporting period;
d. the basis for determining any PER or IRR;
e. the changes that have occurred in any of those reserves during the reporting period;
f. to whom any remaining balances of any of those reserves is attributable in the event of liquidation of the bank
11.2 IAH Disclosures
A bank must provide each IAH of a PSIA a periodic statement (through SMS, e-mail or website) about the PSIA at intervals stated in the contract or terms of business. The interval must not be longer than 6 months
The bank must ensure that the periodic statement contains the following information as at the end of the period covered by the statement:
a. the number, description and value of investments held by the IAH;
b. the amount of cash held by the IAH;
c. details of applicable charges (including any deductions of fees that the bank is allowed to deduct from the profits of the PSIA) and the basis on which the charges are calculated;
d. the total of any dividends and other benefits received by the bank for the PSIA;
e. the total amount, and particulars, of all investments transferred into or out of the PSIA;
f. details of the performance of the IAH’s investment and the historical performance on PSIA investment returns;
g. the allocation of profit between the bank and the IAH;
h. any changes to the investment strategies that could affect the IAH's investment.
12. Separation of PSIA Types
A bank must keep its accounts for unrestricted IAHs separate from the accounts for restricted IAHs. The bank must record all its transactions in investments for those accounts separately.
13. Effective Date
These Rules shall come into force with effect from the 1st March 2023.
Regulation of Agent Banking in the Kingdom of Saudi Arabia
No: 37541/67 Date(g): 20/2/2019 | Date(h): 15/6/1440 Status: In-Force Section One: Definitions and General Provisions
The Regulation is issued pursuant to powers granted to SAMA under the following laws and regulations:
a. Charter of the Saudi Arabian Monetary Authority, issued by Royal Decree No. 23 dated 23/05/1377H; and
b. Banking Control Law, issued by Royal Decree No. M/5 dated 22/02/1386H.
Banking Agents shall comply with this Regulation in addition to relative laws, regulations, and instructions, including the following:
- Banking Control Law and its instructions;
- Anti-Money Laundering Law and its Implementing Regulations;
- Law on Terrorism Crimes and Financing and its Implementing Regulations;
- SAMA Rules on Outsourcing, and Outsourcing Controls for Foreign Banks’ Branches Operating in Saudi Arabia; and
- Rules Governing Anti-Money Laundering and Combating Terrorist Financing issued to banks, money changers, and foreign banks’ branches operating in Saudi Arabia.
Article 1: Definitions
The following terms and phrases, wherever mentioned herein, shall have the meanings assigned thereto unless the context otherwise requires:
SAMA: Saudi Arabian Monetary Authority*.
Bank: any bank licensed to carry out banking business in the Kingdom of Saudi Arabia in accordance with the provisions of the Banking Control Law.
Regulation: Regulation of Agent Banking.
Agent(s): a legal entity contracted by a licensed commercial Bank and approved by SAMA to engage in Agent Banking activity.
Agent Banking: the provision of banking services and/or products by an Agent on behalf of a Bank in accordance with the provisions of this Regulation.
Know Your Customer (KYC): the processes that the Agent needs to carry out in order to identify its Customers and beneficiaries and verify their identities.
Conflict of Interest: a situation involving achieving a material or moral interest that contradicts job duties.
Exclusive Agent: an Agent that entered into an agency agreement with one Bank to exclusively provide banking services and/or products on behalf of the contracting Bank.
Multiple Agent: an Agent that entered into a non-exclusive agency agreement with a Bank or into agency agreements with multiple Banks to provide banking services on its/their behalf.
Customer: any natural or legal person obtaining banking services or products or to whom such services or products are offered.
* The Saudi Arabian Monetary Agency was replaced by the name of Saudi Central Bank in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding 26/11/2020AD.
Article 2: Purpose and Scope
1. The objectives of this Regulation are as follows:
a. Increasing banking services outreach and promoting financial inclusion to the unbanked and under-banked population while maintaining the safety, soundness and stability of the banking sector;
b. Encouraging Banks to use Agents in the provision of banking services to reduce the cost of banking services and to foster financial inclusion, reach and depth;
c. Setting a regulatory and supervisory framework for Agent Banking, in compliance with which banking services are offered whilst ensuring full compliance with the Banking Control Law and the implementation of its provisions in addition to SAMA instructions;
d. Providing the minimum standards and requirements for Agent Banking to organize business;
e. Outlining the permissible activities that can be carried out by a banking Agent after receiving SAMA’s non- objection; and
f. Providing minimum standards of data and network security, consumer protection and risk management to be adhered to in the conduct of Agent Banking activity.
2. This Regulation shall apply to all Banks desiring to contract with an Agent.
Article 3: Responsibility
1. It is the responsibility of the board of directors of each Bank to ensure compliance with this Regulation. Banks shall be solely responsible for the selection of Agents. Without prejudice to the provisions hereof, the relationship between the Bank and its Agent shall be direct and governed by a contract.
2. The Bank is responsible for all actions or omissions of its Agent(s) in the matter of providing the permissible banking products and services on behalf of the Bank.
3. The board of directors of each Bank shall be responsible for approving policies, procedures and processes which ensure the following:
a. Credible Agents are identified and selected.
b. Risks associated with Agent Banking are identified, documented and addressed. Adequate risk management policies are developed and implemented, in a way consistent with relevant rules and instructions issued by SAMA.
c. Agent Banking activities are constantly monitored to ensure compliance with the provisions hereof and other relevant laws and rules.
d. All necessary controls are in place and complied with to ensure that the contracted Agent fully complies with all legal and supervisory requirements, including SAMA requirements related to AML/CFT, combating embezzlement and financial fraud, and information security.
Section Two: Applying for Agent Banking
Article 4: Application Requirements
1. Banks wishing to contract with Agents shall apply for SAMA’s no-objection pursuant to the provisions hereof. The applications submitted by Banks shall be as follows:
a. One-time application for SAMA’s non-objection to the engagement of the Bank in Agent Banking activity; and
b. Prior to contracting with each Agent, a separate application for SAMA’s non-objection to each Agent to be contracted under an “Exclusive Agent” or “Multiple Agent” arrangement for the purposes of Agent Banking and in accordance with SAMA’s requirements.
c. Applications mentioned in Clause (1.a) and Clause (1.b) of Article 4 may be submitted at the same time. However, the application mentioned in Clause (1.b) may not be submitted alone unless the Bank has previously submitted SAMA’s non-objection application referred to in Clause (1.a).
2. When submitting the application mentioned in Clause (1.a) of Article 4, Banks must also submit, along with it, the following:
a. Approval of the Bank’s board and its commitment to complying with this Regulation and what SAMA issues in this regard;
b. Bank’s internal policy on Agent Banking that covers procedures related to Agent selection, management, monitoring, operations, compliance, conduct, service quality and business supervision;
c. A copy of the Bank’s branch expansion plan;
d. Proof of the Bank’s infrastructure that supports Agent Banking, including systems and technologies to be utilized;
e. The Bank’s qualifying criteria for engaging Agents, such as the following:
- Outreach
- Efficiency
- Integrity
- Security
- Proper IT Infrastructure
f. Description of permissible services that may be provided through the Bank’s Exclusive Agent or Multiple Agent arrangement;
g. Agent Banking contract template;
h. Description of processes for customer due diligence, including KYC and compliance with AML/CFT laws and instructions;
i. Description of procedures of information security and confidentiality protection;
j. Risk assessment report, including risk management, internal control and operational policies and procedures;
k. Description of consumer protection measures, including financial awareness and education strategies related to Agent Banking;
l. Description of controls and monitoring procedures to ensure compliance with relevant laws, regulations, instructions and regulatory requirements;
m. Business Continuity Plan (BCP) and contingency arrangements to ensure continuity of Agent Banking services in the event of disruption; and
n. Any other policies, procedures and/or requirements relevant to the management of Agent Banking business as SAMA may deem appropriate.
Article 5: Application to Contract with an Agent for Agent Banking
1. The Bank may use a super-agent to manage its other banking Agents, provided that the super-agent meets all the requirements of the Fit and Proper Assessment for Agent Banking stipulated in Article 13 hereof while retaining overall responsibility for the agency relationship.
2. The Agent company shall have a commercial register that permits the engagement in Agent Banking business.
3. The Agent shall apply for and receive necessary approval from the relevant supervisory and regulatory entity before the Bank applies for SAMA’s non-objection to the Agent to be contracted.
4. The Bank may appoint its direct employees to perform or supervise Agent Banking business on the Agent premises. In the event that the Bank and its Agent agree on assigning the Agent Banking business to Agent’s employees upon Agent Banking contract, provisions of Article 19 hereof shall be observed.
5. The Bank must provide a signed declaration by its Chief Executive Officer or a duly designated senior officer, confirming that the Bank has carried out the proper and fit assessment of the proposed Agent. The declaration must also indicate that the proposed Agent has met the minimum requirements of Agent Eligibility prescribed herein and has the competence to run Agent Banking business on behalf of the contracting Bank.
6. After reviewing the complete applications in accordance with the provisions hereof, SAMA will notify the Bank of the result of the application.
Article 6: Not Commencing Agent Banking Activity
SAMA’s non-objection to contracting with an Agent shall be deemed cancelled if the approved Agent does not commence business within a nine-month period from the date of issuing SAMA’s non-objection. SAMA may, at its discretion, extend this period.
Section Three: Agent Banking Contract
Article 7: Key Requirements
a. After obtaining SAMA’s non-objection, the Bank must enter into a written contract for a specified period with the Agent for the provision, on the Bank’s behalf, of any of the banking services for which SAMA’s non-objection was issued.
b. The Agent Banking contract must clearly specify the rights and responsibilities of all parties without prejudice to this Regulation and must be signed by the relevant parties prior to the commencement of Agent Banking services by the Agent.
Article 8: Contract
At a minimum, the Agent Banking contract must incorporate provisions that address the following:
1. The appointment of a third party as the Bank’s Agent to provide a clearly defined scope of banking services.
2. Capacity and nationality of the parties and the necessity of all parties having the authority to enter into this Agent Banking contract.
3. The Agent’s personal and business details, including the Agent’s business hours and any other important information.
4. The services provided by the Agent in detail, subject to the provisions of Article 20 hereof.
5. The Agent’s responsibilities, including, at a minimum, the following:
a. Dealing with Customers in a professional way and avoiding any prohibited activities as specified herein.
b. Exercising customer due diligence when conducting transactions, including:
1. Specifying a Customer authentication mechanism for transactions executed through the Agent; and
2. Using an ICT device with a screen of proper size for Customers to review and verify the details of transactions executed.
c. Taking consumer protection measures as follows:
1. Providing proof of transactions to Customers;
2. Facilitating channeling of complaints by Customers to the contracting Bank; and
3. Disclosing mandatory information as specified in SAMA regulations, instructions, and Consumer Protection Principles.
d. Compliance with all applicable laws, instructions and internal policies of the Bank, including the Bank’s codes of ethics and conduct.
e. Exercising due care in handling the Agent Banking systems and devices.
f. Maintaining records, documents, files and proof of transactions for a period not less than 10 years. The Agent must provide the Bank with these records regularly in previously determined periods. The Bank shall then maintain these records to facilitate supervision, control and verification as specified in Article 27 hereof.
g. Fulfilling reporting requirements necessary to enable the Bank to effectively monitor the performance of the Agent on a monthly basis and reporting incidents that may materially affect the efficiency of service delivery.
h. Allowing access upon receiving notification for the contracting Bank to carry out examination or on-site inspection and investigation on the Agent’s premises, and cooperating when the Bank requires information from the Agent as stipulated in Article 29 hereof.
i. Having a description of prohibited activities that the Agent cannot practice on behalf of the Bank, as indicated in Article 20 hereof.
j. Keeping confidential the Customers’ information and not disclosing any information obtained by virtue of work.
k. Conforming to legal and regulatory requirements.
6. Mechanisms for dispute resolution and indemnities, which cover disputes between Customer and Agent, disputes arising between the Agent and the Bank, and non-compliance of the Agent that is detrimental to the Bank. Such mechanisms shall also encompass recourse to other methods of compensation, procedures and period for resolution, indemnities, and obligations of the respective parties in the event of a dispute.
7. Terms of termination or expiration of the Agent Banking contract, which may include failure to meet obligations of the contract or comply with provisions hereof.
8. Measures to mitigate risks associated with Agent Banking services.
9. Compliance with AML/CFT and KYC requirements, including providing SAMA, by the Bank, with all requested documents and periodic reports on AML/CFT.
10. A statement that all information or data that the Agent collects in relation to Agent Banking services, whether from the Customers, the Bank or other sources, is the property of the Bank and that such information must be kept confidential and no unauthorized third party will have access to Customer information. The statement shall also indicate that the aforementioned provisions shall survive termination of the Agent Banking contract.
11. Changing the contract terms for default and contract termination.
12. A transition clause on the rights and obligations of the parties upon termination or cessation of the Agent Banking contract.
13. Stating that the banking services indicated are subject to regulatory review and that SAMA must be granted full authority to inspect and request information, data and documents at any time and full access to the internal systems, reports and records of the Bank and Agent. In addition, the Agent Banking contract must include a statement indicating that SAMA has the power to interrogate the Agent’s staff.
14. SAMA power to cancel or suspend its non-objection as it deems appropriate pursuant to this Regulation.
15. Stating that the Agent will not perform management functions, make management decisions, or act or appear to act in a capacity equivalent to that of a member of management or an employee of the Bank.
16. Any other terms or provisions that the Bank or the Agent considers necessary without prejudice to the provisions of laws, regulations, rules and instructions issued by SAMA.
Article 9: Agent Eligibility
1. The Agent must be licensed to practice its commercial activity before the Bank applies for SAMA’s non-objection to the Agent to be contracted as a banking Agent.
2. The following entities are eligible for appointment as Agents under this Regulation:
a. Companies, except for commercial banks and finance companies, without prejudice to Companies Law;
b. Post offices;
c. SME businesses, such as chain stores;
d. Mobile network operator agents;
e. Foreign licensed companies registered through SAGIA; and
f. Any other entities that SAMA may prescribe.
3. The entity must not have been classified as a non-performing borrower by any banks in the last 12 months preceding the date of signing the contract (such information having been obtained from a licensed credit bureau). The Agent must maintain this status for the whole period of engaging in Agent Banking business.
4. It is necessary to have appropriate physical infrastructure and human resources to provide the Agent Banking services required.
Article 10: Renewal of Agent Banking Contract
Banks wishing to extend Agent Banking contracts must renew their contracts with Agents, whether ‘Exclusive’ or ‘Multiple’, at least one month prior to the expiration date of the banking Agent contract, following a comprehensive assessment of outsourcing risks.
Article 11: Termination of Agent Banking Contract
1. SAMA may withdraw or suspend licenses granted to Banks to engage in Agent Banking business in any of the following cases:
a. Violating any provisions hereof as may, in the opinion of SAMA or the contracting Bank, warrant termination of the agency contract; or
b. Furnishing contracting Bank(s) with false or inaccurate information under this Regulation.
2. Subject to the provisions for termination of the agency contract set out in the contract, the Bank must terminate an agency contract in any of the following cases:
a. if the Agent is guilty of a criminal offense involving fraud, dishonesty or any other forms of financial impropriety;
b. if the Agent, where it is a legal person, is being dissolved or wound up through a court order or otherwise;
c. if the Agent, where it is a sole proprietor, dies or becomes mentally incapacitated;
d. if the Agent transfers, relocates or closes its place of agency business without the prior written consent of the contracting Bank;
e. if the Agent carries on Agent Banking business when the Agent’s principal commercial activity has ceased;
f. if the Agent sustains a financial loss or damage to such a degree that, in the opinion of the Bank, makes it impossible for the Agent to gain its financial soundness within three months from the date of the loss or damage; or
g. if the Agent fails to hold or renew its valid business license.
3. Where a dispute arises between a Bank and its Agent, the parties must exert every effort to settle the dispute within a period of 10 (ten) business days from the date of such dispute. If the dispute is not resolved within this stipulated period and the litigation is sought, then the Bank must begin preparations to terminate the agency within the timeframes mentioned herein before litigation starts.
4. Where an Agent Banking contract is terminated, the Bank must publish a notice of the termination in the locality where the Agent was operating or in any other manner, such as SMS messages, to adequately inform the general public of the cessation of the Agent Banking contract.
5. Upon termination of the Agent Banking contract, the Bank may not re-contract with the Agent, whose agency contract was cancelled, after changing its commercial name.
Article 12: Record Retention
The Agent shall maintain records and documents of its contracting Bank’s Customers for a period not less than ten (10) years. The Bank shall specify the mechanism for their retention and transfer to its possession.
Article 13: Fit & Proper Assessment
1. Prior to arranging a contract with a third party for Agent Banking, the Bank must carry out a ‘fit and proper’ assessment. The assessment is aimed at ensuring that the Agent, its proprietors, and persons involved in the management of the Agent Banking business are sufficiently competent, ‘fit and proper' and that the management structures and funding sources are adequate. The key components of Fit and Proper Assessment, at a minimum, must take into consideration the following:
a. The moral, business and professional suitability of the entities to be contracted as Agents;
b. Negative information obtained from a credit bureau or other credible sources;
c. Criminal records, especially in relation to issues of ML/TF, fraud, or integrity;
d. Business or work experience;
e. Sources of funds necessary to finance the establishment of the Agent Banking business; and
f. Any other information that may negatively or positively affect the prospective Agent.
2. Any Agent, its proprietors, partners, officers or any other individuals that has/have been vetted and approved by SAMA within the previous 12 months may be exempted from vetting under this Regulation.
Article 14: Agent Due Diligence
1. The Bank must establish clear agent due diligence policies. Minimum contents must include methods of identifying Agents, initial due diligence, regular due diligence checks to be performed at specified periods, check list of early warning signals, and corrective actions to ensure proactive agent management.
2. The Bank must clearly specify roles/responsibilities of functions/departments within the Bank with regard to agent management in the agent due diligence procedures.
3. The Bank must ensure that proper monitoring processes for AML/CFT and combating embezzlement and financial fraud in the area of Agent Banking are in place. The necessary actions to be taken by Agents in this regard must be communicated to the Agents, and the Agents’ compliance must be monitored regularly.
4. Due Diligence must, at a minimum, cover the following:
a. Verification of legal status of the Agent;
b. Verification of address and location of all prospective Agents;
c. Establishing that there is no conflict of interest between the Bank and the Agent;
d. Verification of the adequacy of the prospective Agents’ resources for Agent Banking business, including financial and infrastructure resources (especially information security, technology and personnel);
e. Agent’s trustworthiness and likelihood of good behavior;
f. Clear credit history of Agent with a licensed credit bureau;
g. The Bank’ approval for the Agent’s procedures to ensure compliance with security risk management processes; and
h. Any other measures deemed necessary by the Bank.
Article 15: Customer Due Diligence
1. Each Bank engaging in Agent Banking must develop a ‘Customer Due Diligence (CDD)’ program that is tailored to its individual circumstances, type of Agents and risk level. The CDD program should include policies and procedures for the following, as a minimum:
a. Know Your Customer (KYC);
b. Information security; and
c. Data privacy and confidentiality.
2. The Bank must be responsible for ensuring compliance of its Agents with its CDD program and the CDD requirements provided herein.
3. Agents must establish the identity of their Customers as deemed appropriate by the Bank, including through ID, fingerprint, etc., and must verify the purpose and nature of making any banking activities or any banking relationship through Agents.
4. If an Agent has reasons to doubt the credibility of information provided by the Customer, it has to use all the possible reliable means to validate such information. In such cases, the Agent must stop dealing with the Customer and report findings to the Bank’s Money Laundering Reporting Officer (MLRO).
Section Four: Agent Banking Operations
Article 16: Obligations and Responsibilities of the Bank
1. The Bank must make a clear, informed and documented decision on the use of Agents for rendering banking services to its Customers.
2. The Bank must be wholly responsible and liable for all actions or omissions of its Agent(s). This responsibility must extend to actions of the Agent(s) even if not authorized in the contract so long as they relate to Agent Banking services or other matters connected therewith. Such responsibilities include the following:
a. Maintaining effective oversight of the Agent’s activities and ensuring that appropriate controls, including remote transaction monitoring to identify and report suspicious and fraudulent transactions, are incorporated into the Bank’s procedures on Agent Banking, in order to assure compliance with relevant laws, regulations and instructions.
b. Assessing the adequacy of controls of Agent Banking activities through regular audits.
c. Formulating and implementing policies and procedures to safeguard the information, communication and technology systems and data from threats.
d. Providing Agents with this Regulation, operational manuals and risk management policy documents as must be needed for rendering services to Customers efficiently.
e. Conducting risk-based review of critical Agent Banking processes to ensure that relevant laws, rules, policies and instructions are adhered to.
f. Selecting credible Agents with suitable/convenient retail outlets.
g. Managing and mitigating risks associated with the engagement of Agents to provide banking services on behalf of the Bank.
h. Providing basic financial education for Customers and Agents. Such education should cover, at a minimum, the importance of protecting the bank card PIN and not disclosing the confidential information of bank accounts to Agents and the confidential information of banking products and services provided. The Bank must periodically train its Agents as set out in Article 18 hereof.
i. Assigning one of its branches or establishing a central administration to be responsible for supervising its Agent(s) operating in a designated area and recruiting experts necessary to effectively supervise its Agent(s).
j. Enabling Agents when executing Customers’ transactions to use ICT devices that are integrated into the technological systems of the Bank. The figures of the transactions must be reflected in ‘Core Banking Solution’ (CBS) of the Bank. The Customer must get instant confirmation of the transaction through paper-based receipt (debit or credit slip), as well as SMS confirming the transaction.
k. Branding Agent banking business in such a clear manner so that the Customer can realize that the Agent is providing services on behalf of the Bank.
l. Taking steps to update and modify, where necessary, its existing risk management policies and practices to cover current or planned Agent Banking services, and to ensure the integration of Agent Banking applications with the main banking systems so as to achieve an integrated risk management approach for all banking activities. The Bank must also seek to perform regular, dependent test by an internal/external auditor or by the Bank’s concerned department to assess the Agent’s AML/CFT program.
m. Preparing and publishing an updated list of all its Agents, by type of Agent, on its website and annual reports. In addition to this, the Bank may publish a comprehensive list of Agents on flyers, corporate gifts and such other publications, as it deems appropriate.
n. Developing a written policy on conflict of interest and ensuring that this policy helps detect potential conflicts of interest. When the possibility of a conflict of interest arises between the Bank and the Agent, this should be disclosed to SAMA.
Article 17: Cash Services
If the Agent Banking contract allows for providing banking services that involve cash, the Bank shall establish, subject to prior non-objection of SAMA, an appropriate daily cash withdrawal and deposit limit for Customers.
Article 18: Training of Banking Agents’ Employees
Banks must train their Agents’ employees to enhance their competency before any Agent Banking activities are conducted. Training must continue for the whole period of the Agent Banking contract to equip Agents’ employees with any updates. At a minimum, training must encompass the following:
a. Products and services offered by the Agent on behalf of the Bank;
b. Know Your Customer (KYC) processes;
c. Protection of Customer information and complaints handling;
d. Fraud detection mechanisms, including identification of counterfeit money;
e. Procedures of anti-money laundering and counter terrorist financing (AML/CFT);
f. Equipment operation and troubleshooting;
g. Claims processing and reconciliation;
h. Obtaining the Retail Banking Professional Foundation Certificate (RBPFC);
i. Agents that handle loan or credit processing must have fulfilled the requirements set by SAMA;
j. Codes of ethics and conduct; and
k. Procedures and mechanisms of reporting fraudulent and suspicious transactions to the Bank.
Article 19: Permissible Activities
1. The Bank may contract with its Agent to provide some or all of the banking services prescribed under this Article. The services provided by the Agent must be stated in detail in its contract with the Bank and must be prominently displayed on the Agent’s business premises and on the website of the Bank, where a full list of all of the Bank’s Agents and their services can be found.
2. Banks shall be responsible for determining, based on agent risk assessment, the services a particular Agent may provide.
3. Permissible services for Agents, after the Bank obtains SAMA’s non-objection, are as follows:
a. Bank accounts opening;
b. Preparation and submission of loan applications and other related documentation;
c. Preparation and submission of applications for credit cards, domestic worker salary cards and other cards, as well as other related documentation;
d. Preparation and submission of bank letters of guarantee and other related documentation;
e. Cash deposits and withdrawals through ATMs;
f. Check deposits through ATMs;
g. Check book request and collection;
h. Payment of electronic bills, fees and fines for utility services;
i. Generation and issuance of account statements;
j. Activation of accounts after obtaining the final approval of the Bank;
k. Funds transfers, local and international;
l. Currency exchange;
m. Issuance of bank debit and credit cards and checks after obtaining the final approval of the Bank;
n. Encashment of checks;
o. Provision of Banking services for SMEs;
p. Reception and submission of POS terminals’ applications;
q. Sales and marketing services; and
r. Any other activities as may be determined from time to time by SAMA.
Article 20: Prohibited Activities
The Bank shall not permit the Agent to perform any of the following activities:
a. Operating or carrying out any transactions when there is communication failure with the Bank and operating in an offline mode or on a manual basis;
b. Carrying out a transaction where a receipt or acknowledgement cannot be generated;
c. Charging the Customer any fees that are not approved by SAMA or included in the Agent Banking contract;
d. Providing, rendering or holding itself out to be providing or rendering a banking service that is not specifically permitted in the contract;
e. Conducting non-electronic transactions outside of the business premises;
f. Soliciting personal information from Customers, including account details and Personal Identification Number (PIN) of Customers;
g. Providing any form of manual cash services unless a written official non objection letter is obtained in this regard from SAMA;
h. Carrying out any Agent Banking transactions or activities other than those approved in SAMA’s non-objection to the Agent contracted;
i. Conducting any payment system services outside of SAMA’s payment system infrastructure;
j. Accessing credit reports at a licensed credit bureau, as part of the loan application process;
k. Disclosing any information obtained by virtue of work;
l. Violating the Bank’s codes of ethics and conduct; or
m. Any other prohibited activities specified herein or as may be determined from time to time by SAMA.
Article 21: Relocation, Transfer and Closure of Agent Premises
The Bank must ensure the following:
a. that its Agent does not transfer, relocate or close its Agent Banking premises without serving a written notice of intention on the Bank at least sixty (60) business days in advance. In these cases, the Bank must apply for SAMA’s non-objection to the measure intended not less than thirty (30) business days prior to transfer, relocation or closure of Agent Banking premises. The Bank must also forward the details and reason(s) for relocation, transfer or closure of premises to SAMA.
b. that the Agent posts a notice of the relocation, transfer or closure on the Agent’s premises so as to be clearly visible to the general public at all times. Further, the Agent must advise Customers by an effective channel of its intention to relocate, transfer or close the Agent Banking business.
Article 22: Settlement of Transactions
To ensure quality of services provided for the beneficiaries and to earn their trust, the Bank must perform the following:
a. Ensure that all transactions carried out through the banking Agent are posted on a real time basis for ‘in bank’ account transactions;
b. Complete transactions that credit or debit accounts in other banks in accordance with SAMA clearing instructions;
c. Conduct a daily reconciliation to ensure settlement is done properly; and
d. Clarify responsibilities of both the Bank and the Agent towards transaction settlement risks.
Article 23: Information Technology (IT) and Operational Requirements
The technology implemented by the Bank for Agent Banking must comply with the industry standard technology in terms of hardware and software. At a minimum, the Bank must ensure that:
a. The Bank has an automatic system that is suitable for Agent Banking and that provides services stipulated in the contract with the required quality, security and speed.
b. The technology deployed comprises a set of interoperable infrastructure modules that work seamlessly and harmoniously. There must be an end- to-end connection from the Bank to the banking Agent.
c. Payment orders are instantly executed. In the event of failure of communication during a transaction, the transaction must be reversed.
d. An audit trail is maintained and made available on request.
e. All settlement information details are preserved.
f. The Bank puts in place adequate measures to mitigate all the risks that could arise from the deployment and use of its Agent Banking IT infrastructure.
g. The Agent Banking IT infrastructure must be, at a minimum, as follows:
1. Be able to support real time, electronic processing of transactions executed;
2. Be able to provide a secured network, including end-to-end encryption;
3. Be able to support Agent Banking services; and
4. At the end point, devices should not store sensitive Customer information, e.g. PIN, passwords, fingerprints, etc.
h. At a minimum, two-factor authentication is required for Agent and Customer registration.
i. Transaction information is transmitted in a secure manner.
j. There is an advanced and secure technological infrastructure.
k. A secured network, including end-to-end encryption, is provided.
Section Five: Consumer Protection
Article 24: Consumer Protection Requirements
Banks must put in place an appropriate consumer protection framework that ensures implementation of all requirements set out in the Banking Consumer Protection Principles (BCPP) and SAMA instructions to protect beneficiaries from risks involved in Agent Banking services, such as fraud, loss of privacy, loss of service, etc.
The Bank must ensure that the following requirements, at a minimum, are complied with at all times:
a. The Agent must have signs that are clearly visible to the public, indicating that it is a provider of services of the Bank with which it has an Agent Banking contract. The Agent must not represent to the public that it is a Bank.
b. The Agents must issue receipts for all transactions undertaken directly through them. Banks must provide their Agents with necessary tools that enable generation of receipts or acknowledgements for direct transactions carried out through Agents.
c. Where the Agent acts as a receiver or deliverer of documents, the Agent must provide an acknowledgement for all documents received from or delivered to the Customer. Such acknowledgement should include all relevant details.
d. Customer complaints must be resolved in accordance with SAMA requirements on customer complaints. The Bank must keep record of all customer complaints and how such complaints were redressed.
e. The Customer must be made aware of the fact that he/she must not carelessly store PIN and other critical information or share such information with other parties, including Banks and their Agents.
f. The Bank must take necessary steps to promote awareness among Customers about its Agent(s). Such awareness should cover, at a minimum, the responsibilities of the Bank and the Agent, rights of Customers, safety measures to make transactions with Agents, services that can or cannot be provided by the Agent, commissions, and fees.
g. Banks must publish and update the details of their Agents (e.g. name, address, and communication channels) on their websites, including existing Agents, terminated Agents, Agent relocations and/or transfers.
h. Protection measures of Customer information must be developed. Banks and Agents must ensure that such information is not disclosed to unauthorized third parties without prior non-objection of SAMA. Non-Compliance with this provision is considered a crime punishable by law as per the Banking Control Law.
i. A client manual of Agent Banking services must be established. The manual should address the commitment of the Bank and the Agent to security, privacy policy and confidentiality of data, reliability and quality of services, transparency of products and services, and prompt response to enquiries and complaints.
j. The Agent must adequately disclose and display other information on its business premises, which includes, but not limited to, the following:
1. Its appointment as an Agent of a Bank and the duration of the appointment;
2. The list of services, client manual, fees and charges, and daily transaction limits for Customers;
3. The dedicated single toll-free number(s) through which Customers can contact the Bank or the responsible branch; and
4. The current license for the commercial activity being undertaken by the Agent (prominently displayed on its business premises).
Section Six: Supervision of Banking Agents
Article 25: Key Inspection and Supervision Procedures
a. Banks shall be held fully liable for the actions and compliance of their Agents. In addition, Banks must, at least, have in place adequate technological systems for risk management, consumer protection, AML/CFT, and combating embezzlement and financial fraud. It is the responsibility of the Bank’s board of directors to ensure the following:
1. Bank’s policies and procedures are comprehensive and reflect all of SAMA regulatory requirements;
2. Mechanisms are established to ensure that relevant departments of the Bank implement all the necessary provisions of SAMA instructions; and
3. Monitoring of Agents’ activities matches any risks posed to the Bank.
b. Banks must take all other measures, including onsite visits undertaken by their staff or authorized persons to ensure that Agents operate strictly within the requirements of the law, guidelines and Agent Banking contract.
c. Banks must formulate internal audit policy to monitor and control their Agents and must conduct monitoring visits to the Agent’s outlets at regular intervals to ensure that the Agents are working in accordance with the terms and conditions of the contract, rules, regulations, and instructions issued by SAMA. A report of each visit must be prepared and submitted to SAMA upon its request or with the overall annual report prescribed in Article 30.
d. SAMA will monitor the Bank-Agent relationship and its compliance with laid down instructions. SAMA has the right to carry out monitoring visits at any time to any of the Agent’s outlets.
e. SAMA shall have free, full, and unfettered access to the internal systems, documents, reports, records, staff and premises of the Agent at any time as far as the Agent Banking business is concerned. SAMA shall exercise such powers as it may deem necessary.
f. Notwithstanding Banks' responsibility to monitor and supervise their Agents, as set forth in Clause (a) of Article 25, SAMA may, at any time and as it may deem necessary, perform the following:
1. Requesting information and data directly from Agents;
2. Carrying out full-scope or thematic inspection, with regard to Agent Banking, of the records and premises of the Agent;
3. Directing an Agent to take specific actions or desist from specific practices;
4. Ordering the termination of the Agent Banking contract;
5. Directing the Bank to take specific actions against the Agent;
6. Directing the Bank to take remedial actions as a result of the conduct of an Agent; and
7. Any other guidelines, procedures and/or requirements as SAMA may deem appropriate.
Article 26: Off-site Inspection
SAMA, based on reports submitted to it, will carry out off-site monitoring of banking Agents’ business to assess and monitor risks (particularly material risks) and compliance with laws, regulations and instructions that SAMA supervises their implementation.
Article 27: On-Site Inspection
1. SAMA may conduct onsite inspections, as it may deem appropriate and at any time, carried out by its staff or appointed individuals.
2. The Bank and the Agent shall submit documents requested by SAMA staff or appointed individuals in the form and at the time they determine.
Article 28: Random Inspection
SAMA may make both random and targeted visits to Agent’s premises as it may deem necessary at any time (based on a standard sampling method or on reports identifying Agents that have been the subject of multiple complaints). The visits are aimed at examining the compliance of the Agent with all requirements prescribed herein, including those related to consumer protection.
Section Seven: Agent Registration
Article 29: Agent Registry
1. SAMA will establish an electronic agent registry to which Banks are required to submit information on every Agent operating on their behalf. The agent registry must include, as a minimum, the following:
a. Start date of business relationship as set out in the contract;
b. Agent name and business name;
c. Business address;
d. Geographic coordinates of business location;
e. Contact numbers;
f. Agent’s core business and number of years in operation; and
g. Agent banking contract.
2. Banks may not engage in Agent Banking unless they have registered the required information in the agent registry. Any Banks or Agents engaging in Agent Banking without registering in the agent registry will be subject to any actions or penalties that SAMA may take or impose in this regard.
3. Banks must be responsible for keeping the registry up-to-date.
4. In case of any changes in the Agent’s information (e.g. telephone number), Banks must update data in the registry within ten (10) business days of the date of such change made by the Agent.
Article 30: Annual Reporting
The Bank shall submit an overall report on its Agent Banking business annually to its board. The Bank’s board shall, in its turn, submit to SAMA an approved report that includes, as a minimum, the following information:
a. Nature, value, volume and geographical distribution of operations or transactions;
b. Cases of money laundering and terrorism financing;
c. Incidents of fraud, theft or robbery;
d. Results of the monitoring visits carried out by the Bank; and
e. Customer complaints, their nature and number, and the remedial measures taken to address them.
Article 31: Timely and Accurate Reporting
1. Upon request, Banks shall submit timely and accurate reports to SAMA. Banks will be held liable for any false or late reporting and will be subject to actions and penalties that SAMA may take or impose.
2. Banks shall submit, and be willing to submit in the manner required, any information on the volume and value of transactions carried out for each type of services provided by each Agent, or any other information requested by SAMA at any time as it may deem necessary.
Section Nine: Violations
Article 32: Measures and Penalties
SAMA will take measures and/or impose penalties set forth in related laws against any Banks violating any provisions hereof.
Section Ten: Enforcement
Article 33: Enforcement
This Regulation enters into force as of the date of its publication on SAMA’s website.
Guide to Rules Governing Banks’ Remittance Centers
No: 381000063572 Date(g): 12/3/2017 | Date(h): 14/6/1438 Status: In-Force Based on the Banking Control Law issued by Royal Decree No. M/5 dated 22/2/1386H, and the Ministerial Resolution No. 2149/3 dated 14/10/1406H regarding the Implementation Rules for Banking Control Law, and in continuation of the efforts of SAMA to support Remittance Centers by addressing the various technical, operational, and procedural challenges.
Attached is the first edition of the "Guide to Rules Governing Banks’ Remittance Centers". SAMA confirms that all banks operating in the Kingdom must adhere to the implementation of what is stated in this guide, starting from 15/10/1438H, corresponding to 9/7/2017G.
1. Introduction
Remittance services are among the most important services provided by the banking sector in the Kingdom. This service is provided through banks’ remittance centers and licensed remittance companies.
In light of the growing numbers and amounts of transfer transactions and the noticeable increase in the numbers of remittance centers and their branches in the Kingdom, they face various challenges—particularly in technical, operational and procedural aspects—in order to be able to interact professionally with developments in local and international legislations, regulations and rules related to money transfer procedures.
In order for remittance centers to be able to maintain their competitive capabilities, achieve maximum customer satisfaction and provide distinctive services, these centers need modern development strategies through a clear vision; application of a well thought-out methodology; and utilization of modern banking technologies in this field.
In an effort to advance and elevate this sector to a more developed, competitive and organized environment, SAMA has developed the Guide to Rules Governing Banks’ Remittance Centers which includes a set of objectives, regulations, and various developmental features.
Subsequently, this Guide will be developed in line with developmental and organizational changes and procedures.
1.1: Scope
The regulations of this Guide shall apply to all operations of banks’ remittance centers and licensed remittance companies. SAMA is the supervisory authority authorized to implement and take necessary measures as it deems appropriate in regard to any violations of the regulations of this Guide, including imposing penal fees and/or implementation procedures in accordance with the provisions in force under the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386H, and the implementation rules of the provisions of the Banking Control Law issued by Ministerial Resolution No. 3/2149 dated 14/10/1406H.
1.2: Purpose
By developing this Guide, SAMA aims to lay down the basic procedures and requirements to govern the work of these centers and ensure the quality of their customer services.
2. Relevant Laws, Rules and Regulations
* The Anti-Forgery Law, issued by royal decree No. (M/114), dated 26/11/1380H, has been replaced by the Penal Code for Forgery Offenses, issued by royal decree No. (M/11), dated 18/02/1435H.
3. Definitions
The following terms and phrases – wherever mentioned in this Guide – shall have the meanings assigned thereto unless the context requires otherwise:
SAMA:
Saudi Central Bank*.
Saudi Arabia Financial Investigation Unit (SAFIU):
The authority authorized to receive and analyze reports of activities suspected of being related to money laundering and terrorist financing from all financial and non-financial institutions.
Financial Action Task Force (FATF):
An inter-governmental body that sets standards and promotes effective implementation of legal, regulatory and operational measures to combat money laundering terrorism financing, proliferation financing and other threats related to the integrity of the international financial system.
Centers:
Banks’ remittance centers and licensed remittance companies.
Bank:
The bank to which the remittance center belongs.
Remittance Membership / Membership:
A register with a bank’s remittance center established by virtue of a contract called "Remittance Membership Opening Agreement" signed by the center and the membership holder (the customer) that includes all of said customer's information. This agreement constitutes rights and obligations for both parties in accordance with the relevant regulations and instructions.
* The "Saudi Arabian Monetary Agency" was replaced By the "Saudi Central Bank" in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding in 26/11/2020G.
4. Working Hours of Banks’ Remittance Centers*
- The official business days are from Sunday to Thursday.
- Saturday is an optional additional business day after obtaining SAMA's no-objection for each branch.
- Friday is an official weekly day off for all remittance centers.
- The working hours of the centers' branches will be from 9:30 a.m. to 5:30 p.m.
* This paragraph has been amended in accordance with SAMA circular No. (41/2304), Dated 09/09/1439H.
5. General Provisions
1) All instructions issued in all SAMA circulars regarding outbound and inbound remittances of all types shall be complied with, for example but not limited to: Anti-money laundering and counter-terrorist financing circulars.
2) Compliance and implementation of the provisions of the Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia (4th Update) and any previous or subsequent new updates.
3) Reject remittances for any of the countries with whom dealings are prohibited.
6. Disclosure and Transparency
1) Remittance centers must clarify the rights and responsibilities of each party and details of prices, commissions and fees charged by the center, displaying such details on a prominent place in a clear, concise and none-misleading manner.
2) Remittance centers should provide a free paper copy of the Banking Consumer Protection Principles in all branches.
7. Complaints
An appropriate, clear and effective mechanism for customer complaints must be set based on the Regulations for Complaint Handling and Establishment of Complaint Units at Banks and the Banking Consumer Protection Principles—the centers’ complaint mechanism and the period for handling complaints shall be clarified.
8. Services Provided within Remittance Centers
1) Point-of-sale terminals must be made sufficiently available to accept the Saudi Network "mada" cards at all branches of remittance centers.
2) Set up a separate queue dedicated for women in each branch in case of the absence of a ladies section.
3) The centers should verify that all electronic services meet the needs of customers and facilitate the completion of remittances according to state-of-the-art methods.
4) Emphasize on employees to perform their duties efficiently and professionally, ensuring their ability to provide the required services to customers; and provide appropriate and continuous training for employees.
5) Commit to good behavior and professionalism when providing customer service.
6) Work on raising the level of service quality within the branch, such as placing Queuing Machines.
7) Prioritize the service of people with special needs and provide appropriate tools to facilitate their entry into the branches.
9. Customer Acceptance Policies and Procedures
Customer acceptance policies and procedures include all factors relevant to a customer as the person performing a financial transaction through remittance centers; procedures to verify customer’s identity, address and business, and the amount of income and sources of funds; determining the purpose of establishing the relationship (remittances membership) between the remittance center and its customers, while not dealing with unknown or fictitious names and taking into account the full compliance with regulations and instructions issued by SAMA, AML/CFT-related instructions, ‘Know Your Customer (KYC)’ requirements, and Customer Due Diligence (CDD) procedures for customers of various types and categories; and setting classifications and prerequisites to establish relationships with customers.
9.1: Membership
Customers of remittance centers fill in their personal details in the individual membership opening form to benefit from the services provided by the center. The center then issues a membership card to the customer that contains his/her personal number which is linked to an automated system and on which his/her personal details, photo ID, and signature proving the presence of the person himself/herself and the validity of details filled in the form and the details of the beneficiary of the transfer at the center authorized by SAMA to practice this activity. The customer must present their membership number when carrying out any financial transaction in addition to the original ID card to ensure that they are the original party in the relationship and that the ID card is valid.
Membership is subject to regulatory procedures in terms of updating details and freezing, in addition to setting permissible financial limits according to customers' status, log in frequency and so on.
9.2: Membership Opening Conditions
All requirements set forth in the Rules Governing the Opening of Bank Accounts and General Operational Guidelines shall be adhered to, and membership must meet the prerequisites for verification requirements for identities and real users (the beneficiary) of such memberships, including the following:
1) The membership must be opened by the customer themselves, requiring their presence in person while taking into account cases in which the customer is required to visit to establish the relationship as provided for in the Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia.
2) Fill in all details and information related to ‘KYC’ principle in the Membership Opening Form and confirm its validity by signing it.
3) Provide an original copy of valid national IDs for citizens or resident ID for expatriates, to be included within the customer’s file.
4) Remittance centers shall be responsible for matching and verifying the validity of details with the original documents submitted by the customer; and placing the stamp and date on each document and storing them in the automated system.
5) It is necessary to have an identifier for women who cover their faces.
6) Minors (under the age of 18 Hijri years) will not be eligible for membership except with the approval of the guardian or curator (not an identifier).
7) Legal persons are not permitted to open remittance memberships. They are required to open a bank account through which they carry out all financial transactions.
8) An expatriate who has a temporary residence permit in the passport -granted thereto by the Kingdom's embassies under a work visa only in preparation for obtaining a resident ID - can be granted membership based on such permit (for a period of 3 months), to be frozen following expiry of that period until a valid resident ID card is issued.
9) Follow the instructions of persons with whom dealing is prohibited in accordance with the decisions of the Security Council and the Saudi Arabian Monetary Authority.
10) Determine the full information of the beneficiaries of the remittance outside the Kingdom, such as the name and ID number, if available, or an account number and address.
11) Membership may not be shared by more than one person.
12) Membership may not be treated as a checking account or used for purposes inconsistent with the primary purpose for which it was opened.
13) An item that contains confirmation from customers that they are the real beneficiaries from the membership and have a direct relationship with the beneficiaries of the remittance shall be added in the membership opening form.
14) Determine the amounts and numbers of expected monthly/yearly remittances (outbound and inbound), and evaluate whether they are adequately commensurate with customers’ monthly incomes.
9.3: Updating Details
Remittance centers shall update customers’ details regarding their membership in the following cases:
1) Upon the expiry of the identity validity period or after the lapse of a maximum of 5 years, whichever is earlier.
2) When customers’ personal identification documents and details, or the nature of their financial operations, are suspected.
3) When their financial transactions do not conform with the information provided to the remittance center or when the pattern and behavior of the customer’s financial operations change.
It is also possible to benefit from the service (Yaqeen) as an the additional option for verifying the identity of customers electronically according to SAMA circular No. (371000018071) dated 12/2/1437H.
9.4: General Instructions Regarding Customers
1) Remittance centers shall identify the customer through valid identification documents in all cases in which it deals with customers.
2) The nature of customers' business and activities shall be consistent with the volume, purpose and category of the executed financial transactions, in addition to the importance of identifying the real beneficiaries of such transactions and taking necessary measures to verify customers.
3) The validity period of the resident ID/visa/temporary resident permit shall be taken into consideration when dealing with expatriates, pilgrims, Umrah performers and visitors.
4) Secure information from official certifications such as the national ID, resident ID or passport and obtain a copy of such, as well as ensuring their conformity to the original ones carried by the customer and employee upon creating the membership.
5) Reject any dealings with fictitious, digital or anonymous names.
6) Membership numbers shall be linked with names and ID numbers, and shall be considered an automatic reference to the transactions carried out when creating the relationship (creating a membership number for the customer).
7) The requirements of KYC, AML/CFT rules issued by SAMA and other relevant regulations and instructions shall be applied.
8) The relationship with the customer shall be terminated when the remittance center is unable to verify the sources of transactions or doubts the validity or adequacy of the customer’s identification details, or when the customer continues to use the remittance membership for purposes other than that for which the membership was created.
9) The customer's name and the national/resident ID number shall be entered in both Arabic and English, and shall be considered mandatory fields for opening the membership.
10) The opening of membership shall be approved by the manager of the remittance center after verifying all the customer information and their conformity with the volume and nature of his/her activities and transactions.
11) The necessary approvals shall be applied when opening remittance memberships for high-risk customers or for which enhanced heightened due diligence is required based on the FATF recommendations and AML/CFT rules.
9.5: ‘Know Your Customer’ Principle
The purpose of applying ‘KYC’ principle is to enable remittance centers to form a clearer picture by ascertaining the true identity of each customer with an appropriate degree of confidence and identifying the types of business and transactions that the customer is likely to carry out with a remittance center. Moreover, for achieving this purpose, remittance centers procedures shall include the following measures:
1) Identify and verify the identity of all permanent and temporary customers on a continuous basis.
2) Identify the identity of the real beneficiaries for all transactions carried out by customers at the level that achieves complete understanding and knowledge thereof.
3) The risk-based approach shall be applied to assess the risks associated with various types of customers and take appropriate measures to enhance the requirements for identifying and verifying the identity of customers or real beneficiaries of their transactions.
4) Take the measures that would update the requirements for identifying and verifying the identity of all customers on a continuous basis.
5) Track changes in the identity of customers and take necessary action regarding their impact on the requirements of control and supervision.
6) Make available identification records of customers/real beneficiaries to the competent officials responsible for compliance with the AML/CFT standards and relevant concerned officials.
7) Verify the identity of customers and real beneficiaries through reliable and independent sources.
9.6: Customer Due Diligence (CDD) Measures
The application of due diligence procedures entails that remittance centers monitor, and make sure that they understand, the financial transactions of customers and their real beneficiaries; and that they verify all business activities in which they engage, as well as information related to membership creation while satisfying themselves that such information is reliable and clear. The instructions require that remittance centers apply the essential due diligence procedures to all permanent and temporary customers, including real beneficiaries, and that these procedures be continuous and consistent with the degree of risks associated with the business and transactions carried out by customers as follows:
1) Track the activities of financial transactions and their consistency with the information provided by customers.
2) Due diligence procedures are required upon creating and strengthening the relationship when carrying out sporadic transactions whose value, individually or collectively, exceeds the declared limits. They are also required in the event of cases suspected to involve ML/TF, regardless of exemptions or transaction amount limits, or in case of doubts about the accuracy or adequacy of the information previously obtained when identifying customers.
3) Check whether any person is acting on behalf of the customer and ensuring the legality of such practice.
4) Determine the persons who hold ownership or control over the customer.
5) Due diligence procedures shall be strengthened for high-risk customers possibly due to the volume or types of anticipated or actual transactions, including those that involve jurisdictions classified as high risk or those mentioned on the FATF website as being jurisdictions that do not adequately implement the recommendations related to AML/CFT, or transactions that are defined by law or applicable instructions as being a high-risk source, such as correspondent banking relationships and politically exposed persons.
6) Simple due diligence procedures and measures shall not be acceptable in case of suspicion of ML/TF transactions.
7) Ability to mitigate the due diligence requirements on relationships that have been classified into low risk categories according to the risk assessment carried out by the remittance center.
8) To not permit the termination or absolute restriction of relationships with entire categories of customers aiming to avoid risk management or due to limited financial returns (profits) and without considering other risk mitigation measures for individual customers within a specific sector and dealing with risks on a case-by-case basis.
10. Outbound and Inbound Domestic and International Remittances
Domestic/international remittance activities (sending and receiving) shall be carried out through modern money transfer systems, such as SWIFT and the Saudi Arabian Riyal Interbank Express System (SARIE), and instantaneous money transfer systems, or through contractual agreements with reliable money transfer service providers under the following conditions:
1) The execution of money transfer transactions for customers shall be accepted through membership only.
2) Domestic money remittances shall be carried out through SARIE only.
3) Money transfers (receiving) may be received for temporary customers (who are not entitled to create a membership relationship) of visitors who hold a visa/temporary residence permit as well as pilgrims and Umrah performers, provided that the amount of a single financial transaction does not exceed SAR 5,000 or its equivalent with a total not exceeding SAR 50,000 or its equivalent during one year, and that the requirements for dealing with temporary customers are fulfilled. A copy of the passport, including the page showing the entry visa, shall be obtained when carrying out permissible transactions. Other money transfer requirements, including the availability of other details such as home country address, contact number or the point of contact in Saudi Arabia and the signature, shall be taken into consideration, and the relationship of the recipient of the transfer with the transferor shall be clarified.
4) The consistency of the nature of the customer’s business and activities – whether as the owner of the membership or a temporary customer – the sources of funds and his/her annual income will be considered against the volume of his/her financial transactions and the purpose and type of the executed financial transactions.
5) Identify the real beneficiary who is in full or partial control of the membership or the financial transactions executed by customers; take necessary measures to achieve customer identification procedures; and fulfil CDD requirements.
6) Record all money transfers made by customers in the membership record of customers, provided that they include detailed information about such remittances.
7) Strengthen implementation requirements of the ‘KYC’ principle, and take necessary steps to meet heightened CDD requirements for high-risk customers.
8) Document, and record in the registers, all outbound and inbound money transfers that have been made for customers, including names of transferors and beneficiaries, and transfer amounts with their dates—such transfers shall be automatically linked to the customer’s ID number.
9) Furnish SAMA, in coordination with Banking Supervision Department, with a monthly statement that includes all money transfers that have been carried out with internal and external financial institutions (banks and money changers).
10) Take into consideration money transfer requirements set forth in the AML/CFT rules issued by SAMA.
11) Obtain complete and accurate information about the transfer originator (the customer) for outbound remittances, and shall be kept complete in the transfer message, or shall include the following:
a. Required and accurate information about the transfer originator:
- The name of the transfer originator.
- The membership number of the transfer originator when the transaction was carried out.
- The address of the transfer originator which can be left blank if it is not available and replaced with the official ID number (the national ID for citizens, the resident ID for expatriates) or the date and place of birth together.
- The purpose of the transfer shall be specified in detail, confirming full knowledge about the beneficiary.
b. Information required about the real beneficiary:
- The beneficiary's name and address in his/her home country.
- The date of birth, if available.
- The type of relationship with the beneficiary.
- The beneficiary’s account number when this account is used to carry out the transaction or, in case there was no account, use a distinct identification number for the transaction so that it could be monitored.
12) In the event of inbound remittances, and given the importance of considering common procedures followed by countries and financial institutions operating therein, complete information about the transfer originator shall be obtained and attached fully to the transfer message as provided in the abovementioned Paragraph 11.
13) In the event that a number of external wire transfers are sent from one originator within a bulk transfer to beneficiaries in another country, all information related to the originator accompanying the wire transfer with that transfer should be included for each external wire transfer, provided that the bulk transfer file (in which individual wire transfers are collated) contains the full information of the originator which can be tracked easily.
14) In the case where wire transfers are not accompanied with complete information about the originator, remittance centers operating in the Kingdom must put in place effective procedures and deal with them as follows:
- Obtain complete information from the correspondent financial institution or from the transfer service provider— this applies to all domestic and international banks.
- Reject the transaction and return the transfer if the correspondent financial institution does not respond.
- In case a transaction was suspicious and the financial institution did not respond, it is necessary to report this to SAFIU.
- Document the decisions that were taken in writing along with their reasons, and keep these documentary and electronic records for a period of ten years based on AML/CFT rules issued by SAMA.
- Inbound remittances must include the name of the financial institution, the country of origin for the transfer, the name of the correspondent financial institution and the country, and the correspondent financial institution must adhere thereof. In the event of a change in the transfer originator information, the remittance center must inform the beneficiary of such change.
15) Strengthen due diligence measures when implementing remittances related to politically exposed persons such as job holders, leadership incumbents and diplomats.
16) Reject any outbound/inbound remittances from/to Saudi Arabia for any charitable or non-profit organizations, except for bodies authorized to do so according to the Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia.
17) When implementing any new electronic money transfer and payments systems, it must be ensured that they have the ability to prevent and detect ML/TF operations.
18) Comply with transparency standards and ensure that money transfer messages (accompanying outbound/inbound transfers) contain full information of the originator and the beneficiary.
19) Perform continuous CDD measures towards customers sending/receiving remittances and audit the operations executed throughout the period of that relationship to ensure the completeness and conformity of operations carried out with the volume of customers activity, including the source of income, noting that the task of implementing the measures of ‘KYC’ and due diligence for the transferring person rests with the party, whether foreigner or domestic, transferring the funds.
20) In cases where technical restrictions prevent the transmission of complete information of the originator that is associated with an external wire transfer along with a local wire transfer (during the period necessary for harmonizing payment systems), the intermediate remittance center - the recipient of the transfer - must keep a record of all the information received from the financial institution that issued the transfer for a period of 10 years based on the AML/CFT rules issued by SAMA, taking into account the commitment to a period not exceeding (72 working hours) to respond to any inquiries received from the correspondent bank or concerned authorities.
21) In the event of repeated cases of lack of information, and lack of cooperation of the correspondent financial institutions (banks, money changers originating the transfer, transfer services providers); transfer centers operating in Saudi Arabia should assess the relationship with such banks, money changers, or transfer services providers, and consider restricting or terminating the relationship therewith.
22) In the case of suspicion of the transactions of, or the relationship with, a correspondent financial institution or a transfer services provider from a ML/TF perspective, such cases must be reported to SAFIU immediately and documented.
23) Remittance centers operating in Saudi Arabia contracting with money transfer services providers must obtain full information of the parties of the transfer transactions that such providers execute on their behalf.
24) Remittance centers operating in Saudi Arabia must put in place, for all their transactions, effective procedures to verify that ‘KYC’ requirements and due diligence measures are met and based on the risk rate and materiality treatment; and to tighten due diligence for funds transferred from or to countries against which FATF warnings have been issued.
25) Monitor all transactions (outbound/inbound transfers) to detect abnormal patterns in activities that do not have a clear economic or legal purpose, and examine the background and purpose of those transactions to the maximum extent possible, with the results being documented in writing.
26) When there are reasonable grounds to suspect that customers’ funds, operations and transactions represent proceeds of criminal activity or is related to or associated with ML/TF operations, they must be reported to SAFIU.
27) As for domestic transfers (inside the Kingdom) that are performed exclusively through SARIE, it is necessary to ensure that the name of the transferor and his/her account number are mentioned and that they are registered and stored in the remittance center’s system for the purpose of fast retrieval of information when requested by competent authorities. It is also necessary to verify the identity of the beneficiary from the internal (inbound) transfer in accordance with the Rules Governing the Opening of Bank Accounts and General Operational Guidelines.
28) Examine the names of individuals, entities and banks originating wire transfers and their beneficiaries against lists of individuals and entities whose assets must be stopped, rejected or frozen based on local instructions issued by supervisory authorities, as well as international lists such as the United Nations lists; and take necessary action thereof.
29) Examine the names of individuals, entities and banks that are the originators of transfers or intermediaries or beneficiaries thereof against international lists, such as those of the Security Council, the United Nations, FATF, etc.. and take necessary action accordingly.
11. Money Transfer Services Providers
The guidelines for contracting such transfer services providers must be observed, provided they include the following:
1) Transfer services providers to be contracted with is internationally recognized and licensed by supervisory authorities in the country of domicile of such providers.
2) Banks should submit a prior non-objection request from SAMA in accordance with SAMA Rules on Outsourcing for contracting with money transfer services providers, attached therewith a file that includes the final contract draft to be signed with the services provider, as well as its company brief and a certificate of compliance with AML/CFT.
3) The business of contracted money transfer services providers related to transactions executed through remittance centers operating in the kingdom should be subject to the supervision and control of the remittance center through which those transfer services providers operate.
4) Transferring money should fall under the core business of transfer services providers.
5) Transfer services providers must have in place adequate policies and measures for AML/CFT and combating embezzlement and financial fraud.
6) The contract to be concluded with the money transfer services provider shall include the following:
a. Compliance with the Kingdom's local laws and instructions, rules and circulars issued by SAMA.
b. Taking into account domestic, regional and international requirements, including compliance with international resolutions and the United Nations lists, as well as warning notices issued by international organizations, for example the warning notices issued by FATF.
c. Holding that the information they receive are subject to banking confidentiality clauses and is only used for authorized purposes.
d. Ensuring that all necessary prudential measures are applied when providing these services; and their effectiveness in the early detection of suspicious transactions.
e. The importance of adhering to the application of ‘KYC’ principle and fulfilling due diligence requirement on a continuous basis towards customers and sources and uses of transferred funds.
f. Commitment to provide SAMA with any requested information.
7- Linking the systems of money transfer services providers contracted by banks with said banks’ systems so as to reflect all transactions executed through the transfer services provider within the banks’ system.
12. Security Safety Laws and Systems
Remittance centers shall abide with the instructions provided in the Law of Private Security Services and its Implementing Regulations issued by Royal Decree No. M/24 dated 8/7/1426H; the Law of Transport of Money, Precious Metals and Negotiable Instruments issued by Royal Decree No. M/81 dated 18/10/1428H; and the Security Safety Guide issued by SAMA, No. 485/M A/36 dated 7/1/1416H, as well as any current or subsequent updates while considering the provisions of such instructions as the minimum of security and safety laws that must be adhered to.
13. Employment
Remittance centers (banks) shall comply with the instructions of SAMA, the Ministry of Labor and Social Development and other relevant supervisory and regulatory authorities regarding all laws, instructions and regulations issued for private sector employees as follows:
1) Compliance with the requirements for employment of citizens and for contracting employment services companies contained in SAMA Circular No. 341000068320 dated 3/6/1434H, and emphasizing on the commitment to the nationalization of jobs in compliance and anti-money laundering departments, remittances, cash advance and security guards pursuant with the instructions issued in this regard by His Majesty the King, as well as the instructions of concerned authorities such as the Ministry of Interior, Ministry of Labor and Social Development, and the Saudi Arabian Monetary Authority.
2) Instructions for working hours and times, vacations and official holidays, including the provisions hereunder.
3) Instructions issued by the Ministry of Labor and Social Development regarding the Labor Law and employee-specific regulations.
4) Instructions issued by SAMA regarding appointment requirements for leadership positions and employment standards.
5) Providing both an administrative and functional structures that encompass all departments and jobs, including senior positions, in which departments' functions and individuals’ duties and responsibilities are specified.
6) Appointing a manager for remittance centers with subject matter and practical qualification who has experience in banking business; an appropriate degree of financial and administrative expertise; and a history of good conduct, and who has not been previously convicted of any crime violating honor or morals.
7) Providing SAMA (in coordination with Banking Supervision Department) a granular semi-annual report on the number of Saudi employees and percentage of jobs nationalization with its relevant plan.
Regulation on Branch Network
No: 43089486 Date(g): 24/5/2022 | Date(h): 23/10/1443 Status: In-Force Based on Saudi Central Bank Law issued by Royal Decree No. (M/36) dated 11/04/1442 H and the Banking Control Law issued by Royal Decree No. (M/5) dated 02/22/1386 H, and based on SAMA's supervisory and regulatory role and its keenness to promote the principle of financial inclusion, increase the access of financial services to priority areas and geographical diversification of the bank branch network, and to ensure that banks develop an integrated internal framework to regulate the opening, closing and transfer mechanism of branches, self-service centers and affiliated remittance centers.
The branch network instructions are attached and replace the Annual Branch Expansion Plan (ABEP) issued under Circular No. (351000126713) dated 11/10/1435 H.
1. Preamble
This Regulation is issued by the Saudi Central Bank (SAMA) in exercise of the powers vested upon it under its Law issued vide Royal Decree No. (M/36) on 11-04-1442H and the Banking Control Law issued by the Royal Decree No. M/5 on 22-02-1386H (11 June 1966G).
The Regulation lay down the regulatory processes for banks in planning for the opening, closure and relocation of their Branch Network.
The Regulation will become effective from the date of its issuance and supersede the existing SAMA Circular No. 351000126713 issued on 11-10-1435 H (7 August 2014 G).
2. Definitions
2.1 SAMA: The Saudi Central Bank established under the Law issued vide Royal Decree No. (M/36) on 11-04-1442H;
2.2 Regulation: The Regulation on Branch Network;
2.3 Bank: means any bank licensed to carry out banking business in the Kingdom of Saudi Arabia in accordance with the provisions of the Banking Control Law;
2.4 Branch Network: includes branches, service centers, and remittance centers;
2.5 Branches: means full-fledged branches providing full range of banking services as well as more efficient branch models (mini / light branches) offering basic banking services including, inter-alia, the opening of accounts, cash deposits, cash withdrawals, fund transfers, issuance and encashment of pay orders/demand drafts, etc.
2.6 Service Centers: means outlets established for providing customer facilitation, marketing and sales services, and similar other activities.
2.7 Remittance Centers: means financial service providers engaged in domestic/international remittance activities (sending and receiving money) in accordance with the SAMA Rules Governing Banks' Remittance Centers.
2.8 ATM: means automated teller machine. ATM includes Automated Teller Machines (ATMs), Cash Deposit Machines(CDMs), Interactive Teller Machines (ITMs), Kiosk and Self-Service Machines offering cash deposits and withdrawals;
2.9 Zones: Branch Network will be categorized into following zones for the purpose of this Regulation (based on the latest publicly available population data of the General Authority for Statistics):
a) Zone 1 (Large cities): to include all cities with population of 1.0 million and above;
b) Zone 2 (Medium Cities): to include all cities with population of 0.5 to 1.0 million;
c) Zone 3 (Small Cities): to include all cities with population of 0.1 to 0.5 million;
d) Zone 4 (Rural Areas): to include villages and small towns with population of less than 0.1 million.
2.10 Priority Areas: includes Zone 3 (Small Cities) and Zone 4 (Rural Areas)
2.11 Digital Modes: means channels used to execute transactions through electronic mediums or using technology enabled/virtual/online modes. These modes includes, inter-alia, the use of debit/credit/prepaid cards, internet banking, mobile banking, mobile wallets, digital payment apps, etc.;
2.12 Customer: means any natural or legal person obtaining banking services or products or to whom such services or products are offered by a bank;
2.13 Inactive License: means a license previously issued by SAMA for the opening of a branch but the concerned branch is currently inoperative due to either delay in commencement of operations or suspension of its operations for whatever reasons.
3. Objectives of the Regulation
The Regulation is aimed at achieving the following key regulatory objectives:
a) Promoting financial inclusion and increasing outreach of financial services to the priority areas;
b) Setting a regulatory and supervisory framework for the branch network;
c) Encouraging geographic diversification of the branch network;
d) Ensuring consumer protection; and
e) Facilitating banks in streamlining their branch networks.
4. Scope of Application
The Regulation will be applicable to all locally incorporated banks as well as the branches of foreign banks licensed and operating in the Kingdom. The branches of foreign banks shall comply with this Regulation only if they plan to expand beyond three branches and to the extent, the Regulation becomes relevant to them.
5. Branch Network Policy
5.1 Banks are required to prepare a Branch Network Policy for opening, closing and relocating of branches, service centers, and remittance centers. Branch Network Policy of the Bank will cover, inter-alia, the following points:
a) Bank's overall strategy to serve customers (including the elderly and disabled customers) and deploy service channels (including the digital platforms);
b) Defining market niche / target market of the Bank;
c) Bank's approach towards promoting financial inclusion and increasing outreach of financial services;
d) Key channels to be deployed for the delivery of financial services;
e) Broad parameters/criteria for opening, closing and relocating of branches, service centers, and remittance centers;
f) Plans for promoting the use of digital modes;
g) Plans for offering any other financial services through branches (e.g. bancassurance) or engaging agent banks to undertake permissible banking activities;
h) Plans for serving customers in priority areas as a part of corporate social responsibility (CSR).
5.2 The Branch Network Policy will not cover ATMs, which will continue to be dealt with separately under the existing SAMA rules/instructions.
5.3 Banks will submit the draft Branch Network Policy to their Board of Directors (or the delegated committee of the Board) for review and approval. However, the Branch Network Policy of the branches of foreign banks can be approved by the Chief Executive or a duly authorized senior executive at Head Office instead of the Board of Directors.
5.4 Banks to submit the Branch Network Policy to SAMA after its approval by their Board of Directors (or the delegated Board committee) within four months from the issuance of this Regulation along with the following information:
a) Details and annual volume of financial services offered through digital modes during each of the last three years;
b) Number of branches, service centers, and remittance centers opened, closed or relocated (Zone-wise) during each of the last three years;
c) Number of new ATMs (including portable/temporary ATMs) deployed during each of the last three years;
d) Results of any customer survey conducted and/or Mystery Shopping done to assess the customer satisfaction and quality of banking services;
e) Any other measures taken to increase the outreach of financial services and offering basic banking services to public.
5.5 SAMA will review the Branch Network Policy to grant it's no objection. While evaluating the Branch Network Policy of a Bank, SAMA will review, inter alia, the following:
a) Bank's plan for offering financial services through digital modes and timeline for their roll out;
b) Results of any customer feedback survey conducted and/or Mystery Shopping done to assess the customer satisfaction and quality of banking services; and
c) Any other measures taken to increase the outreach of financial services and offering basic banking services in priority areas.
5.6 Banks will review (and update, if required) the approved Branch Network Policy every three years (or more frequently, if so required) to ensure its consistency with the relevant regulatory processes and prevailing market dynamics. The revised Policy after review and approval by the Board of Directors or the delegated committee of the Board (in the case of branches of foreign banks, by the Chief Executive or a duly authorized senior executive at Head Office) will be submitted to SAMA within 30 calendar days of its approval.
6. Licensing of Branches
6.1 Banks are required to obtain approval for license from SAMA for a new branch, service center or remittance center (both within the Kingdom and overseas). SAMA's prior approval for opening of a branch abroad will be required before approaching the concerned host supervisor/regulatory authority for any such approval.
6.2 Banks will submit the proposal for obtaining license of a new branch, service or remittance center to SAMA as per their approved Branch Network Policy. The proposal should contain all relevant information on the proposed branch/center including name of the city, tentative location, zone of location, brief justification for choice of the city/location, and feasibility study (including projected business/financial impact).
6.3 Banks are required to use inactive licenses for branches/service centers/remittance centers before approaching SAMA for the new licenses.
6.4 SAMA's prior approval for a new branch, service or remittance center will not be required if such branch/center is being opened within the same zone by using the inactive licenses for branches/service centers/remittance centers. Furthermore, SAMA's prior approval will also not be required if a new branch, service or remittance center is being opened in any of the smaller zones by using the inactive license of a branch/service center/remittance center of a larger zone. However, in such cases, banks will approach SAMA at-least two months in advance for amendment of the inactive license for opening the proposed branch or center at the new location.
6.5 Banks will not be required to submit Annual Branch Expansion Plan (ABEP) to SAMA once their Branch Network Policy is approved.
6.6 Banks are expected to play their role in increasing outreach of financial services to the priority areas as a part of their corporate social responsibility.
7. Opening of Branches
7.1 After receiving approval for a new branch license from SAMA, banks shall finalize the branch location, seek necessary approvals from the concerned government authorities, construct the branch and make all other arrangements to open the branch.
7.2 Once a branch is ready to commence operations, banks shall obtain a formal license from SAMA for opening of the approved branch. The request for obtaining such a license will contain all relevant information about the readiness of the bank to open the branch and will be submitted only after all necessary arrangements (as detailed in Point 7.3 below) for opening of the branch are in place.
7.3 All applications for obtaining a license for opening new branches shall be submitted along with relevant information including, inter alia:
a) The exact location of the branch;
b) The safety and security arrangements for the branch and the customers (including arrangements for the elderly and disabled customers);
c) The status of IT infrastructure/connectivity;
d) The proposed staffing arrangements;
e) The status of approvals from relevant government authorities;
f) Certificate of compliance with the municipality regulations, etc.;
g) A certificate from the internal audit department of the bank confirming that the new branch complies with all relevant requirements of the government authorities and SAMA.
7.4 Once SAMA issues a formal license for opening a branch, the bank will take all necessary measures to make the branch operational within six months of the date of issuance of the license and ensure compliance of all conditions of the branch license.
7.5 Banks shall inform SAMA in writing within 14 calendar days of commencement of operations by a new branch.
8. Closure of Branches
8.1 Banks will seek prior approval of SAMA for the closure or relocation of a branch or service center. Furthermore, in case of any forced closure/relocation of a branch, service or remittance center due to circumstances beyond their control, banks will notify all such cases to SAMA along with the reasons thereof.
8.2 Banks will have the flexibility to plan for closure or relocation of branches and service centers or convert a branch to a service center in Zone 1 and 2. However, any such request for closure or relocation will be allowed by SAMA subject to the condition that the bank has taken necessary measures to promote the use of digital modes.
8.3 Closure of branches or service centers in Zones 3 and 4 (priority areas) will not be allowed but their relocation within the same city/governorate will be permissible.
8.4 Banks will be allowed to merge two nearby branches in case of merger of two banks or in other justifiable cases subject to the condition that there remains a branch of the same bank within the distance of 10 kilometers.
8.5 Banks will not terminate the services of any employee merely due to the closure or relocation of a branch or service center.
8.6 Banks will be free to close and/or relocate remittance centers as per their approved Branch Network Policy. However, they will be required to notify SAMA at-least 30 calendar days before any such closure or relocation of a remittance center.
9. Communication to Customers
9.1 Banks will be required to inform customers through SMS and Email at-least two months before closure or relocation of any branch, service center or remittance center.
9.2 Banks will place a notification on the bank's website as well as on the branch site/entrance with contact numbers for seeking further information;
9.3 The communication from bank shall guide the customers about alternate options for them for availing the banking services. This will, inter alia, include information about the nearest branch of the bank, service center or other available channels.
10. Submission of Returns
Banks will submit the following returns to SAMA on quarterly basis within 30 calendar days of the end of each calendar quarter:
10.1 Data on opening, closing and relocation of branches, service and remittance centers (as per format attached as Annexure-I).
10.2 Data on delivery channels used to serve the customers (as per format attached as Annexure-ll).
10.3 Data on customers served in-person/physically in branches/centers, ATMs and Agent banks (as per format attached as Annexure-lll).
Annexure-I
Name of the Bank: --------------------------
Data on opening, closing and relocation of branches, service and remittance centers for the quarter ended-------------
Data of Branches Sr. No. Zones Branches Opened during Quarter Branches closed during Quarter Branches relocated during Quarter Total active Branches at Quarter end Total inactive Branch licenses 1 Zone 1 2 Zone 2 3 Zone 3 4 Zone 4 5 Outside KSA 6 Total Data of Service Centers Sr. No. Zones Centers Opened during Quarter Centers closed during Quarter Centers relocated during Quarter Total active Service
Centers at Quarter endTotal inactive Service
Center licenses1 Zone 1 2 Zone 2 3 Zone 3 4 Zone 4 5 Outside KSA 6 Total Data of Remittance Centers Sr. No. Zones Centers Opened during Quarter Centers closed during Quarter Centers relocated during Quarter Total active Remittance Centers at Quarter end Total inactive Remittance
Center licenses1 Zone 1 2 Zone 2 3 Zone 3 4 Zone 4 5 Outside KSA 6 Total Annexure-II
Name of the Bank: ---------------------------
Data on delivery channels used to serve customers, for quarter ended----------------
Sr. No. Zones Total No. of active customers of the Bank at beginning of the Quarter Total No. of customers served during the Quarter No. of Customers served in person/physically in branch/service center during
QuarterNo. of Customers served through digital modes during the quarter No. of
Customers served through self-service machines during the quarterNumber of
Customers served through any other mode during the quarter1 Zone 1 2 Zone 2 3 Zone 3 4 Zone 4 5 Outside KSA 6 Total Note: In the last column, provide the number of customers served through any mode other than in-person/physically served, digital modes or through self-service machines).Annexure-III
Name of the Bank: ---------------------------
Data on customers served in-person/physically in branches/centers/ ATMs/Agents for the quarter ended------------
Sr. No. Buckets of Customers (Average No. of customers served per day, during the quarter No. of Branches No. of Service Centers No. of Remittance centers No. of self-service machines No. of ATMs No. of branches of agent banks Total 1 0-10 2 11-20 3 21-30 4 31-50 5 51-70 6 71-100 7 101-200 8 201-300 9 301-400 10 401-500 11 Above 500 12 Total Governing Rules for Electronic Issuance and Authenticity Verification of Banking Documents
No: 43049648 Date(g): 5/1/2022 | Date(h): 2/6/1443 Status: In-Force Translated Document
Further to SAMA's instructions issued under Circular No. (41071604) dated 28/12/1441 H, which aim to encourage banks in providing the service of issuing banking documents and verifying their authenticity electronically, and as a continuation of SAMA's efforts to develop the financial sector and align with the latest digital technologies to facilitate banking transactions.
Enclosed are the regulations for the issuance and electronic verification of banking documents, aimed at enhancing the electronic services provided to banking sector customers and ensuring the reliability of electronically issued documents according to best practices.
For your information and adherence to these regulations starting from April 1, 2022G.
Chapter One: Introduction and Definitions
First/Introduction
These regulations aim to enhance the electronic services provided to banking sector customers, improving their quality and effectiveness according to best practices. They are designed to facilitate financial transactions by saving time and effort in obtaining banking documents and certificates, and to ensure the reliability of electronically issued documents.
Second/Definitions
The following terms -wherever they appear in these regulations- shall have the meanings specified next to each, unless the context requires otherwise:
Central Bank: Saudi Central Bank (SAMA)
Regulations: Regulations for the issuance and electronic verification of banking documents.
Bank: Banks licensed to conduct banking activities in accordance with the provisions of the Banking Control Law.
Banking Documents: Documents or certificates issued by banks at the customer's request for various purposes. Chapter Two: Issuance and Verification
First/Issuance of Banking Documents
1. The bank should utilize technological systems to process all customer requests for the issuance of banking documents.
2. The bank must provide the option to issue banking documents electronically in Arabic, and in English if requested by the customer.
3. The bank’s mechanism for providing electronic issuance of banking documents should ensure the following: 3.1 Compliance with technical requirements and regulations outlined in relevant systems and instructions, including but not limited to: the Personal Data Protection Law, the Electronic Transactions Law, the Cyber Security Framework, the Business Continuity management Framework, and any directives issued by SAMA or relevant authorities.
3.2 Inclusion in the banking documents of assurances regarding the protection and confidentiality of the information contained, and the responsibility of the bearer to maintain it.
3.3 Ensuring that the banking document meets the internal policies of each bank regarding its official status, such as stamps, signatures, and any measures that ensure the electronic document is considered equivalent to a paper document.
4. The bank should use clear and descriptive titles for banking documents that reflect their actual purpose.
5. The bank must include the date of issuance in all banking documents. Second/Electronic Verification of the Accuracy of Banking Documents
- The bank must provide an electronic verification service for all banking documents issued by it, whether (electronically or in paper form).
- The bank must include a clear explanation in the issued banking documents on how to perform the electronic verification.
- The bank must provide an electronic verification service for all banking documents issued by it, whether (electronically or in paper form).
Chapter Three: Banking Documents
8. The documents listed in this chapter represent the minimum required for issuance by the bank. The purpose indicated for each document should be considered in case of differences in their titles, as follows:
Document
Description
Bank Certificate: A document that confirms the existing relationship between the bank and the customer, including the account number, the date of account opening, and the total balance as requested by the customer.
Debt Confirmation: A document that details an outstanding debt of the customer to the bank, including the amount and the remaining debt.
Account Statement: A statement showing the account balance and transactions conducted during a period specified by the customer.
Clearance Certificate: A document in which the bank acknowledges that there are no outstanding financial obligations of the customer to the bank.
International Bank Account Number (IBAN) Certificate: A document confirming the client's International Bank Account Number (IBAN). Chapter Four: Final Provisions
- These guidelines do not invalidate the provisions outlined in related instructions and any subsequent updates.
- The bank must adhere to issuing banking documents within the timeframes specified by the relevant SAMA's instructions, and must inform the customer of the time required to issue the banking document upon request.
- The bank must implement procedures and measures to ensure compliance with these guidelines.
- The bank must educate customers on the process for issuing banking documents and verifying their authenticity electronically.
- The bank must periodically review the banking documents most frequently requested by customers to prioritize the provision of electronic issuance services for these documents.
- These guidelines do not invalidate the provisions outlined in related instructions and any subsequent updates.
Saudi Arabian Benchmark (SAIBOR/SAIBID)
No: 430418800000 Date(g): 13/12/2021 | Date(h): 9/5/1443 Status: In-Force Further to SAMA Circular No. 67/30986 dated 17/05/1440H concerning the Interbank Offered Rate (SAIBOR).
we would like to inform you that, based on the Saudi Central Bank Law issued by Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386H. And in line with international principles, recommendations, and best practices, and to maintain the quality and integrity of the Benchmark Rate. The instructions in the aforementioned circular have been updated to include improvements to the calculation mechanism for SAIBOR and SAIBID. Banks are required to:
- Adopt the updated mechanism and attached instructions for calculating the Benchmark Rate.
- Compliance with the updated code of conduct agreed upon between the entity responsible for calculating the Benchmark Rate and the banks contributing to its calculation.
- Carry out all necessary regulatory and contractual arrangements and treatments, including those related to existing contracts and financial, legal, regulatory, tax, and accounting matters, to implement the updated definitions and mechanism for calculating the Benchmark Rate.
- Review and update contract and agreement models as necessary to incorporate more flexible terms and provisions.
SAMA emphasizes that this circular does not exempt banks from the responsibility of conducting a regulatory and legal review, and taking necessary measures to address the status of relevant contracts and agreements. It is also the responsibility of the concerned bank to handle any failure to achieve the necessary treatments or settlements concerning these contracts and agreements.
The updated Benchmark Rate Instructions (SAIBOR/SAIBID) are attached, to replace the previous instructions issued under the aforementioned circular.
For your information and action accordingly as of 26 December2021G, noting that the transition process will take place gradually in accordance with the directions of SAMA.
1. Introduction
To maintain the quality and soundness of the Saudi Arabian Benchmark "SAIBOR/SAIBID", banks were instructed in 2017 to form a SAIBOR technical working group (TWG) under the supervision of SAMA. The TWG includes representatives from Saudi Banks, the benchmark administrator and the Saudi Central Bank. The members were tasked to review the integrity and robustness of the current Saudi Arabian Interbank Offered Rate (SAIBOR) and identify areas for enhancement.
The enhancements to SAIBOR/SAIBID below are compatible with International Organization of Securities Commissions (IOSCO) principles for financial benchmarks. These enhancements were the results of the TWG assessment of the existing methodology and the results of the contributor banks surveys, feedback from a public market consultation performed by the benchmark administrator on the key changes being made to the methodology and the results of the benchmark administrator testing phase to demonstrate how the enhanced methodology would perform as compared to existing SAIBOR.
The enhancement issued by SAMA in exercise of the authority vested under the Saudi Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued 22/02/1386H.
These requirements supersedes the previous requirements provided in Circular No. 30986/67 issued in 17/05/1440H.
2. Definition of SAIBOR/SAIBID
SAIBOR - The Saudi Arabian Interbank Offered Rate ("SAIBOR") benchmark is an indicative offer rate at which contributor panel banks would be able to borrow unsecured interbank funds in Saudi Riyals, anchored in transactions where possible together with a historical spread adjustment. A waterfall methodology is applied to enable a rate to be published in a wide range of market circumstances.
SAIBID - SAIBID is a benchmark representing the realized cost of contributor panel banks' wholesale unsecured funding in Saudi Riyals, anchored in transactions where possible. A waterfall methodology is applied to enable a rate to be published in a wide range of market circumstances.
3. Bank Calculation Methodology
3.1 SAIBOR and SAIBID will be based on contributor bank submissions, determined using a standardized waterfall methodology, as summarized below.
SAIBID Submission SAIBOR Submission Level 1
Where a SAIBOR contributor bank has sufficient eligible transactionsVolume Weighted Average Price (VWAP) only VWAP plus Spread Percentage Level 2
Where a SAIBOR contributor bank has insufficient eligible transactions to make a Level 1 submissionVWAP (including credit spread adjustment) VWAP (including credit spread adjustment) plus Spread Percentage Level 3
The SAIBOR contributor banks may only provide a Level 3 submission if there are insufficient eligible transactions to make a submission at Level 1 or Level 2. If there are transactions that would be eligible for Level 1 or Level 2, except that they took place prior to a move in policy rates, then the process described below under SAMA Policy Rate Moves shall be followed for the purpose of Level 3.Subject to process described SAMA Policy Rate Moves below, expert judgment will estimate the VWAP that would have been calculated had unsecured eligible transactions occurred in the last business day. Subject to process described in SAMA Policy Rate Moves below, expert judgment will estimate the VWAP that would have been calculated had unsecured eligible transactions occurred in the last business day and will include the Spread Percentage
3.2
The key terms set out in the above table and subsequently in this document will be defined as following:
■ Spread Percentage: As of the date of this Circular, the Spread Percentage is 16 per cent and represents the difference between SAIBOR and SAIBID across all relevant tenors for the most recent five years of publicly available data. The Spread Percentage will be applied to each submission in order to create the SAIBOR submission. The appropriateness of the level of Spread Percentage will be reviewed regularly on at least an annual basis and more frequently if required by market conditions. Under the review process, the benchmark administrator will consult with the panel of contributing banks and will amend the Spread Percentage subject to approval by SAMA.
■ Spread Cap: the Spread Percentage may be subject to a cap to be introduced and specified at the discretion of SAMA should market conditions require it. Following any such introduction of a Spread Cap, it shall be reviewed regularly on at least an annual basis and more frequently if required by market conditions. Under the review process, the benchmark administrator will consult with the contributing banks and will introduce or amend (as relevant) the Spread Cap subject to approval by SAMA.
■ Credit Spread Adjustment (Level 2): Saudi Riyal repo transactions used in Level 2 may be collateralized with any type of Saudi Riyal fixed income security. Such a secured transaction will typically be priced at a lower rate than an equivalent unsecured transaction. In order to maintain consistency with Level 1 submissions and the objective of SAIBOR, a contributor bank will use expert judgment to include a suitable credit premium in the VWAP created from the secured repo transaction(s) before making the Level 2 submission. Expert judgment may not be used for any other purpose for a Level 2 submission and is subject to the submission procedures and recording keeping requirements described under "Expert Judgment" below. The credit premium should reflect the nature and credit quality of the collateral used in the repo transaction(s) and result in a submission rate that is equivalent to an unsecured transaction rate.
■ Business Day: A "business day" for the purposes of a SAIBOR submission is defined as the 24 hour period from the start of the submission window on the previous business day until the start of the submission window on the current day of the submission.
■ Expert Judgment:
- Where expert judgment is used, the panel banks have the flexibility to determine its own expert judgment approach.
- Expert judgment approach must be properly documented in the SAIBOR internal submission procedures developed by each SAIBOR contributor bank. These submission procedures are subject to appropriate internal governance processes1. Each contributor bank will notify SAMA and the benchmark administrator of its submission procedures by no later than 31 December 2021 and at least annually thereafter. In addition, each contributor bank will notify SAMA and the benchmark administrator following any significant change to its submission procedures. In each case, notice will be provided by a contributor bank by submitting a copy of its submission procedures to SAMA and the benchmark administrator2. When submitting such submission procedures to SAMA and the benchmark administrator each contributor bank shall include a statement stating that the version of the submission procedures provided has been approved by its Board or its Board delegated authority.
- The SAIBOR internal submission procedures and records detailing the factors and judgment used in each daily submission must be available at all times to be shared with SAMA and/or the administrator upon request.
3.3 Contributor banks are required to implement a process whereby the Head of Asset and Liability Management (ALM) or similar position in the bank (without any role in proprietary trading) takes the responsibility for submission of the SAIBOR/SAIBID rates on a daily basis to the benchmark administrator independently without any influence from the bank's Treasurer or the Deputy Treasurer. Banks are required to obtain SAMA's approval for individuals in these roles as per SAMA circulated requirements for Appointments to Senior Positions in Financial Institutions Supervised by the Saudi Central Bank using SAMA standard fit and proper application.
3.4 Contributor banks must develop and implement reasonable submission procedures based on the applicable SAIBOR/SAIBID methodologies. The overall submission procedures should at a minimum include the following:
■ Eligible transaction and other data inputs in calculating submissions
■ Record the level of the waterfall used to calculate the submission;
■ Procedures to detect and evaluate the bona-fide nature of such transactions and inputs;
■ Policies guiding and detailing the use of expert judgment, including documentation;
■ Maintaining reports, records and underlying documentation supporting submissions;
■ Procedures for pre-submission validation of eligible inputs and procedures for review by senior staff to check inputs before submission.
3.5 The submission procedures should be approved by the Board or Board delegated authority and should be consistently applied. Each contributor bank should ensure that its Internal Audit Department undertakes an annual review of the process and of the methodologies and report to the relevant contributor bank's Senior Management, Audit Committee and the Board on the compliance with the established policies and procedures.
1 For the avoidance of doubt, each contributor bank's submission procedures shall property document its SAIBOR and SAIBID submission procedures in respect of the SAIBOR and SAIBID contributions to the benchmark administrator as detailed further in paragraph 2.4 below, including (but not limited to) eligible transaction and other data inputs in calculating submissions for Level 1, 2, and 3 submissions and policies guiding and detailing its expert judgment approach.
2 Copies of each contributor bank's submission procedures should be provided to: (1) SAMA at the following email address: BankingDataSection@SAMA.GOV.SA; and (2) the benchmark administrator at the following email address: FRCompliance@lseg.com.4. Minimum Eligible Transaction Size
A minimum size for each individual eligible transaction of SAR 10mm for the O/N, 1 week, 1 month and 3 month SAIBOR tenors. For 6 month and 12 month SAIBOR tenors, there is no minimum size for individual transactions to be eligible but the aggregate transaction size (that is, the combined size of all transactions used in the VWAP calculation for Level 1 or Level 2) must be equal to or greater than SAR 50mm in order for the VWAP to qualify for a SAIBOR submission.
5. Transaction Tenor Criteria
Benchmark submissions are currently computed for 6 tenors
Tenor Permitted maturity range Overnight 1 business day, and must be an overnight transaction 1 week 5 business days 1 month From 25 to 35 calendar days inclusive 3 month From 80 to 100 calendar days inclusive 6 month From 150 to 210 calendar days inclusive 12 month From 330 to 390 calendar days inclusive The qualifying ranges can be progressively tightened as the market deepens.
6. Transaction Window and Publication
SAIBOR will be published at 12:00pm KSA time. The transaction window for data collection will be as of 11:00am of the previous business day up and until 11:00am of the current business day. Subsequently, contributor banks will be able to submit their contributions to the benchmark administrator from 11:00am up until 11:50am.
7. Final Calculations and Averaging
Under the enhanced methodology, the following Minimum Contribution Criteria shall apply.
Contributions Received Number of High
Contributions
TrimmedNumber of Low
Contributions
Trimmed5 or more 2 2 4 or fewer N/A N/A
■
Where 5 or more contributions are received, the contributions will be applied with a trimming methodology where the 2 highest and lowest contributions, per tenor, are excluded from the calculation, once the trimming methodology has been applied, the SAIBOR rates will be calculated as an average of the remaining rate and published to 5 decimal places.
■ If fewer than 5 contributions are received by the time that SAIBOR is due to be published, the fallback arrangement described below will apply.
Fallback Arrangement
■ If the minimum 5 contributions are not received by 11:50am KSA time, a fallback arrangement is triggered. Triggering the fallback arrangement extends the contribution window by 30 minutes from 12:00pm to 12:30pm KSA time to accept additional contributions from contributor banks who have not contributed.
■ If the minimum contributions are reached by 12:30pm KSA time, the benchmark will be released. If not, the previous day's SAIBOR value will be republished together with a flag indicating a republication.
8. Contributor Banks Standards for Submission and Data Keeping
Banks expected to:
■ Submit SAIBOR/ SAIBID will reflect the true price of unsecured wholesale liquidity in the KSA Market.3
■ Maintain records and evidence to substantiate the rates submitted to the benchmark administrator.
■ In case of significant perceived credit deterioration of a SAIBOR and SAIBID contributing bank, Saudi Central Bank and the benchmark administrator will review the eligibility of the bank concerned.
3 Wholesale liquidity is defined as unsecured SAR funding from all sources for the banks with maturities of less than one year excluding retail deposits less than SAR 10million and equity.
9. Reporting to SAMA
Contributor banks are required to provide a monthly report on their interbank transactions using the SAMA SAIBOR/SAIBID monthly return (attached) within five (5) working days after the end of each month to BankingDataSection@SAMA.GOV.SA.
Annex 1: Eligibility Detailed Criteria
Waterfall Level Eligible Transaction Types Eligible Counterparty Minimum Transaction Size Minimum No. of Transactions Level 1 ■ Unsecured wholesale Saudi Riyal deposits received or raised by the SAIBOR contributor bank from an eligible counterparty.
■ Domestic primary and secondary market transactions by a SAIBOR contributor bank where it raises funds via unsecured certificates of deposit (CDs) and commercial paper (CPs) where such instruments are:- Denominated in Saudi Riyals;
- The transactions take place in the domestic KSA market; and
- Issued by the relevant SAIBOR contributor bank itself.
Exclusions:- Structured deposits- Internal transactions such as transactions with a subsidiary (including a subsidiary that is a fund and including transactions between contributor bank branches and its head office).- Unsecured deposits made by SAMA unless expressly advised otherwise by SAMA and where transacted at market prices.- Transactions which have been Entered into outside of the applicable lookback period. See Lookback Period below.- Transactions that occurs before a move in the repo or reverse repo policy rates by SAMA. See SAMA Policy Rate Moves below.
■ Banks■ AH central banks4■ Government Related Entities (GREs)■ Non-bank Financial Institutions■ Corporates and all retail segments (that meet the required minimum threshold amount)■ O/N, 1 week, 1 month and 3 month SAIBOR tenors - minimum size for individual transactions of SAR 10mm■ 6 month and 12 month SAIBOR tenors:■ no minimum size for individual transactions.■ -aggregate transaction size of all transactions used in the VWAP calculation must be equal to or greater than SAR 50mm.■ Transactions with a minimum of 2 different counterparties, provided if only one eligible transaction has taken place following a move in policy rates by SAMA during the Lookback Period, that single transaction shall be used to make a Level 1 submission.Level 2 ■ Saudi Riyal repo transactions (excluding those with SAMA) which have the economic effect of the contributing bank being the receiver (i.e. borrower) of Saudi Riyals. All types of Saudi Riyal fixed income securities are permitted collateral for an eligible repo transaction.Exclusions:- Internal transactions such as with a subsidiary (including a subsidiary that is a fund and including transactions between contributor banks between contributor banks branches and its head office).- Repo transactions with SAMA.- Transactions that occurs before a move in the repo or reverse repo policy rates by SAMA. See SAMA Policy Rate Moves below.As per Level 1 As per Level 1 A Level 2 submission may be made using a single eligible repo transaction. Level 3 Subject to the "Sama Policy Rate Moves", acceptable Level 3 inputs that may be used to form the expert judgment used to determine a Level 3 submission are5:■ Transactions that are outside the specified tenor buckets;■ Interpolation/extrapolation (from transactions in the markets underlying Level 1 and Level 2);■ Other market instruments: interest rate swaps, money market operation rates, forward rate agreement/single period swaps, overnight-indexed swaps, SAMA bills;■ Macro-economic factors (monetary policy change, policy rate change in major economies & significant economic data);■ Credit standing i.e. a published and verifiable change in the credit standing of the bank; and■ Other factors: those that can be evidenced and verified, as agreed with a contributor panel bank's internal compliance and risk.The key terms set out in the above table be defined as following:
■ Lookback Period: When identifying eligible transactions for Level 1 or Level 2, a SAIBOR contributor bank must first use transactions executed during the last business day. If there are insufficient eligible transactions in the last business day, the SAIBOR contributor bank may extend the period to the last two business days. This process may be repeated, extending the period by one business day at a time, until either sufficient eligible transactions have been obtained or until a maximum of five business days has been reached.
For the avoidance of doubt, the process of looking back by one extra day at a time (up to a maximum of 5 business days and subject to any moves in policy rates by SAMA) must be completed for Level 1 before the contributor bank moves to Level 2. If sufficient eligible transactions are found in the Lookback Period for Level 1, these will be used to create a submission even if more recent transactions exist that would be eligible for Level 2.
Banks are allowed to use Level 3 inputs without any restriction on maximum number of business days.
■ SAMA Policy Rate Moves: No transaction that occurs before a move in the repo or reverse repo policy rates by SAMA will be an eligible transaction for Level 1 or Level 2. This also applies intraday: any transaction that occurs before a policy rate during a business day will not be an eligible transaction. The following process shall apply following a policy rate move by SAMA:
1. Eligible transactions that take place after the policy rate move will be used to make a Level 1 submission. If there are insufficient eligible transactions (see Level 1 eligibility criteria above) following such a move during the maximum five day look back period, Level 2 will be used.
2. Eligible transactions that take place after the policy rate move will be used to make a Level 2 submission. If there are insufficient eligible transactions (see Level 2 eligibility criteria above) following such a move during the maximum five day look back period, Level 3 will be used.
3. Where Level 3 is used following a policy rate move by SAMA, both Level 1 eligible transactions and also Level 1 transactions that would have been eligible except for the fact that they took place before the move in policy rates by SAMA will be used, when exercising expert judgment, to create a VWAP, subject to the process described under Lookback Period above. The VWAP will then be adjusted by the SAIBOR contributor bank to adjust for the effect of the move in policy rates. Such adjustment will be in accordance with the contributor bank's documented internal submission procedures. Submissions for SAIBOR will include the Spread Percentage adjustment to the final VWAP and submissions for SAIBID will exclude the Spread Percentage adjustment to the final VWAP.
4. Where Level 3 is used following a policy rate move by SAMA and there are insufficient Level 1 eligible transactions (see Level 1 eligibility criteria above) to create a submission even when including Level 1 transactions that took place before the move in policy rates, then both Level 2 eligible transactions and also Level 2 transactions that would have been eligible except for the fact that they took place before the move in policy rates by SAMA will be used to create a VWAP, subject to the process described under Lookback Period above and including the adjustment for the credit premium detailed above under "Credit Spread Adjustment (Level 2)". For the purposes of exercising expert judgment, the VWAP will then be adjusted by the SAIBOR contributor bank to adjust for the effect of the move in policy rates. Such adjustment will be in accordance with the contributor bank's documented internal submission procedures. Submissions for SAIBOR will include the Spread Percentage adjustment to the final VWAP and submissions for SAIBID will exclude the Spread Percentage adjustment to the final VWAP.
5. If there are insufficient transactions for both Level 1 and Level 2 including transactions that took place prior to a policy move by SAMA, expert judgment alone will be used by a SAIBOR contributor bank to make a submission.
6. Where a VWAP is adjusted at Level 3 as described above, the size of the adjustment should not exceed the size of the move in policy rates by SAMA except where the SAIBOR contributor bank has strong reasons to believe that a larger adjustment is required to ensure that the submission is representative of current market conditions. In all cases where expert judgment is used including such VWAP adjustments, a contributor bank must record all the factors used in determining the submission it makes as detailed under "Expert Judgment" above.
4 Including SAMA deposits but only where transacted at market prices and are specified for inclusion by SAMA
5 Level 3 should represent the Bid-side of the market but SAIBOR submissions determined using Level 3 should include the Spread Percentage (see table in Section 2.2)SAMA SAIBOR/SAIBID Monthly Return
Instruction guidelines
How to report the data
Scope of consolidation
The information is asked at the solo domestic level of each bank.
Reference date
The reference date should be 30/31 of each month.
Completeness of the analysis
Please provide your responses on the relevant cells in the excel file without modifying the format of the templates.
Quantitative information
The quantitative responses should be amounts in SAR '000. The Bank's input for SAIBOR/SAIBID rate each day should be included in all tabs 'SAIBOR', 'SAIBID' and 'Other info’
Qualitative information
Please provide specific responses to the qualitative questions at a sufficient level of detail to achieve the objectives of the return.
Sample data
We have taken a sample example to demostrate how the return should be filled.
Contact persons
Kindly refer to SAMA's SAIBOR/SAIBID circular for report submission details which can be found under "Reporting to SAMA"
Deadline for submission
5 working days
Name of the Bank Reporting period
SAR Interbank Lending Transactions (SAIBOR)
Trade Date Transaction rate Name of the counterparty (kindly use official name) Maturity date Duration in number of days Bank's input for SAIBOR rate If transaction rate is different from input rate, state reasons 29/05/21 100,000 1.10 ABC Bank 30/05/21 1 1.25 Name of the Bank Reporting period
SAR Interbank Borrowing Transactions (SAIBID)
Trade Date Transaction rate Name of the counterparty (kindly use official name) Maturity date Duration in number of days Bank's input for SAIBOR rate If transaction rate is different from input rate, state reasons 29/05/21 100,000 0.75 ABC Bank 30/05/21 1 0.80 Name of the Bank Reporting period
List all bid/offer transactions undertaken at the bank's offered/bid rates
Date Bank's input for SAIBOR rate Number of transactions not undertaken at offered rates Number of transactions Name of customers (kindly use Official name) Rate offered Tenor (no. of days) Reasons for not undertaking 29/05/21 1.25 1 ABC Bank 1.30 100,000 30 Customers negotiating a lower rate 29/05/21 1.25 2 CBA Bank 1.45 50,000 90 No interest in 90 days 29/05/21 1.25 4 DEF Bank 1.25 50,000 7 Customers demanding a lower rate than SAIBOR Date Bank's input for SAIBOR rate Number of transactions not undertaken at offered rates Number of transactions Name of customers (kindly use Official name) Rate offered Tenor (no. of days) Reasons for not undertaking 29/05/21 0.90 1 ABC Bank 0.90 75,000 60 Banks not willing to offer at SAIBOR rate
Charging Policy for Cross Currency Payments Using "AFAQ" Service
No: 43038107 Date(g): 2/12/2021 | Date(h): 27/4/1443 Status: In-Force
Further to SAMA Circular No. (42068309), dated 24/9/1442H, regarding the Operating Rules for Cross Currency Payments using "AFAQ" Service for the local banking sector.Please find attached the Charging Policy for Cross Currency Payments using AFAQ Service.
For your information and action accordingly as of 8/5/1443 H corresponding to 12/12/2021 G.
1. Definitions
In this document, the following terms will have the following meanings except as the context may otherwise require:
Term Definition SAMA Saudi Central Bank. GPC Gulf Payments Company. AFAQ Arabian Gulf System for Financial Automated Quick Payment Transfer Cross-Currency
PaymentPayment from the bank of one country to a bank from another country through the GCC RTGS Central Component. The Paying Bank sends funds in its country domestic currency, and the Receiving bank receives funds in its country domestic currency. Operating Rules Operating Rules for Cross Currency Payments using AFAQ Service Pilot Phase The period of time commencing upon April 19, 2021 until close of business on July 17, 2021 2. Introduction
2.1 General
The ''Arabian Gulf System for Financial Automated Quick Payment Transfer" (AFAQ) is the Real Time Gross Settlement service for cross-currency cross-border payments between Gulf Cooperation Council (GCC) Countries; that is owned and managed by the National Central Banks (NCBs) of the six GCC countries (Kingdom of Saudi Arabia, United Arab Emirates, Kingdom of Bahrain, Sultanate of Oman, Qatar and Kuwait).
AFAQ Service is in line with the Charter of the Cooperation Council for the Arab States of the Gulf, which aims at achieving closer convergence and stronger links among the GCC countries, reaching advanced economic and financial integration, promoting collaboration, integration, interconnectedness and all aspects of cooperation among the GCC member states and their people at all levels.
AFAQ service has been designed to effectively mitigate frictions associated with conventional cross border payments; namely cost, speed and transparency. This innovative service would serve to bring down the cost of executing cross border payments incurred by relevant stakeholders within the ecosystem.
2.2 Purpose
With the aim of Facilitating cross-border payments in the region, providing essential infrastructure to enable the on-going integration of financial markets across the GCC region, utilizing the advantages of real-time gross settlement, Encouraging closer financial and economic integration between the GCC countries; SAMA has implemented a Specific Model in which functions of the Domestic RTGS system for both Sending and Receiving cross-border payments will be performed at the AFAQ Service's Central Component hosted technically by the Gulf Payments Company (GPC); While controlled, supervised & operated by SAMA according to the operating Rules.
2.3 Statuary Authority
Without prejudice to Saudi Central Bank "SAMA" rights under applicable laws and regulations, this Charging Policy is constituted by SAMA in exercise of the powers stipulated in the Saudi Central Bank Law dated 11/04/1442H (26.11.2020); Designating SAMA as the competent authority to Establish, Develop & Operate national infrastructures for Payment, Clearing & Settlement systems; Issue rules, guidelines, and licenses; Control and Oversee Payment, Clearing & Settlement systems within its sphere of competence.
2.4 Scope
Fees are levied by SAMA on the Participants for the use of the Service. Fees are levied under the following headings:
• Service & Transaction Fees charged to the Sending Participant according to the volume of messages sent by that Participant.
• Exceptional and Penalty fees aimed at encouraging best practice to ensure the smooth functioning of the overall service for the benefit of all Participants and their customers.
2.5 Amendment
SAMA may amend, replace or supplement the contents of this Charging Policy as it deems fit; in consultation with Participants. Such amendment will be duly notified to Participants.
2.6 Compliance
Each Participant will comply with this Charging Policy.
3. Service & Transaction Fees
3.1 Participant Membership Fee
SAMA will charge an annual charge of SAR 50,000.00 to cover the expenses incurred in regards to operating & maintaining the Service.
3.2 Discounted Participant Membership Fee
Participants joining AFAQ within the first 6 months after completion of the Pilot Phase will receive a 50% reduction on the Participant Membership Fee.
During the discount period of 6 months, the amount of the Participant Membership Fee will be calculated as 1/12th of the annual fee for each month or part thereof from the date of joining.
From the start of the seventh month after completion of the Pilot Phase, Participant Membership Fee will revert to the full annual charge of SAR 50,000.00
3.3 Transaction Fees
A fee of SAR 12.00 will be charged for each payment message sent by the Participant.
3.4 Discounted Transaction Fees
No transaction fees will be charged during the Pilot Phase.
For a period of 6 months from the completion of the Pilot Phase, a discount on the transaction fees will apply resulting in a fee of SAR 10.00 to be charged for each payment message sent by the Participant.
From the start of the seventh month after completion of the Pilot Phase, transaction fees will revert to SAR 12.00 for each payment message sent by the Participant.
4. Exceptional and Penalty Fees
Penalty fees and charges intended to encourage best practices and to ensure the smooth operation of the Service will be charged to Participants who fail to meet the required standards.
These Exceptional and Penalty fees aren't expected to yield any significant income to SAMA, as Participants can avoid such charges by adopting the best practices, which this type of fee is intended to promote.
4.1 Cut-off time extension
When a Participant wishes to have the cut-off time on any day extended, a formal request must be submitted to SAMA by whatever communication facility is agreed with SAMA at the time. Such requests should be sent to SAMA as early as possible.
If the request is approved by SAMA, a penalty fee will be charged to the Participant requesting or causing the cut-off time extension. The amount of the fee payable will be SAR 25,000.00 for each period of 30 minutes by which the cut-off time is to be extended.
4.2 Late Return of Payments
The Operating Rules specify latest times governing the return of payments by a Receiving Participant. If the payment is returned after the specified time, a penalty fee of SAR 100.00 will be charged for the late return of payment.
SAMA may levy an additional charge based on the amount of the payment returned.
Any Participant that receives a Return Payment later than that set out in the operating Rules shall forward the details to SAMA.
5. Payment of Invoices
Invoices will be issued by SAMA to Participants in respect of AFAQ as follows:
• Transaction Fees will be invoiced to Participants on a monthly basis.
• Participant Membership Fees will be issued to Participants yearly in advance. During the 6 month discount period set out in Section 3.2 above, invoices for Participant Membership Fees will be issued at the time of joining.
• Exceptional & Penalty Fees will be charged to Participants on a case-by-case basis.
All fees are payable within 10 business days of receipt of the relevant invoice by the Participant.
If the designated fee is not paid within 10 business days, A penalty fee of SAR 1,000.00 will be charged for late payment.
6. FX Margin
Given the fact that the FX Rate is guaranteed by the respective central banks during the daily operations of AFAQ & taking into consideration that Participants wouldn't incur FX rate risk, cost of funding foreign currencies or other costs associated with the conventional correspdent banking model, No FX margin may be applied.
7. Fees charged to Customers
Whilst a Participant opting for charging fees to remitters is urged to set discounted & competitive fees with the aim of encouraging the use of the Service & in alignment with the Banking Tariff communicated by SAMA, the tariff which may be charged to a Customer by a Participant for sending a cross currency payment using AFAQ Service must not exceed the allowable maximum fee for cross border transfers as illustrated in the Banking Tariff; as amended from time to time.
8. Other Exceptional and Penalty fees
SAMA may charge additional appropriate penalty fees where there is,
• A breach of the Operating Rules,
• Non-compliance with any of the timings set by SAMA in the Daily Business Cycle,
• Contravention of any of the conditions stated in this Charging Policy, or,
• Any other circumstances that SAMA deems to be not in the best interest of the smooth functioning of the Service.
Appendix 1
Service Fees
Fee Type Fee Scale Pilot
PhaseDiscount Period of 6
MonthsAfter The Discount Period And Subsequent Years * Participant Membership fees OSAR SAR 25,000.00
(1/12th for each month or part thereof) = 12,500.00 SAR
SAR 50,000.00 Transaction Fees
Fee Type Fee Scale Pilot
PhaseDiscount Period of 6
MonthsAfter The Discount Period And Subsequent Years *Transaction fees OSAR SAR 10.00
per payment message
SAR 12.00
per payment message
Appendix 2
Exceptional & Penalty Fees
Penalty Type Fees Scale Participant who returned the payment ,late 100.00 SAR
per payment message
Participant requests to have the cut-off time on any day extended 25,000.00 SAR
for each 30 minutes extension
A breach of the Operating Rules. Penalty amount will be determined by SAMA Non-compliance with any of the timings set in the Business Day Timetable. Contravention of any of the conditions set out in the Charging Policy. Any other circumstances that SAMA deems to be not in the best interests of the smooth functioning of the Service. Initial Public Offering (IPO) Rules for Receiving and Lending Banks
No: 43060832 Date(g): 9/2/2022 | Date(h): 8/7/1443 Status: In-Force Based on the powers granted to the central bank for the supervision and oversight of the banking sector in the Kingdom, and in reference to the SAMA's circulars regarding the role and participation of banks in Initial Public Offering (IPO), Circular No. 38399/MAF/588, dated 12/11/1426H, Circular No. MAF/337, dated 8/11/1425H, and Circular No. 333/MAF/200, dated 22/8/1413H, and the General Rules for Regulating underwriting transactions by Saudi joint stock companies.
We would like to inform you that SAMA has introduced new Initial Public Offering (IPO) Rules for Receiving and Lending Banks. These rules aim to ensure that banks participating as receiving or lending banks in IPOs in the financial market effectively manage the potential risks they may be exposed to.
For your information and action accordingly as of this date.
1. Introduction
These Rules are issued by Saudi Central Bank (SAMA) in exercise of the powers vested upon it under its Law issued by the Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued by the Royal Decree No. M/5 dated 22/02/1386H and the Rules for enforcing its Provisions issued by Ministerial Decision No. 3/2149 dated 14/10/1406H.
These Rules shall supersede the previous instructions issued by SAMA related to the role and participation of banks in IPOs in connection to Circular No. 38399/MAF/588 dated 12/11/1426H and No. MAF/337 dated 8/11/1425H and 333/MA/200 dated 22/8/1413H, and the circular on the general rules regulating underwriting transactions by Saudi joint stock companies, with an emphasis on compliance with these rules in line with the rules, instructions and other regulatory requirements issued whether by SAMA or other legislative authorities, where applicable.
2. Definitions
1. The following terms and phrases, wherever mentioned herein, shall have the meanings assigned to them unless the context otherwise requires:
Term Definition SAMA Saudi Central Bank Receiving Bank A receiving bank that collects and processes application forms and subscription amounts from retail subscribers within an IPO. For an IPO with more than one receiving bank, the term “receiving bank” includes the main receiving bank or a sub-receiving bank. Lending Bank A bank that extends credit facilities to its clients for the purpose of facilitating their subscription for securities in an IPO. Issuer A person who issues or intends to issue securities. Securities A security is a document that shows a person’s legal ownership of a share in a joint stock company and reflects a financial value. Offering Period It includes the period of registration of subscription applications, the process of book building, the payment of the subscription value, and the final allocation of offered shares. Related Parties The parties outlined in Article 2, Paragraph 6 of the first update to SAMA Related Parties Rules for Banks vide SAMA’s Circular No. 41045379 dated 01/07/1441H. Exposures The Exposures outlined in Article 3.1, Paragraph 4 of the Large Exposure Rules for Banks vide SAMA’s Circular No. 67/1651 dated 09/01/1441H. Retail Subscribers A natural person who is not a legal entity nor of high net worth. High-Net-Worth Subscribers Natural persons with high solvency who are classified according to the limits and criteria of the bank, provided that their assets under the bank’s management are not less than SAR 5 million. Legal Entities A legal entity such as commercial institutions, companies, government and semi-government sectors, and financial institutions or a group of persons and/or entities that come together for a specific purpose and form a legal entity. Government Offering The IPO of a company’s Securities in which the Saudi government, or any entity directly or indirectly affiliated with it, owns 51% or more. 3. Objective
2. These Rules aim to assist a Receiving Banks or a Lending Bank Involved in an IPO of Securities in setting the minimum policies and procedures to reduce the potential risks to which they may be exposed.
4. Scope
3. These Rules apply to all banks that take part in an IPO of Securities, whether inside or outside Saudi Arabia, in the capacity of:
a. Lending Bank and/or;
b. Receiving Bank.
5. Governance
4. Banks shall incorporate the provisions of the Rules into its policies and procedures, and take the necessary measures to ensure compliance with them. Banks shall also apply, at a minimum, the following governance procedures:
a. Banks’ board of directors, or their authorized delegate, shall be responsible for setting the criteria for participation as a Lending Bank or a Receiving Bank.
b. Banks shall prove its ability to take part in an IPO and undertake its role prudently and efficiently, by possessing the financial and operational capacity that includes the resources, systems and procedures necessary to manage the associated risks.
c. Banks shall set procedures to monitor IPO-related activities, and comply with the requirements contained in these Rules.
5. Banks may not contravene its internal policies related to financing programs or other programs without obtaining the approval of the bank’s board of directors or its authorized delegate.
6. Banks shall ensure the effectiveness of all relevant systems before commencing an IPO.
6. Risk Management and Operational Capabilities
6.1 Lending Bank
7. A bank that wishes to participate in an IPO as a Lending Bank shall apply, as a minimum, the following:
a. The policy and procedures related to the financing of Securities shall be documented and adequately cover all the main risks that the bank may be exposed to.
b. Adhere to credit policies approved by the bank, and limit the total Exposures in each IPO within an amount that does not exceed the bank's ability to meet its obligations on the settlement date.
c. Follow the internal policies of guarantees, or any other related policies.
d. Conduct a comprehensive analysis, prior to financing the purchase of Securities, that at least includes the potential impact on the Capital Adequacy Ratio (CAR), Loan-to-Deposit Ratio (LDR), SAMA Liquidity Ratio, Liquidity Coverage Ratio (LCR), the Net Stable Funding Ratio (NSFR), Leverage Ratio, Large Exposure limits, and Exposures limits to Related Parties, taking into account the relevant instructions issued by SAMA.
6.1.1 Lending Limits
8. The Leverage Ratio for retail subscriptions shall not exceed 50% of the amount to be subscribed for each Retail Subscriber, with a maximum financing limit not exceeding 2 million Saudi Riyal.
9. Both High-Net-Worth Subscribers and Legal Entities are excluded from Paragraph 8 above. However, the bank shall follow its approved credit standards, and limit the total Exposures to an amount within the risk appetite of the subscriber (credit lines).
10. Banks shall not exceed the Exposures limits stipulated in the relevant instructions issued by SAMA.
6.2 Receiving Bank
11. A bank that wishes to participate in an IPO as a Receiving Bank shall apply, as a minimum, the following:
a. Have a clear understanding of the respective role and responsibilities of the Receiving Bank and the Issuer of an IPO. This shall be clearly defined in the Receiving Bank agreement.
b. Only undertake the role commensurate with its financial and operational capacity, and to conduct a thorough analysis in advance of the potential financial impact arising from an IPO.
6.2.1 Operational Capabilities
12. If a bank has not previously acted as a Receiving Bank in an IPO, or is wishing to act as a Receiving Bank in a large-scale IPO or a government offering, the bank shall notify SAMA in advance and, in particular, prove its financial and operational capacity to process the share applications in accordance with Paragraph 11-b above. It shall also prove its ability to manage the subscription amounts and recycle the application monies in the money market when needed.
13. If a bank intends to act as a Receiving Bank in a large-scale IPO or Government Offering, it shall have sufficient experience and a track record in acting as a Receiving Bank.
14. Banks shall give proper consideration to the number and readiness of branches or any other channels to be designated as channels for receiving subscription applications, and ensure the adequacy of arrangements to meet the expected demand of subscribers.
15. The bank shall ensure that it is fully qualified and conversant with IPO process, while ensuring concentrating its resources and effecting its relevant policies. For large-scale IPOs or government offerings, the bank shall establish a temporary internal committee to coordinate the receipt of information on the subscription and escalate to senior management if necessary.
16. In determining whether an IPO is of a large scale for the bank for the purposes of paragraphs 12, 13 and 15 above, the bank shall benchmark the scale of the IPO against its own financial capacity (capital base) by multiplying the expected share price by the number of shares to be issued and dividing the result by the bank’s Tier 1 regulatory capital. If the resulting percentage is equal to or greater than 100%, the IPO will be considered of large scale. Factors to be considered include the estimated value of subscription monies to be recycled, the general trends in the stock market during the IPO, and the expected level of demand from subscribers.
17. The Receiving Bank shall agree in advance with the Issuer and approve a plan to deal with the high levels of demand for purchasing Securities in the IPO process. The plan must include - at least - the following considerations:
a. Possibility of adding branches to receive subscription applications if needed, including making relevant announcements.
b. Possibility of using another Receiving Bank to assist in receiving or processing applications.
c. Possibility of extending working hours to receive applications, if possible.
d. Arrangements for printing and distributing additional copies of subscription application forms and prospectuses, if needed.
e. Arrangements to hire additional staff, if necessary.
18. The Receiving Bank shall work closely with the Issuer during the IPO process to determine the need for contingency measures in accordance with the approved plan, as required.
6.2.2 Liquidity Requirements
19. Banks shall effectively manage its balance sheet and plan well in advance to ensure continuous compliance with the LDR, SAMA Liquidity Ratio, LCR, NSFR, and any other liquidity requirements required by SAMA.
20. Banks shall review the collateral pledged with SAMA and their daytime limits to ensure they have sufficient collateral to cover large intraday transfers and liquidity needs during the IPO process.
21. Banks shall take due diligence when recycling application monies in the money market, if needed. A Receiving Bank is encouraged to participate in the interbank lending, as needed.
7. Cybersecurity
22. Banks shall establish appropriate precautionary cybersecurity controls to protect the information assets and data of banks and subscribers from cyberattacks, taking into account compliance with the regulatory requirements related to cybersecurity.
23. Banks shall ensure that controls related to cybersecurity monitoring are applied to all systems and applications used in the IPO process. The monitoring incident response capabilities shall be governed by the cybersecurity incident response policy, and ensuring the readiness of incident response teams.
24. Banks shall conduct a comprehensive testing program to ensure cyber resiliency and controls effectiveness of the systems and applications used in the IPO process, including - but not limited to - the following:
a. Vulnerability assessment and penetration testing.
b. Cybersecurity compromise assessment.
25. Banks shall ensure operational resiliency by testing a range of potential disruptive scenarios, in line with regulatory requirements related to business continuity management.
26. Banks shall implement preventive measures to reduce the risks arising from the third-party and service providers dependencies and should also ensure the readiness of third-party arrangements to support the systems and applications involved in the IPO process.
8. Subscription Surplus Refund
27. Banks shall establish documented procedures to refund the value of the subscription surplus, if any, after share allocation.
28. Banks shall inform subscribers of the subscription surplus refund process and timeline. The surplus amount shall be refunded to the subscriber's account via electronic means only.
29. In the event of IPO cancellation or incompleteness, banks shall return the entire subscription amounts to the subscriber’s account via electronic means only, according to the respective timetable.
30. Banks shall exercise due diligence in handling subscription amounts refunds and, at minimum, shall verify the identity of the subscriber before refunding the amount.
9. Reporting
31. Banks shall submit to SAMA an IPO data report based on the following:
a. End of Offering Period report.
b. In the event that an IPO falls under the definition of a large-scale IPO or a Government Offering, reports shall be submitted on daily basis during the Offering Period.
32. Reports shall be submitted to SAMA within a maximum of one working day based on abovementioned instructions.
33. Reports shall be submitted to SAMA via e-mail: BankingDataSection@SAMA.GOV.SA
34. SAMA, at its sole discretion, may apply Article 31-b to subscriptions that do not fall under the definition of a large-scale IPO or Government Offering.
10. Implementation and Effective Date
35. These Rules shall come into force from issuing date.
Instructions on Periods of Issuing the Clearance Letter and Executing Requests for Account Transfer and Debt Transfer
No: 43023350 Date(g): 21/10/2021 | Date(h): 15/3/1443 Status: In-Force Translated Document
Based on the authorities vested to SAMA under its law issued by Royal Decree No. M/36 dated 11/4/1442H, the Banking Control Law issued by Royal Decree No. M/5 dated 22/2/1386H, and the Finance Companies Control Law issued by Royal Decree No. M/51 dated 13/8/1433H, and in reference to the timeframes for issuing clearance letters, account transfers, and debt transfers outlined in various related instructions of SAMA
Attached are the instructions on timeframes for issuing clearance letters, account transfers, and debt transfers, which supersede the time-frames specified in various related instructions of SAMA. Exceptions to these instructions include cases subject to judicial decisions and ongoing cases before the competent authorities.
To take note and act accordingly within thirty working days from its date.
Chapter One: Definitions and General Provisions
1. Definitions
The following words and phrases, wherever they appear in these instructions, shall have the meanings set forth below, unless the context requires otherwise:
Central Bank: The Saudi Central Bank.
Instructions: Instructions on timeframes for issuing clearance letters, account transfers, and debt transfers.
Financial Institutions: Banks and finance companies under the supervision and regulation of SAMA.
Banks: Banks licensed to conduct banking activities in accordance with the provisions of the Banking Control Law.
Customer: An individual benefiting from the products or services of financial institutions.
Account Transfer: The process of transferring a customer's account balance from one bank to another, with the closure of the original account.
2. General Provisions
2.1 These instructions aim to specify the timeframes that financial institutions must adhere to when receiving a customer's request for issuing a clearance letter, transferring an account, or transferring debt. This is intended to protect customers, ensure fairness in transactions, and promote competition.
2.2 These instructions do not affect the provisions outlined in related instructions or any subsequent updates, including, but not limited to, the following:
- Banking Consumer Protection Principles as communicated by SAMA Circular No. (341000095960) dated 3/8/1434H.
- Regulations For Consumer Financing as per SAMA Circular No. (351000116619) dated 10/9/1435H.
- SAMA Circular No. (361000083199) dated 11/6/1436H concerning Consumer Financing Buyout.
- Regulations of Issuance and Operating of Credit and Monthly charge Cards as communicated by SAMA Circular No. (361000090389) dated 26/6/1436H.
- Finance Consumer Protection Principles as communicated by SAMA Circular No. (361000110320) dated 14/8/1436 H.
- SAMA Circular No. (39100028242) dated 10/3/1439H regarding the Transfer of the Real Estate Financing Debts.
- SAMA Circular No. (391000086876) dated 9/8/1439H concerning the Transfer of Mortgage Loans.
Chapter Two: Timeframes for Processing Customer Requests
3. Clearance Letter
Financial institutions must process the customer's request for issuing a clearance letter - regardless of its purpose, including salary transfers - provided there are no outstanding financial obligations from the customer, within a timeframe not exceeding one business day from the date of receiving the request. For customers with a credit card and/or monthly debit card, this timeframe extends to seven business days.
4. Account Transfer
Banks must process the customer's request to transfer an account within a timeframe not exceeding one business day from the date of receiving the request.
5. Debt Transfer
5.1 Consumer Finance:
Financial institutions (debt sellers) must process the customer's request to transfer debt by completing the necessary consumer finance debt transfer forms within a timeframe not exceeding one business day from the date of receiving the request.
5.2 Real Estate Finance:
A-Financial institutions (debt sellers) must process the customer's request to transfer real estate financing debt by completing the necessary real estate financing debt transfer forms within a timeframe not exceeding three business days from the date of receiving the request.
B- Financial institutions (debt sellers) must complete the processing of the customer's request within a timeframe not exceeding five business days from the date of receiving the approval of the financing entity (the institution wishing to purchase the debt) for the debt transfer.
Chapter Three: Final Provisions
- Exceptions to these instructions include cases subject to judicial decisions and ongoing cases before the competent authorities.
- Financing entities must take all necessary measures to ensure compliance with the timeframes specified in these instructions. They should utilize technological systems and electronic services to process customer requests, including the issuance and electronic verification of documents.
- The timeframes outlined in these instructions replace those specified in other related SAMA instructions.
- Exceptions to these instructions include cases subject to judicial decisions and ongoing cases before the competent authorities.
Operating Rules for Cross Currency Payments using AFAQ Service
No: 42068309 Date(g): 5/5/2021 | Date(h): 24/9/1442 Status: In-Force In reference to the Gulf Instant Payment Settlement System "AFAQ", which aims to provide a unified environment for financial transactions between the Gulf Cooperation Council (GCC) countries and offer financial services to customers of all categories by enabling and facilitating cross-border transfers in a fast, secure, and efficient manner. This system serves as a tool to ensure the flow of payments in the local banking sector and supports bilateral and multilateral trade activities, contributing to enhancing economic cooperation and integration among the GCC member states.
Attached is the document regarding the "Operating Rules for Cross Currency Payments using AFAQ Service for the local banking sector".
For your information and implementation as of the current date.
1. Definitions
In this Operating Rules, the following terms will have the following meanings except as the context may otherwise require:
Term Definition SAMA Saudi Central Bank. NCB National Central Bank (NCB) or Monetary Authority of each of the six GCC countries. GPC Gulf Payments Company. AFAQ Arabian Gulf System for Financial Automated Quick Payment Transfer Confirmed
Exchange RateThe exchange rate to be used for conversion between a pair of GCC currencies. This rate is confirmed and guaranteed by the relevant NCBs on every Business Day for use throughout that Business Day. Cross-currency payment Payment from the bank of one country to a bank from another country through the GCC RTGS Central Component. The Paying Bank sends funds in its country domestic currency, and the Receiving bank receives funds in its country domestic currency. CSM Country Specific Model. Domestic RTGS The RTGS system operated by each NCB for processing domestic and eligible cross-currency cross-border payments.
The Domestic RTGS systems act in both Sending and Receiving mode. For clarity purposes in this OR references to the "Receiving Domestic RTGS" and "Sending Domestic RTGS" are used to illustrate various actions performed by these systems while they are acting in either Receiving or Sending mode.
AFAQ CC The Central Component (CC) of the AFAQ Service. OR Operating Rules. RPG Regional Payment Gateway. The RPG acts in both Sending and Receiving mode. Arbitrage The simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same currency or asset. 2. Introduction
2.1. General
The "Arabian Gulf System for Financial Automated Quick Payment Transfer" (AFAQ) is the Real Time Gross Settlement service for cross-currency cross-border payments between Gulf Cooperation Council (GCC) Countries; that is owned and managed by the National Central Banks (NCBs) of the six GCC countries (Kingdom of Saudi Arabia, United Arab Emirates, Kingdom of Bahrain, Sultanate of Oman, Qatar and Kuwait).
AFAQ Service is in line with the Charter of the Cooperation Council for the Arab States of the Gulf, which aims at achieving closer convergence and stronger links among the GCC countries, reaching advanced economic and financial integration, promoting collaboration, integration, interconnectedness and all aspects of cooperation among the GCC member states and their people at all levels.
2.2. Purpose
With the aim of Facilitating cross-border payments in the region, providing essential infrastructure to enable the on-going integration of financial markets across the GCC region, utilizing the advantages of real- time gross settlement, Encouraging closer financial and economic integration between the GCC countries; SAMA has implemented a Specific Model in which functions of the Domestic RTGS system for both Sending & Receiving cross-border payments will be performed at the AFAQ Service ‘s Central Component hosted technically by the Gulf Payments Company (GPC); While controlled, supervised & operated by SAMA according to the operating Rules.
2.3. Statuary Authority
Without prejudice to Saudi Central Bank "SAMA" rights under applicable laws and regulations, these Operating Rules are constituted by SAMA in exercise of the powers stipulated in the Saudi Central Bank Law dated 11/04/1442H (26/11/2020G); Designating SAMA as the competent authority to Establish, Develop & Operate national infrastructures for Payment, Clearing & Settlement systems; Issue rules, guidelines, and licenses; Control and Oversee Payment, Clearing & Settlement systems within its sphere of competence.
2.4. Scope
These Operating Rules will cover the following areas:
a) Key operational activities across cross currency payments using AFAQ Service; hereinafter referred to as "the Service",
b) Business Rules for access and eligibility of Direct Participants, suspension, termination and withdrawal of Direct Participants,
c) Payment Rules for eligible payments,
d) Business day timetable and calendar,
e) Claims and dispute management
f) Business continuity and contingency arrangements.
2.5. Amendment
SAMA may amend, replace or supplement the contents of these Operating Rules as it deems fit; in consultation with Participants. Such amendment will be duly notified to Direct Participants.
2.6. Compliance
Each Direct Participant will comply with these Operating Rules.
2.7. Charges
The Direct Participants will pay SAMA's charges for the use of the Service in accordance with the Service Charging Policy issued by SAMA, as amended by SAMA from time to time.
2.8. Controlled Documents
A list of controlled documents which delineates operations of the Service is included in APPX (1). The controlled documents set out the detailed system operations.
3. Direct Participants
3.1. Direct Participants Admission
SAMA may admit Direct Participants as members of the Service if in the opinion of SAMA they meet the qualifying criteria as defined by SAMA from time to time. A Direct Participant in the Service must be:
• Participating in the Saudi Arabian Riyal Interbank Express System (RTGS).
• Maintaining a current AFAQ's account in accordance with SAMA's banking conditions.
• Complying with legal, supervisory, technical & operational requirements communicated by SAMA.
• Signatory to the Agreement of Participation in the Service.
3.2. Suspension or Termination of Direct Participants
On notice to a Direct Participant, SAMA may in its discretion suspend a Direct Participant temporarily or terminate a Direct Participant permanently (in each case with immediate effect or as otherwise prescribed in the notice) if the Direct Participant fails to comply with the qualifying criteria defined by SAMA from time to time or if the Direct Participant is, or states that it is, or SAMA reasonably suspects that it may be insolvent or if Direct Participant's relevant licence is revoked or if the Direct Participant fails to comply with these Operating Rules or if, in the good faith opinion of SAMA, the continued membership of the Direct Participant may prejudice the Service or the other Direct Participants or is undesirable.
3.3. Withdrawal of Direct Participants
Subject to receiving a prior written consent of SAMA, Direct Participant may withdraw from the Service upon serving written notice to SAMA within a period not falling less than thirty 30 days prior to the proposed withdrawal date.
3.4. Obligations on Cessation
In case of cessation, the Direct Participant will remain liable for all its accrued and accruing obligations under these Operating Rules. SAMA may give directions as it sees fit to give effect to the suspension, termination or withdrawal of the Direct Participant, including without limitation the surrender of its rights, software and materials in respect of the Service and the continued use or non-use of the Service.
3.5. Notice
SAMA will as soon as practicable give the other Direct Participants notice of changes to or suspensions of a Direct Participant.
4. Systems & Operations
4.1. Overview of AFAQ Service's Architecture
The AFAQ Service is made up of the following components:
• Sending Domestic RTGS system,
• Sending Regional Payment Gateway (RPG),,
• Central Component,
• Receiving Regional Payment Gateway (RPG),
• Receiving Domestic RTGS system,
• Communications network linking all of the other components of the full system,
• In the case of the countries using the CSM, the functions of the Domestic RTGS system, for both Sending & Receiving cross-border payments, will be performed at the AFAQ Service CC. The service is technically hosted by GPC. The service is managed by the NCB of the country using the CSM as part of their Domestic RTGS services.
4.1.1 Sending Domestic RTGS
The Sending Domestic RTGS system, operated by that country's NCB, handles all communications with the Direct Participants in the sending country. It also deals with all aspects of the processing of outward cross- border payments in accordance with the OR of that country's Domestic RTGS system, including, message validation, accounting, verification of availability of funds on the account of the Sending Participant, debiting the account of the Sending Participant, crediting the account of the Receiving NCB and translation of the messages, if necessary, to the format required by the Sending RPG.
4.1.2 RPG
RPG’s main functions are to validate, transform and route the cross-border payment messages.
• Message routing and validation,
• Message queuing in any event causing the AFAQ Service or RPG to queue messages until they can be delivered,
• Handling of Payment Completion Confirmations,
• Exception handling and return of payments,
• Systems management and access control,
• Synchronization of static data with the AFAQ Service cc.
• Holding of the current Participant Directory for message validation purposes.
• Holding of the current FX Translation Rates table for message validation purposes.
• Holding of the current Calendar for message validation purposes.
• Conversion of message formats MX from/to MT.
• Rejection of cross-border cross-currency payments where validation fails.
4.1.3 Sending RPG
The Sending RPG, operated by that country's NCB, receives individual payment messages from the Sending Domestic RTGS system, validates the message format, encrypts all the sensitive data, adds the summary data required for settlement and prepares the full message for transmission to the AFAQ Service CC. The Sending RPG also processes Payment Completion Confirmation messages from the AFAQ Service CC and matches them with the previously sent payment messages.
4.1.4 Receiving RPG
The Receiving RPG, operated by that country's NCB, receives payment messages from the AFAQ Service CC, decrypts the sensitive data, translates the messages into the format required by the Receiving Domestic RTGS system and forwards the messages to the Receiving Domestic RTGS.
Any data not included in the message from the Receiving RPG to the Receiving Domestic RTGS system is retained and available in the Receiving RPG. Receiving Direct Participants and Receiving NCBs have access to this data.
The Receiving RPG also processes Payment Completion Confirmation messages from the Receiving Domestic RTGS, matches them with the previously sent payment messages and transmits the Completion Confirmation to the AFAQ Service CC.
4.1.5 AFAQ Service CC
The AFAQ Service CC will perform the following main functions:
• Receive payment messages from the Sending RPG,
• Validate the message format and content,
• Perform the accounting entries over the shadow accounts of sending and receiving NCBs, and the Primary Accounts of Direct Participants in the case of countries using the CSM,
• Transmit the payment message to the Receiving RPG, or, to the Direct Participants in the case of countries using the CSM,
• Process Payment Completion Confirmation messages from the Receiving RPG, match them with the previously sent payment messages and transmit the Completion Confirmation to the Sending RsPG, or, to the Direct Participants in the case of countries using the CSM,
• Process payment rejections and returns,
• Maintain the Direct Participants directory,
• Maintain FX Exchange Rates for cross-currency conversion and end-of-day Settlement,
• Maintain the Business Day Timetable and Calendar,
• Provide enquiry services to NCBs, and to the Direct Participants in the case of countries using the CSM,
• Produce and transmit MT950 Shadow Account statements at end-of-day, and
• Perform end-of day Settlement activities.
4.1.6 Receiving Domestic RTGS
The Receiving Domestic RTGS system, operated by that country's NCB, handles all communications with the Direct Participants in the receiving country. It also deals with all aspects of the processing of Inward cross-border payments in accordance with the rulebook of that country's RTGS system, including, debiting the account of the Sending NCB, crediting of the account of the Receiving Participant, sending of the Payment Completion Confirmation to the Receiving RPG and transmission of the inward payment message to the Receiving Participant.
4.1.7 Country Specific Model (CSM)
The architecture for the CSM is the same as for the standard RPG configuration except that there is no automated communication with the country's Domestic RTGS system that processes domestic transactions.
4.2. Service's Architecture
As SAMA has adopted the CSM for carrying out SAMA and Direct Participants operations in AFAQ's Service, the functions of a Domestic RTGS system in respect of both inward and outward cross-border payment processing and bookkeeping of Direct Participants' mirror accounts and the relevant NCB shadow accounts are performed in the AFAQ Service CC.
4.3. SAMA's Systems
SAMA controls the installation, maintenance, operation, security, and contingency of the Service and has the right to regulate, administer and monitor the Service using the facilities afforded.
4.4. Direct Participants' Systems
Each Direct Participant is responsible at its own cost for the development, maintenance, security and reliability (including back-up and contingency) of its host system connected to the Service and any links from or to the Service.
4.5. Certification
No Direct Participant may use the Service until it and its systems used in relation to the Service have been certified by SAMA.
4.6. Monitoring
SAMA has the right to monitor relevant Direct Participant's activities for the sake of ensuring that the Service is operated properly, exercising responsibility for central risk management and mitigating pertinent risks.
4.7. Responsibility for Liquidity
SAMA has no responsibility to monitor Direct Participant’s liquidity. It is the responsibility of each Direct Participant to manage its own Liquidity.
4.8. Information
The Service provides reporting and enquiry facilities operating in near real-time; giving each Direct Participant immediate visibility of respective position & enabling it to manage its Liquidity.
4.9. Enhancements to Systems
SAMA may arrange for enhancements and changes to the Service and advise the Direct Participants accordingly, giving such notice before the changes are to be implemented as SAMA considers reasonable. SAMA may give directions for the safe, accurate and timely implementation of changes, updates and distributions. The changes will be binding on the Direct Participants and each Direct Participant will at its own cost carry out all necessary tests & modifications to its own systems linked to the Service and to its pertinent procedures to give effect to these measures.
4.10. Service Levels
SAMA may from time to time specify the service levels to be provided by the Service and by the Direct Participants systems used in connection with the Service.
4.11. Reporting
Each Direct Participant must inform SAMA Immediately of any event which may affect its role or function as a Direct Participant in the Service, including any known or planned disconnection from the Service, or any significant changes to Its host system interface to the Service, its organisation, or environment.
4.12. Operating Procedures
Each Direct Participant must maintain their own internal operating procedures that comply with these Operating Rules.
4.13. Contingencies
Each Direct Participant must ensure that their back-up and contingency procedures are such that the Service is capable of completing their daily processing requirements, without compromising the integrity, security, or performance of the Service. Each Direct Participant will ensure that it has access to adequate contingency facilities to enable It to send and receive its Payment Messages at least during the Operational Phase of the Business Cycle. Each Direct Participant shall ensure that their contingency procedures allow the resumption of operations at the contingency site when required, with the minimum loss of operational time in accordance with the Business Continuity Management Framework published by SAMA, as amended from time to time.
4.14. Tests
Each Direct Participant will comply with the Business Continuity Management Framework issued by SAMA & conduct realistic tests of contingency facilities at least twice annually to ensure the readiness and capability of operations. Signed records of the conduct of such tests must be retained.
4.15. Back-ups
Each Direct Participant is responsible for backing up data and programs for its own the Service operations.
4.16. Confidentiality
Unless advised otherwise by SAMA, The Direct Participant agrees to keep confidential all information concerning SAMA's business or its ideas, intellectual properties, products, customers or services that are of confidential, proprietary or trade secret nature.
4.17. Security
The Direct Participants will abide by applicable rules, regulations, policies and frameworks issued by SAMA; including the Service Security Policy as amended by SAMA from time to time. The Direct Participant must ensure the security and soundness of (SAMA - AFAQ) operations and inform SAMA in case of any security incidents.
4.18. Fraudulent Activities
The Direct Participant must take necessary actions & implement adequate measures to prevent, detect and respond in a timely manner to fraudulent activities involving the Service & report such activities to SAMA and the Direct Participants concerned in accordance with relevant fraud prevention guidelines.
4.19. Accounts at SAMA
Each Direct Participant must maintain a current the Service account at SAMA. Relevant Direct Participant's account must be held in accordance with SAMA's banking conditions from time to time.
5. Business Day Timetable and Calendar
5.1. Timetable
The timetable will allow all Direct Participants to provide high level of service to their customers. The Business Day Timetable will be impacted by providing adequate time for the completion of start-of-day and end-of-day business processes and to allow reasonable time for extending the period required for "pre end- of-day activities" in the event of problems or delays.
Some of the Business Day times are controlled by the system(s) while others are intended as times that all parties must adhere to.
The following key events occur during the course of the business day (Business Day Period):
1. System start.
2. FX Translation Rate adjustment - NCBs can send messages with FX Translation Rates; the official rate for their currency against the USD.
3. FX Translation Rate authorization - at the beginning of the period AFAQ Service cc calculates the cross- rates for all currency pairs and delivers them to NCBs for approval. NCBs send authorization messages: either approval or decline. In case no approval or decline is received, the FX rate is considered as unconfirmed. The system will prohibit cross-border payments for unconfirmed pairs of currencies.
4. System Housekeeping - at the beginning of the period, the system sends FX Translation rates notifications to the NCBs for all approved currency pairs. This period is also used for other housekeeping e.g. Business Day Calendar changes and Participant Directory updates.
5. Start of Day Funding: In accordance with SAMA's banking conditions the Direct Participant wishing to transact through AFAQ on a specific day shall prefund their respective account with SAMA through the Saudi Arabian Riyal Interbank Express "RTGS" on a daily basis to ensure that available balance in AFAQ is sufficient to cover all payment messages of all types as they fall due for payment. The Start of Day Funding message must be supplemented as per the following criteria:
• Be for credit to SAMA.
• Be an Interbank Payment Message.
• Quoting the Routing Code /AFAQSD100/ in Account with institution Field.
• Stating the nature & date of the funding in the Sender to Receiver Information Field.
6. Exchange period for all types of payments - exchange window for any type of operations including returns initiated by Direct Participants.
7. Exchange period for Interbank payments - only interbank payments will be accepted during this period.
8. End-of-day operations - automated return of cross-currency payments by Central Component which cannot be delivered to the RPGs of the receiving countries. RPGs do not automatically return the payments which cannot be delivered to the Domestic RTGS systems - as this should be only RPG operator's decision.
9. Reporting - generation of statements and Net Position reports, reconciliations and confirmations by NCBs & Direct Participants.
10. End-of-day Settlement window - end of day settlement operations through the Settlement Agent.
11. End-of-day reconciliation with NCBs - NCBs can monitor today's activity and send inquiries to the system to reconcile their activities during the day in case of any inconsistencies.
12. End of Day reconciliation With Direct Participants: On a successful completion of End of Day Settlement Window with NCBs, SAMA will reconcile respective accounts held & issue a "Zeroizing" transaction to sweep the available balance maintained by the Direct Participant within the Service to the current account of the Direct Participant in RTGS.
13. Archiving - data archiving
14. System stop.
5.2. Business Days
SAMA will specify and advise the Direct Participants of the days deemed Business Days for the purposes of the Service. SAMA may declare Business Days to be non-Business Days and vice versa for the purposes of the Service.
5.3. Calendar
The Business Day Calendar is maintained as a table in the AFAQ Service cc. The table contains a calendar of working days and holidays for cross-currency payments per country. Cross-currency payments are processed only if there is a working day in both the Sending and Receiving countries. Any updates to the calendar will be made within the AFAQ Service CC.
5.4. Cut-off
SAMA has the right to manage the orderly cut-off of the Service.
5.5. Limits on Transactions
SAMA may limit the categories of transactions allowed during times of the Business Cycle under advice to the Direct Participants.
5.6. Closures
SAMA may close the Service for the purposes of maintenance, correction of technical problems، or installation of systems, or other reason, which in SAMA's opinion makes a closure desirable.
5.7. Availability
Each Direct Participant will ensure that it is in a position to receive and send Payment Messages during the Operational Phase advised by SAMA.
6. FX Rates and Currency Conversion
Prior to the start of the "open for business" phase, confirmed exchange rates will be set in the central system and the RPGs. These rates will be used throughout that business day for the transformation of payment messages. The Sending Direct Participant must include the currency code and amount in the currency of the sending country as well as the exchange rate and the currency code and amount in the currency of the receiving country in the appropriate fields of payment messages. The exchange rate must be the correct confirmed exchange rate for the pair of currencies for that business day. The exchange rate and the converted amount will be validated by the RPG and AFAQ Service cc. Payment messages with an incorrect exchange rate and/or converted amount will be rejected.
7. Payment Messages
7.1. Eligible AFAQ Transactions
7.1.1 The Direct Participant must ensure that AFAQ Transactions shall be effected solely for Genuine Client Needs. For the purposes of these Rules, Genuine Client Needs means bona fide financial and payment needs of non-banking clients of financial institutions participating in the AFAQ system, including (but not limited to) payments arising from bilateral commercial trade activities, remittances and consumer payments.
7.1.2 The Direct Participant shall place adequate measures to ensure that the Service is utilized in a manner consistent with clause 7.1.1.
7.1.3 The Direct Participant shall not, nor shall it permit any of its clients to engage in or be part of Arbitrage or Speculative Activities to profit from any price differences that may exist from time to time between the Foreign Exchange Rates used within the Service and any rates used in other foreign exchange markets.
7.2. Qualified Payment Messages
Payment messages transmitted for processing by the Service must meet the following criteria:
a) Single Payment Messages only,
b) Customer or Interbank payments in the format specified by SAMA,
c) Same day value only - must be a working day in both the Sending and Receiving countries,
d) Must include the currency code and amount in the currency of the Sending country as well as the exchange rate for that business day and the currency code and amount in the currency of the Receiving country in the appropriate fields.
e) Follow message specifications set out in respective Message Format Guidelines.
f) Be for credit to:
• The Receiving Direct Participant itself (interbank payment),
• A Financial Institution holding an account with the Receiving Direct Participant (Interbank payment), or,
• A non-financial institution or person holding an account with the Receiving Direct Participant (Customer payment).
7.3. Payments Processing
The payment for the Receiving Country, when transformed by the AFAQ Service, contains the opposite exchange rate and the two currency amounts in the opposite order. The Receiving Direct Participant, for checking of correct calculation of amounts, should use the original exchange rate used by the Sending Direct Participant (or Sending Domestic RTGS system).
The AFAQ Service cc will process the transaction as per the following:
1) Payments from countries using the CSM
a. Payment Message in the Sending Currency of countries using the CSM:
i. DR: Settlement Account of the Sending Direct Participant;
ii. CR: Shadow Account of the NCB of the Receiving Country;
b. Payment Message in the Receiving Currency:
i. DR: Shadow Account of the NCB of countries using the CSM,
ii. CR: Control (Technical) Account of the NCB of the Receiving Country
2) Payment to countries using the CSM
a. Payment Message in the Sending Currency:
i. DR: Control (Technical) Account of the NCB of the Sending Country,
ii. CR: Shadow Account of the NCB of the countries using the CSM.
b. Payment Message in the Receiving Currency of countries using the CSM:
i. DR: Shadow Account of the NCB of the sending country,
ii. CR: Settlement Account of the Receiving Direct Participant (in the countries using the CSM).
In all cases the entries of both payment messages are posted simultaneously.
If the payment cannot be processed by the AFAQ Service cc for any of the reasons listed under Reasons for Rejection in APPX (2), a rejection message will be sent back to the Sending RPG. The Sending RPG will generate a return payment and send it to the Sending the Direct Participant stating the reason for rejection.
A returned payment message must not be resent with the same Unique Message Reference as the original one. It may, after correction of the reason(s) for rejection, be sent as a new payment by the Sending Direct Participant with a different Unique Message Reference, but UETR can be the same.
7.4. Completion of a Payment
A payment is deemed to be completed, for the purpose of sending the Payment Completion Confirmation, once it has been validated and accepted by the Receiving Domestic RTGS system for onward transmission to the receiving Direct Participant.
The final stage of processing of a payment within the receiving country is subject to the rules, regulations and processing procedures that govern the Receiving Domestic RTGS system.
7.5. Confirmation of Completion
The Receiving Domestic RTGS system, after it has validated the incoming payment and accepted it for onward transmission to the Receiving Direct Participant, will generate and send a Payment Completion Confirmation through the Receiving RPG to the AFAQ Service CC quoting the Unique Message Reference of the payment message.
The AFAQ SERVICE cc will match the Payment Completion Confirmation with the Sent Payment with the same Unique Message Reference and forward the Payment Completion Confirmation through the Sending RPG to the Sending Domestic RTGS system.
The Sending NCB will monitor all payments sent to ensure that matching Payment Completion Confirmations have been received. If the relevant Payment Completion Confirmation has not been received after an interval of 10 minutes from the time the payment was sent by the Sending RPG, and the payment in question was not returned or rejected, the Sending NCB will commence enquiries with GPC as to the cause of the missing confirmation. The Sending NCB is required to monitor receipt of all Payment Completion Confirmations. All payments must be confirmed as completed before the end-of-day process is started.
7.6. Crediting Beneficiary's Account
In accordance with applicable laws, rules & regulations, The Receiving Direct Participant, where the Beneficiary's account number quoted in the Payment Message is the correct account number for the Beneficiary stated in "Beneficiary Customer" field (Field 59), must credit the Beneficiary with same day value as soon as possible but not later than the end of the same Business Cycle.
7.7. Value to Correct Beneficiary
The Receiving Direct Participant will ensure that the value of the payment is given to the correct Beneficiary as per the details in the relevant Payment Message.
7.8. Returns by the Receiving Direct Participant
In case a Payment Message couldn't be credited to the Beneficiary Customer, The Receiving Direct Participant - unless advised otherwise by SAMA - should return to the Sending Direct Participant as soon as possible, preferably within the same business day. If the payment cannot be returned on the same business day, it should be returned before the cut-off time for that type of payment on the next business day or within 2 business days at the latest without liability for use of funds compensation; abiding by the return rules prescribed in 7.8 & using the same exchange rate and currency amounts as in the original received payment with no deductions.
7.9 Return Payment Rules
The receiving Direct Participants shall perform the following validation checks, for returned cross-currency payment messages:
• Any Payment being returned must be returned as a single message,
• The Payment Reference in field 72 is the same as the Reference in the original payment,
• Only one successful return payment is allowed for each received payment message,
• The payment must be returned within a maximum of 2 business days from the date of receiving the original payment message when both countries (sending and receiving) have business day simultaneously,
• The payment currency code and amount in the return payment must be the same as those in the original payment message,
• The exchange rate in the return payment must be the same as the exchange rate in the original payment message received by the return message creator's party,
• The instructed currency code and amount in the return payment must be the same as those in the original payment message received by the return message creator's party,
• The presence of original direct payment reference is checked in Central Component database and Return is rejected if
o The original direct credit reference is not found, or,
o The return is greater than two business days
o A successful Return has already been accepted by the Central Component
o Either of the currency amounts, currency code or exchange rate do not match the original payment
7.10 Reasons for Return or Rejection
A list of valid return and rejection codes is included in APPX (2).
7.11 Payments to the UAE
All payments sent to UAE must contain the correct Purpose of Payment Code according to the list of such codes as communicated by SAMA.
7.12 IBAN
All Customer Payments sent to those countries that use the International Bank Account Number (IBAN) standard - as advised by SAMA from time to time - must quote the IBAN in the Beneficiary Customer's account number field in the payment message in the format and following the rules published for the receiving country. Failure to include valid IBAN may be a valid reason for rejecting/returning the payment.
7.13 Finality Provisions
A payment is deemed to be Final & Irrevocable once the account of the Sending Direct Participant has been debited.
7.14 Cancellation
A Payment Message, once it has been debited to the account of the Sending Direct Participant, cannot be cancelled or recalled.
7.15 Anti-Money Laundering and Combating Terrorist Financing
Each Direct Participant must comply with Anti Money Laundering and Combating Terrorist Financing laws and the Implementing Regulations.
8 Miscellaneous
8.1 Liabilities of SAMA
Notwithstanding anything to the contrary in these Operating Rules or in any document or electronic communication referred to in these Operating Rules, neither SAMA nor any of its officers, employees or agents ("a Specified Party") shall be liable for any losses, or damages or expenses of any kind, whether direct or consequential ("Losses") suffered by a Direct Participant or any other person arising directly or indirectly from:
a) any delays caused by or malfunctions or breakdowns or any inadequacy of the Service,
b) any interruption or loss of the Service or of any of the services contemplated by the Service,
c) any liability for Losses attributable to those parts of the Service which are the responsibility of a Direct Participant or to a Direct Participants fault or systems, or
d) (without limitation) any acts or omissions of a Specified Party in connection with the Service or these Operating Rules;
8.2 Force Majeure
A specified Party shall not be liable for any Losses or any non-performance of the Operating Rules or of Payment Messages or of any obligation in relation to the Service arising directly or indirectly from circumstances beyond reasonable control.
8.3 Emergencies
If any malfunction, breakdown, or interruption or any emergency affects the Service or its operations, transactions will be handled in accordance with the directions of SAMA. Without limiting the discretion of SAMA, SAMA may extend the hours of operation of the Service, direct the use of contingency facilities or close down the Service in whole or in part.
8.4 Direct Participants Act as Principals Only
Each Direct Participant shall be liable as principal in respect of its Payment Messages.
8.5 Assignments
No Direct Participant may assign all or any of its rights or obligations under these Operating Rules. The Service Operating Rules bind the successors of each Direct Participant.
8.6 Dispute Settlement
In the case of any unresolved disputes or claims arising between any persons in relation to these Operating Rules or any rules, regulations or directives issued pursuant to them, the complainant may submit the dispute or claim to SAMA.
8.7 Severability
In case any provision in this Operating Rules shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
8.8 Governing Law
These Operating Rules are governed by the Laws of the Kingdom of Saudi Arabia.
Appendix 1 - Controlled Documents
This table contains the list of documents that have been shared with the pilot banks.
AFAQ Documentation Version Document SAMA-l 3095 DS 509 001 GCC RTGS SAMA Design specification Participants edition 2019-11-01 SAMA-l 3095 MF 502 001 GCC SAMA-LQ-Message Formats-2019-11-01 SAMA-l 3095 MF 502 001 GCC SAMA-MT-Message Formats-2019-11-01 SAMA-l 3095 TD 501 008 GCC RTGS REST API specification 2019-09-06 SAMA-l 3095 DS 506 018 GCC RPG Design SAMA Specifics Participants updated 2020-07-02 SAMA-l 3095 DS 506 002 GCC RPG SAMA Design Specification Participants Edition 2020-09-16 Version 001 GCC RTGS MX Message Formats for Participants 2020-09-16 Version 001 SAMA RPG Participant User Guide revision Version 001 GCC RTGS Security Requirement Version 1.0 GPC Circular No.003- Explanatory Note for AFAQ Currency Conversion 2020- 11-17 Version 1.1 Final GPC PKI Commercial CP Version 1.0 GCC RTGS Cross Currency Service - Integration Test and Market Rehearsal Plan version for Pilot Banks Version 1.0 GPC Market Rehearsal Kick-Off Presentation - KSA & BAH 30.N0V-2020 Appendix 2 - Return and Rejection Codes
This table contains the list of Return and Rejection codes that can be used in status messages. The codes can be interpreted as having the meanings shown for each code.
Return reason codes based on payments Rejected by the RPG or Central Component Code Explanation RJ00 System error. Contact support. RJ01 Incorrect FX Rate RJ02 Incorrect Receiving Currency amount RJ03 Invalid Value Date RJ04 Currency code wrong for Receiving country RJ05 A non working day in the Receiving Country RJ06 A non working day in the Sending Country RJ07 Invalid business day period RJ08 Invalid Receiving Direct Participant RJ09 Participant is not active RJ10 Non delivery to Receiving Domestic RTGS RJ11 FX rate is not authorized RJ12 BIC is invalid RJ13 Returned at cut-off time as not delivered RJ14 Approved FX rate not found RJ15 FX rate is absent RJ16 Payments are not allowed RJ17 No active business day found RJ18 Invalid account RJ19 Lack of funds RJ20 No direct credit found RJ21 Return period expired RJ22 Incorrect return amount RJ23 Return payment duplication RJ24 Payment was cancelled RJ25 Payment was rejected RJ90 Access rights check failed Payments Returned
Will be registered in AFAQ CC dictionary (which may be updated from time to time).
System will validate during return processing.
Code Explanation AC01 Format of the account number specified is not correct AC03 Wrong IBAN in SCT AC04 Account number specified has been closed on the bank of account's books AC06 Account specified is blocked prohibiting posting of transactions against it. AC13 Debtor account type is missing or invalid AC14 An agent in the payment chain is invalid AC15 Account details have changed AC16 Account is in sequestration AC17 Account is in liquidation ADRM Beneficiary account is dormant AG01 Transaction forbidden on this type of account (formerly No Agreement) AG02 Bank Operation code specified in the message is not valid for receiver AM01 Specified message amount is equal to zero AM02 Specific transaction/message amount is greater than allowed maximum AM03 Specified message amount is a non processable currency outside of existing agreement AM04 Amount of funds available to cover specified message amount is insufficient. AM05 Duplication AM06 Specified transaction amount is less than agreed minimum. AM07 Amount of funds available to cover specified message amount is insufficient. AM09 Amount received is not the amount agreed or expected AM10 Sum of instructed amounts does not equal the control sum. ARDT Already returned original SCT BACL Beneficiary account closed BALC Beneficiary account blocked BADE Beneficiary account does not exist BADC Beneficiary account is in a different currency BDIN Beneficiary Name does not match Beneficiary account number BE01 Identification of end customer is not consistent with associated account number (formerly Creditor Consistency). BE04 Specification of creditor's address, which is required for payment, is missing/not correct (formerly Incorrect Creditor Address). BE05 Party who initiated the message is not recognized by the end customer BE06 End customer specified is not known at associated Sort/National Bank Code or does no longer exist in the books BE07 Specification of debtor's address, which is required for payment, is missing/not correct. BE08 Returned as a result of a bank error. CN01 Authorization is cancelled. CURR Currency of the payment is incorrect CUST Cancellation requested by the Debtor DS28 Return following technical problems resulting in erroneous transaction. DT01 Invalid date (eg, wrong settlement date) ED01 Correspondent bank not possible. ED03 Balance of payments complementary info is requested ED05 Settlement of the transaction has failed. ERIN The Extended Remittance Information (ERI) option is not supported. FF05 Local Instrument code is missing or invalid FOCR Return following a cancellation request FR01 Returned as a result of fraud. FRTR Final response/tracking is recalled as mandate is cancelled. IBAN Invalid Beneficiary account number IBIC Invalid Beneficiary BIC MD06 Return of funds requested by end customer MD07 End customer is deceased. MS02 Reason has not been specified by end customer MS03 Reason has not been specified by agent. NARR Reason is provided as narrative information in the additional reason information. NOAS No response from Beneficiary NOCM Customer account is not compliant with regulatory requirements, for example FICA (in South Africa) or any other regulatory requirements which render an account inactive for certain processing. NOOR Original SCT never received PPCI Purpose of Payment Code incorrect or invalid RC01 Bank Identifier code specified in the message has an incorrect format (formerly Incorrect Format For Routing Code). RC07 Incorrect BIC of the beneficiary Bank in the SCTR RF01 Transaction reference is not unique within the message. RR01 Specification of the debtor's account or unique identification needed for reasons of regulatory requirements is insufficient or missing RR02 Specification of the debtor's name and/or address needed for regulatory requirements is Insufficient or missing. RR03 Specification of the creditor's name and/or address needed for regulatory requirements is insufficient or missing. RR04 Regulatory Reason RUTA Return following investigation request and no remediation possible. SL01 Due to specific service offered by the Debtor Agent SL02 Due to specific service offered by the Creditor Agent SL11 Whitelisting service offered by the Debtor Agent; Debtor has not included the Creditor on its "Whitelist'' (yet), In the Whitelist the Debtor may list all allowed Creditors to debit Debtor bank account. SL12 Blacklisting service offered by the Debtor Agent; Debtor included the Creditor on his "Blacklist". In the Blacklist the Debtor may list all Creditors not allowed to debit Debtor bank account. SL13 Due to Maximum allowed Direct Debit Transactions per period service offered by the Debtor Agent. SL14 Due to Maximum allowed Direct Debit Transaction amount service offered by the Debtor Agent. SP01 Payment is stopped by account holder. SP02 Previously stopped by means of a stop payment advise. TMO1 Associated message was received after agreed processing cut-off time. TRAC Return following direct debit being removed from tracking process. ULBA Unable to locate Beneficiary account UPAY Payment is not justified. XX00 Unknown reason (system replaces when receives a reason not registered in the CC dictionary) Instructions for Banking Obligations and Transactions in Accordance with the Bankruptcy Law and Its Implementing Regulations
No: 42066419 Date(g): 1/5/2021 | Date(h): 20/9/1442 Status: In-Force Translated Document
Referring to the Bankruptcy Law, issued by Royal Decree No. (M/50) dated 28/05/1439 H, and its Implementing Regulations, issued by Council of Ministers Resolution No. (622) dated 24/12/1439 H, and acknowledging the important role of banks in implementing the bankruptcy law.
To clarify the obligations of banks according to the Bankruptcy Law and its Implementing Regulations, as well as to facilitate banking transactions related to bankruptcy procedures, please find attached the instructions detailing banking obligations and transactions in light of the Bankruptcy Law and its Implementing Regulations. These instructions supersede SAMA instructions communicated by Circular No. (41039914) dated 08/06/1441 H.
For your information, and to act in accordance with the instructions effective from this date.
Chapter One: Definitions and General Provisions
1. Definitions
1.1 The words and phrases used in these instructions shall have the meanings defined in Article (1) of the Bankruptcy Law, issued by Royal Decree No. (M/50) dated 28/05/1439 H, and Article (1) of its Implementing Regulations, issued by Council of Ministers Resolution No. (622) dated 24/12/1439 H. 1.2 The following words and phrases -wherever they appear in these instructions- shall have the meanings set forth below, unless the context requires otherwise: Central Bank: The Saudi Central Bank.
The Law : The Bankruptcy Law.
The Regulation:: The Implementing Regulations of the Bankruptcy Law.
Competent Court: The court where the request to commence bankruptcy proceedings is filed.
The Committee: The Bankruptcy Committee.
2. General Provisions
2.1 These instructions aim to clarify the obligations of banks and financial institutions according to the provisions of the Law and Regulation, as well as to facilitate banking transactions related to bankruptcy procedures. 2.2 These instructions do not affect the provisions of the Law and Regulation, as well as other related regulations and instructions, including- For example but not limited to- the following: Rules on Management of Problem Loans, issued by SAMA Circular No. (41033343) dated 11/05/1441 H. Rules for Bank Accounts, issued by SAMA Circular No. (65681/67) dated 01/11/1440 H. Regulations for Bankruptcy Procedures in Commercial Courts, issued by Minister of Justice Decision No. (6421) dated 21/03/1441 H. SAMA Circular No. (42025830) dated 21/04/1442 H, concerning the affirmation not to refuse to confiscate a bank guarantee letter due to the commencement of bankruptcy proceedings and the suspension of claims against the client who issued the guarantee letter. SAMA Circular No. (42016471) dated 16/03/1442 H, concerning the importance of adhering to the regulations related to the commercial environment and credit transactions. Chapter Two: Obligations of Banks and Financial Institutions
3. Banks and Financial Institutions, as operators of banking activities or creditors of the debtor, must adhere to the following:
3.1 Facilitate the provision of any information or procedures related to the debtor’s transactions subject to financial reorganization, liquidation, financial reorganization for small debtors, liquidation for small debtors, or administrative liquidation to the trustee or committee, as applicable, through various channels, in accordance with the provisions of Chapter Three of these instructions. 3.2 Adhere to the suspension of claims against the debtor immediately upon receiving proof of a court order from the competent court suspending claims. This should be done through official notification channels, the trustee, or the debtor—whichever is applicable— including debit and transfer orders from bank accounts in accordance with the judgments and decisions issued by the competent courts after the suspension of claims, with the following considerations: Adhere to the suspension of claims according to the timeframes specified for each procedure in the Law, or until the bank receives confirmation of the cancellation of the suspension, considering any extensions that may be granted by the competent court.
The suspension of claims does not extend to attachment and debit orders from bank accounts and prohibitions on transactions based on judgments and decisions issued before the suspension of claims, unless otherwise directed by the competent court.
Ensure compliance with relevant legal provisions regarding the enforcement on guarantees during the suspension of claims.
3.3 Submit the bank's claims to the trustee or committee—whichever is applicable—within the specified timeframe, detailing their nature and attaching supporting documentation. 3.4 Verify the powers and duties of the trustee, and each trustee individually if there are multiple, based on the competent court's ruling. 3.5 Ensure that employees in the relevant departments and branches are familiar with these instructions. Chapter Three: Banking Transactions That May Be Required by the Trustee or Committee
4. Bank Accounts
4.1. A bank account must be opened for the debtor subject to one of the bankruptcy procedures outlined in Section (3.1) according to the following requirements: 1. A request from the trustee or committee, as applicable, to open the account, specifying its purpose. 2. A decision from the competent court including any of the following: A. The initiation of liquidation or liquidation for small debtors for the natural or legal person, and the appointment of a single trustee. B. The initiation of liquidation or liquidation for small debtors and the appointment of multiple trustees, specifying their duties and powers, including the opening and management of bank accounts. C. The initiation of administrative liquidation and the appointment of the Bankruptcy Committee to manage the procedure. D. The suspension of the debtor’s authority and the appointment of the trustee to manage the operations during financial reorganization proceedings. 3. A copy of the trustee's national ID, or a letter from the committee containing the details of the person authorized to manage the account in administrative liquidation proceedings, along with a copy of their national ID. 4. A copy of the commercial register, the founding contract, and its appendices for the legal entity subject to bankruptcy proceedings, or the national ID/residence permit for the natural person. 4.2 The trustee or committee must be enabled to continue managing the debtor's accounts subject to one of the bankruptcy procedures outlined in Section (3.1) according to the following requirements: 1. A decision from the competent court including any of the following: A. The initiation of liquidation or liquidation for small debtors for the natural or legal person, and the appointment of a single trustee. B. The initiation of liquidation or liquidation for small debtors and the appointment of multiple trustees, specifying their duties and powers, including the management of bank accounts. C. The initiation of administrative liquidation and the appointment of the Bankruptcy Committee to manage the procedure. D. The suspension of the debtor’s authority and the appointment of the trustee to manage operations during financial reorganization proceedings. 2. A copy of the trustee’s national ID, or a letter from the committee detailing the person authorized to manage the account in administrative liquidation proceedings, along with a copy of their national ID. 4.3 A bank account must be opened for the purpose of depositing the proceeds from the sale of the bankruptcy assets securing the debtor’s debt subject to financial reorganization or financial reorganization for small debtors, according to the following requirements: 1. A request from the trustee to open the account, specifying the purpose and the account’s validity period, which should not exceed the date of issuance of the competent court’s judgment to conclude the proceedings. 2. A decision from the competent court initiating the financial reorganization or financial reorganization for small debtors for the natural or legal person and appointing the trustee. 3. A copy of the trustee’s national ID. 4. The trustee’s acknowledgment to notify the bank immediately upon the court’s decision regarding their dismissal or acceptance of their resignation, and to enable the new trustee to continue managing the account, following the court's decision appointing the new trustee in place of the current trustee, along with a copy of their national ID. 5. Bank Account Statements for a Period of Ten Years
5.1 The trustee or the committee—depending on the circumstances—shall be provided with the bank account statements of the debtor subject to one of the bankruptcy procedures specified in paragraph (3.1), after fulfilling the decision of the competent court containing any of the following: A. The initiation of liquidation or liquidation for small debtors for the natural or legal person and the appointment of a single trustee. B. The initiation of liquidation or liquidation for small debtors and the appointment of multiple trustees, specifying their duties and powers, including the request for bank account statements. C. The initiation of administrative liquidation and the appointment of the Bankruptcy Committee to manage the procedure. D. The suspension of the debtor’s authority and the appointment of the trustee to manage operations during financial reorganization proceedings. 6. The Execution or Submission of the Transactions Outlined in Sections (4) and (5) Should not Exceed the Timeframes Specified in the Following Table
Section
Timeframe
Section (4.1) One business day from the completion of requirements. Section (4.2) Immediately upon completion of requirements. Section (4.3) One business day from the completion of requirements (for opening the account), and immediately upon completion of requirements (for continuing account management). Section (5.1) Seven business days from the completion of requirements. The requirements and Information Needed for Customers’ Bank Account Statements
No: 42059442 Date(g): 4/4/2021 | Date(h): 22/8/1442 Status: In-Force Translated Document
Based on the powers granted to SAMA under the provisions of the Banking Control Law and its implementing regulations, and in line with SAMA’s supervisory and regulatory role over financial institutions under its jurisdiction, and in an effort to standardize the minimum operations, information, and details that should be included in bank account statements for customers according to unified standards across all banks. Given that the information contained in a bank account statement serves as a source and reference for legal evidence in matters that benefit the public interest, it simultaneously assists customers in understanding the sources of funds deposited into their accounts, the amounts withdrawn and transferred from them, as well as the types, nature, and dates of the transactions carried out. This ensures clarity and precision in understanding, leaving no room for ambiguity. Furthermore, this enables customers to determine their responsibility for verifying the sources and uses of their funds and the authorities for managing these transactions. This information also benefits banks by providing clear responses to customer inquiries regarding transactions on their accounts.
Attached is the updated version of the required information for bank account statements for customers. Banks are also reminded of the option to provide customers with a simplified bank account statement as an alternative, which includes at a minimum: (The type of transaction, its date, and the amount).
Please take note and ensure compliance with these specified requirements by the end of the second quarter of 2021G.
Transaction Type and Criteria for Statement Details: Cash Deposit (Bank Branch). (1/1)
Type of Transaction and Standards for Account Statement Details
Cash Deposit (Bank Branch). (1/1)
No.
Information Criteria
Arabic
English
Notes
A
Creation of the Service Delivery Channel
1
Name of Service Delivery Channel/Code (Bank Name + Branch Name where the deposit is made)
√
√
-
2
Location of the Service Delivery Channel (City where the branch is located)
√
√
-
3
Transaction Reference Number (Generated by the system)
√
√
-
4
Type of Transaction (Cash Deposit - Bank)
√
√
-
5
Transaction Date
√
√
-
6
Transaction Time (Mandatory for ATM and online transactions, optional for other transactions)
√
√
Statements arranged by date and time
7
Due Date (Creditor)
√
√
-
B
Credit Information
1
Amount
√
√
-
2
Currency
√
√
-
3
Applied Exchange Rate
-
-
-
4
Purpose / Payment Details / Source of Funds
-
-
-
5
Depositor's Name
-
-
-
6
Depositor's ID Number
-
-
To be recorded on the cash deposit form
Transaction Type and Criteria for Statement Details
Cash Deposit (ATM) - (1/2)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Name of the Service Delivery Channel/Code (Bank Name + ATM Code for cash deposit)
√
√
-
2 Location of Service Delivery Channel (City where the ATM is located)
√
√
-
3 The transaction reference number (generated by the ATM)
√
√
-
4 Transaction type (Cash Deposit - ATM)
√
√
-
5 Transaction start date
√
√
-
6 Transaction start time (mandatory for ATMs and electronic banking transactions, optional for other regular transactions)
√
√
Mandatory for ATMs and electronic banking transactions
7 Due date (creditor)
√
√
-
B Creditor information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied exchange rate
-
-
-
4 Purpose / Payment details / Source of funds
-
-
-
5 Depositor's name
-
-
-
6 Depositor's ID number
-
-
-
7 Fees
-
-
-
Cash Withdrawal (Check) – (2/1)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Name of Service Delivery Channel/Code (Bank Name + Branch Name from which the cash is withdrawn)
√
√
-
2 Location of Service Delivery (City where the branch is located)
√
√
-
3 Transaction Reference Number (generated by the system)
√
√
-
4 Transaction Type (Cash Withdrawal - Within Bank)
√
√
-
5 Transaction Creation Date
√
√
-
6 Transaction Creation Time
√
√
-
7 Due Date (Debtor)
√
√
-
B Debit Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Fees
√
√
If withdrawal is in a foreign currency
5 Check Number
√
√
-
6 Beneficiary Name
-
-
-
7 Beneficiary ID Number
-
-
Recorded by the cashier on the check
Cash Withdrawal (Form) – (2/2)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Name of Service Delivery Channel/Code (Bank Name + Branch Name where the cash is withdrawn)
√
√
-
2 Location of Service Delivery channel (City where the branch is located)
√
√
-
3 Transaction Reference Number (generated by the system)
√
√
-
4 Transaction Type(Cash Withdrawal - Receipt)
√
√
-
5 Transaction Creation Date
√
√
-
6 Transaction Creation Time
√
√
-
7 Due Date (Debit)
√
√
-
B Debit Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Fees
√
√
If withdrawal is in a foreign currency
5 Beneficiary Name
-
-
-
6 Beneficiary ID Number
-
-
Recorded on the form
Cash Withdrawal (ATM) – (2/3)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Name of Service Delivery / Code (Bank Name + ATM Code where the cash is withdrawn)
√
√
-
2 Location of Service (Country and City where ATM is located)
√
√
-
3 Transaction Reference (Name and Code of the Bank that issued the ATM/Visa card + Transaction Reference Number generated by the ATM)
√
√
-
4 Transaction Type (Cash Withdrawal "Mada Card / Credit Card" – ATM)
√
√
-
5 Transaction Creation Date
√
√
-
6 Transaction Creation Time (Mandatory for ATMs and electronic banking transactions; optional for other regular transactions)
√
√
Mandatory for ATMs and electronic banking transactions.
7 Due date (debtor)
√
√
-
B Debit Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Fees
√
√
If the amount is withdrawn in a foreign currency
Deposit of Checks (Clearing – External) (3/1)
No
Information Criteria
Arabic
English
Notes
A
Establishing a Service Delivery Channel
1
Name of the Service Delivery Channel / Code (Bank name and Branch/Department conducting the transaction)
√
√
-
2
Location of the Service Delivery Channel (City name where the branch/department is located)
√
√
-
3
Reference number for the transaction (generated by the system)
√
√
-
4
Transaction Type (Cash Deposit - Bank)
√
√
-
5
Transaction Start Date
√
√
-
6
Transaction Start Time
√
√
-
7
Due Date (Creditor)
√
√
-
B
Creditor Information
1
Amount
√
√
-
2
Currency
√
√
-
3
Check Number
-
-
-
4
Drawn on the Bank Name
-
-
-
5
Name of the Depositor
-
-
If not the account holder
6
Depositor ID Number
-
-
To be recorded on the check deposit form
7
Name of the Drawer
-
-
-
8
Country of the Bank Issuing the Check
-
-
-
Check Deposit (Collection) – (3/2)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Name / Code of the Service Delivery Channel (Bank Name and Branch/Department where the transaction occurs)
√
√
ATM Information (if the check was deposited via an ATM)
2 Service Delivery Channel Location (City where the branch/department is located)
√
√
-
3 Transaction Reference Number (generated by system)
√
√
-
4 Transaction Type (Check Collection)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 (Credit) Due Date
√
√
-
8 (Debit) Due Date
√
√
-
B Debtor information
1 Amount
√
√
Collection fees
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Cheque number
√
√
-
5 Drawn on the bank name and city
-
-
-
6 Fees (collection fees + correspondent banks)
-
-
-
C Creditor Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Cheque number
√
√
-
5 Drawn on the bank name and city
-
-
-
6 Depositor's name
-
-
If not the check holder
7 Depositor's ID number
-
-
And it is recorded on the check deposit form
8 Drawer's name
-
-
-
Check Deposit (Same Bank- Internal) – (3/3)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Name / Code of the Service Delivery Channel (Bank Name and Branch/Department where the transaction is conducted)
√
√
ATM Information (if the check was deposited via an ATM)
2 Service Delivery Channel Location (City where the branch/department is located)
√
√
-
3 Transaction Reference Number (generated by system)
√
√
-
4 Transaction Type (Internal Check Deposit)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Debit)
√
√
-
8 Due Date (Credit)
√
√
-
B Debtor information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Cheque number
√
√
-
5 Beneficiary's name
√
√
-
C Creditor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Cheque number
√
√
-
5 Drawn on the bank's name
-
-
-
6 Depositor's name
-
-
If not the cheques holder
7 Depositor's ID number
-
-
And it is recorded on the check deposit form
8 Check issuer's name
-
-
And it is recorded on the check deposit form
9 Check issuer's ID number
-
-
And it is recorded on the check deposit form
Check Cashing (Clearing/Internal Collection) – (4)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Delivery Channel Name/Code (Bank Name and Branch/Department where transaction takes place)
√
√
-
2 Location of the Service Delivery Channel (Name of the city where the branch/department is located)
√
√
-
3 Transaction Reference Number (Generated by the system)
√
√
-
4 Transaction Type (Clearing/Internal Collection)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Debtor)
-
-
-
8 Due Date (Creditor)
-
-
-
B Debtor ledger information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Cheque number
√
√
-
5 Beneficiary's name
-
-
-
6 Beneficiary's ID number
-
-
-
7 Presenting bank / Collecting bank's name
-
-
-
Outbound Money Transfer (Fast System) – (5/1)
No
Information Criteria
Arabic
English
Notes
A
Establishing a Service Delivery Channel
1
Name / Code of the Service Delivery Channel (Bank Name and Branch where the transaction is conducted)
√
√
-
2
Location of the Service Delivery Channel (Name of the City for the Branch)
√
√
-
3
Transaction Reference Number (Outbound Transfer Number generated by the system) + Local System Transaction ID Number
√
√
Local System Transaction ID Number
4
Transaction Type (Outbound Transfer – Local System)
√
√
-
5
Transaction Start Date
√
√
-
6
Start Time of the Transaction (Mandatory for ATM/Electronic Banking Transactions, Optional for Other Transactions)
√
√
Mandatory for ATM Transactions
/ Electronic Banking
7
Due Date (Debit)
√
√
-
B
Debit Entry Information
1
Amount
√
√
-
2
Currency
√
√
-
3
Applied Exchange Rate
-
-
-
4
Fees
√
√
-
5
Beneficiary Name
-
-
-
6
Beneficiary Bank Name/Code
-
-
-
7
Beneficiary Account Number
-
-
Credit Card Number if to a Credit Card Account
8
Beneficiary Address
-
-
To be noted on the form
9
Purpose/Details of the Transaction
-
-
To be noted on the form
10
Number and Date of Reference at SAMA / Judicial Order if Issued by SAMA
-
-
-
Outbound Money Transfer (SWIFT) – (5/2)
No
Information Criteria
Arabic
English
Notes
A
Establishing a Service Delivery Channel
1
Name / Code of the Service Delivery Channel (Bank Name and Branch where the transaction is conducted)
√
√
-
2
Location of the Service Delivery Channel (Name of the City where the Branch conducting the transaction is located)
√
√
-
3
Transaction Reference Number (Outbound Transfer Number Generated by the System)
√
√
-
4
Transaction Type (Outbound Transfer – SWIFT)
√
√
-
5
Transaction Start Date
√
√
-
6
Start Time of the Transaction (Mandatory for ATM/Electronic Banking Transactions, Optional for Other Transactions)
√
√
Mandatory for ATM/Electronic Banking Transactions
7
Due Date (Credit)
√
√
-
B
Credit Entry Information
1
Amount
√
√
-
2
Currency
√
√
-
3
Applied Exchange Rate
-
-
-
4
Fees
√
√
SWIFT Fees
5
Commission
√
√
Commission on Transfer
6
Beneficiary Name
-
-
-
7
Beneficiary Bank Name
-
-
-
8
Beneficiary Account Number
-
-
-
9
Beneficiary Address
-
-
To be noted on the form
10
Country of Transfer
-
-
-
11
Purpose / Details of the Transaction
-
-
To be noted on the form
Outbound Transfer (Salaries) – (5/3)
No
Information Criteria
Arabic
English
Notes
A
Establishing a Service Delivery Channel
1
Name / Code of the Service Delivery Channel (Bank Name and Branch where the transaction is conducted)
√
√
-
2
Location of the Service Delivery Channel (Branch City Name)
√
√
-
3
Transaction Reference Number (MT 102 - Outbound Transfer Number generated by the system) + Local System Transaction ID Number
√
√
Local System Transaction ID Number
4
Transaction Type (Salaries – Total Customer Payments)
√
√
-
5
Start Date of the Transaction
√
√
-
6
Transaction Start Time (Mandatory for ATM/Electronic Banking Transactions, Optional for Other Transactions)
√
√
Mandatory for ATM/Electronic Banking Transactions
7
Due Date (Debit)
√
√
-
B
Debit Entry Information
1
Amount
√
√
Total Amount
2
Currency
√
√
-
3
Applied Exchange Rate
-
-
-
4
Fees
√
√
Total Customer Payments Fees
5
Payment Details (Salaries)
√
√
-
Outbound Transfer (Profit Shares) – (5/4)
No
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Name/Code of service delivery Channel(Bank Name and Branch where the transaction takes place)
√
√
-
2 Channel Location (Branch City Name)
√
√
-
3 Transaction Reference Number (MT 102 - Outbound Transfer Number Generated by the System)
√
√
Local System Transaction Identifier Number
4 Transaction Type (Profit Shares – Total Customer Payments)
√
√
-
5 Start Date of the Transaction
√
√
-
6 Start Time of the Transaction
√
√
-
7 Maturity Date (Debit)
√
√
-
B Debit Entry Information
1 Amount
√
√
Total Amount
2 Currency
√
√
-
3 Exchange Rate Applied
-
-
-
4 Fees
√
√
Customer Payments Total Message
5 Field 70: Payment Details (Profit Shares + Period) Example: Profit Shares / First Half of 2010G
√
√
-
Inbound Transfer (Rapid System) – (6/1)
No
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Channel Name/Code (Bank Name and Branch/Department where the transaction takes place)
√
√
-
2 Channel Location (City Name where the Branch/Department is located)
√
√
-
3 Transaction Reference Number (Inbound Transfer Number) + Local System Transaction Identifier Number
√
√
Local System Transaction Identifier Number
4 Transaction Type (Inbound Transfer – Local System)
√
√
-
5 Start Date of the Transaction
√
√
-
6 Start Time of the Transaction (Mandatory for ATM/Electronic Banking Transactions, Optional for Other Transactions)
√
√
-
7 Maturity Date (Credit)
√
√
-
B Credit Entry Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Sender Name
-
-
-
4 Sender Account Number
-
-
Credit Card Number if from a Credit Card Account
5 City Name of Sender
-
-
-
6 Name/Code of the transferring bank
√
√
-
7 Purpose/Payment Details
-
-
-
8 Reference number and date at SAMA / judicial decision in case it is mandated by SAMA
-
-
-
Inbound Transfer (SWIFT System) – (6/2)
No
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Channel Name/Code (Bank Name and Branch/Department where the transaction takes place)
√
√
-
2 Channel Location (City Name where the Branch/Department is located)
√
√
-
3 Transaction Reference Number (Inbound Transfer Number)
√
√
-
4 Transaction Type (Inbound Transfer – SWIFT)
√
√
-
5 Start Date of the Transaction
√
√
-
6 Start Time of the Transaction
√
√
-
7 Maturity Date (Credit)
√
√
-
B Credit Entry Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Sender Name
-
-
-
5 Sender Account Number
-
-
-
6 Sender's Country Name
-
-
-
7 Bank Name of Sender
-
-
-
8 Purpose/Payment Details
-
-
-
Incoming Transfer (Salaries) – (6/3)
No Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Name / Code of Service Channel (Bank and Branch / Department where the transaction takes place)
√
√
-
2 Location of the Service Channel (City name where the branch/department is located)
√
√
-
3 Reference number for the transaction (MT 102 - Incoming Transfer Number) + Local System Unique Identifier for the transaction
√
√
Unique Identifier for Local System Transactions
4 Type of Transaction (MT 102 - Local Incoming Transfer - Salaries)
√
√
-
5 Date of Transaction Start
√
√
-
6 Time of Transaction Start
√
√
Mandatory for ATM / electronic banking transactions
7 Due Date (Creditor)
√
√
-
B Creditor Transaction Details
1 Amount
√
√
-
2 Currency
√
√
-
3 Name of the Customer Order (Transferrer)
√
√
-
4 Name / Code of the Transfer Bank
√
√
-
5 Purpose / Payment Details (Salaries)
-
-
-
Incoming transfer (profit share)- (6/4)
No Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel 1 Name / Code of the service delivery channel (name of the bank and branch / department where the transaction is conducted)
√
√
-
2 Location of the service delivery channel (name of the city where the branch/department is located)
√
√
-
3 Transaction reference number (MT 102 – incoming transfer number) + local system transaction identification number
√
√
Local system transaction identification number
4 Transaction type (Profit Share)
√
√
-
5 Transaction start date
√
√
-
6 Transaction start time
√
√
-
7 Due date (credit entries)
√
√
-
B Creditor ledger information
1 Amount √ √ - 2 Currency √ √ - 3 Field 50: Name of the ordering customer (remitter). Example: Saudi Telecom Company, SABIC, etc √ √ The company that declared the profit share 4 Name / Code of the remitting bank - - - 5 Name of the entity / company - - - 6 Account number of the entity / company - - - 7 Name of the remitting bank - - - 8 Field 70: Purpose/Payment details (Profit share + period) Example: Profit share / First half of 2010 - - - C Debtor ledger information 1 Amount √ √ - 2 Currency √ √ - 3 Field 50: Name of the ordering customer (remitter) Example: Saudi Telecom Company, SABIC, etc √ √ The company that declared the profit share 4 Name/Code of the remitting bank - - - 5 Beneficiary's name - - - 6 Beneficiary's account number - - - 7 Beneficiary's bank - - - 8 Field 70: Purpose/Payment details (Profit share + period) Example: Profit share / First half of 2010 - - - Internal Transfer (Account to Account – Same Bank) – (7)
No
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Name / Code of Service Channel (Bank and Branch / Department where the transaction takes place)
√
√
-
2 Location of the Service Channel (City name where the branch is located)
√
√
-
3 Reference number for the transaction (generated by the system)
√
√
4 Type of Transaction (Transfer from Account to Account)
√
√
-
5 Date of Transaction Start
√
√
-
6 Time of Transaction Start
√
√
-
7 Due Date (Creditor)
√
√
-
8 Due date (creditor)
√
√
-
B Debtor ledger information
1 Amount
√
√
-
2 Currency
√
√
-
3 Exchange Rate Applied
√
√
-
4 Beneficiary's name
-
-
-
5 Beneficiary's ID number
-
-
-
6 Beneficiary's account number
-
-
-
7 Purpose of the transfer
-
-
-
8 Reference number and date in SAMA / court order in case it is mandated by SAMA
-
-
-
C Creditor ledger information
1 Amount
√
√
-
2 Currency
√
√
-
3 Exchange Rate Applied
-
-
-
4 Name of the remitter
-
-
-
5 ID number
-
-
-
6 Account number
-
-
-
7 Purpose / Payment details
-
-
-
8 Reference number and date in SAMA / court order in case it is mandated by SAMA
-
-
-
Cashier Request (in Saudi Riyals) – Version (8)
No.
Information Standards
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name/Code (Bank and Branch Name)
√
√
-
2 Service Channel Location (Branch City Name)
√
√
-
3 Transaction Reference Number (Generated by System)
√
√
-
4 Transaction Type (Cashier Request)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Credit)
√
√
-
B Debit Entry Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Commission
√
√
-
5 Bank application number
-
-
-
6 Beneficiary's name
-
-
-
Demand Draft Under Collection – Version (9)
No.
Information Standards
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name/Code (Bank and Branch Name)
√
√
-
2 Service Channel Location (Branch City Name)
√
√
-
3 Transaction Reference Number (Generated by System)
√
√
-
4 Transaction Type (Demand Promissory Note)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Debit)
√
√
-
B Debtor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Commission
√
√
-
5 Demand promissory note number
-
-
-
6 Beneficiary's name
-
-
-
SADAD Payments System – (10)
No.
Information Standards
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name (Bank/Branch/Management/Electronic Banking Channel)
√
√
-
2 Service Channel Location (City Name for Branch/Management/Electronic Banking Channel)
√
√
-
3 Transaction Reference Number (Generated by SADAD system - 9 digits)
√
√
-
4 Transaction Type (SADAD Payments)
√
√
-
5 Transaction start date
√
√
6 Transaction start time (mandatory for ATM transactions, optional for regular transactions)
√
√
Mandatory for ATM transactions. Optional for regular transactions
7 Due date (debtor)
√
√
-
B Debtor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Biller name (company name) Example: Saudi Telecom Company, Saudi Electricity Company, Mobily, Ministry of Interior - Traffic Violations, Ministry of Interior - Driver’s License, Ministry of Interior - Vehicles, Ministry of Interior - Saudi Passports, and others
-
-
-
4 Invoice number or biller subscription number (for Saudi Telecom Company and Saudi Electricity Company) / or beneficiary ID number (for the Ministry of Interior)
-
-
-
C Creditor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Biller name (company name) Example: Saudi Telecom Company, Saudi Electricity Company, Mobily, Ministry of Interior - Traffic Violations, Ministry of Interior - Driver’s License, Ministry of Interior - Vehicles, Ministry of Interior - Saudi Passports, and others
-
-
-
4 Invoice number or biller subscription number (for Saudi Telecom Company and Saudi Electricity Company) / or beneficiary ID number (for the Ministry of Interior)
-
-
-
Direct Debit Payments - (11)
No
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name (Bank Name and Branch/Department where the transaction occurs)
√
√
-
2 Service Channel Location (City Name where the Branch/Department is located)
√
√
-
3 Transaction Reference Number (System-generated unique reference number) + Local System Transaction ID
√
√
Local System Transaction ID
4 Transaction Type (Direct Debit Payments)
√
√
-
5 Start Date of the Transaction
√
√
-
6 Start Time of the Transaction
√
√
-
7 Maturity Date (Debtor)
√
√
-
B Debit Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Beneficiary Name (Originator's Name)
-
-
-
5 Beneficiary Bank (Guaranteeing Bank Name)
-
-
-
6 Direct Debit Authorization Number
-
-
-
Foreign Currency Purchase (Cash) - (12)
No
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name (Bank Name and Branch where the transaction occurs)
√
√
-
2 Service Channel Location (City Name where the Branch is located)
√
√
-
3 Transaction Reference Number (System-generated unique reference number)
√
√
-
4 Transaction Type (Foreign Currency Sale)
√
√
-
5 Start Date of the Transaction
√
√
-
6 Start Time of the Transaction
√
√
-
7 Maturity Date (Creditor)
√
√
-
B Creditor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Currency Purchased from the Customer
-
-
US Dollar, Euro, AED + Amount
Foreign Currency Sale (Cash) - (13)
No
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name (Bank Name and Branch where the transaction occurs)
√
√
-
2 Service Channel Location (City Name where the Branch is located)
√
√
-
3 Transaction Reference Number # (System-generated unique reference number)
√
√
-
4 Transaction Type (Foreign Currency Purchase)
√
√
-
5 Start Date of the Transaction
√
√
-
6 Start Time of the Transaction
√
√
-
7 Maturity Date (Debtor)
√
√
-
B Debit Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Costs
-
-
-
5 Commissions
√
√
-
6 Currency Sold
-
-
US Dollar, Euro, AED + Amount
7 Depositor Name
-
-
-
8 Depositor ID Number
-
-
-
9 Source of Funds
-
-
-
10 Purpose of Deposit
-
-
-
Credit Card Settlements - Transactions - (14)
No
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1
Service Channel Name (Bank Name and Branch/Department where the transaction occurs)
√
√
-
2
Service Channel Location (City Name where the Branch/Department is located)
√
√
-
3
Transaction Reference Number (System-generated unique reference number)
√
√
-
4
Transaction Type (Credit Card Settlement)
√
√
-
5
Start Date of the Transaction
√
√
-
6
Start Time of the Transaction (Mandatory for ATM/online banking transactions, optional for other regular transactions)
√
√
Mandatory for ATM/online banking transactions.
7
Maturity Date (Debtor)
√
√
-
8
Maturity Date (Creditor)
-
-
-
B Information on debit entries (entry for a demand deposit for the customer's current account). Credit card balance settlements are executed for the outstanding limit of the Visa credit card (Visa credit limit) at the beginning or end of each month, according to the arrangements agreed upon with the customer.
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Account Number (Credit Card) of the Beneficiary Creditor
-
-
-
Point of Sale Operations – ATMs/Visa Card - (15)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name (POS Number + Bank Name + Store Name)
√
√
-
2 Service Channel Location (Country or City Name of the POS)
√
√
-
3 Transaction Reference Number (ATM Number/Visa Card Number + Bank Name)
√
√
-
4 Transaction Type (Purchase via POS/Visa Card/Mada Card/Mada Pay/Apple Pay)
√
√
-
5 Credit Card Company
√
√
-
6 Transaction Start Time (Mandatory for ATM/Online Banking Transactions; Optional for Other Transactions)
√
√
Mandatory for ATM/Online Banking; Optional for Regular Transactions
7 Due Date (Debtor)
√
√
-
8 Due Date (Creditor)
-
-
-
B Debit Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Fees
√
√
Purchase via Visa Card / Cash Withdrawal
C Credit Ledger Information
1 POS Number
√
√
-
2 Bank Name of the POS
√
√
-
3 Store Name of the Transaction
√
√
-
4 Service Channel Location (City Name of the POS)
√
√
-
5 Country Name
√
√
-
6 Issuing Bank Name of the Card
√
√
-
7 Transaction Type (Purchase via POS/Visa Card/Mada Card/Mada Pay/Apple Pay)
√
√
-
8 Credit Card Company (Visa, MasterCard, American Express)
√
√
-
Public Offering of Shares - Subscription - (16)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Delivery Name/Code (Bank Name + Branch Name where the operation is executed)
√
√
-
2 Delivery Location (City Name where the branch is located)
√
√
-
3 Transaction Reference Number (Generated by the system)
√
√
-
4 Transaction Type (Initial Public Offering – Subscription)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
Mandatory for ATM/Online Banking Transactions
7 Due Date (Debtor)
√
√
-
B Debit Entry Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Request Number for the Initial Public Offering
-
-
-
5 Entity/Company Name
-
-
-
6 Entity/Company Account Number
-
-
-
C Credit Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Request Number for the Initial Public Offering
-
-
-
5 Number of Shares Subscribed
-
-
-
6 Entity/Company Name
-
-
-
7 Entity/Company Account Number
-
-
-
8 Transfer Bank Name
-
-
-
Pending Orders - (17)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name/Code (Name of Bank/Branch where the operation is executed)
√
√
-
2 Service Location (City Name of the branch executing the operation)
√
√
-
3 Transaction Reference Number (System generates a reference number) + The unique identifier number for the transaction concerning local system operations
√
√
Reference number specific to the local system transactions
4 Transaction Type (Standing Order)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
Mandatory for ATM/Online Banking Transactions
7 Due Date (Debtor)
√
√
-
B Debtor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Fees
√
√
-
5 Funded (Current order)
√
√
-
6 Beneficiary's Name
-
-
-
7 Beneficiary's account number
-
-
-
8 Beneficiary's address
-
-
-
9 Beneficiary's bank name
-
-
-
10 Transaction details (type of current order and its reference number)
-
-
-
C Creditor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Fees
√
√
-
5 Funded (Standing order)
√
√
-
6 Remitter's name
-
-
-
7 Account Number
-
-
-
8 Remitting bank's name
-
-
-
9 Purpose of the transfer
-
-
-
10 Transaction details (type of current order and its reference number)
-
-
-
Costs / Fees – Operations - (18)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name / Code (Name of the department / branch of the bank where the transaction is executed)
√
√
-
2 Service Channel Location (Name of the city where the branch executing the transaction is located)
√
√
-
3 Transaction Reference Number (The system generates a reference number for the transaction)
√
√
-
4 Transaction Type (Costs / Fees)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Debtor)
√
√
-
B Debtor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applicable Exchange Rate
-
-
-
4 Transaction Details (Details of Costs / Fees)
-
-
-
5 Name of Entity / Company
-
-
-
C Creditor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applicable Exchange Rate
-
-
-
4 Transaction details (costs/fees details)
-
-
-
5 Name of the entity / company
-
-
-
Term Deposits - (19)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name (Name of the department / branch of the bank where the transaction is executed)
√
√
-
2 Service Channel Location (Name of the city where the branch/department executing the transaction is located)
√
√
-
3 Transaction Reference Number (Transaction Number)
√
√
-
4 Transaction Type (Term Deposit)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Debtor)
√
√
-
8 Due Date (Creditor)
√
√
-
9 Type / Details of the deposit
-
-
-
B Debtor Ledger Information (Funds are deposited as term deposits and a confirmation of the term deposits is issued to the customer)
1 Amount
√
√
-
2 Currency
√
√
-
3 Applicable Exchange Rate
-
-
-
C Creditor Ledger Information (Upon maturity, the principal + interest is deposited as mentioned in the confirmation of the term deposits sent to the customer)
1 Amount
√
√
-
2 Currency
√
√
-
3 Applicable Exchange Rate
-
-
-
Term Loan Transactions - (20)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name (Name of the department / branch of the bank where the transaction is executed)
√
√
-
2 Service Channel Location (Name of the city where the branch/department executing the transaction is located)
√
√
-
3 Transaction Reference Number (Transaction Number)
√
√
-
4 Transaction Type (Term Loan)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Debtor)
√
√
-
8 Due Date (Creditor)
√
√
-
B Debtor Ledger Information (Loan Installment Payment) (Installment schedule as per the agreement signed by the customer)
1 Amount
√
√
-
2 Currency
√
√
-
3 Applicable Exchange Rate
-
-
-
4 Type of financing
-
-
-
5 Payment details
-
-
-
C Creditor Ledger Information (Loan Payment) (A confirmation of the loan detailing the loan specifics is sent to the customer)
1 Amount
√
√
-
2 Currency
√
√
-
3 Applicable Exchange Rate
-
-
-
4 Type of financing
5 Financing details
-
-
-
Murabaha Deposits - (21)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name (Name of the department / branch of the bank where the Murabaha deposit is made)
√
√
-
2 Service Channel Location (Name of the city where the branch/department executing the transaction is located)
√
√
-
3 Transaction Reference Number (Transaction Number)
√
√
-
4 Transaction Type (Murabaha Deposit)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Debtor)
√
√
-
8 Due Date (Creditor)
√
√
-
B Information for Debits (Payment) (An investment confirmation of Murabaha containing investment details is sent to the customer)
1 Amount
√
√
-
2 Currency
√
√
-
3 Applicable Exchange Rate
-
-
-
C Creditor ledger information (on the payment date) (a credit entry is made for the sale price, including the purchase amount + the profit mentioned in the Murabaha investment confirmation)
1 Amount
√
√
-
2 Currency
√
√
-
3 Applicable Exchange Rate
-
-
-
Tawarruq Financing - (22)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Channel Name (Name of the department/branch where the operation is executed)
√
√
-
2 Service Location (City where the branch/department is located)
√
√
-
3 Transaction Reference Number (Murabaha transaction number)
√
√
-
4 Transaction Type (Murabaha Financing)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Debtor)
√
√
-
8 Due Date (Creditor)
√
√
-
B Debit Entry Information (Payment of installment) (A Tawarruq financing confirmation containing the transaction number and details of the purchase and sale of the commodity is sent to the customer.)
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
C Creditor Ledger Information (Tawarruq Repayment) (Confirmation of Tawarruq containing transaction number and details of goods purchase and sale is sent to the customer)
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
SAMA Orders - (23)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Service Delivery Channel Name (Name of the department/branch where the operation is executed)
√
√
-
2 Service Location (City where the branch is located)
√
√
-
3 Transaction Reference Number (The system generates a reference number for the transaction) + Unique Identifier Number for Rapid System Transactions
√
√
Unique identifier number for Rapid System Transactions
4 Transaction Type (Standing Order)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Debtor)
√
√
-
B Debtor Ledger Information
1
Amount
√
√
-
2
Currency
√
√
-
3
Applied Exchange Rate
-
-
-
4
Fees
√
√
-
5
Commission (Standing Order)
√
√
-
6
Name of Beneficiary
-
-
-
7
Beneficiary Account Number
-
-
-
8
Beneficiary Address
-
-
-
9
Name / Code of Beneficiary Bank
-
-
-
10
Reference Number at SAMA
-
-
-
11
Purpose of Transfer if specified in SAMA Order
-
-
-
12
Transaction Details (Type of standing order and reference number)
-
-
-
C Creditor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Fees
√
√
-
5 Commission (Standing Order)
√
√
-
6 Name of Remitter
-
-
-
7 Account Number
-
-
-
8 Name of Remitter Bank
-
-
-
9 Purpose of Transfer if specified in SAMA Order
-
-
-
10 Transaction Details (Type of standing order and reference number)
-
-
-
Issuing a Bank Check - (24)
No.
Information Criteria
Arabic
English
Notes
A Establishing a Service Delivery Channel
1 Name / Code of the Service Delivery Channel (Name of the bank and the branch/department where the transaction is executed)
√
√
-
2 Location of the Service Delivery Channel (Name of the city where the branch/department is located)
√
√
-
3 Transaction Reference Number (Generated by the system)
√
√
-
4 Transaction Type (Issuing a Bank Check)
√
√
-
5 Transaction Start Date
√
√
-
6 Transaction Start Time
√
√
-
7 Due Date (Debtor)
-
-
-
8 Due Date (Creditor)
-
-
-
B Debtor Ledger Information
1 Amount
√
√
-
2 Currency
√
√
-
3 Applied Exchange Rate
-
-
-
4 Check Number
√
√
-
5 Name of Beneficiary - for Order
-
-
-
6 Name of Beneficiary
-
-
-
Instructions on the Working Hours of Bank Branches, Self-Service Centers, and Remittance Centers in Shopping Centers
No: 41049329 Date(g): 11/3/2020 | Date(h): 16/7/1441 Status: In-Force Translated Document
In accordance with Article Sixteen of the Banking Control Law and in reference to the Central Bank circular No. 35487/MAU/586 dated 09/10/1427H. concerning the working hours of bank branches for the public.
We present the following instructions. These are related to the working hours of bank branches, self-service centers, and remittance centers in shopping malls with the purpose of extending their optional hours under specific guidelines and in keeping with applicable regulations.
For your information and action accordingly as of 15/3/2020G. All banks are required to review the status of their existing branches and remittance centers within shopping malls and adjust their working hours and provided services accordingly.
First: Definitions
The following terms and phrases - wherever used herein- shall have the corresponding meanings, unless the context indicates otherwise:
Shopping malls: Large, enclosed markets, typically consisting of multiple floors and containing various businesses, entertainment venues, and food outlets.
Independent Branch: A fully integrated, standalone bank branch located in the same building as the shopping mall, accessible solely through an external entrance.
Non-Independent Branch: A fully integrated bank branch located within the shopping mall.
Independent Self-Service Center Branch: A standalone self-service center within the mall building, accessible solely through an external entrance.
Non-Independent Self-Service Center Branch: A self-service center located inside the mall, or in a rented space in the mall’s lobby.
Independent Remittance Center Branch: An independent fully integrated remittance center branch within the mall. The branch entrance is external only.
Non-Independent Remittance Center Branch: A fully integrated remittance center branch located within the shopping mall.
Cash Transactions: Transactions that involve the exchange of cash through deposits, cash withdrawals, or the deposit, withdrawal, or issuance of cheques through tellers.
Customer Services: Opening accounts, updating information, printing "MADA" cards and credit cards, and receiving inquiries, requests, and complaints.
Marketing and Sales Services: Offering consumer loan products, real estate loans, and credit cards.
Second: General Provisions
- The working hours of independent bank branches and independent remittance center branches shall remain as per the instructions issued by the central bank regarding them.
- The application of what is stated in these instructions shall not result in any violation of the provisions of the Labor Law and its implementing regulations.
- The Central Bank must be informed about any branches with extended working hours, as well as any subsequent changes.
Third: Instructions
A. Non-Independent Branches.
Non-independent bank branches are allowed to operate for extended working hours in line with the mall's working hours throughout the week, following these controls:
- Operations after 4:30 PM from Sunday to Thursday shall be limited to customer service and marketing and sales services, any cash transactions are prohibited during these hours.
- Cash transactions shall not be provided on Fridays and Saturdays, with operations limited to customer service and marketing and sales services only.
B. Independent and Non-Independent Self-Service Center Branches.
Independent and non-independent self-service center branches are allowed to operate for extended working hours in line with the mall's working hours throughout the week, following these controls:
- The cash withdrawal or cheque cashing service shall not exceed an amount of (5,000) SAR through Interactive Teller Machines (ITM) after 4:30 PM from Sunday to Thursday.
- The cash withdrawal or cheque cashing service shall not exceed an amount of (5,000) SAR through Interactive Teller Machines (ITM) on Fridays and Saturdays.
C. Non-Independent Remittance Centers.
Non-independent remittance center branches are allowed to operate extended working hours in line with the mall's working hours throughout the week, provided that operations after 5:30 PM are limited to membership opening services, data updates, beneficiary additions, card printing, and providing cash transfer services only through self-service machines (KIOSK) or point-of-sale devices.
Rules of Saudi Arabian Riyal Interbank Express Indirect Participation
No: 43046288 Date(g): 27/12/2021 | Date(h): 23/5/1443 Status: In-Force Based on the powers vested to the Saudi Central Bank under its law issued by Royal Decree No. M/36 dated 11/04/1442 H, the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386 H, and the implementing the provisions of the Banking Control Law issued by Ministerial Resolution No. 3/2149 dated 14/10/1406 H.
Attached are the rules for indirect participation of banks in the Saudi Rapid Financial Transfer System, which aims to set eligibility criteria for indirect participation in the system, and to determine the requirements of the service level agreement between the bank participating directly and indirectly in the system.
1. Introduction
1.1 Background
These rules are issued by SAMA in exercise of the powers vested upon it under Saudi Central Bank Law issued by Royal Decree No. M/36 on 11/4/1442 H (26/11/2020 G), the Banking Control Law issued by Royal Decree No. M/5 on 22/02/1386 H (11/6/1966 G) and Council Minister Resolution #226 dated 2/5/1440 H.
This document set out respective rules regulating Indirect Participation within the Real Time Gross Settlement System.
Based on SAMA's own discretion, SAMA can direct a Bank to change its status from Indirect Participant to Participant or vice versa giving sufficient notice period. Similarly, SAMA can also hold, limit, suspend or revoke Settlement Agent status of a Bank giving sufficient notice period.
1.2 Definitions
Bank As defined in Article 1(a) of the Banking Control Law and licensed by its provisions. National Bank As defined in Article 1(c) of the Banking Control Law. Foreign Bank As defined in Article 1(d) of the Banking Control Law. Saudi Arabian Riyal Interbank Express Saudi Arabian Riyal Interbank Express System, the Kingdom's Inter-Bank Electronic Funds Transfer Systems i.e. the Central System at SAMA, the Participants’ Gateways, the security sub-system, the Contingency Central System and Gateways, the communications links between these systems, and all other systems used by SAMA in connection with Saudi Arabian Riyal Interbank Express. Participant As defined by Rule 2.1.1. of SARIE Operating Rules and Regulations - Version 3.0. Settlement Agent A Participant who is authorized by SAMA to clear, settle and record transactions for Indirect Participants. Indirect Participant A Non-Participant Bank, whose transactions are cleared, settled and recorded by a Settlement Agent through Saudi Arabian Riyal Interbank Express. 1.3 Scope
1. These rules are only applicable to Banks.
2. Any Financial Institutions, supervised by SAMA or any other regulatory authority, are out of scope in relation to the applicability of these rules.
3. For the avoidance of any doubt, these rules are not applicable to International Corresponding Banking Business.
2. Criteria
2.1 Participant
4. As stipulated in SARIE Operating Rules and Regulations.
2.2 Indirect Participant
5. Subject to SAMA’s approval, a bank may opt to apply to register itself as Indirect Participant.
6. A Bank can be a Participant or an Indirect Participant therefore cannot hold both participation statuses at one time.
7. Upon receiving information as per Article 19 of these Rules, SAMA will assess overall risk before approving Tiered Participation Participant arrangement.
8. SAMA may define and impose risk exposure thresholds on case-by-case basis, which Indirect Participant has to monitor on a period basis.
9. Indirect Participant must notify SAMA its expectation on a bi-annual basis to when it is likely to breach thresholds as and if communicated by SAMA.
10. Indirect Participant must provide an updated information as required by Article 22 of these Rules whenever there is a significant change to risk exposures.
11. An existing Participant may apply to de-register itself to be Participant and register itself to Indirect Participant subject to SAMA’s approval.
12. An Indirect Participant may appoint only one Settlement Agent in Saudi Arabian Riyal Interbank Express and shall notify the identity of the Settlement Agent to SAMA in writing at least three (3) months before such service come into effect in Saudi Arabian Riyal Interbank Express.
2.3 Settlement Agent
13. Only National Banks having Participant status can be Settlement Agents.
14. Participants must follow SAMA New Banking Products and Services Regulation before offering Saudi Arabian Riyal Interbank Express Clearing Service to Banks.
15. SAMA may define and impose risk exposure thresholds on case-by-case basis, which Settlement Agent has to monitor on a periodic basis.
16. Settlement Agents must notify SAMA its expectation at least on an annual basis to when it is likely to breach thresholds.
17. Participants, through its own current account with SAMA (as Indirect Participant will not maintain current account with SAMA) must be able to clear all types of SAR transactions on the behalf of their indirect participants without any encumbrance.
18. Participants must have ability and capacity to execute SAMA’s monetary operations (Overnight Repurchase Agreement (Repo), Overnight Reverse Repurchase Agreement (Reverse Repo), USD sales etc.) and SAMA’s open market operations (SAMA Bills and term Repo etc.) on the behalf of their indirect participants without any encumbrance.
3. Indirect Participant Registration
3.1 Application Letter
19. A bank wish to register itself as Indirect Participant must send application letter to SAMA along with following documents:
i) Appointment Letter from Chief Executive Officer (CEO) or equivalent of the Indirect Participant proposing the appointment of Settlement Agent;
ii) A letter from the Bank to SAMA explaining to why it is in the Bank’s interest to operate as Indirect Participant;
iii) Draft Service Level Agreement between Settlement Agent and the Bank wishing to register itself as Indirect Participant; and
iv) Current Year plus 3 year SAR Payment Instructions Volumes and Values forecast (Incoming and Outgoing) of the Indirect Participant.
20. Based on review of the application letter and documents / information stated in article 19, SAMA will approve Bank’s registration as indirect participant to the Bank. SAMA may require additional information or may apply additional criteria on a case-by-case basis.
21. SAMA may reject the request if SAMA is of the view that Bank does not satisfy the Saudi Arabian Riyal Interbank Express Indirect Participation Rules. SAMA can also reject the request if it is of the view that it would be best interest of Financial Sector for the Bank to be Participant.
3.2 Appointment of Settlement Agent
22. As a part of appointing Settlement Agent, Indirect Participant must ensure that:
i) the Settlement Agent is authorized to clear, settle and record transactions for Indirect Participants;
ii) the Settlement Agent has operational, technical, financial and organizational capacity to support the needs of the Indirect Participant;
iii) it has identified all material dependencies on its Settlement Agent and must satisfy itself on the arrangements Settlement Agent has in response to those dependencies;
iv) it has performed detailed risk assessment on the Settlement Agent; and
v) all arrangements are in place with Settlement Agent to satisfy Indirect Participant's own clearing liabilities such for e.g. Intraday and / or Overnight Liquidity Facilities.
3.3 Onboarding of Indirect Participant
23. As a part of its onboarding process, Settlement Agent should ensure that:
i) it has identify, assess and document the risk associated with its provision of Saudi Arabian Riyal Interbank Express clearing and settlement services to the Indirect Participant including the impact of its own additional capital requirement due to increase in risks.
ii) it has ability and capacity to clear Indirect Participant’s liabilities (whether prefunded or not) i.e. Settlement Agent must ensure that it maintain adequate liquidity with SAMA to ensure its and its indirect participant’s liabilities are cleared on a timely manner. It establishes and operates such controls, policies and arrangements as are necessary to ensure that it has appropriately mitigated to an acceptable level the risks associated with providing Saudi Arabian Riyal Interbank Express clearing and settlement services to its Indirect Participant.
iii) it has taken reasonable steps to ensure that the Indirect Participant to whom it will provide do not jeopardize the safety, integrity or reputation of the Saudi Arabian Riyal Interbank Express.
iv) it has performed detailed risk assessment on its portfolio of Indirect Participants once additional Indirect Participant will be on-boarded.
3.4 Service Level Agreement
24. Both parties ("Indirect Participants and Settlement Agents") must ensure that they have a legally enforceable service level agreement in place under jurisdiction of Kingdom of Saudi Arabia.
25. Scope of services, roles and Responsibilities of both parties must be clearly defined.
26. Effective and expiry dates of the agreement, mechanism of renewal and requirement of periodic review of the agreement must be clearly defined.
27. All key performance indicators and its related attributes such as (but not limited to) definitions, calculation methods, threshold levels, frequency of measurements, reporting mechanism etc. must be clearly defined.
28. All applicable Information Security and Business Continuity Requirements pertaining to both parties in case of Incidents and Disasters must be clearly documented.
29. Both parties must ensure that dispute resolution arrangements are clearly documented including details of the charges payable in case of error, back value etc.
30. Both parties shall establish a process regularly to monitor and document (at a minimum annually) the performance of each other against their contractual obligations in respect of the service level agreement.
4. Risk Management
4.1 Material Dependencies
31. As part of appointment process of Settlement Agent, Indirect Participant should assess and document all its material dependencies on the Settlement Agent. Indirect Participant must ensure that they have adequate arrangements to manage these dependencies, as Settlement Agent will clear all types of SAR transactions of Indirect Participant.
32. Similarly, as part of Indirect Participant On-boarding process, Settlement Agent should assess and document all its material dependencies on Indirect Participant and review adequacy of the arrangements Indirect Participant have to manage these dependencies.
33. Both parties must re-assess and document review of the dependencies identified in Article 31 and 32 above and their arrangements to manage those dependencies at least on an annual basis. As a part of annual review process, both parties should receive/provide updates from/to each other on the arrangements in place to manage material dependencies both parties have on each other.
34. As a part of annual or subsequent review process, both parties should consider whether there are any new material dependencies identified since the last review or appointment date.
35. Both parties should review the effects of all incidents (operational, technical or others) incurred on the service since the last review. Both parties must satisfy themselves that all the remedial action taken to mitigate risk(s) are designed, implemented and operating effectively.
36. Both parties must ensure that similar process is carried to all newly identified dependencies as stated in Article 33 above.
37. Both parties must maintain an up to date log of all incidents that caused disruption to the services with sufficient detail i.e. nature of the incident, detail of its root cause and disruption created, any losses incurred, details of remedial action and status of the remedial action.
4.2 Prudential Requirements
38. Settlement Agent must incorporate all credit lines (utilized, unutilized, committed and uncommitted) assigned to indirect participants as part of the SAMA’s requirements for measuring Counterparty credit risk at the time of on-boarding and on an on-going basis.
39. Indirect Participant must incorporate, manage and measure Settlement Agent Counterparty credit risk especially the cash balance and collateral held by Settlement Agent.
40. Both parties must measure and incorporate all associated risks with Tiered Participation arrangement as part of the Prudential Risk Requirements at the time of inception and on an on-going basis.
5. Other Provisions
5.1 Reporting Requirements
41. Settlement Agent must file statistical report return relating to its Indirect Participants within 5 working days of the month end as prescribed in Appendix 1.
42. Settlement Agent must report all operational incidents and/or credit events relating to services provided to its Indirect Participants within 24 hours of the incident / event occurrence followed by a full report within 7 working days of occurrence detailing the cause(s) of event along with remedial action taken to avoid repetition.
43. Similarly, Indirect Participant must report all operational incidents and/or credit events relating to services provided by its Settlement Agent within 24 hours of the incident / event occurrence followed by a full report within 7 working days of occurrence detailing the cause(s) of event along with remedial action taken to avoid repetition.
44. In case of an operational incident and / or credit event, SAMA encourages both parties to work closely with each other to remediate the effect(s) of incident / event effectively and efficiently. SAMA also encourages both parties to submit joint report instead of submitting separate reports as prescribed in article 42 and 43 of these rules. In case, either Settlement Agent or Indirect Participant submits a joint report, then both parties will be no longer required to submit separate reports as prescribed in articles 42 and 43 of these rules.
45. Banks are required to submit a copy of the report to SAMA via the following email address.
5.2 End User Terms
46. Settlement Agent shall ensure that the contract between the Indirect Participant and its End Users provides (in easily understandable language and in a clear and comprehensible form) all matters related to services relating to Saudi Arabian Riyal Interbank Express.
Appendix 1 - Monthly Statistical Return
Part A: SAR Outgoing Instructions
Insert name of the Settlement Agent Monthly Indirect Participants SAR Outgoing Instructions Month, YYYY Date Indirect Participant’s Name 1 Indirect Participant’s Name 2 Total Indirect Participants Instructions Total Saudi Arabian Riyal Interbank Express Instructions processed by Settlement Agent Percentage of Indirect Participant Instructions over Total Saudi Arabian Riyal Interbank Express Instructions Volume Value Volume Value Volume Value Volume Value Volume (%) Value (%) a b c d e f = b + d g = c + e i j k = f/i x 100 l = g/j x 100 dd/mm/yyyy dd/mm/yyyy dd/mm/yyyy Total In case of a bulk instruction - take volume of individual instructions within the bulk instructionPart B: SAR Incoming Instructions
Insert name of the Settlement Agent Monthly Indirect Participants SAR Incoming Instructions Month, YYYY Date Indirect Participant’s Name 1 Indirect Participant’s Name 2 Total Indirect Participants Instructions Total Saudi Arabian Riyal Interbank Express Instructions processed by Settlement Agent Percentage of Indirect Participant Instructions over Total Saudi Arabian Riyal Interbank Express Instructions Volume Value Volume Value Volume Value Volume Value Volume (%) Value (%) a b c d e f = b + d g = c + e i j k = f/i x 100 l = g/j x 100 dd/mm/yyyy dd/mm/yyyy dd/mm/yyyy Total In case of a bulk instruction - take volume of individual instructions within the bulk instructionPart C: Credit Lines and Collateral
Insert name of the Settlement Agent Credit Lines and Collateral Held As of DD/MM/YYYY SAR' mn Indirect Participant’s Name Credit Lines Value of Collateral Held Total Unutilized Utilized Committed Uncommitted Total Cash Non- Cash a** b c d e ***g h i Indirect Participant’s Name 1 Indirect Participant’s Name 2 Indirect Participant’s Name 3 Total ** a = b + c = d + e
*** g = h + 1Financial Sector Safety and Security Guidelines CCTV Specifications Summary
No: 694270000149 Date(g): 22/7/2019 | Date(h): 20/11/1440 Status: In-Force Reference to the telegram from His Royal Highness, the Minister of Interior, No. 68733 dated 27/03/1440H, regarding the Royal Decree No. 59766 dated 20/11/1439H, which directs the Ministry of Interior to prepare a regulatory framework mandating all government, commercial, and public places, as well as any other locations deemed necessary by the Ministry, to install security surveillance cameras connected to the National Information Center. Also, in reference to the telegram from the Deputy Minister for Security Capabilities, No. 8692 dated 03/09/1440H, which includes instructions for the relevant authorities to require banks and financial institutions, to implement the agreed-upon technical specifications for security systems and to provide the agency with a timeline for implementation.
Attached herewith is the final version of the technical specifications for the security systems in the financial sector. We kindly request that you expedite their implementation from the date of this notice for all your new or under-construction locations. For existing premises, you are required to provide SAMA within two weeks of this notice with an upgrade and modification plan that includes the site name, number of cameras, and the timeline. Should you have any inquiries regarding this matter, please coordinate with the advisor to the Deputy Governor for the Development of the Financial Sector or contact via email at (BankingSafetySecurity@SAMA.GOV.SA).
Security Surveillance Systems
The Security Surveillance Systems specified in this document are based on the following standards:
• BS EN 62676-4 2015, Application Guidelines, including Operational Requirements.
• Centre for Applied Science and Technology CAST (UK Government).
• ANSI/ASIS PAP-1:2012 Physical Asset Protection.
Note:
• The minimum recording retention for all bank facilities (Head Office, Branches, Cash Centres and ATMs) security surveillance systems shall be 90 days.
• In the event of any claims or complaints from customers, financial organisations need to create a copy of the CCTV footage of the incident and store it for a period of 1 year from the date of receiving the complaint
• In the event of any rejected claims or complaints from the customer, banks need to take a copy of the CCTV footage of that incident and store for a period of 5 years from the date of the complaint.
The following specifications shall be used to define surveillance objectives for CCTV equipment at branches:
CCTV system surveillance objectives Ser Surveillance objective Body representation Appropriate linear resolution Face width Camera type required for coverage 1 Identification 120% 250 Pixels/m 40 Pixels Full HD with WDR above 120db 2 Recognition 50% 100 Pixels/m 17 Pixels Full HD camera 3 Detection 10% 20 Pixels/m 3 Pixels Full HD Camera The following table defines how specific areas within branches/facilities shall be considered with reference to the surveillance objectives defined above.Surveillance objectives by branch/facility areaBranch/facility area Surveillance objective All entrances and exits; indoor and outdoor Identification Full coverage of parking areas Detection Full coverage of cash counters Identification Full coverage of perimeter area Detection Full coverage of reception and customer waiting area Identification Full coverage of service area Recognition Full coverage of locker/safe rooms Identification Emergency doors and exits Identification Entrances to utility/communication/HVAC/electrical rooms Identification Full coverage of IT rooms and data centres Identification Full coverage of ATMs Identification Cull coverage of customer face at ATM/CCDM Identification The following table specifies the branch surveillance objectives by functional area and the technology required to achieve these objectives.Surveillance objectives by branch (Customer side) functional area and technological requirementsFunctional area Surveillance objective Technology required Main branch entrance Identification Wide Dynamic Range (WDR) and IR camera Waiting area Identification Normal dome camera with 2.8 - 12mm VF lens Reception Identification Normal dome camera with 2.8 - 12mm VF lens Corridors Detection Normal dome camera with 2.8 - 12mm VF lens Lobbies Identification Normal dome camera with 2.8 - 12mm VF lens Tellers Identification WDR Box camera with 20mm VF lens Operations area Recognition Indoor IR camera with VF lens Elevators - outside of elevator Recognition Normal dome camera with 2.8 - 12mm VF lens Customer Parking Recognition Outdoor IR/PTZ IR camera Perimeter Recognition Outdoor IR/PTZ IR camera ATM Identification Inbuilt pin-hole camera The following table specifies the office surveillance objectives by functional area and the technology required to achieve these objectives.Surveillance objectives by office (Staff /Employee side) functional area and technological requirementsFunctional area Surveillance objective Technology required Main entrance door Identification WDR camera Reception Identification Normal dome camera with 2.8 - 12mm VF lens Lobby Identification Normal dome camera with 2.8 - 12mm VF lens Corridors Detection Normal dome camera with 2.8 - 12mm VF lens Elevators Detection Normal dome camera with 2.8mm VF lens Emergency exits Identification Normal dome camera with 2.8 - 12mm VF lens Storage areas Recognition Normal dome camera with 2.8 - 12mm VF lens IT / IDF room Identification Indoor IR camera with VF lens Security Control Room / IT room Identification Indoor IR camera with VF lens SWIFT/dealing/treasury room Recognition IR camera with VF lens File and Passport office Recognition IR camera with VF lens Data centre Identification Indoor IR camera with VF lens Vault - outside Identification Indoor IR camera with VF lens Vault - inside Identification Indoor IR camera with VF lens Office entrance Recognition Normal dome camera with 2.8 - 12mm VF lens Vehicle entry Identification Indoor IR camera with VF lens and number plate recognition Access points to the building Detection Indoor IR camera with VF lens Utility rooms Recognition Indoor IR camera with VF lens Perimeter Detection PTZ camera/Outdoor IR camera Parking - indoor Detection Indoor IR camera with VF lens Parking - outdoor Detection PTZ camera/Outdoor IR camera CCTV System Installation Requirements
The CCTV system design shall enable monitoring of buildings and facilities from a security control room; furthermore, the system must be able to integrate with third party systems including but not limited to the Building Management System (BMS), Access Control Systems (ACS) and the Intruder Detection System (IDS).
The system must be designed, engineered, furnished, delivered, installed and tested prior to handover, with appropriate handover documentation signed by the receiving authority and the installation engineers. The system must be supported by an Uninterruptable Power Supply (UPS) as well as being connected to a generator to ensure for long term continuity in the event of power loss.
The security surveillance system must support the following recording types: • Motion Detection
• Continuous Recording
• Video Analytics
Each branch/facility shall maintain a register which records all security equipment failures, including details regarding time and date of failure; type of failure; action taken; date of rectification. All failures and intentional stoppages of the system shall be recorded in the log.
All cameras shall be installed in protective enclosures at locations and heights which are not easily accessible. These enclosures shall be rated to prevent the ingress of dust, dirt and moisture that might affect the operation of the camera. Vandal proof housings shall be used for cameras installed at a height which is accessible to people. Outdoor camera enclosures shall be rated to a minimum of IP66, with a sun-shield.
All siting of cameras should appropriately consider factors such as lighting ambient conditions.
Supporting CCTV equipment shall be installed in lockable racks or cabinets in secure rooms, in accordance with the branch security zoning policy.
General CCTV Camera Specifications
CCTV cameras shall be compliant with the following specifications:
• IP cameras shall be compliant with the H.264 baseline encoding profile
• IP cameras shall be capable of multi-stream with its native resolution and FPS
• Live stream of IP cameras shall be a minimum resolution of 720p at a minimum of 12 FPS
• Recording streams of IP cameras shall be in accordance with storage requirements in this document
• Each camera shall be configurable with a single IP address
• IP cameras shall support security features including HTTPS standards
• IP cameras shall be able to automatically start streaming according to the last known configuration when it is restarted/reset/rebooted
• Cameras must support 4CIF through full HD resolutions
• Full HD quality day and night cameras with wide dynamic range (WDR) above 120dbs and with backlight compensation shall be required for the main areas as per surveillance objectives
• The FPS software should be capable of being scalable between 12 - 30 FPS
• IP cameras shall be synchronised to the NTP server or similar time server
• All cameras shall be configured with a unique name based on the location and coverage; camera names shall not be repeated.
• The system must have a time and date display on the image.
• The system must be capable of searching by time, date and the camera for real time view.
• The system must be an integral part of a private network with an IP-based infrastructure.
• The network infrastructure should be able to afford high quality images and video during display and recording.
• A firewall and security system should be provided for the CCTV network in case of connecting to other networks.
• The system should give warnings when the communication is interrupted or lost.
Specifications for CCTV Cameras and NVR Server
The following tables define the exact specifications for each specific camera type employed at branches/facilities and the NVR server.
PTZ IP cameras
PTZ IP cameras specification table
Ser Specification description 1. The image sensor shall be ⅓or ½ CMOS (complementary metal-oxide semiconductor) 2. Shall be true Day and Night and automatically switches between colour and black/white depending on the illumination 3. Minimum of 20x optical zoom and 12x digital zoom, minimum 2 Megapixel Full HD resolution cameras. Min of 20x optical zoom in HD cameras 4. Optical zoom control shall provide a scaling function that automatically adjusts the speed of the pan and tilt movement dependent on the field of view 5. Shall be a true IP camera with a high-level connection to the other components in the system; camera shall communicate internal errors and support built-in functions like motion detection through a TCP/IP 6. Auto focus and iris with manual override 7. Shall support a minimum illumination for colour 0.2 lux 80% scene reflectance and 0.02 lux 80% scene reflectance for B/W 8. Shall have back-light compensation; multiple users; privacy zone masking; auto and manual tour; remote set-up and automatic image flip 9. Gain control should be automatic; manually 'on' or 'off' 10. Shall be capable of utilising encrypted password transmission (HTTPS) 11. Panning range shall be 360° continuous and tilting range shall be 180°. In-built geared pan/tilt is preferred 12. Pan/tiIt speed shall be minimum of 0.5%/s to 100%/s 13. Minimum 100 pre-sets and shall have accuracy of +/- 0.1° 14. Operating temperature shall be -10°C to +60°C. Relative humidity shall be 0 - 95% non- condensing 15. Shall have built-in compression algorithms such as MJPEG and H.264 16. Vandal- and dust-proof housing construction with polycarbonate dome and cast aluminium body 17. Shall be ONVIF (open network video interface forum) compliant 18. Outdoor cameras shall be in an IP66 rated enclosure with sun-shroud 19. Cameras must contain open API and support multi streaming External fixed IP cameras
External fixed IP cameras specification table
Ser Specification description 1 The image sensor shall be ⅓ or ½ CMOS. CCD chips used in less than 0.5 lux illumination with 20mm vari-focal lens, minimum 2-megapixel camera. Lux should be 0.2lux colour, 0.01 lux B/W 2 Shall be D/N automatically, switching between colour and B/W mode and vice versa 3 Auto focus and iris with manual over-ride 4 Shall have upgradable internal storage minimum 32GB SD card 5 Shall be ONVIF (open network video interface forum) compliant 6 Outdoor cameras shall be in an IP66 rated enclosure with sun-shroud 7 Shall support 12VDC, 24VDC and POE (power over Ethernet) 8 Automatic tracking white balance 9 Operating temperature should be -10 to +60 10 Cameras must contain open API and support multi streaming Dome IP cameras
Dome IP cameras specification table
Ser Specification description 1 The image sensor shall be ⅓ or ½ CMOS. CCD chips used in less than 0.5 lux illumination with 20mm vari-focal lens, minimum 2-Megapixel camera. Lux should be 0.2lux colour, 0.01 lux B/W 2 Auto focus and iris with manual over-ride 3 Shall have tri-axis 4 Shall have upgradable internal storage minimum 32GB SD card 5 Shall be ONVIF (open network video interface forum) compliant 6 Shall support 12VDC, 24VDC and POE (power over Ethernet) 7 Automatic tracking white balance 8 Shall have built-in compression algorithms such as MJPEG and H.264 9 Cameras must contain open API and support multi streaming Indoor IR IP cameras
Indoor IR IP cameras specification table
Ser Specification description 1 The image sensor shall be ⅓ or ½ CMOS. CCD chips used in less than 0.5 lux illumination with 20mm vari-focal lens, minimum 2-megapixel camera. Lux should be 0.2lux colour, 0.01 lux B/W 2 High power infrared LED's 3 Auto focus and iris with manual over-ride 4 Shall support 12VDC, 24VDC and POE (power over Ethernet) 5 Shall have built-in compression algorithms such as MJPEG and H.264 6 Shall be ONVIF (open network video interface forum) compliant 7 Automatic tracking white balance 8 Cameras must contain open API and support multi streaming Indoor IP Box cameras
Indoor IP Box cameras specification table
Ser Specification description 1 The image sensor shall be ⅓ or ½ CMOS. CCD chips used in less than 0.5 lux illumination with 20mm vari-focal lens, minimum 2-Megapixel camera. Lux should be 0.2lux colour, 0.01 lux B/W 2 Dual encoding stream support 3 Support up to 32GB SD card capable to record in motion in case of NVR failure 4 Automatic tracking white balance 5 Shall have built-in compression algorithms such as MJPEG and H.264 6 Shall be ONVIF (open network video interface forum) compliant 7 Shall support 12VDC, 24VDC and POE (power over Ethernet) 8 Cameras must contain open API and support multi streaming Outdoor IR IP cameras
Outdoor IR IP cameras specification table
Ser Specification description 1 The image sensor shall be ⅓ or ½ CMOS. CCD chips used in less than 0.5 lux illumination with 20mm vari-focal lens, minimum 2-Megapixel camera. Lux should be 0.2lux colour, 0.01 lux B/W 2 Auto focus and iris with manual override 3 Shall support a minimum illumination for colour 0.2 lux 80% scene reflectance and 0.02 lux 80% scene reflectance for B/W 4 High power infrared LEDs 5 Shall have built-in compression algorithms such as MJPEG and H.264 6 Shall be ONVIF (open network video interface forum) compliant 7 Outdoor cameras shall be in an IP66 rated enclosure with sun-shroud 8 Operating temperature shall be -10°C to +60°C. Relative humidity shall be 0 - 95% non- condensing 9 Cameras must contain open API and support multi streaming Pinhole IP cameras
Pinhole IP cameras specification table
Ser Specification Description 1. The image sensor shall be ⅓ or ½ CMOS. CCD chips used in less than 0.5 lux illumination with 20mm vari-focal lens, minimum 2-Megapixel camera. Lux should be 0.2lux colour, 0.01 lux B/W 2. Super wide dynamic range 3. Shall have built-in compression algorithms such as MJPEG and H.264 4. Shall be ONVIF (open network video interface forum) compliant 5. Operating temperature shall be -10°C to +60°C. Relative humidity shall be 0 - 95% non-condensing 6. Cameras must contain open API and support multi streaming NVR server
NVR specification table
Ser Specification description 1 When viewing recorded footage the server shall be capable of providing 90 to 180 days of continuous recorded footage at a minimum of 12 FPS with the resolution of 5MP with RAID 5 on hot swappable hard disk arrangement; the RAID 5 shall be hardware controlled. External NAS/SAN storage shall be considered for any branch installation with more than 32 cameras 2 Shall be capable of full operation under a Physical Security Information Management (PSIM) system with full integration capability for video analytics 3 Shall be client-server based NVR 4 Shall support simultaneous recording, playback, exporting video and searching 5 Shall support recording of a minimum of 12 FPS with 5MP resolution for each video channel individually 6 Shall have extra 25% provision in video inputs and storage capacity for future expansion 7 Shall support H.264/MPEG4/MJPEG compression 8 Shall have twin gigabit Ethernet ports 9 Shall have a USB ports and HDMI ports and VGA ports 10 Shall be based on Linux or Windows server (at least 2008) standard platform or above 11 The NVR and storage shall be equipped with dual processor, dual power supplies and a minimum of 10/1 gigabit per second dual communication uplinks to network with any single point of failure. 12 The CPU load of server and storage must not exceed 70% 13 Shall support plug and play configuration 14 Shall support individual camera schedule with different frame rates and resolution 15 Shall support continuous, motion based, alarm and events based recording 16 Shall be synchronised automatically with time server or NTP server 17 Shall support ONVIF communication protocol 18 Shall support multiple users with different privileges 19 Shall be protected with passwords 20 Shall be capable of sending an email in the event of a loss of video or NVR failure 21 Shall be in a secure location, which limits access to those with access rights and fixed in an IT rack CCTV Operational Deployment Requirements
The following operational deployment requirements for CCTV will be maintained for all branches/facilities
Security Surveillance operational deployment requirements
Ser Operational deployment requirement 1 Each branches/facilities entrance and exit (whether from outside or from inside a building) shall be provided with a dedicated CCTV camera, deployed to provide identification of an unknown person, e.g. 120% of screen height. Cameras looking towards the outside of the building from an internal mounting position will need a wide dynamic range in order to capture the intended target 2 All internal public circulation and assembly areas shall be provided with a camera with general views which allow the individual target to be tracked throughout the branch. This requires recognition of a known person e.g. 50% of screen height 3 Each entrance to the private (staff) domain (whether from the exterior or from the public domain) shall be provided with a dedicated CCTV camera, deployed to provide identification of an unknown person, e.g. 120% of screen height. Cameras looking towards the outside from an internal mounting position will need a wide dynamic range in order to capture the intended target 4 Provided the entrance to the private (staff) domain are sufficiently covered by CCTV there should be no need to track through the common staff areas, unless required by each individual bank policy 5 As well as a general view of the teller area, each individual teller station should have its own dedicated camera. The dedicated camera should be able to capture all transactions as well as identifying an unknown customer e.g. 120% of screen height. The dedicated camera should ideally be positioned above the teller station, looking towards the customer, but capturing the whole workstation. It is required to cover cash drawers and activity of the same area 6 Highly restricted access areas (operations room, IT servers, data centres, safety deposit rooms, tellers, operations area and any other cash dealing areas) require fixed cameras with general views which allow an individual target to be tracked throughout the area while monitoring their activities. This requires identification of a known person, e.g. 1200% of screen height. If the area is too large to be covered by an individual camera, additional cameras shall be deployed as necessary to comply with this guidance 7 The entrance to the vault/strong room/safety deposit box room shall be provided with a dedicated CCTV camera on the inside in addition to the vault entrance from the outside, deployed to provide identification of an unknown person, e.g. 120% of screen height. Additionally, the area should be provided with general views which allow an individual target to be tracked throughout the area while monitoring their activities, requiring recognition of a known person, e.g. 50% of screen height. Users of safety deposit boxes shall be provided a private area where items can be deposited and removed out of sight of the cameras 8 The entire cash and valuables in transit (CVIT) route shall be monitored by CCTV. The route should be provided with a general view which allows an individual target to be tracked along the entire path and their activities monitored, requiring recognition of a known person, e.g. 50% of screen height 9 All ATM's shall have a wide dynamic range camera within the body of the machine to identify the user, e.g. 120% of screen height. Additionally, all ATM shall have a general view camera covering the area around the machine which provides recognition of a known person, e.g. 50% of screen height 10 All branch external facades shall be monitored by CCTV. The cameras shall be able to observe the activities around the entire branch perimeter, e.g. 25% of screen height. Additionally, any external areas owned by the branch, such as customer and staff parking, should also have observation coverage. 11 It is mandatory for fixed CCTV cameras to be deployed in the following areas: Teller areas/teller counters focussing to teller and customer's face as well as teller counter for cash demonstration (using one camera for each teller and another camera for the drawer) Teller door entrance/teller counters field area Customer services and waiting areas Operations areas, back office and cash loading area All corridors leading to the vault, where applicable Branch vault room, focussing on the whole vault entrance/exit Branch vault room, focussing on the cash cabinet and the entrance Safety deposit box room entrance ITD server; SWIFT/dealing and security room: CPD; Cad file office; HR filing; passport office; IDF room On-site and off-site ATMs (a minimum of two cameras, one focussing on the customer's face and the other on the withdrawal of cash; with an additional camera used for perimeter/rear entry of the service cabinet, where applicable) Staff entrance door Bank main entrance Bank premises and parking area Lift lobbies, office entrances and emergency exit Customer service, counter coverage and reception area Any other risk area as per requirements To cover the security items Entry to high security areas, subject to prior approval from authorised staff Design and fixing of cameras shall be in proper sequence with the recording device Specification and viewing angles shall comply with SAMA policy Recording capacity shall be in accordance with SAMA policy NVR recorder must be secured in accordance with this document CCTV system shall be supported by a UPS in accordance with SAMA requirements There shall be separate power supply for all devices and cameras No cables shall be exposed without conduits CCTV room temperatures shall be maintained as per system requirements Spot monitor for branch manager and security officer Sufficient lighting shall be provided for all monitoring and recording areas Security system drawings must be received from the supplier prior to the installation of the systems, and once the systems have been installed 12 CCTV room shall be covered by a camera and the entrance shall be via an access control system reader. Only designated and authorised bank personnel shall handle the CCTV system and equipment 13 Deployment of CCTV cameras shall be at an appropriate angle, in which maximum areas can be viewed. In the event that a camera's location needs to be changed approval shall be sought from the respective branch manager or department head in consultation with the security department 14 Branch staff shall be assigned to ensure the correct temperature is maintained in the CCTV room 15 A CCTV system viewing monitor shall be installed in the office of the respective branch manager 16 Authorisation for access to the security system control room shall be restricted to the designated staff only. In the event of a requirement for system vendor/maintenance technician attendance, this should only be authorised by the designated responsible staff and designated security department personnel. Technician attendance should be logged alongside the purpose for the visit 17 Entry to the CCTV/IT room is restricted and all entry shall be documented in the security log-book alongside a reason and relevant justification 18 Support to law enforcement authorities will follow the bank procedures after approval by the bank's security department 19 Video data overwriting or missing recordings shall be reported immediately to the branch/facility management and the security department 20 To ensure optimum system performance the branch manager/delegated staff shall check the CCTV system on a daily basis; the Head of branch operations/delegated staff shall ensure that the security personnel are checking the system on a daily basis and that there is no interruption to the system. Checks should include whether standard time is applied to the security system. Any interruption in recording or fault in the security system shall be reported immediately to the security department who will coordinate with the vendor maintenance team 21 Security systems maintenance records shall be maintained in a separate file for future record and maintenance. All visits of contractors/system vendors shall be recorded in the log, and shall be at the prior approval of relevant branch/facility manager in consultation with the bank security department 22 The CCTV checking form used in branches and bank facilities shall be maintained daily and submitted at the end of the month by security to the security department; it shall be signed by the designated staff alongside the signature of the security guard 23 In compliance with system maintenance requirements, the CCTV system shall be regularly maintained by the vendor to ensure it is working optimally 24 Each branch/facility must ensure that the system is in operational condition at all times and recordings are stored for the duration dictated by SAMA regulations 25 All cameras on the NVR shall be coded with a unique identification number 26 All equipment requiring users to log on using a password shall be configured with user/site-specific password/passwords. No system/product default passwords shall be allowed 27 The CCTV system at all branches/facilities shall be inspected annually by the security department CCTV Surveillance Specifications
1. General
The ATM will have a pin-hole camera located above the client facing screen to record the client's face, this will be supported by an overhead camera to record the transaction and whether cash was deposited and withdrawn. Additionally, in the case of an off-site ATM and additional camera is to be located to observe and cover rear entrance to the cash service room as well as an internal camera to observe the custodians/financial organisation employees during their activities inside the service room. Supporting CCTV equipment shall be installed in lockable racks or cabinets in secure rooms, in accordance with the branch security zoning policy.
Note: This section must be read along with Security Surveillance Systems, from pages 2-16, as the primary resource and means to support and clarify the surveillance requirements.
Camera Description
1. The specified unit shall be of manufacturer's official product line, designed for commercial and/or industrial 24/7/365 use.
2. The specified unit shall be based upon standard components and proven technology using open and published protocols
3. The specified unit shall be manufactured in accordance with ISO 14001.
Certifications and Standards
General abbreviations and acronyms:
1. AGC: Automatic gain control
2. AES: Advanced Encryption Standard
3. API: Application Programming Interface
4. Aspect ratio: A ratio of width to height in images
5. Bit Rate: The number of bits/time unit sent over a network
6. Bonjour: Enables automatic discovery of computers, devices, and services on IP networks.
7. DHCP: Dynamic Host Configuration Protocol
8. DNS: Domain Name System
9. EIS: Electronic Image Stabilization
10. FPS: Frames per Second
11. FTP: File Transfer Protocol
12. H.264 (Video Compression Format)
13. IEEE 802.1x: Authentication framework for network devices
14. IP: Internet Protocol
15. IR light: Infrared light
16. ISO: International Standards Organization
17. JPEG: Joint Photographic Experts Group (image format)
18. LAN: Local Area Network
19. LED: Light Emitting Diode
20. LPR: License Plate Recognition
21. Lux: A standard unit of illumination measurement
22. MBR: Maximum Bit Rate
23. MPEG: Moving Picture Experts Group
24. Multicast: Communication between a single sender and multiple receivers on a network
25. NTP: Network Time Protocol
26. NTSC: National Television System Committee - a colour encoding system based on 60Hz
27. ONVIF: Global standard for the interface of IP-based physical security products
28. PACS: Physical Access Control System
29. PAL: Phase Alternating Line - a colour encoding system based on 50Hz
30. PoE: Power over Ethernet (IEEE 802.3af/at) standard for providing power over network cable
31. Progressive scan: An image scanning technology which scans the entire picture
32. PTZ: Pan/Tilt/Zoom
33. QoS: Quality of Service
34. RAID: Redundant Array of Independent Disks
35. SaaS: Software as a Service
36. SIP: Session Initiation Protocol
37. SMTP: Simple Mail Transfer Protocol
38. SMPTE: Society of Motion Picture and Television Engineers
39. SNMP: Simple Network Management Protocol
40. SSL: Secure Sockets Layer
41. TCP: Transmission Control Protocol
42. TLS: Transport Layer Security
43. Unicast: Communication between a single sender and single receiver on a network
44. UPnP: Universal Plug and Play
45. UPS: Uninterruptible Power Supply
46. VBR: Variable Bit Rate
47. VMS: Video Management System
48. WDR: Wide dynamic range
The specified unit shall carry the following EMC approvals:
1. EN 55032 Class A, EN 55024, EN 61000-6-1, EN 61000-6-2
2. FCC Part 15 - Subpart B Class A
3. VCCI Class A
4. RCM AS/NZS CISPR 32 Class A
5. ICES-003 Class A
6. KCC KN32 Class A, KN35
The specified unit shall meet the following product safety standards:
1. IEC/EN/UL 60950-1
2. G. The specified unit shall meet relevant parts of the following video standards:
3. SMPTE 296M (HDTV 720p)
4. SMPTE 274M (HDTV 1080p)
5. SMPTE ST 2036-1 (UHDTV)
The specified unit shall meet the following standards
1. MPEG-4:
a. ISO/IEC 14496-10 Advanced Video Coding (H.264)
2. Networking:
a. IEEE 802.3at (Power over Ethernet Plus)
b. IEEE 802.1X (Authentication)
c. IPv4 (RFC 791)
d. IPv6 (RFC 2460)
e. QoS - DiffServ (RFC 2475)
Quality Assurance
A. All installation, configuration, setup, program and related work shall be performed by electronic technicians thoroughly trained by the manufacturer in the installation and service of the equipment provided.
B. The contractor or designated sub-contractor shall submit credentials of completed manufacturer certification, verified by a third-party organization, as proof of the knowledge.
C. The Contractor shall provide four (4) current references from clients with systems of similar scope and complexity that became operational in the past three (3) years. At least three (3) of the references shall be utilizing the same system components, in a similar configuration as the proposed system
D. The specified unit shall be manufactured in accordance with ISO 9001.
Warranty
A. All security system components and labour furnished by the contractor including wiring, software, hardware and custom parts shall be fully warranted for parts, materials, labour and travel expenses for a minimum of three (3) years from date of the final acceptance of the Video Surveillance System.
B. The manufacturer shall provide warranty and optional extended warranty for the camera for a total period of maximum five years. If enacted as part of the contract, the contractor will repair or replace parts and/or labour per the warranty for the length of this warranty at no cost to the client.
2. Products
General
A. Cameras shall be Full HD IP-based and comply with established network and video standards.
B. Cameras shall be powered by the switch utilizing the network cable. Power injectors (midspans) shall be provided by the contractor when required for proper operation.
C. Cameras shall be fully supported by an open and published API (Application Programmers Interface), which shall provide necessary information for integration of functionality into third party applications.
D. Cameras shall comply with relevant ONVIF profile as defined by the ONVIF Organization.
Video Surveillance Schedule
A. Camera types listed below describing various resolutions, form-factor and features shall be supplied by a single camera manufacturer for the video surveillance system.
Video Surveillance Cameras
A. Fixed 2 MP camera for IP
1. The fixed network camera shall meet or exceed the following design specifications:
a) The camera shall operate on an open source; Linux-based platform and including a built-in web server.
b) The camera shall be equipped with an IR-sensitive progressive scan megapixel sensor.
c) The camera shall provide a removable IR-cut filter, providing day/night functionality.
d) The camera shall provide remote focus functionality.
e) The camera shall provide local video storage utilizing a microSD/microSDHC/microSDXC memory card expansion.
f) The camera shall be manufactured with an aluminium casing.
g) The camera shall be equipped with a SFP slot for fibre network connectivity.
h) The camera shall incorporate network redundancy functionality.
i) The camera shall be designed to be compatible with different lenses from the manufacturer, including:
1. 24 mm fixed lens, f/2.8
2. 35 mm fixed lens, f/2
3. 50 mm fixed lens, f/1.4
4. 85 mm fixed lens, f/1.2
5. 100 mm fixed lens, f/2.8
6. 10-22 mm varifocal lens, f/3.5-4.5
7. 55-250 mm varifocal lens, f4-5.6
8. 70-200 mm varifocal lens, f/2.8
2. The fixed camera shall meet or exceed the following performance specifications:
a) Illumination. The camera shall meet or exceed the following illumination specifications:
• Colour: 0.2 lux F1.2
• B/W: 0.001 lux F1.2
b) Resolution
• The camera shall be designed to provide video streams in resolutions up to 1280x720 (HD 720p) at a minimum of 12 frames per second using H.264 or Motion JPEG.
• The camera shall be designed to provide up to 4 individually cropped out view areas
• The camera shall support video resolutions including:
i. 1280x720 (HDTV 720p) or better
c) Encoding
• The camera shall support the following video encoding algorithms:
i. Support H.264 with automatic scene adaptive bitrate control
ii. MPEG 4
• The camera shall provide independently configured simultaneous H.264 and Motion JPEG streams.
• The camera shall in H.264 support Variable Bit Rate (VBR) for video quality adapted to scene content. To protect the network from unexpected bit rate spikes the camera shall support Constant Bit Rate (CBR) or Maximum Bit Rate (MBR).
• The camera shall provide configurable compression levels.
• Support standard baseline profile H.264 with motion estimation.
• Support motion estimation in H.264/MPEG-4 Part 10/AVC.
• The camera shall for its H.264 implementation support scene adaptive bitrate control with automatic dynamic Region of Interest (ROI) to reduce bitrate in unprioritized regions in order to lowering bandwidth and storage requirements.
d) Transmission
• The camera shall allow for video to be transported over:
i. HTTP (Unicast)
ii. HTTPS (Unicast)
iii. RTP (Unicast & Multicast)
iv. RTP over RTSP (Unicast)
v. RTP over RTSP over HTTP (Unicast)
• The camera shall support Quality of Service (QoS) to be able to prioritize traffic
• Cameras must contain open API and support multi streaming
e) Image
• The camera shall incorporate Automatic and Manual White Balance.
• The camera shall incorporate an electronic shutter operating in the range of 1/8000 to 1 s.
• The camera shall support manually defined values for:
o Colour level
o Brightness
o Sharpness
o Contrast
• The camera shall incorporate a function for optimization of low light behaviour.
• The camera shall allow for rotation of the image.
f) User Interface
• Web server
i. The camera shall contain a built-in web server making video and configuration available to multiple clients in a standard operating system and browser environment using HTTP, without the need for additional software.
ii. Optional components downloaded from the camera for specific tasks, e.g. Active X, shall be signed by an organization providing digital trust services, such as Verisign, Inc.
• Language Specification
i. The camera shall provide a function for altering the language of the user interface and shall include support for at least 10 different languages.
• IP addresses
i. The camera shall support both fixed IP addresses and dynamically assigned IP addresses provided by a Dynamic Host Control Protocol (DHCP) server.
ii. The camera shall allow for automatic detection of the camera based on UPnP and Bonjour when using a PC with an operating system supporting this feature.
iii. The camera shall provide support for both IPv4 and IPv6.
g) Event functionality
• The camera shall be equipped with an integrated event functionality, which can be trigged by:
i. Video Motion Detection
ii. Audio Detection
iii. Live Stream Accessed
iv. Camera tampering
v. Manual Trigger/Virtual Inputs
vi. PTZ functionality
vii. External input
viii. Embedded third party applications
ix. Edge storage disruption detection
• Response to triggers shall include:
i. Send notification, using HTTP, HTTPS, TCP, SNMP trap or email
ii. Send images, using FTP, HTTP, HTTPS, network share or email
iii. Send video clip, using FTP, HTTP, HTTPS, network share or email
iv. iv. Send SNMP trap message
v. Recording to local storage and/or network attached storage
vi. Activating external output
vii. Play audio clip
viii. PTZ control functionality
ix. Day/Night vision mode
x. Text Overlay
• The camera shall provide memory for pre-& post alarm recordings.
h) Edge storage
• The camera shall support continuous and event-controlled recording to:
i. Local memory added to the cameras microSD-card slot
ii. Network attached storage, located on the local network
• The camera shall be able to detect and notify Edge storage disruptions.
i) Protocol
• The camera shall incorporate support for at least the following: IPv4/v6, HTTP, HTTPS, SSL/TLS, QoS Layer 3 DiffServ, TCP, ICMP, SNMPv1/v2c/v3 (MIB-II), RTSP, RTP, UDP, IGMP, RTCP, SMTP, FTP, DHCP, UPnP, ARP, DNS, DynDNS, SOCKS, SSH, NTP, CIFS/SMB, Bonjour.
• The Simple Mail Transport Protocol (SMTP) implementation shall include support for SMTP authentication.
j) Text overlay
• The camera shall:
i. Provide embedded on-screen text with support for date & time, and a customer-specific text, camera name, of at least 45 ASCII characters.
ii. Provide the ability to apply privacy masks to the image.
iii. Allow for the overlay of a graphical image, such as a logotype, into the image.
k) Security
• The camera shall support the use of HTTPS and SSL/TLS, providing the ability to upload signed certificates to encrypt and secure authentication and communication of both administration data and video streams.
• The camera shall provide centralized certificate management, with both pre-installed CA certificates and the ability to upload additional CA certificates. The certificates shall be signed by an organization providing digital trust services.
• The camera shall support IEEE 802.1X authentication.
• The camera shall provide support for restricting access to pre-defined IP addresses only, so-called IP address filtering.
• The camera shall restrict access to the built-in web server by usernames and passwords at three different levels.
l) API support
• The camera shall be fully supported by an open and published Application Programmers Interface (APi), which shall provide necessary information for integration of functionality into third party applications.
• The camera shall conform to ONVIF profile G as defined by the ONVIF Organization.
• The camera shall conform to ONVIF profile S as defined by the ONVIF Organization.
m) Embedded applications
• The camera shall provide a platform allowing the upload of third party applications into the camera.
n) Installation and maintenance
• The camera shall be supported with Windows-based management software which allows the assignment of IP addresses, upgrade of firmware and backup of the cameras' configuration.
• The camera shall support the use of Simple Network Management Protocol (SNMP)-based management tools according to SNMP v1, 2c & 3 / MIB-II.
• The camera shall allow updates of the software (firmware) over the network, using FTP or HTTP.
• The camera shall provide the ability to perform remote focus adjustment.
• The camera shall provide the ability to apply a rectangle of customer-defined number of pixels to the image, which can be used as a pixel counter identifying the size of objects in number of pixels.
• The camera shall accept external time synchronization from an NTP (Network Time Protocol) server.
• The camera shall store all customer-specific settings in a non-volatile memory that shall not be lost during power cuts or soft reset.
• The camera shall incorporate a software-controlled functionality for network redundancy.
o) Access log
• The camera shall provide a log file, containing information about the 250 most recent connections and access attempts since the unit's latest restart. The file shall include information about the connecting IP addresses and the time of connecting.
• Provide a connection list of all currently connected viewers. The file shall include information about connecting IP address, time of connecting and the type of stream accessed.
p) Camera diagnostics
• The camera shall be equipped with LEDs, capable of providing visible status information. LEDs shall indicate the camera's operational status and provide information about power, communication with receiver, the network status and the camera status.
• The camera shall be monitored by an overwatch functionality, which shall automatically re-initiate processes or ultimately attempt to restart the unit if a malfunction is detected.
• The camera shall send a notification when the unit has been re-booted, and all services are initialized.
q) Hardware interfaces
• Network interface
i. The camera shall be equipped with one 100BASE-TX/1000BASE-T PoE Fast Ethernet-port, using a standard RJ45 connector and shall support auto negotiation of network speed and transfer mode (full and half duplex).
ii. b. The camera shall be equipped with one SFP connector for SFP fibre module (100/1000 Mbps).
• Serial interface
i. The camera shall be equipped with one RS-485/422 serial port.
• Inputs/Outputs
i. The camera shall be equipped with two configurable I/O ports, accessible via a removable terminal block. These inputs/outputs shall be configurable to respond to normally open (NO) or normally closed (NC) dry contacts. The output shall be able to provide 12 V DC, 50 mA.
• Power
i. The camera shall be equipped with a removable terminal block providing connectivity for external power.
r) Enclosure
• The camera shall be manufactured with an aluminium casing.
s) Power
• Power over Ethernet Plus IEEE 802.3at Type 2 Class 4
i. Max: 25.5 W
ii. Typical: 13.1 W
• 20- 28 V DC
i. Max: 18.6 W
t) Environmental
• The camera shall operate in a temperature range of -10 °C to +60°C & in a humidity range of 10-95% RH (non-condensing). Execution
Installation
A. Outdoor cameras shall be in an IP66 rated enclosure with sun-shroud.
B. The Contractors or subcontractor's main resources within the project shall carry proper professional certification issued by the manufacturer and verified by a third-party organization to confirm sufficient product and technology knowledge.
C. The Contractor shall carefully follow instructions in documentation provided by the manufacturer to ensure all steps have been taken to provide a reliable, easy-to-operate system.
D. All equipment shall be tested and configured in accordance with instructions provided by the manufacturer prior to installation.
E. All firmware found in products shall be the latest and most up-to-date provided by the manufacturer, or of a version as specified by the provider of the Video Management System (VMS) or the Network Video Recorder (NVR) alternatively the DVR manufacturer.
F. All equipment requiring users to log on using a password shall be configured with user/site-specific password/passwords. No system/product default passwords shall be allowed.
NVR server
The NVR must, in the event of any alert/alarm, automatically stream the CCTV footage to the SCR for storage. This will allow and support any follow up actions by the SCR operators or MOI investigations. This is especially important in the event that the ATM unit is intentionally damaged or rammed with the aim of toppling or removing it from site. As such a final snapshot of the illegal activity will be available and safely stored.
Maintenance
A programme of preventative maintenance must be undertaken in line with the manufactures' guidelines; periods between maintenance checks must not exceed six months (except where contractually agreed). Additionally, regular testing of the system must be undertaken to ensure key components are functioning to full specification. Details of the tests should be recorded in the site record for the IDS and retained as well as updates/copies forwarded to the security department.
Bandwidth Requirements for Security Systems
This guideline is applicable for all existing and future deployment and installation of security systems. This encompasses all systems inclusive of the Surveillance System, Access Control System and Intrusion Detection Systems.
The hard-wired direct network interface bandwidth for all security devices shall be sized to cater for the local bandwidth of the accumulated video and alarm feeds as a minimum capacity. All switches and routers used on the security network shall be rated for gigabit speeds (minimum 1 GB) throughout the supporting infrastructure.
When hard wired direct network connectivity is not available directly to the command centre (indirect via telco or wireless / G3 /G4 / G5 networks), connectivity bandwidth shall be sized in the same way as the hard-wired network.
In all cases, the bandwidth for the WAN connectivity between all bank facilities must allow for on the spot streaming and retrieving of the CCTV footage, with a minimum of 15 FPS and 2MP resolution.
Depositors Protection Fund(DPF) Rules
No: 361000089524 Date(g): 14/4/2015 | Date(h): 25/6/1436 Status: In-Force In order to provide a formal mechanism for the protection of small depositors and to further strengthen the existing safety nets, SAMA has decided to establish a Depositors Protection Fund (DPF). The main objective of the DPF is to maintain financial stability by protecting small depositors.
SAMA has prepared the enclosed DPF Rules to provide for the establishment of the DPF and for matters connected therewith. These Rules are being issued by SAMA under Article 3(d) of its Charter issued by Royal Decree No. 23 dated 23-5-1377H (15 December 1957G) and Article 16(3) of the Banking Control Law issued by Royal Decree No. M/5 dated 22-2-13.86H (11 June 1966 G). AU banks including the branches of foreign banks licensed under the Banking Control Law that conduct banking business in Saudi Arabia shall be members of the DPF and liable to pay the prescribed premium. These Rules shall come into force with effect from 1st January 2016.
In order to provide a formal mechanism for the protection of Eligible Depositors and to further strengthen existing safety nets, SAMA has decided to establish a Depositors Protection Fund (DPF) in Saudi Arabia. These rules (DPF Rules) for the establishment of the DPF are being issued by SAMA in exercise of the powers vested upon it under Article 3(d) of its Charter issued by Royal Decree No. 23 dated 23-5-1377 H (15 December 1957 G) and Article 16(3) of the Banking Control Law issued by Royal Decree No. M/5 dated 22-2-1386 H (11 June 1966 G).
The main objective of the DPF is to maintain financial stability by protecting depositors up to certain limits.
These Rules are meant to provide for the establishment of the DPF and for matters connected therewith:
1. Definitions
The following terms and phrases, where used in these Rules, shall have the corresponding meanings, unless the context requires otherwise:
i. SAMA: The Saudi Central Bank*. ii. Rules: Depositors Protection Fund (DPF) Rules. iii. Bank: means any Person practicing any banking business as such term is defined in the Banking Control Law of the Kingdom issued under Royal Decree No. M/5 on 22/2/1386H (11/6/1966). iv. Subsidiary: means any legal entity in which a Bank owns or controls more than 50% of the shares or voting rights. v. Deposit: means the unpaid balance of the aggregate of moneys received or held by a Bank from or on behalf of a person in the usual course of the business of deposit taking of the Bank and includes:
a) a bank draft, cheque or other similar instrument or instruction entered into a payment system notwithstanding any delay or failure or unsettlement by the Bank in crediting the account; b) all forms of deposits including current accounts, savings accounts, time deposits, inheritance accounts, unclaimed accounts, escrow accounts, client accounts, trust accounts, structured deposits, etc. by whatever name called; c) a foreign currency deposit; and/or d) any other deposit or financial instrument as may be specified by SAMA.
However, the term “Deposit” does not include the following, unless it is otherwise specified by SAMA:
a) a deposit that is not payable in Saudi Arabia; b) an inter-bank deposit; c) a negotiable instrument of deposit and any other bearer deposit; d) a repurchase agreement; and e) any other deposit or financial instrument as may be specified by SAMA.
vi. Eligible Depositor: means any depositor of a Bank, whether a natural or a legal Person, but excludes the following:
a) members of the board of directors and senior management of Bank (including its chief executive officer and Key Executives) as well as their Family Members; b) other Banks or financial institutions; c) shareholders holding in excess of 5% shares in the Bank d) Saudi government or quasi-government institutions; or e) Persons acting on behalf of any of the Persons mentioned in a) through c) above; f) any other Person(s) or institution(s) as may be specified by SAMA from time to time;
vii. Family Members: means first-degree relatives including father, mother, spouse and children. viii. Key Executive: means an officer of the Bank whose appointment is subject to prior non-objection of SAMA. ix. Person: means a natural or a legal person. x. Assessment Year: means a calendar year from 1st January to 31st December for determining the amount of annual premium payable by a Bank to the DPF;
* The Saudi Arabian Monetary Agency was replaced by the name of Saudi Central Bank in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding 26/11/2020G.
2. General Provisions
i. These Rules shall be called the Depositors Protection Fund Rules, 2015 (hereinafter called the DPF Rules); ii. The DPF Rules shall be applicable to all Banks, including all branches of foreign Banks licensed under the Banking Control Law that conduct banking business in Saudi Arabia. However, the provisions of these Rules shall not apply to the following:
a) branches of Saudi Banks operating outside the Kingdom; b) subsidiaries of Saudi Banks operating within or outside the Kingdom.
iii. All Banks, including all branches of foreign Banks, operating in Saudi Arabia shall be participants of the DPF and required to pay the prescribed premium; iv. The DPF Rules shall come into force with effect from 1st January 2016.
3. Establishment of the DPF
i. The DPF shall be established as an administrative unit in SAMA. The head of the DPF unit shall report to the Deputy Governor for Supervision; ii. The management and oversight of the DPF shall be provided by a governing committee appointed by the Governor of SAMA and its terms of reference will be approved by SAMA; iii. The governing committee may constitute one or more subcommittees and determine their terms of reference to ensure smooth functioning of the DPF.
4. Functions of the DPF
The DPF shall cany on all or any of the following functions:
i. Collect premiums and contributions; ii. Manage resources of the DPF and conduct its operations; iii. Evaluate the adequacy of the DPF’s funding from time to time; iv. Assess claims of Eligible Depositors for payments out of the DPF; v. Make payments of accepted claims to Eligible Depositors within applicable protection limits; vi. Perform all such other functions as may be incidental or related to the affairs of the DPF or required to achieve its objectives.
5. Resources of the DPF
i. The DPF’s resources shall consist of the following:
a) Initial and periodic premium payments from Banks; b) return on the investment of DPF’s resources; c) proceeds received from a Bank’s property in case of its sale or liquidation; d) Other sources of funding including loans and grants.
ii. If at any time, the resources of the DPF fall short of its liabilities, such shortfall may be covered in such manner as may be specified by SAMA and may include, inter alia, requiring Banks to make advance premium payments and/or increasing the rate and/or frequency of premium payments for which Banks will be notified in advance; iii. SAMA shall open and maintain a separate account in the name of DPF with itself and all premium payments and contributions shall be deposited in the said account.
6. Use of the DPF’s Resources
i. The DPF’s resources shall be used only for:
a) payments in relation to protected Deposits up to the applicable protection limits under the DPF Rules; b) repayment of principal and payment of commission/return on any loans obtained by the DPF; and c) meeting its operating expenses;
ii. The DPF’s resources shall be managed by the governing committee according to the guidelines approved by SAMA.
7. Protection of Deposits
i. The DPF shall insure the payment of Deposits held on an Eligible Depositor’s account(s) with a Bank up to the applicable protection limit as determined by SAMA from time to time. However, no financial liability shall be assumed by SAMA as a result of making any such determination; ii. The applicable protection limit shall be inclusive of any special commission/ return due or accrued on Deposits up to the cut-off date determined by SAMA.
8. Protection Limit
i. The protection limit for protection of Eligible Depositors shall be SAR 200,000 per Person per Bank. This means that the total amount payable by the DPF to any one Eligible Depositor in respect of his Deposit in a Bank shall not exceed SAR 200,000; ii. SAMA may, from time to time, having regard to the availability of funds with the DPF as also to the maintenance of financial system stability, raise the above protection limit as deemed appropriate.
9. Determining the Size of Protected Deposits
i. The total amount of a Bank’s liability to an Eligible Depositor shall be determined by adding up all such Eligible Depositor’s Deposits, including any return due or accrued thereon on or before the cut-off date set by SAMA. In establishing the Bank's total liability to an Eligible Depositor, foreign currency Deposits shall be converted into Saudi Riyals at the exchange rate determined by SAMA on the cut-off date; ii. Only one Deposit per Person per Bank shall be covered under the DPF. If an Eligible Depositor has more than one account with a Bank, all Deposits with that Bank shall be deemed to be one Deposit and be protected only up to the maximum limit of SAR 200,000. Where an Eligible Depositor is a joint owner of a Deposit with a Bank together with one or more other Persons, only his proportionate share of such joint Deposit(s) shall be taken into account, and, together with any other Deposits he may have with that Bank, be deemed to be one Deposit and be protected only up to the specified limit of SAR 200,000 per Person per Bank; iii. The Deposit of a legal Person shall not be aggregated with the personal Deposit of its owner(s) while determining the amount of protected Deposit; iv. Any Deposits which are subject to a regulatory freeze, or restrictions of any sort shall not be included while determining the amount of protected Deposits unless specifically allowed by SAMA; v. The amount of a protected Deposit shall be determined after deducting any sum of money which the Bank is legally entitled to deduct by way of set-off from the deposit held by a depositor with the Bank; vi. SAMA may provide further guidance on determining the size of Deposits as well as the procedure to be adopted for payment of the protected amount of Deposits.
10. Payment of Premium
i. Every Bank shall initially pay a flat rate premium to the DPF as may be specified by SAMA from time to time. However, SAMA may at any time change the basis for calculation of premium, and may in particular move from a flat rate to a risk-based method; ii. The annual premium owed by a Bank for an Assessment Year shall initially be 0.05% of the average amount of Deposits of Eligible Depositors held by the Bank. However, SAMA may review the premium rate from time to time and make changes therein as deemed appropriate after taking into account the relevant factors including size of the accumulated DPF. Any such change in premium rate shall be notified to Banks at least six months in advance; iii. The amount of premium shall be payable on a quarterly basis and calculated by Banks at the rate of one-fourth of 0.05% (i.e. 0.0125%) of the average amount of deposits of Eligible Depositors held by the Bank during the preceding calendar quarter. The quarterly average of deposits will be calculated by adding the opening and closing balance of deposits of Eligible Depositors during a calendar quarter and dividing it by 2. The payable premium must be paid by a Bank within thirty (30) days of the end of each calendar quarter. The first premium payment shall be for the quarter ending 31st March 2016 and shall be paid by 30 April 2016; iv. No premium contribution (or part thereof) shall be refundable to a Bank in any circumstance; v. The annual premium payable by a Bank shall be based on returns containing data of Deposits to be certified by its Managing Director or Chief Executive Officer and must be submitted in the form and within the deadlines determined by SAMA; vi. If a Bank fails to make a premium payment in full and on time, SAMA may impose a premium surcharge and take any other punitive action against the defaulting Bank as permitted under the Banking Control Law.
11. Submission of Return
i. Every Bank shall submit to SAMA a quarterly return containing information on the composition and amounts of its average Deposits for each calendar quarter. The return shall also set out in detail the calculation of the annual premium and shall be certified by the Managing Director or Chief Executive. The return shall be submitted to the DPF Unit within 30 days of the end of every calendar quarter; ii. If a Bank fails to submit the above return within the specified time or provides incorrect information, SAMA may take any action permitted under the Banking Control Law.
12. Responsibilities of Banks
i. A Bank shall pay the annual premium and any premium surcharge within such time and in such manner as specified by SAMA; ii. A Bank shall be liable to fully indemnify the DPF for any payments made to its Deposit holders, until its liquidation; iii. A Bank shall comply with and observe all relevant rules, regulations, directives/instructions, etc. issued by SAMA; iv. A Bank shall forthwith inform SAMA about any significant deterioration in its capital adequacy or liquidity position or any other major development which has a significant bearing on its safety and soundness.
13. Maintenance of Accounts
i. The DPF shall maintain separate accounts and other records and prepare annual financial statements including the profit and loss account and balance sheet; ii. The accounts of the DPF shall be audited by an external auditor to be appointed by SAMA for this purpose.
14. Miscellaneous Matters
i. SAMA may from time to time issue further instructions and guidance to the Banks to deal with any other related matters and to achieve the objectives of the DPF; ii. Any issues arising during the implementation of these rules shall be dealt with under the rules and regulations of SAMA and the applicable laws of the Kingdom of Saudi Arabia
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Depositors Protection Fund (DPF): Frequently Asked Questions (FAQs)
Q.1: What is the Depositors Protection Fund(DPF)
Ans.: The DPF is a fund established to protect eligible depositors. All banks including the branches of foreign banks licensed under the Banking Control Law that conduct banking business in Saudi Arabia are members of the DPF. The DPF will provide full protection to depositors having deposits of up to SAR 200,000, including principal and accrued commission/retum, with a member bank. For example, if a person had a deposit in a member bank with a principal balance of SAR 194,500 and accrued commission/return on this deposit of SAR 5,000 on the cut-off date, the full SAR 199,500 would be insured, since principal plus commission/return did not exceed the SAR200,000 protection limit for a single depositor.
Q.2: Why the coverage under DPF is restricted to SAR 200,000?
Ans.: The objective of the DPF is to provide adequate protection to eligible depositors. The protection limit of SAR 200,000 would fully insure more than 97% of depositors of banks. This is a high level of coverage and exceeds international norms of 80% to 90%.
Q.3: Why is the DPF established? I thought Saudi Arabia’s banking system is very safe?
Ans.: Yes, Saudi Arabia’s banking system is safe and sound. SAMA has a regulatory framework in place to ensure the safety and soundness of individual banks as well as the overall Banking System. SAMA also ensures that banks are well managed, well capitalized and have enough liquidity to meet their obligations to depositors. The DPF is a financial safety net and layer of protection for depositors. The objective is to build up a protection fund in good times rather wait for a crisis to happen.
Q.4: How does the DPF work?
Ans.: In the unlikely event of a member bank failure, SAMA premiums paid by member banks and other resources available with it.
Q.5: Who is covered under the DPF?
Ans.: Individuals and other non-bank depositors with accounts in member banks are covered. Non-bank depositors include sole proprietorships, partnerships, companies, unincorporated entities, etc. However, the following are not covered:
a) members of the board of directors and senior management of Bank (including its chief executive officer and Key Executives) as well as their Family Members; b) other Banks or financial institutions; c) shareholders holding in excess of 5% shares in the Bank d) Saudi government or quasi-government institutions; or e) Persons acting on behalf of any of the Persons mentioned in a) through c) above;
Q.6: What types of deposits are covered for protection under DPF?
Ans.: All types of deposits whether in local or foreign currency with member banks including current accounts, savings accounts, time deposits, inheritance accounts, unclaimed accounts, escrow accounts, client accounts, trust accounts, structured deposits, etc. are covered except the following:
a) a deposit that is not payable in Saudi Arabia; b) an inter-bank deposit; c) a negotiable instrument of deposit and any other bearer deposit; d) a repurchase agreement; and e) any other deposit or financial instrument as may be specified by SAMA.
Q.7: If I have deposits in several member banks, will all my deposits be added up for deposit protection purposes?
Ans.: No. Your deposits in different member banks are protected separately. The SAR200,000 deposit protection limit is applicable per depositor per member bank.
Q.8: If I have deposits in different branches of the same member bank, will all my deposits be protected separately?
Ans.: No. Deposits held in different branches of the same member bank will be consolidated for deposit protection purposes.
Q.9: As foreign currency deposits also enjoy protection under the DPF, are they separately protected from Saudi Riyal deposits?
Ans.: No. Saudi Riyal and foreign currency deposits are not separately protected if they are placed in the same member bank. Foreign currency deposits will be converted to Saudi Riyals and aggregated with local currency deposits for protection of up to SAR200,000.
Q.10: Do I need to sign up or pay a premium to be covered by the DPF?
Ans.: No action is needed from you as a depositor as all premiums and costs relating to coverage under the DPF are borne by member banks.
Q.11: In the event that a compensation is to be claimed from a failed bank, do I need to file a claim with the DPF or the bank?
Ans.: The DPF will provide details on how the compensation will be made. You do not need to file any claims. The DPF will make announcements for payment of compensation to eligible depositors through the public media and at the affected bank and its branches. If your deposit exceeds the compensation from the DPF, you can file a separate claim with the liquidator of the affected bank for the difference but you cannot claim what has already been compensated under the DPF.
Q.12: How the DPF will affect credit rating of a bank?
Ans.: The DPF is a regulatory financial safety net and should have a positive impact on credit ratings of member banks. The statement earlier issued by the Supreme Economic Council in October 2008 stating that the Saudi authorities continued to ensure the safety of local banks and bank deposits, has not been withdrawn. As the protection provided by the DPF is a designated layer of protection for the eligible depositors, it should provide additional comfort to the external rating agencies.
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Security and Safety Guidelines
No: 291000000525 Date(g): 24/8/2008 | Date(h): 23/8/1429 Status: In-Force With reference to the Central Bank Circular No. 485/MA/36 dated 07/01/1416H on the Security Safety Manual, a copy of the final draft of the updated Security Safety Manual is attached.
We hope that you will express your views on the draft within one month from the date of this letter.
Section 1 Requirements and Responsibilities
Synopsis
This section describes the general requirements of the Security and Safety Guidelines and the responsibilities of the banks and SAMA.
1. Introduction
Since the last guidelines were introduced in June 1995 (1/1416) a number of major changes have affected the security and safety responsibilities of the Saudi banks to its staff, assets and customers.
A major consideration is the recent increase of criminal activity against Saudi banks in the form of robbery, theft and fraud. Whilst the initial guidelines provided suitable standards and requirements at the time, it was therefore, assessed that these required a detailed review process followed by a revision of the minimum security and safety standards.
The recent criminal activities and the advances in security and safety equipments, systems and procedures has provided an opportunity to implement more effective measures that incorporate international, regional and local standards that would only benefit the Saudi banks.
2. Security and Safety Standards and Requirements
SAMA has issued the Security and Safety Guidelines that are designed to provide the minimum standards in the following areas:
a. Implementation of a Corporate Security and Safety Plan b. Standards for the implementation of Electronic Security and Safety Systems c. Standards for the implementation of Physical Security and Safety Systems d. Standards for the Cash in Transit procedures and transportation service providers e. Standards and Procedures for the Security Guards operating in the main buildings and branches
These documents have been prepared using international consultants and reviewed by SAMA and associated government agencies prior to their dissemination to the Saudi Banks.
3. Security and Safety Unit
Saudi banks are required to appoint a senior and capable individual as a Security and Safety Manager who will be responsible for the design, planning and implementation of the minimum standards contained within the SAMA Security and Safety Guidelines. The Security and Safety Manager is to be provided the necessary personnel and resources to fulfil these obligations and thereby safeguard the staff, assets, customers and business operations of the bank.
4. Implementation Plan
A detailed Implementation Plan is attached at Appendix 1 to this Circular. The banks are required, within 30 days of the implementation date, to provide a certificate to SAMA from an external security consultant that these requirements and standards have been implemented.
5. Effective Date
With this Circular is attached the final version of the SAMA Security and Safety Guidelines which supersede the previous guidelines and all memorandums and circulars issued prior to this date. The effective date for the implementation of these requirements is (Date).
To ensure regulatory compliance of the implementation of the new requirements, SAMA and the Joint Security Committee will carry out site visits to the banks using appointed representatives. The failure by a bank to meet the requirements and standards could lead to penalties prescribed under the Banking Control Law.
Summary of Responsibilities
SAMA:
To ensure the effective implementation of the Security and Safety Guidelines the following responsibilities are to be undertaken by Saudi Central Bank:
1. The Guidelines are to be implemented in full by all banks before the 01st July 2009.
2. The Guidelines are to supersede the previous version and any associated amendments, circulars and memos.
3. All matters regarding the Security and Safety of the banks will be coordinated through SAMA. All correspondences, responses and requirements from external organizations, agencies and ministerial departments will be reviewed, assessed and forwarded as formal amendments to all banks.
4. Amendments and updates to the Guidelines will be provided by SAMA electronically and/or hardcopy as applicable.
5. Regular audits of the Guidelines will be carried out by SAMA or its nominated external consultants to ensure compliance and implementation by the banks.
6. Annual audits of the Guidelines will be conducted to ensure the accuracy and validity of its content. The audits will be conducted internally or by its nominated external consultants.
BANKS:
To ensure the effective implementation of the Security and Safety Guidelines the following responsibilities are to be undertaken by the Banks:
1. The Guidelines are to be implemented in full by all banks before the 01st July 2009.
2. The Guidelines have been prepared to provide the minimum security and safety standards for all banks. It is expected, where applicable, that all banks will exceed these requirements and adopt internal standards and specifications dependent upon their structure and organizational needs.
3. The sections within the Guidelines have been designed to work in unison with each other and a clear understanding of its entire content is required.
4. The appointment of identified and capable personnel is to be undertaken to ensure the implementation of the Guidelines and its compliance.
5. All sections within the Guidelines are to be adhered to in full and will include the implementation of any subsequent amendments sent by SAMA.
Section 2 Corporate Security and Safety Plan
Synopsis
This section describes the minimum requirements for the establishment and implementation of the Corporate Security and Safety Plan.
1.0 INTRODUCTION The purpose of the Corporate Security and Safety Plan (CSSP) is to provide a single document that incorporates all the procedures and processes to ensure the security and safety of the banks staff, assets and customers.
The CSSP is to include the overall security and safety policy of the bank and identify locations requiring dedicated plans and procedures for specific facilities.
The CSSP is to include the minimum requirements contained within this section and be prepared, introduced and implemented by the appointed Security and Safety Manager and/or a nominated external consultant.
2.0 RESPONSIBILITIES The CSSP is considered a strategic document that will have an impact on every aspect of the banks business and therefore requires senior management commitment and approval.
The CSSP is to include a Corporate Policy Statement that confirms the commitment by the banks senior management and their enforcement of its content.
To ensure the successful enforcement of the CSSP the bank is to appoint a Security and Safety Manager and who is provided the necessary assistance and support to carry out his duties and responsibilities.
Whilst the CSSP is to be enforced, controlled and managed by the Security and Safety Manager, Its preparation and implementation can be undertaken and/or assisted by a nominated external consultant.
The CSSP is to include the minimum requirements contained within these guidelines and be available for audit and assessment by SAMA and/or its nominated representatives.
3.0 CORPORATE SECURITY AND SAFETY PLAN REQUIREMENTS The Corporate Security and Safety Plan (CSSP) is to include all aspects that would affect the security and safety of the banks' staff, assets and customers.
The CSSP is to incorporate the policies, procedures and processes for both general and detailed requirements.
Whilst common elements will affect the bank as a whole, the more detailed requirements will need to be prepared for specific facilities. These facilities include:
1. Regional Buildings 2. Branches 3. Cash Holding Facilities 4. Data Centres 5. Disaster Recovery (DR) Sites 6. Warehouses
To ensure a complete and consistent approach is incorporated within the preparation of the CSSP the following sections and elements are to be mandatory.
3.1 INTRODUCTION This section of the CSSP will include the following elements:
1. Purpose and Regulatory Basis - identifies the standards, regulatory requirements and authority of the CSSP. 2. CSSP Security and Control - identifies the security of the CSSP and its dissemination within the bank. 3. Reviews and Audit Requirements - identifies the frequency of reviews, audits and those responsibly for conducting them. 4. Reference Documentation - includes the associated material in the construction of the CSSP and related plans, policies and procedures. 5. Business Description and Assets - provides a summary of the banks facilities that are included within the CSSP.
3.2 INTERNAL SECURITY AND SAFETY ORGANISATION This section of the CSSP will include the following elements:
1. Corporate Policy Statement - signed policy statement from senior management that provides commitment to the CSSP. 2. Security and Safety Organisational Chart - identifies the management and reporting chain of all relevant personnel. 3. Security and Safety Personnel Responsibilities and Job Descriptions - provides the requirements of each position and their Key Performance Indicators. 4. External Agencies and Organisations - identifies the coordination between the banks' security personnel and external groups i.e. Contract Guards, Police, Civil Defence, SAMA etc. 5. Security Coordination Committee -identifies personnel responsible for review of the CSSP and any amendments and/or updates. 6. Conduct and Ethical Practices -provides the standards expected of the security and safety personnel. 7. Vendor Management and Tendering Process - identifies the procedures for tendering and contracting security and safety related equipment, services and systems.
3.3 SECURITY AND SAFETY TRAINING AND DRILLS This section of the CSSP will include the following elements:
1. Security and Safety Awareness Programmes - provides the training and education requirements delivered to new and existing staff. 2. General Security and Safety Training - identifies internal and external training in security, fire prevention and incident control for the banks' dedicated security and safety personnel. 3. Specialist Security and Safety Training - outlines specific training to select personnel that would include Retail Robbery, Anti Money Laundering (AML), Fire Marshalls / Floor Wardens and Emergency Evacuation procedures. 4. Security and Safety Drills - include practical tests of the physical and electrical security and safety systems, measures and procedures.
3.4 RECORDS AND DOCUMENTATION This section of the CSSP will include the following elements:
1. Purpose and Requirements - outlines the files and records required to support the CSSP, provide a centralised reference system and assist in the audit process. 2. Security and Safety Files:
a. Internal and External CSSP Updates and Amendments b. CSSP Distribution List c. Security Equipment List and Floor Plans d. Safety Equipment List and Floor Plans e. Access Control Card Request and Issue Record f. Master Key and Password Register g. Training Courses and Programmes h. Security and Safety Drills i. Fire Marshalls / Floor Wardens j. Reviews, Inspections, Assessments and Audits k. Incidents, Threats and Breaches of Security l. Service and Maintenance Contracts, Schedules and Reports m. Visitor and Control Room Logs n. Approved Vendor List
3. Maintenance of Records - identifies the location and security of the records and files that are to be retained for a minimum of five (5) years from the date of preparation.
3.5 SECURITY SYSTEMS AND PROCEDURES This section of the CSSP will include the following elements:
1. Security Guards - include roles, responsibilities and post instructions for the access control of the banks facilities. 2. Entry Point Screening Procedures - identifies the procedures for permitting access to a facility for staff, visitors, customers and vehicles. 3. ID Cards / Access Control Cards -includes the request, issue, replacement and cancellation procedures for the cards. 4. Locks and Keys - identifies the distribution, storage, management and recording of all keys, lock changes and master keys. 5. 5. Restricted Areas - identifies and lists the locations considered sensitive, high risk and vulnerable whose loss would severely impact on the business operation and the security and safety of the bank. 6. Security and Safety Equipment Systems - includes the operational capability, locations, specifications, standards, testing and maintenance for installed equipment and systems in the following locations:
a. Main Buildings b. Branches c. Restricted Areas d. Cash Holding Facilities (Vaults and Safes) e. ATMs f. Data Centres and Back Up Sites g. Disaster Recover (DR) Sites h. Warehouses
7. Asset Protection - identifies the cash and types of valuables held by the bank and the levels of security needed for their protection. 8. Cash In Transit (CIT) - provides the internal procedures and processes in the receipt, accounting and delivery of cash and the coordination with external service providers in its transportation. 9. Communications Systems - identifies the relevant systems used by the security personnel and the effective management of their use. 10. Disposal of Sensitive Material -identifies the procedures for the disposal of sensitive electronic data stored on equipment and confidential documentation. 11. Clear Desk Policy - identifies the procedures for the accessibility of confidential documents in Individual workspaces.
3.6 SECURITY AND SAFETY THREATS AND RESPONSES This section of the CSSP will include the following elements:
1. Identification of Threats and Risks - provides a summary of the main threats and risks concerning the banks staff, assets and customers. 2. Security and Safety Response Procedures - provide a detailed list of the main events and the response procedures in mitigating their effects. The following are to be included within the CSSP:
a. Bomb Threats (vehicle and Package) b. Armed Robbery c. Burglary d. Shooting e. Fire
3. Travel Security - identifies the risks and mitigation procedures when travelling as individuals and in groups. Considerations are to include the following:
a. Air b. Vehicle (Company and Private) c. Hotels
4. Search Plans - provide detailed procedures for searching and checking during routine operations and elevated threat levels. The following are to be included within the CSSP:
a. Buildings b. Cars c. Armoured CIT Vehicles and Trucks d. Stores Delivery Vehicles e. Personnel
3.7 SAFETY SYSTEMS AND PROCEDURES This section of the CSSP will include the following elements:
1. Fire Systems and Equipment - provide a detailed list of the equipment, function, location, specification and operating capability of the installed systems in each facility. The following are to be included within the CSSP:
a. Fire Detection Equipment b. Fire Alarm and Control System c. Fire Suppression Equipment and Systems (Sprinklers, Extinguishers and Hose Reels)
2. Emergency Response Procedures - provide detailed instructions for personnel in the event of discovering a fire or smoke condition. 3. Emergency Evacuation Procedures - provide detailed instructions and plans on the emergency evacuation procedures of a facility. 4.
First Aid - identifies the personnel trained to deal with First Aid and the equipment they have available to use. Section 3 Electronic Security and Safety Systems
This section should be read in conjunction with " the Financial Sector Safety and Security Guidelines CCTV Specifications Summary" issued by circular No.(69427/149), dated 20/11/1440H, Corresponding to 22/07/2019G .Synopsis
This section describes the minimum requirements and standards for Electronic Security and Safety Systems installed throughout the banks facilities.
1.0 INTRODUCTION The purpose of installing electronic security and safety systems is to enhance the physical measures employed to protect, deter and mitigate the effects of a serious incident and/or criminal activity.
No single system in isolation is completely effective, and it is only through their layered approach, physical barriers, manned guarding, effective management and clearly identified procedures and policies can their use be fully maximized to best effect.
Due to the variety and availability of internationally recognized standards it is left to the bank and its internal policies and practices to dictate the appropriate standards for such systems.
The every increasing availability of systems, equipment and changes / advancements in technology provides an extensive selection of products to choose from. The selection of the appropriate systems and equipment is dependent upon the security and business requirements of the bank.
The guidelines contained within this document are designed to provide a minimum requirement that must be met and included for all electronic security and safety system installations.
2.0 CCTV SURVEILLANCE AND RECORDING SYSTEM The use of a CCTV Surveillance and Recording system is an essential element in an effective security and safety screen. The systems main functions within the bank environment are as follows:
1. Visual deterrence 2. Proactive and preventative surveillance on suspicious activity 3. Identification of individuals 4. Visual evidence in criminal investigations 5. Visual confirmation in the event of an incident 6. Post event analysis
The installation and connection of a CCTV surveillance network should consider the integration with related systems such as the Access Control, Intruder, Building Management and Fire Alarm systems.
2.1 General Requirements and Standards To ensure appropriate equipments, systems, services and their security are incorporated throughout the banks facility, the following are considered a minimum requirement for all locations:
1. All Installed equipment is to include a one (1) year warranty period as standard. 2. On expiration of the warranty period all equipment is to be serviced and maintained by a qualified, recognised and registered supplier and/or service provider. A minimum schedule should include two (2) visits per year.
CCTV Cameras:
1. CCTV camera types employed throughout the banks facilities are dependant upon their purpose and can be a mixture of both fixed and dome type. 2. Dependant upon the purpose and requirement of the camera the picture/image type can be:
a. Black and White b. Colour c. Combination (Day/Night)
3. To ensure the security of the connections and cabling of the cameras all exposed cabling is to be encased in steel tubes no less than 1.5mm thick. 4. Pinhole Camera - Minimum Requirements:
a. Resolution: 500 TVL b. Lens: 1/3 inch c. Fixed Iris Lens: 3.8mm d. Back Light Compensation (BLC) e. Illumination: 0.1 Lux
5. Fixed Camera - Minimum Specification:
f. Resolution: 500 TVL g. Lens: 1/3 inch h. Video Motion Detection (VMD) -through DVR l. Auto Iris Lens j. Back Light Compensation (BLC) k. Illumination: 0.1 Lux
6. PTZ Camera - Minimum Specifications:
a. Resolution: 500 TVL b. Lens: 1/4 inch c. Optical (x22) and Digital (x10) Zoom d. Auto and Manual Focus e. Pan Range: 340 deg f. Tilt Range: 90 deg g. Pan-Tilt Speed: 300 deg / sec h. Back Light Compensation (BLC) i. Illumination: 0.1 Lux
7. External Cameras - Minimum Requirements:
a. Positioned to cover all access and entry points for a facility. b. Provide effective picture quality at both day and night. This can be achieved by correct positioning, shielding from the sun, In-built LED lighting and/or external illumination. c. Fully enclosed in a weatherproof and vandal resistant housings. d. Positioned at a minimum height of 2.5m.
8. Internal Cameras - Minimum Requirements:
a. Provide effective picture quality at both day and night. This can be achieved by correct positioning, built in LED lighting and/or external illumination. b. Positioned at a minimum height of 2.5m and not vulnerable to approach without surveillance.
CCTV Digital Recording System:
The central element of the CCTV surveillance system is the recording medium. To ensure effective management, recording and storage of surveillance material it is to be undertaken in a digital format.
The type of system installed is dependant upon the requirements and capability of the bank. Ultimately, this can be either a hardwire system or an IT based solution.
1. The recording equipment is to be secured (as well as its power supply) separately in an enclosed and lockable cabinet / container that is securely fixed. 2. To ensure the integrity and continuous operation of the recording and surveillance equipment in the event of a power failure a separate battery back up supply is to be incorporated. The use of a UPS system is to have a minimum back up capability of 30 minutes. 3. The location of the recording equipment is essential in maintaining its integrity and in the prevention of tampering. The following options are available for its placement:
a. Security Control Room b. Communication Room c. Data Room d. Cash / Operations Officer (if located within the secure Teller Area)
Monitors:
To ensure effective monitoring and viewing of the CCTV surveillance system a 17" screen is to be considered as a minimum for all identified locations.
2.2 Detailed Requirements - Main Buildings The classification for main buildings includes all facilities not separately covered within these guidelines. They include the following types:
1. Head Office Buildings 2. Regional Buildings 3. Data / Computer Centres 4. Disaster Recovery Sites 5. Warehouses
To ensure an effective recording period is adopted for all main buildings a minimum storage period of 1 month is to be retained at 6 fps. If recordings for specific incidents and events are requested and/or required by the bank these can be transferred to separate hard disk drives and/or writeable discs as required.
In addition to the general requirements listed above the following standards are to be considered as minimum requirements for CCTV surveillance and recording systems in all main buildings:
CCTV Cameras - Surveillance Area:
1. External coverage of all entry and exit points 2. Internal coverage of customer reception areas and staff entrances 3. Internal coverage of entry and exit points 4. Floor access points that include stairwells and elevator lobbies 5. Restricted Areas that require internal surveillance include:
a. Data and Computer Rooms (including individual aisles) b. Security Control Rooms
CCTV Digital Recording System:
The operation and storage of the system is to be located in the Security Control Room. For smaller buildings it can be located in a secure area and monitored from the reception and/or the security guard position.
2.3 Detailed Requirements - Branches and Cash Holding Facilities The primary risks and threats facing the banks are against its branch network and cash holding facilities. The geographic diversity and storage of cash / valuables makes them an attractive target for criminal activities.
In combination with other related systems the CCTV surveillance capability plays an essential role in deterring, recording and monitoring the potential risks.
The requirements covered within these guidelines include male, female and combined branches. Where combined branches are concerned they are to have separate recording and monitoring systems and controlled independently of each other.
To ensure an effective recording period is adopted for all branches and cash holding areas a minimum storage period of 3 months is to be retained at 6 fps. If recordings for specific incidents and events are requested and/or required by the bank these can be transferred to separate hard disk drives and/or writeable discs as required. If specific recorded data is requested by SAMA a copy is to be retained by the bank for a period of 1 year.
In addition to the general requirements listed above the following standards are to be considered as minimum requirements for all branches and cash holding facilities:
1. Cash In Transit (CIT) Route - the bank is responsible for the continuous and uninterrupted CCTV recording of cash and valuables once it has arrived at the property until the time it has left the property. This is to include the following:
a. External arrival / departure point b. The transit route through the branch or cash holding facility c. Transfer point to bank staff d. Cash Handling Area e. Transfer to Storage Area f. Storage Area (Vault / Safe / Safety Deposit Boxes) g. ATM service room and access door
2. CIT Call Point - at the recognised access point for CIT operations a Call Point is to be fitted (bell / Video Speaker Phone) to alert the Cash Officer and/or Security Guard. 3. Branch - in addition to the above requirements the following areas are also to be covered by CCTV cameras:
a. Tellers - a camera is to be located behind the teller positions and cover a maximum of two (2) teller locations. The camera is to include facial features of the customers and the area around the teller. The coverage of VIP tellers is also to be covered. b. Entry and Exit Points - all doors that exit the building are to be monitored internally. These include main, service entrances and emergency exits. Internal stairwells and access points to upper floors are also to be covered. c. Customer Lines - a camera is to monitor the customer lines.
4. Monitors - the surveillance and monitoring of the installed cameras is to be undertaken by the Cash Officer and nominated representatives. Security guards are only to be provided surveillance of the external areas, public areas and the entry points to the building.
Monitors are to be positioned so that the images are not clearly visible to the customers.
No more than sixteen (16) images are to be displayed on the monitor at any one time.
2.4 Detailed Requirements - ATMs In addition to, and for the same reasons, the risk and threats facing the branches and cash holding areas, the ATMs are also a potential target for criminal activities.
To ensure an effective recording period is adopted for all ATMs a minimum storage period of 3 months is to be retained at 6 fps. If recordings for specific incidents and events are requested and/or required by the bank these can be transferred to separate hard disk drives and/or writeable discs as required.
Whilst the ATMs located in the branches are supported by their security system, all ATMs are to incorporate the following minimum requirements:
CCTV Cameras - Surveillance Area:
1. External Camera - to monitor the activity in front of the ATM and include the immediate area around the customer / vehicle. 2. Internal Camera - to clearly monitor the facial features of the customer.
CCTV Digital Recording Equipment:
1. Branch ATMs - are to be connected to the branch recording system. 2. Off Site ATMs - are to have a separate recording unit or server-based system.
Sufficient ventilation and cooling are to be available to the installed equipment to ensure effective and continuous operation.
2.5 Additional Considerations In addition to the minimum requirements listed above for the CCTV surveillance and recording system the bank could implement a Central Monitoring System (CMS) which is considered preferable by SAMA.
The adoption of a CMS will provide a remote monitoring and (possible) recording capability that will enhance the banks' ability to respond to incidents and effectively mitigate the potential losses and damage as a result of a serious event that would affect its staff, assets, business and customers.
SAMA is currently reviewing this option for kingdom wide implementation with the following considerations:
1. Bank Controlled CMS 2. Police Controlled CMS 3. Privately Controlled CMS
3.0 ACCESS CONTROL SYSTEM An Access Control System is designed to provide a centralised control, management and recording of personnel throughout the banks facilities.
To ensure effective security of the banks facilities; Its critical assets, and the prevention of unauthorised access a dedicated system is to be employed.
Electronic Access Control Systems include the following types:
1. Proximity Cards 2. Biometric 3. Digital Keypads
Access Control utilising mechanical locks and keys are Included within Section 4 'Physical Security and Safety Systems'.
To ensure the integrity and continuous operation of the Readers in the event of a power failure a separate battery back up supply is to be incorporated within the reader / controller. The internal battery is to have a minimum back up capability of 30 minutes.
Access control systems that utilise controllers are to have a maximum of eight (8) doors controlled from a single unit.
The central database for maintaining the record of authorised personnel and the access log is to have a separate automatic / simultaneous back up capability.
To ensure effective security, control and recording of specific locations and Restricted Areas, all banks are to implement one (1) of the above systems, mechanical alternatives or a combination of them and retain a log of events for a period of 6 months.
ID Cards:
All staff, contractors and visitors are to be issued and clearly display an ID Card that identifies them whilst in the banks facility.
The cards may be incorporated within the Access Control system technology described above or be independently produced.
All banks are to ensure an effective system is adopted for the process of requesting, issuing and managing of the ID Cards.
4.0 INTRUDER ALARM SYSTEMS An Intruder Alarm System incorporates a number of different sensors to detect and alarm in the event of unauthorised access or presence.
All alarms are to be controlled through a panel and have both local and remote capability. Remote capability may include one (1) or a combination of the following options:
1. External and separate Building / Branch / Security Control Room 2. Regional Building 3. Centralised Monitoring Station (CMS)
The remote location must have a 24-hour monitoring capability to ensure an effective response.
The bank is responsible for the preparation and implementation of effective response procedures in the event of receiving an alarm from any one of the identified systems.
The Intruder Alarm panel can either be a separate system or be combined with the Fire Alarm System.
The panel is to be located in a secure location and situated within a Restricted Area. Remote keypads for arming / disarming are to be located close to the exit of the area to be alarmed and not in a public area of the building or branch.
To ensure the integrity and continuous operation of the Intruder Alarm panel and its sensors / detectors in the event of a power failure a separate battery back up supply is to be incorporated. The use of a UPS system is to have a minimum back up capability of 48 hours.
The following sensors / alarms are to be fitted in the locations identified:
Hold Up / Panic Buttons:
These are designed to be activated if the operator / user is being attacked or threatened. The buttons are to be fitted in the following locations:
1. Teller Positions 2. Cash Officer 3. Cash Handling Area 4. Branch / Operations Manager 5. Vault / Safety Deposit Room 6. Security Guard (Branch) 7. Reception Desk (Main Buildings) 8. ATMs
The buttons can be of double operation and suitably protected and positioned against false activation.
Passive Infra Red (PIR) Sensors:
PIR sensors are designed to detect movement in a given area under their surveillance. Sensors are to be a minimum of dual technology and Include enhanced features to minimise false alarms. The sensors are to be fitted in the following locations:
1. Access points to the Teller Area 2. Access route and door to the Vault / Safe / Safety Deposit Room 3. Emergency Exit doors (Ground Floor) 4. Data / Computer Room 5. Disaster Recover (DR) Sites 6. ATM Cabinet 7. ATM Service Room
The PIR sensor is to have a visual LED self-test capability to demonstrate when movement is detected. This is to be active when in the armed or disarmed mode.
Seismic / Vibration Sensors:
Seismic sensors are used to detect vibrations from all types of attacks through solid structures. The primary purpose of the sensors is to protect and prevent access to the vault, cash holding areas and ATMs.
All sensors are to be flush mounted within the floor (where applicable), wall and ceilings and be suitably protected using a protective cover to prevent damage and as a trip hazard.
Locations to be fitted with seismic sensors are as follows:
1. Vaults - to cover all 4 walls, ceilings and floor (where there is a basement) 2. ATMs - to be fitted inside the body / cabinet of the unit
Additional sensors are to be fitted to walls and ceilings adjoining other commercial or private properties.
Magnetic Door Contacts:
Restricted Areas identified above that do not have Electronic Access Control Systems are to incorporate Magnetic Door Contacts and linked to the Intruder Alarm Panel. Additional locations include all ground floor Emergency Exit doors.
Magnetic Door Contacts are to be fitted to the internal side of the door and located at the top open corner. Dependant upon the construction material and design of the door alternative contacts / switches may be used.
All doors with Magnetic Contacts are to have effective heavy duty door closures fitted.
Glass Break Detectors:
Glass Break Detectors are to incorporate dual technology that is capable of analyzing both flex (impact) and audio (shattering) frequencies.
Prior to the fitting of the sensors the glazed areas are to be checked for their type (sheet / tempered / laminated) to ensure their effectiveness.
If the glazed panels have film fitted, are of tempered or laminate type there is no requirement for the detectors.
Where sheet glass is used it is to be supported by the detectors.
5.0 FIRE DETECTION, ALARM AND SUPPRESSION SYSTEMS The installation of a dedicated, integrated and effective fire detection, alarm and suppression system is critical for the safety of the banks staff, assets, business and customers.
The installation of smoke detectors is to be included in all rooms, stairwells, corridors, lift shafts, and public areas of a banks facility.
Fixed temperature thermal detectors are to be fitted to all kitchen and tea room facilities. Special attention is to be given to the fitting of thermal detectors within ATMs.
To ensure effective identification and response to a potential alarm activation a maximum of 20 detectors are to be registered in each zone if the system is not of the addressable type.
Manual Call Points are to be installed next to emergency exits, escape routes and located close to the fire extinguisher and hose reel points. The distance between Manual Call Points should not exceed 30m.
On the activation of an alarm an audible ringing is to be heard throughout the entire facility. An audible bell and visual strobe is to be visible from outside the facility.
The internal bells are to be rated at 108 dB and external bells at 120 dB.
The strobe is to remain active until the system has been reset.
Both the strobe and bells must be tamper resistant.
All cabling is to be fire rated and not run alongside power cables.
All banks are to ensure the fire alarm panel has both local and remote capability. Remote capability may include one (1) or a combination of the following options:
1. External and separate Building / Branch / Security Control Room 2. Regional Building 3. Centralised Monitoring Station (CMS)
The remote location must have a 24-hour monitoring capability to ensure an effective response.
To ensure the Integrity and continuous operation of the Fire Panel, detectors and suppression systems in the event of a power failure a separate battery back up supply is to be incorporated. The internal battery is to have a minimum back up capability (under normal load) of 48 hours and then maintain the activation of the alarm for a further 5 minutes.
The bank is responsible for the preparation and implementation of effective response procedures in the event of receiving an alarm from the panel.
The Fire Alarm panel can be implemented as a separate system or combined along with the Intruder Alarm System. It is to be located in a secure room and remote annunciator panels near personnel operating on a 24 hour shift.
All installed equipment is to Include a one (1) year warranty period as standard.
On expiration of the warranty period all equipment is to be serviced and maintained by a qualified, recognised and registered supplier and/or service provider. A minimum schedule should include two (2) visits per year.
To ensure the effectiveness and capability of the system, regular internal tests are to be conducted. These tests are to be conducted on a monthly basis and the results recorded.
Evacuation procedures and floor plans identifying exit routes are to be prepared and positioned throughout the facility for maximum exposure.
All Emergency Exit doors are to be fitted with mechanical push bars / levers to facilitate a quick and easy access and open outwards in the direction of escape (Section 4).
To facilitate the safe evacuation process from a building once a fire alarm has activated the recruitment and training of Floor Wardens / Fire Marshalls is to be done from with the banks' staff.
Careful selection of individuals and their deputies will ensure all relevant areas are considered and included.
6.0 LIGHTING Internal and external lighting can enhance the security and safety requirements of the bank and assist the surveillance capabilities of the security guards and CCTV surveillance system.
Application, placement and types of lighting are to be carefully considered as part of the overall requirements.
All CCTV camera locations that do not have built in illumination are to be supported by external lighting.
All identified Restricted Areas are to maintain constant illumination.
All branches are to maintain constant lighting throughout the ground floor.
External lighting is to be available for all entry and exit points of a building including emergency exit doors.
Emergency lighting incorporating an internal battery back-up capability is to be available in the event of a power failure and automatically activate.
Emergency lighting is to be fitted in the following locations:
1. Emergency Exit Routes 2. Emergency Exit Doors 3. Fire Extinguisher and Hose Reel Locations 4. Manual Fire Alarm Points 5. Restricted Areas
Emergency lighting must be capable of operating for minimum of 3 hours and fitted no less than 2m from ground level.
Emergency Exit signs that are not self-illuminating and to be covered by the back-up system.
7.0 POWER SUPPLY Whilst the main power for the banks facilities will be supplied from the electrical grid there may be occasions where a disruption or power failure is experienced.
As identified above, all the main security and safety systems are to incorporate an emergency battery / UPS back up system that will provide sufficient power for a minimum of 30 minutes. This is designed to provide sufficient time to secure the premises until normal power is resumed.
In critical facilities the use of emergency generators is to be used. The following locations are to incorporate generators:
1. Head Office Buildings 2. Regional Head Office Buildings 3. Data / Computer Buildings 4. Cash Centres / Main Cash Holding Facilities
Dependant upon business and bank requirements, additional buildings / facilities may be identified for generator back up.
8.0 SERVICE AND PREVENTIVE MAINTENANCE Once systems have been installed it is essential they are properly serviced and maintained by qualified, approved and experienced service providers.
The adoption of a comprehensive service and preventive maintenance contract will mitigate the possibility of system failure in the event of an incident and prolong the life of the equipment.
A minimum schedule of three (3) visits is to be conducted for all locations. Locations include main buildings, branches, data and cash centres, ATMs and warehouses.
8.1 Disposal of Equipment To ensure the security of information contained on hard drives, internal memory and recordable mediums an effective disposal procedure is to be adopted.
Equipment identified for proper disposal are as follows:
1. ATMs 2. Point of Sale Hardware 3. PCs and Laptops 4. Fax Machines 5. CCTV Recording Hardware 6. Servers and Back Up Units 7. CDs and DVDs
Disposal is to take the form of electronic (erasing), or physical (destruction), or a combination of both to ensure the data is permanently removed.
Clear procedures are to be in place for the disposal of the above equipment/items and coordination between the Security and Safety Manager and the Information Security department is to identify the responsibilities dependant upon the internal processes of the bank.
Section 4 Physical Security and Safety Systems
Synopsis
This section describes the minimum requirements and standards for Physical Security and Safety Systems installed throughout the banks facilities.
1.0 INTRODUCTION The purpose of installing physical security and safety systems is to enhance the electronic and procedural measures employed to protect, deter and mitigate the effects of a serious incident and/or criminal activity.
No single system in isolation is completely effective, and it is only through their layered approach, physical barriers, manned guarding, effective management and clearly identified procedures and policies can their use be fully maximised to best effect.
Due to the variety and availability of internationally recognised standards It is left to the bank and its internal policies and practices to dictate the appropriate standards for such systems.
The every increasing availability of, equipment and changes / advancements in technology provides an extensive selection of products to choose from. The selection of the appropriate systems and equipment is dependant upon the security and business requirements of the bank.
The guidelines contained within this document are designed to provide a minimum requirement that must be met and included for all physical security and safety system installations.
2.0 EXTERNAL SECURITY AND SAFETY MEASURES The first line of deterrence and protection for any facility is the application of measures to secure the external perimeter.
The effective use of measures and systems will greatly reduce the risk of criminal elements considering the facility a potential target for their activities and in preventing easy access.
2.1 Windows and Glass Panels The increased use of glass in buildings and branches provide an alternative entry point to the much better protected main entrances.
Glass panels provide both a security and a safety risk to a facility, its personnel and customers.
The most vulnerable areas are on ground level and those obscured from public sight. To protect and secure these locations the following options are to be installed:
1. Sheet/Tempered Glass - is to have security/blast film (min 200 microns) attached to the inner surface and be secured within the frame. A minimum thickness of 10mm is to be used for the glass panels. 2. Laminate Glass - does not require additional measures added to the panels.
Laminate glass panels are to be capable of multiple attacks and be tested/certified by internationally recognised standards.
All ground floor windows/glass panels are to be of clear glass (or maximum 10% tint) and lighting is to be left on during 'out of working' hours to maximise external surveillance.
The use of grills and shutters to secure the facility during 'out of hours' can be used but will not reduce the above requirements for the glass panels.
Windows and glass panels in upper floors still require an element of protection for personnel who may be at risk from flying/broken glass. To ensure the safety of personnel in the upper floors the following options are to be installed:
1. Sheet Glass - is to have security/blast film (min 150 microns) attached to the Inner surface and be secured within the frame. 2. Tempered / Laminate Glass - does not require additional measures added to the panels.
2.2 Main Entrances All bank facilities are to have at least one main entrance that is to be used for its primary access control point.
These entrances are to be kept to a minimum to ensure their control of access and surveillance capability. All staff and service entrances are to be treated in the same way.
All glass doors are to conform to the above standards (2.1) in the type and protection required.
All non-glass doors are to be of solid wood or steel construction and fitted with an eye-hole if an observation window is not available.
All access doors to the main entrances are to have a manual locking capability regardless of its primary operating action.
Dependant upon the use of the main entrance, the results of a Security Risk Assessment (SRA) and the procedures identified within the Entry Point Screening procedures of the Corporate Security and Safety Plan (CSSP), the following screening equipment may be required:
1. Baggage X-Ray Screener 2. Archway Metal Detector 3. Hand Held Metal Detectors
2.3 Emergency Exits Emergency exit doors are the primary means of exiting a facility in the event of an incident and should provide unrestricted use from the inside.
As these locations are easily accessible from the outside they are to be secured using the following measures:
Internally:
1. A mechanical push bar/lever is to be fitted to the internal surface. 2. Electronic locking systems are to be on a 'fail open' setting. 3. Magnetic Contact connected to the Intruder Alarm System 4. CCTV Camera 5. An eye-hole. 6. Appropriate exit signage and lighting.
Externally:
1. Flat door plate with no handle. 2. CCTV Camera and PIR.
As part of the fire safety requirements, all routes leading to the emergency exit are to be clear of obstructions and have appropriate signage and lighting to facilitate easy exit.
2.4 ATM Locations In addition to a facilities' cash holding areas the Automated Teller Machines (ATM) are to be considered high risk. The diversity in their locations (Branch, Drive Up, and Stand Alone) and the cash they hold make them an attractive target compared to highly secured locations such as vaults and safes contained within buildings and branches.
Only internationally recognised standards and providers are to be used in the purchase of ATM units.
Whilst the locations are dictated by the bank in conjunction with SAMA and Police approval, there are a number of minimum-security requirements and are as follows:
1. All ATM units are to be securely fixed to a solid base using at least four (4) points. 2. All cabling is to be buried/hidden where possible. 3. All exposed cabling is to be contained within a steel conduit. 4. All waste paper containers should only facilitate the use of receipt slips and be self extinguishing. 5. All ATM units are to have external lighting on 24 hour operation. 6. All intruder/fire panels are to have tamper sensors fitted. 7. All ATM cabinets are to have the following security measures:
a. Access via high security lock and cylinder or electronic access control. b. Door contact connected to intruder alarm panel. c. Seismic/Vibration Sensor (Section 3) d. PIR connected to the intruder alarm panel (Section 3). e. Hold Up Button (Section 3). f. Smoke and Heat Sensor. g. External alarm bell and strobe.
All ATM units are to have CCTV surveillance (Section 3) that is recorded on its own Digital Recording system, or remotely, through the system incorporated within branch it is attached to.
All ATM units are to be connected to a remote Central Monitoring Station (CMS) for the activation of alarms from any of the fitted sensors.
3.0 INTERNAL SECURITY AND SAFETY MEASURES Should the external security and safety measures be defeated and/or bypassed the internal systems are designed to delay and deter criminal activity as part of a layered methodology.
The internal security measures primarily concentrate on the Restricted Areas identified within a facility so that security can be effectively and efficiently focused.
Restricted Areas: are considered as follows:
1. Vaults, Safes and Safety Deposit Rooms 2. Teller Areas 3. ATM Service Rooms 4. Cash Holding Areas 5. Cash Handling Areas 6. Building Access / Entry Points 7. Security Control Room 8. Data / Computer Rooms 9. IT /Communication Rooms 10. Disaster Recovery (DR) Sites 11. Electrical Rooms
Additional locations can utilise either electronic and/or mechanical means to secure their access and include the following:
1. ATM Cabinets 2. Generator Rooms 3. PTT/PABX Room 4. SCECO Switch Room 5. Electrical Rooms
All Restricted Area doors are to have effective heavy duty door closures fitted.
3.1 Mechanical Locks Mechanical locks using keys are a standard means of securing doors throughout a facility.
In addition to the considered use of an electronic access control system, appropriate mechanical locks can be used in conjunction, or as a replacement, for the security of Restricted Areas (Section 3).
To compliment the electronic security and safety measures the physical requirements are as follows:
1. All doors are to be of solid wood or steel construction with same quality material for door frames. 2. All locks/cylinders are to be of high security standard with deadlocking mechanism and resistant to the following:
a. Picking b. Drilling c. Overlift and Reading d. Rap and Rake
3. All hinges are to be of steel heavy duty standard with non-rising or removable pins. 4. All doors are to have heavy duty door closures fitted. 5. All doors are to have appropriate security signage for Restricted Areas.
Restricted Areas are to be completely sealed outside the main entry points that are secured by the above / or electronic means. All false ceilings, floors, AC vents and other access points are to be considered and secured. All walls are to be of brick/block construction.
The other major consideration concerning mechanical locks is in the security and control of the keys.
As part of the requirements of the Corporate Security and Safety Plan (CSSP) the following is to be established for keys that access Restricted Areas:
1. Log of all keys and the controlling department. 2. Secure storage and issue procedures. 3. Cylinder / Lock / Key replacements. 4. Regular audits / inspections of the keys and issue log. 5. Issue, storage and security of master keys and blanks.
3.2 Teller Areas The teller areas are considered a Restricted Area and incorporate a number of electronic security systems/sensors (Section 3) to protect them during working and silent hours.
The main threat against the tellers is a hostile attack from a customer, armed robbery and direct access to the vault, safe and/or cash holding area.
In consideration with the electronic systems, security guards and effective procedures that accommodate the main threats, the following options are available for protecting the teller area:
Option 1: Open Cash Drawer
1. Tempered/Hardened glass (Min 10mm in thickness) is to be fitted to the top of the teller counter and extend for a minimum of 2m in height. 2. Construction below the counter is to be of double brick/block with an external layer steel sheet.
Option 2: Automated Cash Dispenser
1. An Automated Cash Dispenser is fitted to each teller position. The dispenser is to be securely fixed to the floor using at least 4 points and have the following security measures:
a. Mechanical / Electronic access control mechanism. b. Seismic / Vibration sensor (Section 3).
3. Suitable and appropriate signage is to be used to identify the use of Automated Cash Dispensers.
The main purpose of the above options is to provide additional delay for the police to respond as well as maximising the protection of the teller personnel, branch staff and customers.
As a result of a Security Risk Assessment (SRA) of the branch there may be a requirement to fit tempered/hardened glass to the top of the teller counter for Option 2. This will be dependant upon the risks identified in the area.
3.3 VAULTS AND SAFES The primary storage, security and safekeeping for the majority of cash holdings, valuables and high value documents in a facility are kept in the designated vault and/or safe.
Vault
In addition to the electronic security systems identified in Section 3, the following physical measures are to be incorporated:
1. Vaults are to have walls, floor and ceiling of steel reinforced concrete with a minimum thickness of 30cm. 2. Reinforcing is to be in horizontal and vertical staggered rows of 10cm forming a grid pattern using No5 diameter deformed steel bars. A minimum of at least two (2) grid patterns shall be used. 3. The grids are to be in parallel with the face of the walls and secured using beam bolsters, wall ties or upper continuous high chairs and fastened together at the corners. 4. The use of modular panels can be used if materials are rated to provide protection against attack using a cutting torch (oxyacetylene), mechanical and/or electrical tools for a net working time of 60 minutes. 5. The main door is to be constructed of high strength stainless steel with a minimum thickness of 10cm. The door is to provide protection against attack using a cutting torch (oxyacetylene), mechanical and/or electrical tools for a net working time of 60 minutes. 6. A double rotary mechanical combination and key system is to be used for access control of the main door. The keys are to be under dual control of two (2) senior bank/branch officers. Spare keys are to be kept and combinations are to be kept In a neighbouring branch vault. 7. The frame of the main door is to be welded to the walls reinforcing bars and filled with concrete. 8. A steel day gate is to be fitted with two (2) high security cylinders on both sides. 9. If an optional emergency door is installed it must conform to the specifications of the main door. 10. An emergency vault ventilator must be provided in the wall or vault door. 11. A telephone is to be fitted inside the vault. 12. All cables connected to the vaults security and safety systems are to be secured and protected within steel conduit.
Storage Requirements The purpose of the below table is to provide a minimum security requirement for the identified amounts of cash and valuables. Where extremely high amounts (in excess of SR 20,000,000) are stored, protection levels and specifications are to be investigated and assessed separately. Storage Requirement for Cash and Valuables
Amount / Value
(Cash and Valuables)
Storage Type Over SR 2,000,000 Vault SR 500,000 to SR 2,000,000 Safe 'Type A' Up to SR 500,000 Safe 'Type B' Safes
A safe is defined as a free standing, prefabricated secure storage unit whose protection originates in the prefabrication and which does not have holes through the protection other than those for locks and cables for anchoring.
The safe is to be designed and manufactured to meet stringent international testing authority standards and be approved and/or listed by an international recognised testing laboratory or agency.
The safe is to have a dual control mechanism that consist of one (1) of the following:
1. 2 x Combination Locks 2. 2 x Key Locks 3. Combination and Key Lock
The safe is to be fire tested and certified to international standards for a resistance of one (1) hour.
The safe must be positioned in a Restricted Area will the associated protection and systems identified within these guidelines.
Type A:
The minimum weight for this safe is 750kg (empty) and must be securely anchored to the concrete floor using two (2) internal bolts that is only accessible from inside the safe.
All six (6) sides (including the door) must be resistant to a cutting torch (oxyacetylene), mechanical and/or electrical tools for a net working time of 30 minutes.
Type B:
The minimum weight for this safe is 200kg and must be securely anchored to the concrete floor using two (2) internal bolts that is only accessible from inside the safe.
All six (6) sides (including the door) must be resistant to a cutting torch (oxyacetylene), mechanical and/or electrical tools for a net working time of 15 minutes.
3.4 Safety Deposit Box Room Customer safety deposit boxes are to be contained within a room that incorporates the same requirements and standards as listed above for a vault.
The electronic security systems (Section 3) are also those required for this location. Special attention in the fitting of the internal CCTV camera is to be considered to ensure it does not cover the area designated for the customer to inspect its content.
All safety deposit boxes are to have dual control high security cylinders.
3.5 Strong Rooms In addition to the use of the above listed vault and safes there may be a requirement to store other sensitive material and documents separately. These items may include the following:
1. Documents classified Confidential and above. 2. Stocks of Cheque Books. 3. Bills, Securities and Guarantees. 4. Official Seals 5. Shares and Bond Documents 6. Spare Master Keys
If existing facilities for storage are not available, the strong rooms are to have the same requirements designated for the vault. The only differences are as follows:
1. Vaults are to have walls, floor and ceiling of steel reinforced concrete with a minimum thickness of 15cm. 2. The main door is to be constructed of high strength stainless steel with a minimum thickness of 10cm. The door is to provide protection against attack using a cutting torch (oxyacetylene), mechanical and/or electrical tools for a net working time of 15 minutes.
3.6 Cabinets In addition to the above listed secure storage rooms there may be a requirement to secure and protect other materials.
The use of cabinets primarily provides protection against fire and environmental damage. Whilst they do provide a level of security this should be considered limited.
All cabinets are to have locks that, if tampered with, will provide visual evidence.
Fire Resistant Cabinets:
The safe is to be fire tested and certified to international standards for a resistance of one (1) hour.
The fire resistant cabinets are designed to protect environmentally sensitive items such as:
1. Microfilms and Microfiche 2. Insurance Files 3. Documents classified below Confidential
Steel Cabinets:
The steel cabinets are designed to protect sensitive items such as:
1. Account Documents 2. Unclassified Mail 3. Specimen Signatures 4. Date, Authority and Signature Stamps 5. Registers 6. Security and Safety Plans
3.7 Fire Safety Equipment The risk of a fire in a facility is potentially greater than any other form of hazard or incident type. The ability to effectively detect and quickly extinguish a fire is critical in minimising the potential damage to life and the assets of the bank.
In addition to the electronic safety systems (Section 3) it is the use of automated and hand held fire suppression systems that will ensure an effective response.
The positioning, quantity and use of these equipments are available through international standards (eg NFPA), Civil Defence standards and requirements. These should also be clearly identifies within the Corporate Security and Safety Plan along with the identification of responsible personnel, their training on how to use the equipment and in emergency evacuation procedures.
The main suppression equipment types are as follows:
Water Sprinkler Systems:
Dependant upon Civil Defence requirements on the locations, standards and specifications the bank is to install an automated water sprinkler system to all underground car parking areas.
Clean Gaseous Systems:
In sensitive electrical locations there is a requirement to minimise the damage to the equipment in the event of an automated system activating.
This is achieved by using a system such as FM200 (or equivalent) but will require the room to be sealed against air leaks. Due to the non toxic nature of this type of system it is also considered essential in similar areas that are occupied by bank staff and/or contractors.
Fire Extinguishers and Fire Hoses:
A wide range of fire extinguisher types are available (water, powder, chemical) and their positioning will be dependant upon the locations they are designed to protect.
The majority of extinguishers will be water based (Class A Fires). Electrical / Computer rooms will require the use of dry powder types (Class C Fires) and positioned accordingly. The minimum capacity for any extinguisher is to be not less than 6kg.
Should extinguishers over 10kg be required they should be trolley based.
The positioning of fire hoses is to ensure sufficient coverage is achieved between them so that no area cannot be reached or is inaccessible.
Emergency water supplies are to be available to support the hoses in the event of a failure of the mains water supply. This can be achieved by reserving a given amount of water in the existing water tanks or by having a separate tank specifically for the fire fighting system.
The use of generators (Section 3) will also be required to support the pumps in the event of power loss.
Signage is to be located at each position where extinguishers and fire hoses are fitted.
As a minimum requirement they are to be located in the following areas:
1. Floor lobby areas 2. Emergency Exits 3. Restricted Areas (Fire Extinguishers dependant upon type required) Section 5 Cash in Transit - Bank Procedures
Synopsis
This section describes the minimum requirements, procedures and standards for Cash in Transit (CIT) operations for all banks.
1.0 INTRODUCTION The Cash in Transit (CIT) operations currently pose the greatest risk to the banks. It is during the transit and movement of cash and valuables between the secure storage locations that it is most vulnerable.
This section describes the internal procedures and requirements of the bank for the movement, handling and safeguarding of cash and valuables.
As all banks outsource the CIT function a separate document has been prepared for companies that provide this service.
This section is designed to work in coordination and conjunction with the other section requirements outlined within the SAMA Guidelines.
2.0 DEFINITION OF TERMS Cash:
Includes both local and foreign currency bank notes and coins.
Valuables:
Includes all negotiable documents and materials such as cheques, bills, bonds and guarantees. This also includes precious stones, metals and customer safety deposit boxes.
CIT Manager:
This person is assigned by the bank and responsible for the internal coordination of the CIT service and is to be assisted by identified personnel for kingdom wide operations.
Consignor:
The person or party involved in the dispatch/sending of the cash or valuables.
Consignee:
The person or party involved in the receipt of the cash or valuables.
3.0 RECORDS AND DOCUMENTATION To ensure the security and safety of the CIT operations the bank is responsible for maintaining and coordinating the necessary documentation for the movement and handling of cash and valuables.
The following records and documentation are required:
1. CIT Operating Schedule - an operating schedule is to be prepared by the bank or CIT service provider for all transportation, deliveries, pick ups and ATM replenishments. The schedule is to be sent to the police by the end of the previous working day. Copies of the schedule are to be held by the bank and CIT service provider. 2. CIT Transfer Record - a transfer record of all cash and valuables is to be maintained by the bank and include the following:
a. Names and signatures of carriers, consignees and consignor b. Date and time of transfer c. Cash amount or content of consignment d. Condition of consignment e. Seal numbers f. Departure and destination
3. Corporate Security and Safety Plan (CSSP) - the CSSP is to include a detailed list of procedures and processes for the internal movement and handling of cash and valuables. These procedures are to be sent to SAMA for verification and approval. Procedures are required for the following:
a. Custodians / ATM replenishment teams b. Branches (Vaults / Safes / Safety Deposit Boxes) c. Cash Centres / Holding Areas
The bank is responsible for the compliance of these guidelines and may utilise the services of an external security consultant to ensure the CIT requirements are met for all applicable facilities and equipment.
The CIT Manager and/or the Security and Safety Manager are responsible for the implementation, coordination and maintenance of the above requirements.
4.0 TRANSPORTATION REQUIREMENTS The external transportation of cash and valuables is primarily undertaken by CIT service providers. The requirements, procedures and regulations for these companies are contained within the separate document 'Cash in Transit Procedures for Transportation Companies'.
To ensure the secure and safe movement and handling of cash and valuables, the minimum requirements for banks are as follows:
1. Canvas Bag Container - to have a double flap and be capable of attaching a uniquely numbered plastic or metal seal. 2. Cassette Container - to be constructed of heavy duty plastic or metal and be capable of attaching a uniquely numbered plastic or metal seal. 3. Self Sealing Container - to be constructed of thin gauged plastic and be individually coded and/or numbered.
The bank is responsible for the coordination, verification and performance of the CIT service provider. Regular assessments of the service providers' procedures are to be conducted by the CIT Manager, Security and Safety Manager and/or external consultant.
The transportation of cash and valuables outside the banks property is to be notified to the appointed police contact by the bank or CIT service provider.
Should the CIT service provider not be able to deliver a consignment in time the SLA is to clearly identify the procedures for storing and securing it until it can be delivered.
The use of the above-mentioned CIT Operating Schedule will ensure the police are aware of the routes, locations and activities.
Whilst it is preferable to have a police escort and presence during the delivery operations and ATM replenishment it may not be possible due to availability of resources. It is the banks responsibility to ensure they are informed and maintain the CIT schedule they, or the service provider, has established.
The CIT Manager is responsible for the coordination of the schedule and that the police are provided sufficient notice.
5.0 CIT-PREPARATION To ensure suitable supervision, accountability and security in the preparation of the cash and valuables for transportation, this is to be a dual control operation. A minimum of two (2) bank employees are responsible for the counting, packing and sealing of the bags/containers. Ultimate responsibility is with the following personnel:
1. Cash Officer 2. Chief Cashier / Teller
Nominated deputies can undertake this task but must be authorised by the above.
Dual control is to be maintained until the transfer has taken place and the CIT Transfer Form has been completed.
The Branch Manager or Cash Centre Manager is to coordinate with the above staff to identify the transfer of cash and valuables for the next working day with the CIT service provider.
The CIT Manager or representatives are to ensure the CIT Transfer Forms and Records are correctly completed, maintained and securely stored for each location.
6.0 CIT-DISPATCH Once the preparatory phase has been completed the two (2) authorised personnel are to recheck seals and the security of the bags or containers and verify the transporting personnel against their ID cards.
On completion and signing of the CIT Delivery Receipt Form the bags or containers are to be handed over to the authorised carriers.
The original and a copy of the CIT Transfer Form are to be sent in a sealed envelope to the consignee.
If cash or valuables are being sent to SAMA an authorised bank employee is to be present during the handover. The authorised employee is to acknowledge the receipt of the consignment from the carriers after checking the bags or containers are securely sealed.
The authorised bank employee is then to deposit the consignment, forward the deposit receipt and record the transaction.
7.0 CIT - RECEIPT Only authorised bank employees are to receive the cash and valuables from the carrier along with the CIT Transfer Form.
On verifying that the bags or containers are securely sealed the two (2) authorised bank employees are to sign the CIT Delivery Receipt Form.
On confirming the contents of the bags or containers are correct and in order, the two (2) authorised bank employees are to sign the CIT Transfer Form.
On completion and recording of the checks and receipt of the consignment, a copy of the CIT Transfer Form is to be sent to the consignor.
The Cash Officer or Cash Centre Manager is responsible for checking the forms and records in line with the procedures laid down in the CSSP.
Cash and valuables being received from SAMA is to follow the above (6.0) requirements.
8.0 CIT - DISCREPANCIES If a discrepancy Is identified during the preparation, receipt or delivery of cash and valuables the following actions are to be undertaken:
1. Insecure Bags or Containers - in the event of tampering, missing seals and/or any other signs of insecurity of the bags or containers they are to be refused unsigned and returned to the carrier immediately for investigation.
The authorised checking personnel are to make a report and the following are notified and sent a copy of the report:
a. Cash Officer / Cash Centre Manager b. Branch Manager c. CIT Manager / Regional Representative d. Consignor Manager
When returned consignor the bag or container is to be checked by the original authorised personnel for verification.
In the event of a loss of cash or valuables a report is to be prepared and signed by both the consignor and consignee.
2. Discrepancy in Cash or Valuables - in the event of a discrepancy between the CIT Transfer Form and the contents of the bag or container the above actions are to be followed once a confirmation has been made between the Branch Manager / Cash Centre Manager and the consignor regarding the CIT Transfer Form..
All original reports are to be held and maintained by the CIT Manager for safe keeping.
Dependant upon the nature of the incident and whether it was resolved or not, the CIT Manager may involve the Security and Safety Manager and/or other identified personnel should further investigations be required.
Training is to be provided for personnel authorised to conduct these operations that includes the following:
1. Anti Money Laundering (AML) 2. Procedures and processes for the movement of cash and valuables as per the CSSP 3. Procedures in the event of armed robbery and/or criminal acts
9.0 ATM The replenishment and servicing of Automated Teller Machines (ATM) is to be regarded as a CIT operation when the machine cannot be replenished within a secure area.
The replenishment operation is to be undertaken by a minimum of two (2) authorised personnel.
All replenishment operations are to be conducted in the presence of armed guards.
Lobby ATMs:
Where relevant, all doors and access points to the ATM lobby or replenishment area are to be secured and locked prior to the opening of the ATM.
The use of blinds and screens are to be maximised to prevent unnecessary visibility of the replenishment operation.
External ATMs:
The replenishment teams will be assisted by the team in the armoured car. The cash containers are to remain in the vehicle until they are required and are as close to the ATM as possible.
During the replenishment the armoured car team is to remain vigilant and is responsible for the protection of the team and the cash containers.
Dependant upon availability the police may also be present to provide additional security and protection to the replenishment teams and the cash containers.
Should the replenishment schedule change from the prepared itinerary this is to be communicated back to the CIT Manager or regional representative. Any changes are to be sent to the nominated contact in the police to ensure their presence during transit and replenishment operations.
Police presence is dependant upon availability of resources and CIT operations should maintain their schedule of timings and identified routes.
Training is to be provided for personnel authorised to conduct these operations that includes the following:
4. ATM Security and Safety Systems 5. Procedures and processes for the movement of cash and valuables as per the CSSP 6. Procedures in the event of armed robbery and/or criminal acts Section 6 Security Guards for Main Buildings and Branches
Synopsis
This section describes the minimum requirements and standards for Security Guards operating throughout the banks Main Buildings and Branches.
1.0 INTRODUCTION In addition to the installation and implementation of other security and safety measures to protect the banks' main buildings and branches, a security guarding service to be used.
The purpose of using security guards is to enhance the electronic and procedural measures employed to protect, deter and mitigate the effects of a serious incident and/or criminal activity.
No single system in isolation is completely effective, and it is only through their layered approach, physical barriers, manned guarding, effective management and clearly identified procedures and policies can their use be fully maximized to best effect.
The guidelines contained within this document are designed to provide a minimum requirement that must be met and included for the use of security guards for the banks main buildings and branches.
2.0 RESPONSIBILITIES AND REQUIREMENTS The security guard(s) is intended to compliment the use of other security and safety systems, measures and equipment.
The deployment of security guards throughout the banks main buildings and branches is to be closely monitored and supervised by the service provider and the banks personnel.
To ensure sufficient guards are available to carry out their responsibilities, an assessment is to be carried out to identify the quantity and requirements. This can be part of the Security Risk Assessment or undertaken as a separate report.
The security guards can be contractors or directly employed by the bank.
Detailed responsibilities and requirements are to be identified within the Corporate Security and Safety Plan (CSSP) and controlled, monitored and enforced by the Security and Safety Manager.
The primary responsibilities of the security guard is as follows:
1. Provide an effective physical and visual deterrent. 2. Provide effective control of access and entry points. 3. Provide an effective response to security and safety incidents.
The primary requirements of the security guard is as follows:
1. They are to be a Saudi national. 2. Clearly identifiable and appropriate uniform is to be worn at all times. 3. Maintain the Security Guard Shift Report. 4. Fully trained and prepared for their function and location.
All security guard reception/entry locations are to maintain a Shift Report that records all the events and activities for each shift. The security guard/supervisor is to include the following Information:
1. Date, time and guard names for each shift changeover. 2. Suspicious activity identified during the shift period. 3. Incidents/Events during the shift period. 4. Activation of Alarms. 5. Security and Safety equipment check and test.
The Security and Safety Manager is to ensure that the information contained within the Security Guard Shift Report is reported, acknowledged and any appropriate action taken. Apart from immediate/emergency actions the report is to be checked and acknowledged at the start of each working day.
Prior the changeover between shifts, the oncoming guard is to have physically checked his area of responsibility and acknowledged the content of the previous shift report.
All security guard locations are to have detailed Post Instructions that clearly identify their function, responsibilities, incident response and reporting chain. These will form part of the CSSP (Section 2).
The effective use of security guards will greatly reduce the risk of criminal elements considering the facility a potential target for their activities and in preventing easy access.
3.0 ACCESS CONTROL One of the primary responsibilities of the security guard is the control of access to the building or branch.
To assist in the control and identification of personnel an ID Card system is to be employed by all banks.
All security guards are to be aware of the Restricted Areas within their area of responsibility.
All buildings and branches are to have 24 hour security guard presence and working hours and overtime are to conform to the regulations laid down in the Saudi Labor Law and are the responsibility of the service provider.
The security guards are responsible for the enforcement of a Clear Desk Policy and are to report any infringements within their shift reports.
3.1 Main Buildings To ensure the identity and control of the different personnel working and visiting the building, the following are to be clearly identified:
1. Permanent Employees 2. Contractors 3. Visitors
The security guard is to enforce the wearing and prominent display of the issued ID cards by all personnel working and visiting the building.
A Building Log Sheet is to be maintained at each reception/access point. The log sheets are to include all personnel (without ID) and visitors that enter the building. The information is to include the following:
1. Name, contact number and date 2. Type of ID used 3. Person Visited / Employee Dept 4. Time in and out
Visitors are issued temporary ID cards once the following has been confirmed:
1. Confirmation of visit/appointment by bank employee. 2. Confirmation of visitor by official identification (picture and name).
Visitors are not to be given access without being escorted by the visited bank employee or a security guard. The bank employee is responsible for their visitor until they are returned to the reception desk and logged out.
The bank is to establish clear policies and procedures on the identification, issuance and control of an ID card system. These are to be contained within the CSSP (Section 2).
3.2 Branches To ensure the identity and control of the different personnel working in the branch, the following are to be clearly identified:
1. Permanent Employees 2. Contractors
The security guard is to enforce the wearing and prominent display of the issued ID cards by all employees and contractors whilst working in the branch.
Customers are only permitted entry during the banks official opening hours.
Cash In Transit (CIT) operations are considered a separately and can be found in Section 5.
Bank employees are only permitted access to the branch during out of hours if prior permission has been provided by the Branch Manager or his nominated deputy.
Access to the branch out of working hours, regardless of permission, is to be visually confirmed by the guard prior to allowing entry.
The bank is to establish clear policies and procedures on the identification, issuance and control of an ID card system. These are to be contained within the CSSP (Section 2).
3.3 Cleaning Personnel All cleaning personnel are to be escorted and/or supervised whilst working within Restricted Areas during out of hours. This can be undertaken by a bank employee or the security guard dependent upon the policy of the bank.
The contract company providing the cleaning services are to issue a list of all personnel, and their duty hours, to the building reception desk or branch security guard.
Changes to the names and/or hours are to be confirmed in writing by the nominated supervisor/manager of the service provider.
4.0 ADDITIONAL CONSIDERATIONS Whilst it is mandatory for all buildings and branches to maintain 24 hour security, the installation of a remotely monitored alarm/surveillance capability may be considered for the reduction in security guard numbers and presence.
All implemented and/or proposed systems should be prepared in writing and sent direct to SAMA for review and consideration.
Banking Products and Finance Activities
Responsible Lending Principles for Individual Customers
No: 46538/99 Date(g): 16/5/2018 | Date(h): 2/9/1439 Status: In-Force Responsible Lending Principles, issued by SAMA under Circular No. (46538/99) dated 02/09/1439H (17/05/2018), Amended by SAMA’s Circular No.( 40694/1) dated 09/09/1439H (24/05/2018).Note: This translation is provided for guidance. The governing text is the Arabic text.
Relevant Laws and Instructions
Chapter I Definitions
1. The following terms and phrases, wherever mentioned herein, shall have the meaning assigned thereto unless the context requires otherwise:
SAMA: Saudi Central Bank*.
Governor: Governor of Saudi Central Bank (SAMA).
Creditor: Banks and finance companies, supervised by SAMA and licensed to practice one or more activities of finance.
Principles: Responsible Lending Principles for Individual Customers.
Consumer: An individual who obtains or applies for a finance loan or at whom such finance is directed.
Finance Amount: The limit or the total amount made available to the consumer under a finance contract.
Term Cost: The term cost due by the consumer under a finance contract, which may be expressed as a fixed or changed annual percentage of the Finance Amount provided for the consumer.
Variable Term Cost: The term cost specified according to an index or a reference rate which must be explicitly stated in the finance contract; such a cost will change in accordance with the change in such an index.
Total Amount Payable by the Consumer: Finance amount plus all due costs that the consumer must pay as per provisions of finance contract, including term cost, fees, commissions, administrative costs, insurance and any expenses deemed necessary to obtain finance and excluding any expenses that the consumer can avoid, such as costs and fees customer must pay upon his/her violation of any obligations mentioned in the finance contract.
Monthly Credit Obligations: Total amount payable by the consumer, which is calculated on a monthly basis, as per the credit report issued by licensed credit bureaus and the consumer’s disclosure.
Gross Salary: The basic monthly salary (after deducting pension or GOSI contributions) plus all fixed allowances paid to the consumer by the employer on a monthly basis.
Total Monthly Income: The monthly average income of the consumer from any periodical income whether received on a monthly, annual or other periodic basis, including gross salary or any other income (allowances and compensation that are paid periodically, rental income, revenues of other investments, etc.) which can be reasonably verified, calculated as per provisions of Paragraph (17) hereof.
Monthly Disposable Income: The remaining amount of the consumer’s total monthly income for spending, investment or savings after deducting current or expected basic expenses and monthly credit obligations, calculated on a monthly basis.
Deductible Ratio: The ratio of consumer’s monthly credit obligations to total monthly income, calculated as per terms and conditions stated in Chapter IV on Quantitative Principles of Responsible Lending.
Deduction: The act of deducting an amount from the consumer’s gross salary or monthly pension.
* The "Saudi Arabian Monetary Agency" was replaced By the "Saudi Central Bank" in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding to 26/11/2020G.
Chapter II General Provisions
2. The principles herein aim to encourage responsible lending that meets the actual needs of consumers, especially those related to owning housing and assets rather than consumer purposes. The principles also aim to enhance financial inclusion by providing adequate financing for all segments of society, taking into account reasonable deductible ratios that the consumer can afford. In addition, the principles focus on ensuring fairness and competitiveness among creditors to make sure that their procedures and mechanisms are effective and efficient.
3. The principles apply to all creditors and finance activities directed at consumers. These activities encompass all credit products and programs designed for individuals, including, but not limited to, personal finance, vehicle finance, credit cards and real estate finance.
4. The creditor must set appropriate internal controls and procedures to ensure compliance with the principles herein, other relevant laws, regulations, and instructions. It must also pay special attention to documenting information and maintaining documents provided by consumers, thereby gaining an acceptable degree of reliability.
5. If the creditor assigns certain related work to another party or other parties, it must ensure that those parties act in compliance with the principles herein and that they do not contravene the provisions hereof, other relevant laws, regulations and instructions.
6. The creditor must take necessary measures to ensure that the principles herein are fully understood and adhered to by its staff and are shared with its consumers. It must not only focus on the number of financing agreements or the value of finance, but it must also take into account such principles when preparing its incentive programs for its staff. It must ensure that no programs are developed in a way that may lead to irresponsible finance.
7. The creditor must keep sufficient records that show its commitment to the principles herein, other related laws, regulations, and instructions.
Chapter III Qualitative Principles of Responsible Lending
8. The creditor must adopt a clear, transparent and documented scientific method, criteria and procedures to evaluate the creditworthiness of the consumer and his/her ability to repay. These methods, criteria, and procedures must be in accordance with the best practices in this area without prejudice to the principles herein. The board of directors of the creditor must adopt, revise annually, and update when necessary these criteria and procedures. The creditor must apply these procedures and document this application in the finance file before granting finance.
9. Upon the consumer’s consent, the creditor must examine the credit record of the consumer to verify his/her solvency, ability to meet the monthly credit obligations, and his/her credit behavior. The information obtained must be documented in the finance file. The creditor must ask the consumer to disclose, in writing, any other credit obligations he/she has, such as loans from his/her employer, friends or relatives, whether current or expected, and this must be documented in the finance file. Upon granting the finance, the creditor must, in accordance with the provisions of relevant laws, regulations and instructions, register all credit information relating to the finance granted to the consumer with licensed credit bureaus after obtaining his/her consent. The creditor must then update such information throughout the period of dealing with the consumer. The creditor must reject a finance request if it does not obtain the consumer’s consent to all matters stated in this paragraph.
10. The creditor must assess the ability of its consumers to meet monthly credit obligations, especially in cases where consumer's deductible ratios are close to the maximum deduction limits set out herein. The assessment of the ability to meet monthly credit obligations is primarily based on the assessment of the consumer’s monthly disposable income that can be used to meet his/her monthly credit obligations. Basic expenses that vary according to several factors, such as income levels, number of dependents, and residence place, whether the consumer owns such a place, rents it, or otherwise, must be taken into consideration, the creditor should develop appropriate rules in line with best practices to apply comprehensive factors to various categories of consumers. The finance is considered bearable if the consumer’s total monthly credit obligations, upon granting him/her finance, are less than the consumer’s monthly disposable income. This must also be consistent with the deductible ratios stated in Chapter IV on Quantitative Principles of Responsible Lending, Paragraphs (15, 16, and 17) hereof.
11. Based on a credit study and assessment of consumer’s monthly disposable income, the creditor must use financial models and tools to measure the consumer’s ability to meet monthly credit obligations and to what extent such finance suits his/her needs and circumstances. Such models depend on some basics, including identifying and classifying the regular basic expenses of various consumers. Basic expenses cover, as a minimum, the following groups:
a. Food expenses, which are affected by the number of dependents;
b. Housing (rent) and services’ expenses, which depend on whether the consumer is the owner or tenant of the house or otherwise;
c. Wages for domestic worker;
d. Education expenses, which are affected by the number of dependents;
e. Health care expenses, which are affected by the number of dependents;
f. Transportation and communications expenses;
g. Insurance expenses for individuals and their dependents, as the case may be; and
h. Any expected costs or expenses.
In addition to the above-mentioned expenses, existing monthly credit obligations, which can be verified through licensed credit bureaus; finance granted by the consumer’s employer, friends, or relatives; and any other finance that is repaid through installments on a monthly, semi-annual, or other basis must be considered.
12. The creditor must ensure both the efficiency and effectiveness of such financial models and tools, used to measure the consumer’s ability to repay finance. It should benefit from its information and data, as well as legally available general statistics sources. The methodology of such models and tools must include, as a minimum, the following:
a. A mechanism to calculate and analyze total monthly income;
b. A mechanism to calculate and analyze monthly credit obligations; and
c. A mechanism to calculate and analyze basic expenses, including the following:
o A list of basic expense indices compared to verified data;
o The ability of changing basic expenses according to income levels; and
o The ability of changing basic expenses according to the number of dependents.
Chapter IV Quantitative Principles of Responsible Lending
This article is amended in accordance to SAMA circular No. (40694/1) dated 09/09/1439.13. Terms for calculating the consumer’s monthly credit obligations must be observed as follows:
a. The monthly credit obligation of a credit card must be equal to the minimum repayment of the credit ceiling for each credit card issued to the consumer.
b. Monthly credit obligations include all credit obligations to creditors and specialized government lending institutions; any other credit obligations, such as loans from employers, friends, or relatives; and other types of finance.
c. Before granting finance with variable term cost and upon calculating the monthly credit obligations of such finance, the creditor must take into account including additional margin in the term cost. The term cost and the additional margin must be considered when documenting the monthly credit obligations for such finance in the consumer’s credit report in the credit bureau in order to avoid risks of changes to term cost.
d. Upon granting finance, the creditor must be responsible when the deductible ratio exceeds the permitted limit hereunder if it is due to a change in the term cost. If this happens, the creditor must reschedule the repayment periods of the finance and must not add a term cost that may lead to exceeding such limits.
e. Monthly credit obligations of finance where all installments are not equal must be calculated based on monthly installments that are fixed at the monthly average level for all installments regardless of whether such finance is payable by equal repayments or requires a final payment.
14. Terms for calculating the total monthly income of the consumer must be observed as follows:
a. Gross salary, as documented by any means by the employer, must be included in such calculation.
b. As for other income, half of the monthly average of the total amount earned by the consumer from any periodical income, whether monthly, annual or other, must be included in such calculation. The other income must include periodically-paid allowances and compensation, rental income, revenues of investments, dividends, etc., which can be reasonably verified via, at least, a two-year bank statement or official documents proving their continuity.
c. Government subsidies, such as those given through the Citizen Account Program or social security, must not be counted as part of the total monthly income of the consumer. However, government subsidies that are documented through contracts with a citizen and that are provided by the Ministry of Housing or the Real Estate Development Fund may be incorporated in the total monthly income of the consumer in real estate finance products.*
15. Deductible ratios for consumers whose total monthly income is SAR 15,000 and less must be subject to the following restrictions:
a. The monthly credit obligations of finance, which are linked only to the monthly deduction of the gross salary of consumer, must not exceed 33.33% of the gross salary for employees and 25% for retired consumers.
b. Monthly credit obligations, excluding monthly credit obligations for real estate finance, must not exceed 45% of the total monthly income of the consumer.
c. Monthly credit obligations of finance must not exceed 55% of the total monthly income of the consumer However, for the consumers who are benefiting from the Ministry of Housing or the Real Estate Development Fund for mortgage products, the monthly obligations of finance must not exceed 65% of the total monthly income.*
16. Deductible ratios for consumers whose total monthly income is more than SAR 15,000 and less than SAR 25,000 must be subject to the following restrictions:
a. The monthly credit obligations of finance, which are linked only to the monthly deduction of the gross salary, must not exceed 33.33% of the gross salary for employees and 25% for retired consumers.
b. Monthly credit obligations, excluding monthly credit obligations for real estate finance must not exceed 45% of the total monthly income of the consumer.
c. Monthly credit obligations of finance must not exceed 65% of the total monthly income of the consumer.
17. Deductible ratios for consumers whose total monthly income is SAR 25,000 and more must be subject to the following restrictions:
a. Monthly credit obligations of finance, which are linked only to the monthly deduction of the gross salary, must not exceed 33.33% of the gross salary for employees and 25% for retired consumers.
b. Credit obligations of finance are subject to the credit policies of the creditor. The creditor must assess the ability of its consumers to meet monthly credit obligations stated herein.
18. Finance term must not exceed (5) years or (60) months from granting such finance, except for real estate finance and credit cards.
19. SAMA may review and amend periodically the ratios in Paragraphs 15, 16, and 17 hereof, taking into account the soundness and stability of the financial system and the forecasts for economic growth.
*Amended in accordance to SAMA circular No. (40694/1) dated 09/09/1439.
Chapter V Publishing and Coming into Force
20. The Principles hereof are issued by a decision of SAMA Governor and published on SAMA website.
21. The provisions of Paragraphs 15, 16 and 17 hereof must be applicable as of the date of circulating such principles.
22. All provisions hereof must come into force as of 01/12/1439H (12/08/2018). The principles herein must be fully observed from that date.
23. The principles herein must supersede any provisions to the contrary.
Regulations for Consumer Financing
No: 351000116619 Date(g): 7/7/2014 | Date(h): 10/9/1435 Status: In-Force These Regulations shall be applicable to Financing Contracts and all related Guarantee Agreements executed by banks licensed and authorized by SAMA. SAMA is the sole authority empowered to apply these Regulations and to take necessary measures as it deems appropriate regarding any violations of these provisions, including imposing punitive charges and or enforcement actions as applicable under the Banking Control Law. These Regulations supersede and replace the Regulations for Consumer Credit of October 2005 issued as circular 33232-MASH/516 dated 23/9/1426 H and its subsequent updates. SAMA may update these Regulations as and when required.
SAMA may, at its discretion, impose a restriction on a Creditor under which its Consumer Financing portfolio may not exceed a specified percentage of its total Financing portfolio.
Definitions
Article 1: Definitions
Each of the following words and phrases, wherever it appears in this Regulation, shall have the meaning following it in this article unless the context indicates otherwise:
Adequate notice: a printed notice to a Borrower that sets forth clearly the pertinent facts so that the Borrower may reasonably be expected to have noticed it and understood its meaning. The notice may be given by Guaranteed Communication Means reasonably assuring receipt by the Borrower.
Advertisement: a commercial message in any medium that promotes, directly or indirectly, a Financing product.
Amount of Financing: the limit or the total amount made available to a Borrower under a Financing Contract.
Annual Percentage Rate or APR: the discount rate at which the present value of all payments and installments that are due from the Borrower, representing the Total Amount Payable by the Borrower, equals the present value of all payments of the Amount of Financing available to the Borrower on the date on which the Financing amount or the first payment thereof is available to the Borrower, calculated in accordance with Annex 1.
Authenticated Communication: Borrower instructions received through a recorded, verifiable and retrievable medium such as paper, electronic or verbal recording.
Borrower: a natural person who, in Financing transactions covered by this Regulation, obtains Financing for purposes outside his trade or profession.
Business Day: a day on which the banks are open for business to the general public.
Calendar Day: any day in a month, including weekends and holidays.
Change in Circumstance: death, disability (partial or total), retirement (mandatory or voluntary), loss of job or bankruptcy of a Borrower*.
Consumer Financing: a Financing granted to a Borrower as follows:
- The Financing is for purposes unconnected with the Borrower’s commercial or professional activity, generally including personal Financing, car Financing, home improvement Financing, and similar products as approved by SAMA.
- Such Financing is granted for the purchase of goods and services for consumption or other needs of the Borrower as identified above, e.g. for the purchase of furniture, consumer durables, automobiles, household items, education, etc.
- Real estate Financing and Finance Leasing are excluded.
- Financing against shares (Margin Lending) is also excluded.
Creditor: a bank licensed and authorized by the Saudi Central Bank.
Default: any breach of the terms and conditions of the Financing Contract and the nonpayment by a Borrower of their monthly installment for 90 Calendar Days from its due date.
Default Notice: a notice from a Creditor to a Borrower under a Financing Contract with the Creditor notifying that he/she is delinquent in payments.
Draw-down: an Amount of Financing drawn by the Borrower under a Financing Contract.
Financing: the right to incur new debt and defer payment, or the right to defer existing debt.
Financing Contract: an agreement by which a Creditor grants, or promises to grant, a Consumer Financing or similar financial accommodation to a Borrower.
Gross Salary basic monthly salary (less GOSI and pensions contributions) plus all fixed allowances paid to Borrower by the employer on a monthly basis.
Guarantee Agreement: an ancillary agreement concluded by a Guarantor and guaranteeing or promising to guarantee the fulfillment of any form of Financing granted to a Borrower.
Guaranteed Communication Means: registered mail, hand delivery, and any recorded, verifiable and retrievable electronic medium.
Guarantor: a natural person who guarantees or promises to guarantee the fulfillment of any Financing granted to a Borrower.
Initial Disclosure: the information required to be provided to the Borrower by a Creditor upon opening a Consumer Financing account in accordance with Section 5 of these Regulations.
Licensed Credit Bureau: a credit information company licensed by SAMA to collect and maintain credit information on consumers and provide the same to members upon request.
Optional Feature: features and services which are not part of the standard features or services of the Financing Contract product, requiring payment of additional fees and/or Term Cost by the Borrower.
Outsourcing: an arrangement under which a third party (i.e. a service provider) undertakes to provide a Creditor with a service previously carried out by the Creditor itself or a new service to be launched by the Creditor. Outsourcing can be to a service provider in Saudi Arabia or overseas and the service provider may be a unit of the same Creditor (e.g. head office or an overseas branch), an affiliated company of the Creditor's group or an independent third party, and is subject to the requirement to fully comply with SAMA Rules on Outsourcing issued vide 34720/BCS/424 dated 17/7/1429H Correspondent to 20/7/2008.
Refinancing: repayment of an existing Financing from the proceeds of a new Financing granted to the Borrower.
Repayments or Deductions: deductions from the Gross Salary or monthly pension entitlement of a Borrower towards repayment of Financing. Only deductions for Real Estate Financing repayments and divorce settlements are excluded.
SAMA: the Saudi Central bank**.
Satisfactorily Resolved: resolution of the dispute in accordance with the procedures and timeframes for resolving disputes.
Secured Financing: a Financing that is collateralized by assignment of rights to property including a security interest in personal property or real estate taken by the Creditor as collateral. A Financing may be secured by pledge of cash (deposits), tangible goods or other collateral.
Term Cost: the term cost due and payable by the Borrower under the Financing Contract; this must be expressed as a fixed annual percentage of the Amount of Financing obtained by the Borrower.
Term to Maturity: the period from initial disbursement to the date on which the final repayment of the relevant Financing is due.
Total Cost of Financing: all costs payable by the Borrower under a Financing Contract other than the Amount of Financing, including Term Cost, fees, commissions, administrative services fees, insurance, and any charges required to obtain Financing, but excluding any expenses the Borrower can avoid, such as costs or fees due and payable by the Borrower as a result of the Borrower's breach of any obligations contained in the Financing Contract.
Total Amount Payable by the Borrower: the Amount of Financing plus the Total Cost of Financing.
*The definition of "Change in Circumstance" has been amended in accordance with Circular No (381000095088) dated 10/09/1438H. The amended definition is currently available only in Arabic.
** The "Saudi Arabian Monetary Agency" was replaced By the "Saudi Central Bank" in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding in 26/11/2020G.
Section One Scope of Application
Article 2: Application of the Regulations
- These Regulations apply to all kinds of Consumer Financing.
- These Regulations do not apply to lease or real estate Financing or margin lending.
Article 3: Meaning of Consumer Financing and Amount of Financing
- For the purposes of these Regulations, Consumer Financing is granted under a Financing Contract in case of any of the following:
- The repayment of a debt owed by a person (the Borrower) to another (the Creditor) is deferred; or
- a person (Borrower) incurs a deferred debt to another (Creditor).
- For the purpose of complying with Article 14(1), the Creditor must calculate the Amount of Financing based on the Borrower's Gross Salary or monthly pension entitlement (as the case may be) when the application for Financing is submitted.
- For the purposes of these Regulations, Consumer Financing is granted under a Financing Contract in case of any of the following:
Section Two Financing Contracts and Guarantee Agreements
Article 4: Financing Contracts and Guarantee Agreements
- A Financing Contract or Guarantee Agreement must be in the form of-
- a written contract document signed by the Borrower or Guarantor and the Creditor; or
- a written contract document signed by the Creditor and constituting an offer to the Borrower that is accepted in writing by the Borrower.
- All Financing Contracts, application forms, Guarantee Agreements, repayment schedules, Borrower acknowledgement letter and other documentation related to Consumer Financing must be in Arabic and if the Borrower requests that documentation be prepared in English, the documentation shall be prepared in both languages. The Creditor must provide copies thereof to the Borrower. In the event of a divergence between the Arabic and the English text of any such document, the Arabic text prevails.
- Each contracting party must receive a copy of the Financing Contract or Guarantee Agreement (as the case may be).
- A Financing Contract or Guarantee Agreement must be in the form of-
Article 5: Necessary content of Financing Contracts or Guarantee Agreements
1- The Creditors must provide a synopsis for each Financing Contract to the Borrower that contains, in clear and succinct language, basic information about the Financing, including the Total Cost of Financing. The receipt of this synopsis by the Borrower must be documented and included in the Financing file.
2- The Financing Contract must include at least the following information:
(a) names of the parties to the Financing Contract, the national identity number or Iqama number of the Borrower as applicable, official addresses, means of contact including telephone and mobile numbers and e-mails, if available;
(b) type of Financing;
(c) Term to Maturity;
(d) Amount of Financing;
(e) conditions for drawing down the Amount of Financing, if any;
(f) description of the calculation method for determining Term Cost to enable the Borrower to understand the Term Cost and to distribute the cost over the Term to Maturity;
(g) Term Cost and the conditions governing the application of the Term Cost and any index or reference rate applicable to the Term Cost;
(h) Annual Percentage Rate (APR);
(i) Total Cost of Financing and the Total Amount Payable by the Borrower, calculated at the time of entering into the Financing Contract; stating the assumptions made in order to calculate that amount;
(j) instalment amounts payable by the Borrower, number of instalments, due dates of instalments, and method of distribution over the remaining amounts;
(k) charges, commissions and costs of administrative services;
(l) payment periods of charges or amount that must be paid without paying the Amount of Financing; and related payment conditions;
(m) consequences of delayed repayment of instalments;
(n) where applicable, notarial fees;
(o) collateral and required insurance;
(p) procedures for exercising the right of withdrawal, if any, its conditions and resulting financial obligations;
(q) procedures for early repayment and indemnifying the Creditor, if applicable, and the method for determining such indemnity;
(r) procedures for dealing with collateral if its value decreases, if applicable;
(s) procedures for exercising the right of termination of the Financing Contract;
(t) Borrower's consent to filing his/her information in credit bureau records; and
(u) any other data or information stipulated by the Agency.
Article 6: Amendment of the Financing Contract
Any amendment (including any addition to) of a Financing Contract by the Creditor after it has been signed by the Borrower is invalid unless the Borrower has agreed in writing.
Article 7: Copy of Financing Contract and Guarantee Agreement for Borrower and Guarantor as applicable
If a Financing Contract or Guarantee Agreement needed to be signed by the Borrower or Guarantor and returned to the Creditor, the Creditor must give each of the Borrower or Guarantor, as applicable, a signed copy they may keep, not later than 10 Calendar Days after the Financing Contract or Guarantee Agreement has been entered into.
Article 8: Annual Percentage Rate (APR)
- The APR must include all mandatory charges or costs under a Consumer Financing as shown in the relevant advertising notices or materials.
- The Financing Contract must stipulate the use of the declining balance method in distributing the Term Cost over the maturity period, which means that the Term Cost is allocated pro-rata to installments based on the remaining balance of the Amount of Financing at the beginning of the period for which an installment is due.
- The Term Cost is fixed.
Article 9: Fees and Charges
All fees, costs and administrative services charges to be recovered from the Borrower by the Creditor must not exceed the equivalent of (1%) of the Amount of Financing or (5,000) five thousand Saudi riyals, whichever is lower.
Article 10: Right of Termination or Withdrawal
- The Borrower may, by giving written notice to the Creditor within 10 Calendar Days from the date of execution of a Financing Contract, terminate the Financing Contract, unless
- Draw-down of any part of the Amount of Financing has occurred; or
- A credit card or other means of obtaining Financing provided to the Borrower by the Creditor has been used to acquire goods or services for which Financing is to be advanced under the Financing Contract.
- In the event of termination under Article 10(1), the Creditor may not charge or claim any Term Cost and or fees from the Borrower unless the conditions under Article 10(1)(a) or (b) above have been met.
Clarifications in accordance with Circular No. (381000095091) dated 10/09/1438H.This part is currently available only in Arabic. Please Click here to read the Arabic version.
- The Borrower may, by giving written notice to the Creditor within 10 Calendar Days from the date of execution of a Financing Contract, terminate the Financing Contract, unless
Article 11: Early payments
- A Creditor must accept any payment under a Financing Contract before its due date as partial payment if it is equivalent to one full installment or multiples thereof.
- A Creditor must credit each payment made under a Financing Contract to the Borrower's account promptly after receipt of such payment.
- The Borrower may prepay, at any time, the remaining Amount of Financing without incurring any Term Cost for the remaining period. The Creditor is entitled to compensation from the Borrower for the following:
- The cost of re-investment, which may not exceed the Term Cost for the three months following the payment, calculated on the basis of a declining balance; and
- The expenses the Creditor pays to a third party as a consequence of the Financing Contract for the remaining period of the Consumer Financing if such expenses are unrecoverable, and provided that such expenses are properly recorded in the Borrower's Financing file.
- The Creditor must notify the Borrower in writing of all such fees payable by the Borrower as referenced under Art. 11(3)(a)and (b) above. The Creditor must give that notification by Guaranteed Communication Means within 10 Business Days after the first to occur of:
- receipt by the Creditor of a notice from the Borrower of the intended prepayment; or
- receipt by the Creditor of the prepayment,
Article 12: Balance Transfer
- Creditors must quickly facilitate the transfer of balance(s) to other Creditors in the Consumer Financing accounts of their Borrowers. Creditors must not unreasonably withhold their consent to a balance transfer request they receive.
- Creditors may not unreasonably withhold the issuance of a balance statement or certificate of outstanding liabilities requested by the Borrower; these must be issued within 7 Business Days from the date of request.
Article 13: Assignment of Rights
- If the Creditor assigns rights under a Financing Contract or the Financing Contract itself to a third party or issues securities against rights under the Financing Contract, the Borrower may use against the assignee any defense that would have been available to him against the original Creditor.
- The Creditor must receive a no-objection letter from SAMA before he can assign a Consumer Financing or a portfolio of Consumer Financings to another party.
Article 14: Maximum Credit Limit and Maximum Term to Maturity
- Before granting a new Consumer Financing or increasing the limit of any Consumer Financing and without prejudice to the requirements of any applicable law or regulation, a Creditor must ensure that the total monthly Repayments or Deductions recovered from a Borrower under his Consumer Financing obligations to all Creditors do not exceed 33.33% of the Borrower's Gross Salary during the period in which those Repayments or Deductions are made. For retired Borrowers, the deduction limit is 25% of their monthly pension.
- The Creditor must first obtain the Borrower's prior approval and then obtain and examine the credit record of the Borrower from one or more of the Licensed Credit Bureaus, to confirm the Borrower's compliance with the requirement under Article 14(1), his solvency, repayment capacity and credit conduct. The confirmation of such prior approval by the Borrower must be documented in the Borrower's Financing file.
- The Creditor must, upon the approval of the Borrower, register the Borrower's credit information with one or more of the Licensed Credit Bureaus in accordance with the relevant laws, regulations and instructions. Such information shall be updated throughout the period of dealing with the Borrower.
- The Creditor must decline a Financing request if he does not obtain the approval of the Borrower as referred to in Article 14(2) and 14(3) above.
- Creditors must ensure that the maximum Term to Maturity of a Consumer Financing does not exceed 5 years from the date of initial disbursement.
- *In the event of a Change in Circumstance of the Borrower, Creditors may reschedule the repayment terms of the Consumer Financing (provided no new Financing is being granted and without any change to the Term Cost under the original Financing Contract) in accordance their credit policies. Creditors must provide SAMA with a half-yearly report of all Consumer Financings that have been rescheduled.
- In calculating the maximum deductions of one third (33.33%) for Borrowers and one fourth (25%) for pensioners, Creditors must include all Consumer Financing Repayments or Deductions, including the minimum monthly payment required for all credit cards issued to the Borrower.
*Article 14(6) has been amended in accordance to Circular No (381000095088) dated 10/09/1438H. The amended article is currently available only in Arabic.
Section Three Obligations and Accountability
Article 15: General Requirements and Obligations of Creditors and Borrowers
- Consumer Financing granted on the basis of any security other than the deduction of salary or pension payments (e.g. against lien of deposits or assignment of other regular earnings or pledge of collateral) is not subject to the provisions under Article 14(1).
- A Creditor must carry out proper risk management procedures such as the use of credit scoring models for the granting or renewal of all Consumer Financings and must assign appropriate credit limits to its Borrowers.
- Prior to granting a new Consumer Financing, a Creditor must have received a Borrower request through Authenticated Communication or the execution of a Financing Contract. A Creditor may not increase the Financing limit of its Borrower without receiving a request through Authenticated Communication from its Borrower seeking such an increase. Each such increase/amendment in the Financing Contract requires execution of a new Financing Contract.
- Creditors are required to obtain knowledge of the purpose of the Consumer Financing from the Borrower and document that. This confirmation must be a part of a written acknowledgment by the Borrower clearly stating that he has fully understood the terms and conditions and confirms the execution of the respective Financing Contract.
- Creditors are only allowed to refinance Consumer Financing accounts of those Borrowers who have repaid at least 20% of their original Amount of Financing under their Consumer Financing account.
- Creditors refinancing the Consumer Financing accounts of their Borrowers must fully comply with the disclosure requirements under Section 5, Additionally, the Borrower must be provided with a break-down of the refinanced amount, clearly identifying the refinanced amount that will credited to his/her account, net of all identified fees and charges and the settlement of the original outstanding balance prior to a Refinancing.
- Borrowers opting for early retirement are required to ensure that their pension payments continue to be routed to the Creditor in the event of outstanding balances under their Consumer Financing account. A Creditor may require a suitable undertaking from the Borrower affirming the foregoing arrangement.
- Additional features or services requiring additional payment of fees and charges which are optional to the primary product features of the Consumer Financing may not be added on or embedded into the Consumer Financing account and must be clearly represented as an Optional Feature. A Borrower must have indicated his/her desire to obtain such services by Authenticated Communication before their inclusion in the account. Creditors must also clearly disclose all fees and charges for these services to the Borrower within their offer for such Optional Features.
- A Creditor must promptly advise its Borrowers of the following amendments and or changes in their Financing Contract by giving them at least 30 Calendar Days prior written notice:
(a) any increase of the annual fees and/or handling fees charged to the Borrower;
(b) an increase in recurring fees or charges
(c) any new fees or charges.
(d) any other changes.
- The Borrower may terminate the relevant Financing Contract with the Creditor if he/she does not agree to such amendment, change or modification by notifying the Creditor of his/her desire to terminate the Financing Contract within ten (10) Calendar Days after his/her receipt through Authenticated Communication of the notification of the aforementioned changes, subject to full settlement of all outstanding balances on the Consumer Financing account. The aforementioned notice must advise Borrowers of the 10 Calendar Day termination period.
- A Creditor engaging in Outsourcing any component of its Consumer Financing Business must comply with the Rules on Outsourcing issued by SAMA.
- A Creditor is required to implement a clearly defined Code of Conduct for employees engaged in roles involving sales and marketing of Consumer Financing products and follow-up and collection of impaired and delinquent Consumer Financing Accounts. (Creditors are also required to be in compliance with SAMA circular MAT/8211 dated 1/4/1431H.) A Creditor must provide those employees with a copy of the Code of Conduct and obtain their acknowledgement of receipt. The Code of Conduct must prohibit the following:
(a) Any contact with neighbours, relatives, colleagues or friends of the defaulting Borrower for the purpose of requesting or conveying information on the solvency of the Borrower or Guarantor.
(b) Any communications (verbal or written) to the Borrower or Guarantor conveying incorrect information on the consequence of defaulting on their obligations to the Creditor.
(c) Unauthorized repossession of the pledged collateral without judicial proceedings or the specific consent of the Borrower.
(d) Communicating with the defaulting Borrower using envelopes tagged with inscriptions identifying contents as containing debt collection information.
(e) Any breach of confidentiality of Borrower information, conflict of interest and breach of ethical values.
- Creditors are required to have structured training programs for all new staff and Consumer Financing product knowledge programs for staff involved in marketing and sales and customer service for Consumer Financing products.
- A Creditor must issue procedural rules to handle Borrower complaints relating to Consumer Financings and to ensure that Borrowers are made aware of the procedure and contact details of the complaint handling unit/department.
- If a Borrowers' application for any Financing facility is declined, the Creditor must provide the Borrower with a written reason for the rejection through Guaranteed Communication Means.
- Upon full and final repayment of the Consumer Financing by the Borrower, the Creditor is required to issue a no liability or clearance letter within 7 Business Days from the date of full and final settlement und update his record with a Licensed Credit Bureau.
Article 16: Non Performance of Financing Contract and Guarantee Agreements
- A Creditor may only proceed to enforcement against a Guarantor if the Borrower is in Default and has failed to comply with a Default Notice for a period of not less than 30 Calendar Days from the date of receipt.
- Creditors, their representatives, and any other assignees of the Creditor's rights under the Financing Contract or Guarantee Agreement may not take disproportionate, excessive or unreasonable measures to recover amounts due to them in the event of non-performance of aforementioned agreements
- A Creditor may demand immediate repayment in the event of Default only through a Default Notice requesting the Borrower, or where applicable, the Guarantor to comply with his/her obligations under the Agreement within 30 Calendar Days from the date of the issuance of notice.
- A Default Notice is not required in the event of any of the following:
(a) Fraudulent activities by the Borrower or Guarantor, which must be proven by the Creditor;
(b) Steps taken by the Borrower to sell or attempt to sell financed goods to which the Creditor has retained title or pledged collateral without due authorization of the Creditor.
- A Creditor may suspend Draw-downs under a Financing Contract in the event of a failure by either the Borrower or the Guarantor to abide by its terms and conditions in a Default. However the Creditor is required to give notice of its intent to suspend Draw-downs to the Borrower and the Guarantor (if any) without delay.
- A Creditor is required to provide without delay and upon request of the Borrower, a detailed statement of account incorporating all applicable fees, Term Cost and charges including any administrative charges, free of charge in the event of a Default or prepayment of the Consumer Financing.
- A Creditor may not bring an action for the enforcement of security over goods pledged as collateral without first obtaining approval from the Committee for Settlement of Banking Disputes if:
(a) the Borrower has repaid 75% of the Amount of Financing; and
(b) the Borrower has not provided his/her consent to the Creditor (whether in the Finance documentation or otherwise) to enforce that security.
Section Four Advertising
Article 17: Advertising Consumer Financing Products
- The Creditor must indicate in all product advertisements its name, logo, any identifying representation and contact details.
- The advertisement must disclose, in a manner that is clear to the Borrower, the name and Annual Percentage Rate of the advertised product and shall not include other rates such as the Term Cost.
- The Creditor may not do any of the following:
(a) Provide an advertisement that includes a false offer or statement or claim expressed in terms that would directly or indirectly deceive or mislead the Borrower.
(b) Provide an advertisement that includes the unlawful use of a logo, a distinctive mark, or a counterfeit mark.
- SAMA may require any Creditor who does not abide by the provisions of this Article to withdraw the advertisement within one Business Day of notice SAMA from to that effect.
- Furthermore, SAMA may take other punitive actions as required.
Section Five Rules of Information Disclosure
Article 18: General disclosure
A Creditor is required to provide the Borrower in writing with the Initial Disclosure information stated in Article 21 below. The Initial Disclosure must be made in clear and easy-to-read language duly highlighting terms and conditions which may affect the Borrower's rights and obligations, and the Creditor must use any format specified by SAMA from time for that purpose. Furthermore, the specific terms contained under Article 21 (1) (b) and (c) and information on the Total Cost of Financing must be included in the Initial Disclosure statement.
Article 19: Manner of Disclosure
- For the purpose of these Regulations, a Creditor must provide the Borrower with a written disclosure statement that provides the information required by these Regulations to be disclosed.
- A disclosure statement may be part of a Financing Contract or an application for a Consumer Financing or may be an annex to the foregoing documents.
- The Creditor is required to obtain written acknowledgement from the Borrower confirming he/she has received and read the Initial Disclosure statement.
- Information disclosed in a disclosure statement may be based on a reasonable assumption or estimate and such information must be clearly identified to the Borrower as an assumption or estimate.
- A disclosure statement, or consent in relation to a disclosure statement, must be in plain, clear and concise language. It must be presented in a manner that is logical and likely to bring to the Borrower's attention the information required by these Regulations to be disclosed.
- If the Borrower consents by Authenticated Communication, the disclosure statement may be provided by electronic means in an electronic form that the Borrower can retrieve and retain.
- A disclosure statement is deemed to be provided to the Borrower:
(a) on the day recorded as the time of sending by the Creditor's server, if provided by electronic means, and the Borrower has consented to receive it by electronic means.
(b) on the day recorded as the time of sending by a fax machine, if provided by fax and the Borrower has consented to receive it by fax;
(c) ten Calendar Days after the postmark date, if provided by registered mail; or
(d) when it is received, in any other case.
Article 20: Timing of Initial Disclosure
A Creditor that proposes to enter into a Financing Contract with a Borrower must provide the Borrower with the Initial Disclosure statement required by these Regulations prior to or upon entering into the Financing Contract by the Borrower and the Creditor.
Article 21: Initial Disclosure – Content
- A Creditor that enters into a Financing Contract with a Borrower must provide the Borrower with an Initial Disclosure statement that includes the following information:
(a) The initial limit of the Financing, if it is known at the time the disclosure is made;
(b) The APR and the annual Term Cost;
(c) The nature and amounts of any recurring non-Term Cost charges;
(d) The minimum payment during each payment period and the method for determining it;
(e) Each period for which a statement of account is to be provided;
(f) The date on and after which Term Cost accrues;
(g) The particulars of all charges and administrative fees that may be imposed;
(h) information about any Optional Feature in relation to the Financing Contract that the Borrower accepts in writing, the charges for each Optional Feature and the conditions under which the Borrower may cancel that feature;
(i) the manner in which the Term Cost is calculated; and
(j) information on all applicable charges including reporting of Default cases to a Licensed Credit Bureau or appropriate Regulatory Authorities as per SAMA's approval.
- If the initial limit of the Financing is not known when the Initial Disclosure statement is made, the Creditor must disclose it in:
(a) The first statement of account provided to the Borrower; or
(b) In a separate statement that the Borrower receives on or before the date on which the Borrower receives that first statement of account.
- If a Financing Contract is amended, the Creditor must, in writing and within 30 Calendar Days or more before the amendment takes effect, disclose to the Borrower and Guarantor (if any), any changes to the agreement pertaining to items referred to under Article 21(1) except changes to the following:
(a) A decrease in charges other than Term Cost or Default charges;
(b) A change concerning information about any Optional Feature in relation to the Financing Contract.
- An amendment referred to in Article 21(3) must be disclosed in the first statement that is provided to the Borrower after the amendment is made.
- If a Creditor offers to defer or skip a payment or installment under a Financing Contract, the Creditor must, with the offer, disclose in a prominent manner whether Term Cost will continue to accrue during any period covered by the offer if the offer is accepted. Creditors must ensure compliance with Article 14(5), i.e. the maximum Term to Maturity may not exceed 5 years.
Section Six Dealing with Borrowers
Article 22: Rules for dealing with Borrowers
- A Creditor must deliver at least on a quarterly basis to each Borrower a statement of his/her Consumer Financing transaction amounts in writing or through electronic medium (such as e-statement) as agreed with the Borrower in advance. The account statement should fully disclose the following information:
(a) The dates on which the statement period begins and ends.
(b) The opening and closing balances (indicating the amount owed by the Borrower at the beginning and at the end of the statement period).
(c) Particulars of each Draw-down during the statement period.
(d) The amount of the Term Cost charge debited to the Borrowers account during the statement period and when the Term Cost was debited.
(e) Particulars of any fees and charges debited to the Borrower's account during the statement period.
(f) Payments to or from the account.
(g) Particulars of each amount paid by the Borrower to the Creditor, or credited to the Borrower, during the statement period.
(h) Particulars of any amount transferred to or from the account to which the statement relates or to or from any other account maintained under or for the purposes of the Financing Contract.
(i) If a minimum amount is payable by the Borrower under the Financing Contract, a statement of the amount and the date by which it is due.
- The address for notification of account statement errors: The address or telephone number to be used for notification of account statement errors or any other enquiries that a Borrower may have on the account statement.
- The time period allowed to the Borrower to verify the accuracy of transactions as annotated in the account statement after which the account statement is binding: This period shall not be less than 30 Calendar Days as of the date of sending the statement via Guaranteed Communication Means
- The Saudi Riyal shall be used as a basis for calculating all transactions and charges of Consumer Financing, and it shall be used in all disclosures of monetary values for Consumer Financing accounts denominated in Saudi Riyal. For Consumer Financing accounts denominated in currencies other than Saudi Riyal, the basis for calculation will be their respective currency of account.
- If the Creditor wants to change the charges related to the Consumer Financing account or the method of paying due amounts, it must notify the Borrower of such change within a period of at least 60 Calendar Days prior to its application. The notice shall be mailed or delivered by Guaranteed Communication Means to the address on record of the Borrower.
- The Borrower is required to keep the Creditor's records updated with his/her latest address and to immediately notify the Creditor of any change in his/her contact details in writing or by Authenticated Communication. Failure to provide this information will release the Creditor from any liabilities and obligations under Article 22.5 above.
Section Seven Dispute Resolution
Article 23: Rules for Dispute Resolution
- The term “account statement error/dispute” means any transaction posted to the Borrower's Consumer Financing account, resulting in an error in the overall balance. Account statement errors shall include the following:
(a) Failure by the Creditor to properly credit a payment or any other amount deposited in the Borrower's account.
(b) Accounting error made by the Creditor, so that a charge would be lower or higher than it should be including the imposition of fees or charges that are not in accordance with the terms and the agreement in force.
(c) The Creditor's failure to deliver, by Guaranteed Communication Means, an account statement to the Borrower’s address on record.
(d) Any other errors not covered above.
- The term “notice of account statement error”/dispute means a written notification given by a Borrower to the Creditor, using the contact information as included within the said account statement or other information supplied by the Creditor, and it must meet the following requirements:
(a) It must be received by the Creditor no later than 30 Calendar Days after the Creditor had mailed or delivered by Guaranteed Communication Means the first account statement which contains the alleged account statement error.
(b) The notice shall enable the Creditor to identify the Borrower's name and account number, and indicate, to the extent possible, the Borrower's reasons for believing that an account statement error exists, the nature of such error, the transaction details including posting date and amount related to the error.
- The Creditor must address account statement errors/disputes as follows:
(a) The Creditor must mail or deliver by Guaranteed Communication Means a written response to the Borrower within 30 Calendar Days of receiving the notice of account statement error/dispute advising the Borrower of the likely timeframe of resolution of the error/dispute and requesting any additional available information or documentation.
(b) The Creditor shall conduct the necessary investigation and comply with the appropriate dispute resolution procedures (as communicated to the Borrower) within 60 Calendar Days, but in no case later than 90 Calendar Days from the date of receipt of the notice of account statement error/dispute.
- If the account statement error/dispute has not been Satisfactorily Resolved, the Borrower shall not be obliged to pay the portion of the required payment that the Borrower believes is related to the disputed amount, including Term Cost or any other charges. The Creditor may not try to collect any amount, Term Cost or other charges related to the account statement error/dispute until the dispute is Satisfactorily Resolved.
- The Creditor must not make or threaten to make an improper report about the Borrower's credit standing, or report that an amount or account is delinquent prior to the error/dispute being Satisfactorily Resolved, because the Borrower did not pay the disputed amount or relevant Term Cost or other charges during the error/dispute resolution process in any event, not earlier than 90 Calendar Days from the date of the notice of account statement error/dispute.
- If the Creditor determines that an account statement error has occurred as stated by the Borrower, it must correct the error and pay back any disputed amount and relevant Term Cost and other charges debited on the Borrower's account and deliver by Guaranteed Communication means a correction notice to the Borrower.
- If the Creditor determines that a different account statement error other than the one identified in the Borrower’s notice has occurred, the Creditor must mail or deliver by Guaranteed Communication Means to the Borrower the Creditor's reasons for believing that a different account statement error has occurred and the reasons for the belief that the error alleged by the Borrower is incorrect. The Creditor shall correct the error and credit the Borrower’s account with the correct amount in accordance with procedures in force.
- If the Creditor determines that no account statement error has occurred, it must mail or deliver by Guaranteed Communication Means to the Borrower an explanation of the reasons of believing that the error alleged by the Borrower is incorrect and provide the Borrower with copies of any documented evidence if he/she so requests.
- If the Creditor believes that a Borrower is liable for all or part of the disputed amount and relevant Term Cost and other charges, it must:
(a) Notify the Borrower in writing of the date when payment is due and the portion of the disputed amount and relevant Term Cost and other charges for which the Borrower is liable.
(b) Report to a Licensed Credit Bureau that an account or amount is delinquent because the amount due has remained unpaid after the due date provided for in the terms and conditions of the relevant Financing Contract.
- Without prejudice to applicable law and regulation, a Creditor that has fully complied with the requirements of this section shall not have further responsibilities under this section if the Borrower insists on his/her claim.
- The Committee for Settlement of Banking Disputes is the final authority in resolving any unresolved disputes between the Borrower and the Creditor.
- These Regulations are issued in Arabic and English. In the event of a conflict between the two versions of these Regulations, the Arabic version prevails.
Annex 1 Calculation of the Annual Percentage Rate
This annex has been updated by circular No (45025707) dated 17/04/1445H (corresponding to 01/11/2023). Please refer to Rules Governing Calculation of Annual Percentage Rate (APR) to read the updated version.The Annual Percentage Rate (APR) is the discount rate at which the present value of all payments and installments that are due from the Borrower, representing the Total Amount Payable by the Borrower, equals the present value of all payments of the Amount of Financing available to the Borrower on the date on which the Financing amount or the first payment thereof is available to the Borrower, in accordance with the following equation:
where:
m is the number of the last payment to be received by the Borrower
d is the number of a payment to be received by the Borrower
Cd is the amount of payment (d) to be received by the Borrower
Sd is the period between the date of the first payment to be received by the Borrower and the date of each subsequent payment to the Borrower, expressed in years and fractions of year, therefore S1=0.
n is the number of the last repayment or payment of charges due on the Borrower
p is the number of a repayment or a payment of charges due on the Borrower
Bp is the amount of repayment or payment of charges (p) due on the Borrower
tp is the period between the date of the first payment to be received by the Borrower and the date of each repayment or payment of charges due on the Borrower, expressed in years and fractions of year
X is the Annual Percentage Rate (APR)
- For the purpose of calculating APR, periods between dates shall be based on a year of 12 equal months.
- For the purpose of calculating APR, the Total Amount Payable by the Borrower shall be determined, including all unavoidable costs and fees with the exception of charges and fees payable by the Borrower as a result of non-compliance with any of his commitments laid down in the Financing Contract.
- The calculation of the APR must be based on the assumption that the Financing Contract will remain valid for the agreed period and that the Creditor and the Borrower will fulfil their obligations under the terms specified in the Financing Contract.
- If the Financing Contract contains clauses allowing variations in the charges contained in the APR but unquantifiable at the time of calculation, the APR shall be calculated on the assumption that the charges will remain fixed at the initial level and will remain applicable until the end of the Financing Contract.
- The Annual Percentage Rate must be calculated and expressed in percentage points with minimum two basis points and the portion of a basis point being rounded to one full point.
Rules Governing Calculation of Annual Percentage Rate (APR)
No: 45025707 Date(g): 31/10/2023 | Date(h): 17/4/1445 Status: In-Force Chapter I: General Provisions
Article 1: Definitions
The following terms and phrases, where used in these Rules, shall have the corresponding meanings unless the context requires otherwise:
Central Bank: The Saudi Central Bank.
Rules: Rules Governing the Calculation of the Annual Percentage Rate (APR).
Finance Providers: Banks, and Finance Companies Licensed to engage in retail lending.
Borrower: a person receiving finance.
Financing Agreement: an agreement whereby financing is granted for the activities listed in the Laws and Regulations.
Amount of Finance: the ceiling or the total amounts made available to the borrower under a finance agreement.
Annual Percentage Rate (APR): The discount rate at which the present value of payments and installments that are due from the borrower representing the total amount payable by the borrower equals the present value of all payments of the amount of financing available to the borrower on the date on which the financing amount or the first payment thereof is available to the borrower.
Total Amount Payable by the Borrower: the sum of principal loan amount and the total cost of finance.
Total Cost of Finance: All the costs to be paid by the borrower under a financing agreement other than the amount of Finance, including term cost, fees, commissions, administrative services fees, insurance, and any charges required to obtain finance excluding any expenses the borrower can avoid such as costs or fees payable by the borrower due to his breach of any of his obligations contained in the financing agreement.
Article 2: Scope of Implementation
1. These Rules shall be applicable on all finance providers engaging in retail lending 2. The Rules shall be read in conjunction with the related Laws and Regulations, including but not limited to the following: - Finance Companies Control Law and its Implementing Regulation. - Rules Regulating Consumer Microfinance Companies. - The Rules on Disclosure of Interest Rates on Financing and Saving Products. - The Regulations for Consumer Financing. - SAMA's Circular No. 381000095091 issued on 10/9/1438H to clarify Article (10) and Article (21) and the APR Calculation Mechanism in the Regulation for Consumer Financing. Article 3: General Provisions
1. The objective of these Rules is to standardize the Annual Percentage Rate (APR) calculation for different types of retail lending, ensuring transparency in the finance offers and comparability to enable retail consumers to make informed decisions.
2. The APR for financing transactions shall be determined in accordance with the instructions and APR Calculator implemented through these Rules for the following:
a. Advertising and promotional materials.
b. Finance offering stage.
c. Financing contract.
d. Periodic statements provided to customers.
e. Any other disclosure of APR.
Chapter II: APR Calculator
Article 4: SAMA APR Calculator
Finance providers shall utilize the Excel based calculator issued by SAMA for the purpose of implementing the Rules.
Article 5: Implementation and Update of the APR Calculator
- Finance providers shall update the relevant policies and procedures to comply with the requirements included in the Rules.
- Finance providers are responsible for implementing adequate internal controls and audit mechanisms to safeguard the integrity of the APR Calculator deployed. In case where the APR Calculator is automated, finance providers should verify the results obtained using the automated tool by comparing those results to the figures obtained by using Excel based APR Calculator provided by SAMA.
- Finance providers shall also ensure that the APR Calculator made available to customers through their websites is updated to align with the Rules requirements and the enclosed Calculator.
Chapter III: APR Calculation Requirements
Article 6: APR Calculation Method
The APR should be calculated based on the net present value method using the following formula:
Where:
- m is the last payment of the amount of finance to be received by the borrower. - d is the payment to be received by the borrower from the amount of finance. - Cd is the payment value of (d) to be received by the borrower from the amount of finance. - Sd is the period between the date on which the amount of finance or the first payment is available to the borrower and the date of payment (d), calculated in years and parts of the year, and so that this period of first payment received by the borrower from the amount of finance is zero (s1=0) - n is the last payment payable by the borrower. - p is the payment payable by the borrower. - Bp is the payment value (p) payable by the borrower - Tp the period between the date on which the amount of finance or the first payment is available to the borrower and the date of the payment (p) to be received from the borrower, calculated in years and parts of the year. - X is the Annual Percentage Rate. Article 7: Cost of Finance
1. For calculating the APR, finance providers shall specify the total amount payable by the borrower.
2. Finance providers shall include the cost elements in the total cost of finance as specified below:
a. All types of costs that the borrower has to pay in order to access the credit.
b. All costs shall be accounted for regardless of whether they are payable to the finance provider or a third party or payable directly or indirectly by the borrower or whether they give access to financial or non-financial services.
c. Term cost, commissions arising from the credit agreement, credit brokerage fees payable by the borrower, administrative fees / or loan processing fee, insurance related costs, valuation costs, cost of ancillary services, and taxes including VAT, etc.
d. Cost of ancillary services or supplementary services to the financing agreement, shall be included in the total cost of finance where the ancillary service is mandatory to obtain the finance or to obtain the finance on the terms and conditions marketed by the finance provider.
Article 8: Costs Excluded from APR Calculations
The total cost of finance shall not include:
a. Any amount charged in lieu of early repayment or settlement and changes in the terms and conditions of the financing agreement. b. Fees and charges incurred as a result of failure to comply with the terms of the agreement i.e., late payment charges in the form of penalties, charges for collection, etc. c. Other costs not paid in connection with the financing agreement (e.g. vehicle registration fees). Article 9: General Requirements
Finance providers must consider the following while calculating the APR:
- The periods between the date on which the amount of finance or the first payment is available to the borrower and the date of each payment received or payable by the borrower shall be calculated on the basis of 365 days a year.
- The APR shall be calculated on the assumption that the amount of finance is valid for the term agreed upon and the parties’ adherence to their obligations according to the conditions stipulated in the financing agreement.
- The APR must be calculated and expressed in percentage points with a minimum of two basis points, rounding half basis points to the nearest full basis points.
- In case the finance agreement contains a clause allowing variations in term cost and fees contained in the APR (e.g. floating) which is not quantifiable at the time of financing, the APR must be calculated on the assumption that the term cost and other charges remain fixed in relation to the initial term cost applied and will remain applicable until the end of the financing agreement.
Article 10: Specific Requirements for Credit Cards Products
Finance providers while calculating the APR for credit cards shall assume the following:
- The amount of finance is provided for a period of 1 year starting from the date of the initial drawdown or card allotment/approval date, and that the final payment made by the borrower clears the principal payment, term cost and other charges, if any.
- The principal payments and term cost are repaid by the borrower in 12 equal monthly payments, commencing 1 month after the date of the initial drawdown.
- If the ceiling of the credit card has not been determined, that ceiling shall assumed to be SAR 10,000 when calculating the advertised APR.
- At the pre-contractual stage, the amount of finance shall be equal to the financing limit or credit card limit requested by the customer or offered to the customer.
- At the contractual stage, the amount of finance shall be equal to the financing limit or credit card limit based on the agreement concluded with the borrower.
Chapter IV: Concluding Provisions
Article 11
The internal audit function shall review the APR calculation process at least annually. Any control deficiencies highlighted by the internal auditor shall be addressed by management in a timely and effective manner.
Article 12
These Rules shall enter into force (90) days after the date of their publication on SAMA’s official Website.
New Banking Products and Services Regulation
No: 45032226 Date(g): 30/11/2023 | Date(h): 16/5/1445 Status: In-Force This regulation was issued under circular No. (391000006163), dated 18/01/1439H, corresponding to 08/10/2017G, and updated by Circular No. (45032226), dated 16/05/1445H, corresponding to 30/11/2023G.Based on the powers granted to SAMA according to Saudi Central Bank Law issued by Royal Decree No. (M/36) dated 11/04/1442 H and related regulations. And referring to SAMA Circular No. (391000006163) dated 18/01/1439 H regarding SAMA's New Banking Products and Services Guidelines, and in continuation of what SAMA issued in this regard.
Attached is the first update of the above-mentioned guidelines, which seeks to achieve several objectives, most notably promoting sound practices in managing the risks associated with products and services, clarifying the roles and responsibilities of the board of directors and senior management in the governance, development and oversight of banking products and services. In addition to improving the mechanism for receiving and processing bank notifications to introduce new banking products and services, clarifying the products and services that require no written objection or notification to SAMA (provided that the requirements in the instructions are met), and creating a unified model for introducing new banking products and services. These instructions will replace the previous instructions.
For your information and action accordingly as of March 1, 2024 G.
1. Introduction
Banks frequently introduce new products and services and/or modify existing products and services in normal course of business. These new or modified products and services could expose the banks or the financial system as a whole to new risks or could amplify existing risks. Therefore, the risks posed by the introduction and/or modification of products and services must be identified, assessed, monitored and managed appropriately by the banks.
New Banking Products and Services Guidelines were issued by SAMA in 2017; due to changes in the financial system and regulatory framework, SAMA decided to update these guidelines. The key objectives of this regulation is to promote sound risk management practices and/or manage risks associated with banking products and services. The banks must adhere to this regulation as minimum set of regulatory requirements.
2. Objective
This Regulation sets out SAMA’s requirements with regard to banks’ offering of new products and services and regulatory requirements of notifying SAMA prior offering a new product or service, and the required supporting documents to be submitted. In addition, the regulation aim to improve the time-to-market for banks to introduce new product and service, and promoting sound risk management practices in managing and controlling risks associated with banking products and services.
3. Scope of Application
This Regulation shall be applicable to all licensed banks in Saudi Arabia under the Banking Control Law.
4. Definitions
4.1 Product or Service
A product or service are what the banks offer to their customers within the scope of banking business as defined in the Banking Control Law.
4.2 New Product or Service
A new product or service is one that a bank offers for the first time in Saudi Arabia notwithstanding the fact that a bank, its parent bank, branches or subsidiaries in a foreign jurisdiction may have offered similar product and service outside of Saudi Arabia, or a variation to an existing product offered by bank in Saudi Arabia or a combination of product or service with another existing or new product or service, that results in a material change(1) to the structure, features or risk profile of the existing product or service.
(1) Material changes or modifications may include, for example, significant changes to key terms related to payout, rights and obligations of the counterparties/customers, the changes in nature of assets underlying the product or service, changes result in new or additional risk exposure to the bank or the customer.
4.3 Existing Product or Service
An existing product or service, which a bank had offered, and continue to offer, until the bank decides to discontinue or make material modifications to the product or service.
5. Board of Directors and Senior Management Responsibilities
5.1 Board of Directors (The Board)
5.1.1 The Board has an oversight responsibility (2) to ensure that senior management develop and implement the detailed internal policies and procedures for offering of new products and services.
5.1.2 The Board is responsible for ensuring that product and service risks are well managed, and the needs and rights of consumers are appropriately addressed.
5.1.3 The Board must review whether the offering of products and services by the bank remains consistent with the risk appetite approved by the board and internal policies and procedures for offering of new products and services.
5.1.4 The Board must review and revise the bank’s risk appetite when the offering of products and services by the bank is no longer consistent with the approved risk appetite. Any changes to the risk appetite must be justified and documented with detailed risk assessment, taking into consideration the risk management capabilities and risk bearing capacity of the bank. The Board must also ensure that internal policies and procedures are updated by senior management accordingly following changes in risk appetite.
(2) The management function responsible for overseeing the operations of Foreign Bank Branch (FBB) are to ensure that policies an d procedures for new products and services are consistent with the requirement of this regulation, and effectively implemented in its operations.
5.2 Senior Management
5.2.1 Senior management are responsible for the design, implementation, and compliance of the bank’s new products and services with the Board approved internal policies and procedures for offering of new products and services.
5.2.2 Senior management must ensure that offering of any new or existing products and services must fall within the scope of banking business as defined in the Banking Control Law.
5.2.3 Senior management must ensure that that risks arising from new products and services are well understood and aligned to the bank’s risk appetite and tolerance level.
5.2.4 Senior management has to determine whether the change to any product or service is considered to be a material change (3).
5.2.5 Senior management must periodically review the appropriateness of the products and services internal policies and procedures and whether they continue to meet the objectives as set out in this regulation, and must propose to the Board that the policies and procedures be amended if this is no longer the case.
5.2.6 Senior management must identify and mitigate potential negative effects on the bank's reputation either actual or perceived.
5.2.7 Senior management must ensure that there are full operational readiness to support new products and services, including processes, controls and systems infrastructure and approvals from other authorities are obtained prior to offering new products and services, where relevant.
(3) Chief Risk Officer (CRO) and Chief Compliance Officer (CCO), in coordination with the product or service developer, are responsible for determining whether the change to any product or service is considered to be a material change.
6. Products and Services Policy Requirements
6.1 General Requirements
Banks are required to have in place an internal policies and procedures that set out the oversight and governance arrangements for the offering of new products and services. These internal policies and procedures must at minimum satisfy the following:
6.1.1 To be integrated as part of the bank’s governance, risk management and internal control framework.
6.1.2 Defining the roles and responsibilities of all stakeholders including the Board and all control functions involved in developing and launching new products and services.
6.1.3 Defining parameters for the authority which approves new products and services including the circumstances under which such authority may be delegated.
6.1.4 Defining the requirements to have a pilot or testing phase for new products and services. A bank is required to assess the effect of a product and service on target market before its commercial launch and take appropriate changes where scenario analysis shows adverse results for the target market.
6.1.5 Consumer protection requirements including the bank’s standards for management of customer suitability and mis-selling risks along with a requirement to conduct annual assessment of all products and services against such established standards.
6.1.6 The internal policies and procedures must be reviewed and updated on a regular basis or when it’s needed, ideally on an annual basis, and at least once every (3) years.
6.1.7 The policies and procedures must be communicated by the bank in a timely manner to all relevant parts and levels within the organization, and to ensure that the new product and service offering are fully integrated throughout a bank’s line functions.
6.2 Considerations
When developing products and services internal policies and procedures, banks must consider the following:
6.2.1 Designing and bringing to the market products and services with features, charges and risks that meet the interests, objectives and characteristics of, and are of benefit to the market segment identified for the products and services. In this regard, a formal customer appropriateness and customer fairness assessment must form part of bank’s processes before approval of new products and services.
6.2.2 The products and services offered to customers are fair and suitable.
6.2.3 Avoid any conflicts of interest, potential for mis-selling, terms and conditions that are inherently unfair to consumers, and business practices that restrict the freedom of choice to consumers.
6.2.4 To be proportionate to the nature, scale, risk, and complexity of a bank’s products and services, and designed to identify and control product risk across the value chain, including at minimum the stages of product development, authorization and governance, price, marketing, sale and distribution.
6.2.5 The gradual commercial launch of any new product and service taking into consideration the market segment, riskiness and complexity of the product and service.
6.2.6 Compliance with all applicable rules and regulations issued by SAMA and all other relevant regulators when developing a new product and service as well as any subsequent updates to the rules and regulations. Examples of such rules and regulations (but not limited to):
a. Responsible Lending Principle for Individual Customers (issued in 2018).
b. Financial Consumer Protection Principles and Rules (issued in 2022).
c. Rules for Advertising Products and Services Provided by Financial Institutions (issued in 2023).
d. Debt Collection Regulations and Procedures for Individual Customers (issued in 2018).
e. SAMA Cyber security Framework (issued in 2017).
f. SAMA Counter-Fraud Framework (issued in 2022).
g. SAMA Business Continuity Management Framework (issued in 2017).
h. Information Technology Governance Framework (issued in 2021).
i. Rules related to touch\face ID, Tahaqaq requirements, digital signature, national and global payment requirements for MADA, Visa, MasterCard, Face recognition.
6.3 Products and Services Risk Assessments
6.3.1 Banks must establish lines of responsibility for managing risks related to new products and services.
6.3.2 Banks must conduct a full risk assessment of new products and services which form the basis on whether or not to introduce them to the market taking into account reviewing all the associated risk throughout the life cycle of the products and services.
6.3.3 Banks must have risk management standards for developing and launching any new products and services to the market. These include, inter alia, adequate due diligence and approvals, procedures to identify, measure, monitor, report, and mitigate risks, effective change management processes and technologies, ongoing performance monitoring and review mechanisms.
6.3.4 Banks must have risk classification process for each product and service that the bank intend to launch. The classification process must result with an overall risk classification for the product or service (for example: high, medium or low risk).
6.3.5 Banks must have a risk management, controls and monitoring processes in respect of third party risks management, where the bank’s products and services are offered in partnership with Fintech companies, agents or similar entities.
6.3.6 The risk management function must have internal organizational and operational capacity i.e. effective controls, monitoring and reporting systems and procedures in place, to monitor and manage potential risks of the proposed new products and services poses to the bank's own financial health, as well as to the financial well-being of the customers and overall market stability.
6.3.7 The risk management function must document, review and approve risk profile (associated risks) of new products and services before its launch. Risk profile of the new products and services must include at least detailed description of all associated risks i.e. identification, quantification (if possible), assessment, classification and its mitigation plan.
6.3.8 The risk management function must perform comprehensive fraud risk assessment covering fraudulent events across different channels and assessment of prevention, detection, and investigation capabilities from people, process and technology perspective taking into consideration emerging technologies. The risk assessment must also include evaluation of all possible scenarios and dynamic fraud techniques such as social engineering, phishing. that ensures safety and soundness of the bank against dynamic fraudulent scenarios. In addition, the bank must enforce defense in depth mechanism in their environment to ensure deep protection for the customers such as using multichannel technique to ensure customer identity and confirmation of the financial service/transaction for example: registration and activation/approval of services from different channels whenever applicable.
6.3.9 The risk management function must conduct comprehensive risk assessment which cover cyber resilience and data privacy including evaluating threats, vulnerabilities and weaknesses needed to be analyzed for potential impact on the bank that leads to improve member organizations cyber posture.
6.3.10 The risk management function must assure that its people, systems and processes have the ability to adequately capture and report risks and financial commitments relating to its new products and services in a timely manner.
6.3.11 The risk management function must assure that all material risks posed by the introduction of new products and services or by the modification of existing products and services are identified, assessed, monitored and managed appropriately; and must be regularly reviewed in light of the changing market conditions not previously factored.
6.3.12 The risk management function must assess how new products and services will affect the bank's current and projected financial and capital positions.
6.4 Products and Services Compliance
The compliance function must ensure the following:
6.4.1 Review all new products and services from compliance, regulatory and financial crimes perspective and ensure that they conform to all applicable rules and regulations issued by SAMA and all other relevant regulators.
6.4.2 Products and services offered are compliant with all rules and regulations issued by SAMA and all other relevant authorities at all time.
6.4.3 Identify the risks of non-compliance that might arise from products and services, set plans to manage it, and evaluate these risks at least once annually.
6.4.4 Report to the Board at least once annually the risks of non-compliance and how it would be mitigated.
6.4.5 The compliance function must be the main contact point for liaison for submission of all applications for non-objection to introduce new products and services and to notify SAMA of any products and services in cases where non-objection is not required.
6.5 Products and Services Auditing
The internal audit function must ensure the following:
6.5.1 Timely identification of internal control weaknesses, adherence to regulatory requirements and products and services policies and procedures.
6.5.2 To audit all new products and services in a reasonable time i.e. within one year after launching the product or service depending on the nature, type, complexity, and riskiness of the new products and services.
6.5.3 Report to the Audit Committee the results of the audit process that was conducted on the bank’s products and services at least once annually. In case, products and services associated risks increase or violating any rules and regulations issued by SAMA and all other relevant regulators, the internal audit must include them in their yearly audit plan.
6.6 Product Development Function
The product development function (business units) must ensure the following:
6.6.1 They are familiar with products and services policies and procedures and all applicable rules and regulations issued by SAMA and all other relevant regulators.
6.6.2 They are competent and appropriately trained; and thoroughly understand the products and services’ features, characteristics, risks, and ensure that corrective actions are taken to mitigate identified risks related to products and services.
6.7 Products and Services On-going Monitoring and Control
6.7.1 Banks must ensure that the requirement of monitoring products and services on an ongoing basis is in place and implemented, to ensure that the interests, objectives and characteristics of targets market continue to be appropriately taken into account. In addition, the banks must address consumer complaints and rectify them on timely basis.
6.7.2 If the bank identifies a problem/risk related to products or services in the market, or when monitoring the performance of the products or services as required, the bank must take necessary corrective actions and implement measures to prevent future recurrence. The corrective action plan, which may include suspension or withdrawal of products or services must be approved by the senior management function or other functions within the bank accountable for approval of product and services. Banks must also report to SAMA such incidents including the corrective action plan that have been or will be taken.
6.7.3 In the case of product or services suspension or withdrawal, banks are required to notify SAMA at least prior to (45) business days by email before suspending or withdrawing any products or services via (PSBanking@sama.gov.sa). The notification must include justifications for the suspension or withdrawal and the plan to deal with beneficiary customers (exiting plan) affected by discontinuation of products or services.
6.7.4 After the introduction of new products or services, SAMA may, at any time, suspended the product or service if any regulatory incompliance has been identified and/or there is a negative impact on the banking sector or on consumers. SAMA will direct banks to provide corrective actions in such case for approval and implementation.
6.8 Documentations and Reporting Requirement
6.8.1 Banks are required to submit a report to SAMA which include all products and services. The report must be signed by the Chief Executive Officer, and submitted by Compliance Function to Banking Licensing Division via (PSBanking@sama.gov.sa) – by 1st March of each year, according to the table provided in (Annexure 5).
6.8.2 Banks must document all actions taken while implementing the internal policies and procedures, preserve these documents for audit purposes and to make them available to SAMA upon request. In addition, the banks must retain all the documents relating to the risk assessment of the new products and services including key risks from both the bank’s and customer’s perspective, together with the systems and processes that are in place to mitigate these risks.
6.8.3 An inventory of bank’s existing products and services containing information such as (but not limited to): name of a product and service, target market, risk classification, developer of the product or service, reviewer of the product, approver of the product, approval date, launch date, last review date, latest changes made including the description and the date of changes.
7. Notification and Non-Objection Requirements
7.1 Notification Requirements
The following requirements applies to banks that satisfy the required maturity level in Cyber Security Framework, Counter-Fraud Framework, Business Continuity Framework, and Information Technology Governance Framework, which must be independently validated by a qualified and experienced third party on annual basis.
7.1.1 Banks are required to notify SAMA by email at least (10) business days before launching any new products and services via (PSBanking@sama.gov.sa).
7.1.2 SAMA will acknowledge receipt of the notification within (10) business days of receiving the bank’s request. In case, a bank does not receive acknowledgement receipt from SAMA within (10) business days from sending the notifications, it is the bank’s responsibility to follow up with Banking Licensing Division via (PSBanking@sama.gov.sa) for confirming that whether SAMA has received the notification or not.
7.1.3 Banks will be able to launch new products and services once they receive SAMA’s acknowledgement of receipt of the bank’s notification.
7.1.4 Banks must launch their new products and services within (12) months of receiving the acknowledgment receipt from SAMA, otherwise the bank must submit a new notification.
7.1.5 SAMA have the right to ask banks for further information about products and services despite the fact that bank has launched the products and services or not.
7.1.6 SAMA may prohibit a bank from introducing or continuing to offer any products or services if SAMA concludes that such product or service will undermine SAMA’s primary objective of maintaining safety and soundness of the financial sector.
7.1.7 Banks must not reintroduce a product or service that has been stopped or discontinued by the bank for more than (12) months without notifying SAMA by following the notification requirements as per clause (7.1.1).
7.2 Non-objection Requirements for Specified Products and Services
7.2.1 Banks are required to seek SAMA’s non-objection for the below products and services prior launching, as an exception to the notification requirements:
1. Home Loans Products.
2. Financial Lease Products.
3. Financial Derivatives.
4. Products and services that are not covered in existing rules and regulations issued by SAMA.
7.2.2 Banks that do not comply with required maturity level stated in clause (7.1), must apply for nonobjection for all types of products and services.
7.2.3 Banks must launch their new products and services within (12) months of receiving the SAMA’s non-objection, otherwise the bank must submit a new application.
7.2.4 Banks must not reoffer a product or service that has been stopped or discontinued for more than (12) months without a new non-objection from SAMA, as per clauses (7.2.1) and (7.2.2) for products or services that require SAMA’s non-objection.
7.3 Offering of Financial Derivatives Products
Banks must ensure the following are satisfied before submitting a non-objection application to SAMA:
7.3.1 Banks seeking to introduce new financial derivatives products for their customers are required to develop and implement internal customer suitability procedures ensuring that these products are only sold to suitable customers.
7.3.2 Customer suitability procedures must be designed to seek sufficient knowledge about the customer to establish that the customer has a practical understanding of the features of the product and the risks to be assumed.
7.3.3 For complex financial derivatives such as structured products, the complexity of the payoff structure can make it difficult for customers to accurately assess the value and risk of the structured product. Banks must clearly demonstrate to the customer the potential profit and loss scenarios for the structured products over the time horizon.
7.3.4 Banks must ensure that customers are fully aware of risks involved in complex products such as financial derivatives and structured products, the product must meet the customer’s business or investment objectives and risk appetite, the customer have prior investment experience and fully understood and sign-off the terms of contract accordingly.
7.3.5 Banks must not recommend a financial derivative product to a customer unless it is reasonably satisfied that the product is suitable for that particular customer and the nature of the customer’s business. Such a decision must be made based on information sought and obtained from the customer.
7.3.6 Banks seeking to introduce new financial derivative products must demonstrate that the proposed financial derivative instrument has a bona fide economic purpose and does not merely provide means of financial speculation, leverage, or regulatory arbitrage. To meet this test, a bank would have to identify the intended customers for the proposed new financial derivative products and describe (with sufficient specificity) potential uses.
7.3.7 Banks intending to introduce a new financial derivatives products must demonstrate that it has the internal organizational and operational capacity to monitor and manage potential risks of the proposed new products pose to a bank’s own financial health, as well as to the financial well-being of the customers and overall market stability.
7.3.8 Banks must demonstrate that effective control, monitoring & reporting systems, and procedures are in place to ensure on-going operational compliance with a bank’s, the customer’s and the counterparty’s risk appetite. A bank must also have a strong governance process around the valuation of financial derivatives, which includes robust control processes and documented procedures.
7.3.9 Banks intending to introduce a new financial derivatives products will have to demonstrate that the proposed products do not pose potentially unacceptable systemic risk. It is the responsibility of the bank to ensure that suitability of customers for the new financial derivatives product are assessed not only based on a bank’s exposure to an individual customer but also based on the industry’s exposure to the customer. A bank would therefore need to obtain full disclosure from the customers about their financial derivative exposures with other banks and non-banking entities prior to selling new financial derivative products.
7.3.10 Banks must ensure that the new financial derivative such as, structured products that seeks to market is not likely to have a negative impact on broader socio-economic policy goals of the country, for example an impact on SAIBOR or SAR.
7.3.11 Financial derivatives involving SAR against a foreign currency are subject to the requirements of a separate SAMA circular that banks must comply with.
7.3.12 Banks are required to ensure new financial derivative products comply with SAMA Rules on Trade Repository Reporting & Risk Mitigation Requirements for Over-the-Counter ("OTC") Derivatives Contracts issued by SAMA (issued in 2019) and any subsequent updates.
7.4 Documentation Requirements
7.4.1 A bank notifying or seeking a non-objection from SAMA for the introduction of a new product or service must fully complete the checklist and provide the supporting documents as stated in (Annexure 1).
7.4.2 SAMA will not process any application that does not meet or fulfill the above mentioned documentations.
8. Effective Date
This regulation shall be effective by 1st of March 2024. Once effective, this regulation shall supersede the existing SAMA New Banking Products and Services Guidelines issued by circular No. 391000006163 in 18-01-1439H (08-10-2017G).
9. Annexure
Filling Form Instructions 1. This form is for new banking products and services in accordance with the New Banking Products and Services Regulation (second version / Nov 2023). 2. The form must be fully filled out by the bank. 3. The bank must verify the accuracy of the information filled in this form. 4. The form must not be modified in any way. 5. This form and supporting documents such as contracts, terms and conditions should be sent in two formats (Word-PDF) along with the other requirements as shown in annexure (1) to Banking Licensing Division via (PSBanking@sama.gov.sa) Bank name Product or service name Purpose of the application ☐ Notifying SAMA before launching a new product or service.
☐ Obtaining SAMA's no-objection for launching a new product or service according to clause (7.2.1)
☐ Obtaining SAMA's no-objection for launching a new product or service according to clause (7.2.2).
Is it a material change to an existing product or service? ☐ Yes ☐ No Provide date of previous Notification/Non-objection:
Day/Month/Year
Launching date:
Day/Month/Year
New product or service expected launch date:
Day/Month/Year
The rules and regulations that were taken into account in developing this product or service Product or service type
(You can check more than one)☐ Savings ☐ Personal finance ☐ Credit card ☐ Financial Derivatives ☐ Home finance ☐ Prepaid cards ☐ Financial lease ☐ Corporate finance ☐ Banking services ☐ E-service ☐ Treasury product ☐ Other: Annexure (1): Checklist
No. Document Attached Yes No Not Applicable 1 A formal letter signed by the Chief Compliance Officer notifying or requesting SAMA's no-objection to offer new product or service ☐ ☐ 2 Application form for new banking products and services (Annexure 2) ☐ ☐ 3 Statement of compliance (Annexure 3) ☐ ☐ 4 Consumer protection checklist (for retail products and services) signed by the Product or
Service Developer and Chief Compliance Officer (Annexure 4)
☐ ☐ ☐ 5 Copies of supporting documents e.g. terms and conditions, contracts, process workflow (Images), promotional material and any other related documents ☐ ☐ ☐ 6 Contract draft / service level agreement (SLA) / non-disclosure agreement (NDA) if there is a third party in the product and service ☐ ☐ ☐ 7 Risk assessment report which describe the product or service all inherent risks from both the bank's and customer's perspective together with the systems and processes that are in place to mitigate these risks. The following risks need to be considered at minimum:
- Credit Risk
- Market Risk
- Operational Risk
- Strategic Risk
- AML&CFT Risk
- Legal Risk
- Technology Risk
- Cyber Risk
- Fraud Risk
- Business Continuity Risk
- Data Privacy Risk
- Reputational Risk
☐ ☐ ☐ 8 Necessary Shari’ah Committee Approvals for new Shari’ah Compliant Products or Services. ☐ ☐ ☐ I, the undersigned, acknowledge that all the above-mentioned data and information and attached documents are correct, accurate and complete Chief Compliance Officer Date Day/Month/Year Signature Annexure (2): Application Form for New Banking Products or Services
No: 45032226 Date(g): 28/11/2023 | Date(h): 16/5/1445 Status: In-Force A detailed description of the product or service: Product or Service Risk Classification (For example: High, medium, low risk): Did The bank completed the independent evaluation required under clause (7.1) ? ☐Yes ☐No Evaluation date: Day/Month/Year Is the bank complied with the required maturity level in the frameworks mentioned in clause (7.1) ? ☐Yes ☐No Notes: Product or service objectives: Product or service features: Product or service offering journey: Product or service delivery channel(s): ☐ Bank branches ☐ E-Channels ( ☐ Phone Banking, ☐ Mobile Banking, ☐ Bank's Website) ☐ Relationship Mangers ☐ Other: Targeted customers: ☐ Existing bank customers ☐ Non-existing bank customers Targeted segment: ☐ Retail ☐ Small/Medium enterprises ☐ Corporate ☐ Government sector ☐ Non-profit sector ☐ Other: Customer identity verification mechanism: Fees, commissions and any other additional amounts might be incurred by the customer: Product or service launching plan in the local market: Similar products or services offered in the local market (if any): The potential impact on the bank's liquidity ratios (SAMA Liquidity Ratio, CAR, LCR & NSFR) and any other regulatory indicators: Technological requirements, details and the integration method with third parties and other technological systems, including but not limited to Robot, Cloud, Biometrics: System classification by the entity, whether it is a main or secondary system: In case of storing data, clarify the location of the data storage, the storage method and the type of data shall be clarified in detail, with reasons and justifications: In case of contracting with third parties, the details of the third parties shall be provided, including the name, location, duties, responsibilities, and any relevant information. Third-party remote access method (if applicable): In case of contracting with third parties, what are the type of data will be shared, and what measures will be taken to maintain information privacy and security: Has the verification method been clarified for the product/service, e.g. two factor authentication (2FA) using the password and the one-time password (OTP): Has the product/service been added to fraud monitoring systems with the ability to directly add and modify scenarios: Do third parties comply with the cloud computing cybersecurity controls (in the case of using cloud computing technology): In case of technological integration, explain the integration method in detail: The internal bank function responsible for monitoring the product or service: The method of cancelling the product or service by the customer and cancelation fees (if applicable): Information/correspondences with SAMA regarding the above product or service(If any): Additional information: Product or service developer name and contact information (email, mobile phone, landline): Annexure (3): Statement of Compliance
Product/Service name We, the undersigned, acknowledge that the aforementioned product or service has been fully reviewed and does not violate any laws, instructions or professional practices. We also acknowledge that submitting this application (notification or non-objection) to SAMA does not burden it with any responsibility whatsoever and does not indicate that SAMA guarantees the product or service soundness. In addition, we acknowledge that we bear all the risks that may result from launching the product or service. Furthermore, we confirm that failure to comply with this acknowledgment entitles the authorities to take all measures, including inflicting penalties, holding violators accountable, withdrawing the product or service from the market, committing to correcting any adverse results, and compensating customers for any losses that may occur due to default or negligence on the bank's part. Product or Service Developer Head of Customer Care Head of Legal Affairs Head of Data Privacy Head of Financial Fraud Head of Business Continuity Head of Information Security Head of Information Technology Chief Risk Officer Head of Anti-Money Laundering and Counter-Terrorist Financing Chief Compliance Officer Annexure (4): Consumer Protection Checklist
Before or upon concluding a product/service agreement with the customer: No Requirements Cases Yes No Not Applicable 1 Has the bank done a complete study on the product or service suitability to customer needs ☐ ☐ ☐ 2 Were the expected risks to customers from the product or service identified when advertising, and disclosed in the initial disclosure form (before signing the contract) ☐ ☐ ☐ 3 The bank must disclose the discounts and their conditions to customers - if available - and include them in the initial disclosure form (before signing the contract) ☐ ☐ ☐ 4 Ensuring that customer service staff and/or marketers are clearly familiar with the product or service provided helps customers make a decision before entering into a contract ☐ ☐ ☐ 5 The bank must study the customer's financial solvency before granting the product/service and keep it in the customer's file in a way that enables it to:
1. The customer's ability to fulfill the due payments without delay
2. The customer's understanding of the characteristics of the product or service.
3. The product or service meets the customer's need
4. The customer's ability to bear the risks of the product or service
☐ ☐ ☐ 6 The bank must disclose the product/service provider in the initial disclosure form if the product or service provider is a third party ☐ ☐ ☐ 7 Advertising the product or service to customers is appropriate, does not use a seductive or misleading method of marketing, and uses language that is easy to understand and in clear writing, including margins ☐ ☐ ☐ 8 Are the terms and conditions explained in clear language, including fees, and are they fair to customers? A summary of this is provided in the initial disclosure statement, and this is explained to the customer before signing the contract ☐ ☐ ☐ 9 The potential fines and penalties that the customer will bear if the product or service is used on other than the agreed terms must be explained ☐ ☐ ☐ After concluding the product or service agreement with the customer: 1 The product or service must be compatible with SAMA Care's main or sub-classifications of complaints ☐ ☐ ☐ 2 Clarifying the mechanism for submitting a complaint and the contact information with the bank in the product or service contract ☐ ☐ ☐ 3 Providing beneficiaries with a free statement of account (paper or electronic) on a monthly basis showing the payments made and the remaining payments ☐ ☐ ☐ 4 Having specialized staff to provide advice to customers who face financial and technical difficulties during contract periods and providing appropriate solutions for them to overcome these difficulties ☐ ☐ ☐ Product or Service Developer Chief Compliance Officer Date Date Day/Month/Year Day/Month/Year Signature Signature Annexure (5): Annual Report for Banking Products and services
Regulations of Issuance and Operating of Credit and Monthly Charge Cards
No: 361000090389 Date(g): 15/4/2015 | Date(h): 26/6/1436 Status: In-Force Preamble
- These Regulations shall be applicable to the issuance and operations of all aspects of Credit and Charge Cards as issued by a regulated entity (such as Banks, Finance Companies and other Credit and Charge Card Issuers) as licensed and authorized by Saudi Central Bank, (such as VISA, MasterCard, Union Pay & AMEX). Saudi Central Bank is the sole authority empowered to apply these Regulations and to take necessary measures as it deems appropriate regarding any violations of these provisions including imposing punitive charges and/or enforcement actions as applicable under the Banking Control Law and the Implementing Regulation of the Finance Companies Control Law. These Regulations are to be read in conjunction with the Banking Consumer Protection Principles and supplement the Regulations as annotated in the Updated Regulations for Consumer Financing issued in July 2014 and its subsequent updates.
- Saudi Central Bank may, at its discretion, impose a restriction on a Card Issuer under which its Credit Card authorized limit portfolio may not exceed a specified percentage of its total Credit portfolio.
- In all cases where instruction or information is required from Cardholders, Card Issuers may accept Authenticated Communication unless otherwise specified.
- In all cases where instruction or information is required to be sent to Cardholders, Card Issuers may use Guaranteed Communication Means unless otherwise specified.
- Card Issuers must include details about the Card Issuer’s credit advisory services in all monthly statements, default notices and any other correspondence or communications regarding the Cardholder’s account.
Definitions
“Adequate Notice”: Notice to a Cardholder that set forth clearly the pertinent facts so that the Cardholder may reasonably be expected to have noticed it and understood its meaning. The notice may be given by Guaranteed Communication Means reasonably assuring receipt by the Cardholder.
“Advertisement”: A commercial message in any medium that promotes, directly or indirectly, a Credit or Charge Card product.
“Annual Percentage Rate or APR”: The discount rate at which the present value of all payments and instalments that are due from the Cardholder,
representing the total amount payable by the Cardholder, equals the present value of all payments of the Amount of Credit available to the Cardholder on the date on which the Credit amount is available to the Cardholder, calculated in accordance with Annex 1.“Authenticated Communication”: Cardholder instructions received through recorded, verifiable and retrievable medium either paper, electronic or verbal.
“Billing Cycle”: The interval between the days or dates of regular periodic statements. These intervals shall be equal and no longer than a quarter of a year. An interval will be considered equal if the number of days in the cycle does not vary more than four days from the regular day or date of the periodic statement..
“Business Card”: shall mean a Credit or Charge Card issued for the purposes of purchasing goods or services on behalf of a Corporate Entity, where the Corporate Entity bears liability for all amounts charged to the Credit or Charge Card.
“Business Day”: A day on which the Card Issuers are open for business to the general public.
“Calendar Day”: Any day in a month, including weekends and holidays and based on the official calendar of Saudi Arabia: Umm Alqura Calendar.
“Card Association”: shall mean VISA, MasterCard, American Express, Union Pay and Diners Club or similar institutions. Also known as “Payment Systems Operators”.
“Cardholder”: shall mean (a) a holder, or an applicant to become a holder, of a Credit or Charge Card issued by the Issuer or (b) a holder, or an applicant to become a holder who has agreed with the Issuer to pay all obligations arising from the issuance of a Supplementary Credit or Charge Card to a Designated Individual. He/She is the Primary Cardholder. A Cardholder may be a natural person or a Corporate Entity as applicable.
“Card Issuer”: An authorized entity that issues a Credit or Charge Card.
“Card Limit”: The credit line made available to a Credit or Charge Cardholder under a Credit or Charge Card Agreement.
“Cash Advance”: a transaction to withdraw cash by the Cardholder against his/her Credit or Charge Card Limit. A Cardholder receives a Cash Advance when they:
- Withdraw cash from an ATM.
- Withdraw cash from any other source.
- Make a wire transfer.
- Receive any other mode of cash advance as stipulated by the Card Issuer.
“Charge Card”: a card similar to a Credit Card but one that requires the Charge Card holder to repay the full outstanding amount upon receipt of the account statement or on the due date as per the account statement.
“Corporate Card”: shall mean a Credit or Charge Card issued to an employee or Officer of a Corporate Entity where, under the terms of use of the card:
a. The Corporate Entity bears liability for any amounts charged to the card. b. The employee or Officer and the Corporate Entity bear liability on a joint and several basis for any amounts charged to the card: or c. The Corporate Entity bears responsibility for any amounts charged to the card for the purposes of the business of the Corporate Entity. “Corporate Entity”: shall mean a corporation, partnership or sole proprietorship,
“Credit”: the right to defer payment of debt or to incur debt and defer its payment. Credit is extended by a Card Issuer under a plan in which:
a. The Card Issuer reasonably contemplates repeated transactions. b. The Card Issuer may impose a Term Cost from time to time on an outstanding unpaid balance. c. The amount of credit that may be extended to the Cardholder during the term of the plan (up to any limit set by the Card Issuer) is generally made available to the extent that any outstanding balance is repaid. “Credit Bureau”: A licensed national credit bureau offering consumer and commercial credit information services to respective members in the Kingdom of Saudi Arabia.
“Credit Card”: shall mean a card which is issued by an Issuer in association with Credit Card Associations. The card so issued is used by a card holder to obtain in advance, by virtue of the Issuer’s credit, money, goods, services or other benefits from businesses accepting this card domestically and internationally, and repay the relevant indebtedness thereafter or in accordance with other arrangements. This definition includes Corporate Cards and Business Cards but does not include other types of cards issued such as Debit cards, ATM cards and/or pre-paid cards.
“Credit or Charge Card Agreement”: means an agreement for a Credit or Charge Card between the Card Issuers (as licensed and authorized by Saudi Central Bank) and a "Cardholder".
“Default”: any breach of the terms and conditions of the Credit or Charge Card Agreement and the non-payment by a Cardholder of his/her monthly instalment for 90 Calendar Days from its due date.
“Default Notice”: a notice from a Card Issuer to a Cardholder notifying the Cardholder that he is delinquent in payments.
“Designated Individual”: a natural person who has been nominated by a Cardholder to be a holder, or an applicant to become a holder, of a Supplementary Credit or Charge Card issued at the Primary Cardholder’s instructions.
“Fraud”: a deliberate act to dishonestly obtain a benefit (e.g. money, a product or a service).
“Grace Period”: the date by which, or the period within which, any Credit extended for purchases may be repaid without incurring a Term Cost. If a Grace Period is provided, that fact must be disclosed. If the length of the Grace Period varies, the Card Issuer must disclose the range of days or the minimum number of days in the Grace Period, if the disclosure is identified as a range or minimum.
“Gross Salary”: basic monthly salary (less GOSI and pensions contributions) plus all fixed allowances paid to the Cardholder by the employer on a monthly basis.
“Guaranteed Communication Means”: registered mail, hand delivery, and any recorded, verifiable and retrievable electronic medium.
“Initial Disclosure”: the information required to be provided to the Cardholder by a Card Issuer upon opening a Credit or Charge Card account.
“Optional Feature”: features and services which are not part of the standard features or services of the Credit or Charge Card product, requiring payment of additional fees or term cost by the Cardholder.
“Outsourcing”: an arrangement under which a third party (i.e. the service provider) undertakes to provide to a Card Issuer a service previously carried out by the Card Issuer itself or a new service to be launched by the Card Issuer. Outsourcing can be to a service provider in Saudi Arabia or overseas and the service provider may be a unit of the same Card Issuer (e.g. head office or an overseas branch), an affiliated company of the Card Issuer’s group or an independent third party and is subject to the requirement to fully comply with Saudi Central Bank Rules on Outsourcing.
“Primary Cardholder”: a person in whose name a Credit or Charge Card Account is maintained.
“Profit Rate”: applies to credit extended under Sharia Compliant contracts. It means the rate used to derive profits and is expressed as an annual percentage rate ‘APR’.
“Risk”: the potential of any activity to damage the Issuer entity.
“Central Bank”: the Saudi Central Bank.
“Satisfactorily Resolved”: resolution of the error/dispute in accordance with the procedures and timeframes for resolving disputes.
“Term Cost”: the amount of the Term Cost payable by the Cardholder and it may be represented as a fixed or variable percentage of the outstanding balance on the Credit card account.
“Unauthorized Use”: the use of a Credit or Charge card by a person, other than the Cardholder, who does not have actual, implied, designated or apparent authority for such use, including card skimming.
Section One Scope of Application
Application of the Regulations
Article 1
These Regulations will apply to both Credit and Charge Cards, unless a specific exclusion is noted in the relevant article and will apply to salaried and non-salaried applicants.
Article 2
These Regulations are the complete Regulations for the issuance and operation of Credit and Charge Cards in the Kingdom of Saudi Arabia. They will take precedence over any other regulations issued previously.
Article 3
These Regulations will cover Credit and Charge Cards issued by any regulated entity, licensed by Saudi Central Bank.
Article 4
Companies subject to the provisions of the Implementing Regulation of the Finance Companies Control Law may extend Credit Cards without collateral, based on their Risk assessment methods.
Article 5
Credit and Charge Cards issued by Finance Companies are not subject to the restrictions on fees and commissions stipulated in Article (83) of Implementing Regulation of the Finance Company Control Law as well as Article (9) in the updated Consumer Finance Regulations (July 2014).
Section two Card Issuing
General Requirement
Article 6
All Credit Agreements, application forms, Guarantee Agreements, repayment schedules and other documentation related to Credit and Charge Cards should be in Arabic. An English version of all such documents should be available and provided to a Cardholder if required by them. In the event of a conflict between the two versions of these Regulations, the Arabic version prevails.
Article 7
The Cardholder rights and responsibilities relating to the Credit or Charge Card shall be recorded in the “Cardholder Agreement” that shall meet Saudi Central Bank information disclosure requirements, as provided in Section 5 - ‘Information Disclosure’ of these Regulations.
Article 8
All Card Issuers will fully comply with the international rules and procedures agreed with the relevant Card Association (e.g. Visa Rules / MasterCard Rules / American Express Business and Operational Policies). Where there is any overlap with any Card Association rules, the Articles in these Regulations will take precedence.
Article 9
A Card Issuer may not issue a Credit or Charge Card without receiving a signed application from an applicant.
Article 10
The decision to issue new Credit or Charge Cards requires an effective Risk management strategy to enable an assessment of the eligibility and affirmation of the suitability of the applicant, unless an applicant already holds a Credit or Charge Card(s) issued by the Card Issuer that meets the card issuing requirements provided in Section 2 -‘Card Issuing’ of these Regulations.
Article 11
A Card Issuer shall not issue a Credit or Charge Card to any person who is below 18 years of age (Hijri), except in the case of a Supplementary card as detailed in Section 2 - ‘Card Issuing’ of these Regulations. University students are exempt from this Article, if they can:
a) Provide a Co-signee that meets the card issuing requirements.
b) Provide independent annual income verification and can meet the obligations of the Credit or Charge Card.Article 12
When assessing applications, Card Issuers must perform the following:
a. Verify that the financial information and applicant personal details supplied on the application form are correct. b. Calculate the probability of the applicant’s ability to repay any indebtedness. c. Determine the amount that the applicant can repay. Article 13
The assessment of a request for a Credit or Charge Card should be based on the applicant's ability to meet all the obligations under the Credit or Change Card Agreement, and entity credit policy.
Article 14
A Card Issuer must provide all first time Cardholders with access to free credit advisory services, such as financial education and awareness, before activation of the new Credit or Charge Card can be completed.
Article 15
If the issue of any new, replacement, or supplemental Credit or Charge Card is rejected to a new applicant or existing Cardholder, the Card Issuer must disclose the rejection reasons within I week from the date of the rejection decision.
Article16
The minimum Gross Salary eligibility for new Credit Cardholders is set at SAR 24,000 per annum for bank customers and SAR 30,000 for non-bank customers. Where salary or pension is not used as the main basis of assessment, including for university students, the decision may be based on relationship balances and on the basis of demonstrated good behavior as evidenced in a credit bureau report obtained from a Licensed Credit Bureau.
Article 17
It is the Card Issuers responsibility to make sure that their card manufacturer meets Saudi Central Bank and the Card Association’s standards. A manufacturer must therefore make sure that they keep Cardholder data and cards in a secure environment. Card Issuers must meet and maintain adequate levels of security when they store, process and transmit Cardholder data, in accordance with Card Association rules as a minimum and with Saudi Central Bank circulars as a mandatory obligation.
Article 18
Additional features (such as credit or default insurance products etc.) that require additional payment which are optional to the primary product features of the Credit or Charge cards, must not be added on or embedded to the Credit or Charge Card account and are to be clearly represented as an “Optional Feature”. A Cardholder must indicate his/her approval to obtain such services before their inclusion in the account. Card Issuers must also clearly disclose all fees and Term Cost for these services to the Cardholder within their offer for such Optional Features.
Replacement Cards
ARTICLE 19
A replacement Credit or Charge Card with a new validity period may be issued by a Card Issuer to a Cardholder in the following scenarios:
a. The card has been reported as lost, stolen or damaged. b. The card has been invalidated on suspicion of a fraud or suspicious transaction.
c. The validity period of the card is due to expire, and the replacement card is of the same type as the Credit or Charge Card so replaced.
d. Any other technical reasons including systems and technology enhancements.
e The account is not delinquent.
f A Co-branded card, affinity card or private label card has terminated and a replacement card is issued according to the provisions of the original card Agreement between the Card Issuer and the Cardholder.
g. New or updated requirements and Regulations.
The Card holder has the right to accept or reject the replacement card. A Cardholder shall be deemed to have given their consent if they:
- do not express an objection to the notices referred to in the preceding paragraph within 2 weeks from the issuance of such notices, or
- activates the replacement Credit or Charge Card.
ARTICLE 20
A replacement card shall be treated as being of the same kind as the Credit or Charge Card being replaced including the:
- Type of card
- Terms of use
- Branding
Any fees and Terms Cost relating to the original card held by the Cardholder will apply to the replacement card. The only exception will be where the Cardholder has applied for and activated an upgraded Card, which may have different terms and conditions, including pricing and other features.
Supplementary cards
ARTICLE 21
The Supplementary card may be issued at the Primary Cardholder's request to issue a Supplementary card under their account, to their Designated Individual.
ARTICLE 22
A replacement Supplementary card must be issued in accordance with the Articles for card issuing provided in these Regulations.
ARTICLE 23
The Primary Cardholder shall be liable for all liabilities incurred under the Supplementary card, including any outstanding and or unpaid balances.
Section Three Credit Limits
Article 24
A Card Issuer is not permitted to increase a Credit limit of its Cardholder without receiving an Authenticated Communication from the Primary Cardholder seeking such an increase and according to the Regulations and circulars issued by Saudi Central Bank relating to Credit and Charge Cards. Any confirmation of such prior request by the Primary Cardholder must be documented. This Article does not apply to Charge Cards.
Article 25
When setting initial credit limits, a Card Issuer needs to consider:
a. The results of a debt burden analysis (the ratio of the Cardholder’s debt to his annual income).
b. Account behaviour information (on existing accounts) e.g. typical value of transactions; timeliness of repayments.
Article 26
A Card Issuer may not issue or permanently increase the Credit limit of an existing Credit or Charge Card without seeking the Cardholder’s Credit records from a Licensed Credit Information Bureau, and examining the credit record of the Cardholder to confirm the Cardholder’s solvency, repayment capacity and credit conduct.
Article 27
A Card Issuer is required to carry out proper risk management procedures including the use of Credit scoring models, delinquency behaviour etc., for issuance and for renewal of Credit or Charge Cards and to assign appropriate Credit limits to the Cardholder.
Article 28
The Card Issuer risk management procedures, together with their Credit scoring model, must be reviewed annually at a minimum or as directed by Saudi Central Bank. A fundamental part of this annual review must be the assessment of Cardholder account behavior delinquency.
Article 29
Where a Cardholder has not made the full minimum monthly repayment on 3 consecutive occasions the Card Issuer will immediately:
a) Freeze the account and treat it as a delinquent account.
b) Offer the Credit Advisory Services (regarding how to deal with financial difficulties) free of charge to the Cardholder, and
c) Work towards a mediated settlement before implementing collection and legal system against the Cardholder.
d) A Card Issuer must deal directly with a defaulting Cardholder during this time and can only hand over the case to an internal or external collection agency a minimum of one month after the date when the third consecutive defaulted monthly repayment has occurred. Thereafter and at all times, the Card Issuer must be available to directly offer Credit Advisory Services to the defaulted Cardholder.
Article 30
A Card Issuer is not allowed to lower the minimum monthly repayment required from its Cardholder below 5% of the outstanding balance on the Credit card account.
Article 31
Upon receipt of a request from a Cardholder seeking closure of the Credit or Charge Card account and upon receipt of full and final repayment of the Credit or Charge Card account, the Card Issuer is required to issue a no liability or clearance letter no more than one month from the date of full and final repayment of the outstanding amount and update the Cardholder’s record with any Licensed Credit Bureau within maximum of one week of closing the account.
Section Four Advertising
Article 32
A Card Issuer that advertises a Credit or Charge Card in an Advertisement must disclose, in a manner that is clear to the Cardholder, the name and Annual Percentage Rate (APR) of the advertised product and shall not include other rates such as the Term Cost.
Article 33
A Card Issuer launching a campaign, advertising special term cost free promotions for a specific period, must ensure that the Advertisement discloses in a manner equally as prominent, whether or not term cost accrues during the specific period and is payable after the end of the period, with the end date of the special term cost free promotion period clearly displayed on the Advertisement.
Article 34
The Card Issuer must indicate in all product Advertisements its name, logo, any identifying representation and contact details.
Article 35
SAMA may require any Card Issuer who does not abide by the provisions of the articles within these Regulations to withdraw the Advertisement within one Business Day of notice from Saudi Central Bank.
Article 36
If a Card Issuer offers an introductory promotional term cost, the Card Issuer must remind the Cardholder one week before the end date of the introductory promotional term cost. The Card Issuer will provide the Cardholder with the revised term cost and any change in other terms and conditions that will apply to the period after the introductory period. The Cardholder may have the option to terminate the account. In 10 days if he/she does not accept the new term cost.
Article 37
Advertising by Card Issuers will not be deceptive or misleading and will not exaggerate the advantages of a product or service. All text and numbers, including footnotes shall be clearly visible and understandable with a legible font size (minimum equivalent to Arial 9).
Article 38
The Card Issuer may not carry out any of the following:
a. Provide an Advertisement that includes a false offer or statement or claim expressed in terms that would directly or indirectly deceive or mislead the consumer. b. Provide an Advertisement that includes the unlawful use of a logo, a distinctive mark, or a counterfeit mark.
Section Five Information Disclosure
Disclosure statement
Article 39
A Card Issuer that proposes to enter into a Credit or Charge Card Agreement with a Cardholder must provide an Initial Disclosure. The Disclosure must be clear and easy to understand and highlight the terms and conditions which may affect the Cardholder’s rights and obligations, and the Card Issuer must use any format specified by Saudi Central Bank from time to time for that purpose.
Furthermore, the specific terms contained under Article 74 dealing with ’account statement errors/disputed transactions' must be included in the Initial Disclosure. An Initial Disclosure is deemed to be provided to the Cardholder by any of the following:a) On the day recorded as the time of sending by the authorized Card Issuer’s server, if provided by electronic means, and the Cardholder has consented to receive it by electronic means.
b) On the day recorded as the time of sending by a fax machine, if provided by fax and the Cardholder has consented to receive it by fax.
c) 2 weeks after the postmark date, if provided by registered mail.
d) When it is received, in any other case.
Article 40
The Initial Disclosure must include the following information as a minimum:
a. The initial Credit limit, if it is known at the time the disclosure is made.
b. The APR and the annual 'Term Cost'.
c. The nature and amounts of any recurring non-Term Cost’ charges.
d. The minimum payment during each payment period and the method for determining it.
e. Each period for which a statement of account is to be provided.
f. The date on and after which term cost accrues and information concerning any Grace Period that applies.
g. The particulars of all fees and charges.
h. Information about any Optional Feature in relation to the Credit or Charge Card Agreement that the Cardholder accepts in writing, the fees for each Optional Feature and the conditions under which the Cardholder may cancel that feature.
i. The manner in which the term cost is calculated.
j. If the Cardholder is required by the Credit or Charge Card Agreement to pay the outstanding balance in full on receiving a statement of account:
1. Mention of that requirement
2. The Grace Period by the end of which the Cardholder must have paid that balance and,
3. The penalty fees charged on any outstanding balance not paid when due.
k. Information on all applicable charges including reporting of Default cases to a Licensed Credit Information Bureau or appropriate Regulatory Authorities as per Saudi Central Bank’s approval.
l. An illustrative example of calculations depicting sample conversion of foreign currency charges into Saudi Riyal, showing the foreign exchange conversion fees used when the Card Issuer converts a foreign transaction back to Saudi Riyal. The calculations should include one foreign currency purchase transaction and one Cash Advance transaction at an ATM/POS outside of Saudi Arabia.
Article 41
An Initial Disclosure may be part of a Credit or Charge Card Agreement or an application for a Credit or Charge Card or may be an annex to the foregoing documents. The Card Issuer is required to obtain a signed acknowledgement from the Cardholder of having read and received the Initial Disclosure. This signed acknowledgement must be retained, even after the Cardholder closes their Credit or Charge Card account.
Article 42
If the Cardholder consents, the Initial Disclosure may be provided by electronic means that the Cardholder can retrieve and retain.
Article 43
If the initial Credit limit is not known when the Initial Disclosure is made, the Card Issuer must disclose it in:
a. The first statement of account provided to the Cardholder; or
b. In a separate statement that the Cardholder receives on or before the date of the first statement of account.
General disclosures
Article 44
As part of the Initial Disclosure, Card Issuers must include a summary covering the basic information regarding the Credit or Charge Card product and the main provisions of the Credit or Charge Card Agreement, in a language clear to the Cardholder and in accordance with the format stipulated by Saudi Central Bank. The Cardholder's receipt of such summary shall be documented in the Cardholder record (Annex 2).
Article 45
If a Credit or Charge Card agreement is amended, the Card Issuer must, at least 30 Calendar Days before the amendment takes effect, disclose to the Cardholder, any changes to the agreement, except changes to the following:
a. An extension to the Grace Period.
b. A decrease in fees and charges.
c. A change concerning information about any optional service in relation to the Credit or Charge Card Agreement.
Article 46
The Card Issuer shall mail or deliver to the Cardholder, the monthly account statement at least three weeks prior to due date. Where the Cardholders agree to receive their monthly statement by electronic channel, the Card Issuers may not send the physical statements. The Card Issuer that fails to satisfy such requirement shall forfeit the right to collect any additional fees as a result of such failure.
Article 47
A Card Issuer should include specific warning statements in all Agreements, terms and conditions, application forms and Advertisements, in red colors stating clearly the potential consequences for the Cardholder in;
a) Not meeting the Credit or Charge Card conditions as confirmed in the Agreement.
b) Only making the minimum repayments each month.
Regular account statements
Article 48
A Card Issuer must provide Cardholders with regular monthly statements that contain the following information:
a. Details of Credit Limit: includes approved Credit limit, available and outstanding balances.
b. Previous balance: The outstanding account balance at the beginning of the account statement cycle.
c. Purchases or Advances: Identification of transaction and its merchant description including the date of transaction and the transaction amount in Saudi Riyal or its equivalent if it's in foreign currency.
d. Details of fees or term cost charged to the account, and the dates when those amounts were posted to the account, including fees for 'Optional Features' purchased by the Cardholder.
e. The amount that the Cardholder must pay, on or before a specified due date.
f. The total sum for payments and the total sum for purchases, total sum for Credit advances and total sum for fees.
g. Any payments charged or refunds to the account during the account statement cycle, including the amount and the date of payment and or refund.
h. If the term cost has changed during the account statement cycle, each periodic rate used to calculate the term cost and the value of balances to which it will be applied shall be disclosed. If different periodic rates were used for different types of transactions, the types of transactions to which such rates are applied shall be disclosed.
i. The amount of the balance to which a periodic rate was applied. The manner in which the balance was determined shall be disclosed.
j. The closing date of the account statement cycle on which the balance becomes due and outstanding.
k. The date on which the new outstanding balance of the Credit or Charge Card must be paid fully or partially to avoid term cost and any applicable penalty charges.
l. The address or telephone number to be used for notification of account statement errors or any other enquiries that a Cardholder may have on the account statement.
m. The time period allowed to the Cardholder to verify the accuracy of transactions as annotated in the account statement after which the account statement is binding. This period shall not be less than 30 Calendar days as of the date of sending the statement.
Disclosure of fees, commissions and charges
Article 49
Details of foreign currency transactions, including conversion rate, fees and all charges levied on the foreign currency transaction, must be displayed on the transaction record in the Cardholder’s monthly statement, in the manner stipulated by Saudi Central Bank.
Article 50
If a Card Issuer offers to defer or skip a payment under a Credit or Charge Card Agreement, the Card Issuer must, with the offer, disclose in a prominent manner whether term cost will continue to accrue or if any additional charges will accrue during any period covered by the offer, if the offer is accepted.
Article 51
The Card Issuer is required to promptly advise its Cardholders of any changes in their Credit or Charge Cards agreement by giving them at least 30 Calendar Days prior notice advance notice.
Section Six Cardholder Dealing
General
Article 52
The Saudi Riyal shall be used as a basis for calculating all transactions and charges of Credit and Charge Cards, and it shall be used in all disclosures of monetary values for cards issued and or denominated in Saudi Riyal. For cards issued in currencies other than the Saudi Riyal, the basis for calculation will be their respective currency of issuance.
Article 53
A Cardholder may terminate the relevant Credit or Charge Card Agreement if they do not agree to any amendment, change or modification by notifying the Card Issuer of their desire to terminate the Credit or Charge Card Agreement within 14 calendar Days after their receipt and after paying the outstanding amount. The aforementioned notice from the Card Issuer should advise Cardholders of their entitlement to a 14 calendar Days termination period.
Article 54
The Cardholder is required to keep the Card Issuer's records updated with their latest address and to immediately notify the Card Issuer of any change in their contact details. Failure to provide this information will release the Card Issuer from any liabilities and obligations under Article 56.
Article 55
A Card Issuer may allow its Cardholder or a Designated Individual to process a Cash Advance using their Credit or Charge Cards up to a maximum of 30% of their Credit limit. ATM cash withdrawals are subject to limits that pertain in the jurisdiction where the Cardholder is making the cash withdrawal.
Article 56
Card Issuers should be advised to incorporate in their Credit or Charge Card agreements a clause which specifies that within 10 days of receiving a Credit or Charge Card, the Cardholder has the right to cancel it free of change and the Card Issuer will not claim any fee unless the Cardholder has activated the Card.
Article 57
The Card Issuer must, upon the approval of the Cardholder, register the Cardholder’s credit information with a Licensed Credit Information Bureau in accordance with the relevant laws, regulations and instructions. Such information shall be updated throughout the period of dealing with the Cardholder.
Article 58
Card Issuers must issue regular SMS, email and other electronic communication awareness messages regarding paying the outstanding amount in time and the actions that a Cardholder needs to take in case of fraudulent transactions and a lost/stolen card with contact details.
Article 59
Card Issuers are expected to have appropriate anti-fraud and monitoring systems and procedures in place to protect itself and its Cardholders. At a minimum, Card Issuers must have systems to detect unusual transactions or account behaviour and must proactively contact Cardholders to verify any suspicious transactions.
Article 60
A Card Issuer should emphasise to merchant customers that they cannot pass on or impose any additional fees or charges (merchant service charge) when Cardholders use a Credit or Charge card for payment of goods or services in their stores. The Card Issuer responsible for accepting the merchant’s deposits should ensure the amounts deposited are aligned with the merchants’ business. A Card Issuer should facilitate training of merchants’ staff on the use of POS devices and provide them with the required rules and regulations to be followed.
Article 61
A Card Issuer engaging in Outsourcing of any component of its Credit or Charge Card business (including marketing for new cards and or collection of dues etc.) shall comply with Saudi Central Bank’s ‘Rules on Outsourcing’.
Article 62
Each monthly statement must include an illustrative information in red colours showing :
a. How long it will take the Cardholder to pay off the amount of SAR 7000 or actual statement balance using the minimum repayment amount only. b. The Term Cost to the Cardholder as a result of paying only the minimum amount due.
Article 63
Card Issuers must issue an SMS message to Cardholders:
(a) Advising when a debit transaction has been authorized, showing the merchant name, date and amount of the debit transaction, updated balance of the account and the credit limit available after the transaction amount has been posted to the account.
(b) Advising when a credit transaction has been processed, showing the payer name, date and amount of the credit transaction, the updated balance of the account and the credit limit available after the transaction amount has
been posted to the account.
(c) Release of pre-authorizations transactions.
Article 64
A Card Issuer must inform Cardholders about outstanding transactions and request payment within a maximum of 90 days from the original date of the transaction. After that, the Card Issuers can only debit a Cardholder’s account for payment after obtaining documented approval from the Cardholder.
Article 65
A Card Issuer is required to implement a clearly defined Code of Conduct for employees engaged in Cards business including sales and marketing of Credit and Charge Card products and follow-up and collection of impaired and delinquent Credit Card and Charge Card Accounts. A Card Issuer must provide those employees with a copy of the Code of Conduct and obtain their acknowledgement of receipt. The Code of Conduct must prohibit the following:
a) Any contact with neighbours, relatives, colleagues or friends of the defaulting Cardholder for the purpose of requesting or conveying information on the solvency of the Cardholder.
b) Any communications (verbal or written) to the Cardholder conveying incorrect information on the consequence of defaulting on their obligations to the Card Issuer. c) Unauthorized repossession of the pledged collateral excluding cash collateral without judicial proceedings or the specific consent of the Cardholder.
d) Communicating with the defaulting Cardholder using envelopes tagged with inscriptions identifying contents as containing debt collection information.
e) Any breach of confidentiality of Cardholder information, conflict of interest and breach of ethical values.
Article 66
Card Issuers are prohibited from increasing the Term Cost on an existing outstanding balance as a result of delinquency or default.
Article 67
Credit and/or Charge Card outstanding amount must be due on the same date each month and payments received up to and including midnight on the due date must be treated as timely. Card Issuers cannot charge a late payment fee unless Cardholders are given at least 21 days to pay their due amount.
Article 68
Late payment fees must be reasonable in proportion to the violation of the account terms in question and must not exceed SAR100. The amount of the late payment fee cannot exceed the outstanding amount.
Article 69
Card Issuers are prohibited from allowing a cardholder to exceed the approved credit limit and paying an ‘over-the-limit- fee and any decision to allow the balance to exceed the authorized credit limit is based on the Card Issuer’s risk assessment.
Article 70
Cash Advance fees must not exceed:
- SAR75 for Cash Advance transaction up to SAR 5000.
3% of transaction amount over SAR 5000, and subject to
a maximum of SAR 300.Article 71
Card issuers are prohibited from imposing any fees for transfer transactions between Cardholder’s current account and the Cardholder’s Credit or Charge Card account at the same bank.
Article 72
Card issuers must immediately credit transfers between their Cardholder’s current account at their bank and the Cardholder’s Credit or Charge Card that has been issued by them.
Article 73
Card issuers must send a notification to Cardholders, one month before expiry of reward points, and repeat one week before expiry date, advising the Cardholder of the number of points due to expire and the expiry date.
Section Seven Disputed Transactions
Account error/disputed transaction
Article 74
The term “account statement error/disputed transaction” shall represent any transaction posted to the Cardholder’s Credit or Charge Card account, resulting in an error in the overall balance. Account statement errors shall include the following:
a. An Unauthorized use transaction that is not made by the Cardholder or person authorized by the Cardholder.
b. A transaction on which the Cardholder requests additional clarification including documented evidence.
c. Failure by the Card Issuer to properly credit a payment or any other amount deposited in the Cardholder’s account.
d. Accounting error made by the Card Issuer, so that a charge would be lower or higher than it should be including the imposition of fees or term cost that are not in accordance with the terms and the agreement in force.
e. The Card Issuer’s failure to deliver a monthly account statement to the Cardholder’s address on record.
f. Any other errors relate to Cardholder transactions.
Article 75
The term “notice of account statement error/disputed transaction" means a notification given by a Cardholder to the Card Issuer, using the contact information as included within the said account statement or other information supplied by the Card Issuer, and it must meet the following requirements:
a. It must be received by the Card Issuer no later than 30 Calendar Days after the Cardholder had mailed or delivered the first account statement which contains the account statement error.
b. The notice shall enable the Card Issuer to identify the Cardholder’s name and account number, and indicate, to the extent possible, the Cardholder’s reasons for believing that an account statement error exists, the nature of such error, the transaction details including posting date and amount related to the error.
c. If the card holder is proven to having being engaged in any fraud behaviours relating to the disputed transactions, and if the card holder refuses to provide relevant necessary materials for the investigation of the disputed transaction, the Card Issuer shall have no liability for the disputed transactions.
d. If an unauthorised transaction or fraud occurs after the Cardholder has notified the Card Issuer by telephone of the loss or theft of the card, then the Card Issuer will bear the responsibility for the amount of the unauthorized transaction or fraud.
Article 76
The Cardholder’s liability for Unauthorized use of the Credit or Charge card shall be limited by the following:
1. In an Unauthorized use of the Credit or Charge card on account of its Loss or Theft, the maximum liability of the Cardholder prior to the Cardholder reporting the Loss or Theft to the Issuer shall not exceed the available credit limit or the amount of unauthorized transactions posted to their account, whichever is lower at the time of such Loss or Theft.
2. The Cardholder shall not bear any responsibility or cost unless the Card Issuer has provided adequate notice of the Cardholder’s maximum potential liability and of means by which the Card Issuer may be notified of loss or theft of the card (such as a telephone number, address,).
3. The Cardholder shall have no liability for any Unauthorized transactions made by the use of the card after reporting its Loss or Theft to the Card Issuer if the following conditions were met:
a) The Cardholder has immediately and without delay notified the card issuer by telephone of the loss or theft of the card.
b) The Cardholder shall also be not responsible if the Card Issuer has failed to receive the notification of loss or theft due to negligence or delay on its part,
c) The Cardholder has exercised vigilant care in safeguarding the card from risk of loss, theft or unauthorized use.
4. If any dispute is found to be a potential or genuine fraud (e.g. counterfeit, skimmed, etc.,) the full amount of the disputed transaction must be reversed on the card account.
Article 77
When informed of the Unauthorized charges by their Cardholders, Card Issuers should ensure appropriate investigations are carried out to determine responsibility and liability. Cardholder are required to provide the necessary information and documentation to assist in the investigations.
Article 78
In any action by a Card Issuer to enforce liability for the use of a Credit or Charge Card, the burden of proof is upon the Card Issuer to show that the use was authorized. If the use was unauthorized, then the burden of proof is upon the Card Issuer to show that the conditions of liability for the unauthorized use have been met.
Article 79
Where a Card Issuer is making refund to a Cardholder account, they must immediately communicate the decision to Cardholder by SMS and refund the due amount.
Article 80
In the case of a Cardholder disputing a transaction, Card issuers must freeze any accruing term cost and must not charge out any term cost on the disputed amount.
Article 81
Card Issuers are required to have systems in place to record and retain Cardholder calls for at least 180 days from the date of recording for verification if required.
Article 82
Card Issuers are required to provide Cardholders with a reference or transaction number at the time of the report of loss, theft or Unauthorized usage.
Article 83
A Cardholder can raise a chargeback claim by sending an Authenticated Communication to their Card Issuer challenging a debit on their card statement within 30 calendar days of the statement date, on which the debit first appears. Such claim include:
a. Charges the Cardholder did not authorize.
b. Charges for undelivered goods or services.
c. Charges for goods or services different from what was represented or of the wrong quantity.
- Upon receipt of the chargeback claim, the Card Issuer must initiate the chargeback claim within a maximum of one week.
Article 84
Where a Card Issuer discovers an internal error, or is informed of an error by a Cardholder making a complaint or a claim, then the Card Issuer should refund all other Cardholders who are affected by a similar error. The Card Issuer should issue a notice to all affected Cardholders, advising them of the error and the steps being taken for corrective action, including the amount of the refund to the Cardholders' accounts. This should be completed within 60 Calendar Days of the original error being identified.
Section Eight Dispute Resolution
Article 85
Card Issuers must have a comprehensive dispute resolution policy and procedures (also known as complaint handling policy and procedures) and comply with Saudi Central Bank Regulations for complaint handling departments A copy of the Card Issuer's complaint handling policy and procedures must clearly be on display in all of their branches and on their websites and they must provide a hard copy to a Cardholder if requested.
Article 86
The Card Issuer must mail or deliver a response to the Cardholder within 30 Calendar Days of receiving the notice of account statement error/dispute advising the Cardholder of the likely timeframe of resolution of the error/dispute and requesting any additional available information or documentation.
Article 87
The Credit or Charge Card Issuer shall conduct necessary investigation and comply with the appropriate dispute resolution procedures (as advised to Cardholder) within two complete account statement cycles, but in no case shall be later than 90 Calendar Days as of the date of receiving the notice of “account statement error/disputed transaction. However, on an exceptional basis the Card Issuer is allowed to extend the resolution date up to 180 Calendar Days from the date of receiving notice of “account statement error/disputed transaction” if the Card Issuer confirms and can prove that the account statement error/disputed transaction falls under the purview of and is being pursued in accordance with the rules and Regulations of the relevant 'Card Association' for the Card.
Article 88
If the account statement error/disputed transaction has not been Satisfactorily Resolved, the Cardholder shall not be obliged to pay the portion of the required payment that the Cardholder believes is related to the disputed amount, including term Cost or fees. The Card Issuer may not try to collect any amount, term cost or fees related to the account statement error/disputed transaction until the dispute is resolved, in accordance with the rules and regulations.
Article 89
The Card Issuer shall not make an improper report about the Cardholder’s Credit standing, or report that an amount or account is delinquent prior to the error/disputed being Satisfactorily Resolved. The Cardholder is not required to pay the disputed amount or term cost or fees during the error/disputed resolution process in any event, not earlier than 90 calendar days (180 days for exceptions cases) from the date of the notice of account statement error/disputed.
Article 90
If the Credit or Charge Card Issuer determines that an account statement error has occurred as stated by the Cardholder, it shall correct the error and pay back any disputed amount and relevant Term Cost and fees debited on the Cardholder’s account and deliver a correction notice to the Cardholder.
Article 91
If the Credit or Charge Card Issuer determines that a different account statement error other than the one identified in the Cardholder’s notice has occurred, the Card Issuer shall mail or deliver to the Cardholder the card issuer’s reasons for believing that a different account statement error has occurred and the reasons for the belief that the error alleged by the Cardholder is incorrect. The issuer shall correct the error and credit the Cardholder’s account with the correct amount and relevant term cost and fees in accordance with procedures in force.
Article 92
If the Card Issuer determines that no account statement error has occurred, it shall mail or deliver an explanation of the reasons of believing that the error alleged by the Cardholder is incorrect and provide the Cardholder with copies of any documented evidence.
Article 93
If the Credit or Charge Card Issuer deems that a Cardholder is liable for all or part of the disputed amount and relevant term cost and fees, it must:
a. Notify the Cardholder of the date when payment is due and the portion of the disputed amount and relevant term cost and fees that the Cardholder is liable for.
b. Report to a Licensed Credit Information Bureau that an account or amount is delinquent because the amount due has remained unpaid after the due date given by the Credit or Charge Card Issuer as defined in the terms and conditions of the Cardholder agreement in force, except for any extension or Grace Period provided by the Card Issuer to the Cardholder.
ANNEX 1
This annex has been updated by circular No (45025707) dated 17/04/1445H (corresponding to 01/11/2023). Please refer to Rules Governing Calculation of Annual Percentage Rate (APR) to read the updated version.ANNEX 1
CALCULATION OF THE ANNUAL PERCENTAGE RATE IN CREDIT CARD
Annual Percentage Rate (APR) is the discount rate at which the present value of all payments and instalments that are due from the Cardholder, representing the Total Amount Payable by the Cardholder, equals the present value of all payments of the Amount of Credit available to the Cardholder on the date on which the Credit amount or the first payment thereof is available to the Cardholder, in accordance with the following equation: 
where: m: is the number of the last payment to be received by the Cardholder d: is the number of a payment to be received by the Cardholder Cd: is the amount of payment (d) to be received by the Cardholder Sd: is the period between the date of the first payment to be received by the Cardholder and the date of each subsequent payment to the Cardholder, expressed in years and fractions of year, therefore S1=0. n: is the number of the last repayment or payment of charges due on the
Cardholderp: is the number of a repayment or a payment of charges due on the Cardholder Bp: is the amount of repayment or payment of charges (p) due on the Cardholder tp: is the period between the date of the first payment to be received by the Cardholder and the date of each repayment or payment of charges due on the Cardholder, expressed in years and fractions of year X: is the Annual Percentage Rate (APR) Assumptions for the calculation of APR - For the purpose of calculating APR, periods between dates shall be based on a year of 12 equal months or 365 days a year.
- For the purpose of calculating APR, the Total Amount Payable by the Cardholder
shall be determined, including all unavoidable costs and fees with the exception of charges and fees payable by the Cardholder as a result of non-compliance with any of his commitments laid down in the Credit Card Agreement.
- The calculation of the APR must be based on the assumption that the Credit Card Agreement will remain valid for the agreed period and that the Card Issuer and the Cardholder will fulfil their obligations under the terms specified in the Credit Card Agreement.
- If the Credit Card Agreement contains clauses allowing variations in the charges
contained in the APR but unquantifiable at the time of calculation, the APR shall be calculated on the assumption that the charges will remain fixed at the initial level and will remain applicable until the end of the Credit Card Agreement.
- For the purpose of calculating advertised APR, the following shall be assumed:
A) If the ceiling of the credit card has not determined, that ceiling shall assumed to be SAR 10,000;
B) The total amount of credit shall be deemed to be drawn down in full at the start of day 1;
C) The first year unavoidable fees (e.g. application fee, maintenance fee) shall be determined;
D) The credit is provided for a period of one year; and
E) The credit will be repaid in full in 12 equal monthly payments - If the contract contains clauses allowing different ways of drawdown with different charges or Term Cost, the Total Amount of Credit shall be deemed to be drawn down at the highest charge and term cost applied to the most common mechanism.
- If there is a fixed timetable for payment received by the Cardholder but the amount of such payment is flexible, the amount of each payment shall be deemed to be the lowest for which the contract provides.
- If the Credit Card Agreement contains clauses offering charges or term cost for limited period or amount, the term cost and charges shall be deemed to be the highest for the whole duration of the contract.
- The Annual Percentage Rate must be calculated and expressed in percentage points with a minimum of two basis points, and rounding the following decimal place by one point if that place is greater than or equal to 5.
ANNEX 2
Credit card Issuer Logo
Credit Card Agreement Synopsis
Credit card holder Information
Cardholder name
Date of Agreement
National ID / Iqama / CR
Agreement reference number
Credit card information
Credit card limit
APR
Administration fees
Term cost
Annual fees
Minimum amount due
Foreign currency conversion fees
Settlement date
Other fees
Late payment fee
The most prominent provisions
Implications of transactions in foreign currency Implications of paying the minimum amount due Implications of default Implications on cash withdrawals Implications of cash transfer Credit Card Features You will not pay any additional amount when you pay the full outstanding amount in due date.
*Disclaimer: Reviewing this synopsis shall not substitute reviewing the contract, its appendices, and shall not exempt from the obligations stipulated in the contract.
card holder signature Authorized issuer signature and stamp
Credit card issuer contact information
ANNEX 3
FX Illustration Box
Date
Description
Date dd/mm/yyyy
Merchant name on dd/mm/yyyy Debit
Original Currency Amount Currency Conversion Rate Local Currency Amount Other Fees/Charges FX Amount ?? SAR ? SAR ? SAR?
General Rules for Savings Products in Banks
No: 45059688 Date(g): 24/3/2024 | Date(h): 15/9/1445 Status: In-Force Translated Document
Based on the powers vested to Saudi Central Bank under its Law issued by Royal Decree No. (M/36) dated 11/04/1442H, and the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386H, and based on SAMA's efforts to encourage banks to offer savings products and stimulate customer to benefit from them.
Accordingly, attached are the general rules for savings products in banks, which all banks are required to adhere to, and to complete the necessary procedures in accordance with the established policies and procedures.
Chapter One: General Provisions
Article One: Definitions
The following terms- wherever mentioned in these rules- shall have the meanings indicated next to them, unless the context requires otherwise:
Term
Definition
SAMA
Saudi Central Bank. Bank
Banks and financial institutions licensed to conduct banking activities in the Kingdom according to the Banking Control Law. Customer
A natural or legal person. Savings Products
A product characterized by any or all of the following features:
A. Exchange transactions limited to a specific number.
B. Maintaining a minimum deposit amount.
C. A return due to the customer on the deposit amount, along with the availability of feature (A) or (B).
Deposit Amount
The amount deposited with the bank for savings. Return
The profit on the deposit amount calculated based on the Annual Equivalent Rate (AER). Annual Equivalent Rate (AER)
The annual return rate on the savings product as specified in Disclosure of Interest Rates on Financing and Savings Products. Deduction
A periodic deduction of a specified amount from one of the customer's accounts and its addition to the deposit amount, which the customer can authorize the bank to execute under the product agreement between the customer and the bank. Trusted Communication Channels
A registered communication method that can be verified and is retrievable in written or electronic form. Article Two: Purpose and Scope
- These rules aim to provide a general framework for savings products offered by banks, which contributes to encourage them to launch savings products and stimulate customer benefits from them.
- These rules apply to all banks when presenting and offering savings products to their customers.
- These rules do not override the provisions stated in the relevant regulations, instructions, and instructions issued by SAMA.
Chapter Two: Provisions for Savings Products
Article Three: Design and Development of Savings Products
1 . When designing and developing savings products, the bank must comply to the following: 1.1 Product design quality, and the principles of disclosure and transparency in its presentation and offering. 1.2. Continuous evaluation of the product's effectiveness and risks based on specific performance indicators. 1.3. Transparency, clarity and accuracy in all product documents, including agreements and initial disclosures. 1.4. Flexibility in the terms for customers to obtain and benefit from the product, or cancel it. The bank should make the product available through digital channels and should not require the customer to have or open a current account, except for products that necessitate such mechanisms, like those involving automatic deductions. 1.5. Inclusiveness of products a various customer segments, including those with low income, foreign residents, and individuals under the age of eighteen. 2. The bank should give importance to savings products in its product development process, considering the best local and international standards and practices in this regard. Article Four: Advertising and Disclosure of Savings Products
The bank must give importance to savings products in promotional advertisements. Additionally, it should allocate a section on its website and mobile application to display these products, including at a minimum the characteristics of each product, the terms of use, and frequently asked questions about the product. The section should be regularly reviewed to ensure the information remains up-to-date.
Article Five: Offering and Managing Savings Products
When offering and managing savings products, the bank must adhere to the following:
1. Implement due diligence measures by identifying the customer and any authorized representatives, -if any-, and verify their identities using reliable and independent documents, data, or information, in accordance with the Anti-Money Laundering Law and the Law on Combating the Financing of Terrorism and their implementing regulations. The bank may also refer to the requirements outlined in the Account Opening Rules issued by SAMA when identifying the customer. 2. Provide the customer with an initial disclosure that include the contents of the agreement specified in paragraph (3) of this article. 3. Conclude a product agreement with the customer that includes, -at a minimum- and considering the characteristics of each product, the following: 3.1. Returns and Calculation Mechanism. 3.2. Annual Equivalent Rate (AER). 3.3. Any fees charged to the customer, including administrative fees. 3.4. The scope and areas of investment for the deposit amount. 3.5. The obligations and rights of both parties, such as withdrawal limits from the deposit amount or the minimum amount that must be retained. 3.6. The circumstances under which the customer may not be entitled to returns. 4. Provide the customer with a summarized monthly statement that includes, -at a minimum-, the deposit amount and the returns accrued since the product was obtained. 5. Subject to the provisions in paragraph (1.5) of Article Six, it is preferred that the agreement with the customer be for a fixed term, with either party having the right to terminate it after providing the other party with sufficient notice through mutually agreed reliable communication channels. Upon termination of the agreement or its expiration without renewal agreement by both parties, the bank must transfer the deposit amount to a current account specified by the customer. Article Six: Offering Savings Products to Non-Residents
1. Without prejudice to the provisions of the Anti-Money Laundering Law and the Law on Combating the Financing of Terrorism and their implementing regulations, it is permissible to offer savings products to non-residents in the Kingdom, provided that the bank adheres to the following minimum requirements: 1.1 Compliance with the laws of the customer’s country of residence, -where applicable-, such as obtaining a license from the relevant authorities in the customer’s country of residence, as well as adhering to personal data protection laws, tax evasion laws, and other related regulations. 1.2 Implementation of enhanced due diligence measures, which may include relying on a third party in accordance with the "reliance on a third party" requirements specified in the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Guide. 1.3 Establishing limits and methods for withdrawals, deposits, and redemption of the deposit amount in accordance with the customer’s risk level. 1.4 Offering these products exclusively in Saudi Riyals. 1.5 Ensuring that the agreement with the customer be for a fixed term, with either party having the right to terminate it after providing the other party with sufficient notice through mutually agreed reliable communication channels. Upon termination of the agreement or its expiration without renewal agreement by both parties, the bank must transfer the deposit amount to a current account specified by the customer. 1.6 Obtaining written no-objection letter from SAMA before offering the product, including a request detailing the target percentage of total savings products and time deposits held by the bank. 2. Without prejudice to the requirements of Account Opening Rules that mandate the closure of the resident customer's current account upon their final departure from the Kingdom, the customer is permitted to keep the available funds in the bank by utilizing savings products, provided that this is based on the customer's request, whether before their departure from the Kingdom or after their departure and the closure of the current account. Chapter Three: Final Provisions
Article Seven
- These rules represent the minimum requirements that banks must adhere to when designing, developing, offering, and managing savings products.
- These rules will be effective from the date of their issuance.
Regulatory Rules for Prepaid Payment Services in the Kingdom of Saudi Arabia
No: BCT/15631 Date(g): 2/5/2012 | Date(h): 11/6/1433 Status: In-Force Introduction
The Saudi Central bank* (SAMA), in accordance with the authority vested on it under the following relevant Saudi laws, is the legislative body responsible for exercising regulatory and supervisory control over banks and money exchangers, issuing general rules and overseeing that all banks and money exchangers comply and effectively implement the relevant laws and regulations.
- The Charter of Saudi Arabian Monetary Agency –issued via Royal Decree No. 23 dated 23/5/1377 H, Articles 1 (c) and 3 (d), which entrusts SAMA to supervise and regulate commercial banks and money-changers, and to set relevant rules whenever deemed necessary;
- The Banking Control Law – issued via Royal Decree No. M/5 dated 22/2/1386 H Article 16 (3).
- Decision No. 3/2149 dated 14/10/1406 H of His Excellency the Minister of Finance concerning the implementation of the provisions of the Banking Control Law.
- Based on the provisions of Articles 4 & 6 of the Anti-Money Laundering Law and its Implementing Regulations issued via Royal Decree No. M/39 dated 25/6/1424 H, empowering regulatory authorities to issue rules related to "Know Your Customer" Principle, and instructions related to precautionary procedures and internal control to detect any of the crimes stated in this Law, ensure compliance of financial institutions with issued instructions; set, apply and update effective written controls and monitor their application to prevent the exploitation of these institutions in money-laundering operations and assist in detecting suspicious transactions.
- Council of Ministers’ Decision, No. 59 Dated 28.3.1420 H which gives the authority to SAMA to authorize the issuance of Electronic Cash Cards and alike, and supervise according to instructions, standards and terms adopted by SAMA.
The Regulatory Rules shall be applicable to the issuance and operations of all aspects of prepaid payments as issued by licensed banks that have been authorized by the Saudi Central Bank*.
SAMA is the sole authority empowered to apply these Regulations and to take necessary measures as it deems appropriate regarding any violations of these provisions including imposing punitive charges and / or enforcement actions as applicable under the Banking Control Law. These rules are to be read in conjunction with and supplement the regulations as annotated in the ‘Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia’ as issued by SAMA. Financial Service providers in the Kingdom of Saudi Arabia are expected to act as responsible businesses, ensuring their customers are educated and informed about the products and services offered, enabling them to make considered decisions about the products and services proffered and their use.
The purpose of the Regulatory Rules is to promote the informed use of prepaid payment services in the Kingdom. The framework defines the scope of prepaid payment services covered by the regulation, the license requirements to issue and acquire prepaid payment services, as well as defining the rights of end users relating to these payments.
The Regulatory Rules prescribes minimum levels of disclosure, gives accountholders the right to cancel prepaid service agreements, regulates certain prepaid payment service practices and provides a means for fair and timely resolution of transaction disputes, thereby providing detailed and sufficient information to educate and enhance the account holder and/or primary cardholder’s knowledge and awareness of prepaid payment service products and their associated terms and conditions.
Where a prepaid payment service is operated utilising the SPAN payment scheme brand these regulations should be read in conjunction with the SPAN Scheme Standard1.
The Regulatory Rules is divided into two sections.
The first section provides a definition of prepaid payment services, of the stakeholders interacting within prepaid payment services and also of the various prepaid payment service segments.
The second section lays down the operating rules and guidelines governing prepaid payment services, including the regulations regarding merchants.
Prepaid payment services operating within the Kingdom, regulated by SAMA, are subject to the rules and regulations defined herein. In addition, Open Loop prepaid services operate through the Saudi Arabian Payments Network (SPAN) and are subject to the applicable Operating Rules and Procedures defined and published by the SPAN Scheme from time to time. These Prepaid Regulatory Rules should therefore be read in conjunction with the ‘SPAN Operating Rules and Regulations’ and ‘SPAN Operating Procedures’, collectively referred to as the ‘SPAN Business Books’.
1The SPAN Scheme Standard relate to the SPAN Business Books, Operating Rules and Procedures
* The Saudi Arabian Monetary Agency was replaced By the name of Saudi Central Bank accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding in 26/11/2020AD.
1. Definitions
The regulatory rules presented herein regulate the issuing, acquiring and usage of prepaid payment services. This regulatory rules document focuses primarily on "Cards", but applies to all prepaid services including smart/EMV cards and magnetic stripe card environments as well as other form factors for prepaid payment services, such as contactless and mobile payments.
1.1. Prepaid Payment Service Definition
A prepaid payment service, as regulated under these rules, is defined by the holding of monetary value in a prepaid account/electronic record that can be utilised to purchase goods or services from one or more businesses who agree to participate in the prepaid program. The defining features are:
- Monetary value is held on account for use to purchase goods and services for variable amounts as determined and agreed between the payer and payee at the time of purchase of the prepaid service
- Settlement of transactions can be between otherwise unrelated business entities.
Note: for the purposes of this document the terms "account", "electronic record" and "sub-record" are used interchangeably.
"Open loop" payment services enable the purchase of goods and services from a group of unrelated businesses through a prepaid account utilising a payment brand accepted at the participating merchants, i.e. multiple contracting entities, multiple issuers and multiple acquirers. "Open loop" prepaid services require a clearing and settlement services between different businesses. This includes the ability to encash any part of the prepaid balance through a third party network, such as ATM networks.
“Restricted loop” is a subset of an open loop program, in that the merchant acceptance of the program is limited to a specified merchant or a specified network of merchants. Examples of a restricted loop program include in its broadest form, prepaid accounts for the purchase of specific services or goods across a network of merchants (e.g., a prepaid coffee card accepted across a range of unrelated coffee shops, or a mall card accepted only at merchant locations within a specific mall);
"Closed loop" is the purchase of prepaid goods and services related to the goods and services within a defined contracting entity i.e. single contracting entity, single issuer & single/multiple acquirers. In its most restrictive form, close loop programs prepaid accounts for the purchase of services or goods from a specific merchant or merchant chain utilizing the settlement and clearing functions of the prepaid payment service. (e.g., a nationwide retailer offers a prepaid card valid only at its nationwide locations, an independent merchant offers a prepaid card valid only at its single store location but chooses to utilize the prepaid payment service for settlement and clearing functions).
Examples of closed loop prepaid goods and services include:
- Prepaid accounts for the purchase of specific services or goods, such as prepaid fares for public transport or prepaid airtime for mobile telephony services;
- Vouchers (a paper certificate or a series of electronic digits with a non-reloadable amount associated that allows the holder to make payments up to that value at a specific merchant or merchant chain);
- Gift cards for use at a merchant or merchant chain
A prepaid payment instrument is an access device, or token of identity, that can access a pre-funded account balance held by the issuer (refer to 1.2.1 Issuing Program Manager) to which a transaction can be charged. Such an access device could be a payment card, an internet wallet or a payment device utilising mobile technology.
Prepaid instruments encompassed in this regulatory framework include any access device that can provide transactional services against a prepaid balance, including but not limited to:
- Smart/EMV cards (payment cards with an embedded micro-processor);
- Magnetic stripe cards (payment cards with a magnetic stripe);
- Internet wallets (stored value internet accounts)
- Mobile payments
- Contactless payments (Near Field Communications technology)
1.1.1. Acceptance
Prepaid payment services within these regulatory rules can be used across a range of different acceptance models, or prepaid payment service programmes. These are:
Closed loop prepaid Payment Services2. A closed loop prepaid payment service is a prepaid product that is redeemable at a single merchant or at an affiliated group of merchants with the same name, mark, or logo3. The payment device is purchased on a prepaid basis and is honoured upon presentation at such single merchant or affiliated group of merchants. Closed loop prepaid products may or may not be reloadable.
Examples of closed loop prepaid products are:
i. Merchant branded gift cards
ii. Merchant branded store cards
Restricted loop prepaid payment services: A restricted loop prepaid payment service is a prepaid product that is used to acquire goods and services at a limited network of service providers (e.g. fuel stations), either within a clearly limited area or alternatively that can be used to pay for a limited range of goods and services. Restricted loop payment products may or may not be reloadable.
Examples of restricted loop prepaid products are:
Prepaid payment services that are accepted at different merchants located within a clearly defined area such as shopping cards or mall cards. Other examples include University or campus payment devices, Conference cards, Stadium cards, and other cards that are only accepted within a specific closed venue;
Prepaid payment services that are accepted at different merchants, located in different locations but that can only be used to purchase a limited range of goods and services such as Petrol cards, Meal vouchers or Public transport cards4.
C. Open loop prepaid payment services. Open loop prepaid products are payment instruments that are redeemable at all merchants or service providers where the payment brand is accepted without restrictions.
Open loop prepaid products may or may not be reloadable.
2 While closed loop prepaid payment services may be issued under these Rules in the Kingdom of Saudi Arabia, it is not anticipated that they will form the bulk of the programmes on offer
3 Where the prepaid payment service can be used to purchase or access a range of goods or services that are not predetermined at the time the prepaid account is loaded with value (e.g. airtime)
4 For example, transport cards that are accepted by transportation companies (cars, trains and others).
2.1.1. Reloadability
The regulatory principle presented herein governs both reloadable and non-reloadable prepaid payment service products.
a. Non-reloadable prepaid payment service. A prepaid payment service is non-reloadable if it has no mechanism for having additional funds added to the initial balance after the initial issuance.
b. Reloadable prepaid payment service. A prepaid payment service is reloadable if it has the ability of having more funds added after the initial issuance.
It is at the discretion of the prepaid Issuer to determine whether a prepaid product should be reloadable or non-reloadable (noting that re-loadable cards are subject to more rigorous KYC and AML requirements).
Common to both reloadable and non-reloadable prepaid services is that there is a deposit account that holds the available balance on the account until such a time as it is redeemed through spend against the balance or a cash withdrawal, when this service is allowed.
1.2. Stakeholder Definition
The implementation of a prepaid payment service payments system in the Kingdom of Saudi Arabia will impact a range of stakeholders, including for example: SPAN, prepaid payment service issuers, acquirers, merchants, accountholders and primary cardholders.
1.2.1.The Issuing Programme Manager (Issuer)
A prepaid payment service Issuing Programme Manager (IPM) is a regulated bank in the Kingdom of Saudi Arabia that is permitted to accept deposits, according to the Banking Control Law, issued by Royal Decree No. M/5 Dated 22.2.1386 H. The IPM operates the deposit account and collects the funds loaded onto the prepaid account. The IPM is responsible for:
a) Directly reimbursing the acquirers of the service providers (e.g. merchants) that are part of a closed loop payment device, or
b) Reimbursing acquirers through a scheme settlement arrangement if the service providers (e.g. merchants) are part of an open loop payment service.
1. Issuing activities. In order to operate a prepaid payment service programme, IPM’s have responsibility for undertaking the following activities directly, or through partners:
- Prepaid account recruitment. These are the activities associated with marketing to prospective prepaid payment service customers, including the development and distribution of marketing materials;
- Partner recruitment. Activities related to the recruitment of partners into the distribution network, such as an issuing processor, sellers/distributors and the load/reload network representatives (refer to 1.2.1 b);
- Customer recruitment and account set up. Includes the processing of prepaid payment service applications from their receipt by the IPM through to the approval stage (inclusive of the collection of KYC information), setting up new prepaid accounts and the sending out of “service Terms and Conditions” to new account holders;
- Payment product issuing. Includes all aspects related to the delivery of the payment service product to the customers, such as in the case of a prepaid card the production of the card through to the safe delivery of the card and PIN to the primary cardholder; The PIN distribution activity must be undertaken by the regulated entity (i.e. IPM);
- Load /reload network. Relates to the receipt and processing of funds deposited onto the prepaid account. These loads/reloads can potentially be made at a number of different channels, such as affiliated merchants, ATMs, bank transfers, person to person payments or Kiosks;
- Authorisation processing. Refers to the activities related to the approval/decline of an authorisation request associated with the prepaid payment service received by the issuer via SPAN or other payment networks;
- Transaction processing. Activities undertaken by the issuer, from the receipt of the clearing message from the acquirer to the point at which the transaction is posted onto the primary cardholder’s account. These activities also include the research and documentation of transactions disputed by the primary cardholder;
- Overdraft. Drawing more money than the bank accounts holds, prepaid service products are not allowed to go into overdraft;
- Statement production. Activities related to the preparation and delivery of customer statements, which can be via postal mail, web account, email, and SMS or ATM. Paper statements shall however be issued minimum at quarter basis to the primary cardholder (at no additional cost to them) if the cardholder specifically request this option;
- Customer service. Includes the activities associated with the handling and information storage of all general prepaid account related customer enquiries, requests and complaints;
- Fraud investigation. Activities related to the efforts put into preventing and following up suspected or actual cases of prepaid payment service misuse (both processes and systems);
- Usage Monitoring. Activities associated with monitoring the primary cardholder’s activities and customer due diligence that is required to ensure the programme’s on going compliance to AML and CTF regulations in force in the Kingdom of Saudi Arabia;
- Programme management. Includes the general administrative and managerial activities involved with operating the prepaid account business, including the analysis of information generated by the programme and the strategic planning and development of the prepaid product.
2. Other participants within issuing activities.
The IPM may share some of the activities described above with third party as regulated by the "Rules on Outsourcing" issued by the Saudi Central Bank. Outsourcing may be used in order to attain a larger distribution network or reduce transaction processing costs.
Examples of organisations with whom the issuer may share issuing activities are as follows:
- The programme manager. A programme manager may administer several aspects of a prepaid programme, which may include transaction processing and the distribution of the payment device and marketing materials;
- The issuing processor. The issuing processor will typically send the responses to the authorisation requests and post the transactions onto the prepaid accounts. It may also manage the customer service;
- The seller/distributor. The seller/ distributor may be an affiliated shopping mall or a merchant that distributes at a fee the prepaid payment service contracts to prospective cardholders;
- The load/reload network. The load/reload network can include, for example, a branch or an ATM, where primary cardholders can load funds onto the prepaid account with cash or via payment with credit or debit cards, within the allowed limits for the product. In accordance with the "SAMA Rules on Outsourcing", July 2008, issuers are required to seek "no objection" from SAMA on the use of 3rd party (merchant sites) for applying load services to prepaid accounts, where such loads shall be governed by the rules set out in section 2.3.
Table 1: Activities that the IPM could share with third parties
(iv)
(iii)
(ii)
(i)
Load/reload network
Seller/ distributor
Issuing Processor
Programme Manager
(Issuing Activities)
Outsource Partner
X
√
X
√
Prepaid Account Recruitment
(i)
X
X
X
√
Partner Recruitment
(ii)
X
X
X
√
Customer Recruitment & Set-up
(iii)
X
√
X
√
Payment Device Issuing (excluding PIN issuing)
(iv)
√
√
√
√
Load/Re-load
(v)
X
X
√
√
Authorisation Processing
(vi)
X
X
√
√
Transaction Processing
(vii)
N/A
N/A
N/A
N/A
Overdraft
(viii)
√
X
√
√
Statement Production
(ix)
X
√
For closed loop only
√
√
Customer Service
X
X
X
√
√
Fraud Investigation
Xi
X
X
√
√
Usage Monitoring
Xii
X
X
X
√
Programme Management
Xiii
1.2.2. The Acquirer
An acquirer of prepaid payment service is a regulated licensed bank, according to the Banking Control Law, issued by Royal Decree, No. M/5 Dated 22.2.1386 H. The acquiring business is governed by the SPAN Scheme Regulations; an acquirer can be either an ATM acquirer or a POS (merchant) acquirer or both.
An ATM acquirer is a regulated bank which is a member of SPAN and which has entered into an agreement with SAMA to acquire ATM transactions.
The POS (Merchant) Acquirer is a regulated bank which is a member of SPAN and which has entered into an agreement with SAMA to acquire Point-Of-Sale (POS) transactions & an agreement with The Merchant to provide him with POS service.
1.2.3.The Contracting Entity
The contracting entity is the individual or Juristic persons or Government entities that enter into the prepaid payment service contract with the IPM. Please note that for the purposes of these rules, the term ‘Contracting Entity’ may not in all cases be the same as the beneficial owner of the funds held on an account, sub account or electronic record supporting the prepaid payment instrument.
For a commercial prepaid product, the contracting entity will be the Juristic person which enters into the service agreement with the prepaid issuer.
For a retail prepaid product, the contracting entity can be the individual who is either the primary cardholder or legal guardian of the primary cardholder.
If the prepaid contracting entity (an individual or a Juristic person) has selected a multi account product (e.g. petty cash card, household cards), the contracting entity will be the primary cardholder and shall determine the value of the funds transferred to secondary card records (Note: secondary cards have no access to the funds on the primary cardholder record).
When the contracting entity is a governmental entity or a Juristic person, the due diligence processes related to KYC and AML for the cardholder (see 2.3 and 2.5) may be shared between the issuer and the contracting entity. However, the issuer remains responsible for satisfactory completion of the KYC and AML requirements in accordance with prevailing regulatory requirements
1.2.4. The Primary Cardholder
The primary cardholder is the individual that uses the prepaid payment service to pay for goods and services at the point of sale and, if applicable, to withdraw cash from ATMs and utilise money transmission services. The contracting entity (an individual or a Juristic person) and the primary cardholder may be the same, but can also be different parties. For example, a guardian could be the contracting entity for a youth card issued to a child.
1.2.5. Merchants
The term merchant refers to a Company, firm, corporation, government entity or other person who:
a) has a Merchant Account and an existing and on-going relationship with an Acquirer, and;
b) is designated to accept any payment by a cardholder using a valid Payment Card to pay for goods and/or services, and;
c) has contractually agreed to accept the payment device as a method of payment at their premises.
1.2.6. Merchant Account
The Merchants Account refers to an account held with the Acquiring Bank used solely for the purposes of settlement of POS transactions. All current SAMA rules are applicable to the opening and maintenance of this account. This account must be settled on a regular basis.
1.2.7. Saudi Arabian Payment Network – SPAN
SPAN operates the payments network and establishes operating rules for card payment device issuers, processors, merchants and ATMs that accept prepaid payment products. The prepaid payment services under this regulation will be accepted throughout the SPAN network, with additional acceptance through non-domestic payment networks, including the GCC countries, as agreed by SPAN.
1.3. Prepaid Payment Services Products Segmentations
1.3.1. Retail payment products
These include general purpose payment products, for example:
a) Payroll Cards (which can include remittance services where the consumer contracts directly for the services with issuer or his agent).
b) Student Cards.
c) Household Cards.
d) Youth Cards.
e) etc.
1.3.2. Government Entities payment products
Government Entities (which include all governmental institutions, ministries, and local juristic entities and the like) payment products are used by government entities to effect payments to recipients of state payment or to purchase products or services for such agencies. Also, to distribute compensation or benefits to employees and/or beneficiaries. Examples of Government Entities oriented cards are as follows:
a) Social Insurance accounts/payment products
b) Procurement accounts/payment products
Funds can only be loaded onto the prepaid account by a government entity itself.
1.3.3. Juristic Persons Payment products
Juristic Persons payment products are used by corporations (which include all appropriately licensed juristic institutions or entities and the like) to facilitate procurement; distribute compensation or benefits to employees, customers or beneficiaries.
Examples of Juristic Persons payment cards programmes are as follows:
a) Payroll cards
b) Employee benefits cards (Health care, transit, etc.)
c) Customers incentive cards
d) Procurement accounts/payment products
2. Rules and Guidelines Governing Prepaid Payment Services
2.1 General Prepaid Payment Service Issuing Rules
2-1-A Closed loop Prepaid Payment Services
A close loop prepaid products may or may not be reloadable. Closed loop prepaid payment services are not allowed to provide cash withdrawal functionality at ATMs or transfer of funds into a bank account.
An issuer (refer to 1.2.1 Issuing Programme Manager) proposing to operate closed loop prepaid programme must seek SAMA’s “no objection” to the proposed programme at a contracting entity level.
A closed loop prepaid payment service issued in the Kingdom is not allowed to provide cross- border payment functionality, unless permitted by SAMA.
2-1-B Restricted Loop Prepaid Payment Services
A restricted loop prepaid products may or may not be reloadable. Restricted loop prepaid payment service product is not allowed to provide cash withdrawal functionality at ATMs or transfer of funds onto a bank account.
Any Issuer (refer to 1.2.1 Issuing Programme Manager) proposing to operate restricted loop prepaid programme must seek SAMA’s “no objection” to the proposed programme at a contracting entity level.
A restricted loop prepaid payment service issued in the Kingdom is not allowed to provide cross-border payment functionality, unless permitted by SAMA.
2-1-C Open Loop Prepaid Payment Services
Open loop prepaid products may or may not be reloadable. An open loop prepaid payment product can, but is not required to, enable cash withdrawals at ATMs or the transfer of funds onto a bank account, including international remittances within the restrictions of Know Your Customer (KYC) and Anti Money Laundering (AML)/Combating Terrorist Financing (CTF) rules documented in Section 2-5.
Any Issuer (refer to 1.2.1 Issuing Programme Manager) proposing to operate open loop prepaid programme must seek SAMA’s “no objection” to the proposed programme at a product level.
2-1-D Outsourcing
Regulated Issuers (Refer to The issuing Programme Manager (issuer) 1-2-1) may outsource activities within the KSA to trusted third parties under an outsourced service contract, provided that the regulated issuer assumes the responsibility for all actions undertaken by a third party.
In accordance with the "Rules on Outsourcing", issued by Saudi Central Bank, section 2-3, banks are required to confirm SAMA has "no objection" prior to undertaking any Material Outsourcing.
2.1.1 All disclosures
All disclosures required by these Rules shall be made in the Arabic language and utilise the Hijrah calendar and/or using the Gregorian calendar. Disclosures in the English language shall be provided at the primary cardholder’s request. Any Operator must be a licensed bank in the Kingdom of Saudi Arabia that is permitted to accept deposits, according to the Banking Control Law, issued by Royal Decree, No. M/5 Dated 22.2.1386 H.
These rules have been issued in a bilingual form in Arabic and English. In case of any difference in the meaning or interpretation of the text, the Arabic text will prevail. The English language will be referred to only for the purpose of assisting in understanding these rules.
2.1.2 Disclosure requirements
All disclosure requirements contained in these Regulatory Rules apply to products offered in totality by a business approved by SAMA to issue prepaid payment services. Where a joint product is offered the disclosure requirements apply to the business approved by SAMA to issue prepaid payment services.
2.2 License to Issue and/or Acquire prepaid Payment Services
2.2.1 Banking license
To issue a prepaid payment service product or acquire prepaid payment service transactions a financial institution must be a licensed bank in the Kingdom of Saudi Arabia, according to the Banking Control Law, issued by Royal Decree, No. M/5 Dated 22.2.1386 H, and licensed to provide financial services within the Kingdom of Saudi Arabia, with SAMA’s “no objection” prior to introduce any prepaid product.
2.2.2 Regulatory Rules
A Prepaid issuer or acquirer operating in the Kingdom of Saudi Arabia shall be allowed to issue or acquire prepaid payment services within all acceptance categories (Open Loop, Restricted Loop, Closed Loop) & prepaid payment service segments (Payroll Cards, Youth Cards, etc.) in both the reloadable & non-reloadable variants, as long as the requirements contained within these rules are me
2.3 Know Your Customer Requirements
No: BCT/15631 Date(g): 2/5/2012 | Date(h): 11/6/1433 Status: Modified The general rules for Know Your Customer (KYC) are set out in "Rules Governing Anti-Money Laundering (AML) & Combating Terrorist Financing (CTF)", Issued by Saudi Central Bank, Section 4.3. For prepaid products the entity responsible for KYC purposes is the regulated entity permitted to issue prepaid products.
Depending on the classification of the prepaid payment service proffered, KYC obligations for prepaid payment accounts or electronic records will require either a full verification of the primary cardholder or non-verification.
Specifically,
- KYC requirements for open loop prepaid services will require full verification
- Closed loop cards will not require verification for the primary cardholder within certain constraints.
2.3.1 Full Verification
Open loop and/or reloadable prepaid payment service products are allowed to be issued to an individual provided a Full Verification process has been undertaken:
a) As a result of a written Request from the Contracting entity OR an electronic request in accordance with SAMA E-banking Rules clause 4.1(ii), (which allow for online, internet based account application, provided certain security considerations are taken into account) for the account/electronic record and payment device; b) Where an acceptance by the primary cardholder of the Terms and Conditions relating to the prepaid payment service is obtained by signature;
c) As a renewal of, or substitute for, an existing prepaid payment service.
Full verification is the process by which the Issuer or an authorised third party obtains and verifies the prepaid accountholder’s identity. Accountholders whose identity has been fully verified shall have a prepaid payment service with the full functionality as determined by the Issuer. Full verification is conducted face-to-face (refer to (100-8) interviewing the customer in Rules governing the opening of bank accounts & general operational guidelines in Saudi Arabia).
The face to face verification process requires a government issued document with primary cardholder's full name and photograph. The accepted documents are the same as mentioned in the rules of opening bank accounts. In addition, for those who are not resident in the Kingdom and are in Saudi Arabia to perform Hajj & Omrah or to provide professional consultancy services for government agencies or for a local commercial entity, the accepted documents are a valid passport with valid Saudi visa.
Merchants will not be entitled to conduct the full verification due to the potential conflict of interest.
The Issuer remains responsible for the verification process and is officially required to produce the verification information on demand by SAMA.
d) The issuer may issue prepaid services using existing KYC details provided that one of the following conditions is satisfied:
1. The accountholder is requesting a prepaid payment service from an issuer that has already conducted the full verification of the accountholder , OR
2. The accountholder is replacing a prepaid payment service device from an issuer that has already conducted the full verification of the accountholder.
2.3.2 Card Payment Service Products that use a simpler form of KYC
Card payment service products that use a simpler form of KYC are limited to products providing restricted value, non-reloadable services which can be offered by the issuer (directly or via a third party) without verification of the cardholders identity. This may apply if the prepaid payment service has the following characteristics:
- The prepaid payment service is not reloadable; and
- The amount stored on the device does not exceed 400 SAR; and
- The value is redeemable through a predefined merchant group (closed or restricted loop); and
- The value on the prepaid account cannot be redeemed at ATMs or by transfer to a bank account.
2.4 Account Opening Requirements
For prepaid accounts issued in the Kingdom, the opening of accounts must be in compliance with the current version of “Rules Governing the Opening of Bank Accounts & General Operational Guidelines in Saudi Arabia” issued by SAMA or with the rules defined in sections 2.4.1, 2.4.2, 2.4.3, 2.4.4 .
For closed loop prepaid payment products not requiring KYC the account opening rules are defined in section 2.4.5.
2.4.1 Rules for Opening Prepaid Electronic Records where the Contracting Entity is an Individual
For prepaid payment products where the contracting entity is an individual and where the prepaid payment product is not using a simpler form of KYC the said individual shall be the person for whom the bank will need to identify the required information pertinent to doing financial business with them as a customer for KYC purposes. The individual will also be the person against which the required transaction monitoring of KYC, AML and CTF are applied.
Included within these are all consumer prepaid payment services where the contracting entity is an individual. This includes personal payment service products with a single payment device attached, as well as payment service products with sub-records such as youth cards. Specifically for payment service products for minors less than 18 years old the requirements set out in "Rules Governing the Opening of Bank Accounts & General Operational Guidelines in Saudi Arabia", section 200-1-1 “Minors of less than 18 years' old" apply.
For such a payment service product the following conditions shall apply;
1- A master account shall be opened under the name of the contracting entity.
2- Electronic record or ‘sub-records’ (sub-accounts of the master account) shall be opened for every payment service product issued.
3- Such payment service product shall be branded for use at SPAN access points.
4- Sub-records’ (card accounts) shall not be allowed to accept cash deposits or any credit entries other than the amounts transferred thereto from the master account of the contracting entity.
5- No monthly statements shall be required for issue for such sub-record customers (sponsored cardholders) unless specifically requested by the contracting entity. Instead, the cardholder can get an ATM-generated brief transaction statement.
6- The signature specimens of the customers of such sub-records shall not be entered into the issuer's computer system.
7- The contracting entity shall provide the issuer with completed application forms and copies of the personal documents of sponsored cardholders under its sponsorship and acknowledge that payment services are to be provided to them under its responsibility.
8- Transactions of such prepaid payment services shall be limited to:
- Depositing of funds can only be made by the contracting entity
- Withdrawing (via ATM and PoS)
- POS purchase
- Payment of bills via SADAD
- Remittance outside of the Kingdom by the primary cardholder’s membership of a remittance service if included in the contracted payment services agreed with the contracting entity
9- Such cards shall be delivered to concerned sponsored cardholders by the contracting entity, and personal identification numbers (PIN’s) of the cards shall be delivered by the issuer (the issuer branches or representative) to the primary cardholder under a written form to be kept in the master account file.
10- A special design shall be adopted for the above-mentioned cards which is consistent with the design specification for SPAN Prepaid cards issued from time-to-time by the SPAN scheme.
11- Card expiry is to be within 3 years of issue, Card expiry can be extended for certain categories (i.e. Student cards) subject to SAMA approval.
12- For payroll cards:
- Once the cardholders valid Government issued identity card has expired the card has to be stopped.
- The issuer shall provide necessary technical support and make available sufficient ATM access to serve the above-mentioned customers as near as possible to their work locations.
All programs must comply with the regulatory rules for prepaid payment services in the Kingdom of Saudi Arabia.
2.4.2 Rules for Opening Prepaid Electronic Records where the Contracting Entity a Juristic Person
For prepaid electronic records where the contracting entity is a juristic person and where the prepaid electronic records is not using a simpler form of KYC, the individual(s) who will be provided the payment service product shall be the person for whom the issuer will need to identify the required information pertinent to doing financial business with them as a customer for KYC purposes. The individual will also be the person against which the required transaction monitoring of KYC, AML and CTF are applied.
Included within these are all commercial prepaid payment services where the contracting entity is a Juristic person. This includes salary payment service products, prepaid procurement cards (petty cash payment products) with a single payment device attached, as well as payment service products with sub-records.
Specifically account opening procedures must be compliant with section 300 of the 'Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia’ as issued by SAMA.
For the opening of accounts of prepaid payment service products where the contracting entity is a Juristic person the following conditions shall apply;
1- A master account shall be opened under the name of the Juristic person for each payment service product contracted by the contracting entity.
2- Electronic record or ‘sub-records’ (sub-accounts of the master account) shall be opened for every payment service device.
3- Such payment service product shall be branded for use at SPAN access points.
4- Sub-records’ (the payment device accounts) shall not be allowed to accept cash deposits or any credit entries other than the amounts transferred thereto from the master account of the contracting entity.
5- No monthly statements shall be required for issue for such sub-record customers (the cardholder) unless specifically requested by the sub-record customer. Instead, the cardholder can get an ATM-generated brief transaction statement.
6- The signature specimens of the customers of such sub-records shall not be entered into the issuer's computer system.
7- (a) The contracting entity shall provide the issuer with completed application forms and copies of the personal documents of its personnel and/or beneficiaries to which payment services are to be provided indicating that they are checked and found valid and identical to their respective originals, that the listed personnel and/or beneficiaries work under its sponsorship and/or that they are under its responsibility. The contracting entity must be compliant with all applicable rules.
OR
(b) The contracting entity shall provide the issuer with a list of the relevant ID numbers of their employees and/or beneficiaries sourced from their valid government identification (e.g. Iqama number). The issuer representative shall source the relevant employee and/or beneficiaries’ information by reference to the Ministry of Interior data held at the National Information Centre and produce the employee and/or beneficiary sub-record application form for later signature by the employee and/or beneficiaries (refer to xii below).
8- The authorized representatives of the issuer shall review the originals of the valid government identification of the cardholder and attest the authenticity of the provided copies attached to the applications of opening the sub-records.
9- A form of opening a sub-record or card account for each employee and/or beneficiary shall be signed by the employee and/or beneficiary (only).
10- No such an individual employee and beneficiary may have more than one sub-record per payment service agreement with the contracting entity.
11- Transactions of the records of such cards shall be limited to:
- Withdrawing (via ATM and/or POS) the amount(s) of the salary and/or other amounts payable to the card holder.
- PoS purchase.
- Remittance outside of the Kingdom by the employee’s membership of a remittance service if included in the contracted payment services agreed with the contracting entity
- Payment of bills via SADAD if included in the contracted payment services agreed with the contracting entity
- For payroll cards only: Transfer from card record to employee’s own current account, in the case of the current account being in the same issuer if included in the contracted payment services agreed with the contracting entity.
12- Such cards can be delivered to concerned employees/beneficiary by juristic person whereas personal identification numbers (PIN’s) of the cards must be delivered by the issuer (the issuer branches or representative) for the primary cardholder under a written form to be kept in the master account file.
13- A special design shall be adopted for the above-mentioned cards which is consistent with the design specification for SPAN Prepaid cards issued from time-to-time by the SPAN scheme.
14- Card expiry is to be within 3 years of issue.
15- For payroll cards:
- Once the cardholders valid Government issued identity card has expired the card has to be stopped.
- The issuer shall provide necessary technical support and make available sufficient ATM access to serve the above-mentioned customers as near as possible to their work locations.
16- The above-mentioned service shall be rendered to eligible Juristic persons having a relationship with the issuer.
17- All programs must comply with the regulatory rules for prepaid payment services in the Kingdom of Saudi Arabia.
2.4.3 Rules for Opening Prepaid Electronic Records where the Contracting Entity is a Government Agency
For prepaid electronic records where the contracting entity is government agency and where the prepaid electronic record is not using a simpler form of KYC, the individual(s) who will be provided the payment service product shall be the person for whom the issuer will need to identify the required information pertinent to doing financial business with them as a customer for KYC purposes. The individual will also be the person against which the required transaction monitoring of KYC, AML and CTF are applied.
Included within these are all commercial prepaid payment services where the contracting entity is a government agency. This includes salary payment service products, prepaid procurement cards (petty cash payment products) with a single payment device attached, as well as payment service products with sub-records.
Specifically account opening procedures must be compliant with the following clauses (Section 500-1-1, sub-clauses 1, 2, 3 and 7 & Section 500-2) of the 'Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia’ as issued by SAMA.
In addition to the rules laid out in the above, for a prepaid payment product opened under these rules the account terms and conditions must specify the withdrawal functionality and/or value threshold (via POS and/or ATM), as agreed with the Government entity.
For the opening of accounts of prepaid payment service products where the contracting entity is government agency the following conditions shall apply;
1- A master account shall be opened under the name of the government agency for each payment service product contracted by the contracting entity.
2- Electronic record or ‘sub-records’ (sub-accounts of the master account) shall be opened for every payment service device.
3- Such payment service product shall be branded for use at SPAN access points.
4- With the exception of Student card, Sub-records’ (the payment device accounts) shall not be allowed to accept any credit entries other than the amounts transferred thereto from the master account of the contracting entity.
5- No monthly statements shall be required for issue for such sub-record customers (the cardholder) unless specifically requested by the sub-record customer. Instead, the cardholder can get an ATM-generated brief transaction statement.
6- The signature specimens of the customers of such sub-records shall not be entered into the issuer's computer system.
7- (a) The contracting entity shall provide the issuer with completed application forms and copies of the personal documents of its personnel or beneficiaries to which payment services are to be provided indicating that they are checked and found valid and identical to their respective originals, that the listed personnel work under its sponsorship and/or that they are under its responsibility. The contracting entity must be compliant with all applicable rules.
OR
(b) The contracting entity shall provide the issuer with a list of the relevant ID numbers of their employees and/or beneficiaries sourced from their valid government identification. The issuer representative shall source the relevant employee and/or beneficiaries’ information by reference to the Ministry of Interior data held at the National Information Centre and produce the employee sub-record application form for later signature by the employee (see xii below).
8- The authorized representatives of the issuer shall review the originals of the valid government identification of the cardholder and attest the authenticity of the provided copies attached to the applications of opening the sub-records.
9- A form of opening a sub-record or card accounts for each employee/beneficial shall be signed by the employee/beneficial (only).
10- No such an individual employee may have more than one employee/beneficial sub-record per payment service agreement with the contracting entity.
11- Transactions of the records of such cards shall be limited to:
- Withdrawing (via ATM and/or POS) the amount(s) of the salary and/or other amounts payable to the card holder.
- PoS purchase
- Remittance outside of the Kingdom by the employee’s/beneficiaries membership of a remittance service if included in the contracted payment services agreed with the contracting entity
- Payment of bills via SADAD if included in the contracted payment services agreed with the contracting entity
- For payroll cards only: Transfer from card record to employee’s own current account, in the case of the current account being in the same issuer if included in the contracted payment services agreed with the contracting entity.
12- Such cards can be delivered to concerned employees/beneficiaries by the Government Entity, whereas personal identification numbers (PIN’s) of the cards must be delivered by the issuer (the issuer branches or representative) for the card holder under a written form to be kept in the master account file.
13- A special design shall be adopted for the above-mentioned cards which is consistent with the design specification for SPAN Prepaid cards issued from time-to-time by the SPAN scheme.
14- Card expiry is to be within 3 years of issue, Card expiry can be extended for certain categories (i.e. Student cards) subject to SAMA Approval.
15- For payroll cards:
- Once the cardholders valid Government issued identity card has expired the card has to be stopped.
- The issuer shall provide necessary technical support and make available sufficient ATM access to serve the customers as near as possible to their work locations.
16- The above-mentioned service shall be rendered to the government agencies that have a relationship with the issuer.
17- All programs must comply with the regulatory rules for prepaid payment services in the Kingdom of Saudi Arabia.
2.4.4 Rules for Opening Prepaid Electronic Records where the Contracting Entity is a Householder
For prepaid payment products where the contracting entity is an individual householder and the contracting entity has satisfied the normal SAMA Account Opening and KYC requirements, as identified at 2.4.1. The contracting entity will also be the person against which the required transaction monitoring of KYC, AML and CTF obligations are applied.
Included within these are all retail prepaid payment services where the contracting entity is a householder who offers payments cards to household members, for the purpose of effecting purchase payments and cash withdrawals using a SPAN debit card drawn on monies for which the contracting entity is the beneficial owner.
Such household members shall be either:
- A family member (e.g. wife, son) or have a legal relationship with the contracting entity (e.g. legal guardian).
- A contracted employment relationship, where the cardholder is under the sponsorship of the contracting entity.
For such a payment service product the following conditions shall apply;
1- A master account shall be opened under the name of the contracting entity which is directly related to the bank account of the contracting entity.
2- Electronic record or ‘sub-records’ (subaccounts of the master account) shall be opened for every payment service product issued.
3- Such payment service product shall be branded for use at SPAN access points only.
4- Sub-records’ (card accounts) shall not be allowed to accept cash deposits or any credit entries other than the amounts transferred thereto from the master account of the contracting entity.
5- Sub-records credits shall not exceed a cumulative maximum of SAR 13,000 in any twelve month period.
6- No monthly statements shall be required for issue for such sub-record customers (cardholders) unless specifically requested by the contracting entity. Instead, the cardholder can get an ATM-generated brief transaction statement.
7- The cardholder shall not be required to be subjected to the standard KYC requirements.
8- The contracting entity shall remain liable and responsible for all transactions effected by the cardholder as evidenced through the sub-record.
9- The householder has to provide the issuer with completed application details and the National Identification Number for cardholders which have to be validated by the issuer.
10- In the event of a change of cardholder the contracting entity has to submit the National Identification number of the new cardholder in line with condition ix.
11- Transactions of such prepaid payment services shall be limited to:
- Domestic withdrawals (via ATM and PoS purchase)
- POS purchase
- Transfers to and from the prepaid payment service record to the contracting entity's own current account.
12- Issuers will issue cards and personal identification numbers (PIN’s) to the contracting entity for delivery to cardholders (e.g. Household members).
13- Once the cardholders valid Government issued identity card has expired the card has to be stopped.
14- A special design shall be adopted for the above-mentioned cards which is consistent with the design specification for SPAN Prepaid cards issued by the SPAN scheme.
15- Card expiry is to be within 3 years of issue.
16- All programs must comply with the regulatory rules for prepaid payment services in the Kingdom of Saudi Arabia.
2.4.5 Rules for Opening Prepaid Electronic Records that Use a simpler form of KYC
For Prepaid Payment Electronic Records that uses a simpler form of KYC the following applies:
1- A master account shall be opened under the name of the contracting entity.
2- Electronic record or ‘sub-records’ (subaccounts of the master account) shall be opened for every card issued in the programme.
3- Such card can be:
a) used within a closed or restricted loop arrangement different from SPAN access points
b) used at specified SPAN access points.
4- Sub-records’ (the card accounts) shall not be allowed to accept cash deposits or any credit entries other than at the issuance of the card.
5- No statements shall be required for issue. Instead, the cardholder can request a balance enquiry at participating merchant outlets.
6- No signature specimens of the customers are required to be obtained.
7- Transactions facilitated through such cards shall be limited to PoS purchase (excluding cash back option) up to the amount deposited in the card record at the time of activation of the card.
8- A special design shall be adopted for the above-mentioned cards which is different from the design specification for SPAN Prepaid cards. The card will not carry the SPAN Logo
9- Card expiry is to be within 2 years of issue.
10- The above-mentioned service shall be rendered to eligible entities having a relationship with the issuer.
11- Such accounts must be open under the approval of the compliance officer at the bank according to procedures set by the bank based on its customer categorization process.
12- All programs must comply with the regulatory rules for prepaid payment services in the Kingdom of Saudi Arabia.
2.5 Anti-Money Laundering & Control of Terrorist Financing
The general rules for Anti-Money Laundering (AML) are set out in the Saudi Arabian "Anti Money Laundering (“AML”) law" and "Rules Governing Anti-Money Laundering & Combating Terrorist Financing", Section 4.2. Any prepaid product must comply with all anti-money laundering/combating financing of terrorism guidelines already implemented in the Kingdom of Saudi Arabia.
2.5.1 Anti-money laundering regulations
Anti-money laundering regulations are designed to prohibit the funding of prepaid accounts with financial money from criminal activities.
2.5.2 Issuer compliance
Irrespective of the number of parties with whom the Issuer may share the issuing activities, the issuer remains liable for ensuring compliance of its prepaid programme(s). If necessary, additional systems, procedures and controls must be deployed by the issuer to ensure compliance with these guidelines.
2.5.3 Monitoring of payment service activity
The issuer is required to monitor on an on-going basis the prepaid payment service activity by undertaking the following tasks and verifying to SAMA their compliance with the Kingdom's AML legislation:
- Keep up to date the primary cardholder’s verification data (as described in 2.3) held on record as required according to the Anti-Money Laundering (“AML”) law in the Kingdom of Saudi Arabia, Article 5
- Verify transaction records at regular intervals, where the frequency will depend on the level of risk attributed to the primary cardholder, to ensure that these fall within the scope agreed in the contract established with the primary cardholder;
- Maintain a log of all the transactions undertaken using the prepaid payment services. This data must be available for scrutiny by SAMA as appropriate when requested;
- Report suspicious activity promptly to Financial Intelligence Unit if it suspects that funds loaded onto the prepaid account are the proceeds of criminal activity;
- Such monitoring to be undertaken by the Financial Intelligence Unit as defined in the "Anti Money Laundering (“AML”) law" and "Rules Governing Anti-Money Laundering & Combating Terrorist Financing", Section 4.2;
- Conduct transaction screening as well as account and primary cardholder behaviour monitoring, to identify any unusual activity;
2.5.4 Funds transfers
If the prepaid payment service allows the primary cardholder to transfer money to a bank account in the Kingdom of Saudi Arabia or abroad, the issuer must conduct the following precautionary measures:
- Obtain adequate levels of information about the beneficiary bank; and
- Assess whether the beneficiary bank’s anti-money laundering controls and risk management procedures are adequate; and
- Screen the beneficiary's bank account against available AML/CFT negative files.
- Consider all the relevant rules relating to remittances and follow Customer Due Diligence (CDD) processes with individual customers and with receiving banks (correspondent banks).
2.5.5 Face to face verification
Further to the customer due diligence measures carried out at the onset of the contract (see 2.3), a further full verification must be carried out face-to- face whenever:
a. There is a suspicion of money laundering or terrorist financing;
b. There are doubts about the veracity or adequacy of the previously obtained primary cardholder identification data;
c. Higher compliance risks are posed.
The prepaid account must be blocked until full verification occurs if any of the above suspicions are raised.
2.5.6 SAMA Examination
SAMA may conduct the following activities:
a. Request the issuer to provide, detailed information about the transaction (e.g. primary cardholder’s identity, transactions history) upon request;
b. Interview staff at the Issuer to investigate potential compliance issues;
c. Conduct an inspection of the books and accounts of a bank, or affiliated third parties;
d. Impose penalties to any issuer who fails to observe the primary cardholder due diligence and the transaction archiving requirements.
2.6 Data Protection
Banks must ensure that card and account holder's confidentiality is maintained at all times and comply with the requirements of:
a) "Rules Governing Anti-Money Laundering & Combating Terrorist Financing", Section 4.10: "Record Keeping & Retention" and
b) "Rules Governing the Opening of Bank Accounts & General Operational Guidelines in Saudi Arabia", Part 2 "Supervisory Rules & Controls" Section 4: "Updating Account Data".
In addition to the requirements described as follows:
2.6.1 Contracting entity (an individual or a juristic person or government entity) data collection
The issuer is responsible for ensuring that the primary cardholder’s data is collected and processed, irrespective of other parties being involved in providing the service (refer to 1.2.1).
2.6.2 Contracting entity (an individual or a juristic person or government entity) data storage
The issuer shall ensure that contracting entity (an individual or an organisation) personal data, either in electronic format or paper-based, collected during the contracting entity’s recruitment, as well as from the transactional activity of the payment device is stored in secured facilities within the Kingdom of Saudi Arabia (see "Rules on Outsourcing" issued by SAMA).
The data storage facilities and the data transmission processes are considered secured if the issuer has taken the necessary technical and organisational measures to comply with the Payment Card Industry (PCI) standards as defined, to protect the data against:
a) Accidental loss;
b) Alteration, unauthorised disclosure or access;
c) All other forms of unlawful processing.
2.6.3 Third party use of contracting entity (an individual or a juristic person or government entity) and/or primary cardholder data
Prior consent of the primary cardholder is needed when the issuer or a third party wishes to use the primary cardholder’s personal data for services additional to the purpose for which it has been collected (e.g., for e-marketing purposes), except when:
a) The issuer or the third party is required to do so in order to comply with a legal obligation (e.g., responsibility to comply with regulations relating to money laundering); or
b) The data is non-attributable and its use is defined in the contract to which the primary cardholder is party (note: primary cardholders can provide such consent as part of the application process).
2.7 Distance Selling of Reloadable Products
2.7.1Distance selling rules and guidelines
The distance selling rules and guidelines described in this section are applicable whenever a prepaid account and payment device is requested via an internet website, call centre or postal mail. Distance selling applications to an eligible prepaid issuer within the Kingdom for a prepaid account originating from outside the Kingdom of Saudi Arabia.
2.7.2 Provision of contracting entity (an individual or a juristic person or government entity) with contractual terms and conditions
All contractual terms and conditions must be provided in a written form (including electronically).
2.7.3 Confirmation of contract receipt by the contracting entity (an individual or a juristic person or government entity)
Upon completing the electronic full verification (see 2.3.1), the Issuer must confirm that the contracting entity (an individual or a juristic person or government entity) has received the contract information by contacting the primary contracting entity (an individual or a juristic person or government entity) via telephone, postal mail or email or any other electronic means. Contracts can be concluded online.
2.7.4 Cooling off period
The contracting entity (an individual or a juristic person or government entity) shall be entitled to a cooling-off period of 14 days, during which they may terminate the initial contract without any penalties.
a)
The issuer can start the provision of services during the cooling-off period provided the contracting entity (an individual or a juristic person or government entity) agrees to such and the full verification where appropriate has been completed. Agreement during the cooling-off period is deemed granted when contracting entity (an individual or a juristic person or government entity) activates the payment device. Such agreement may not restrict the contracting entity's (an individual or a juristic person or government entity) right to cancel within the 14 day period; b)
If the contracting entity (an individual or a juristic person or government entity) terminates the contract during the cooling-off period, the contracting entity (an individual or a juristic person or government entity) will be entitled to a full refund of any unused balance (the difference between any loads and spend, and between withdrawals or fees charged to the prepaid payment service account). 2.8 Consumer Protection
2.8.1 Provision of disclosures
The issuer shall provide the disclosures required under this section on or with any application that is made available to the customers, including one contained in a catalogue, magazine, or other generally available publication, to open a prepaid payment service account.
2.8.2 Disclosures with or upon application
A prepaid payment service issuer shall disclose the following with or on an application:
a) All charges and fees, if any, associated with the use of the instrument, including:
1) Fees for issuance, or availability, such as any annual or other periodic fee, expressed as an annualised amount, or any other fee that may be imposed for the issuance or availability of the prepaid payment service, including any fee based on card activity or inactivity;
2) Minimum commission charge or any minimum or fixed commission charge that could be imposed upon completion of a certain period;
3) Transaction charges or any transaction charge imposed for the use of the payment device for purchases and/or any conditions attaching to such charges;
4) Cash withdrawal fees. Any fee imposed on cash withdrawals from the account (if cash withdrawals are allowed);
5) Any other fee or penalty fee imposed in connection with the usage of the prepaid payment service account. b) The terms and conditions relating to the redemption of the value remaining on the prepaid account. For illustrative purposes, table 2 outlines the "beneficial ownership" of funds held on sub-record accounts.
c) The rights and liabilities of the contracting entity (an individual or a juristic person or government entity) must be summarised in a set of Terms and Conditions, which shall meet the disclosure requirements contained in these Regulatory Rules;
d) The time limits during which the contracting entity (an individual or a juristic person or government entity) has the right to cancel the prepaid payment service agreement after it has been signed (the cooling off period);
Table 2: Beneficial owners of funds on prepaid accounts in specific cases
Beneficial Owner
Cardholder
Contracting entity
Account Party
Account Type
Employee Employee Employer (Payroll Card) Child* Child Guardian Youth Card (U18) Student Student University\Student
(Student Card)
Visitor Visitor Committee/visitor Visitor Card (e.g. Hajj and/or
Umrah)
Householder Domestic Staff Householder (Household Card) Company Co. Employee Company Company Card (Petty Cash) Welfare Recipient Welfare Recipient Government (Welfare Card) Cardholder# Cardholder Merchant (Gift Card) Cardholder Cardholder Cardholder (General purpose Card) e) If the payment device is lost, stolen or misused by someone who obtained it without the contracting entity's (an individual or a juristic person or government entity) consent, any consumer liability, or limit thereof, shall be stated:
1) For non-personalised prepaid account products where the contracting entity is anonymous (non-personalised cards) the payment device is considered equivalent to cash.
2) For personalised prepaid account products the following liability rules apply:
1) Notification to the issuer of loss or theft of the payment device is deemed given when the primary cardholder in person, in writing or by telephone has taken steps to inform the issuer about the loss, theft or possible unauthorised use of the payment device.
2) The primary cardholder retains liability for all prepaid payment account usage up to the point of notification to the issuer. No liability shall exist for unauthorised use on the primary cardholder after notification to the payment device issuer;
f) A statement that the primary cardholder should contact the payment device issuer for any change in personal details / information and the issuer should provide a telephone number or a mailing address for that purpose;
g) The expiry period and the terms and conditions pertaining to expiration of the instrument;
h) Any optional additional services shall be presented as a ‘positive option’, which the applicant must indicate, if one wishes to receive them. Any charges for these services must be disclosed;
i) The customer service office, telephone numbers, Email (if exits) and website URL.
* The Child/Accountholder is the beneficial owner of the funds, but the Guardian will typically have Power of Attorney and signing rights on the Account until the Child reaches age of majority (18)
#The value on the Gift Card will be the property of the Cardholder, but may be limited to ‚withdrawal through Purchase‘ at the Merchant outlet. This will be defined in the Prepaid Service Terms & Conditions
2.8.3 Government entities or juristic persons programmes
If the prepaid payment service is a Government or a juristic persons prepaid payment service (see1.3.2 and 1.3.3), the master accountholder/contracting entity shall be responsible for all expenses incurred in processing the payment including bank fees, service provider charges, and all other costs. The Contracting entity is not allowed to share any costs with the primary cardholders, including deducting fees from funds from the account directly or indirectly.
However, in the case of sub-records where the cardholder is the beneficial owner, transaction effected directly by the beneficial owner (e.g. ATM and/or POS transactions) which may be chargeable, can be applied to such sub-record. All other expenses related to production and distributions of cards remain responsibility of the contracting entity.
2.8.4 Written contracts
The issuer must enter into a written contract with the contracting entity (an individual or a juristic person or government entity) which can be in electronic form.
2.8.5 Contract signature
Contracts must be signed by the contracting entity (an individual or a juristic person or government entity). If the contract is entered into online there must be a requirement for a digital signature or exchange of written copies later on.
2.8.6 Contracting entity/Cardholder complaints
The issuer must put in place an effective mechanism to attend to any primary cardholder complaints. The contracting entity (an individual or a juristic person or government entity) will also be able to complain to SAMA in accordance with the SPAN rules.
2.8.7 Communication language
The use of clear and simple language terms is required in all communications. The Arabic language should be the main communication language.
2.8.8 Honouring primary cardholder payment instructions
The issuer shall honour the primary cardholder's instructions for payments, at approved locations, if there is sufficient balance outstanding against the instrument.
2.8.9 Card fees
Periodical fees, such as dormancy fees or inactivity charges, shall not be charged to prepaid payment services, except in the circumstances below and provided that these are clearly stated in the terms and conditions:
a. There has been no purchase activity using the card in the 3-month period prior to the date on which the charge or fee is imposed;
b. Such charge or fee, if any, is reasonable and does not exceed limits set in the circulars "Schedule of Maximum Fees for Prepaid Services", appended and updated by SAMA.
2.8.10 Card expirations
Prepaid Payment Services shall be subject to standard SPAN card expiration date,
a. The expiration date is at least 3 years after the date on which the prepaid account funds were first loaded, where the card is a smart/EMV card
OR
B. two years for magnetic stripe cards;
AND
c. the terms of expiration are prominently disclosed
2.8.11 Unfair contract terms
Any term in the contract will be considered unfair if it causes a significant imbalance in the rights and obligations arising under the agreement to the detriment of the account or primary cardholder. Unfair terms will be considered null and void, but shall not affect the validity of any other provisions in the contract. Where there is any doubt as to the meaning of a contractual term, the interpretation should favour the primary cardholder
2.9 Advertising Prepaid Payment Service Products
Advertising for prepaid payment service products must follow SAMA regulations for advertising Financial Service Products, including the SAMA circular dated 28th Safar 1430H- 8th November 2009, which prohibits banks using names and/or pictures of holy places for any marketing activity. In accordance with the Banking Control Law, issued by Royal Decree, No. M/5Dated 22.2.1386 H, article 23 (5).
2.9.1 Definition of an advertisement
For the purpose of this Regulatory Framework, an advertisement is a commercial message in any medium that promotes, directly or indirectly, a prepaid payment service product.
2.9.2 Minimum level of detail
Advertisement shall clearly state the identity of the issuer making the disclosure (i.e. any public disclosure or communication relating to a prepaid service offering MUST identify the identity of the regulated issuer/IPM notwithstanding any other brand or title under which the service may be offered to market). The minimum level of detail should contain the name of the issuer and the bank address/phone number and specify that the account balance is held by a bank.
2.9.3 Presentation of terms
Advertisement shall only state specific terms that actually are, or will be arranged or offered by the prepaid payment service issuer. The terms shall be presented as a whole with charges shown adjacent to the offer.
2.10 Statementing
For prepaid payment service products requiring full KYC verification, (see section 2.3.1), statement preparation and delivery (either physical delivery by post or notification of electronic statement availability or through branches) must occur, at a minimum, quarterly if requested by the account holder.
The statement must include all transactions credited or debited from the account. The statement shall disclose the following items:
a. Charges/Fees. A disclosure of the amount, itemised and identified by type, of any charges or fees debited to the account during the statement cycle;
b. Address or phone number for notice of statement errors. The address or the phone number to be used for notice of statement errors.
In addition, the issuer shall, upon receipt of an enquiry from the cardholder, provide information about the remaining balance on the payment device, in any appropriate form.
For prepaid payment service products that use a simpler form of KYC, (see section 2.3.2), there are no requirements to issue regular statements. Prepaid payment service customers will be entitled to enquire about the remaining balance on the payment device upon presentment of the payment device at PoS at a participating merchant outlet.
2.11 Cardholder Dispute Resolutions for Prepaid Services
2.11.1 Billing errors
In the following the term “billing error” represents a posting to the prepaid payment service account and which gives rise to an error in the overall balance. Billing errors include:
a) A transaction that is not made by the primary cardholder or by a person who has authority to use the consumer’s prepaid payment service;
b) A transaction for which the primary cardholder requests additional clarification;
c) A failure by the issuer to properly post a transaction onto the prepaid account;
d) An error of computational or accounting nature that is made by the issuer, so that a charge is either over or understated, including application of fees or penalty charges that are not in accordance with the Terms & Conditions of the Agreement in force.
2.11.2 Billing error notice
A billing error notice is an oral or written message from the primary cardholder that:
a. Is received by the issuer at the call centre or address provided in the Terms and Conditions in force no later than 180 days after the transaction date of the alleged billing error;
b. Enables the issuer to identify the primary cardholder’s name and account number, and, to the extent possible, indicates the primary cardholder’s reasons for believing that a billing error exists, the type of error, the date and amount of the error.
c. Such billing error notice shall be taken seriously by the bank (issuer and/or acquirer).
2.11.3 Handling of billing errors
The bank (issuer) shall handle billing errors as follows:
1- The primary cardholder can claim for a billing error within a period of 180 days from the transaction date;
2- Once a bank receives a complaint/billing error from primary cardholder, the bank has to inform the customer by either an oral or a written message of the process by which the bank will deal with the billing error. The bank must ensure that the complaint can be uniquely tracked within the bank's complaint management system as directed by SAMA;
3- Until a billing error is resolved, the disputed amount, including any charges owed, shall be held in a pooled (suspense) account;
4- The bank shall conduct reasonable investigations and comply with the appropriate resolution procedures within 12 working days from receiving a billing error notice. If the investigation takes more than 12 working days, then:
a) The bank will be liable to be penalized (according to Claim Processing System (CPS) rules)
b) The cardholder shall be informed of the current status and revised timeline (which must not exceed additional 18 working days) for resolution by the bank
c) The bank has to indicate that an additional time period is required to resolve this issue in the SAMA CPS;
5- If the bank determines that a billing error occurred as asserted, it shall correct the billing error and credit the prepaid account with any disputed amount and related commissions or other charges from the overages (suspense) account and deliver to primary cardholder by any means, a correction notice;
6- If the bank determines that a different billing error occurred from that identified in the billing error notice, the bank shall deliver to the primary cardholder by mail or other means an explanation of the reasons for the bank’s conclusion that a different billing error occurred and the reasons for the belief that the billing error alleged by the primary cardholder is incorrect. The bank shall correct the billing error and credit the prepaid account with any erroneous amount and related commission or other charges as applicable, and provide the customer with the applicable documents, if its requested;
7- The bank has to resolve the complaint/billing error within these additional 18 working days. If bank does not, then the following will occur:
a) the bank will be liable to be penalized (double the first charge)
b) the bank has to repay the customer (the primary cardholder) the disputed amount
c) close this case in the bank's complaint management system and the CPS;
8- The bank (as issuer) has to provide the complainant (primary card holder and/or the merchant) copies of documentary evidence, especially if the bank determines no billing error occurred, if the complainant requests that;
9- The complainant (primary card holder) retains the right to escalate the complaint to SAMA, if unsatisfied with the bank’s treatment of the complaint;
10- The complainant (primary card holder) retains the right to escalate the complaint to the Committee for the Settlement of Banking Disputes (CSBD), if unsatisfied with SAMA's and the bank’s treatment of the complaint;
11- If the bank has fully complied with the requirements of this section, the bank has no further responsibility if a primary cardholder reasserts substantially the same billing error.
2.12 Merchant Dispute Resolution for Prepaid Payment Services
The prepaid dispute resolution process is as defined in the SPAN Scheme Standard. For avoidance of doubt these are as follows.
2.12.1 Merchant Dispute Resolution
a. The term “statement error” represents a posting to the merchant’s account which gives rise to an error in the overall balance. Statement errors include:
1) A failure by the Operator to credit or debit properly a transaction to the merchant’s account;
2) An error of computational or accounting nature that is made by the acquirer, so that a charge is either over or under stated, including application of fees or penalty charges that are not in accordance with the Terms and Agreement in force.
b. A statement error notice is a written or oral message from the Merchant that:
1) Is received by an Operator at the address or telephone number provided in the Terms and Conditions in force no later than 90 days from the transaction date;
2) Enables Operator to identify the merchant’s name and account number, and, to the extent possible, indicates the merchant’s reasons for believing that a statement error exists, the type of error, the date and amount of the error.
c. The Operator (bank) shall handle statement errors as follows:
1- Once the Operator receives a complaint from merchant, the operator has to inform the customer by either an oral or a written message of the process by which the bank will deal with the statement error;
2- The Operator shall conduct a reasonable investigation and comply with the appropriate resolution procedures no later than 30 working days, after receiving a statement error notice;
3- If the Operator determines that a statement error occurred as asserted, it shall correct the statement error and credit or debit the merchant’s account with any disputed amount and related commission or other charges and mail or deliver by other means a correction notice to the merchant;
4- If an Operator determines that a different statement error occurred from that identified in the statement error notice, the Operator shall inform the merchant with an explanation of the reasons for the bank’s belief that a different statement error occurred and the reasons for the belief that the statement error alleged by the merchant is incorrect, correct the statement error and credit or debit the merchant’s account with any erroneous amount and related commission or other charges as applicable; and provide the merchant with the relevant documentary evidence if the merchant so requests;
5- If an Operator determines that no statement error occurred the Operator shall mail or deliver by other means to the merchant an explanation of the reasons for the bank’s belief that the statement error alleged by the merchant is incorrect, furnish copies of documentary evidence, if the merchant so requests.
6- The Operator has to resolve the issue within these 30 working days from the date of receiving the complaint. If the bank does not, then the following will occur:
a) the bank will be liable to be penalized;
b) the bank has to repay the customer (the merchant) the disputed amount;
c) close this case in the bank system;
7- The complainant (merchant) retains the right to escalate the complaint to SAMA, if unsatisfied with the bank’s treatment of the complaint;
8- The complainant (merchant) retains the right to escalate the complaint to the Committee for the Settlement of Banking Disputes (CSBD), if unsatisfied with SAMA's and the bank’s treatment of the complaint.
9- A bank that has fully complied with the requirements described in this section has no further responsibilities if a merchant reasserts substantially the same statement error.
2.13 Merchant Agreements for Closed Loop Prepaid Payment Services
This section provides the rules for the disclosure of information between the prepayment operator, "Operator", (issuer and/or acquirer) of a prepaid payment service transaction and the merchant where the agreement relates to a closed loop prepaid product.
2.13.1 Regulated financial institutions
A closed loop prepaid payment service Operator must be a bank in the Kingdom of Saudi Arabia that is permitted to accept deposits, according to the Banking Control Law, issued by Royal Decree, No. M/5 Dated 22.2.1386 H.
2.13.2 Disclosure of charges
The Operator shall disclose in Merchant Service Agreement all charges, if any, associated with the operation of prepaid payment services and acceptance of prepaid payment service transactions and an explanation of the method of computation of charges as follows:
a. Card account operational fees. Fees payable by the merchant, which may include card issuing fees, annual fees, load fees, etc.;
b. Terminal fees. Any prepaid specific fees for the rental of Point of Sale terminal equipment or any connection charges and frequency of assessment;
c. Merchant Service Commission rates. Any specific prepaid payment service commission rate that is used to compute a commission against the total volume of sales, differentiating between any flat or ad valorem fee, including the frequency of assessment (for example daily, weekly, monthly, etc.). If different rates apply to different types of transactions, the types of transactions and the rates applicable shall also be disclosed;
d. Other charges and penalty charges. The rate of charges, itemised and identified by type, of any charges other than terminal fees and merchant service commission rates charged to the merchant for accepting prepaid payment service transactions and frequency of assessment.
2.13.3 Changes in charges
The Operator shall inform the merchant in writing of any changes in charges at least 60 working days before the changes take effect.
2.13.4 Cancellation of agreement
The merchant shall have the right to cancel a Merchant Service Agreement with a notice period not to exceed 90 calendar days.
2.13.5 Settlement period
The Operator shall disclose within the Merchant Service Agreement the elapsed time between the deposit of transactions, these being either captured on paper or electronically, and the crediting of the value, less any applicable charges according to section 2.13.2, into the merchant’s account. The Operator must pay or credit their contracted Merchants after the transaction reconciliation process is completed according to the terms and conditions stipulated in the Merchant Service Agreement. Payment must cover the transaction totals reduced by the credits (reversals, adjustments and refunds) and any applicable Merchant discounts.
2.13.6 Merchant’s liability for unauthorised use of prepaid payment services
a. The Operator shall disclose the prescribed procedures as follows when accepting prepaid payment service transactions, either in the Merchant Service Agreement or an associated set of operating procedures. The disclosure shall cover:
1- The process that the merchant must follow to verify the identity of the primary cardholder )e.g. ask the cardholder to enter his PIN) ;
2- A statement informing the merchant that it is required to ask for authorisation for all prepaid transactions, (i.e. the floor limit for a prepaid transaction shall be 0 Saudi Riyal, where no offline transactions are permitted)
3- The merchant’s obligations for retaining evidence of the transaction, such as receipts and/or electronic records;
4- Reasonable time periods within which merchants must provide documented evidence, such as signed receipts, to assist the Operator with resolving primary cardholder disputes rose through the issuer.
b. The Operator must disclose any merchant liability arising from an obligation to ensure that the prepaid payment service payment system provided is not misused for acts of fraud, dishonesty or misconduct.
2.13.7 Statementing
The prepaid payment service Operator shall mail or deliver by other means a periodic statement to the merchant relating to prepaid transactions credited to the merchant account. The statement shall disclose the following items:
a. Transactions. A summary of all prepaid payment service transactions, categorised by the charges disclosed in 2.13;
b. Charges. A disclosure of the amount itemised and identified by type of any charges debited to the merchant account during the statement cycle;
c. Address for notice of statement errors. The address to be used for notice of statement errors.
2.14 Non-compliance
If SAMA finds that a bank has failed to comply with the rules contained in this document , it may take one or more of the following measures:
- impose fines on prepaid service providers;
- impose, for any specified period, limitations or other restrictions in relation to carrying out prepaid payment service provision by an issuer or acquirer;
- require a prepaid service provider to provide restitution to their customers; and
- request removal of outsourced service providers.
In applying penalties for non-compliance SAMA will be guided by the level of penalties identified in Article 23 of the 'Banking Control Law', No. M/5 Dated 22.2.1386.
2.15 Account Closure
For prepaid accounts issued within the Kingdom, the closing of accounts must be conducted in accordance with the prevailing legislation.
2.15.1 Account Closure Rules for Reloadable Accounts
If a prepaid payment service account is reloadable, the following closure rules apply:
2.15.2 Disclosure:
The Issuing Programme Manager must provide the accountholder/contracting entity with appropriate methods or options to close their prepaid payment service record (account). Such options must be disclosed to the accountholder at the time of account opening.
2.15.3 Accountholder initiated closure:
The accountholder is permitted to request closure of the prepaid payment service record by advising the issuer directly at an issuers premises or branch (including mobile branches), by authenticated contact through a call centre access, or through written request for record closure to a customer service centre. The issuer must offer the accountholder a mechanism by which they can choose to either transfer any remaining balance to another account/record or withdraw the remaining balance in cash.
The prepaid card(s) associated with the record should be returned to the issuer upon record closure, to be securely destroyed. In the event the prepaid card cannot be provided to the bank during the record closure request, the card should be disabled from further use.
2.15.4 Issuer initiated closure:
Issuer (Bank) can initiate a record closure, at their discretion, after a record has been inactive for at least 180 days and in all cases after 5 years, in accordance with the SAMA ‘Rules Governing the Opening of Bank Accounts & General Operational Guidelines in Saudi Arabia’. If a positive balance remains on the record, the bank must inform the accountholder in cases where the account holder is known, in writing or by other suitable means (e.g. SMS) of their intent to close the record and give the accountholder 30 days prior notice from the date of dispatch of the intent to close.
If after this 30 day period the record remains inactive, the bank must close the prepaid record and disable the associated prepaid card(s). Any remaining balance in the record must be transferred to the Unclaimed Balances Account. Funds will remain at the Unclaimed Balances Account to support any refund in the event the accountholder or his representative was to return in the future and request their remaining funds.
2.15.5 Account Closure Rules for Non- Reloadable Accounts
If a prepaid payment service account is non- reloadable (e.g. Gift Card), the account record expires either:
- When the value on the account record has been exhausted/spent.
- When the expiry date of the card is reached.
2.15.6 Cardholder Balance Refund on Non-Reloadable Accounts
If a cardholder requests redemption of the outstanding balance on a dormant or expired card, the merchant is obliged to honor the cardholder request, upon presentation of relevant ‘proof of ownership’.
Such proof shall include:
- Presentation of the relevant Gift Card
- A receipt that may have been issued by the Merchant or Card Issuer at the point of buying such card or alike.
Upon presentation of such proof, the cardholder shall be entitled to reimbursement of the ‘net outstanding balance’(6) on the account. Such reimbursement may be by way of:
- A re-issued gift card for (at least) the net outstanding balance
- Bankers cheque
- Cash
(6) The net outstanding balance shall be deemed to be the value outstanding on the card following the last recorded purchase transaction, less any legitimate issuer fees (see 2.8.9) that may be applicable up to the time of the ‘redemption’ request.
Rules Governing Disposal of Finance Assets or Their Contractual Rights
No: 605580000099 Date(g): 12/6/2019 | Date(h): 9/10/1440 Status: In-Force These rules were issued by Circular No. (361000145658) dated 18/11/1436H corresponding to 01/09/2015G, and amended in accordance with the Rules Governing Disposal of Finance Assets or Their Contractual Rights No. (99/60558), dated 09/10/1440H, corresponding to 12/06/2019G.Based on the powers vested to SAMA under the relevant laws, regulations and instructions, and the powers vested to SAMA under the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386 H, and the Finance Companies Control Law issued by Royal Decree No. (M/51) dated 13/08/1433H, and Article Sixty-Seven of the Implementing Regulations of the Finance Companies Control Law, and SAMA Circular No. (361000145658) dated 18/11/1436 H containing Rules Governing Disposal of Finance Assets or Their Contractual Rights.
Please find attached the updated version of the "Rules Governing Disposal of Finance Assets and their Contractual Rights".
To take note and abide by it as of its date.
Introduction
These Rules shall apply to banks and finance companies licensed and authorized by SAMA. SAMA is the sole authority empowered to apply these Rules and to take necessary measures, as it deems appropriate regarding any violations of these rules, including imposing punitive charges or enforcement actions as applicable under the Banking Control Law promulgated by Royal Decree No. M/5 dated 22/02/1386H and Finance Companies Control Law promulgated by Royal Decree No. M/51 dated 13/08/1433H. SAMA may update these Rules as and when required.
These Rules have been issued in both Arabic and English. In the event of discrepancy in the interpretation of the two texts, the Arabic text shall prevail.
Chapter One Definitions
- The following terms and phrases, wherever used in these Rules, shall have the meanings assigned thereto unless the context requires otherwise:
Central Bank: Saudi Central Bank*.
Finance entity: Any bank or finance company licensed by SAMA.
Disposal: Encompasses sale of finance assets, or factoring.
First party: A finance entity that intends to dispose its finance assets or their contractual rights.
Second party: An entity that possess finance assets or their contractual rights after being disposed by the first party.
Sale of assets: Transfer of the ownership of finance assets or their contractual rights to the second party.
Factoring: Sale of the rights of finance contracts to the second party, where the ownership of finance assets remains with the first party.
Recourse: Disposal arrangement whereby the first party bears the credit risk of the disposed finance assets or their contractual rights, including default risk.
Partial recourse: Disposal arrangement whereby the first party bears part of the credit risk of the disposed finance assets or their contractual rights, including default risk.
Without recourse: Disposal arrangement whereby the second party bears the credit risk of the disposed finance assets or their contractual rights, including default risk.
Disposal forms: The disposal can be either with recourse, partial recourse, or without recourse.
Finance assets portfolio: A pool of finance assets or their contractual rights, which are intended to be disposed by the finance entity.
* The Saudi Arabian Monetary Agency was replaced by the name of Saudi Central Bank in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding 26/11/2020G.
Chapter Two General Provisions
- These Rules shall apply to all finance entities.
- These Rules govern the disposal of finance assets or their contractual rights, whether the disposal takes the form of sale of asset or factoring.
- SAMA may decline or restrict transactions of disposal of finance assets or their contractual rights based on reasons deemed relevant by SAMA, such as experience, technical capabilities, or risk level.
- SAMA may exempt certain transactions of disposal of finance assets or their contractual rights from certain provisions of these rules when it deems that their nature or volume warrant such exemption.
Chapter Three Requirements for Disposal of Finance Assets or Their Contractual Rights
6. The finance entity shall be in operation for at least two years prior to disposing its finance assets or their contractual rights. 7. The finance entity that intends to dispose finance assets or their contractual rights, shall comply with the following: 7-1 If the assets, which are intended to be disposed, are real-estate assets, there need to be a lapse of at least six months from the date of extending credit related to the assets to be disposed of, or six months from the date of first paid instalment, whichever comes later. 7-2 If the assets, which are intended to be disposed, are other than real-estate assets with contract maturity not exceeding five years, there need to be lapse of at least three months from the date of extending credit related to the assets to be disposed of, or three months from the date of the first paid instalment, whichever comes later. 7-3 If the assets, which are intended to be disposed, are other than real-estate assets with contract maturity exceeding five years, there need to be lapse of at least six months from the date of extending credit related to the assets to be disposed of, or six months from the date of first paid instalment, whichever comes later. Chapter Four Procedures for Disposal of Finance Assets or Their Contractual Rights
8. The finance entity that wishes for disposal of finance assets or their contractual rights must apply for SAMA's no-objection attached with the following: 8-1 Disposal of finance assets portfolio or their contractual rights template (appendix 1). 8-2 Overdue Instalments of finance assets portfolio template (appendix 2). 8-3 A historical record of the last (5) disposed finance assets portfolios or their contractual rights, if available (appendix 3). 8-4 A copy of the proposed contracts and agreements between first and second party. The contract shall contain all necessary information including but not limited to the following: A. Details of the underlying parties in the contract. B. Type of the disposal of finance assets or their contractual rights. C. Forms of the disposal of finance assets or their contractual rights and guarantees thereto. D. Expected date of the contract. E. Type of the finance assets portfolio. F. Gross and net value of the finance assets portfolio. 9. The finance entity can provide the second party - when it deems necessary - with data and information regarding the finance assets portfolio that intended to be disposed. 10. The finance entity, which intends to dispose finance assets or their contractual rights, shall apply for SAMA's no-objection, with all the documents, templates and records as specified in these Rules, at least (15) business days prior to the expected date of the disposal. 11. The finance entity must provide SAMA with a copy of all concluded contracts and agreements regarding the disposal within five business days of their conclusion. Chapter Five Effectiveness
- These Rules shall be effective from the date of their issuance.
Appendices
Instructions When Offering Real Estate Finance Products for Individuals
No: 465440000099 Date(g): 16/5/2018 | Date(h): 2/9/1439 Status: In-Force Translated Document
These instructions were issued under Circular No. (46544/99), dated 2/9/1439H, corresponding to 16/05/2018G, and were amended under Circular No. (41059668), dated 16/10/1441H, corresponding to 07/06/2020G.First: Introduction
A. Objective
These instructions aim to establish the minimum provisions that finance providers must adhere to when offering real estate financing products to individuals, in order to help clients make informed decisions when requesting real estate financing, protect the rights of all parties, and enhance the soundness of the real estate financing sector.
B. Scope
These instructions apply to banks and real estate finance companies subject to the supervision of SAMA.
Second: Instructions for Offering Real Estate Financing Products to Individuals
When offering real estate financing products to individuals, banks and real estate finance companies must comply with the following: 1- When a client submits a request for one of the real estate financing products, the finance provider must request and study the necessary information to understand the client's financial circumstances and form a clear picture of the client's ability to meet the obligations arising from the requested financing. The provider must ensure that the product is suitable for the client. A real estate financing offer should not be made if the results of the client's ability to meet obligations do not align with the provider's approved credit-granting policies. 2- The provider must explain the proposed real estate financing product to the client, clarifying the terms and conditions of the financing contract, especially the risks associated with the product. This explanation must be given by a qualified and responsible employee and discussed with the client in a language the client understands, in a simple and clear manner. The provider must document this explanation and may not offer a real estate financing product unless it is clear that the client understands the terms, conditions, and associated risks. 3- The provider must offer the client a real estate financing offer that is valid for no less than fifteen working days from the date it is presented. The offer can be provided to the client in written or electronic form, according to the client's preference. The offer must include all relevant data and documents in the same format as would be signed if the real estate financing contract were executed. The offer must include the following documents: A. The real estate financing contract and its attachments. B. The disclosure form for the real estate financing offer in the format provided in Annex A. C. The acknowledgment form for accepting the credit risk associated with variable-rate real estate financing, in the format provided in Annex B (for variable-cost financing products). The provider must document the client's receipt of these documents, whether provided in written or electronic form, and ensure that if the client opts for a written offer, they can take the documents off the premises. The client is free to consult others for advice. No real estate financing contract may be signed unless these documents have been provided to the client, and the client is allowed to take them off the premises. 4- Before the offer expires, the provider must assign a qualified credit advisor who is well-versed in real estate financing products for individuals. The advisor must provide the client with a clear explanation of the nature of the proposed financing, its risks, the terms and conditions of the contract, and the repricing mechanism (if applicable). The advisor must also answer the client's inquiries transparently and clearly. The credit advisor must not be the same employee who interacted with the client before the offer or presented the offer. Documenting communication with the credit advisor is a key requirement for finalizing the contract, and this can be done through audio recordings or by signing a meeting confirmation form. No real estate financing contract may be signed unless the credit advisor has provided the required explanation to the client, answered all inquiries, and documented it. 5- There must be a waiting period of at least five working days from the date the client receives the real estate financing offer, allowing the client time to review the offer, consult with the credit advisor, and seek external advice. The provider must encourage the client not to make any decisions regarding the property during this five-day waiting period, such as making a down payment or deposit. No real estate financing contract may be signed before the waiting period ends. 6- Banks and real estate finance companies are prohibited from signing any real estate financing contracts for individuals unless all the above requirements have been met and documented in the financing file. Third: Annexes
Annex A
[Financing Entity Logo]
Real Estate Financing Offer Disclosure Form for Individuals
Client Information
Client Name Offer Submission Date National ID or Resident ID Offer Expiry Date Mobile Number Reference Number (File Number) Total Monthly Income ......... (SAR)
Net Available Monthly Income ....... (SAR)
Total Debt-to-Income Ratio (Before Financing) ....... (%)
Total Debt-to-Income Ratio (With Financing) ....... (%)
Financing Information
Financing Amount ......... (SAR)
Financing Type (Ijarah / Murabaha / Istisna / ...Other) …………….
(+) Profit Amount ......... (SAR)
Annual Percentage Rate (APR) ....... (%)
Property Evaluation Fee ......... (SAR)
Down Payment Amount ......... (SAR)
Insurance* ......... (SAR)
Contract Term ..... (Month)
Any Other Fees or Costs* ......... (SAR)
Number of Installments ...... (Installment)
Administrative Fees ......... (SAR)
Monthly Payment Amount (Installment/Rent) ......... (SAR)
(=) Total Amount Payable ......... (SAR)
Type of Profit Rate (Fixed/Variable) …………….
Variable Profit Rate* :.....(%) Fixed Portion: ..... (%)
Variable Portion:..... (%)
Fixed Profit Rate* ....... (%)
Minimum Monthly Payment Amount Throughout the Contract Term* ......... (SAR)
First Period Duration* ..... (Month)
Maximum Monthly Payment Amount Throughout the Contract Term* ......... (SAR)
Date of First Recalculation of Contract Value/Payments* "Client's Signature Acknowledging Understanding of the Difference Between Fixed and Variable Profit Rates" Final Installment Amount* ......... (SAR)
Additional Notes …………….
Key Property Details
Property Type (Apartment / Villa / Land...) Property Value City Neighborhood Title Deed Number Title Deed Issue Date Title Deed Issuing Authority Property Number Land Area Building Area* Property Readiness for Occupancy* Number of Rooms* Property Age Developer's Warranty Period* Note: Reviewing this form does not replace reading the entire contents of the financing contract and its attachments, and does not exempt from the obligations stated therein.
Client's signature acknowledging receipt and confirming that the credit advisor answered all of their questions
(Signature is not required to approve the financing contract)
Signature and seal of the Authorized Person of the Financing Authority
(Signature is required for financing according to the above data unless misleading information is found or there is a change in the client's circumstances)
*The phrase (not applicable) should be inserted if the relevant clause does not apply to the financing contract.
(Financing entity information and contact details)
Annex B
Acknowledgment of Acceptance of Credit Risks for Real Estate Financing with Variable Term Costs
I, [Client’s Full Name Written by Hand], acknowledge that I have applied to [Lender’s Name Printed] (the Lender) for real estate financing in the form of [Real Estate Financing Type], and that the Lender has provided me with a comprehensive explanation of [Real Estate Financing Type], including the terms and conditions of this financing contract, the risks associated with [Real Estate Financing Type], and has answered all my inquiries, specifically: 1- The Lender explained that the term cost associated with [Real Estate Financing Type] is variable, which means it may increase or decrease during the contract period. The agreed-upon installment may rise or fall, and the Lender provided examples showing that the installment amount could significantly increase (e.g., the agreed installment in the contract: 3500 SAR, could become 5500 SAR or 7500 SAR). The Lender explained the mechanism for recalculating the term cost concerning the reference rate and the dates for recalculating the term cost. 2- I reviewed a disclosure form for the real estate financing offer detailing the term cost associated with [Real Estate Financing Type], the minimum monthly installment amount throughout the contract duration, and the maximum possible monthly installment amount. 3- The Lender provided me with the real estate financing offer, which included clear copies containing all data from the real estate financing contract, its attachments, the disclosure form for the real estate financing offer, and this acknowledgment form. I took these documents to review them outside the Lender’s premises and to present them to anyone I choose for opinion and advice. The offer’s validity was not less than fifteen business days. 4- The Lender provided me with a credit advisor who contacted me and provided a [telephone/face-to-face] comprehensive explanation of [Real Estate Financing Type], including the terms and conditions of this financing contract, the risks associated with [Real Estate Financing Type], and answered all my inquiries. After reviewing all details of the real estate financing offer and understanding them clearly, and after studying all my obligations and considering all future possibilities and the related burdens and commitments not previously undertaken before signing the contract, I hereby, of my own free will, accept the obligations arising from this type of real estate financing upon signing the contract and all its attachments. Instructions for Creditors on Dealing with Promissory Notes
No: 43076917 Date(g): 5/4/2022 | Date(h): 4/9/1443 Status: In-Force Translated Document
Based on the powers vested to SAMA under Its law issued by Royal Decree No. M/36 dated 11/04/1442 H, and The Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386 H, and The Finance Companies Control Law issued by Royal Decree No. M/51 dated 13/08/1433 H.
In order to protect the rights of participants in the financing sector and to unify the procedures for financing entities' handling of promissory notes, the instructions issued in this regard are attached for your reference.
For your information and to be implemented starting from July 1, 2022 G.
Chapter One: Definitions and General Provisions
1. Definitions
The terms and phrases listed below, whenever used in these instructions, shall have the meanings specified next to each of them, unless the context requires otherwise:
SAMA : Saudi Central Bank.
Instructions: Instructions for Handling Promissory Notes.
Financing Entity: Banks, and financing companies are subject to supervision and regulation of SAMA.
Customer: An individual or legal entity receiving a financing product from a financing entity.
Default: The failure of the customer to pay the agreed-upon monthly installments in the financing contract for three consecutive months, or for more than five separate months throughout the financing period, or as stipulated in the financing contract for non-monthly payments.
Third Party: An entity contracted to perform services on behalf of the financing entity that were previously carried out by the financing entity or to provide a new service intended for implementation. This may be a unit within the financing entity, an affiliated company, or an independent company.
Documented Communication: A recorded means of communication that can be verified and retrieved in written or electronic form.
2. General Provisions
2.1. These instructions aim to establish the minimum requirements that financing entities must adhere to when handling promissory notes.
2.2. These instructions do not override the provisions set forth in related instructions, including but not limited to the following:
- Debt Collection Regulations and Procedures for Individual Customers issued under SAMA Circular No. (39100008334) dated 26/07/1439 H.
- Model Contract of the Financial Lease of Vehicles for Individuals issued under SAMA Circular No. (41038534) dated 01/06/1441 H.
- Mortgage Finance Model Contract for Individuals in Murabaha and Ejarah issued under SAMA Circular No. (41038504) dated 01/06/1441 H.
-Rules on Outsourcing for Finance Companies issued under SAMA Circular No. (65338/99) dated 07/05/1440 H.
- First Update to the Instructions for Rules on Outsourcing issued under SAMA Circular No. (41027017) dated 18/04/1441 H.
- Controls on the Customer Signatures on the Bonds of the Order Without Data (Blank) in Exchange for Access to Banking Facilities issued under SAMA Circular No. (271000000743) dated 19/12/1427 H.
- SAMA Circular No. (41044391) dated 25/06/1441 H concerning the "Nafith" Electronic Platform Approved by the Ministry of Justice.
- SAMA Circular No. (41045412) dated 01/07/1441 H concerning the "Nafith" Electronic Platform Approved by the Ministry of Justice.
Chapter Two: Instructions for Handling Promissory Notes by Financing Entities
3. The financing entity must establish a policy approved by the Board of Directors for handling promissory notes, which must include, at a minimum, the following:
3.1. Procedures to be followed before initiating enforcement actions on a promissory note
A. Identifying the department responsible for communicating with the defaulting client, without prejudicing the communication mechanisms outlined in the related SAMA instructions.
B. Designating the authorized individual responsible for approving the initiation of enforcement actions on the promissory note before the competent court.
3.2. Procedures to be followed when initiating enforcement actions on a promissory note
a. Identifying the necessary documents for enforcing a promissory note, which must include, at a minimum: (the financing contract under which the promissory note was issued, the promissory note due for payment, evidence of the client's default, and proof of communication with the defaulting client).
b. Designating the department responsible for carrying out the enforcement procedures on the promissory note before the competent court.
c. If enforcement tasks are assigned to a third party, the financing entity must adhere to the related SAMA instructions.
d. Identifying the department responsible for coordinating with the third party regarding the enforcement of the promissory note and ensuring their compliance with relevant laws, regulations, and instructions.
e. Limiting the claim under the promissory note to the amount due from the defaulting client according to the relationship documents and account statements when filing for enforcement before the competent court.
3.3. Procedures to be followed upon the completion of the purpose of the promissory note:
a. The authorized individual must directly endorse the promissory note to indicate that its value has been settled, for the purpose of returning it to the client.
b. The responsible department must directly contact the client through a documented communication method to return the promissory note.
c. The promissory note should be returned to the client either in person at the financing entity’s office or by sending it to the client's national address upon request. The costs of sending the note may be charged to the client if delivery is requested, with the client’s request being documented.
d. If the client does not respond or cannot be reached to receive the completed promissory note, the financing entity should endorse the note to indicate that the client has settled its value and keep it in the client’s file. Additionally, the entity must attach proof of communication attempts with the client without response and ensure that the note is returned to the client upon request.
e. In the case of renewing the relationship with the client or modifying the loan or facility, the financing entity must return the original promissory note or notes related to the renewed or modified contract to the client and obtain a new promissory note or notes in light of the new relationship.
Chapter Three: Final Provisions
- Enforcement actions on a promissory note before the competent court may only be initiated after fulfilling the requirements specified in the policy referenced in Section (3) of these instructions.
- The financing entity shall be liable for any damages incurred by the client due to the enforcement of a promissory note that the client has already settled.
- The financing entity must adhere to the model format for promissory notes prepared by the Ministry of Commerce, as issued under SAMA Circular No. (6876/BC/213) dated 09/06/1410 H.
- When issuing an electronic promissory note, the financing entity must use the approved electronic platforms.
- SAMA reserves the right to take any actions stipulated in the Banking Control Law and the Finance Companies Control Law and its implementing regulations against a financing entity that does not comply with these instructions.
- The financing entity must develop a plan for communicating with clients to return promissory notes that have fulfilled their purpose. This plan should be implemented within one year from the date of publication of these instructions and SAMA should be informed upon its completion.
- SAMA has the authority to amend and update these instructions as needed.
Rules for Comprehensive Insurance of Motor Vehicles Financially Leased to Individuals
No: 441/191 Date(g): 22/7/2020 | Date(h): 2/12/1441 Status: In-Force SAMA has issued this Rules according to the Governor’s Decision number (441/191) dated 02/12/1441G, based on the powers vested to SAMA by The Cooperative Insurance Companies Control Law promulgated by Royal Decree No. (M/32) dated 02/06/1424H (corresponding to 31/07/2003), and its Implementing Regulation issued by the Decision of the Minister of Finance No. (1/596) dated 01/03/1425H (corresponding to 20/04/2004, and The Finance Companies Control Law promulgated by royal decree number (M\51) dated 13\08\1433H and its Implementing Regulation issued according to the Governor’s Decision number (2/ M SH T) dated 14\04\1438H, and Finance Lease Law promulgated by Royal Decree number (M/48) dated 13\08\1433H, and its Implementing Regulation issued according to the Governor’s Decision number (1/M SH T) dated 14\04\1434H.
Article 1 Purpose
The objective of these Rules is to regulate the relationship between the financing entities and their individual customers with regard to the insurance coverage on the financially leased vehicles.
Article 2 Definitions
For the purpose of applying the provisions of these Rules, the following terms and phrases, wherever mentioned herein, shall have the meanings assigned thereto, unless the context otherwise requires:
1. Central Bank: The Saudi Central Bank*.
2. Rules: The Rules for Comprehensive Insurance of Motor Vehicles Financially Leased to Individuals.
3. Insurer: The Insurance Company licensed to practice Motor Vehicle Insurance.
4. Insureds: The Lessor and the Lessee identified in the Policy Schedule.
5. Lessor: The finance companies or the banks licensed to practice finance leasing.
6. Lessee: The beneficial owner of the leased Motor Vehicle according to the finance lease contract.
7. First Beneficiary: The Lessee, being the beneficial owner, in the event of Partial Loss or Damage.
8. Second Beneficiary: The Lessor, being the owner of the Motor Vehicle, in the event of Total Loss.
9. The Unified Comprehensive Insurance Policy for Motor Vehicles Financially Leased to Individuals (the “Policy”): The insurance Policy mentioned in section two of these Rules, whereby an Insurer undertakes to indemnify the beneficiaries of the insurance coverage in the event of damage or loss resulted of a risk covered under the Policy for a Premium paid by the Insureds. This Policy shall include the insurance coverage request, provisions and conditions, exclusions, Policy Schedule and Appendixes (if any) which shall comply with all the provisions set forth under these Rules.
10. Motor Vehicle: The insured Motor Vehicle under the Policy, financially leased to the Lessee by the Lessor.
11. Driver: The person authorized to drive the Motor Vehicle and whose name is stated in the Policy Schedule.
12. Accident: An event wherein the insured Motor Vehicle sustains incidental damage or loss.
13. Claim: A Claim for indemnity for damage or loss caused by a risk covered under the Policy.
14. Claimant: Any natural or juristic person or their legal representatives who sustained damage or loss caused by risk covered under the Policy.
15. Premium: The amount paid by the Insureds or their representatives to the Insurer in exchange for the Insurer’s agreement to indemnify for damage or loss resulting directly from a risk covered under the Policy.
16.Actual Amount of Premium: The Policy price before applying the individuals’ eligible discounts based on the underwriting instructions issued by Saudi Central Bank.
17. Discounts: No claims discount and loyalty discount, indicated in Saudi Central Bank’s underwriting guidelines.
18. Sum Insured: The value of the Motor Vehicle upon submission of the insurance coverage request approved by the Insurer and identified in the Policy Schedule.
19. Material Change: Any change that leads to an increase in the likelihood or magnitude of risk.
20.Insurance Form: The application that is being filled while contracting between the Lessor and Lessee; which includes the details and information of the Insureds along with the Additional Benefits requested by the Lessee, the details of the Motor Vehicle to be insured, the Sum Insured and its yearly depreciation and any other information needed for pricing the Policy, to be relied upon when requesting the insurance coverage from the Insurer.
21. Policy Schedule: The schedule attached to the Policy that forms an integral part thereof. It contains the information of the Insureds and the authorized Drivers (if any), term of coverage, Sum Insured, Premium, details of the insured Motor Vehicle, limits of coverage, and Additional Benefits (if any).
22. Partial Loss: The destruction or damage of parts of the Motor Vehicle that would reduce or prevent the benefit thereof,without exceeding the minimum limit of Total Loss set by the authorized entity in auto damages’ appraisal.
23. Total Loss: Full Loss or destruction of the Motor Vehicle, that the rendition of repairs is technically unfeasible or economically costly, according to the standards set by the authorized entity in auto damages’ appraisal.
24.Deductible: The amount borne by the Lessee for every damage or loss associated with a risk covered under the Policy.
25.Lessee Insurance Account: The account created by the Lessor and endorsed to the finance leasing contract, which states the paid amounts to the Insurer as Premium and what was withdraw from the lessee for the Motor Vehicle’s insurance in accordance to these Rules. for the purpose of liquidation at the end of the leasing contract.
26.Additional Benefits: Any additional insurance coverage requested to be added to the base coverage by the Lessee and for which extra Premium is paid.
27. Endorsement: An agreement between the Insurer and the Insureds subsequent to the issuance of the Policy, whereby items of coverage are added to, amended, or removed on top of the basic coverage and which should be attached to the Policy and deemed an integral part thereof.
* The Saudi Arabian Monetary Agency was replaced by the name of Saudi Central Bank in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding in 26/11/2020G.
Chapter One: Provisions of the Relationship Between the Lessor and the Lessee in Comprehensive Insurance of Motor Vehicles Financially Leased to Individuals
Article 3
Any Motor Vehicle governed by financially leasing contract to individuals shall be insured according to the provisions of these Rules. No amendments shall be allowed to the insurance coverage to go beyond the minimum limits set by these Rules, such as amendments to the coverage, conditions, provisions, or exclusions.
Article 4
The Lessor must include the name of the Lessee in the “vehicle registration” as the “actual user” of the Motor Vehicle.
Article 5
The Lessor shall insure the Motor Vehicle annually during the period of the finance leasing contract.
The Lessor shall obtain insurance offers from at least three Insurers, and chose the best offer and lower price and provide it to the Lessee.
Article 6
1. The Insurance Premium shall be calculated annually by the Insurer based on the changes on the Sum Insured and the pricing factors for the Lessee. The Lessor shall provide the Insurer with the Lessee’s information in the Insurance Form which is required the pricing; after obtaining the Lessee’s approval.
2. The Lessee shall provide the Lessor with any Material Changes to his/her data, which have been previously submitted to the Insurer and which effect the insurance Premium.
3. The Insurer shall provide the Lessor with The Actual Amount of the Premium along with the Premium amount after applying the Discounts, if the Lessee is eligible for any.
4.The Lessor shall calculate the Premium amount on the Lessee at the beginning of the finance leasing contract, based on the Actual Amount of the Premium. (as the explanatory example below)
5.At the end of the insurance year, the Lessor shall calculate the balance amount of what have been paid to the Insurer, and what have been paid by the Lessee, and keep it in the Lessee Insurance Account, and provide the lessee with a copy of the Lessee Insurance Account.
6.At the end of the finance contract between the lessee and the Lessor, the Lessor shall pay back the Lessee the extra amount of Premiums paid by the Lessee or shall ask the Lessee to pay the extra amount paid by the Lessor to the Insurer for the insurance Policy.
7. The accounts settlement related to the insurance Policy shall be made within (30) days from the termination date of the agreement between the Lessor and the Lessee.
Explanatory example:
First year:
Motor Vehicle Value: 100,000 SAR.
The Actual Amount of Premium: 4,000 SAR. SAR.
The Premium amount after applying Discounts: (for example, no claim discount 30%): 2,800 SAR. The Lessor computes the Premium amount on the Lessee based on The Actual Amount of Premium (4,000) SAR and saves the different between The Actual Amount of Insurance Premium and the Premium amount after applying the Discounts: (4,000-2,800=1,200) SAR added to the Lessee Insurance Account.
Second year:
Motor Vehicle value: 80,000 SAR. (after applying depreciation percentage).
The Actual Amount of Premium: 3,200 SAR.
The Premium amount after applying Discounts: (for example, no claim discount 40%): 1,920 SAR.
The different between The Actual Amount of Premium and the Premium amount after applying the Discounts: (3,200-1,920=1,280) SAR added to the Lessee Insurance Account. The Lessee Insurance Account balance: (first year: 1,200+second year: 1,280=2,480) SAR.
Third year:
Motor Vehicle value: 70,000 SAR.
The Actual Amount of Premium: 2,800 SAR.
No amount will be added to the Lessee Insurance Account if he/she is not eligible for any Discounts for having an accident.
At the end of the finance lease contract, the amount withdrew from the Lessee and the amount paid to the Insurer are subjected to liquidation, as follow:
Amount withdrew from the Lessee: 4,000+3,200+2,800=10,000 SAR. Amount paid to the Insurer: 2,800+1,900+2,800=7,520 SAR.
7,520-10,000=2,480 SAR to be paid back to the Lessee.
Article 7
The Lessor and the Lessee shall agree at the beginning of the finance leasing contract on the annual depreciation percentage, which shall be stated in the Insurance Form
Article 8
Only the Lessee shall have the right to request Additional Benefits to the Policy and determine the Deductible amount.
Article 9
The Lessor and the Lessee shall agree on the method of repairs to take place (dealerships or certified auto repair shops) in The Insurance Form.
Article 10
1-The Lessor shall explain to the Lessee the scope of insurance coverage as well as the conditions, provisions and exclusions applicable to the Policy.
2-The Lessor shall provide the Lessee with a hard or electronic copy of the Policy at the beginning of the finance leasing contract and at every renewal of the Policy.
Article 11
Sum Insured Calculation:
The Sum Insured is determined in the first year following registration of the Motor Vehicle at the authorized authority based on the retail price offered by the certified dealership for the insured Motor Vehicle (excluding finance amounts or any other future services), provided that the value will be subject to the annually depreciation percentage, as specified in the Insurance Form as to reflect its real value at the time of renewal.
Chapter Two: The Unified Comprehensive Insurance Policy for Motor Vehicles Financially Leased to Individuals
Article 12
The Policy shall be treated as individual insurance policies regarding -for example but not limited to- pricing, eligible Discounts and Claims settlement.
Article 13
The insurance coverage request that was completed and signed by the insurance applicant or their legal representative shall form an integral part of the Policy; which contains the provisions, conditions, exclusions, coverage limits and schedule; and any Endorsement agreed upon, whether at the start of the insurance coverage or following its effectiveness.
Article 14
Insurance Coverage
Coverage under the Policy shall include loss or damage to the insured Motor Vehicle, and third party civil liability.
Article 15 General Provisions
1. Scope of Coverage:
The Insurer shall compensate the beneficiary for loss or damage to the Motor Vehicle, including any installed accessories, occurring due to any incident, including fire, theft or damage resulting from lightening or natural disasters such as floods or hailstones, according to the Policy conditions provided below.
2.Maximum Indemnity Limit:
a. Partial Loss: The maximum indemnity limit in case of Partial Loss or Damage is the cost of reinstatement of the Motor Vehicle, in addition to the costs of transportation and storage, after calculating the Deductible amount and the depreciation rate if applicable according to the conditions stated in the Policy, and this amount shall be determined by entities licensed to conduct vehicle damage assessments.
b. Total Loss: The Insurer’s maximum liability limit in case of Total Loss shall not exceed the Sum Insured for the Motor Vehicle. The Motor Vehicle is deemed as Total Loss or damaged if the damage assessment shows that the needed repairs are economically or technically infeasible, provided that such assessment is conducted by entities licensed to conduct vehicle damage assessments.
3. Deductible:
a- In the event of Partial Loss or Damage to the Motor Vehicle the Insurer may charge the Deductible amount specified in the Policy Schedule for each Claim.
b- The Insurer’s liability starts after the Deductible has been exhausted, and this is only applicable to damages or losses occurring to the insured Motor Vehicle, and it does not apply on claims arising from civil liability coverage against third party.
c- The First Beneficiary shall not be charged a Deductible if the Lessee or the Driver were not held liable for the Accident, according to the report prepared by the entity attending the Accident scene.
d- In case the First Beneficiary or the Driver is held partially liable for the Accident, the percentage of Deductible amount shall be calculated as per the percentage of liability accounted for by the Lessee or the Driver regarding the Accident only.
e- Under no circumstance shall the Deductible be multiplied within this Policy for a single motor Accident.
4. Storage and Transportation:
The Insurer shall pay the expenses incurred by the Insureds when transporting the damaged Motor Vehicle, due to an Accident covered under the Policy, to a safe location, auto repair shop, certified dealership, or to an assessment center in the case the vehicle was immobile. Such expenses will be limited to a maximum of SAR (500) within the city and SAR (1,000) outside the city; provided that the transportation receipt is submitted when filing the Claim.
6. Claim Settlement Procedures:
a- Either the First or the Second Beneficiary may file a Claim request to the Insurer upon the occurrence of loss or damage covered under the Policy. The Insurer shall provide the Claimant, within (3) business days, with a notice acknowledging receipt of the Claim and informing them of any missing documents. The Insurer may also appoint an assessor or loss adjuster, if necessary, within a period not exceeding (3) business days from receiving the Claim completed with all documents, provided that the Insurer informs the Claimant of whether the Claim is accepted or rejected, within (10) business days from the date of filing the Claim completed with all documents.
b- If the Claim is accepted and deemed to be Partial Loss, the Insurer shall approve repairing the insured Motor Vehicle at the respective certified dealership or the certified auto repair shops approved by the Insurer (as specified in the Policy Schedule) within (5) business days, ensuring that the First Beneficiary receives the Motor Vehicle after it has been reinstated to its former condition before the loss or damage. The Insurer shall also provide details regarding the due indemnity process and what does it cover (the amount of spare parts and labor charges).
c- If the insured Motor Vehicle is deemed to be Total Loss, the Insureds shall compensate the Second Beneficiary with the Sum Insured specified in the Policy Schedule - after calculating the Deductible, if any - and inform the First Beneficiary of the amount indemnified to the Second Beneficiary via a reliable communication means. The Insurer shall settle the Claim sustained under this Policy with integrity and fairness, without any compromises, and within a maximum period of (10) business days from the date of the Claim completed with all documents. The Second Beneficiary shall deliver the Motor Vehicle wreckage to the Insurer.
d-In the event of damage or loss of the Motor Vehicle caused by a third party, The Insurer shall compensate beneficiaries in
accordance to these Rules. The Insurer has the right of recovery against the Insurer of the third party whom caused the accident.
e- The Insurer shall prioritize the First Beneficiary in purchasing the insured Motor Vehicle wreckage when its loss or damage is deemed as economically Total Loss, according to the value determined by the authorized entity in assessing the Motor Vehicle after the occurrence of the damage.
f- In case of Motor Vehicle theft, the Insureds or any of them shall report to the competent authorities and the Insurer promptly, and the Claim shall only be accepted after a period of (60) days from the date of submission of such report.
g- If an Insurer does not issue the necessary approval for repairing the Motor Vehicle or settling the Claim within the prescribed period without a legal justification, both beneficiaries - after filing a complaint to the Insurer- are entitled to submit a complaint against the Insurer via SAMACares website (www.Samacares.com) or with the Committees for Resolution of Insurance Disputes and Violations, so as to compel the Insurer to settle the Claim and compensate such beneficiaries for any costs incurred as a result of their inability to use the Motor Vehicle due to the Insurer's delay in settling the Claim.
h- In case of rejection of the Claim, the Insurer shall:
1.Provide the Claimant with the reasons for rejection.
2.Inform the Claimant of their right to submit a complaint at SAMACares website (www.Samacares.com) or refer their case to the Committees for Resolution of Insurance Disputes and Violations for consideration.
3. Provide the Claimant with a copy of documents related to the Claim upon their request.
Article 16 Coverage Exclusions
This coverage excludes:
1- A Motor Vehicle found to be driven by a person who does not hold a valid license corresponding to the type of vehicle driven, according to the relevant laws and regulations, or in the event that an order is issued by a concerned authority for the forfeiture of the Driver’s license, or if the license was expired at the time of the Accident unless it was renewed within (50) business days from the date of the Accident.
2-The Deductible amount stated in the Policy Schedule.
3-Consequential loss or denial of usage.
4-Manufacturing defects and damages resulting due to the usage of the Motor Vehicle or from mechanical or electrical malfunctions.
5-Damage, loss or theft of tires, rims, and/or hubcaps (wheel covers), unless such loss or damage occurred thereto at the time of the covered Accident.
6-Death or physical injury to the Insured or the Driver.
7-Emergency medical expenses.
8-Loss or damage to goods and/or personal belongings while being loaded, unloaded or transported in or on the Motor Vehicle.
9-Loss or damage to any trailer unless expressly stated otherwise in the Policy Schedule.
10-Loss or damage to a Motor Vehicle as a result of theft or attempt theft due to leaving the Motor Vehicle running or abandoning the keys inside of it, or due to not shutting down the windows or closing the doors.
11-All additional Motor Vehicle’s accessories, apart from those already fitted by the manufacturer and whose price is already included in the original price of the Motor Vehicle, unless the type and value of such accessories are explicitly and specifically stated in the Policy Schedule.
12-If the Motor Vehicle is used in contravention to restrictions set forth in the Policy Schedule.
13-Carrying passengers beyond the permitted loading capacity of the Motor Vehicle or overloaded; if it is proven that the Accident was caused by such violation.
14-If the Motor Vehicle is used for any type of racing or for acceleration, endurance or speed testing.
15-A Motor Vehicle driven by a person under the influence of drugs, alcohol, or medicines which medically prohibit driving after taking it.
16-If the Motor Vehicle is being used or operated as working machinery.
17-Car drifting, running a red light or driving against direction of traffic if it is proven that this was the cause of the Accident according to the report prepared by the authorized entity of traffic Accidents.
18-A Motor Vehicle driven in areas that are normally off-limits to the public, such as airports or seaports.
19-Any liabilities or costs that were directly or indirectly incurred due to criminal and hostile acts committed by the Insureds and/or the Driver.
20-If the Driver escapes the scene of the Accident for no acceptable justification.
21-If it is proven in the report prepared by the authorized entity attending traffic Accidents that the Accident was caused deliberately by the Insured or the Driver.
22-Submitting inaccurate information or concealing material facts in the insurance coverage request.
23-Accidents occurring outside the territorial borders of the Kingdom of Saudi Arabian.
24-Any liability or expenses arising, directly or indirectly, from the following:
a) War, invasion, acts of foreign enemy, hostilities, warlike acts (whether war is declared or not), or civil war.
b) Rebellion, military or popular uprising, insurgence, revolution, usurping authority, martial laws, siege; or any events or reasons leading to declaring or continuation of martial laws, siege, or acts of vandalism and terrorism committed by person(s) working individually or on behalf of or related to any terrorist organization. Terrorism shall mean the use of violence for political, intellectual, philosophical, racial, ethnic, social, or religious purposes. The use of violence includes putting the public and/or a segment of it under panic condition; affecting and/or causing turmoil; intervening in any operations and/or activities or policies related to the government; or causing turbulence negatively affecting the national economy or any of its sectors.
c- Strikes, riots, or civil or labor unrest.
d-What has been caused, or contributed to, by nuclear weapons, ionizing radiations, radioactive contamination due to any nuclear fuel or waste, or contamination due to nuclear fuel combustion. For the purposes of this exclusion, combustion shall include any nuclear fission.
The Lessee may opt to cancel any of the exclusions above, which will be included as an Additional Benefits, unless deemed to be in conflict with relevant laws.
Article 17
Covering Third Party Civil Liability
The determination of coverage in this section is subject to the Unified Compulsory Motor Insurance Policy issued by Saudi Central Bank.
General conditions
1. Subrogation:
Following indemnification of an insurance beneficiary, the Insurer has the right to act on behalf of the Insured in pursuing their Claim against the person at fault, unless it is the First Beneficiary.
2. Right of Recovery:
In the case that an Insurer made indemnity payments to any party whomsoever for damage or loss, and it was later discovered that the payments were made upon a risk excluded from or not covered under the Policy; or if the Claim involved deceit, fraud, misinformation or forgery, the Insurer is entitled to recover against the indemnified person for the indemnity payments. The Insurer is also entitled to recourse against any person at fault in case of attempted theft or theft of the insured Motor Vehicle or when the insured Motor Vehicle is driven by any person without permission from the Insureds.
3. Changes:
The Insureds shall notify the Insurer, within 20 business days of any Material Changes to the information submitted in the insurance coverage request. The Insurer shall notify the Insureds in case it intends to increase the amount of the Premium, or reimburse part of the Premium to the lessor when it is reduced. If no notification is sent to the Insured by the Insurer within five business days, then this shall indicate the Insurer’s agreement to continue providing the coverage at the Premium rate agreed upon at the time of signing the Policy.
5. Obligations of the Insureds or Driver in Case the Occurrence of an Accident Covered under the Policy:
a) Shall inform the concerned entities as soon as an Accident occurs and shall not leave the scene of the Accident until procedures have been completed, except in cases where leaving the scene is required such as the case of physical injuries.
b) Shall not Claim responsibility with the intention of harming the Insurer, pay or undertake to pay any amount to any party involved in the Accident except after obtaining a prior written approval from the Insurer.
c) Shall cooperate with the Insurer, and issue powers of attorney enabling the Insurer to carry out the pleading, defending and settlement procedures on behalf of the Insured or the Driver, if the Insurer expresses its desire to do so.
d) Shall, at the Insurer's expense, perform all actions required to guarantee the Insurer's right for recovering any of its due entitlements from any other party, as a result of indemnity paid in accordance with the Policy.
e) Shall inform the concerned entities in case of theft or any other criminal act and shall cooperate with the Insurer in securing the conviction of the offender.
6. Fraud:
All rights arising from the Policy shall be forfeited if the Claim involves fraud, or if the Insureds or the Driver adopts fraudulent ways or methods to gain benefit under this Policy, or if the liability or damage resulted from a deliberate act by or collusion with, the Insureds, the Driver, or others. The Insurer has the right of recover against any party found to be responsible for such fraud, whether as a conspirator or an accomplice.
7. Cancellation:
Neither the Insurer nor the Insureds has the right to cancel the Policy after its issuance, except in the following cases:
a. The write-off of the Motor Vehicle’s registrar.
b. Transfer of ownership of a Motor Vehicle to another owner.
c. The existence of alternative Policy that provides the same coverage indicated in the Rules and covers the remaining term of the Policy to be cancelled.
d. Termination or cancelation of the finance leasing contract between the Lessor and the Lessee.
The Insurer shall refund the Lessor the due amount payable for the uncovered period by depositing the amount to their bank account via IBAN, and it will be added to Lessee Insurance Account, within three business days from the date on which the Insurer becomes aware of the occurrence of any of the cases mentioned above. The due amount payable to the Insureds for the uncovered period is calculated by subtracting the elapsed days from the total Policy term (in days) and then dividing the result by the total Policy term. The result is then multiplied by the insurance Premium less administrative fees (a maximum of SAR 25), and as follows:
(365 - elapsed days) /365 × insurance Premium less administrative fees (a maximum of SAR 25) = return Premium payable to the Insured.
The Insurer is exempted from paying the return Premium in the case that there is a Claim—related to the Policy to be cancelled and on the Motor Vehicle covered by the Policy—whose value exceeds the amount to be refunded as per the calculation formula mentioned above.
Notwithstanding the foregoing, Insurers, Insureds and Drivers shall remain bound by the provisions of this Policy with respect to the obligations arising prior to its cancellation.
8. Policy Issuance and Renewal Notification:
The Insurer may not issue this Policy unless it is automatically linked to the system of the authorized entity in the collection, maintenance, and sharing of insurance information. The Insurer shall notify the Insureds of the expiry date of the Policy- (45) days as maximum- in advance, in order to enable them to renew the Policy or replace it with another Policy from another insurance company.
Policy Schedule
Policy Schedule for the Comprehensive Insurance for Motor Vehicles Financially Leased to Individuals
Policy No.
Insureds Information
Insured (Lessee)
Insured (Lessor)
National ID number for
Saudi nationals
Commercial
Registration No.
Name of Insureds
Phone number
National Address
Vehicle Details
Chassis No.
Registration Plate No.
Vehicle Registration Expiry Date
Vehicle Color
Customs Card No.
Type of Chassis
Year of Manufacture
Vehicle Make
Names of
Authorized Drivers
Vehicle Model
Premium
Deductible
Percentage of Considering the Motor Vehicle as Economic Total Lost
Sum Insured
Geographic Border
Additional Benefits
Repair Method
(dealerships or certified auto repair shops)
Converge period
The insurance coverage request that was completed and signed by the insurance applicant or their legal representative shall form an integral part of the Policy; which contains the provisions, conditions, exclusions, coverage limits and schedule; and any Endorsement agreed upon, whether at the start of the insurance coverage or following its effectiveness. Insurance Form
Insurance Form
(to be filled by the Lessor and the Lessee at the beginning of the Finance agreement)
Lessor and Lessee Information
(Lessor)
(Lessee)
National ID number for
Saudi nationals
Commercial
Registration No.
Name of Lessee and
Lessor
Phone number
National Address
Vehicle Details
Chassis No.
Registration Plate No.
Vehicle Registration Expiry Date
Vehicle Color
Customs Card No.
Type of Chassis
Year of Manufacture
Vehicle Make
Names of
Authorized Drivers
Vehicle Model
Annual Depreciation Percentage of Motor Vehicle
Actual Value of Motor Vehicle
The approximate value of the Motor Vehicle for the next years from the Motor Vehicles Financially Leased Contract.
First Year: (actual value of Motor Vehicle selling price)
Second Year: (Motor Vehicle value based on depreciation percentage)
Third Year: (Motor Vehicle value based on depreciation percentage)
Forth Year: (Motor Vehicle value based on depreciation percentage)
Fifth Year: (Motor Vehicle value based on depreciation percentage)
Deductible
Additional Benefits
Repair Method (dealerships or certified auto repair shops)
Regulations for Total Loss Settlement of Vehicle Leasing Contracts
No: 498600000099 Date(g): 24/9/2019 | Date(h): 25/1/1441 Status: In-Force Translated Document
With reference to the powers vested to SAMA under the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386H, the Finance Companies Control Law issued by Royal Decree No. (M/51) dated 13/08/1433H, and the Finance Lease Law issued by Royal Decree No. (M/48) dated 13/08/1433H, and in order to achieve SAMA’s objectives of maintaining fairness in transactions in the finance sector and protecting customers.
Attached are the regulations for the total loss settlement of vehicle leasing contracts, which apply to total loss incidents occurring after (01/01/2020G).
First: Definitions
The following terms and phrases, wherever mentioned in these regulations, shall have the meanings indicated next to each of them, unless the context requires otherwise:
No. Term Definition 1 Lessor A joint-stock company licensed to practice financial leasing, including commercial banks. 2 Lessee The person who owns the benefit of the leased asset under the contract. 3 Advance Lease Payment The payment made by the lessee at the beginning of the contract to the lessor to enable them to use the leased asset. This payment is divided and amortized equally over all lease payments throughout the contract period. 4 Number of Last Due Payment The number of payments due from the lessee from the start of the financing period up to the date of the incident, according to the payment schedule attached to the contract. 5 Financing Period The number of agreed-upon lease payments. 6 Total Loss The total loss or damage to the vehicle, where repairing the vehicle is either technically unfeasible or economically costly, according to the standards approved by the relevant authority in assessing vehicle damage. 7 Settlement in the Event of Total Loss A calculation process through which the remaining debt amount is determined from the date of the total loss of the leased asset (interruption of benefit). 8 Unconsumed Amount of the Advance Lease Payment The amount owed to the lessee from the advance lease payment. 9 Remaining Principal Amount The remaining principal amount as of the date of the incident, according to the repayment schedule in the financing contract. 10 Incident An event that caused damage or accidental loss to the leased vehicle. 11 Insurance Compensation The compensation amount paid by the contracted insurance company. 12 Net Settlement Amount The net credit or debit amount after the settlement in the event of a total loss. Second: Mechanism for Settling a Vehicle Finance Lease Contract in the Event of Total Loss
A. Unconsumed Amount of the Advance Lease Payment:
Unconsumed Amount=(Financing Period–Number of Last Due Payment)×( Advance Lease Payment \Financing Period ) B. Difference Between the Remaining Principal Amount and the Insurance Compensation:
Difference=Remaining Principal Amount (including the last payment, if any)−Insurance Compensation - If the amount is greater than zero, multiply by (Lessee’s Responsibility Percentage for the Accident).
- If the amount is less than or equal to zero, it is taken as is.
C. Net Settlement Amount:
=Unconsumed Amount of the Advance Lease Payment (A)−Difference Between Remaining Principal Amount and Insurance Compensation (B) D. Action Regarding the Net Settlement Amount:
- If the net settlement amount is greater than zero, the lessee is compensated with the full net settlement amount - any outstanding amounts owed by the lessee before the total loss, if applicable.
- If the net settlement amount is less than zero, the lessor is entitled to claim the net settlement amount from the lessee + any outstanding amounts owed by the lessee before the total loss, if applicable.
The Guidelines on Standing Orders for Financing Entity
No: 43033273 Date(g): 18/11/2021 | Date(h): 13/4/1443 Status: In-Force Translated Document
Based on the powers vested to SAMA under its law issued by Royal Decree No. (M/36) dated 11/04/1442H, the Banking Control Law issued by Royal Decree No. (M/5) dated 22/06/1386 H, and the Finance Companies Control Law issued by Royal Decree No. (M/51) dated 13/08/1433 H.
To contribute to providing different financing options for customers, reduce the risk of default, and establish a minimum set of regulations that must be adhered to when offering or utilizing this service.
You will find the regulations for the standing payment order in favor of the financing entity, which replace the standing payment order regulations in favor of real estate financiers as notified by SAMA’s Circular No. (41039820) dated 05/06/1441 H. The most notable changes are as follows:
- The service now includes all financing products and is no longer limited to real estate financing products.
- The scope of financing entities now includes banks and funds affiliated with the National Development Fund.
For your information and action accordingly as of this date.
- The service now includes all financing products and is no longer limited to real estate financing products.
First: Definitions and General Provisions
A. Definitions
The following terms and phrases—wherever mentioned in these regulations—shall have the meanings specified next to each of them, unless the context requires otherwise:
Financing Entity: Banks, commercial banks, and financing companies subject to the supervision of SAMA, as well as government financing entities such as banks and funds affiliated with the National Development Fund.
Financing: Credit granted to the customer by the financing entity.
Customer: A natural person who has obtained a financing product from a financing entity.
Standing Payment Order in Favor of the Financing Entity: A service provided by banks through which regular financial transfers are made from the customer's account to the financing entity’s account for a specified period and amount to repay the financing.
Reliable Means of Communication: A registered means of communication that can be verified and retrieved in written or electronic form.
B. Objective
These regulations aim to establish the minimum provisions that must be adhered to regarding the standing payment order in favor of financing entities, promote and protect competition between financing entities, support the availability of financing options for customers, and contribute to reducing the risks of default in repayments.
C. Scope of Application
These regulations apply to all financing products, without prejudice to the Responsible Lending Principles for Individual Customers and the Debt Collection Regulations and Procedures for Individual Customers, as well as other related laws and instructions.
Second: Regulations for Standing Payment Order in Favor of a Financing Entity
A. Bank Obligations
When offering a standing payment order in favor of a financing entity, banks must adhere to the following: 1. Verify the existence of a fixed monthly income for the customer (such as a salary or equivalent) before accepting the request to establish a standing payment order in favor of the financing entity.
2. Obtain the customer’s acknowledgment of their awareness of the consequences of establishing a standing payment order in favor of the financing entity, according to the acknowledgment form specified in the annex.
3. Notify the customer upon establishing the standing payment order in favor of the financing entity via reliable means of communication, with the notification including, at a minimum, the following: the transfer amount, the date the order will begin, the duration in months, the account number to which the amount will be transferred monthly, and the name of the beneficiary financing entity.
4. Execute the standing payment order for the full transfer amount on the due date or within five (5) days of the due date if the amount is not available on the specified date.
5. Notify the customer if the standing payment order is not executed, providing the reason via reliable means of communication.
6. Obtain the beneficiary financing entity’s approval for the standing payment order or receive a clearance letter from the financing entity when the customer requests to amend or cancel the standing payment order.
7. Ensure that the amount to be transferred from the customer’s account is not among the amounts that SAMA has confirmed should not be touched or deducted. Also, comply with the regulations related to account freezing, enforcement, and blocking bank accounts when creating or executing standing payment orders. B. Obligations of the Beneficiary Financing Entity
The beneficiary financing entity of a standing payment order must adhere to the following: 1. Grant the customer approval to change the standing payment order amount when their circumstances change, leading to a rescheduling of the debt. This must be done within (3) working days from the completion of the rescheduling procedures by the financing entity.
2. Provide the customer with a clearance letter and a no-objection certificate for cancelling the standing payment order within (7) working days from the date of the customer’s request in the following cases: a. Full repayment of the outstanding obligations.
b. Exemption from the obligations as specified in the relevant instructions of SAMA, according to the applicable laws and regulations, or as stipulated in the contracts.
3. Beneficiary financing entities may coordinate and reach prior agreements with each bank individually to obtain immediate notifications or periodic data reports that include details of the standing payment orders executed in their favor.
4. Notify the customer upon receipt of the standing payment order amount via reliable means of communication. Annex
I acknowledge that the standing payment order to settle my obligations from my bank account (IBAN No.: .......) is a result of the financing granted to me by the financing entity, and that I cannot cancel it without providing a clearance letter from the beneficiary financing entity. I also acknowledge that I am not entitled to change the monthly deduction amount or the deduction period without the approval of the beneficiary financing entity. I further acknowledge that the bank has the right to deduct the monthly amount on the specified date or within (5) days of the specified date. I acknowledge that the bank executing the standing payment order is not responsible for any damages that may arise from the standing payment order, and bears no liability resulting from the execution of this order. The bank also reserves the right to seek recourse for any damages it may incur as a result of this order.
The Working Mechanism of Dealing with the Beneficiaries of First Home Regarding Tax Revenues
No: 747280000067 Date(g): 25/8/2019 | Date(h): 24/12/1440 Status: In-Force Translated Document
Referring to the ongoing coordination between SAMA, the Ministry of Housing, and the General Authority of Zakat and Tax regarding the mechanism for refunding Value-Added Tax (VAT) on the first home.
SAMA received a letter from His Excellency the Minister of Housing, No. 703, dated 20/12/1440H, which includes the approval of the VAT refund mechanism for the first home and requests its circulation to financing entities. The mechanism has been in effect since 01/08/2019G.
Attached is the operational procedure for dealing with beneficiaries of the first home concerning tax revenues.
Responsibilities of the Citizen
- If the purchase is made through a financer, the beneficiary must provide the certificate to the financer and cover any additional tax amounts if the value of the residential unit exceeds 850,000 SAR. The beneficiary must also sign a commitment not to present it to any other financing entity, developer, or seller.
- If the purchase is made directly from a developer registered with the Authority, the beneficiary must provide the certificate to the developer and cover any additional tax amounts if the value of the residential unit exceeds 850,000 SAR. The beneficiary must also sign a commitment not to present it to any other financing entity or developer.
- If the purchase is made directly from a developer not registered with the Authority, no tax amounts are payable for the residential unit.
- If the purchase is made through a financer, the beneficiary must provide the certificate to the financer and cover any additional tax amounts if the value of the residential unit exceeds 850,000 SAR. The beneficiary must also sign a commitment not to present it to any other financing entity, developer, or seller.
Responsibilities of Financing Entities
1) If the purchase is made from a developer registered with the Authority:
1.1. The financer will receive the certificate from the beneficiary and any additional tax amounts if the value of the residential unit exceeds 850,000 SAR. The beneficiary must also sign a commitment not to present the certificate to any other financing entity or developer. The financer will then issue a sales invoice for the full tax amount (certificate value + any additional tax amounts).
1.2. The financer will provide the certificate and any additional tax amounts if the value of the residential unit exceeds 850,000 SAR to the developer, and will receive a purchase invoice for the full tax amount (certificate value + any additional tax amounts).
1.3. The financer must record the full tax amount (certificate value + any additional tax amounts) for both sale and purchase in their tax declarations for the above-mentioned case.
2) If the purchase is made from a developer not registered with the Authority.
2.1. No tax amounts are to be paid to the developer.
2.2. The financer should submit a refund request through the portal and attach the deed after transfer of ownership, the sales invoice, financing contract, and the Authority’s declaration confirming the developer’s tax registration eligibility.
Responsibilities of Sales and Development Entities Registered with the Zakat, Tax, and Customs Authority, whether individuals or companies:
1) If the sale is made to a financing entity: 2.3. The seller will receive the certificate from the financer and any additional tax amounts if the value of the residential unit exceeds 850,000 SAR. The seller will also obtain a commitment from the beneficiary through the financing entity, confirming that the certificate will not be presented to any other financing entity or developer. The seller will then issue a sales invoice for the full tax amount (certificate value + any additional tax amounts).
2.4. The seller should submit a refund request through the portal, attaching the deed after the transfer of ownership and the sales invoice.
2.5. The seller must record the full tax amount (certificate value + any additional tax amounts) for the sale in their tax declarations for the above-mentioned case.
2) If the sale is made directly to the beneficiary:
2.1. The seller will receive the certificate from the beneficiary and any additional tax amounts if the value of the residential unit exceeds 850,000 SAR. The beneficiary must also sign a commitment not to present the certificate to any other financing entity or developer. The seller will then issue a sales invoice for the full tax amount (certificate value + any additional tax amounts).
2.2. The seller should submit a refund request through the portal, attaching the deed after the transfer of ownership and the sales invoice.
2.3. The developer must record the full tax amount (certificate value + any additional tax amounts) for the sale in their tax declarations for the above-mentioned case.
Transfer of The Real Estate Financing Debts
Based on Article 2 of the Real Estate Finance Law issued by Royal Decree No. (M/50) dated 13/08/1433H. which authorizes SAMA to regulate the real estate finance sector, including the issuance of standards and procedures related to real estate financing, further to the circular No. 391000000353 dated 01/01/1439H. Regarding Variable-Cost Real Estate Financing Products for Individuals.
Based on the role of SAMA in protecting the rights of customers of financial institutions under its supervision, and due to the importance of regulating the transfer of customers' debts who meet the conditions of the above circular, it is necessary to adhere to the following:
First: The financing entity (debt seller) must fill out the form for transferring real estate debt (attached) within seven working days of receiving the request from the customer. It should complete all the necessary information while adhering to the accelerate the payment standards mentioned in Article 84 of the Implementing Regulation of the Finance Companies Control Law issued by the decision of His Excellency the Governor No. 2/MFC dated 14/04/1434H. which regulates the accelerated payment process, with the necessity of notifying the customer immediately upon issuing the debt transfer document, provided that the offer period specified in the form is not less than ten working days." Second: After the financing entity (willing to purchase the debt) receives the debt transfer form, it commits to the following: Grant credit equivalent to(100%) of the value of the offer specified in the form. • Obtain a written acknowledgment from the customer that includes all obligations, if any, such as, but not limited to, (property safety, appraisal fees, property guarantee, etc.). Third: Upon the approval of the financing entity (willing to purchase the debt) and completion of the requirements, a cheque in the amount of the debt is issued and the form is returned to the financing entity (the debt seller) to complete the ownership transfer process within a period not exceeding seven working days from the date of receiving the debt transfer form. Fourth: The financing entity (the debt seller) must, after receiving the form and the bank cheque, commit to the following: Initiate the process of transferring the property ownership to the financing party (the debt buyer) from the date of receiving the bank cheque. Update the customer's credit record and issue a clearance letter for the customer. Fifth: Taking into account the aforementioned points, the financing entity (willing to purchase the debt) commits to the following provisions, stated in Article 10 of the Implementing Regulation of the Real Estate Finance Law, issued by the decision of His Excellency the Minister of Finance No. 1229 dated 10/04/1434H. Additional Provisions According to Circular No. (391000086876) dated 09/08/1439H.It has been observed that some real estate financiers, when purchasing real estate financing debt from another financier, provide the customer with an excess cash amount, resulting in an increase in the amount of the new financing.
In order to ensure SAMA's commitment to protecting customers and ensuring that financing entities comply with the relevant regulations and instructions, SAMA would like to emphasize the following:
- Compliance with the provisions of Article (11) of the Implementing Regulation of the Real Estate Finance Law, as well as the subsequent circulars issued by SAMA regarding it, which set the maximum limit for granting credit in real estate financing contracts, in any form of financing, at 90% of the value of the first dwelling for the citizen.
- Compliance with the accelerate the payment standards outlined in Article 84 of the Implementing Regulation of the Finance Companies Control Law, which regulate the process of accelerated payment.
- Compliance with paragraph (Second) of the above-mentioned circular, which states that "Grant credit equivalent to(100%) of the value of the offer specified in the form".
- Compliance with the purchase of real estate financing debt at an amount equivalent to the value of the purchase offer only.
For your information and adherence accordingly. Please note that SAMA will take all legal measures against real estate financiers who do not comply with the provisions of this circular.
Real Estate Murabaha Finance Buyout
Based on the powers vested to SAMA in accordance with the relevant regulations, rules, and instructions, and referring to the instructions regarding the time periods for issuing the clearance letter and transferring the account and debt, issued in accordance with SAMA Circular No. (43023350) dated 15/3/1443 H, and SAMA Circular No. (42013215) dated 4/3/1442 H, regarding the subjection of the mortgage contract concluded between a lender - on behalf of or as an agent for others - and individual customers is subject to the financing regulations and instructions issued by SAMA.
- SAMA wishes to emphasize the following to real estate financiers:
A- Executing customer requests related to the transfer of real estate financing debts according to the Murabaha agreement, while adhering to the specified time frames for transferring real estate financing debts as outlined in the instructions mentioned above. - B- Compliance with SAMA's instructions related to the purchase and transfer of real estate financing debt between financiers.
- C. The working days related to the procedures for lifting the mortgage are excluded from the time periods mentioned in the instructions above, provided that the reason is related to an external party.
- D- Update internal policies in accordance with these instructions.
- SAMA wishes to emphasize the following to real estate financiers:
Self-Build Product Instructions for Retail Mortgage Finance
Based on the powers vested to SAMA under the relevant regulations, laws, and instructions, and based on SAMA's role in protecting the rights of clients of financial institutions under its supervision, and in order to ensure the safety of the real estate finance sector and achieve financial stability, real estate financiers must adhere to the following when granting financing under the 'Self-Build' product for retail mortgage finance:
- Determine the total value of construction payments "financing amount" at the beginning of the contract, and link the payments to specific completion percentages in a single financing contract.
- Reflect the total financing amount in the customer’s credit record at the beginning of the contract, specifying the actual amount granted to the customer in the same record.
- Ensure that administrative fees charged by the financing entity to the beneficiary do not exceed (1%) of the financing amount or SAR 5,000 (whichever is less), in accordance with the instructions issued by SAMA, including those issued under Circular No. 361000091211 dated 30/06/1436H.
- Disburse the specified payment amount within (15) days from the date of the customer's request, provided that the client has met the completion percentages required for each payment as per the contract.
To take note and action accordingly within a period not exceeding (30) days from its date. Additionally, real estate financiers must take all necessary measures to apply the provisions of this circular to existing financing contracts under the 'Self-Build' real mortgage finance.
Collecting Amounts Owed to Finance Entities for Previous Periods in Exchange for VAT on Real Estate Finance Contracts
Referring to the Law of Value Added Tax issued by Royal Decree No. M/113 dated 2/11/1438 H and the Executive Regulations of the Value Added Tax Law issued by the Board of Directors of the General Authority for Zakat and Tax under Decision No. (3839) dated 14/12/1438 H.
SAMA wishes to emphasize the importance for all financing entities to comply with the Law of Value Added Tax, its Executive Regulations, and the guidelines and instructions issued by the General Authority for Zakat and Tax in this regard, and SAMA confirms that financing entities have the right to demand that customers pay the Value Added Tax amounts due for previous periods from real estate finance contracts, To facilitate customers, financing entities may offer all possible options for payment or settlement provided that do not violate the relevant regulations and instructions, and on the condition that written approval is obtained from the customer if they accept any payment or settlement option before proceeding with any payment of the due amount. If the customer does not accept the available options for settling the VAT amounts due for previous periods, the financing entity may seek recourse through the competent judicial authorities to claim the payment of those amounts.
For your information and compliance. SAMA will take the necessary legal measures in the event of non-compliance with these instructions.
Variable-Cost Real Estate Financing Products for Individuals
SAMA would like to emphasize the importance of the Financial Consumer Protection Principles and Rules , particularly the necessity of Equitable and Fair Treatment (Principle No. 1), disclosure and transparency (Principle No. 2), and financial education and awareness (Principle No. 3). Additionally, SAMA highlights the responsibilities of lender toward their customer, particularly the obligation to ensure that the product is suitable for the customer's needs and circumstances, explaining the product’s nature, costs, and associated benefits and risks in a clear and understandable manner. Moreover, lender must provide advice and support to customers facing financial difficulties, working with them to overcome these challenges before proceeding with legal actions.
In light of the challenges some beneficiaries of variable-cost real estate financing products have faced, particularly the increase in monthly installments, and based on a study conducted in this regard, SAMA directs real estate lenders to immediately take all necessary actions to care for their customers. These care measures should include appointing specialists with sufficient knowledge of this type of product to communicate with customers, providing a clear explanation of the product’s nature, its benefits and risks, the relevant contract terms, the repricing mechanism, and addressing any other customer inquiries. The due diligence procedures must also include offering customers one or more options, in addition to the option of continuing with the existing real estate financing contract. These options may include converting the contract to a fixed-rate financing contract, rescheduling the payments, or enabling the customer to transfer the debt to another real estate lender under conditions that suit the customer.
SAMA stresses that none of these options should result in the customer being charged any additional costs for the remaining period, in accordance with the Guide for Calculating the Early Payment Amount outlined in the finance regulations and without imposing any additional administrative fees on the customer.
SAMA clarifies that these directives are issued to ensure the protection of customers' rights and to promote fairness and transparency in transactions. This is based on the powers granted to SAMA under the Saudi Arabian Monetary Authority Law, issued by Royal Decree No. (23) dated 23/05/1377H, the Real Estate Finance Law issued by Royal Decree No. (M/50) dated 13/08/1433H, the Finance Lease Law issued by Royal Decree No. (M/48) dated 13/08/1433H, and the Finance Companies Control Law issued by Royal Decree No. (M/51) dated 13/08/1433H, along with the implementing regulations for these laws. SAMA will take legal action in the event of non-compliance with the above directives.
In light of the inquiries received by SAMA on this matter, SAMA emphasizes that real estate lenders must undertake the following:
- Disclose the reference index for the variable cost of real estate financing products on their website.
- Urgently communicate with all customers benefiting from variable-cost real estate financing products regarding the following points:
A. The ability to access the reference index data for the variable cost of real estate financing products on the lender’s website and provide the dedicated link for this information. B. Provide customers with contact details and grant them a period of no less than one month from the date of receipt to offer them options to amend their contract terms or any other options as outlined in the aforementioned circular. C. Inform customers of their right to communicate with a credit advisor who is well-versed in the characteristics of this type of product to provide a clear explanation of the product’s nature, its benefits and risks, the relevant contract terms, the repricing mechanism, and to answer any customer inquiries in this regard. This communication and the outcomes must be properly documented. Please note that SAMA will take all necessary legal actions in the event of non-compliance with the issued instructions in this regard.
Digital Confirmation of Banking Products for Bank Customers
Further to SAMA's instructions regarding SAMA's non-objection to provide personal finance products and issuing credit cards for individuals by utilizing Digital Confirmation services. In line with SAMA's commitment to enabling all customers to easily obtain their banking and financing needs, and enhancing the strategic goals related to digital transformation.
We inform you that SAMA has no objection to provide all financing products through electronic channels to individual bank customers, as well as small and medium enterprises through digital certification services. This is provided that the requirements in the Electronic Transactions Law issued by Royal Decree No. (M/18) dated 08/03/1428 H and the Implementing Regulations are followed, and the bank must assess the risks associated with the service, determine the types of financing covered by this service, and set adequate controls, policies, and precautionary measures. The following minimum requirements must be met:
- The digital certification service provider must be accredited by the National Digital Certification Center.
- The provision of digital certification services must not affect the bank's basic procedures for verifying the eligibility and identity of the customer, agent, or authorized signatory.
- The financing request must be initiated through one of the electronic channels, taking into account the necessary procedural controls and notifying the customer via SMS about the request. Additionally:
- For individuals: the request must be activated through another channel, for example, the controls for adding and activating beneficiaries as detailed in the Cyber Security Framework
- For enterprises: consider the necessary procedural controls, including but not limited to: authorizing multiple approvals for financing requests, activating the request from another channel, etc.
- Ensure that the customer/business owner or authorized representative approves the execution of the request by contacting the customer via a phone call from the call center or customer service.
- It is the bank's responsibility to verify the information provided by the customer/business before executing the transaction.
- Approval of the request must be obtained at least 24 hours after submission for individuals and three business days for enterprises.
- Adequate security standards must be established to protect data and communication with the digital certification service provider, considering the security encryption standards for data as well as data privacy.
- Maintain copies of documents and all legal matters concerning digital certification.
- Update agreements and contracts to clarify that this service is conducted electronically using digital certification and that there shall be no objection to its electronic execution.
- Specify the type of financing and its maximum limit in accordance with the bank's policies and potential risks based on the bank's classification.
- Periodically evaluate and monitor the precautionary controls and ensure their effectiveness.
These instructions replace SAMA's instructions regarding the SAMA’s non-objection to offering personal financing products and issuing credit cards for individuals through digital certification services.
Regulations for Processing Financial Refunds for Bank Cards
Based on the Banking Control Law issued by Royal Decree No. M/5 dated 22/2/1386H, and the powers vested to SAMA to apply the Implementation Rules for Banking Control Law under the decision of the Minister of Finance No. 3/2149 dated 14/10/1406H, and referring to the Regulations of Issuance and Operations of Credit and Monthly Charge Cards issued by Circular No. 361000090389 dated 26/6/1436H, and SAMA’s instructions issued by Circular No. 19901/M AT/9006 dated 18/4/1432H regarding instant SMS notification services.
We inform you that all banks operating in the Kingdom must adhere to the following when processing financial refund transactions for bank cards:
First: Credit Cards
- Process and settle financial refund transactions within three working days from the date of receiving the transaction in the acquirer bank's law.
- Process and settle financial refund transactions to credit card accounts within three working days from the date of receiving the transaction in the issuer bank's law.
- Notify customers via SMS immediately upon crediting the refund amount to the card account.
Second: Debit Cards (Mada)
- Process and settle financial refund transactions immediately upon receiving the transaction in the acquirer bank's law.
- Process and settle financial refund transactions to the card account immediately upon receiving the transaction in the issuer bank's law.
- Notify customers via SMS immediately upon crediting the refund amount to the account linked to the card.
For your information and action accordingly as of 01/01/2020G.
Procedural Requirements for Mortgage Registration
No: 391000070455 Date(g): 6/3/2018 | Date(h): 19/6/1439 Status: In-Force Translated Document
Based on the powers granted to SAMA under the Saudi Arabian Monetary Authority Law issued by Royal Decree No. (23) dated 23/5/1377 H, and the Banking Control Law issued by Royal Decree No. (M/5) dated 22/2/1386 H, and the Financing Companies Control Law issued by Royal Decree No. (M/51) dated 13/8/1433 H, and with reference to the Registered Real Estate Mortgage Law issued by Royal Decree No. (M/49) dated 13/8/1433 H.
Given the discrepancies reported to SAMA between the procedures of financing entities and notaries, and in continuation of the cooperation between the Ministry of Justice and SAMA, the Ministry of Justice has issued a procedural guide aimed at standardizing mortgage procedures between financing entities and notaries. Additionally, the Ministry has released forms for mortgage registration and an incident registration form.
Therefore, SAMA requires banks and financing companies to adhere to the following:
First: Adhere to and comply with the procedural requirements for documenting and registering mortgages according to the registration forms (Appendix 1).
Second: Provide SAMA with cases where notaries refuse to act, using the Incident Documentation Form (Appendix 2).
Procedural Requirements for Mortgage Documentation and the Prepared Forms for That Purpose.
First: The presence of the mortgagor or their representative with a power of attorney authorizing the required action.
Second: The presence of a representative from the financer (bank or financing company) with a power of attorney authorizing the required action.
Third: The mortgagee must be a licensed bank or financing company, and the financer must hold a valid license from SAMA for real estate financing.
Fourth: The mortgaged property must be owned by the mortgagor. However, it is permissible for the mortgaged property to belong to a guarantor who offers their property as collateral for the benefit of the debtor, even without the debtor's consent.
Fifth: The mortgaged property must be specifically identified, existing or expected to exist, and capable of being sold.
Sixth: The financer must provide proof that the contract executed between them and the mortgagor complies with Islamic Sharia principles, through a letter from the Sharia board granting approval of the product, rather than approving each individual contract separately.
Seventh: The completion of the transfer of ownership and the mortgage must be done in a single process, in accordance with Ministry of Justice Circular No. 13/T/6973 dated 19/1/1439 H, for the purposes of correcting a previous mortgage.
Eighth: The process must be carried out in accordance with the forms prepared by SAMA and the Ministry of Justice.
Form 1 (Property Owned by the Financing Company)
To His Excellency, the Chief Notary of ............... May Allah protect him
Peace be upon you, and the mercy and blessings of Allah,To proceed:
We inform you that the bank/company: ........................, under Commercial Register No. ............................... dated / / 14 H, owns the property according to the deed issued by your office No. ............ dated / / 14 H. We seek your approval to transfer ownership of the aforementioned property to Mr./Ms. ................... of Saudi nationality, under Civil Registration No. ....................... on the condition that the property is mortgaged to the financing company/bank ................ as collateral for an outstanding amount of .................. SAR (amount in words) under Financing Contract No. .......... dated / / 14 H, approved by the Sharia Board of the financing company/bank under No. .................. dated / / 14 H. Please note that the Sharia Board's approval is still valid and has not been amended or revoked. The execution of this contract, which establishes the debtor's liability, has been or will be carried out according to the Sharia Board's decisions. The debt will be repaid in .......... monthly installments, each amounting to ............... SAR (amount in words), payable on the ............ of each Hijri/Gregorian month, starting from / / 14 H. In case of non-payment, the property will be sold in accordance with the enforcement regulations.
Therefore, we kindly request that you document the mortgage. May Allah protect and care for you ،،،
Representative of the Financing Company / Bank
Form 2 (Property Owned by the Mortgagor)
To His Excellency, the Chief Notary of ............... May Allah protect him
Peace be upon you, and the mercy and blessings of Allah,To proceed:
We inform you that the individual/citizen/organization/company ........................... under Register No. (................) dated / / 14 H, has outstanding dues to the financing company/bank amounting to(Only ................... SAR) under Financing Contract (................) No. (........) dated / / 14 H, approved by the Sharia Board under No. ( ) dated / / 14 H. Please note that the Sharia Board's approval is still valid and has not been amended or revoked. The execution of this contract, which establishes the debtor's liability, has been or will be carried out according to the Sharia Board's decisions. The debt will be repaid in ( ) monthly installments, each amounting to ( ) (SAR), payable on the ( ) of each Hijri/Gregorian month, starting from / / 14 H. The aforementioned party has mortgaged the described property as collateral for these dues, according to the terms outlined in the mortgage contract. In case of non-payment, the property will be sold in accordance with enforcement regulations.
Therefore, we kindly request that you document the mortgage. May Allah protect and care for you ،،،
Representative of the Financing Company / Bank
Form 3 (Property Owned by a Third Party, Sold to the Company, Then Sold to the Client and Mortgaged)
Property Sale and Mortgage Registration Form (Murabaha)
To His Excellency, the Chief Notary of ............... May Allah protect him
We inform you that the individual/citizen/organization/company: ......................, under Register No. ....................... owns the property according to the deed issued by your office No. .................... dated / / 14 H. The mentioned party wishes to sell the described property to the financing company/bank .............. under Commercial Register No. ........................... dated / / 14 H, for a price of .................. SAR (amount in words). The financing company/bank has accepted this sale and then resold it on deferred terms for ...................... SAR (amount in words) to Mr./Ms. ..................... of Saudi nationality, under Civil Registration No. ....................., and accepted this sale on the condition that the mentioned property be mortgaged to the financing company/bank.............................. as collateral for the outstanding dues amounting to ................... SAR (amount in words) under Murabaha Contract No. ................. dated / / 14 H, approved by the Sharia Board under No. .............. dated / / 14 H. Please note that the Sharia Board's approval is still valid and has not been amended or revoked. The execution of this contract, which establishes the debtor's liability, has been or will be carried out according to the Sharia Board's decisions. The debt will be repaid in ............... monthly installments, each amounting to ................. SAR (amount in words), payable on the ........ of each Hijri/Gregorian month, starting from / / 14 H. In case of non-payment, the property will be sold in accordance with enforcement regulations.
Therefore, we kindly request that you document the sale and mortgage. May Allah protect and care for you،،،
Representative of the Financing Company / Bank
Incident Documentation Form
Referring to SAMA Circular No. 381000089828 dated 28/8/1438 H, which mandates banks and financing companies to register mortgage agreements in accordance with the fact of the contract, to cease procedures related to property ownership transfer instead of mortgaging it, and to rectify the status of properties currently registered in the bank's name within a period not exceeding 3 years, while also informing clients of these changes.
We inform you that it has been impossible for us to execute the mortgage due to the following incident:
Notary Office Location Name of the Notary Transaction Registration Number and Date at the Notary Office Deed Number and Date Type of Financing Real Estate Financier (Bank or Financing Company) - SAMA reviewed the mentioned request and found it compliant with the relevant regulations and instructions of the institution.
- Attached to the form is a copy of the letter addressed to the Notary Office.
Representative of SAMA
Financial Market Activities
Banks Investment Rules
No: 43083108 Date(g): 25/4/2022 | Date(h): 24/9/1443 Status: In-Force Based on the Saudi Central Bank Law issued by Royal Decree No. M/36 dated 11/04/1442H and the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386H, and based on the Central Bank's supervisory and regulatory role, and to ensure that banks establish an integrated internal framework to organize their investments, govern their procedures, effectively manage the resulting risks, and maintain the quality and safety of these investments, you will find attached the first version of the Banks' Investment Rules.
For your information and action accordingly as of October 1, 2022G.
1. Introduction
Banks invest in different asset classes for the purpose of managing liquidity, hedging, diversification of assets, and generating returns. These Investments expose banks to a multitude of risks; therefore, SAMA has decided to issue these Banks Investment Rules.
These Rules are issued in accordance with the authority vested in Saudi Central Bank (SAMA) under the Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued via Royal Decree No. M/5 dated 22/2/1386H.
2. Objectives
The objectives of these Rules are as follows:
2.1 Ensure banks put in place a comprehensive internal investment framework, with proper risk management in accordance with SAMA regulatory requirements.
2.2 Provide guidance for bank investment activities to ensure the alignment with sound risk management and governance practices.
3. Scope of Application
These Rules are applicable to banks’ investments that are reported as net investments in the balance sheet for all banks licensed under the Banking Control Law.
4. Definitions
The following terms and phrases, where used in these Rules, should have the corresponding meanings, unless the context implies otherwise:
■ Rules
Banks Investment Rules.
■ Local Investment
Any investment in both trading and banking book that takes place in the Kingdom of Saudi Arabia regardless of the currency and the residency of the issuer.
■ International Investment
Any investment in both trading and banking book that takes place outside the Kingdom of Saudi Arabia regardless of the currency and the residency of the issuer.
5. General Requirements
5.1 Banks should be prudent in managing their investments, and ensure the safety of their capital and liquidity taking into consideration the following:
■ Properly managing investment concentration to avoid the potential loss of one investment negatively affecting the whole investment portfolio.
■ Properly managing the liquidity of their investment portfolio to meet cash requirements and any liabilities as they fall due.
5.2 Banks should review and monitor their investment portfolio and make sure that their decisions and portfolio management practices comply with SAMA’s regulations and the bank’s policies and procedures.
5.3 Banks’ investment decisions must be associated with a proper documented rationale taking into consideration the economic environment, investment maturity, price volatility, market behavior, credit risk, concentration risk, legal risk and all other applicable risks. In addition, banks should focus on understanding the investment structures including any associated risks and potential payoffs.
6. Governance
6.1 Banks should have clear governance structure in terms of the role of the Board of Directors and Senior Management. In addition, banks should have a clear internal controls and audit procedures in terms of protecting the interests of depositors and other stakeholders.
6.2 The Board of Directors of a bank is ultimately responsible for the oversight of the bank’s investments. The Board or its delegated authority is responsible for approving the internal Investment Policy and Strategy. For Foreign Banks Branches (FBB), the responsibilities of the Board of Directors lies with the authority responsible for overseeing the business and operations of the FBB at Head Office/Regional Office.
6.3 Banks should have a committee at management level that will be held responsible and accountable for investment decisions including the approval and allocation of funds, risk assessment, setting investment limits and insuring that the bank’s investments are in-line with its Investment Policy.
6.4 Banks’ Investment Policy should include, but not limited to, the following:
■ Governance requirements including setting controls, responsibilities, and delegation of authority.
■ Investment eligibility criteria.
■ Prudential exposure limits taking into consideration minimum capital, liquidity and reserve requirements set by SAMA.
■ Terms regulating the bank’s local and international investments by setting investment limits in-line with the bank’s core business activity, strategy, risk tolerance, risk profile, market and macroeconomic conditions which include but not limited to setting the following limits:
- International investments (Local/foreign currency) to total investments
- International investments (Local/foreign currency) to total regulatory capital (Tier 1 + Tier2)
- Total investments / Total Assets
■ Guidelines to handle active/passive breaches to an investment limit or any fraudulent activity.
■ Criteria on eligible counterparties for dealing/trading as well as the proper counterparty limits.
■ Guidelines that include valuation of the portfolio, waterfall-pricing system and consistent portfolio calculation performance and reporting systems.
■ Systems for management of various risks and internal controls.
■ Data keeping requirements.
6.5 Banks should develop a clear, robust and demonstrable set of procedures, monitoring tools, governance and contingency plans to enable them to proactively identify any potential difficulties and risks, investigate the drivers and act in a timely manner to mitigate potential investment losses and report to the bank’s senior management and SAMA if needed.
6.6 Banks Investment Policy and procedures should be reviewed at least every three years or more frequently if the bank deems it necessary based on the changes in the relevant regulatory requirements or business practices.
6.7 Banks Investment Policy and procedures should adhere to the investment requirements in the Banking Control Law and all relevant regulations.
6.8 Banks should have a strategy for their investments that articulates in a clear and concise manner the bank’s approach and objectives, including establishing quantitative investment targets /goals and how to achieve them over a realistic timeframe.
6.9 Banks Investment Strategy should take into consideration the credit risk (Sectoral, Geographical, Settlement, etc.), market risk (volatility, interest rate including Interest Rate Risk in the Banking Book (IRRBB), FX, etc.), Operational risk (errors, frauds), liquidity risks, concentration risk and any other applicable risks.
6.10 Banks should oversee the implementation of the Investment Strategy and ensure that it remains appropriate in relation to the bank’s size, complexity, geographical footprint, business strategy, markets and regulatory requirements.
6.11 Banks should have an operational guidelines detailing how the investment strategy will be implemented. This should include clearly defining and documenting the roles, responsibilities, formal reporting lines and individual (or team) goals and incentives geared towards reaching the targets in the Investment Strategy.
6.12 Banks should put in place mechanisms to monitor the operational guidelines effectiveness and its integration into the bank’s risk management framework.
7. Risk Management and Monitoring
7.1 Banks should analyze and assess current and prospective investments, taking into consideration all risks that may arise from such investment. The results and any risks identified in the assessment should be reported to the relevant committee responsible for the bank’s investment activities.
7.2 Banks investments should be in-line with their risk management framework. Banks should have an adequate risk management system to identify, measure, and manage the risks generated from investment activities.
7.3 Before engaging in any investments, Banks should comply with all relevant Anti Money Laundering and Terrorism Financing requirements issued by SAMA.
7.4 The investment portfolio should be in-line with the bank’s investment objectives as specified in their Investment Strategy. Banks should monitor the performance of their investment portfolio on continuous basis and establish benchmark for monitoring purposes where applicable.
7.5 Banks should diversify their investment portfolio to avoid concentration risk; also, they should determine their diversification strategy based on their risk tolerance.
7.6 Banks should perform an annual portfolio level stress-testing taking into consideration macro-economic circumstances to identify the bank’s risk-bearing ability and verify how potential risks are covered, and provide the results of the assessment to SAMA upon request.
7.7 Banks should have adequate resources to manage their investment portfolio including strong managerial /investment capabilities, knowledgeable staff with relevant professional experience.
8. Approval Requirements and Controls
8.1 Banks should obtain SAMA non-objection on investments that require regulatory approval based on the Banking Control Law and Ministerial Decree No. 3/2149, such investments will be approved on a portfolio level. Any changes in these investments’ structure or limits (increase or introduce new limits) will require prior non-objection from SAMA.
8.2 Banks should clarify in their policies the investment channels and approval requirement for each investment product, including that investing in Money Market Funds (MMFs) must be through entities that are licensed by the relevant authority (i.e. the Capital Market Authority “CMA”) and must comply with its Regulations. Such investment must also comply with the following conditions:
■ Saudi riyal-denominated funds must be invested exclusively in the onshore Saudi market.
■ The minimum credit rating requirement for any MMF set by SAMA.
■ The custodian of the MMF must be licensed and regulated.
■ The lending or placement of Saudi riyal-denominated funds, directly or indirectly, is restricted to banks and financial institutions regulated by SAMA or CMA, respectively. Doing otherwise requires SAMA’s prior approval.
8.3 The request for obtaining SAMA non objection must at least include the following:
■ Confirmation of the Board of Directors or its delegated authority approval of the Bank’s Investment Strategy, including investment limits, risk tolerance and allocations for hedging and trading purposes.
■ SAMA’s last non-objection on investment limits.
■ Existing approved limits and utilization amount.
■ Detailed description of each asset class of the outstanding and proposed investments, which includes the followings:
- Strategy for each asset class.
- Ratings (Country issuer instrument) as applicable.
- Book value.
- Market value.
- Expected annual growth rate.
- Projected exposure amount for 3 years (Year-end).
- IFRS9 ECL staging classification, if applicable.
- Asset category in terms of fair value measurements (level 1, level 2, and level 3) as described in IFRS13.
- Asset category in terms of liquidity (High quality liquid assets (HQLA) level 1, level 2a or 2b).
- Revised investment limit.
- Economic sector of security issuer.
- Geographical distribution.
- Currency of denomination.
- Risk Weighted Asset for Credit Risk, Market Risk or Operational Risk.
■ Impact assessment on SAMA regulatory ratios including (Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), Capital Adequacy Ratio (CAR), SAMA Liquidity Ratio (LR), Leverage Ratio) if limits are fully utilized.
■ List and copy of all relevant approved policies and procedures, in particular for monitoring the portfolio performance.
■ Risk assessment for the proposed investment portfolio.
■ Details on the mechanism currently in place for reporting portfolio related to risks/developments to senior management and Board of Directors.
■ The escalation process for any breach of the approved limits.
■ Any other information SAMA may deem necessary for determining SAMA non-objection.
8.4 Banks should review the approved limits (no change/increase/decrease) to be in -line with the bank’s risk tolerance and market position at a minimum every three years.
9. Implementation and Effective Date
9.1 These Rules shall come into force starting from 1 October 2022. All Banks should develop/update their current Investment Policy, procedures and Strategy to be in -line with the requirements prescribed in these Rules.
9.2 Any violation or circumvention of these Rules may warrant the appropriate regulatory action by SAMA.
Guidelines on Repurchase Agreements
No: 43013189 Date(g): 19/9/2021 | Date(h): 12/2/1443 Status: In-Force Based on the Central Bank's supervisory and regulatory role and its keenness to develop and strengthen the financial sector by adopting the best international practices, and based on the powers granted to the Central Bank under the Saudi Central Bank Law issued by Royal Decree No. M/36 dated 11/04/1442 H and the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386 H.
We inform you that it has been decided to introduce the accompanying Guidelines on Repurchase Agreements, which aim to ensure that repurchase agreements are concluded in accordance with policies and procedures consistent with the Central Bank's regulatory requirements, as well as adopting standardized legal documents for these transactions and ensuring the integrity and comprehensiveness of the risk management of practitioners of repurchase activities.
For your Information and action accordingly as of today.
Part A: Overview
1. Introduction
1.1. The market for repurchase agreements (repo) is an important source of secured short-term funding, complementing other sources of funding in the banking system. A well-developed repo market would also enhance the breadth and depth of Saudi Arabia's bonds and sukuk markets.
1.2. To develop an orderly Saudi repo market, it is important that the Saudi repo market operates with standard market practices in line with global best practices and underpinned by professional conduct as well as prudent and sound risk management practices.
2. Objectives
2.1. These guidelines issued by Saudi Central Bank (SAMA)'s set out policy requirements for repo transactions to:
2.1.1. Ensure that repo transactions are conducted in a manner that is consistent with SAMA's regulatory requirements and the objectives of developing an orderly repo market; and
2.1.2. Ensure that repo market participants practice sound and comprehensive risk management, including the adoption of standard legal documentation.
3. Legal Provisions
3.1. These guidelines are issued by SAMA in exercise of the powers vested upon it under its Charter issued by the Royal Decree No.36 on 11-04-1442H (26 November 2020G) and the Banking Control Law issued by the Royal Decree No. M/5 on 22-02-1386H (11 June 1966G) and the rules for Enforcing its Provisions issued by Ministerial Decision No 3/2149 on 14/10/1406AH.
3.2. All policy requirements in these guidelines are binding on participants in the Saudi repo market.
3.3. These guidelines shall be read together with:
3.3.1. Relevant rules and regulations issued by SAMA;
3.3.2. Saudi Capital Market Law and the relevant rules and regulations issued by the Capital Market Authority (CMA) of Saudi Arabia;
3.3.3. Saudi Bankruptcy Law issued by the Ministry of Commerce (MOC);
3.3.4. Rules and regulations issued by the Ministry of Investment of Saudi Arabia (MISA);
4. Effective Date
4.1. This guideline will come into effect as of the date of issuance.
5. Applicability
Market participants
5.1. These guidelines shall apply to all repo market participants, defined as eligible counterparties in Section 9.
Types of repo transactions
5.2. These guidelines are applicable to any Saudi Riyal (SAR) denominated, outright sale or purchase of eligible securities with an agreement to repurchase or resell the same or equivalent eligible securities at an agreed specified future date or on demand, subject to mutual agreement.
5.3. For avoidance of doubt, there is no prohibition on bank's existing repo transaction entered into with a domestic or foreign counterparty, where the securities or cash leg is denominated in foreign currency and the transaction is governed by the GMRA, subject to compliance to the relevant and applicable rules and regulations in Saudi Arabia.
6. Terms and Definitions
6.1. In these Guidelines, unless the context otherwise requires, the following terms shall have the following meanings:
6.1.1. Custodian: It is a third party that provides services in relation to collateral of a repo transaction, which may include providing custody of the collateral, collateral management, collateral account segregation and other ancillary operations during the life of the transaction;
6.1.2. Eligible Security: an eligible security (or referred to as collateral) that the repo seller provides to the repo buyer to secure funding and meet the requirements in Section 10;
6.1.3. GMRA: Global Master Repurchase Agreements;
6.1.4. Held-in-Custody: It is an arrangement in a repo transaction, where the repo seller retains or a third party is appointed, to retain the collateral security in a segregated account;
6.1.5. HNWI: High Net Worth Individual
6.1.6. ICMA: International Capital Market Association;
6.1.7. Master Repo Agreement (MRA): It is a standardized contract approved by SAMA, that provides all terms and conditions of a repo agreement between a repo buyer and a repo seller;
6.1.8. Repurchase Agreement (Repo): It is an agreement where a seller sells securities to a buyer with a simultaneous promise arrangement for the buyer to resell or for the seller to repurchase the same or equivalent securities for an agreed price at a specified future date or on demand. In addition, repo term will be used commonly in this guideline referring to repo and reverse repo equivalently unless otherwise is specified.
6.1.9. Reverse Repurchase Agreement (Reverse Repo): It is an agreement where a buyer buys financial securities from a seller with a simultaneous promise arrangement for the seller to repurchase or for the buyer to resell the same or equivalent securities for an agreed price at a specified future date or on demand;
6.1.10. Repo Buyer: A market participant who is a cash provider at the repo transaction start date;
6.1.11. Repo Seller: A market participant who is a securities provider at the repo transaction start date
6.1.12. Repo market participants: Eligible counterparties referred to in Section 9;
6.1.13. SOCPA: Saudi Authority of Auditors and Accountants
6.1.14. SARIE: The Saudi Arabian Riyal Interbank Express or any other future instant payments system;
6.1.15. Saudi Repo Market: It is a part of the financial markets in which financial securities are exchanged through an agreement for cash and vice versa in Saudi Arabia;
6.1.16. Tadawul: Saudi Exchange.
Part B: Policy Requirements
7. Legal Agreement
7.1. All repo market participants shall ensure that their repo transactions in Saudi Arabia must be governed by the standard Master Repurchase Agreement (MRA) for the Sale and Purchase of Securities (2020 version) as attached in Appendix A, approved by SAMA.
7.2. Any amendments to the MRA must be incorporated in the Annexures to the agreement and must be mutually agreed by both parties. It should be made clear in trade confirmations or in other alternative agreed forms (e.g. supplementary letter) that the parties mutually agree to a variation of the standard terms and conditions. Parties to the agreement should note that amendments to the MRA may impact the ability of parties to rely on industry legal opinions on the enforceability of the MRA
7.3. At a minimum, the repo agreement shall consist of:
7.3.1. Absolute transfer of ownership of the eligible securities;
7.3.2. Marking-to-market of the repo, unless the eligible security is held by a custodian;
7.3.3. Use of the haircut and margin call, where necessary;
7.3.4. Substitution of the eligible securities where necessary; and
7.3.5. Event of default.
7.4. The MRA shall be subject to and governed by Saudi law.
8. Risk Management Requirements
Risk management policies and procedures
8.1. Banks, including other repo market participants are required to put in place policies and procedures to govern their repo activities. The policies should cover governance, authorization, risk management, internal controls and reporting requirements.
8.2. The risk management policies and procedures must be sufficiently comprehensive covering credit, counterparty, market, legal and operational risks arising from the repo market participant's repo activities.
8.3. Depending on the scale of its repo activities, repo market participants shall ensure effective coordination between the related functional areas (e.g. treasury, back-office, risk management, compliance and IT functions), as well as readiness of the relevant systems and infrastructure to support effective risk management and their repo activities. Such systems may include systems for securities valuation and management, credit control, custody, risk management, record keeping and regulatory reporting purposes.
8.4. Repo market participants shall ensure compliance with the relevant accounting standards for repo transactions as endorsed by SOCPA. Counterparty and credit risks
8.5. Repo market participants must establish exposure limits based on different risk measures, including limits for counterparties and issuers of the underlying collateral securities. These limits must be reviewed on a periodic basis or on a more frequent basis, as market circumstances change.
8.6. Repo market participants shall also take into account the quality of the securities used in the transaction and apply valuation haircut accordingly. Repo market participants shall manage the associated credit risk of collateral securities issued by non-sovereign and corporate and adjust the terms and conditions accordingly such as in terms of repo rates and haircut.
Conduct risk
8.7. The conduct of repo agreements by repo market participants must be in line with the principles of market professionalism and integrity. All repo market participants are prohibited from entering into repo transactions with the intent of manipulating Saudi financial markets.
8.8. Repo market participants shall ensure the confidentiality of the identity of parties to a repo transaction, at all times, except as otherwise required for regulatory reporting to SAMA.
Legal risk
8.9. The ownership of the eligible securities must be fully transferred from the seller to the buyer, even if a custodial arrangement is used to hold the eligible security for parties to the transaction.
8.10. There must be adequate documentation to cover the type of repo that are intended to be undertaken. Any deviation from the normal repo type as described in this document or any other arrangements, shall be mutually agreed between counterparties and properly documented in the legal agreement.
8.11. Repo market participants shall ensure that all the relevant legal and regulatory requirements are fully complied with at all times.
9. Eligible Counterparties
9.1. The following counterparties are eligible to partake in repos transactions, subject to the requirement that at least one principal to the repo transaction must be a bank licensed by SAMA:
9.1.1. Financial institutions, which include banks, insurers and finance companies licensed by SAMA;
9.1.2. Capital market institutions, approved by the CMA;
9.1.3. Corporates, including financial and non-financial corporates incorporated in Saudi Arabia. Corporates should be assessed of their knowledge, sophistication and understanding of risks in the repo market;
9.1.4. Financial and non-financial corporates not domiciled in Saudi Arabia shall not transact repos where the securities have time to maturity of less than one year. For foreign financial corporates, the maturity of securities provided as collateral shall have tenors at least three months longer than the maturity of the repo transaction; and
9.1.5. Non-foreign high net worth individual, subject to suitability assessment that they have the knowledge and understand the risks of the repo market.
10. Eligible Securities
10.1. Eligible SAR denominated instruments shall include:
10.1.1. Bonds/Sukuk issued or guaranteed by the Government of the Kingdom of Saudi Arabia;
10.1.2. Securities issued by SAMA;
10.1.3. Bonds’/Sukuk issuances listed in Saudi Exchange; and
10.1.4. Any other eligible securities as may be specified by SAMA.
10.2. The legal maturity (i.e. excluding any optionality) of a security must be at least equal to or longer than the maturity of the repo transaction.
10.3. Securities are not eligible as collateral if they are issued or guaranteed by the repo seller.
11. Price Sources and Valuation
11.1. Counterparties must agree on the price sources to be used to value collateral to minimize disputes between counterparties.
11.2. The market value of the securities should be calculated using dirty prices, in line with the market practice for the accrued interest/profit which is calculated from the last coupon date up to but excluding the margin delivery date. In the event of a dispute about the price used by the margin caller, both parties should agree on an alternative price source, negotiate promptly, reasonably and act in good faith.
11.3. The selection of the price sources should follow a waterfall-based approach to account for any possible failure or unavailability of prices from any single source.
12. Custody
12.1. Prior to engaging in any repo agreements with custodial arrangements, each repo market participant must fully understand the terms and conditions of the custody agreement, including their right and obligations.
12.2. A licensed bank shall have in place custody arrangement and processes for eligible securities held-in-custody on behalf of the repo participants, including comprehensive systems and processes to monitor and segregate the held-in-custody securities to mitigate the risk of duplicative use of securities.
13.Reporting and Settlement Requirements
13.1. A bank repo participant shall report all repo transactions involving eligible securities in Section 10 to SAMA on a daily basis. A bank repo participant is not required to report if there are no repo transactions of eligible securities for that day.
13.2. Other repo market participants shall submit weekly returns on daily positions to SAMA. Weekly reports will cover Sunday to Thursday and should reach SAMA by close of business the following Sunday. Banks are not required to send the weekly returns if there are no repo transactions of eligible securities for that week.
13.3. The Weekly Reports shall include the following:
13.3.1. Name both counterparties (buyer and seller)
13.3.2. Transaction date or deal date
13.3.3. Value date
13.3.4. Currency
13.3.5. Tenor
13.3.6. Due date
13.3.7. Cash amount
13.3.8. Description of securities (i.e. obligor of risk)
13.3.9. Amortized adjusted notional value of securities
13.3.10. Haircut
13.3.11. Initial margin/margin ratio
13.3.12. Profit rate
13.3.13. Profit payment frequency
13.3.14. Profit amount
13.3.15. Total amount due
13.3.16. Market segment for the buyer/seller
13.3.17. First exercisable option date (if applicable)
13.3.18. Any substitution for the securities (if applicable)
13.4. All reports should be sent to email: repo@sama.gov.sa
13.5. The delivery and fund transfer of non-SAMA issued eligible securities with cash must be done through Tadawul and SARIE, respectively in the case where both the counterparties being licensed agents and currency of transaction is SAR.
13.6. The exchange of SAMA issued securities with cash must be done through SAMA and SARIE respectively in the case where both the counterparties being licensed agents and currency of transaction is in SAR.
13.7. The exchange of eligible securities with cash must be done through any agreed systems between the counterparties in the case where one of the counterparties being non-licensed agents or transaction currency is not SAR.
* For the avoidance of doubt, repo market participants are allowed to transact in repos involving perpetual debt with embedded options that could be triggered in less than two years, however the tenor of the repo transaction shall be at least three months shorter than the first exercise date.
Appendix A
Master Agreement for the Sale and Purchase of Securities
Dated as of ____________________________________
Between:
_____________________________________________________________________________________(“Party A”)
and
_____________________________________________________________________________________(“Party B")
1. Applicability
(a) From time to time the parties hereto may enter into transactions in which:
(i) one party, acting through a Designated Office, ("Seller") agrees to sell to the other, acting through a Designated Office, (“Buyer”) Securities against the payment of the purchase price by Buyer to Seller;
(ii) Seller grants a Wa’ad (undertaking) to Buyer to purchase Securities from Buyer on a future specified date, subject to a specified condition being satisfied; and
(iii) Buyer grants a Wa'ad (undertaking) to Seller to sell Securities to Seller on a future specified date, subject to a specified condition being satisfied.
(b) Each such transaction shall be referred to herein as a “Transaction" and shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex1, unless otherwise agreed in writing.
2. Definitions
(a) "Act of Insolvency" shall occur with respect to any party hereto upon -
(i) its making a general assignment for the benefit of, or entering into a reorganisation, arrangement, or composition with, creditors; or
(ii) all or substantially all assets of such party, provided the relevant process is not dismissed, discharged, stayed or restrained within 15 days; or
(iii) its becoming insolvent or becoming unable to pay its debts as they become due or failing or admitting in writing its inability generally to pay its debts as they become due; or
(iv) its seeking, consenting to or acquiescing in the appointment of any trustee, administrator, receiver or liquidator or analogous officer of it or any material part of its property; or
(v) the presentation or filing of a petition in respect of it (other than by the other party to this Agreement in respect of any obligation under this Agreement) in any court or before any agency or the commencement of any proceeding by any Competent Authority alleging or for the bankruptcy, winding-up or insolvency of such party (or any analogous proceeding) or seeking any reorganisation, arrangement, composition, re-adjustment, administration, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such petition not having been stayed or dismissed within 15 days of its filing (except in the case of a petition presented by a Competent Authority or for winding-up or any analogous proceeding, in respect of which no such 15 day period shall apply); or
(vi) the appointment of a receiver, administrator, liquidator, conservator, custodian or trustee or analogous officer of such party or over all or any material part of such party’s property; or
(vii) the filing of any application for the commencement of any protective settlement or any financial restructuring procedure or any liquidation (including any such procedure in respect of small debtors) under the Saudi Arabian Bankruptcy Law (issued pursuant to Royal Decree no. M/50 dated 28/5/1439H (corresponding to 13 February 2018));
(b) "Applicable Rate", in relation to any sum in any currency, the rate selected in a commercially reasonable manner by the Affected Party;
(c) "Appropriate Market", the meaning specified in paragraph 12;
(d) "Base Currency", the currency indicated in Annex1;
(e) "Business Day" means -
(i) in relation to the settlement of a Transaction or delivery of Securities under this Agreement through a settlement system, a day on which that settlement system is open for business;
(ii) in relation to the settlement of a Transaction or delivery of Securities under this Agreement otherwise than through a settlement system, a day on which banks are open for business in the place where the relevant Securities are to be delivered and, if different, the place in which the relevant payment is to be made; and
(iii) in relation to the payment of any amount under this Agreement not falling within (i) or (ii) above, a day other than a Friday, Saturday or Sunday on which banks are open for business in the principal financial centre of the country of which the currency in which the payment is denominated is the official currency and, if different, in the place where any account designated by the parties for the making or receipt of the payment is situated.
(f) “Buyer Exercise Condition”, the meaning specified in paragraph 4(b)(ii);
(g) “Cash Equivalent Amount” has the meaning given in paragraph 6(h);
(h) “Cash Margin”, a cash sum paid or to be paid to Buyer or Seller in accordance with paragraph 4;
(i) "Cash Settlement Amount", the meaning specified in paragraph 12(e)(iii);
(j) "Cash Settlement Payment Date”, the meaning specified in paragraph 12(e)(iii);
(k) "Competent Authority”, a regulator, supervisor or any similar official with primary insolvency, rehabilitative or regulatory jurisdiction over a party in the jurisdiction of its incorporation or establishment or the jurisdiction of its head office;
(l) “Confirmation”, the meaning specified in paragraph 3(b);
(m) "Contractual Currency”, the meaning specified in paragraph 9(a);
(n) "Defaulting Party", the meaning specified in paragraph 12;
(o) "Default Market Value”, the meaning specified in paragraph 12;
(p) “Default Notice", a written notice served by the non-Defaulting Party on the Defaulting Party under paragraph 12(b) designating a day as an Early Termination Date;
(q) “Deliverable Securities”, the meaning specified in paragraph 12;
(r) “Designated Office”, a branch or office which is specified as such in Annex1 or such other branch or office as may be agreed in writing by the parties;
(s) "Distribution(s)”, the meaning specified in sub-paragraph (gg) below;
(t) “Early Termination Date”, the date designated as such in a Default Notice or as otherwise determined in accordance with paragraph 12(b);
(u) “Electronic Messaging System”, an electronic system for communication capable of reproducing communication in hard copy form, including email;
(v) "Equivalent Margin Securities”, Securities equivalent to Securities previously transferred as Margin Securities;
(w) “Equivalent Securities”, with respect to a Transaction, Securities equivalent to the First purchased Securities under that Transaction. If and to the extent that such First Purchased Securities have been redeemed, the expression shall mean a sum of money equivalent to the proceeds of the redemption (other than Distributions);
(x) Securities are “equivalent to” other Securities for the purposes of this Agreement if they are: (i) of the same issuer; (ii) part of the same issue; and (iii) of an identical type, nominal value, description and (except where otherwise stated) amount as those other Securities, provided that -
(A) Securities will be equivalent to other Securities notwithstanding that those Securities have been redenominated into Saudi Riyal or that the nominal value of those Securities has changed in connection with such redenomination; and
(B) where Securities have been converted, subdivided or consolidated or have become the subject of a takeover or the holders of Securities have become entitled to receive or acquire other Securities or other property or the Securities have become subject to any similar event other than a Distribution, the expression “equivalent to” shall mean Securities equivalent to (as defined in the provisions of this definition preceding the proviso) the original Securities together with or replaced by a sum of money or Securities or other property equivalent to (as so defined) that receivable by holders of such original Securities resulting from such event;
(y) "Event of Default”, the meaning specified in paragraph 12;
(z) “Exercise Date”, in respect of a Transaction, the earlier of (i) the date specified in the Confirmation for that Transaction and (ii) the Early Termination Date;
(aa) "Exercise Notice”, a notice substantially in the form set out in Annex III of this Agreement;
(bb) “Exercised Transaction”, in respect of an Early Termination Date, each Transaction in respect of which the Exercising Party has delivered an Exercise Notice to the Undertaking Party in accordance with paragraph 5(a) prior to the occurrence of that Early Termination Date;
(cc) "Exercising Party”, in respect of any Exercise Date:
(i) if such Exercise Date is not an Early Termination Date, if the Seller Exercise Condition with respect to that Exercise Date is satisfied, Buyer, and if the Buyer Exercise Condition with respect to that Exercise Date is satisfied, Seller; or
(ii) if such Exercise Date is an Early Termination Date, if the Cash Settlement Amount is payable to Seller, Seller, and if the Cash Settlement Amount is payable to Buyer, Buyer;
(dd) “First Purchase Date”, with respect to any Transaction, the date on which First Purchased Securities are to be sold by Seller to Buyer in relation to that Transaction;
(ee) “First Purchased Securities”, with respect to any Transaction, the Securities sold or to be sold by Seller to Buyer under that Transaction, and any New Purchased Securities transferred by Seller to Buyer under paragraph 10 in respect of that Transaction;
(ff) “First Purchase Price”, on the First Purchase Date, the price at which the First Purchased Securities are sold or are to be sold by Seller to Buyer;
(gg) “Income”, with respect to any Security at any time, all profit by way of distribution, dividends or other distributions thereon, including distributions which are a payment or repayment of principal in respect of the relevant securities ("Distribution(s)”);
(hh) “Income Payment Date”, with respect to any Securities, the date on which Income is paid in respect of such Securities or, in the case of registered Securities, the date by reference to which particular registered holders are identified as being entitled to payment of Income;
(ii) “Margin Percentage”, with respect to any Margin Securities or Equivalent Margin Securities, the percentage, if any, agreed by the parties acting in a commercially reasonable manner;
(jj) “Margin Securities”, in relation to a Margin Transfer, Securities of the type and value (having applied Margin Percentage, if any) reasonably acceptable to the party calling for such Margin Transfer;
(kk) "Margin Transfer", any, or any combination of, the payment or repayment of Cash Margin and the transfer of Margin Securities or Equivalent Margin Securities;
(ll) “Market Value”, with respect to any Securities as of any time on any date, the price for such Securities (after having applied the Margin Percentage, if any, in the case of Margin Securities) at such time on such date obtained from a generally recognised source agreed by the parties or as otherwise agreed by the parties (and where different prices are obtained for different delivery dates, the price so obtainable for the earliest available such delivery date) having regard to market practice for valuing Securities of the type in question plus the aggregate amount of Income which, as at such date, has accrued but not yet been paid in respect of the Securities to the extent not included in such price as of such date, and for these purposes any sum in a currency other than the Contractual Currency for the Transaction in question shall be converted into such Contractual Currency at the Spot Rate prevailing at the time of the determination;
(mm) “Net Exposure”, the meaning specified in paragraph 6(c);
(nn) the “Net Margin” provided to a party at any time, the excess (if any) at that time of (i) the sum of the amount of Cash Margin paid to that party and the Market Value of Margin Securities transferred to that party under paragraph 6(a) (excluding any Cash Margin which has been repaid to the other party and any Margin Securities in respect of which Equivalent Margin Securities have been transferred or a Cash Equivalent Amount has been paid to the other party) over (ii) the sum of the amount of Cash Margin paid to the other party and the Market Value of Margin Securities transferred to the other party under paragraph 6(a) (excluding any Cash Margin which has been repaid by the other party and any Margin Securities in respect of which Equivalent Margin Securities have been transferred or a Cash Equivalent Amount has been paid by the other party) and for this purpose any amounts not denominated in the Base Currency shall be converted into the Base Currency at the Spot Rate prevailing at the time of the determination;
(oo) “Net Value”, the meaning specified in paragraph 12;
(pp) “New Purchased Securities", the meaning specified in paragraph 10(a);
(qq) “Non-Exercised Transaction”, in respect of an Early Termination Date, each Transaction that is not an Exercised Transaction;
(rr) "Price Differential”, with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the First Purchase Price for such Transaction (on a 360 day, 365 day or other day basis in accordance with the applicable market convention, unless otherwise agreed between the parties for the Transaction) for the actual number of days during the period commencing on (and including) the First Purchase Date for such Transaction and ending on (but excluding) the date of calculation or, if earlier, the Second Purchase Date;
(ss) “Pricing Rate”, with respect to any Transaction, the per annum percentage rate for calculation of the Price Differential agreed to by Buyer and Seller in relation to that Transaction;
(tt) “Receivable Securities”, the meaning specified in paragraph 12;
(uu) “Second Purchase Date", with respect to any Transaction, the date on which Buyer is to sell the Second Purchased Securities to Seller in relation to that Transaction, pursuant to the exercise by the Exercising Party of the undertaking given to it by the Undertaking Party;
(vv) “Second Purchased Securities”, with respect to any Transaction, Equivalent Securities or such other Securities as agreed between Seller and Buyer.
(ww) “Second Purchase Price”, with respect to any Transaction and as of any date, the sum of the First Purchase Price and the Price Differential as of such date;
(xx) "Securities", Shari'ah-compliant securities or financial instruments, or such other securities or financial instruments as specified in Annex 1;
(yy) “Seller Exercise Condition", the meaning specified in paragraph 4(b)(i);
(zz) “Spot Rate”, where an amount in one currency is to be converted into a second currency on any date, unless the parties otherwise agree:
(i) for the purposes of paragraph 12, the spot rate of exchange obtained by reference to a pricing source or quoted by a bank, in each case specified by the non-Defaulting Party, in the Saudi Arabia inter-bank market for the purchase of the second currency with the first currency at such dates and times determined by the non-Defaulting Party; and
(ii) for any other purpose, the latest available spot rate of exchange obtained by reference to a pricing source or quoted by a bank, in each case agreed by the parties (or in the absence of such agreement, specified by Buyer), in the Saudi Arabia inter-bank market for the purchase of the second currency with the first currency on the day on which the calculation is to be made or, if that day is not a day on which banks are open for business in Saudi Arabia, the spot rate of exchange quoted at close of business in Saudi Arabia on the immediately preceding day in Saudi Arabia on which such a quotation was available;
(aaa) “Term”, with respect to any Transaction, the interval of time commencing with the First Purchase Date and ending with the Second Purchase Date;
(bbb) "Termination”, with respect to any Transaction, refers to the requirement with respect to such Transaction for Buyer to sell the Second Purchased Securities against payment by Seller of the Second Purchase Price, pursuant to the exercise by the Exercising Party of the undertaking given to it by the Undertaking Party;
(ccc) “Transaction Costs”, the meaning specified in paragraph 12;
(ddd) “Transaction Exposure”, with respect to any Transaction at any time during the period from the First Purchase Date to the Second Purchase Date (or, if later, the date on which the Second Purchased Securities are delivered to Seller or the Transaction is terminated under paragraph 12(i) or 12(j)) the amount “E” determined as the result of the formula E = R - V, where:
R=the Second Purchase Price at such time; and
V=the Adjusted Value of the Second Purchased Securities at such time
or, where a Transaction relates to Securities of more than one description or to which different haircuts apply, the sum of the Adjusted Values of the Securities of each such description.
For this purpose the “Adjusted Value” of any Securities is their value determined on the basis of the formula, (MV(1 - H)), where:
MV= the Market Value of the Second Purchased Securities at such time
H= the “haircut” for the relevant Securities, if any, as agreed by
the parties from time to time, being a discount from the Market Value of the Securities.
If E is greater than zero, Buyer has a Transaction Exposure equal to E and if E is less than zero, Seller has a Transaction Exposure equal to the absolute value of E;
(eee) "Undertaking Party", in respect of any Exercise Date, the party that is not the Exercising Party; and
(fff) except in paragraphs 16(b)(i) and 20, references in this Agreement to “written” communications and communications "in writing” include communications made through any Electronic Messaging System agreed between the parties.
3. Initiation; Confirmation; Termination
(a) A Transaction may be entered into orally or in writing at the initiation of either Buyer or Seller.
(b) Upon agreeing to enter into a Transaction hereunder Buyer or Seller (or both), as shall have been agreed, shall promptly deliver to the other party written confirmation of such Transaction (a “Confirmation”).
The Confirmation shall describe the First Purchased Securities (including CUSIP or ISIN or other identifying number or numbers, if any), identify Buyer and Seller and set forth -
(i) the First Purchase Date;
(ii) the First Purchase Price;
(iii) the Second Purchase Date;
(iv) the Pricing Rate applicable to the Transaction;
(v) in respect of each party the details of the bank account(s) to which payments to be made hereunder are to be credited; and
(vi) any additional terms or conditions of the Transaction;
and may be in the form of Annex II or may be in any other form to which the parties agree.
The Confirmation relating to a Transaction shall, together with this Agreement, constitute prima facie evidence of the terms agreed between Buyer and Seller for that Transaction, unless objection is made with respect to the Confirmation promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, the Confirmation shall prevail in respect of that Transaction and those terms only.
(c) On the First Purchase Date for a Transaction, Seller shall transfer the First Purchased Securities to Buyer or its agent against the payment of the First Purchase Price by Buyer in accordance with paragraph 8(c).
(d) Termination of a Transaction will be effected on the date fixed for Termination
4. Undertakings
(a) In respect of each Transaction and subject to paragraph 12:
(i) Seller unilaterally hereby irrevocably and unconditionally undertakes to Buyer that if:
(A) the Seller Exercise Condition with respect to an Exercise Date is satisfied; and
(B) Buyer delivers to Seller an Exercise Notice on, and with respect to, that Exercise Date,
Seller will purchase from Buyer for delivery on the Second Purchase Date the Second Purchased Securities for an amount equal to the Second Purchase Price; and
(2) Buyer unilaterally hereby irrevocably and unconditionally undertakes to Seller that if:
(A) the Buyer Exercise Condition with respect to an Exercise Date is satisfied; and
(B) Seller delivers to Buyer an Exercise Notice on, and with respect to, that Exercise Date,
Buyer will sell to Seller for delivery on the Second Purchase Date the Second Purchased Securities for an amount equal to the Second Purchase Price.
(b) The:
(i) “Seller Exercise Condition” is satisfied in respect of an Exercise Date if the Market Value (or, if an Early Termination Date has occurred, the Default Market Value) of the Second Purchased Securities on such date is lower than the Second Purchase Price on such date; and
(ii) “Buyer Exercise Condition" is satisfied in respect of an Exercise Date if the Market Value (or, if an Early Termination Date has occurred, the Default Market Value) of the Second Purchased Securities on such date is equal to or higher than the Second Purchase Price on such date.
5. Exercise of Undertakings
In respect of each Transaction and subject to paragraph 12:
(a) the Exercising Party, as the recipient of the Undertaking Party’s undertaking, will be entitled to deliver to the Undertaking Party, on each Exercise Date, an Exercise Notice with respect to that Exercise Date; and
(b) following the delivery to the Undertaking Party of an Exercise Notice with respect to an Exercise Date, such delivery constituting an offer by the Exercising Party to the Undertaking Party to enter into the relevant sale and purchase:
(i) the Undertaking Party shall accept such offer orally by telephone or in writing via email, provided that, if the Undertaking Party has not responded to such offer within 5 hours of delivery of the Exercise Notice in accordance with the details specified in Annex I, the Undertaking Party will be deemed to have accepted such offer;
(ii) the Undertaking Party hereby further agrees that not responding to the offer is tantamount to acceptance of the offer;
(iii) Buyer shall deliver to Seller the Second Purchased Securities on the Second Purchase Date; and
(iv) Seller shall pay to Buyer the Second Purchase Price on the Second Purchase Date.
(c) If the Exercising Party has not delivered an Exercise Notice in accordance with paragraph 5(a) above on the Exercise Date:
(i) the Undertaking Party shall be entitled to deliver an offer to enter into the relevant sale and purchase to the Exercising Party, on or prior to the Second Purchase Date;
(ii) if the Exercising Party has not responded to such offer within 5 hours of delivery of the offer in accordance with the details specified in Annex I then the Exercising Party shall be deemed to have accepted such offer;
(iii) the Exercising Party hereby further agrees that not responding to the offer is tantamount to acceptance of the offer;
(iv) Buyer shall deliver to Seller the Second Purchased Securities on the Second Purchase Date; and
(v) Seller shall pay to Buyer the Second Purchase Price on the Second Purchase Date.
6. Margin Maintenance
(a) If at any time either party has a Net Exposure in respect of the other party it may by notice to the other party require the other party to make a Margin Transfer to it of an aggregate amount or value at least equal to that Net Exposure.
(b) A notice under sub-paragraph (a) above may be given orally or in writing.
(c) For the purposes of this Agreement a party has a Net Exposure in respect of the other party if the aggregate of all the first party's Transaction Exposures plus any amount payable to the first party under paragraph 7 but unpaid less the amount of any Net Margin provided to the first party exceeds the aggregate of all the other party's Transaction Exposures plus any amount payable to the other party under paragraph 7 but unpaid less the amount of any Net Margin provided to the other party; and the amount of the Net Exposure is the amount of the excess. For this purpose any amounts not denominated in the Base Currency shall be converted into the Base Currency at the Spot Rate prevailing at the relevant time.
(d) To the extent that a party calling for a Margin Transfer has previously paid Cash Margin which has not been repaid or delivered Margin Securities in respect of which Equivalent Margin Securities have not been delivered to it or a Cash Equivalent Amount has not been paid, that party shall be entitled to require that such Margin Transfer be satisfied first by the repayment of such Cash Margin or the delivery of Equivalent Margin Securities but, subject to this, the composition of a Margin Transfer shall be at the option of the party making such Margin Transfer.
(e) Any Cash Margin transferred shall be in the Base Currency or such other currency as the parties may agree.
(f) A payment of Cash Margin shall give rise to a debt owing from the party receiving such payment to the party making such payment.
(g) Where Seller or Buyer becomes obliged under sub-paragraph (a) above to make a Margin Transfer, it shall transfer Cash Margin or Margin Securities or Equivalent Margin Securities within the minimum period specified in Annex I. or, if no period is there specified, such minimum period as is customarily required for the settlement or delivery of money, Margin Securities or Equivalent Margin Securities of the relevant kind.
(h) Where a party (the “Transferor”) becomes obliged to transfer Equivalent Margin Securities and, having made all reasonable efforts to do so, is, for any reason relating to the Securities or the clearing system through which the Securities are to be transferred, unable to transfer Equivalent Margin Securities then
(i) the Transferor shall immediately pay to the other party Cash Margin at least equal to the Market Value of such Equivalent Margin Securities; and
(ii) if the failure is continuing for two Business Days or more the other party may by notice to the Transferor require the Transferor to pay an amount (the “Cash Equivalent Amount") equal to the Default Market Value of the Equivalent Margin Securities determined by the other party in accordance with paragraph 12(g) which shall apply on the basis that references to the non-Defaulting Party were to the other party and references to the Early Termination Date were to the date on which notice under this paragraph is effective.
(i) The parties may agree that, with respect to any Transaction, the provisions of subparagraphs (a) to (h) above shall not apply but instead that margin may be provided separately in respect of that Transaction in which case -
(i) that Transaction shall not be taken into account when calculating whether either party has a Net Exposure;
(ii) margin shall be provided in respect of that Transaction in such manner as the parties may agree; and
(iii) margin provided in respect of that Transaction shall not be taken into account for the purposes of sub-paragraphs (a) to (h) above.
(j) The parties shall agree and specify in Annex 1 whether Cash Margin shall be held in a manner that results in the accrual of an investment return and if so the basis on which that investment return shall be determined. In the absence of any such agreement between the parties, there shall be no investment return payable by a party in respect of Cash Margin held by it.
7. Income Payments
Unless otherwise agreed -
(a) where: (i) the Term of a particular Transaction extends over an Income Payment Date in respect of any Securities subject to that Transaction; or (ii) an Income Payment Date in respect of any such Securities occurs after the Second Purchase Date but before the Second Purchased Securities have been delivered to Seller or, if earlier, the occurrence of an Early Termination Date or the termination of the Transaction under paragraph 12(j) then Buyer shall on the date such Income is paid by the issuer transfer to or credit to the account of Seller an amount equal to (and in the same currency as) the amount paid by the issuer;
(b) where Margin Securities are transferred from one party ("the first party”) to the other party ("the second party”) and an Income Payment Date in respect of such Securities occurs before Equivalent Margin Securities are transferred or a Cash Equivalent Amount is paid by the second party to the first party, the second party shall on the date such Income is paid by the issuer transfer to or credit to the account of the first party an amount equal to (and in the same currency as) the amount paid by the issuer;
and for the avoidance of doubt references in this paragraph to the amount of any Income paid by the issuer of any Securities shall be to an amount paid without any withholding or deduction for or on account of taxes or duties notwithstanding that a payment of such Income made in certain circumstances may be subject to such a withholding or deduction.
8. Payment and Transfer
(a) Unless otherwise agreed, all money paid hereunder shall be in immediately available freely convertible funds of the relevant currency. All Securities to be transferred hereunder (i) shall be in suitable form for transfer and shall be accompanied by duly executed instruments of transfer or assignment in blank (where required for transfer) and such other documentation as the transferee may reasonably request, or (ii) shall be transferred through any agreed book entry or other securities clearance system or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer.
(b) Unless otherwise agreed, all money payable by one party to the other in respect of any Transaction shall be paid free and clear of, and without withholding or deduction for, any taxes or duties of whatsoever nature imposed, levied, collected, withheld or assessed by any authority having power to tax, unless the withholding or deduction of such taxes or duties is required by law. In that event, unless otherwise agreed, the paying party shall pay such additional amounts as will result in the net amounts receivable by the other party (after taking account of such withholding or deduction) being equal to such amounts as would have been received by it had no such taxes or duties been required to be withheld or deducted.
(c) Unless otherwise agreed in writing between the parties, under each Transaction transfer of the First Purchased Securities by Seller and payment of the First Purchase Price by Buyer against the transfer of such First Purchased Securities shall be made simultaneously and transfer of the Second Purchased Securities by Buyer and payment of the Second Purchase Price payable by Seller against the transfer of such Second Purchased Securities shall be made simultaneously.
(d) Subject to and without prejudice to the provisions of sub-paragraph 8(c), either party may from time to time in accordance with market practice and in recognition of the practical difficulties in arranging simultaneous delivery of Securities and money waive in relation to any Transaction its rights under this Agreement to receive simultaneous transfer and/or payment provided that transfer and/or payment shall, notwithstanding such waiver, be made on the same day and provided also that no such waiver in respect of one Transaction shall affect or bind it in respect of any other Transaction.
(e) Without prejudice to paragraph 7, the parties shall execute and deliver all necessary documents and take all necessary steps to procure that all right, title and interest in any First Purchased Securities, any Second Purchased Securities, any Margin Securities and any Equivalent Margin Securities shall pass to the party to which transfer is being made upon transfer of the same in accordance with this Agreement, free from all liens (other than a lien granted to the operator of the clearance system through which the Securities are transferred), claims, charges and encumbrances.
(f) Notwithstanding the use of expressions such as “margin”, “Net Margin” and “substitution”, which are used to reflect terminology used in the market for transactions of the kind provided for in this Agreement, all right, title and interest in and to Securities and money transferred or paid under this Agreement shall pass to the transferee upon transfer or payment (and, in respect of transfers of margin, the obligation of the party receiving Margin Securities being an obligation to transfer Equivalent Margin Securities).
(g) Time shall be of the essence in this Agreement.
(h) Subject to paragraph 12, all amounts in the same currency payable by each party to the other under any Transaction or otherwise under this Agreement on the same date shall be combined in a single calculation of a net sum payable by one party to the other and the obligation to pay that sum shall be the only obligation of either party in respect of those amounts.
(i) Subject to paragraph 12, all Securities of the same issue, denomination, currency and series, transferable by each party to the other under any Transaction or hereunder on the same date shall be combined in a single calculation of a net quantity of Securities transferable by one party to the other and the obligation to transfer the net quantity of Securities shall be the only obligation of either party in respect of the Securities so transferable and receivable.
(j) If the parties have specified in Annex I that this paragraph 8(j) shall apply, each obligation of a party under this Agreement (the "first party”) (other than an obligation arising under paragraph 12) is subject to the condition precedent that none of the events specified in paragraph 12(a) (Events of Default) shall have occurred and be continuing with respect to the other party.
9. Contractual Currency
(a) All the payments made in respect of the First Purchase Price or the Second Purchase Price of any Transaction shall be made in the currency of the First Purchase Price (the “Contractual Currency”) save as provided in paragraph 12(e)(ii). Notwithstanding the foregoing, the payee of any money may, at its option, accept tender thereof in any other currency, provided, however, that, to the extent permitted by applicable law, the obligation of the payer to pay such money will be discharged only to the extent of the amount of the Contractual Currency that such payee may, consistent with normal banking procedures, purchase with such other currency (after deduction of any premium and costs of exchange) for delivery within the customary delivery period for spot transactions in respect of the relevant currency.
(b) If for any reason the amount in the Contractual Currency received by a party, including amounts received after conversion of any recovery under any judgment or order expressed in a currency other than the Contractual Currency, falls short of the amount in the Contractual Currency due and payable, the party required to make the payment will, as a separate and independent obligation, to the extent permitted by applicable law, immediately transfer such additional amount in the Contractual Currency as may be necessary to compensate for the shortfall.
(c) If for any reason the amount in the Contractual Currency received by a party exceeds the amount of the Contractual Currency due and payable, the party receiving the transfer will refund promptly the amount of such excess.
10. Substitution
(a) A Transaction may at any time between the First Purchase Date and the Second Purchase Date, if Seller so requests and Buyer so agrees, be varied by the transfer by Buyer to Seller of Securities equivalent to the First Purchased Securities, or to such of the First Purchased Securities as shall be agreed, in exchange for the transfer by Seller to Buyer of other Securities of such amount and description as shall be agreed (“New Purchased Securities”) (being Securities having a Market Value at the date of the variation at least equal to the Market Value of the Equivalent Securities transferred to Seller).
(b) Any variation under sub-paragraph (a) above shall be effected, subject to paragraph 8(d), by the simultaneous transfer of the Equivalent Securities and New Purchased Securities concerned.
(c) A Transaction which is varied under sub-paragraph (a) above shall thereafter continue in effect as though the First Purchased Securities under that Transaction consisted of or included the New Purchased Securities instead of the Securities in respect of which Equivalent Securities have been transferred to Seller.
(d) Where either party has transferred Margin Securities to the other party it may at any time before Equivalent Margin Securities are transferred to it under paragraph 4 request the other party to transfer Equivalent Margin Securities to it in exchange for the transfer to the other party of new Margin Securities having a Market Value at the time at which the exchange is agreed at least equal to that of such Equivalent Margin Securities. If the other party agrees to the request, the exchange shall be effected, subject to paragraph 8(d), by the simultaneous transfer of the Equivalent Margin Securities and new Margin Securities concerned. Where either or both of such transfers is or are effected through a settlement system in circumstances which under the rules and procedures of that settlement system give rise to a payment by or for the account of one party to or for the account of the other party, the parties shall cause such payment or payments to be made outside that settlement system, for value the same day as the payments made through that settlement system, as shall ensure that the exchange of Equivalent Margin Securities and new Margin Securities effected under this sub-paragraph does not give rise to any net payment of cash by either party to the other.
11. Representations
Each party represents and warrants to the other that -
(a) it is duly authorised to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and thereunder and has taken all necessary action to authorise such execution, delivery and performance;
(b) it will engage in this Agreement and the Transactions contemplated hereunder as principal;
(c) the person signing this Agreement on its behalf is, and any person representing it in entering into a Transaction will be, duly authorised to do so on its behalf;
(d) it has obtained all authorisations of any governmental or regulatory body required in connection with this Agreement and the Transactions contemplated hereunder and such authorisations are in full force and effect;
(e) the execution, delivery and performance of this Agreement and the Transactions contemplated hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected;
(f) it has satisfied itself and will continue to satisfy itself as to the tax Implications of the Transactions contemplated hereunder;
(g) in connection with this Agreement and each Transaction -
(i) unless there is a written agreement with the other party to the contrary, it is not relying on any advice (whether written or oral) of the other party, other than the representations expressly set out in this Agreement;
(ii) it has made and will make its own decisions regarding the entering into of any Transaction based upon its own judgment and upon advice from such professional advisers as it has deemed it necessary to consult;
(iii) it understands the terms, conditions and risks of each Transaction and is willing to assume (financially and otherwise) those risks;
(h) at the time of transfer to the other party of any Securities it will have the full and unqualified right to make such transfer and that upon such transfer of Securities the other party will receive all right, title and interest in and to those Securities free of any lien (other than a lien granted to the operator of the clearance system through which the Securities are transferred), claim, charge or encumbrance; and
(i) insofar as it wishes or is required for any reason to enter into only transactions which comply or are consistent with the principles of Shari’ah ("Shari'ah Compliant" or "Shari'ah Compliance"), it has made its own investigation into and satisfied itself as to the Shari'ah Compliance of this Agreement, each document entered into pursuant to or in connection with this Agreement and the Transactions entered into hereunder, and all necessary action to confirm that this Agreement, each document entered into pursuant to or in connection with this Agreement and the Transactions contemplated hereunder are Shari'ah Compliant has been taken (including the obtaining of a fatwa where required) and it will not claim any dispute on the grounds of Shari'ah Compliance of this Agreement, any document entered into pursuant to or in connection with this Agreement or any Transactions contemplated hereunder;
(j) it has not relied on the other party or any written declaration, fatwa, opinion or other documents prepared by, on behalf of or at the request of the other party for the purposes of a determination or confirmation that this Agreement, each document entered into pursuant to or in connection with this Agreement and the Transactions contemplated hereunder are Shari'ah compliant; and
(k) it is entering into this Agreement in the ordinary course of its business, and not for speculative purposes.
On the date on which any Transaction is entered into pursuant hereto, and on each day on which Securities, Margin Securities or Equivalent Margin Securities are to be transferred under any Transaction, Buyer and Seller shall each be deemed to repeat all the foregoing representations. For the avoidance of doubt and notwithstanding any arrangements which Seller or Buyer may have with any third party, each party will be liable as a principal for its obligations under this Agreement and each Transaction.
12. Events of Default
(a) If any of the following events (each an “Event of Default”) occurs in relation to either party (the "Defaulting Party”, the other party being the “non-Defaulting Party”) whether acting as Seller or Buyer -
(i) Buyer fails to pay the First Purchase Price upon the applicable First Purchase Date or Seller fails to pay the Second Purchase Price upon the applicable Second Purchase Date; or
(ii) if the parties have specified in Annex I that this sub-paragraph shall apply, Seller fails to deliver the First Purchased Securities on the First Purchase Date or Buyer fails to deliver the Second Purchased Securities on the Second Purchase Date, in either case within the standard settlement time for delivery of the Securities concerned; or
(iii) Seller or Buyer fails to pay when due any sum payable under sub-paragraph (i) or (j) below; or
(iv) Seller or Buyer fails to:
(A) make a Margin Transfer within the minimum period in accordance with paragraph 6(g) or, in the case of an obligation to deliver Equivalent Margin Securities, either to deliver the relevant Equivalent Margin Securities or to pay Cash Margin in accordance with paragraph 6(h)(i) or to pay the Cash Equivalent Amount in accordance with paragraph 6(h)(ii); or
(B) where paragraph 6(i) applies, to provide margin in accordance with that paragraph; or
(v) Seller or Buyer fails to comply with paragraph 7; or
(vi) an Act of Insolvency occurs with respect to Seller or Buyer; or
(vii) any representations made by Seller or Buyer are incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated; or
(viii) Seller or Buyer admits to the other that it is unable to, or intends not to, perform any of its obligations hereunder or in respect of any Transaction; or
(ix) Seller or Buyer being declared in default or being suspended or expelled from membership of or participation in, any securities exchange or suspended or prohibited from dealing in securities by any Competent Authority, in each case on the grounds that it has failed to meet any requirements relating to financial resources or credit rating; or
(x) Seller or Buyer fails to perform any other of its obligations hereunder and does not remedy such failure within 30 days after notice is given by the non-Defaulting Party requiring it to do so,
then sub-paragraphs (b) to (h) below shall apply.
(b) If at any time an Event of Default has occurred and is continuing the non-Defaulting Party may, by not more than 20 days’ notice to the Defaulting Party specifying the relevant Event of Default, designate a day not earlier than the day such notice is effective as an Early Termination Date in respect of all outstanding Transactions. If, however, “Automatic Early Termination” is specified in Annex I with respect to the Defaulting Party, then an Early Termination Date in respect of all outstanding Transactions will occur at the time immediately preceding the occurrence with respect to the Defaulting Party of an Act of Insolvency which is the presentation of a petition for winding-up or any analogous proceeding or the appointment of a liquidator or analogous officer of the Defaulting Party.
(c) If an Early Termination Date occurs, subject to sub-paragraph (d) below, the Exercise Date for each Transaction hereunder shall occur on the Early Termination Date and the parties acknowledge and agree that the Exercising Party shall have the right to exercise the undertaking(s) of the Undertaking Party in respect of all (but not some only) of the Non-Exercised Transactions (for which purpose, the Seller Exercise Conditions and the Buyer Exercise Conditions shall be disregarded), by delivering an Exercise Notice to the Undertaking Party (and, for the avoidance of doubt, the same Exercise Notice may cover any number of Transactions), on any day in the period from (and including) the date that the statement under sub-paragraph (e)(iii) below is effective to (but excluding) the day falling 30 calendar days after such date (the “Termination Long Stop Date"); provided that, if the Exercising Party has not delivered an Exercise Notice in accordance with paragraph 5 and this sub-paragraph (c) on or prior to the Termination Long Stop Date, such Exercise Notice will be deemed to have been delivered on the Termination Long Stop Date.
(d) If the Exercising Party exercises the undertaking(s) of the Undertaking Party in accordance with paragraph 5 and sub-paragraph (c) above, subject to the following provisions in respect of each Transaction: (i) all Cash Margin shall be repayable and Equivalent Margin Securities shall be deliverable and Cash Equivalent Amounts shall be payable, in each case on the Cash Settlement Payment Date; and (ii) performance of the respective obligations of the parties with respect to the delivery of Securities, the payment of the Second Purchase Price for any Second Purchased Securities, the repayment of any Cash Margin and the payment of Cash Equivalent Amounts shall be deemed to be discharged and replaced with an obligation on the Undertaking Party to pay the Cash Settlement Amount to the Exercising Party in accordance with the provisions of sub-paragraph (e) below.
(e) (i) The Default Market Values of the Second Purchased Securities and any equivalent Margin Securities to be transferred, the amount of any Cash Margin to be transferred and the Second Purchase Prices and Cash Equivalent Amounts to be paid by each party shall be established by the non-Defaulting Party for all Transactions as at the Early Termination Date, provided that, if the parties have specified in Annex I that "Zero Price Differential on Default” shall apply, then, for the purpose of determining the Second Purchase Price in respect of each Non-Exercised Transaction, the Price Differential shall be deemed to be zero;
(ii) on the basis of the sums so established, an account shall be taken (as at the Early Termination Date) of what is due from each party to the other under this Agreement (on the basis that each party's claim against the other in respect of the transfer to it of Second Purchased Securities or Equivalent Margin Securities under this Agreement equals the Default Market Value therefor and including amounts payable under paragraphs 12(h) and 14 (if applicable)) and the sums due from one party shall be set off against the sums due from the other and only the balance of the account shall be payable (by the party having the claim valued at the lower amount pursuant to the foregoing). For the purposes of this calculation, all Transactions shall be deemed to be Exercised Transactions and all sums not denominated in the Base Currency shall be converted into the Base Currency at the Spot Rate; and
(iii) as soon as reasonably practicable after effecting the calculation above, the non-Defaulting Party shall provide to the Defaulting Party a statement showing in reasonable detail such calculations and specifying the balance payable by one party to the other (such balance, the "Cash Settlement Amount”) and such balance shall be due and payable on the later of the Business Day following (A) the date of such statement and (B) the date on which the Exercising Party exercises the undertaking(s) of the Undertaking Party (the later of such dates, the “Cash Settlement Payment Date”).
(f) For the purposes of this Agreement, the "Default Market Value” of any Second Purchased Securities or Equivalent Margin Securities shall be determined by the non-Defaulting Party on or as soon as reasonably practicable after the Early Termination Date in accordance with sub-paragraph (g) below, and for this purpose -
(i) the "Appropriate Market” means, in relation to Securities of any description, the market which is the most appropriate market for Securities of that description, as determined by the non-Defaulting Party;
(ii) "Deliverable Securities” means Second Purchased Securities or Equivalent Margin Securities to be delivered by the Defaulting Party (in the case of Second purchased Securities, following the exercise by the Exercising Party of the Undertaking Party’s undertaking(s));
(iii) "Net Value” means at any time, in relation to any Deliverable Securities or Receivable Securities, the amount which, in the reasonable opinion of the non-Defaulting Party, represents their fair market value, having regard to such pricing sources (including trading prices) and methods (which may include, without limitation, available prices for Securities with similar maturities, terms and credit characteristics as the relevant Second Purchased Securities or Equivalent Margin Securities) as the non-Defaulting Party considers appropriate, less, in the case of Receivable Securities, or plus, in the case of Deliverable Securities, all Transaction Costs which would be incurred or reasonably anticipated in connection with the purchase or sale of such Securities;
(iv) "Receivable Securities” means Second Purchased Securities or Equivalent Margin Securities to be delivered to the Defaulting Party (in the case of Second Purchased Securities, following the exercise by the Exercising Party of the Undertaking Party’s undertaking(s)); and
(v) "Transaction Costs” in relation to any transaction contemplated in paragraph 12(f) or (g) means the reasonable costs, commissions, fees and expenses (including any mark-up or mark-down or premium paid for guaranteed delivery) incurred or reasonably anticipated in connection with the purchase of Deliverable Securities or sale of Receivable Securities, calculated on the assumption that the aggregate thereof is the least that could reasonably be expected to be paid in order to carry out the transaction.
(g) If-
(i) on or about the Early Termination Date the non-Defaulting Party has sold, in the case of Receivable Securities, or purchased, in the case of Deliverable Securities, Securities which form part of the same issue and are of an identical type and description as those Second Purchased Securities or Equivalent Margin Securities (regardless as to whether or not such sales or purchases have settled), the non-Defaulting Party may elect to treat as the Default Market Value -
(A) in the case of Receivable Securities, the net proceeds of such sale after deducting all reasonable costs, commissions, fees and expenses incurred in connection therewith (provided that, where the Securities sold are not identical in amount to the Second Purchased Securities or Equivalent Margin Securities, the non-Defaulting Party may, acting in good faith, either (x) elect to treat such net proceeds of sale divided by the amount of Securities sold and multiplied by the amount of the Second Purchased Securities or Equivalent Margin Securities as the Default Market Value or (y) elect to treat such net proceeds of sale of the Second Purchased Securities or Equivalent Margin Securities actually sold as the Default Market Value of that proportion of the Second Purchased Securities or Equivalent Margin Securities, and, in the case of (y), the Default Market Value of the balance of the Second Purchased Securities or Equivalent Margin Securities shall be determined separately in accordance with the provisions of this paragraph 12(g)); or
(B) in the case of Deliverable Securities, the aggregate cost of such purchase, including all reasonable costs, commissions, fees and expenses incurred in connection therewith (provided that, where the Securities purchased are not identical in amount to the Second Purchased Securities or Equivalent Margin Securities, the non-Defaulting Party may, acting in good faith, either (x) elect to treat such aggregate cost divided by the amount of Securities sold and multiplied by the amount of the Second Purchased Securities or Equivalent Margin Securities as the Default Market Value or (y) elect to treat the aggregate cost of purchasing the Second Purchased Securities or Equivalent Margin Securities actually purchased as the Default Market Value of that proportion of the Second Purchased Securities or Equivalent Margin Securities, and, in the case of (y), the Default Market Value of the balance of the Second Purchased Securities or Equivalent Margin Securities shall be determined separately in accordance with the provisions of this paragraph 12(g));
(ii) on or about the Early Termination Date the non-Defaulting Party has received, in the case of Deliverable Securities, offer quotations or, in the case of Receivable Securities, bid quotations in respect of Securities of the relevant description from two or more market makers or regular dealers in the Appropriate Market in a commercially reasonable size, using pricing methodology which is customary for the relevant type of security (as determined by the non-Defaulting Party) the non-Defaulting Party may elect to treat as the Default Market Value of such Securities -
(A) the price quoted (or where a price is quoted by two or more market makers, the arithmetic mean of such prices) by each of them for, in the case of Deliverable Securities, the sale by the relevant market maker or dealer of such Securities or, in the case of Receivable Securities, the purchase by the relevant market maker or dealer of such Securities provided that such price or prices quoted may be adjusted in a commercially reasonable manner by the non-Defaulting Party (x) to reflect accrued but unpaid coupons not reflected in the price or prices quoted in respect of such securities and (y) in respect of any Pool Factor Affected Security, to reflect the realisable value of such Security, taking into consideration the Pool Factor Distortion (and for this purpose, “Pool Factor Affected Security” means a security other than an equity security in respect of which the decimal value of the outstanding principal divided by the original principal balance of such Security is less than one (as indicated by any pool factor applicable to such security), such circumstance a “Pool Factor Distortion”);
(B) after deducting, in the case of Receivable Securities, or adding, in the case of Deliverable Securities the Transaction Costs which would be incurred or reasonably anticipated in connection with such a transaction; or
(iii) if, acting in good faith the non-Defaulting Party either -
(A) has endeavoured but been unable to sell or purchase Securities in accordance with sub-paragraph (i) above or to obtain quotations in accordance with sub-paragraph (ii) above (or both); or
(B) has determined that it would not be commercially reasonable to sell or purchase Securities at the prices bid or offered or to obtain such quotations, or that it would not be commercially reasonable to use any quotations which it has obtained under sub-paragraph (ii) above, the non-Defaulting Party may determine the Net Value of the relevant Second Purchased Securities or Equivalent Margin Securities (which shall be specified) and may treat such Net Value as the Default Market Value of the relevant Second Purchased Securities or Equivalent Margin Securities.
(h) The Defaulting Party shall be liable to the non-Defaulting Party for the amount of all reasonable and legal and other professional expenses incurred by the non-Defaulting Party in connection with or as a consequence of an Event of Default.
(i) If Seller fails to deliver the First Purchased Securities to Buyer on the applicable First Purchase Date, Buyer may -
(i) if it has paid the First Purchase Price to Seller, require Seller immediately to repay the sum so paid;
(ii) if Buyer has a Transaction Exposure to Seller in respect of the relevant Transaction, require Seller from time to time to pay Cash Margin at least equal to such Transaction Exposure;
(iii) at any time while such failure continues, terminate the Transaction by giving written notice to Seller. On such termination the obligations of Seller and Buyer with respect to delivery of the First Purchased Securities, and their respective undertakings, shall terminate and, unless "Zero Price Differential on Default" is specified as applicable in Annex I and the Transaction is a Non-Exercised Transaction, Seller shall pay to Buyer an amount equal to the excess of the Second Purchase Price at the date of Termination over the First Purchase Price.
(j) If Buyer fails to deliver some or all of the Second Purchased Securities to Seller on the applicable Second Purchase Date, Seller may -
(i) if it has paid the Second Purchase Price to Buyer, require Buyer immediately to repay the sum so paid;
(ii) if Seller has a Transaction Exposure to Buyer in respect of the relevant Transaction, require Buyer from time to time to pay Cash Margin at least equal to such Transaction Exposure;
(iii) at any time while such failure continues, by written notice to Buyer declare that that Transaction or part of that Transaction corresponding to the Second Purchased Securities that have not been delivered (but only that Transaction or part of Transaction) shall be terminated immediately in accordance with sub-paragraph (d) above (disregarding for this purpose references in that sub-paragraph to transfer of Cash Margin, delivery of Equivalent Margin Securities and payment of Cash Equivalent Amount and as if references to the Second Purchase Date were to the date on which notice was given under this sub-paragraph).
(k) The provisions of this Agreement constitute a complete statement of the remedies available to each party in respect of any Event of Default.
(l) Subject to paragraph 12(m), neither party may claim any sum by way of consequential loss or damage in the event of a failure by the other party to perform any of its obligations under this Agreement.
(m)(i) Subject to sub-paragraph (ii) below, if as a result of a Transaction terminating before the scheduled Second Purchase Date under paragraphs 12(b), 12(i)(iii) or 12(j)(iii), the non-Defaulting Party, in the case of paragraph 12(b), Buyer, in the case of paragraph 12(i)(iii), or Seller, in the case of paragraph 12(j)(iii), (in each case the "first party”) incurs any loss or expense in entering into replacement transactions or in otherwise hedging its exposure arising in connection with a Transaction so terminating, the other party shall be required to pay to the first party the amount determined by the first party in good faith and without double counting to be equal to the loss or expense incurred in connection with such replacement transactions or hedging (including all fees, costs and other expenses) less the amount of any profit or gain made by that party in connection with such replacement transactions or hedging; provided that if that calculation results in a negative number, an amount equal to that number shall be payable by the first party to the other party.
(ii) If the first party reasonably decides, instead of entering into such replacement transactions, to replace or unwind any hedging transactions which the first party entered into in connection with the Transaction so terminating, or to enter into any replacement hedging transactions, the other party shall be required to pay to the first party the amount determined by the first party in good faith to be equal to the loss or expense incurred in connection with entering into such replacement or unwinding (including all fees, costs and other expenses) less the amount of any profit or gain made by that party in connection with such replacement or unwinding; provided that if that calculation results in a negative number, an amount equal to that number shall be payable by the first party to the other party.
(n) Each party shall immediately notify the other if an Event of Default, or an event which, upon the service of a notice or the lapse of time, or both, would be an Event of Default, occurs in relation to it.
(o) Any amount payable to one party (the Payee) by the other party (the Payer) under paragraph 12(e) may, at the option of the non-Defaulting Party, be reduced by its set off against any amount payable (whether at such time or in the future or upon the occurrence of a contingency) by the Payee to the Payer (irrespective of the currency, place of payment or booking office of the obligation) under any other agreement between the Payee and the Payer or instrument or undertaking issued or executed by one party to, or in favour of, the other party. If an obligation is unascertained, the non-Defaulting Party may in good faith estimate that obligation and set off in respect of the estimate, subject to accounting to the other party when the obligation is ascertained. Nothing in this paragraph shall be effective to create a charge or other security interest. This paragraph shall be without prejudice and in addition to any right of set off, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise).
13. Tax Event
(a) This paragraph shall apply if either party notifies the other that -
(i) any action taken by a taxing authority or brought in a court of competent jurisdiction (regardless of whether such action is taken or brought with respect to a party to this Agreement); or
(ii) a change in the fiscal or regulatory regime (including, but not limited to, a change in law or in the general interpretation of law but excluding any change in any rate of tax),
has or will, in the notifying party's reasonable opinion, have a material adverse effect on that party in the context of a Transaction.
(b) If so requested by the other party, the notifying party will furnish the other with an opinion of a suitably qualified adviser that an event referred to in sub-paragraph (a)(i) or (ii) above has occurred and affects the notifying party.
(c) Where this paragraph applies, the party giving the notice referred to in sub-paragraph (a) may, subject to sub-paragraph (d) below, terminate the Transaction with effect from a date specified in the notice, not being earlier (unless so agreed by the other party) than 30 days after the date of the notice, by nominating that date as the Exercise Date and the Second Purchase Date, and the provisions of paragraph 5(b) shall apply accordingly.
(d) If the party receiving the notice referred to in sub-paragraph (a) so elects, it may override that notice by giving a counter-notice to the other party. If a counter-notice is given, the party which gives the counter-notice will be deemed to have agreed to indemnify the other party against the adverse effect referred to in sub-paragraph (a) so far as relates to the relevant Transaction and the original Second Purchase Date will continue to apply.
(e) Where a Transaction is terminated as described in this paragraph, the party which has given the notice to terminate shall indemnify the other party against any reasonable legal and other professional expenses incurred by the other party by reason of the termination, but the other party may not claim any sum by way of consequential loss or damage in respect of a termination in accordance with this paragraph.
(f) This paragraph is without prejudice to paragraph 8(b) (obligation to pay additional amounts if withholding or deduction required); but an obligation to pay such additional amounts may, where appropriate, be a circumstance which causes this paragraph to apply.
14. Late Payment Amount
(a) Late Payment Amount
If the parties have specified in Annex I that this paragraph 14 shall apply, if all or any part of any sum due and payable by a Party (the "Paying Party") under the terms of this Agreement is not paid to the other Party (the “Affected Party") on the due date (the "Due Date”), a late payment amount (the “Late Payment Amount") shall be payable on such amount as calculated in accordance with sub-paragraph (b) below.
(i) For the purposes of sub-paragraph (b) below, the unpaid amount due from the Paying Party shall be called the “Unpaid Sum”; and
(ii) the period beginning on (and including) the Due Date and ending on (but excluding) the date upon which the obligation of the Paying Party to pay the Unpaid Sum is discharged in full shall be called the “Applicable Period".
(b) Calculation of Late Payment Amount
(i) The Late Payment Amount shall be:
(x) an amount equal to the Unpaid Sum multiplied by the Applicable Rate, multiplied further by the number of days in such Applicable Period and divided by 360 or 365 in accordance with the applicable market convention (or as otherwise agreed between the parties); or
(y) such other amount as may be agreed between the parties at the relevant time.
(ii) If the Applicable Period exceeds one week it shall be deemed to be divided into successive sub-periods, each of which (other than the first, which shall be for a period of seven (7) days commencing on the Due Date) shall start on (and include) the last day of the preceding such period and the duration of which shall be selected by the Affected Party (acting reasonably). The Late Payment Amount shall be calculated for each such sub-period as if the references to Applicable Period above were references to such sub-period and shall be payable at the end of each such sub-period.
(c) Payment of Late Payment Amount
Any Late Payment Amount received by the Affected Party shall be used to pay any actual costs (not to include any opportunity cost) incurred by it as a result of the late payment of the Unpaid Sum and the remaining amount (if any) shall be donated by the Affected Party (on behalf of the Paying Party) to such registered charitable foundations as the Affected Party may select under the supervision of its Shari'ah board. The Affected Party shall, as soon as reasonably practicable following the request of the Paying Party, provide the Paying Party with documentation evidencing any such donation.
15. Single Agreement
Each party acknowledges that, and has entered into this Agreement and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that all Transactions hereunder constitute a single business and contractual relationship and are made in consideration of each other. Accordingly, each party agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, and (ii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder.
16. Notices and Other Communications
(a) Any notice or other communication to be given under this Agreement -
(i) shall be in the English language, and except where expressly otherwise provided in this Agreement, shall be in writing;
(ii) may be given in any manner described in sub-paragraphs (b) and (c) below,
(iii) shall be sent to the party to whom it is to be given at the address or number, or in accordance with the electronic messaging details, set out in Annex I
(b) Subject to sub-paragraph (c) below, any such notice or other communication shall be effective -
(i) if in writing and delivered in person or by courier, on the date when it is delivered;
(ii) if sent by facsimile transmission, on the date when the transmission is received by a responsible employee of the recipient in legible form (it being agreed that the burden of proving receipt will be on the sender and will not be met by a transmission report generated by the sender's facsimile machine);
(iii) if sent by certified or registered mail (airmail, if overseas) or the equivalent (return receipt requested), on the date that mail is delivered or its delivery is attempted; or
(iv) if sent by Electronic Messaging System, on the date that electronic message is received;
except that any notice or communication which is received, or delivery of which is attempted, after close of business on the date of receipt or attempted delivery or on a day which is not a day on which commercial banks are open for business in the place where that notice or other communication is to be given shall be treated as given at the opening of business on the next following day which is such a day.
(c) lf-
(i) there occurs in relation to either party an Event of Default; and
(ii) the non-Defaulting Party, having made all practicable efforts to do so, including having attempted to use at least two of the methods specified in sub-paragraph (b)(ii), (iii) or (iv) above, has been unable to serve a Default Notice by one of the methods specified in those sub-paragraphs (or such of those methods as are normally used by the non-Defaulting Party when communicating with the Defaulting Party),
the non-Defaulting Party may sign a written notice (a “Special Default Notice”) which -
(A) specifies the relevant event referred to in paragraph 12(a) which has occurred in relation to the Defaulting Party;
(B) specifies the Early Termination Date designated in the Default Notice;
(C) states that the non-Defaulting Party, having made all practicable efforts to do so, including having attempted to use at least two of the methods specified in sub-paragraph (b)(ii), (iii) or (iv) above, has been unable to serve a Default Notice by one of the methods specified in those sub- paragraphs (or such of those methods as are normally used by the non-Defaulting Party when communicating with the Defaulting Party); and
(D) specifies the date on which, and the time at which, the Special Default Notice is signed by the non-Defaulting Party.
On the signature of a Special Default Notice the Early Termination Date shall occur as designated in the Default Notice. A Special Default Notice shall be given to the Defaulting Party as soon as practicable after it is signed.
(d) Either party may by notice to the other change the address or facsimile number or Electronic Messaging System details at which notices or other communications are to be given to it.
17. Entire Agreement; Severability
This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for Transactions. Each provision and agreement herein shall be treated as separate from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement.
18. Non-assignability; Termination
(a) Subject to sub-paragraph (b) below, neither party may assign, charge or otherwise deal with (including without limitation any dealing with any interest in or the creation of any interest in) its rights or obligations under this Agreement or under any Transaction without the prior written consent of the other party. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns.
(b) Sub-paragraph (a) above shall not preclude a party from assigning, charging or otherwise dealing with all or any part of its interest in any sum payable to it under paragraph 12(c) or (h) above.
(c)Either party may terminate this Agreement by giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding.
(d) All remedies hereunder shall survive Termination in respect of the relevant Transaction and termination of this Agreement.
19. Governing Law and Jurisdiction
This Agreement will be governed by the laws of the Kingdom of Saudi Arabia. Each party submits to the exclusive jurisdiction of the Banking Disputes Committee established in the Kingdom of Saudi Arabia pursuant to High Order No. 729/8 dated 10/7/1407H (corresponding to 10/3/1987) and operating under the aegis of the Saudi Arabian Monetary Authority, as reconstituted pursuant to Royal Order No. 37441 dated 11/8/1433H (corresponding to 1/7/2012) and its appellate committee and any successor forum thereto.
20. No Waivers, etc.
No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such modification, waiver or consent shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to paragraph 6(a) hereof will not constitute a waiver of any right to do so at a later date.
21. Waiver of Immunity
Each party hereto hereby waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, attachment (both before and after judgment) and execution to which it might otherwise be entitled in any action or proceeding in the Courts of England or of any other country or jurisdiction, relating in any way to this Agreement or any Transaction, and agrees that it will not raise, claim or cause to be pleaded any such immunity at or in respect of any such action or proceeding.
22. No Interest Payable
The parties intend and agree that no interest will be payable or receivable under or in connection with this Agreement, and in the event that as a result of any arbitral or judicial award or by operation of any applicable law or otherwise it is determined that any interest is payable in connection with this Agreement, each party agrees to waive any rights it may have to claim or receive such interest and agrees that if any such interest is actually received by it, it shall donate the same to a registered, or otherwise officially recognised, charitable organisation selected by it and whose name shall be disclosed by it to the other party.
23. Recording
The parties agree that each may electronically record all telephone conversations between them.
(Name of Party] (Name of Party] By________________________ By________________________ Title ______________________ Title ______________________ Date Date ANNEX 1 Supplemental Terms or Conditions
Paragraph references are to paragraphs in the Agreement.
1. The following elections shall apply -
(a) paragraph 2(d). The Base Currency shall be:____________________________.
(b) paragraph 2(r). [list Buyer's and Seller s Designated Offices]
_____________________________________________________________________________________________
_____________________________________________________________________________________________
(c) paragraph 2(xx). Securities shall be: [Shari'ah-compliant securities or financial instruments],
(d) paragraph 3(b). [Seller/Buyer/both Seller and Buyer]* to deliver Confirmation.
(e) paragraph 6(g). Delivery period for margin calls to be:______________________________________.
(f) paragraph 6(j). Details agreed between the parties regarding the accrual of any investment return in respect of Cash Margin transferred to a party:_________________________________________.
[(g) paragraph 8(j). Paragraph 8(j) shall apply.]'
[(h) paragraph 12(a)(ii). Paragraph 12(a)(ii) shall apply.]*
(i) paragraph 12(b). Automatic Early Termination shall apply with respect to [Party A] [Party B]]‘
(j) paragraph 12(e)(1) and 12(i)(iii). Zero Price Differential on Default shall [apply][not apply].
(k) paragraph 14. Paragraph 14 shall [apply][not apply].
(l) paragraph 16. For the purposes of paragraph 16 of this Agreement -
(i) Address for notices and other communications for Party A -
Address:_______________________________________________________
Attention:_______________________________________________________ .
Telephone:___________________________________________________.
Facsimile:_______________________________________________________.
Electronic Messaging System:_______________________________________________________
Answerback:_______________________________________________________
Other:
(ii) Address for notices and other communications for Party B -
Address:_______________________________________________________
Attention:_______________________________________________________
Telephone:_______________________________________________________
Facsimile: _______________________________________________________
Electronic Messaging System: _______________________________________________________
Answerback: _______________________________________________________
Other:
2. The following supplemental terms and conditions shall apply -
[Negative rate transactions
In the case of Transactions in which the Pricing Rate will be negative, the parties agree that if Seller fails to deliver the First Purchased Securities on the First Purchase Date then -
(i) Buyer may by notice to Seller terminate the Transaction (and may continue to do so for every day that Seller fails to deliver the First Purchased Securities); and
(ii) for every day that Seller fails to deliver the First Purchased Securities the Pricing Rate shall be zero.]*
ANNEX II Form of Confirmation
To:_________________________________
From:_________________________________
Date:_________________________________
Subject: Securities Sale Transaction
(Reference Number:_________________________________)
Dear Sirs,
The purpose of this letter, a “Confirmation" for the purposes of the Agreement, is to set forth the terms and conditions of the above repurchase transaction entered into between us on the Contract Date referred to below.
This Confirmation supplements and forms part of, and is subject to, the Master Agreement for the Sale and Purchase of Securities as entered into between us as of_________________________________ as the same may be amended from time to time (the “Agreement”). All provisions contained in the Agreement govern this Confirmation except as expressly modified below. Words and phrases defined in the Agreement and used in this Confirmation shall have the same meaning herein as in the Agreement.
In accordance with paragraph 4 (Undertakings) of the Agreement, in respect of the Transaction documented by this Confirmation and subject to paragraph 12 (Events of Default) of the Agreement:
(i) Seller unilaterally hereby irrevocably and unconditionally undertakes to Buyer that if:
(A) the Seller Exercise Condition with respect to an Exercise Date is satisfied; and
(B) Buyer delivers to Seller an Exercise Notice on, and with respect to, that Exercise Date,
Seller will purchase from Buyer for delivery on the Second Purchase Date the Second Purchased Securities for an amount equal to the Second Purchase Price; and
(ii) Buyer unilaterally hereby irrevocably and unconditionally undertakes to Seller that if:
(A) the Buyer Exercise Condition with respect to an Exercise Date is satisfied; and
(B) Seller delivers to Buyer an Exercise Notice on, and with respect to, that Exercise Date,
Buyer will sell to Seller for delivery on the Second Purchase Date the Second Purchased Securities for an amount equal to the Second Purchase Price.
- Contract Date:
- Purchased Securities [state type[s] and nominal value[s]]:
_____________________________________________________________________________________________________
- CUSIP, ISIN or other identifying numbers]:_________________________________________
- Buyer:_______________________________________________________________________________
- Seller:_______________________________________________________________________________
- First Purchase Date:_________________________________________________________________
- First Purchase Price:_________________________________________________________________
- Contractual Currency:_______________________________________________________________
- Exercise Date:______________________________________________________________________
- Second Purchase Date:_____________________________________________________________
- Pricing Rate:_________________________________________________________________________
- Buyer's Bank Account[s] Details:
- Seller's Bank Account[s] Details:
- [ Additional Terms]:*
Yours faithfully,
[SIGNATURE BLOCK FOR PARTY SENDING CONFIRMATION]
Acknowledged and agreed:
(SIGNATURE BLOCK FOR PARTY RECEIVING CONFIRMATION]
ANNEX III Form Of Exercise Notice [Letterhead of the Exercising Party]
To: [ ] (the "Undertaking Party”)
Date: [ ]
Dear:
[We refer to the Confirmation entered into by you and us dated [date] (the "Confirmation”) which supplements, forms part of and is subject to the Master Agreement for the Sale and Purchase of Securities dated [date], as amended and supplemented from time to time, between you and us (the “Agreement").
Unless the context requires otherwise, capitalised terms used in this Exercise Notice and not defined herein will have the same meaning as in the Confirmation.
The Exercising Party hereby confirms to the Undertaking Party that:
- the undersigned is duly authorised to execute and deliver this Exercise Notice on behalf of the Exercising Party;
the Exercising Party is hereby exercising the Undertaking Party’s undertaking in respect of the Exercise Date specified below and accordingly the Undertaking Party is hereby required to [purchase from][sell to] the Exercising Party the following Securities on the following terms:
a. Exercise Date: [ ]
b. Securities: [ ]
c. Second Purchase Date: [ ]
d. Second Purchase Price: [ ]]+
[We refer to the Master Agreement for the Sale and Purchase of Securities dated [date], as amended and supplemented from time to time, between you and us (the “Agreement ').
Unless the context requires otherwise, capitalised terms used in this Exercise Notice and not defined herein will have the same meaning as in the Agreement.
The Exercising Party hereby confirms to the Undertaking Party that:
- the undersigned is duly authorised to execute and deliver this Exercise Notice on behalf of the Exercising Party;
the Exercising Party is hereby exercising the Undertaking Party's undertaking(s) in respect of each Non-Exercised Transaction under the Agreement, and in respect of
+ To be used prior to the occurrence of an Early Termination Dare.
Margin Requirements for Non-Centrally Cleared Derivatives
No: 000042008998 Date(g): 5/10/2020 | Date(h): 18/2/1442 Status: In-Force Introduction
1. The margin requirements are one of the agreed Group of Twenty (G20) reforms to reduce the systemic risk from OTC derivatives.
2. These requirements are issued in accordance with the authority vested in SAMA under the Charter –issued via Royal Decree No. 23 dated 23/5/1377 H, and the Banking Control Law – issued via Royal Decree No. M/5 dated 22/2/1386 H.
3. These requirements supersede SAMA circulars No. 341000134328 dated 25/11/1434 H, 371000101114 dated 15/9/1437 H, and 51226/67 dated 16/8/1440 H.
Objectives
4. Margin requirements for non-centrally cleared derivatives have two main benefits:
• Reduction of systemic risk: Margin requirements for non-centrally cleared derivatives would be expected to reduce contagion and spillover effects by ensuring that collateral is available to offset losses caused by the default of a derivatives counterparty. Margin requirements can also have broader macroprudential benefits, by reducing the financial system’s vulnerability to potentially destabilising procyclicality and limiting the build-up of uncollateralised exposures within the financial system.
• Promotion of central clearing: Margin requirements are expected to promote central clearing, making the G20’s 2009 reform programme more effective. This could, in turn, contribute to the reduction of systemic risk.
Key Principles and Requirements
Element 1: Scope of Coverage – Instruments Subject to the Requirements
Appropriate margining practices should be in place with respect to all derivatives transactions that are not cleared by Central Counterparties (CCPs)1.
5. Except for physically settled foreign exchange (FX) forwards and swaps, these margin requirements apply to all non-centrally cleared derivatives. These margin requirements do not apply to physically settled FX forwards and swaps.2
6. Initial margin requirements for cross-currency swaps do not apply to the fixed physically settled FX transactions associated with the exchange of principal of crosscurrency swaps. In practice, the margin requirements for cross-currency swaps may be computed in one of two ways. Initial margin may be computed by reference to the “interest rate” portion of the standardised initial margin schedule that is described in Element 3 below and presented in the Appendix A. Alternatively, if initial margin is being calculated pursuant to an approved initial margin model, the initial margin model need not incorporate the risk associated with the fixed physically settled FX transactions associated with the exchange of principal. All other risks that affect crosscurrency swaps, however, must be considered in the calculation of the initial margin amount3. The variation margin requirements that are described below apply to all components of cross-currency swaps.
1 These margining practices only apply to derivatives transactions that are not cleared by CCPs and do not apply to other transactions, such as repurchase agreements and security lending transactions that are not themselves derivatives but share some attributes with derivatives. In addition, indirectly cleared derivatives transactions that are intermediated through a clearing member on behalf of a non-member customer are not subject to these requirements as long as (a) the non-member customer is subject to the margin requirements of the clearing house or (b) the non-member customer provides margin consistent with the relevant corresponding clearing house’s margin requirements.
2 Banks should, however, adhere to Supervisory Guidance for Managing Risks Associated with the Settlement of Foreign Exchange Transactions (as published by BCBS https://www.bis.org/publ/bcbs241.pdf)
3 The only payments to be excluded from initial margin requirements for a cross-currency swap are the fixed physically settled FX transactions associated with the exchange of principal (which have the same characteristics as FX forward contracts). All other payments or cash flows that occur during the life of the swap must be subject to initial margin requirements.Element 2: Scope of Coverage – Scope of Applicability
All covered entities (ie financial firms and systemically important non-financial entities) that engage in non-centrally cleared derivatives must exchange initial and variation margin as appropriate to the counterparty risks posed by such transactions4.
7. For the purpose of this element, Systemically Important Non-financial Entities will be entities whose aggregate month-end average national amount of non-centrally cleared derivatives for the preceding March, April and May exceeds SAR 30 billion, at a consolidated group wide basis.
8. For purposes of determining whether a group’s non-centrally cleared derivatives notional amount exceeds SAR 30 billion, the following shall apply:
• Inter-affiliates trades should not be counted.
• All other non-centrally cleared derivatives must be counted.
9. Covered entities include all financial firms, and systemically important non-financial firms as defined in paragraph 7 above. Central banks, sovereigns5, multilateral development banks, the Bank for International Settlements, and non-systemic, nonfinancial firms are not covered entities6.
10. Only non-centrally cleared derivatives transactions between two covered entities are governed by these requirements. A transaction between a covered entity and one of the aforementioned entities is not covered by these requirements.
11. All covered entities that engage in non-centrally cleared derivatives must calculate, balance and exchange, on a bilateral basis, the full amount of variation margin (ie a zero threshold) on a daily basis. In case of any delay or exception, SAMA should be pre-notified.
12. All covered entities must exchange, on a bilateral basis, initial margin with a threshold not to exceed €50 million. The threshold is applied at the level of the consolidated group to which the threshold is being extended and is based on all non-centrally cleared derivatives between the two consolidated groups7.
13. All margin transfers between parties may be subject to a de-minimis minimum transfer amount not to exceed €500,000.
4 Different treatment is applied with respect to transactions between affiliated entities, as described under Element 6 below.
5 Public sector entities (PSEs) may be treated as sovereigns for the purpose of determining the applicability of these margin requirements.
6 Multilateral development banks (MDBs) exempted from this requirement are those that are eligible for a zero risk-weight under the Basel capital framework (as prescribed in the document published by the BCBS and IOSCO.)
7 Investment funds that are managed by an investment advisor are considered distinct entities that are treated separately when applying the threshold as long as the funds are distinct legal entities that are not collateralised by or are otherwise guaranteed or supported by other investment funds or the investment advisor in the event of fund insolvency or bankruptcy.Element 3: Baseline Minimum Amounts and Methodologies for Initial and Variation Margin
The methodologies for calculating initial and variation margin that serve as the baseline for margin collected from a counterparty should (i) be consistent across entities covered by these requirements and reflect the potential future exposure (initial margin) and current exposure (variation margin) associated with the particular portfolio of noncentrally cleared derivatives at issue and (ii) ensure that all counterparty risk exposures are covered fully with a high degree of confidence.
14. The applicable netting agreements in these requirements are not allowed in Saudi Arabia until relevant laws are enacted and netting is allowed by SAMA. If netting is enforceable in any jurisdiction, positive and negative mark to market exposures in that jurisdiction will be allowed to net.
Initial Margin
15. For the purpose of informing the initial margin baseline, the potential future exposure of a non-centrally cleared derivatives should reflect an extreme but plausible estimate of an increase in the value of the instrument that is consistent with a one-tailed 99 per cent confidence interval over a 10-day horizon,8 based on historical data that incorporates a period of significant financial stress. The initial margin amount must be calibrated to a period that includes financial stress to ensure that sufficient margin will be available when it is most needed and to limit the extent to which the margin can be procyclical.
16. The required amount of initial margin may be calculated by reference to either a quantitative portfolio margin model, or a standardised margin schedule. Banks should use the standardised schedule for initial margin. If a bank wishes to use advanced models, it should be subject to internal governance process, validation, testing and approval by SAMA. Models that have not been granted explicit approval may not be used for initial margin purposes.
17. When initial margin is calculated by reference to an initial margin model, the period of financial stress used for calibration should be identified and applied separately for each broad asset class for which portfolio margining is allowed, as set out below. In addition, the identified period must include a period of financial stress and should cover a historical period not to exceed five years. Additionally, the data within the identified period should be equally weighted for calibration purposes.
18. Quantitative initial margin models must be subject to an internal governance process that continuously assesses the value of the model’s risk assessments, tests the model’s assessments against realised data and experience, and validates the applicability of the model to the derivatives for which it is being used. The process must take into account the complexity of the products covered.
19. Quantitative initial margin models may account for risk on a portfolio basis. More specifically, the initial margin model may consider all of the derivatives that are approved for model use that are subject to a single legally enforceable netting agreement. Derivatives between counterparties that are not subject to the same legally enforceable netting agreement must not be considered in the same initial margin model calculation.
20. Derivative portfolios are often exposed to a number of offsetting risks that can and should be reliably quantified for the purposes of calculating initial margin requirements. At the same time, a distinction must be made between offsetting risks that can be reliably quantified and those that are more difficult to quantify. Accordingly, initial margin models may account for diversification, hedging and risk offsets within well defined asset classes such as currency/rates,9,10 equity, credit, or commodities, but not across such asset classes and provided these instruments are covered by the same legally enforceable netting agreement. However, any such incorporation of diversification, hedging and risk offsets by an initial margin model will require approval by SAMA. Initial margin calculations for derivatives in distinct asset classes must be performed without regard to derivatives in other asset classes.
21. For entities using standardised margin schedule, the required initial margin should be computed by referencing the standardised margin rates in Appendix A, and by adjusting the gross initial margin amount by an amount that relates to the net-to-gross ratio (NGR) pertaining to all derivatives in the legally enforceable netting set.
22. The required initial margin amount should be calculated in two steps. First, the margin rate in the provided schedule would be multiplied by the gross notional size of the derivatives contract, and then this calculation would be repeated for each derivatives contract. This amount may be referred to as the gross standardised initial margin. Second, the gross initial margin amount is adjusted by the ratio of the net current replacement cost to gross current replacement cost (NGR). This is expressed through the following formula:
Net standardised initial margin = 0.4 * Gross initial margin + 0.6 * NGR * Gross initial margin
23. Where NGR is defined as the level of net replacement cost over the level of gross replacement cost for transactions subject to legally enforceable netting agreements. The total amount of initial margin required on a portfolio according to the standardised margin schedule would be the net standardised initial margin amount.
24. Derivatives transactions between covered entities with zero counterparty risk require no initial margin to be collected and may be excluded from the initial margin calculation.
25. In a case where bank is allowed by SAMA to use an approved quantitative portfolio margin model, it will not be allowed to switch between model- and schedule- based margin calculations in an effort to “cherry pick” the most favourable initial margin terms. Accordingly, the choice between model- and schedule-based initial margin calculations should be made consistently over time for all transactions within the same well defined asset class and, it should comply with any other requirements imposed by SAMA. However, a bank may be allowed –upon SAMA’s approval- to use a model-based initial margin calculation for one class of derivatives in which it commonly deals and a schedule-based initial margin in the case of some derivatives that are less routinely employed in its trading activities.
26. Initial margin should be collected at the outset of a transaction, and collected thereafter on a routine and consistent basis upon changes in measured potential future exposure, such as when trades are added to or subtracted from the portfolio.
27. The build-up of additional initial margin should be gradual so that it can be managed over time. Moreover, margin levels should be sufficiently conservative, even during periods of low market volatility, to avoid procyclicality. The specific requirement that initial margin be set consistent with a period that includes stress is meant to limit procyclical changes in the amount of initial margin required.
28. Parties to derivatives contracts should have rigorous and robust dispute resolution procedures in place with their counterparty before the onset of a transaction. In particular, the amount of initial margin to be collected from one party by another will be the result of either an approved model calculation or the standardised schedule. The specific method and parameters that will be used by each party to calculate initial margin should be agreed and recorded at the onset of the transaction to reduce potential disputes. Moreover, parties may agree to use a single model for the purposes of such margin model calculations subject to bilateral agreement and appropriate approval by SAMA. In the event that a margin dispute arises, both parties should make all necessary and appropriate efforts, including timely initiation of dispute resolution protocols, to resolve the dispute and exchange the required amount of initial margin in a timely fashion.
Variation Margin
29. For variation margin, the full amount necessary to fully collateralise the mark-to- market exposure of the non-centrally cleared derivatives must be exchanged.
30. To reduce adverse liquidity shocks and in order to effectively mitigate counterparty credit risk, variation margin should be calculated and exchanged for non-centrally cleared derivatives subject to a single, legally enforceable netting agreement with sufficient frequency.
31. Parties to derivatives contracts should have rigorous and robust dispute resolution procedures in place with their counterparty before the onset of a transaction. In the event that a margin dispute arises, both parties should make all necessary and appropriate efforts, including timely initiation of dispute resolution protocols, to resolve the dispute and exchange the required amount of variation margin in a timely fashion.
8 The 10-day requirement should apply in the case that variation margin is exchanged daily. If variation margin is exchanged – at exceptional cases approved by SAMA as prescribed in paragraph 11 of these requirements- at less than daily frequency then the minimum horizon should be set equal to 10 days plus the number of days in between variation margin exchanges; the threshold calculation set out in paragraph 12 should nonetheless be made irrespective of the frequency with which variation margin is exchanged.
9 Currency and interest rate derivatives may be portfolio margined together for the purposes of these requirements. As an example, an interest rate swap and a currency option may be margined on a portfolio basis as part of a single asset class.
10 Inflation swaps, which transfer inflation risk between counterparties, may be considered as part of the currency/rates asset class for the purpose of computing model-based initial margin requirements, and as part of the interest rate asset class for the purposes of computing standardised initial margin requirements.Element 4: Eligible Collateral for Margin
To ensure that assets collected as collateral for initial and variation margin purposes can be liquidated in a reasonable amount of time to generate proceeds that could sufficiently protect collecting entities covered by the requirements from losses on non-centrally cleared derivatives in the event of a counterparty default, these assets should be highly liquid and should, after accounting for an appropriate haircut, be able to hold their value in a time of financial stress. The set of eligible collateral should take into account that assets which are liquid in normal market conditions may rapidly become illiquid in times of financial stress. In addition to having good liquidity, eligible collateral should not be exposed to excessive credit, market and FX risk (including through differences between the currency of the collateral asset and the currency of settlement). To the extent that the value of the collateral is exposed to these risks, appropriately risk-sensitive haircuts should be applied. More importantly, the value of the collateral should not exhibit a significant correlation with the creditworthiness of the counterparty or the value of the underlying non-centrally cleared derivatives portfolio in such a way that would undermine the effectiveness of the protection offered by the margin collected (ie the so- called “wrong way risk”). Accordingly, securities issued by the counterparty or its related parties should not be accepted as collateral. Accepted collateral should also be reasonably diversified.
32. SAMA only considers eligible collaterals, which are allowed under the standardised approach for credit risk under the Risk-based Capital Framework adopted by SAMA, subject to appropriate haircuts described below.
33. Potential methods for determining appropriate haircuts include either internal or third- party quantitative model-based haircuts or schedule-based haircuts. Banks should apply standardised schedule-based haircuts as defined in Appendix B. If higher haircuts are proposed by different regulators in international jurisdictions, the higher haircut should be applied.
34. Risk-sensitive quantitative models, both internal or third-party, could be used to establish haircuts provided that the model is approved by SAMA and subject to appropriate internal governance standards.
35. Banks should not selectively apply the method for determining appropriate haircuts that would produce a lower haircut, banks should consistently adopt either the standardised tables approach or the internal/third-party models approach for all the collateral assets within the same well defined asset class.
36. In addition to haircuts, other risk mitigants should be considered when accepting noncash collateral. In particular, banks should ensure that the collateral collected is not overly concentrated in terms of an individual issuer, issuer type and asset type.
37. In the event that a dispute arises over the value of eligible collateral, both parties should make all necessary and appropriate efforts, including timely initiation of dispute resolution protocols, to resolve the dispute and exchange any required margin in a timely fashion.
38. Collateral that is posted by a counterparty to satisfy margin requirements may, at some point in time before the end of the derivatives contract, be needed by the counterparty for some particular reason or purpose. Alternative collateral may be substituted or exchanged for the collateral that was originally posted provided that both parties agree to the substitution and that the substitution or exchange is made on the terms applicable to their agreement. When collateral is substituted, the alternative collateral must meet all the requirements outlined above. Further, the value of the alternative collateral, after the application of haircuts, must be sufficient to meet the margin requirement.
Element 5: Treatment of Provided Initial Margin
Because the exchange of initial margin on a net basis may be insufficient to protect two market participants with large gross derivatives exposures to each other in the case of one firm’s failure, the gross initial margin between such firms should be exchanged. Initial margin collected should be held in such a way as to ensure that (i) the margin collected is immediately available to the collecting party in the event of the counterparty’s default, and (ii) the collected margin must be subject to arrangements that protect the posting party to the extent possible under applicable law in the event that the collecting party enters bankruptcy.
39. Initial margin should be exchanged on a gross basis and held in a manner consistent with the principle above.
40. The collateral arrangements should be effective under relevant laws and supported by periodically updated legal opinions.
41. Cash and non-cash collateral collected as variation margin may be re-hypothecated, re-pledged or re-used.
42. Except where re-hypothecated, re-pledged or re-used in accordance with paragraph 43 below, cash and non-cash collateral collected as initial margin should not be rehypothecated, re-pledged or re-used.
43. Cash and non-cash collateral collected as initial margin from a customer may be rehypothecated, re-pledged or re-used (henceforth re-hypothecated) to a third party only for purposes of hedging the initial margin collector’s derivatives position arising out of transactions with customers for which initial margin was collected and it must be subject to conditions that protect the customer’s rights in the collateral, where applicable. In any event, and upon approval from SAMA on a case by case basis, the customer’s collateral may be re-hypothecated only if the conditions described below are met:
• The customer, as part of its contractual agreement with the initial margin collector and after disclosure by the initial margin collector of (i) its right not to permit rehypothecation and (ii) the risks associated with the nature of the customer’s claim to the re-hypothecated collateral in the event of the insolvency of the initial margin collector or the third party, gives express consent in writing to the re-hypothecation of its collateral. In addition, the initial margin collector must give the customer the option to individually segregate the collateral that it posts.
• The initial margin collector is subject to regulation of liquidity risk.
• Collateral collected as initial margin from the customer is treated as a customer asset, and is segregated from the initial margin collector’s proprietary assets until re-hypothecated. Once re-hypothecated, the third party must treat the collateral as a customer asset, and must segregate it from the third party’s proprietary assets. Assets returned to the initial margin collector after re-hypothecation must also be treated as customer assets and must be segregated from the initial margin collector’s proprietary assets.
• The collateral of customers that have consented to the re-hypothecation of their collateral must be segregated from that of customers that have not so consented.
• Where initial margin has been individually segregated, the collateral must only be re-hypothecated for the purpose of hedging the initial margin collector’s derivatives position arising out of transactions with the customer in relation to which the collateral was provided.
• Where initial margin has been individually segregated and subsequently rehypothecated, the initial margin collector must require the third party similarly to segregate the collateral from the assets of the third party’s other customers, counterparties and its proprietary assets.
• Protection is given to the customer from the risk of loss of initial margin in circumstances where either the initial margin collector or the third party becomes insolvent and where both the initial margin collector and the third party become insolvent.
• Where the initial margin collector re-hypothecates initial margin, the agreement with the recipient of the collateral (ie the third party) must prohibit the third party from further re-hypothecating the collateral.
• Where collateral is re-hypothecated, the initial margin collector must notify the customer of that fact. Upon request by the customer and where the customer has opted for individual segregation, the initial margin collector must notify the customer of the amount of cash collateral and the value of non-cash collateral that has been re-hypothecated.
• Collateral must only be re-hypothecated to, and held by, an entity that is regulated in a jurisdiction that meets all of the specific conditions contained in this section and in which the specific conditions can be enforced by the initial margin collector.
• The customer and the third party may not be within the same group.
• The initial margin collector and the third party must keep appropriate records to show that all the above conditions have been met.
44. Banks should disclose the level and volume of re-hypothecation as required in section “Reporting to SAMA” below.
Element 6: Treatment of Transactions with Affiliates
Transactions between a firm and its affiliates should be subject to these initial and variation margin requirements.
45. Banks should apply standardised schedule-based haircuts as defined in Appendix B for transactions between the bank and its affiliates.
Element 7: Interaction of National Regimes in Cross-Border Transactions
Regulatory regimes would interact so as to result in sufficiently consistent and non- duplicative regulatory margin requirements for non-centrally cleared derivatives across jurisdictions.
46. These margin requirements are applicable to legal entities established in Saudi Arabia, which includes locally established subsidiaries of foreign entities, in relation to the initial and variation margins that they collect. SAMA may permit a bank to comply with the margin requirements of a host-country margin regime with respect to its derivatives activities, provided that SAMA considers the host-country margin regime to be consistent with the margin requirements described in this framework.
47. For subsidiaries of Saudi banks in host jurisdictions, they should follow the requirements of the host country.
48. A branch is part of the same legal entity as the headquarters; it may be subject to either the margin requirements of the jurisdiction where the headquarters is established or the requirements of the host country. Foreign Bank Branches (FBB) operating in the Saudi Arabia should be deemed compliant with these requirements if:
• The FBB is required to comply with, and has complied with, the margin requirements of that foreign jurisdiction (home regulator) that have been implemented through Published laws, rules or regulations; and
• The FBB has documentary evidence that the margin requirements of the foreign jurisdiction (home regulator) are comparable to SAMA’s or BCBS-IOSCO’s margin requirements for non-central cleared derivatives.
Element 8: Phase-in of the Requirements
These requirements are phased in so that the systemic risk reductions and incentive benefits are appropriately balanced against the liquidity, operational and transition costs associated with implementing the requirements.
49. These requirements are applicable in a phased manner from 1 September 2016 as described in Margin requirements for Non-centrally Cleared Derivatives paper issued by Basel Committee on Banking Supervision (BCBS) and Board of the International Organization of Securities Commissions (IOSCO)11.
50. The remaining phases –at the time of issuance of this document- to apply the requirement to exchange two-way initial margin with a threshold of up to €50 million are staged as follows:
• From 1 September 2021 to 31 August 2022, any covered entity belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of 2021 exceeds €50 billion will be subject to the requirements when transacting with another covered entity (provided that it also meets that condition).
• On a permanent basis (ie from 1 September 2022), any covered entity belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of the year exceeds €8 billion will be subject to the requirements described in this document during the one-year period from 1 September of that year to 31 August of the following year when transacting with another covered entity (provided that it also meets that condition). Any covered entity belonging to a group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of the year is less than €8 billion will not be subject to the initial margin requirements described in this document.
51. For the purposes of calculating the group aggregate month-end average notional amount for determining whether a covered entity will be subject to the initial margin requirements described in this document, all of the group’s non-centrally cleared derivatives, including physically settled FX forwards and swaps, should be included.
52. Initial margin requirements should apply to all new contracts entered into during the periods described above. Applying the initial margin requirements to existing derivatives contracts is not required.12
11 Margin Requirements for Non-centrally Cleared Derivatives.
12 Genuine amendments to existing derivatives contracts do not qualify as a new derivatives contract. Any amendment that is intended to extend an existing derivatives contract for the purpose of avoiding margin requirements will be considered a new derivatives contract.Reporting to SAMA
53. All Banks should report relevant initial and variation margin details as prescribed in these requirements in SAMA Q17 returns.
Appendix A
Standardised initial margin schedule
Asset class Initial margin requirement
(% of notional exposure)Credit: 0–2 year duration 2 Credit: 2–5 year duration 5 Credit: 5+ year duration 10 Commodity 15 Equity 15 Foreign exchange 6 Interest rate: 0–2 year duration 1 Interest rate: 2–5 year duration 2 Interest rate: 5+ year duration 4 Other 15 Appendix B
Standardised haircut schedule
Asset class Haircut
(% of market value)Cash in same currency 0 High-quality government and central bank securities: residual maturity less than one year 0.5 High-quality government and central bank securities: residual maturity between one and five years 2 High-quality government and central bank securities: residual maturity greater than five years 4 High-quality corporate\covered bonds: residual maturity less than one year 1 High-quality corporate\covered bonds: residual maturity greater than one year and less than five years 4 High-quality corporate\covered bonds: residual maturity greater than five years 8 Equities included in major stock indices 15 Gold 15 Additional (additive) haircut on asset in which the currency of the derivatives obligation differs from that of the collateral asset 8 Primary Dealer in the Government Securities Market
No: 449950000067 Date(g): 23/3/2019 | Date(h): 17/7/1440 Status: In-Force Further to the Circular No. 32234/67 issued by the Central Bank on 23/05/1440 H. related to the guidelines and operational principles for Bank Primary Dealers (Bank-PDs) in Government Securities.
Attached are the operational guidelines for Bank Primary Dealers in Government Securities Market in English, which revoke and replace the principles issued under the aforementioned circular.
For your information and action effective from its date.
1. Eligibility conditions for banks proposing to undertake PD business
The following categories of banks would be eligible to undertake PD activities:
A. Banks which meet the minimum capital adequacy ratio as set by SAMA during the ICAAP process.
B. Strong managerial /trading capabilities with treasury operations that is fully computerized, with competent and knowledgeable staff, and with relevant professional experience in main treasury /front and back offices.
C. Adequate risk management systems to measure,manage and provide for the risks emanating from the PD activity. Banks should have a trading desk that has the capacity to hedge risks arising from the PD activities.
D. Adequate physical infrastructure and skilled manpower for efficient participation in primary issues, trading in the secondary market, and to advise and educate investors.
E. SAMA no-objection to undertake Primary Dealership business.
2. General Guidelines and Applicability
A. The bank-PDs' role and obligations in terms of supporting the primary market auctions for issue of Government dated securities, underwriting of Dated Government Securities, market-making in Government securities and secondary market turnover of Government Securities must not contravene any of the prudential rules currently in place for banks.
B. Bank-PDs are required to form a Primary Dealers' Committee and abide by a code of conduct that should be framed by such a committee and such other actions initiated by them in the interests of the securities markets.
C. The investment policy of the bank should be suitably amended to also include PD activities. Within the overall framework of the investment policy, the PD business undertaken by the bank will be limited to dealing, underwriting and market-making in Saudi Government Securities. Investments in Corporate bonds, Commercial Papers, Certificate of deposits and other fixed income securities will not be deemed to be part of the PD business.
D. Bank-PDs should update their investment policy and/or framework and implement a Board approved investment policy and operational guidelines on securities transactions. The policy/framework should include (but not limited to) the following:
- The broad objectives to be followed while undertaking transactions in securities on their own account and on behalf of clients;
- Clearly define the authority to put through deals, and lay down procedure to be followed while putting through deals;
- Various prudential exposure limits;
- Policy regarding dealings through brokers;
- Systems for management of various risks;
- Guidelines for valuation of the portfolio and the reporting systems;
- Operational procedures and controls in relation to the day-to-day business operations to ensure that operations in securities are conducted in accordance with sound and acceptable business practices.
- The effectiveness of the policy and operational guidelines should be periodically evaluated
E. The classification, valuation and operation of investment portfolio guidelines as applicable to banks in regard to "Held for Trading" portfolio will also apply to the portfolio of Government Dated Securities earmarked for PD market-making business.
F. The Government Dated Securities under Bank-PD business will count for SAMA Liquidity Ratios.
G. Bank-PDs should report to SAMA any violations of the terms and conditions of undertaking agreement they sign with the Debt Management Office (DMO).
3. Maintenance of Books, Accounts and Reporting
A. Bank-PDs will have to maintain separate books of accounts for transactions relating to PD business (distinct from transactions in securities on their own account) with necessary audit trails. It should be ensured that, at any point in time, Bank PDs observe the minimum DMO balance of Government Securities earmarked for PD market-making business.
B. Bank-PDs shall submit to their SAMA Team Leaders , an Annual Report on PD activities (with at least information on subscription activities, underwriting activities, primary and secondary markets turnover of the bank) by 15th of February the following year.
C. Bank-PDs should subject the PD transactions and any regulatory returns submitted to the DMO and SAMA to concurrent annual audit. An internal auditors' review report for having maintained the minimum stipulated balance of Government Securities in the PD-book on an ongoing basis and having adhered to these guidelines/ instructions issued by SAMA, should be undertaken and provided to SAMA upon request.
4. Capital Adequacy and Risk Management
A. The capital adequacy requirement and risk management guidelines will be as per the existing guidelines applicable to banks. For the purpose of assessing the bank's capital adequacy requirement and coverage under risk management framework, the PD activity should also be taken into account.
B. The bank undertaking PD activity should put in place adequate risk management systems to measure and provide for the risks emanating from the PD activity.
5. Implementation and Effective Date
A. All Bank-PDs are required to develop and implement the requisite policies and procedures to ensure compliance with these Rules. Any violation or circumvention of these Rules may warrant the appropriate regulatory action by SAMA.
B. Requirement 1(E) (SAMA no-objection) above shall not apply to banks already appointed by the DMO before the effective date of these regulations.
C. These Rules supersede the previous rules issued under SAMA circular 32234 /67 dated 23/05/1440 and shall come into force effective immediately.
Investment Business Activities
Consumer Protection
Regulations for Establishing Customer Care Departments in Banks
No: 44069265 Date(g): 21/3/2023 | Date(h): 29/8/1444 Status: In-Force Translated Document
Based on the Saudi Central Bank Law issued by Royal Decree No. (M/36) dated 11/4/1442 H, and referring to the Central Bank Circular No. (351000145194) dated 26/11/1435 H, which accompanies the update of the regulations for handling and establishing complaint units in banks.
These regulations for establishing Customer Care Departments in banks replace the aforementioned regulations and aim to define the minimum instructions that banks must adhere to in order to ensure due care for customers.
For your information and implementation effective from 15/07/2023 G.
Introduction
The Central Bank is the authority responsible for monitoring and overseeing the banks licensed by it. It has regulatory powers that include framing and organizing matters related to the rights of customers of these banks and ensuring their care, based on the Saudi Central Bank Law issued by Royal Decree No. (M/36) dated 11/4/1442 H and its Article No. 4 of which states: "The Bank shall carry out its duties in accordance with the provisions of this Law, the regulations and policies issued by the Board, and best international standards and practices. To achieve its objectives, the Bank shall have all the necessary powers and carry out the following duties, powers, and competences: ...9 Issuing directives and developing procedures to protect consumers of financial institutions." Additionally, the Banking Control Law issued by Royal Decree No. (M/5) dated 22/2/1386 H and its amendments, which granted Central Bank the authority to set the conditions and requirements that banks must observe when dealing with customers.
Customer care, handling complaints, and financial education are among the key principles outlined in the Financial Consumer Protection Principles and Rules. This involves enabling customers to access complaint resolution mechanisms easily and enhancing their financial literacy and awareness through the bank. The bank should also facilitate customers' access to clear information regarding their protection, rights, and responsibilities. Moreover, the bank should establish appropriate mechanisms to help customers develop an understanding of the risks associated with the products offered by the bank, allowing them to make suitable choices based on their needs.
To achieve the goals related to the care of customers of banks operating in the Kingdom, the Central Bank issues these instructions, which represent the minimum standards that banks must adhere to in order to ensure due care for customers.
Scope of Application
These regulations apply to banks operating in the Kingdom and licensed by the Saudi Central Bank.
Definitions
Term Definition Central Bank The Saudi Central Bank. Bank Banks licensed to conduct banking activities in the Kingdom in accordance with the provisions of the Banking Control Law. Administration Customer Care Department. Customer An individual or entity receiving services and products from the bank. Complaint Any expression of dissatisfaction related to the provided service, whether justified or unjustified, written or verbal. Inquiry A customer's request for information about the services or products offered by the bank. Request A request made by a customer to obtain a product or service provided by the bank. Electronic System The bank's electronic system for recording complaints and inquiries. Section One: Responsibilities, Policies, and Procedures of the Department
1. Establishment of the Department
1-1 The department shall be established by a decision of the bank's Board of Directors and shall report directly to the highest executive position in the bank, whether the CEO, General Manager, or Managing Director. In the case of temporary absence of this position, the department shall report to their deputy, and it should not be administratively linked to any other department within the bank.
1-2 The department shall be granted the necessary powers, financial, technical, and human resources support to perform its duties efficiently and with high quality.
1-3 The department must consist of at least three units (the bank determines the level of each unit based on its business volume and number of customers): the Complaints Handling Unit, the Quality and Performance Analysis Unit, and the Financial and Educational Awareness Unit.
1-4 Without prejudice to the provisions regarding the Requirements for Appointments to Senior Positions in financial institutions under the supervision of the Central Bank, the bank must obtain written approval from the Central Bank before appointing or assigning a manager to the department.
2. Responsibilities of the Department
2-1 Protecting bank customers.
2-2 Handling customer complaints efficiently and with high quality.
2-3 Responding to any inquiries received.
2-4 Increasing customer satisfaction in the complaint resolution process.
2-5 Addressing and reducing the sources of complaints.
2-6 Enhancing customer awareness of the products and services offered by the bank.
2-7 Developing and updating policies and procedures in accordance with the best local and international practices in customer protection.
3. Policies and Procedures of the Department
3-1 The department must develop the following policies:
- A policy for analyzing complaints and their patterns, addressing their causes and sources (Root Cause Analysis), and obtaining approval from the authorized person in the bank. This policy should also include measuring its effectiveness in addressing the sources of recurring complaints.
- A policy for protecting customer rights and ensuring their care throughout all stages of their interaction with the bank (e.g., marketing and sales procedures, post-sale service quality assurance procedures, complaint handling procedures, customer communication procedures, and credit advisory services procedures).
- A policy for awareness and financial education for the bank’s customers that aligns with the products and services offered by the bank. This policy should include at least the role of the employee responsible for providing a comprehensive explanation of the product or service to the customer, including all obligations associated with that service or product.
3-2 The department manager, or their delegate, must have full authority to make decisions regarding the resolution of complaints with amounts not exceeding SAR 20,000. The bank must establish policies and procedures to organize and monitor this process.
3-3 The department must develop and periodically update (at least once every two years) its operational mechanisms with relevant departments, including service level agreements and escalation processes, to ensure that complaints are handled within regulatory time frames. This mechanism should be technically activated and used to measure compliance, including escalation to the highest executive level.
3-4 To ensure the efficiency and effectiveness of handling complaints, inquiries, and requests, the department should include the following definitions in its internal policies related to customer rights protection and ensure compliance with them: (complaint, inquiry, request, customer), in line with the definitions provided in these regulations.
4. Department Personnel and Their Qualifications
4-1 The bank must employ an appropriate number of staff in the department and its units, commensurate with the number of customers, products, services provided by the bank, and the volume of complaints. An analytical capacity study (Capacity Analysis) should be conducted at least once a year.
4-2 The department manager and staff must have sufficient knowledge and experience in customer care. They should, at a minimum, hold certifications in basic retail banking and credit advisory. The bank is also required to continuously train them through relevant programs suitable for their work, at least once a year. Additionally, the bank must ensure that department staff are well-versed in customer service skills, the bank’s products and services, and the regulations and instructions governing the relationship between customers and the bank.
Section Two: Department Units and Their Responsibilities
First: Complaints Handling Unit
- The unit must provide multiple channels for receiving and handling complaints efficiently and effectively. This should enable customers to submit complaints according to their preferences with ease and at times that are convenient for them. These channels should be clearly displayed on the bank’s website homepage and various platforms. The channels must include at least:Free telephone line,Website,Mobile applications,Email,Branches
The unit must have systems and technical programs that support documenting and tracking the complaint handling process by date and time, allowing for visibility of its status and the actions taken. These systems must, at a minimum, include:
2-1 Recording complaints and documenting their receipt, retaining records, and tracking them through all stages of processing. The customer should be provided with a primary reference number and the processing time frame via a text message on their mobile phone registered with the bank.
2-2 The ability for the customer to register complaints directly in the electronic system, view the final result of the handling process and detailed updates, and receive necessary documents if required.
2-3 Classifying complaints in the electronic system according to the bank’s products and services in line with the relevant central bank instructions.
2-4 Enabling customers to evaluate their satisfaction with the complaint handling results automatically.
2-5 Providing real-time report generation and the ability to automatically submit reports to senior management for performance monitoring.
2-6 Facilitating automatic direct linkage to any databases created by the central bank for supervisory and regulatory purposes.
- The unit must handle complaints within a maximum period of 5 working days from the date of receipt from the customer.
- The unit must establish performance indicators for complaint handling and work on monitoring these indicators to achieve the desired goals. Indicators should, at a minimum, include:
Name of the Indicator Description of the Indicator Desired Objective* Customer Satisfaction Rate with Complaint Handling
Number of Complaints Rated as Satisfied/Agreeable by the Customer Out of Total Complaints Not Less Than 85% Service Level Agreement Compliance Rate Number of Complaints for Which the Bank Was Late in Processing Within the Regulatory Period Out of Total Complaints Not Less Than 95% * The central bank may review and adjust the rates of the above indicators from time to time.
Second: Quality and Performance Analysis Unit
1. The unit must review the quality of the complaint handling procedures and ensure they are processed efficiently and with high quality in accordance with relevant regulations and instructions. It should take corrective actions for complaints that have been handled incorrectly and implement necessary procedures to prevent recurrence.
2. The unit must continuously analyze complaint data and provide corrective plans to address the sources of complaints and measure their effectiveness. These reports should be documented and submitted to the administration manager to be forwarded to the CEO on a monthly basis.
3. The unit must ensure the accuracy of the reports and data contained within them.
4. The unit should submit quarterly reports to the administration manager for forwarding to senior management and the bank's board of directors, covering customer care issues. These reports should, at a minimum, include the following:
- Performance measurement indicators for complaints registered in the "SAMACARES" System.
- Performance measurement indicators for complaints received directly by the bank.
- Compliance of relevant departments with the service level agreement.
- Common complaints during the period.
- Challenges faced by the administration and the approach to addressing them.
Third: Financial Awareness and Education Unit
- The unit must continuously raise customer awareness through all available bank channels and implement annual plans for financial awareness and education. These plans should include, at a minimum: products and services and their risks, fraud, savings, and financial planning.
- The unit must continuously inform customers about all channels for submitting complaints and their right to raise complaints and inquiries. It should also inform them about the possibility of requesting credit advisory services, in cases where the bank is not obligated to provide a credit advisor.
- Unit employees are prohibited from contacting customers for the purpose of marketing the bank's products and services.
The unit should submit semi-annual reports to the administration manager for forwarding to the CEO, which should include the following:
- The number of contacts received by the unit.
- The types of consultations provided to customers.
- Measurement of customer satisfaction regarding the appropriateness of the consultations provided.
Final Provisions
- These instructions are considered a minimum standard for what the bank must do to ensure due diligence in customer care and handle complaints and inquiries efficiently and with high quality. They are closely related to the Financial Consumer Protection Principles and Rules.
- Without prejudice to the provisions outlined in the Principles of Internal Auditing for Local Banks Operating in Saudi Arabia, as well as the Principles of compliance for commercial banks operating in the Kingdom of Saudi Arabia; the management must undergo annual review and audit by the Internal Audit Department and the Compliance Department.
- The management must obtain and renew annually the Customer Complaint Management System certification (ISO 10002), in addition to applying the international standard (ISO 10004) related to measuring and monitoring customer satisfaction.
- These instructions replace the controls for establishing complaint units issued under the Central Bank circular number (351000145194) dated 26/11/1435 H.
- All provisions of these instructions shall be effective from the date 15/07/2023 G.
Debt Collection Regulations and Procedures for Individual Customers
No: 391000083340 Date(g): 11/4/2018 | Date(h): 26/7/1439 Status: In-Force Financial Consumer Protection Principles and Rules
To read the “Financial Consumer Protection Principles and Rules”, click here.
I. Introduction
1. General Framework
The general framework of these Regulations includes:
• Controls governing communication with retail consumers and their guarantors.
• Debt collection procedures.
• Procedures for dealing with defaulting retail consumers.
2. Objectives
These Regulations aim at governing the mechanism of debt collection and communication with retail consumers and their guarantors in a manner that enables creditors to follow clear and specific procedures while protecting the rights of all relevant parties.
3. Scope
These Regulations shall apply to banks and finance companies supervised by SAMA.
II. Definitions
Term Definition SAMA
Saudi Central Bank*
Creditor Banks and finance companies supervised by SAMA. Individual Customers Any natural person who obtains financing from a creditor. Debt collection The process of collecting amounts payable by a retail consumer on due dates by a creditor. Default The non-payment of a retail consumer of the monthly installments agreed upon in the finance contract for three consecutive months or more than five separate months throughout the finance period. Complaint Any expression, written or verbal, entailing dissatisfaction with the provided services, whether such dissatisfaction is justified or not. Third party An entity contracted by a creditor to provide, on its behalf, any services which used to be provided by the said creditor or to provide a new service to be launched. Such entity can act as a unit or subsidiary of the creditor or operate independently. Employee Any natural person, including directly contracted employees or outsourced employees, working for a creditor and is subject to its administration or supervision in return for a financial consideration. Authenticated communication A recorded, verifiable means of communication that can be retrieved in written or electronic format. Compelling change in circumstances Any event that causes an uncontrollable change in a retail consumer's circumstances, including without limitation: the inability to work (partially or totally), retirement (compulsory), and loss of a job or some fixed allowances given to employees by employers monthly. Voluntary change in circumstances Any event that causes a change in the circumstances of a retail consumer on their own volition, including without limitation: Retirement (voluntary) and change of jobs. Guarantor Any natural or juristic person who guarantees or promises to guarantee the fulfillment of any financing extended to a retail consumer, according to a written acknowledgement, in the event that they become unable to do so. Day Any day in a month, including weekends and holidays. * The "Saudi Arabian Monetary Agency" was replaced By the "Saudi Central Bank" in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding in 26/11/2020G.
III. Relevant Laws and Instructions
IV. Content of the Regulations
1. Communication with Retail Consumers
A creditor must apply due diligence when communicating with a retail consumer before seeking recourse in competent judicial authorities, while observing the following:
1.1 Authenticated means of communication that a creditor has the right to use when communicating with a consumer or their guarantor are limited to:
- E-mail.
- Registered mail.
- National address.
- SMS messages.
- Phone calls.
1.2 The communication message must include at minimum:
- The creditor’s name and the department concerned with the collection of defaulted payments.
- The contact number of the concerned department and/or the third party.
- Working hours of the concerned department and/or the third party.
- Name of the employee, the creditor and/or the third party if a consumer is contacted through a phone call.
1.3 A creditor must commit to the following:
- The number of attempts to contact a consumer through their phone number must not exceed ten attempts’ within a period of 30 days, and the retail consumer should have the ability to call back the same number used as used by the creditor in attempting to reach them.
- All phone calls received from or made to a retail consumer must be documented and records thereof should be maintained for no less than ten years from the date of the phone call. A retail consumer must be notified at the beginning of the phone call that it is recorded.
- A retail consumer should be able to rate their satisfaction at the end of the phone call (incoming and outgoing), which must also be documented electronically.
- There must be standards in place to ensure that employees provide consumers with correct information with the utmost professionalism regarding their current default status and the legal actions to which a creditor is entitled to pursue.
- A retail consumer must not be provided with inaccurate or illegal information regarding the consequences of default.
- A retail consumer must not be reached through envelopes with phrases indicating that the content is information on debt collection or similar
- A retail consumer’s financial and personal information should be protected, kept confidential, and not be used except for specific professional and legal purposes with the prior consent of the retail consumer. In addition, communication should not be made with any person other than the retail consumer or their guarantor, and in the case of phones calls, the identity of the person answering must be verified.
1.4 In the event that a retail consumer objects to the due amount of payment, a creditor shall:
- Document such objection.
- Submit a complaint of the retail consumer as per SAMA’s instruction in this regard.
- Provide the retail consumer with the estimated period for resolution of their complaint, provided that it does not exceed the statutory period set for resolution of complaints.
- Not communicate with the retail consumer to remind them of defaulted payments until the complaint has been resolved.
- Advise the retail consumer of the escalation mechanism in place and direct them to the relevant entity in the case of dissatisfaction with the result of resolution and desire to escalate the complaint.
- Develop a policy for the analysis of complaints and objections, along with their patterns, to address their root causes. The department concerned with the resolution of complaints shall document such reports and measure their efficiency in resolving the root causes of frequent complaints.
- Develop work procedures with relevant departments that cover service level agreements and escalation mechanisms to ensure that retail consumers’ objections and complaints are resolved within the statutory period, provided that the mechanism is documented electronically and the departments’ level of compliance with such mechanism is measured.
1.5 The department concerned with debt collection and communication and/or the third party must be subject to review and audit by both the internal audit and the compliance departments at the bank or finance company on an ongoing basis in order to ensure the soundness of procedures followed and their conformity with these Regulations and the relevant instructions.
2. Debt Collection Procedures
2.1 A bank must not:
- Deduct any amounts from a retail consumer’s accounts without a judicial order or ruling or without the retail consumer’s prior consent, or if provided otherwise in the finance contract.
- Block accounts or balances of a retail consumer, even if temporarily, and deny them access to funds available in their accounts without a judicial order or ruling.
- Deduct more than one monthly installment for each loan within a single pay cycle, unless there is a judicial order or ruling or prior consent is obtained from the retail consumer.
- Deduct a monthly installment before the due date agreed upon or withhold an installment payment before the due date, as agreed in the financing contract.
- Withhold or deduct end-of-service gratuities payable to retail consumers, unless a judicial order or ruling was issued in this regard.
2.2 A creditors must set the date of deduction in accordance with the monthly payday, provided that such date is specified in the payment schedule or as may be agreed upon with the retail consumer through any of the authenticated communication means.
2.3 A creditor must deduct the monthly installment on the agreed date of deduction. If it is proved that a creditor does not comply with the agreed date of deduction, they shall extend the finance period by a similar term to be added at the end of the period, without any term cost or additional fees, and notify the retail consumer of the same through authenticated communication means.
2.4 A bank, as per requested by a retail consumer, must reschedule the debt when a compelling change in the circumstances of the retail consumer is proved, without granting any new loan, charging extra fees or changing the term cost. A bank must carry out the rescheduling within a period not exceeding 30 days from the date the individual customer is provided with the necessary documents. This excludes asset-backed finance contracts.
2.5 A bank, as per requested by a retail consumer, must reschedule the debt in the case that voluntary changes in a retail consumer’s circumstances are proved, with the potentiality to change the term cost but without charging additional fees. Debt rescheduling must be carried out within a period not more than 30 days from the date the necessary documents are supplied by the individual customer. This excludes asset-backed finance contracts.
3. Procedures for Dealing with Defaulting Consumers
3.1 A creditor must be entitled to take legal actions against any defaulting retail consumer at the competent judicial authorities, and such retail consumer must be notified in the event of default for more than three consecutive months or five separate months throughout the finance period. The last attempt to contact such consumer must be through their national address.
3.2 Upon the issuance of a judicial order or ruling against a defaulting retail consumer, a creditor must comply with the said order or ruling, unless both parties (creditor and retail consumer) agree otherwise (for example without limitation, settlement of debt between both parties, debt rescheduling, etc.).
3.3 A creditor must take in their consideration the circumstances of any defaulting individual customer that was issued an enforceable judicial ruling against them in favor of the creditor, when providing the necessary guarantees by making available the option of debt rescheduling, with the potentiality to change the term cost and without charging additional fees.
V. General Provisions
1. For a contract concluded on 01/10/2018:
1.1 Unless the two parties agree not to apply any of the following exceptions, a creditor must exempt the individual customer from payment of the amounts due under the finance contract in the event of death or total disability. Such exemption shall take effect, at most, 30 days from the date of receipt of the relevant documents. Any amounts deducted after the date of death or that total disability medically certified shall be returned. This excludes commercial finance contracts and cases of death or total disability arising from:
- Deliberate self-injury or suicide attempt, whether the retail consumer has sound mental health or is suffering from mental disorders at the time of the incident.
- Natural disasters.
- Rulings issued by courts or competent judicial authorities pursuant to laws applicable Saudi Arabia.
- Consumption of alcohol, narcotics or illegal drugs.
- Participation, or training to participate, in dangerous sports or competitions such as horse or car racing.
- Job-related death or injury.
- Damage directly or indirectly caused by nuclear weapons, ionizing radiations, radioactive contamination resulting from any nuclear fuel or waste, contamination due to nuclear fuel combustion, war, invasion, acts of foreign enemy, hostilities, warlike acts, or acts of vandalism and terrorism committed by person(s) working individually, on behalf of, or in relation with any terrorist organization.
1.2 A creditor must not impose delay penalties or debt collection fees in excess of the amount due as they should, at most, equal the value of a single installment throughout the finance period.
2. A creditor must ensure that a retail consumer fully understands the potential risks associated regarding non-compliance with the terms and conditions pertaining to finance products.
3. Before extending financing, a creditor must evaluate the creditworthiness of the retail consumer and ascertain their ability to fulfil their payment obligations throughout the contract period. Such creditor must also take into account the retail consumer’s ability to make the final payment, if covered in the finance contract, in addition to potential changes to their credit status (e.g. voluntary / compulsory retirement, unstable allowances).
4. These Regulations set the minimum due diligence obligations to be met by a creditor as they must continuously work on developing their own internal procedures, in line with the nature and size of their business and in accordance with the best local and international standards and practices, with no prejudice to these Regulations and the relevant instructions.
5. These Regulations form an updated version of previous regulations and/or instructions issued in this connection, and shall be binding on creditors and/or third parties. In addition, all creditors and third parties must update their policies and procedures in line with these Regulations. In the event of non-compliance therewith, neither a creditor nor a third party must be exonerated from liability.
6. Subject to Paragraph (1) of Item (5) herein, these Regulations must apply to all existing and future contracts.
Instructions for services provided to persons with disabilities in financial institutions
To read the “Instructions for services provided to persons with disabilities in financial institutions”, click here.
Code of Conduct and Work Ethics in Financial Institutions
To read the “Code of Conduct and Work Ethics in Financial Institutions”, click here.
Rules for Advertising Products and Services Provided by Financial Institutions
To read the “Rules for Advertising Products and Services Provided by Financial Institutions”, click here.
License Disclosure Instructions
To read the “License Disclosure Instructions”, click here.
A Guide for Calculating the Early Payment Amount
To read the “Guide for Calculating the Early Payment Amount”, click here.
Disclosure of Interest Rates on Financing and Savings Products
No: 41068291 Date(g): 22/7/2020 | Date(h): 2/12/1441 Status: In-Force 1. Introduction
The purpose of these Rules is to provide transparency to the market in terms of APR/AER of various products that Banks and finance companies offer for Retail, Micro and Small enterprises as defined by SAMA. This will further allow Retail, Micro and Small Enterprises to compare APR/AER between different financing and savings products offered by Banks and Finance Companies.
SAMA has issued this update of Disclosure of Interest Rates on Financing and Savings Products that supersede SAMA's circular No. 67/70318 dated 25/11/1440H and complementary circular No. 41044254 dated 25/06/1441H. Added or amended texts are underlined.
2. Scope of Application
All Banks and Finance Companies authorized and regulated by SAMA in Saudi Arabia.
3. Definitions
Annual Percentage Rate (APR)
The discount rate at which the present value of payments and installments that are due from the Borrower, representing the Total Amount Payable by the Borrower, equals the present value of all payments of the Amount of Financing available to the Borrower on the date on which the Financing amount or the first payment thereof is available to the Borrower (As per Article 81 of Implementing Regulations of the Finance Companies Law). Annual Equivalent
Rate (AER)
The rate for a savings account or investment product that has more than one compounded interest/profit during the year. It is calculated under the assumption that any interest/profit paid is included in the principal payments balance and the next interest/profit payment will be based on the slightly higher account balance due to adding the interest/profit paid on the principal payments balance. Credit card purchase rate The rate applied to transactions (cash or credit) made with a credit card. The rate only applies to balances that are not paid in full by the end of the billing cycle. Financing amount Amount of on balance sheet loan granted to the customer. Maturity Contractual maturity of on balance sheet loans granted to customers: This is the final payment date of a loan at which point the principal and all interests/profits are due to be paid.
Contractual maturity of savings products: This is the final payment date of savings products at which point the principal and interests/profits owed to the customer are due to be paid.Monthly payment amount Installment amount the customer is obliged to pay to the Bank or Finance Company each month until the debt is fully repaid. Minimum payment amount Lowest amount the customer can pay on the credit card to avoid late payment penalties. Minimum payments are calculated as percentage of the outstanding balance plus any fees that have been added. Months until balance repaid Number of months remaining if minimum repayment on credit card is made by customer each month. Property market value Price negotiated between a willing buyer and a willing seller in an arm's length transaction after fulfilling valuation criteria set by the bank. The value may not be the current listing price or the amount of the most recent offer on the property. Loan to Value Ratio Ratio of a loan provided by the Bank or Finance Company to the value of a property purchased and determined as property market value. Payment type Interest/profit only payments or, both principal and interest/profit payments or else. Early payment charge A fee the customer will be required to pay to a lender if the customer pays off a loan early and before the scheduled maturity term of the credit facility, also sometimes referred to as a Redemption Penalty. Deposit amount Amount deposited with the Bank in savings or investment products. 4. Disclosure requirements
a) Banks and Finance Companies are required to disclose and publish information for Retail financing and saving products (if any) in a detailed and clear manner on the website, marketing channels, and other marketing materials according to the disclosure tables contained in Section (5) of these Rules.
b) Banks and Finance Companies are required to disclose and publish information for Micro and Small Enterprises financing and saving products (if any) in a detailed and clear manner on the website, marketing channels, and other marketing materials and disclose the price range for each product according to the disclosure tables contained in Section (6) of these Rules.
c) If disclosure tables cannot be included in some marketing channels and materials such as paper publications, prices or competitive benefits should not be included or referred to in a misleading way, and customers should be advised to visit the website for more details about the product.
d) A calculator should be developed for each financing or savings product showing the price and payments based on the consumer's input, and if not possible, disclosure should be made by giving at least three examples that include financing or saving amount, prices, maturity, and the category of the consumer.
e) A calculator should be developed for credit cards to calculate the APR and all commissions and expenses that the consumer will bear in advance or monthly, also, the calculator must clarify the appropriate credit card type and limit based on the consumer's input.
f) Financing limits, charges and tariffs should be subject to the relevant laws, regulations, and any other regulatory requirements.
g) Prices, ratios or rates that do not match disclosure tables and calculator results on the website should not be used in marketing campaigns.
h) The process of calculation and factors that affect the pricing should be clarified for the purpose of transparency e.g. if floating interest/profit rate is used, this should be clarified.
i) Disclosing the minimum or maximum limit for products of which the prices that cannot be determined e.g. savings products whose prices are determined based on the average amount kept in the customer's account.
j) If one of the disclosure requirements in the disclosure forms is not applicable to a product, it should be clarified in the disclosure form as "Not Applicable - N/A" given that a reasonable justification is provided.
k) For mortgage loans, which contain multiple features, Banks and Finance Companies should develop a mortgage calculator on their websites considering the inputs prescribed in section 5 (C) of these Rules. For other printed materials, one example per type should be used.
l) Consumers should be informed, in writing, that prices in the disclosure tables or calculator are examples and customers could be offered different prices based on certain factors such as the consumer credit worthiness.
m) Where applicable, disclosure tables and calculator for financing and savings products (if any) should be consolidated in one page under an icon called "Prices of Financing and Savings Products" in the website. Also, Banks and finance companies should enable direct access to the page by adding the icon on the top right of the website home page to make it easier for consumers to access prices. In addition, disclosure tables and calculators should be included on the page dedicated to each product.
n) Prices should be reviewed periodically, at least monthly, and any modification to prices should be reflected in the disclosure tables and calculator within one business day. In addition, the date of the last update should be mentioned at the top of the page.
5. Disclosure Tables for Retail Customers
Banks and Finance Companies should use the examples below as illustration with the minimum type of information the disclosure forms should include. Additional information can be added to the minimum requirements stated in this section.
a) Different types of financing products
(On balance sheet products, such as loans, should be disclosed, and there is no need to disclose off balance sheet products)
Example: Term loan
Financing Amount Maturity in Years APR* Monthly Payment Amount 100,000 5 years 5.5% 1,901 *The above table is just an example and APR may differ depending on the amount, the maturity period, and the credit scoring of each customer.
b) All Credit Cards types and classes
Example: Platinum balance-transfer card
APR* Credit Card Purchase Rate Minimum Repayment Amount %age Months Until Balance Repaid** 19% 17% 5% 60 months * Banks and Finance Companies should clearly disclose all the elements of the APR and commissions in the contracts, and separate between the commissions and expenses that the consumers will bear in advance and the monthly payments on the outstanding amount.
*lf minimum repayment is made every month, it will take almost 60 months to repay the full amount keeping in view compounded interest/added profits each month.
c) Residential Mortgages
Example: First home buy*
Property
Market
ValueLoan to
Value RatioFixed or Variable Interest/Profit Rate** Annual Percentage Rate (APR) Maturity in Years Payment Type Monthly Payment Amount Early payment Charge 500,000 90% Fixed interest/profit rate 4.5% 25 years Principal and interest/profit 19,378 Profit of future 3 installments *Banks and Finance Companies should disclose the repayment period for off-plan and self-construction products in the mortgage calculator.
**lncluding initial interest/profit rate (interest/profit rate fixed for few years at the start of mortgage) and follow on rate (interest/profit rate to be used once initial rate term is over) e.g. Fixed interest/profit rate for few years and thereafter using variable interest/profit rate e.g. 3 month SAIBOR + 20 basis point.
d) Financial Leasing Products for each type of assets
Example: Auto loan
Asset Type Financing Amount Maturity in
YearsAnnual Percentage Rate (APR) Monthly Payment Amount Residual Value Car 200,000 5 years 5% 4,051 20,000 e) Savings for each Class and Type of Product
Example: 2 years fixed deposits
Minimum Deposit Amount Maturity in Years AER Number of Withdrawals Permitted in the 1st Year Number of Withdrawals Permitted in the 2nd Year 20,000 2 years 1.5% 0 2 6. Disclosure Tables for Micro and Small Enterprises
a) Financing Products
(On balance sheet products for micro and small enterprises, such as loans, should be disclosed, and there is no need to disclose off balance sheet products)
Example: Loan types for small enterprises
Product APR* Administrative Fees Minimum (or) Maximum Administrative Fees Short term loan 4% to 6% 2% to 3% SAR 1000 Medium term loan 3% to 5% 1% to 2% SAR 1000 *The above table is just an example and APR may differ depending on the amount the maturity period, and the credit scoring of each customer.
b) Savings Products
Example: 2 years fixed deposits
Minimum Deposit Amount Maturity in Years AER Number of Withdrawals Permitted in the 1st Year Number of Withdrawals Permitted in the 2nd Year 20,000 2 years 1.5% 0 2 7. Implementation Date
These Rules shall enter into force within 15 days from issuance date.
Consumer Complaints
To read the “Consumer Complaints”, click here.
Regulating Banking Employees' Communications with Customers for Payment of Outstanding Debts
In reference to SAMA receiving complaints from bank customers regarding the numerous phone calls they and their family members, relatives, or friends receive at various and inconvenient times from collection employees working for the banks, aiming to pressure them to pay their outstanding debts to these banks.
In the interest of SAMA in organizing the process of debit collection bank customers and the communications related to this, as well as protecting customer privacy, the bank must establish an appropriate mechanism to limit these communications to the debtors or their guarantors whose names and signatures appear on the banking documents of guarantee and not to other family members, relatives, or friends. Furthermore, these communications should be confined and specified within the official working hours of the banks. In case customers do not respond regarding the bank’s indebtedness, they should be followed up through the specialized authorities. We hope to be informed of the measures taken in this regard within a month from its date.
according to Circular No. (5497/MAT/2346) dated 28/01/1432H. In view of SAMA receiving complaints from bank customers that include threats from collection employees working for or contracted by the banks to record remarks on their credit records with the credit information company "SIMAH" to pressure them to settle their outstanding debts, SAMA wishes to remind banks not to involve the name of SAMA, credit information companies, or other supervisory entities in the communications of debt collectors with customers.
According to SAMA Circular No. (341000059261) dated 11/05/1434H. SAMA has observed that some banks are using unprofessional methods to collect distressed debts and are misleading distressed customers by claiming that their names will be removed from "SIMAH's list" upon settling their debts.
Whereas following such methods with distressed bank customers reinforces a false understanding of the role of credit information companies and negatively impacts the efforts made to educate beneficiaries about the reality of credit reports and their contents. Therefore, SAMA emphasizes the necessity for all banks operating in the Kingdom, particularly the employees of the collection department and contracted collection companies, as well as other relevant departments, to refrain from using unprofessional methods to collect distressed debts. This includes misleading distressed customers into believing that their names will be removed from "SIMAH's list" upon debt settlement, which contradicts the actual mechanisms of the credit reporting system in place.
Control and Awareness Measures for Branch and Customer Service Employees in Banks Operating in the Kingdom
No: 42063179 Date(g): 17/4/2021 | Date(h): 6/9/1442 Status: In-Force Translated Document
Based on the powers vested to SAMA under the relevant regulations and instructions, and in line with the SAMA's supervisory and regulatory role in enhancing the protection of the privacy of customers of the financial institutions under its supervision and their employees, as well as in continuously improving and strengthening sound practices in banks.
Enclosed are the regulatory and awareness procedures for branch staff and customer service employees in banks operating in the Kingdom. These procedures aim to mitigate operational risks related to handling banking laws and to ensure that operations are conducted in accordance with approved regulations, instructions, and powers to protect banks and customers from exposure to losses.
Please take note and act accordingly by the end of the third quarter of 2021.
First: Introduction
A. Objective
These procedures aim to establish the minimum regulatory and awareness measures for branch staff and customer service employees in banks operating in the Kingdom. Compliance with these measures is required to mitigate operational risks related to dealing with banking laws and to ensure that operations are conducted in accordance with approved regulations, instructions, and authorities, thereby protecting banks and clients from potential losses.
B. Scope
These procedures apply to banks operating within the Kingdom. This is without prejudice to any other relevant regulations or guidelines, including but not limited to: Cyber Secuity Framework and the Business Continuity Management Framework.
Second: Definitions
The terms and phrases mentioned in these procedures are defined as follows, unless the context indicates otherwise:
Central Bank: The Saudi Central Bank.
Banks: Banks operating within the Kingdom.
Branches: Branches of commercial banks operating within the Kingdom.
Employees: Employees of branches and customer service.
Customers: Customers of the banks.
Third: Supervisory Procedures
Banks must adhere to the required maturity level as Cyber Security Framework and the Business Continuity Management Framework, with particular attention to the following:
Fourth: Awareness Procedures
Banks are required to adhere to the following:
1. Establish a policy for the secure use of banking laws, including procedures for handling usernames and passwords, and review it periodically. 2. Ensure employees are aware of the importance of checking that they are not being observed when entering their username or password. 3. Provide training and qualification for employees on essential information related to information security. 4. Conduct periodic awareness campaigns for employees regarding the instructions issued by SAMA and the banks' own policies, especially concerning the confidentiality of customer account information and the penalties for non-compliance. This should include ongoing educational materials and be conducted at least every three months. 5. Conduct regular awareness campaigns for employees on information security and financial fraud prevention, with ongoing educational materials provided at least every three months 6. Perform tests and surveys of employees at least every six months to assess the effectiveness of the awareness procedures outlined in points (4) and (5). 7. Obtain a declaration from employees, both upon starting work and annually (either in paper or electronic form), acknowledging that they have reviewed and are committed to all policies related to the secure use of banking laws and the handling of usernames and passwords.
Fifth: General Provisions
1. These procedures should be read in conjunction with all related regulations and instructions.
2. These procedures represent the minimum requirements for banks to implement in terms of enhancing the monitoring and awareness aspects for employees. 3. Existing policies, manuals, and procedures should be reviewed and updated periodically to ensure they align with the requirements set forth in these procedures and related instructions. 4. One of the supervisory departments (Internal Audit or Compliance Department) should be assigned to conduct periodic examinations or reviews (within a maximum of two years) to verify compliance with the requirements outlined in these procedures. Standardization of Notification Elements Sent to Financial Institutions Customers
No: 42023876 Date(g): 29/11/2020 | Date(h): 14/4/1442 Status: In-Force Translated Document
Further to the Saudi Central Bank's (SAMA) letter No. 381000060893 dated 07/06/1438H regarding the standardization of notification elements sent to bank customers for Mada card transactions, and in line with SAMA's commitment to enhancing customer awareness through notification messages for transactions on their accounts, memberships, and electronic wallets:
Attached is an update to the notification templates, which includes adding essential elements to the text notifications according to the procedures outlined in Table No. (1) and Table No. (2) at a minimum. Therefore, financial institutions are required to send notification messages for all financial transactions and apply the requirements as specified in the attached tables within 60 days from the date of this notice, and to provide SAMA with an implementation plan within two weeks. Please be aware that legal actions will be taken if the required procedures are not adhered to within the specified time frame.
Table No. (1)
Transaction Type Minimum Information Required internal purchases Amount, Currency
Store Name
Card Type (Mada, Credit), Executed Through Example (Apple Pay, Mada Pay, Atheer)
Card Number (Last Four Digits)
Date
Time
International Purchases Amount, Currency
Store Name
Country
Card Type (Mada, Credit), Executed Through Example (Apple Pay, Mada Pay, Atheer)
Card Number (Last Four Digits)
Date
Time
International Cash Withdrawal Amount, Currency
Country
Fees
Card Type (Mada, Credit)
Card Number (Last Four Digits)
Date
Time
internal cash withdrawal
Amount, Currency
Withdrawal Location (ATM Location or Branch/Code)Card Type (Mada, Credit)
Card Number (Last Four Digits)
Date
Time
Checks Amount, Currency
Payee Name Check Holder's
Account Number
Date
Time
Cash Deposit Amount, Currency
Deposit Method (e.g., Branch or ATM)
Account Number
Date
Time
Domestic Transfers Transferred Amount, Currency
Fees
Sender's Name (for Incoming Transfers)
Receiver's Name (for Outgoing Transfers)
Sender's Account Number (for Incoming Transfers)
Receiver's Account Number (for Outgoing Transfers)
Date
Time
International Transfers Transferred Amount, Currency
Fees
Sender's Name
Receiver's Name
Sender's Account Number
Receiver's Account Number
Transfer Intermediary Company Name (e.g., Western Union)
Destination Country
Date
Time
Internet Purchases Amount, Currency
Website or Store
Card Type (Mada, Credit), Executed Through Example (Apple Pay, Mada Pay, Atheer)
Card Number (Last Four Digits)
Account Number
Date
Time
Government Bill Payments Amount, Currency
EntityService
Invoice Number
Date
Time
Other Bill Payments Amount, Currency
Biller
Service
Invoice Number
Date
Time
Financing / Refinancing Transactions Financing Type
Total Amount of Financing
Monthly Installment
Account Number
Date
Time
Monthly Financing Deduction Financing Type
Due Installment
Total Remaining
Amount Account Number
Date
Time
Fees Amount, Currency
Reason
Account Number
Date
Time
Refund / Reversal Amount, Currency
Country in External Transactions
Store or Website or Entity
Account Number
Date
Time
Mobile App Transactions App Name (e.g., Apple Pay)
Amount, Currency
Store Name or Website
Card Type (Mada, Credit)Card Number (Last Four Digits)
Account Number
Date
Time
E-Wallet Top-Up Wallet Name (e.g., STCPay)
Amount, Currency
Top-Up Channel (Mada, Credit, SADAD, etc.)
Card Number (Last Four Digits)
Amount, CurrencyDate
Time
E-Wallet Transactions Amount, Currency
Card Type (Mada, Credit) / Transaction
Card Number (Last Four Digits)
Store or Website
Date
Time
Table No. (2)
Arabic Term
English Term
سداد فاتورة
Bill Payment
سداد فاتورة لمرة واحدة
Bill Payment one time
إصدار شيك مصدّق
Certified Cheque lssued
بطاقة ائتمانية الغاء حجز مبلغ
Credit Card Cash Release
بطاقة ائتمانية حجز مبلغ
Credit Card Cash Reserve
بطاقة ائتمانية استرجاع نقدي
Credit Card Cashback
بطاقة ائتمانية تأكيد سداد
Credit Card Credited
بطاقة ائتمانية تسديد
Credit Card Payment
بطاقة ائتمانية استرداد مبلغ
Credit Card Refund
إيداع رسوم
Credit Transaction Fees
حوالة واردة من بطاقة
Credit transfer from card
حوالة واردة بين حساباتك
Credit transfer Between Your Accounts
حوالة واردة حساب مواطن
Credit transfer Citizen Account
سحب نقدي طارئ
Credit transfer Emergency Cash Withdrawal
حوالة واردة من حسابك الجاري
Credit transfer From your Current Account
حوالة واردة من حسابك الاستثماري
Credit transfer From Your Investment Account
حوالة واردة حافز
Credit transfer Hafiz
حوالة واردة داخلية
Credit transfer Internal
حوالة واردة دولية
Credit transfer International
حوالة واردة تمويل
Credit transfer Loan
حوالة واردة محلية
Credit transfer Local
حوالة واردة راتب
Credit transfer Salary
حوالة واردة كفيل
Credit transfer Sponsor
حوالة واردة مكافأة طلاب
Credit transfer Student Reward
خصم رسوم
Debit Transaction Fees
حوالة صادرة الى بطاقة
Debit Transfer to card
حوالة صادرة بين حساباتك
Debit Transfer Between Your Account
حوالة صادرة داخلية
Debit Transfer Internal
حوالة صادرة دولية
Debit Transfer International
خصم قسط تمويل
Debit Transfer Loan Instalment
حوالة صادرة محلية
Debit Transfer Local
حوالة صادرة راتب
Debit Transfer Salary
حوالة صادرة مكفول
Debit Transfer Sponsored
حوالة صادرة الى حسابك الجاري
Debit Transfer To Your Current Account
حوالة صادرة الى حسابك الاستثماري
Debit Transfer To Your Investment account
خصم شيك مصدق
Debit Certified Cheque
خصم شيك ورقي
Debit Paper Cheque
إيداع صراف آلي
Deposit ATM
إيداع فرع
Deposit Branch
إيداع شيك مصدق
Deposit Certified Cheque
إيداع شيك ورقي
Deposit Paper Cheque
شراء عملة أجنبية
Foreign Currency Purchase
سحب صراف آلي دولي
International ATM Withdrawal
مدفوعات وزارة الداخلية
MOl Payments
شراء إنترنت
Online Purchase
امر مستديم سداد فواتير
Permanent transfer Bill Payment
امر مستديم حوالة صادرة داخلية
Permanent transfer Debit transfer Bank internal
امر مستديم حوالة صادرة بين حساباتك
Permanent transfer Debit transfer Between Your Accounts
امر مستديم حوالة صادرة دولية
Permanent transfer Debit transfer International
امر مستديم حوالة صادرة محلية
Permanent transfer Debit transfer Local
امر مستديم حوالة صادرة راتب
Permanent transfer Debit transfer Salary
امر مستديم مدفوعات وزارة الداخلية
Permanent transfer MOl Payments
شراء عبر نقاط البيع دولية
PoS International Purchase
شراء عبر نقاط البيع
Pos Purchase
شراء ونقد عبر نقاط البيع
Pos Purchase & Cashback
تسوية نقطة البيع
PoS settlement
حوالة واردة
Received transfer
استرجاع مدفوعات وزارة الداخلية
Refunding MOl Payments
حوالة عكسية
Reverse Transaction
سحب صراف آلي
ATM Withdrawal
سحب فرع
Branch Withdrawal
Rules Governing Calculation of Annual Percentage Rate (APR)
To read the “Rules Governing Calculation of Annual Percentage Rate (APR)”, click here.
Banking Tariff
No: 381000095093 Date(g): 4/6/2017 | Date(h): 10/9/1438 Status: In-Force The attached banking tariff replaced the tariff for banking services issued pursuant to Circular by the Central Bank No. (341000134319), dated 25/11/1434 H, corresponding to 29/09/2013 G.according to The Banking Control Law issued by Royal Decree No. M/5 dated 22/2/1386 H. and Ministerial Decision No. 3/2149 dated 14/10/1406 H regarding the implementation Rules for Banking Control Law. The Central Bank is authorized to set the maximum limit for banking fees on personal accounts and banking services that banks are allowed to charge their individual customers.
Attached is an updated version of the banking tariff and the accompanying instructions, which must be adhered to and implemented within three months from its date.
General Instructions
- The disclosure and transparency principle shall be applied, where all means will be used to inform the customer.
- Disclosing all tariffs at banks’ branches and on their websites in a clear and legible manner to be accessible to customers.
- The maximum banking tariff for banking services as illustrated in the table attached to this circular shall not be exceeded.
- Providing SAMA with all types of tariff or fees according to this circular at the beginning of each Hijri year (Muharram) to be disclosed on website.
- Utilizing banking tariff instructions to encourage the utilization of electronic channels and financial inclusion.
- Obtaining a prior approval from SAMA on tariff or fees for any services or products that are not included in this circular.
- Fees shall be within reasonable and competitive limits as compared with similar services that are conformed to the best applicable applications and practices.
- Not charging any fees associated with the services or products provided to customers except after customers' acceptance for the service and related fee.
- A bank, may opt not to charge any of the tariff set forth herein as it deems appropriate and consistence with its policy of providing services with fair competition.
- Apply the charging policies issued by SAMA for all payment systems (MADA\ SARIE \SADAD…etc.) and its services.
- SAMA will periodically review and update the banking tariff in accordance with approved and licensed products and its fees
Banking Tariff
The banking tariff sets the allowable maximum fees that a bank may, but not necessarily, charge individual customers and beneficiaries for services provided by the bank following their acceptance.
Banking Service Description.
Maximum Banking Tariff
1- Customer Accounts Free
a. opening an account
free b. Balance is less than required limit
None 2- Account statement
At branch:
a. statement for less than one year 25 SAR b. statement for1 - 5 years
30 SAR c. statement for more than five year
50 SAR Electronically (internet, telephone, ATM…):
a. Monthly statement by regular mail or email electronically
Free b. ATM mini statement electronically
free 3- Cash Withdrawal using a withdrawal Form at the Branch
Free 4- MADA ATM and POS Cards:
Free a. issuance of ATM card for a Free account
Free b. ATM cash withdrawal / deposit
Free c. Use of MADA cards at POS terminal by customers
Free d. Renewal of ATM card
Free e. Re-issuance of ATM card retained by an ATM
Free f. NAQAD service (purchase with cash back)
Free g. Re-issuance of ATM card (lost / damaged / 3 invalid passwords)
30 SAR h. issuance of an additional ATM card
30 SAR 5- Electronic Payment of Bills Government Services (SADAD):
a. Government services payment.
Free b. Payment of bills and services..
Free c. SADAD Account for online payment.
Free 6- Banking Transfer & services
At Branch:
a. Transfer to another account within the same bank
Free b. Setting up a standing payment order (one time)
15 SAR c. Transfer to another bank inside the Kingdom through SARIE (same day)
25 SAR d. Transfer to another bank inside the Kingdom through SARIE (forward)
15 SAR e. Transfer to a bank outside the Kingdom.
75 SAR f. Change/cancel transfer outside the kingdom
25 SAR Electronically (internet, telephone and ATM):
g. Transfer to another account within the same bank
Free h. identification of a beneficiary for fund transfer
Free i. Setting up a standing payment order (one time)
10 SAR j. Transfer to another bank inside the Kingdom through SARIE (same day)
7 SAR k. Transfer to another bank inside the Kingdom through SARIE (forward)
5 SAR l. Transfer to a bank outside Kingdom
50 SAR m. Change/cancel transfer outside kingdom
15 SAR 7- Checks
a. Issuance of a checkbook (25 checks)
Free b. Issuance of an additional checkbook (25 checks)
10 SAR c. Issuance of a bank check
10 SAR d. Revocation of a bank check
10 SAR e. Issuance of a bank check (foreign currency)
15 SAR f. Revocation of a bank check (foreign currency)
15 SAR g. Requesting a copy of a check dated to one year
10 SAR h. Requesting a copy of a check dated more than one year
20 SAR 8- GCCNet Transaction Fees
a. Cash withdrawal within Gulf countries
10 SAR b. Balance inquiry within Gulf countries
3 SAR c. Customer use of GCC cards at POS terminals within Gulf countries.
FREE 9. International Network Transaction Fees
a. Cash withdrawal for debit cards
25 SAR Cash withdrawal from credit cards
b. Withdrawal of SAR 5,000 or less
75 SAR c. Withdrawal of more than SAR 5,000
3% MAX 300 SAR d. Credit card dispute fee (if wrong dispute)
50 SAR e. Balance inquiry on ATM
3,5 SAR Model Contracts
The Standard Contract Forms for Opening Current Bank Accounts for Individuals and Juristic Persons
This circular is currently available only in Arabic, please click here to read the Arabic version.Finance Contract Summary Form
No: 351000123114 Date(g): 21/7/2014 | Date(h): 24/9/1435 Status: In-Force This circular is currently available only in Arabic, please click here to read the Arabic version.Mortgage Finance Model Contract for Individuals in Murabaha and Ejarah
This circular is currently available only in Arabic, please click here to read the Arabic version.Consumer Financing Model Contract
No: 44058467 Date(g): 7/2/2023 | Date(h): 17/7/1444 Status: In-Force This circular is currently available only in Arabic, please click here to read the Arabic version.Model Contract of the Financial Lease of Vehicles for Individuals
No: 41038534 Date(g): 26/1/2020 | Date(h): 1/6/1441 Status: In-Force This circular is currently available only in Arabic, please click here to read the Arabic version.Margin Trading System
Other Provisions
Credit Information
Enforcement and Financial Penalties
Instructions for Publishing Banking Penalties
No: 391000035993 Date(g): 17/12/2017 | Date(h): 29/3/1439 Status: In-Force Translated Document
Based on SAMA's supervisory and regulatory role over financial institutions under its supervision, and its commitment to applying the principles of fairness and transparency to enhance trust in the banking sector, enabling users of financial data and decision-makers, including shareholders, investors, lenders, and bank customers in general, to access the financial penalties imposed by SAMA on banks due to violations of the supervisory regulations, the following has been decided:
First: Banks must publish in their annual reports the banking violations that have been subjected to punitive decisions from SAMA under the section "SAMA Punitive Decisions". This should include violations from the current financial year and those from the previous financial year (excluding this year, publication is limited to the current year only). The publication must include the nature of the violation, the number of punitive decisions, and the total amount of fines in Saudi Riyals, according to the format provided in the table below:
Subject of Violation
Previous Financial Year
Current Financial Year
Number of Punitive Decisions
Total Amount of Financial Penalties (SAR)
Number of Punitive Decisions
Total Amount of Financial Penalties (SAR)
Violations of SAMA's Supervisory Instructions
3
1,500,000
None
Violation of SAMA's Customer Protection Instructions
5
250,000
6
300,000
Second: The subjects of violations shall be determined according to the accompanying guide for classifying subjects mentioned in these instructions only
According to the following subjects:
Violation of SAMA's Supervisory Instructions.
Violation of SAMA's Customer Protection Instructions.
Violation of SAMA's Due Diligence Instructions.
Violation of SAMA's Performance Level Instructions for ATMs and POS Devices.
Violation of SAMA's Due Diligence Instructions for Anti-Money Laundering and Counter-Terrorism Financing.
Please note that SAMA will publish the violations reported in the banks' annual reports on its website.
Annex: Instructions for Publishing Banking Penalties
Classification Guide for Banking Violations
Subject of Violation in the Punitive Decision Subject of Violation when Published Violation of Banking Procedures Instructions (Judicial) Violation of Central Bank Supervisory Instructions Violation of Banking Procedures Instructions (Civil) Violation of Central Bank Supervisory Instructions Violation of Banking Procedures Instructions (Security) Violation of Central Bank Supervisory Instructions Violation of Instructions on Disclosure and Seizure of Balances and Accounts Violation of Central Bank Supervisory Instructions Violation of Inspection Instructions Violation of Central Bank Supervisory Instructions Violation of Data Request Instructions Violation of Central Bank Supervisory Instructions Violation of Liquidity Instructions Violation of Central Bank Supervisory Instructions Violation of SIBOR Instructions Violation of Central Bank Supervisory Instructions Violation of Interest Rate Instructions Violation of Central Bank Supervisory Instructions Violation of Requirements for Appointments in Leadership Positions Violation of Central Bank Supervisory Instructions Violation of Instructions for Opening Branches and Installing ATMs Violation of Central Bank Supervisory Instructions Violation of Instructions for Outsourcing Tasks to Third Parties Violation of Central Bank Supervisory Instructions Violation of Banking Products and Services Instructions Violation of Central Bank Supervisory Instructions Violation of Clearing House Instructions Violation of Central Bank Supervisory Instructions Violation of SARIE Instructions Violation of Central Bank Supervisory Instructions Violation of Electronic Service Level Instructions via the Saudi Payments Network Violation of Central Bank Supervisory Instructions Violation of Internal Bank Policies and Instructions Violation of Central Bank Supervisory Instructions Violation of Security Safety Instructions Violation of Central Bank Supervisory Instructions Violation of Saudization Program Instructions Violation of Central Bank Supervisory Instructions Violation of Operational Rules and Procedures for the Saudi Payments Network Violation of Central Bank Supervisory Instructions Violation of Customer Protection Instructions Violation of Central Bank Customer Protection Instructions Violation of Automated Claims Processing Instructions (CPS) Violation of Central Bank Customer Protection Instructions Violation of Anti-Money Laundering and Counter-Terrorism Financing Instructions Violation of Central Bank Due Diligence Instructions for Anti-Money Laundering and Counter-Terrorism Financing. Violation of Bank Account Opening and Operation Instructions Violation of Central Bank Due Diligence Instructions Violations of Central Bank Performance Level Instructions for ATMs and POS Devices Violations of Central Bank Performance Level Instructions for ATMs and POS Devices Other Violation of Central Bank Supervisory Instructions Banking Sector Circulars
Circular No. Circular Title Issue Date (G) Issue Date (H) Status 46004436 Rules for Dealing with E-Commerce Payment Service and Support Providers 24/07/2024 18/01/1446 In- Force 450651330000 Introduction of a New Paragraph within the Rule No. (300-1-5-3) of the Account Opening Rules 22/04/2024 14/10/1445 In- Force 450565080000 Domestic Systemically Important Banks (D-SIBs) 2024 03/11/2024 02/09/1445 In- Force 450340760000 The Requirement for Obtaining the Approval of the Ministry of Human Resources and Social Development to Open Bank Accounts, Transfer or Issue Checks Outside the Kingdom Shall not Apply to the King Faisal Foundation 08/12/2023 26/05/1445 In- Force 450322260000 New Banking Products and Services Regulation 28/11/2023 16/05/1445 In- Force 450213350000 Additional Requirements on Capital Adequacy for Shari’ah Compliant Banking 14/10/2023 30/03/1445 In- Force 440946210000 Dealing with the Licensed Real Estate Brokers in Accordance with the Relevant Laws and Regulations 07/10/2023 22/12/1444 In- Force 440941750000 Suspension of Direct Supplies Operations to the Ministry of Finance Current Account 07/09/2023 21/12/1444 In- Force 440930960000 Issuance of The Implementing Regulations of Payments and Payment Services Law 04/07/2023 16/12/1444 In- Force 440866440000 Acceptance of reconciliation documents issued by the reconciliation centre containing proof of custody 04/06/2023 15/11/1444 In- Force 000044082619 Approval of off-plan sales licences issued by the ECZA - Economic Cities and Special Zones Authority 18/05/2023 28/10/1444 In- Force 000044082632 Amendment of Rule (300-1-4) of the Account Opening Rules 18/05/2023 28/10/1444 In- Force 000044075800 Allowing to enter into membership agreements with FinTech companies supervised by the Central Bank or the Capital Market Authority (CMA) without obtaining the Central Bank's authorization 18/04/2023 27/09/1444 In- Force 000044075612 Implementation of the account verification service through the IPS (SARIE) and RTGS system 16/04/2023 25/09/1444 In- Force 000044073468 Approval of Apostille authentication for foreign public documents 06/04/2023 15/09/1444 In- Force 000044071426 Amendment of Rule (5) of the Account Opening Rules 29/03/2023 7/09/1444 In- Force 440000071146 Loans to Deposits Ratio Guidelines 28/03/2023 6/09/1444 In- Force 000044069265 Rules for establishing a customer care department in banks 21/03/2023 29/08/1444 In- Force 000044064343 Rules for Advertising Products and Services Provided by Financial Institutions 05/03/2023 13/08/1444 In- Force 440626240000 Domestic Systemically Important Banks (D-SIBs) 2023 26/02/2023 06/08/1444 Modified 000044061480 Amendment of Rules (300-1-3) and (300-1-3-3) of Account Opening Rules 19/02/2023 28/07/1444 In- Force 000044058467 Model Retail Consumer Finance Contract 08/02/2023 17/07/1444 In- Force 000044055679 Assigning debt collection operations of banks, financial institutions, and finance companies to debt collection entities licensed by the Central Bank. 30/01/2023 8/07/1444 In- Force 440000049096 Banks Remuneration Rules 24/06/2023 6/12/1444 In- Force 440471440000 basel III Reforms 28/12/2022 4/06/1444 In- Force 000044043873 Compliance with Customer Personal Data Protection Instructions 18/12/2022 24/05/1444 In- Force 000044039893 Controls for the Distribution of Public Investment Funds 04/12/2022 10/05/1444 In- Force 000044037856 Biometric Authentication for Remote Customer Relationship Initiation/Establishment 27/11/2022 3/05/1444 In- Force 000044029338 Ensuring Continuous Fulfilment of the Professional Certification Requirement 31/10/2022 6/04/1444 In- Force 000444022437 Facilitation and Acceleration of the Bank Account Opening Process for Foreign Companies 12/10/2022 16/03/1444 In- Force 000044021528 Counter-Fraud Framework 11/10/2022 15/03/1444 In- Force 440123030000 Profit Sharing Investment Accounts Rules 11/09/2022 15/02/1444 In- Force 000044009296 Updating Financial Institution KPIs 01/09/2022 5/02/1444 In- Force 000044009058 Emphasis on Applying the Method for Calculating Government Subsidies Provided by the Ministry of Municipal and Rural Affairs and Housing or the Real Estate Development Fund 31/08/2022 4/02/1444 In- Force 000044003844 Provision of Finance Awareness Programs for SMEs 11/08/2022 13/01/1444 In- Force 000043096118 Data Quality Improvement Project in the e-commerce sector in the Kingdom 19/06/2022 20/11/1443 In- Force 430957430000 Related Parties Rules for Banks 16/06/2022 17/11/1443 In- Force 000043089486 Regulation on Branch Network 24/05/2022 23/10/1443 In- Force 430831080000 Bank Investment Rules 25/04/2022 24/09/1443 In- Force 000043074912 Amendment of Rule 300.1.5.3 of the Account Opening Rules 29/03/2022 26/08/1443 In- Force 000043071966 Transfer of Murabaha mortgage debt 22/03/2022 19/08/1443 In- Force 000043070746 Increasing the percentage of qualified people with disabilities in employment 20/03/2022 17/08/1443 In- Force 000043069533 Emergency evacuation for people with disabilities 14/03/2022 11/08/1443 In- Force 000043067037 Requirements for ATM Receipts Initiative 06/03/2022 3/08/1443 In- Force 000043065348 Cyber Threat Intelligence Principles for Financial Sector 27/02/2022 26/07/1443 In- Force 000043047240 Urging Adherence to the Preventive and Precautionary Measures 29/12/2021 25/05/1443 No longer Applicable 000043043372 Unified Instructions for Amounts Excluded from Seizure under Judicial Orders 19/12/2021 15/05/1443 In- Force 000043038107 Pricing Policy for Remittance Service through the Gulf Payments System Afaq 02/12/2021 27/04/1443 In- Force 000043037826 Principles of Internal Auditing for Local Banks Operating in Saudi Arabia 01/12/2021 26/04/1443 In- Force 000043034916 Using the fair value or revaluation model option to measure property and investment properties 23/11/2021 18/04/1443 In- Force 000043033258 Passing Reports to Security Authorities via Hotline Numbers of Police Operations Rooms in Provinces 18/11/2021 13/04/1443 In- Force 000043033273 Update to the Guidelines on Standing Orders for Real Estate Financiers 18/11/2021 13/04/1443 In- Force 000043028139 Information Technology Governance Framework for Financial Sector 04/11/2021 29/03/1443 In- Force 000043023350 Duration Instructions for issuing a clearance letter, account transfer and indebtedness 21/10/2021 15/03/1443 In- Force 430131890000 Guidelines on Repurchase Agreements 20/09/2021 12/02/1443 In- Force 000043010538 Accepting the digital ID on Absher platform and Tawakklna application 09/09/2021 2/02/1443 In- Force 000043008128 Banks' approvals for licensed external auditors in Saudi Arabia/SAMA Rulebook 02/09/2021 25/01/1443 In- Force 000043002199 Ensure the availability of communication channels for customers with financial institutions 16/08/2021 8/01/1443 In- Force 000043002220 The electronic link with “Mudad” platform 16/08/2021 8/01/1443 In- Force 000042085168 Approval of documents, instruments and certificates electronically approved by Chambers of Commerce 12/07/2021 2/12/1442 In- Force 000042081293 Principles of Corporate Governance for Financial Institutions Subject to Saudi Central Bank’s Oversight and Supervision 01/07/2021 21/11/1442 In- Force 000042080025 Deactivation of Point-of-Sale Terminals Tied to Frozen Bank Accounts of Juristic Persons 27/06/2021 17/11/1442 In- Force 000042076931 Automization of the Requests of the Ministry of Finance Regrading Government Agencies’ Accounts Held with Commercial Banks Operating in Saudi Arabia Through the e-Portal “Hisab” 14/06/2021 4/11/1442 In- Force 000042075950 Introduction of a Rule Entitled, “Collection Accounts for Managing the Finance Value of Debt-Based Crowdfunding Companies" 10/06/2021 29/10/1442 In- Force 000042073079 Unified Instructions for Funds Exempt from Seizure Under Court Orders 02/06/2021 21/10/1442 Modified 000042069605 Providing Backup Generators in Branches and Transfer Centers 19/05/2021 7/10/1442 In- Force 000042068294 Enabling Mothers to Open Sub-Bank Accounts Linked to Their Main Account for Their Minor Children. 06/05/2021 24/09/1442 In- Force 000042068309 GCC Payments System Remittance Service Document for the Local Banking Sector 06/05/2021 24/09/1442 In- Force 000042066419 Instructions for Banking Obligations and Transactions in Accordance With the Bankruptcy Law and Its Implementing Regulations 02/05/2021 20/09/1442 In- Force 000042065141 Instructions on Forms for Straps of Banknote Stacks of Sixth Edition 26/04/2021 14/09/1442 In- Force 000042064692 Creation of a post dedicated to combating commercial concealment and analyzing and reporting suspected cases of commercial concealment 25/04/2021 13/09/1442 In- Force 000042064776 Updating the requirements for appointment to leadership positions in financial institutions supervised by the Saudi Central Bank 25/04/2021 13/09/1442 In- Force 000042063179 Control and Awareness Measures for Branch and Customer Service Employees in Banks Operating in the Kingdom 18/04/2021 6/09/1442 In- Force 000042061580 Removal of the visual identity of the Kingdom's G20 Presidency 11/04/2021 29/08/1442 No longer Applicable 000042060703 Amendment of Rule No. (300-1-6-6) of the Account Opening Rules 07/04/2021 25/08/1442 In- Force 000042059442 The requirements and information needed for costumers’ bank account statements 04/04/2021 22/08/1442 In- Force 000042058610 Ensure Adherence to Preventive Protocols in all Workplaces 31/03/2021 18/08/1442 No longer Applicable 000042058651 Approving the requirement for lawyers to obtain the unified identity number for non-governmental establishments beginning with number (7), through the establishment's legal registry 31/03/2021 18/08/1442 In- Force 420563710000 Trade Repository Reporting and Risk Mitigation Requirements for Over-the-Counter (OTC) Derivatives Contracts 23/03/2021 10/08/1442 In- Force 000042054762 Approval of Translated Business Registers for Commercial Entities 18/03/2021 5/08/1442 In- Force 000042053614 Amendments of Rules 300.1.1 and 300.1.3 of the Account Opening Rules 15/03/2021 2/08/1442 In- Force 000042048729 Responding to the Requests of the General Secretariat of the Committees for Resolution of Banking and Financial Disputes and Violations 01/03/2021 13/07/1442 In- Force 000042049450 Consideration of Loans Granted by the National Development Fund’s Development Funds and Banks 01/03/2021 17/07/1442 In- Force 000042048340 Update the model forms of current bank account opening agreement for individuals and legal entities 24/02/2021 12/07/1442 In- Force 000042047169 Instant Payments Launch (Fast) 17/02/2021 6/07/1442 In- Force 000042043529 Cancellation of the requirement for the official seal of institutions and companies on documents and papers submitted in dealings with customers 08/02/2021 26/06/1442 In- Force 000042042799 Instruction Not to Seize Alimony Payments Made by the Alimony Fund 04/02/2021 22/06/1442 In- Force 000042033441 Amendment of Rules 4.1 and 4.2 Contained in Chapter II of the Account Opening Rules 04/01/2021 20/05/1442 In- Force 000042033072 Companies and Institutions Must Not Be Required To Restore Revoked Commercial Registers 03/01/2021 19/05/1442 In- Force 000042031578 Verifying the Identity of Customers via a Reliable Source 28/12/2020 13/05/1442 In- Force 000042032166 Remote Work Initiative 28/12/2020 14/05/1442 In- Force 000042027544 Updating Financial Institution KPIs. 13/12/2020 28/04/1442 Modified 000042025830 Not to refrain from confiscating the bank guarantee letter to open a bankruptcy proceeding and suspend claims against the customer ordering the issuance of the letter 06/12/2020 21/04/1442 In- Force 000042023876 Standardization of the elements of notifications sent to customers of financial institutions. 29/11/2020 14/04/1442 In- Force 000042023191 ISSUANCE OF SAUDI CENTRAL BANK LAW 25/11/2020 10/04/1442 In- Force 000042018358 Instructions on forms for banknote stacks of Sixth Edition of Saudi currency 08/11/2020 23/03/1442 Superseded 000042017708 Instructions for replacing the commercial registration number and licences for non-governmental establishments with the unified number starting with (7). 04/11/2020 18/03/1442 Modified 000042016471 The importance of adhering to regulations related to the commercial environment and credit transactions 02/11/2020 16/03/1442 In- Force 000042015321 Providing small denominations and coins 28/10/2020 11/03/1442 In- Force 000042015322 Replacing damaged Saudi banknotes 28/10/2020 11/03/1442 In- Force 000042013845 Self-build product instructions for Retail Mortgage Finance 22/10/2020 5/03/1442 In- Force 000042013854 Opening daycare for children of female workers at financial institutions. 22/10/2020 5/03/1442 In- Force 420138680000 Frequent inquiries for a range of issues related to moving to a new index 22/10/2020 5/03/1442 In- Force 420121570000 Guidelines on the Internal Liquidity Adequacy Assessment Plan (ILAAP) 18/10/2020 1/03/1442 In- Force 420092840000 Interest Rates on Assets and Liabilities Reporting Guidelines 06/10/2020 19/02/1442 In- Force 000042008961 Digital Confirmation of Banking Products for Clients of Public Banks in the Kingdom 05/10/2020 18/02/1442 Superseded 000042008969 License Cancellation of the Dabbous Al-Anzi Agency for Money Exchange 05/10/2020 18/02/1442 Superseded 000042008977 Acceptance of documents from the Social Development Centers regarding the accounts of associations, civil institutions and cooperative societies 05/10/2020 18/02/1442 In- Force 000042008998 Margin Requirements for Non- Centrally Cleared Derivatives 05/10/2020 18/02/1442 In- Force 000042009003 Preparations in providing electronic payment methods for the grocery sector 05/10/2020 18/02/1442 In- Force 000042009004 Digital confirmation of banking products for bank customers 05/10/2020 18/02/1442 In- Force 000042009011 Extending the exception for primary dealers in local sovereign securities 05/10/2020 18/02/1442 In- Force 000042009015 Acceptance of primary and final guarantees via the Etimad platform 05/10/2020 18/02/1442 In- Force 000042009018 Electronic procuration 05/10/2020 18/02/1442 In- Force 000042008566 Launching E-service of verdicts and terminations. 04/10/2020 18/02/1442 In- Force 000042007671 Obtaining Central Bank approval before accepting the nomination, assignment/reassignment, or appointment/reappointment of leadership positions in financial institutions, public or private, or assuming other responsibilities 29/09/2020 12/02/1442 In- Force 000042006529 The standard form for responding to complaints received through the SAMA Cares platform. 22/09/2020 5/02/1442 In- Force 000042005223 Principles of compliance for banks and commercial banks operating in the Kingdom of Saudi Arabia 16/09/2020 29/01/1442 In- Force 420036940000 Increase the Exposure limit for the Group of Connected Counterparties - Aramco Group 10/09/2020 22/01/1442 In- Force 000042002556 Annual plans to install ATMs. 06/09/2020 18/01/1442 In- Force 000042001941 The mechanism for verifying the identity of the partner or shareholder when establishing limited liability companies and joint stock companies, and any amendment to the articles of association 02/09/2020 14/01/1442 In- Force 410716040000 Providing services for issuing and verifying documents electronically 18/08/2020 28/12/1441 In- Force 410713150000 Guidelines for Combating Financial Fraud in Banks Operating in Saudi Arabia 17/08/2020 28/12/1441 Superseded 000041070501 Real estate valuation fees in mortgage contracts for individuals 12/08/2020 22/12/1441 In- Force 410682910000 The Rules for Disclosing Prices of Finance and Savings Products 23/07/2020 2/12/1441 In- Force 410596680000 Amendment of Paragraph (3) of the Mandatory Instructions When Offering Real Estate Finance Products for Individuals 08/06/2020 16/10/1441 In- Force 410592360000 Sharing Credit Information With Bayan Credit Bureau 03/06/2020 11/10/1441 In- Force 410590250000 Subscription to "Natheer" E-Service 02/06/2020 10/10/1441 In- Force 410517800000 Tamweel Electronic Portal Approved by the Public Authority for Small and Medium Enterprises (Munshaat) 01/04/2020 8/08/1441 In- Force 000041049329 Instructions on the Working Hours of Bank Branches, Self-Service Centers, and Remittance Centers in Shopping Centers 16/03/2020 16/07/1441 In- Force 000041049697 Preparedness of Banks and Payment Service Providers to Receive Requests to Provide Electronic Payment Methods for Personal Service Activities 12/03/2020 17/07/1441 In- Force 000041049544 Fees for Banking Services Provided to Companies and SMEs 11/03/2020 16/07/1441 In- Force 000041048833 Controls and Procedures to Be Followed When Handling Paper Currency and Coins 09/03/2020 14/07/1441 In- Force 410443910000 "Nafez" Electronic Platform Approved by the Ministry of Justice 19/02/2020 25/06/1441 In- Force 410399140000 Enabling bankruptcy trustees to exercise their powers granted under the bankruptcy law and its executive regulations 02/02/2020 8/06/1441 Superseded 000041038237 Collecting Amounts Owed to Finance Entities for Previous Periods in Exchange for VAT on Real Estate Finance Contracts 26/01/2020 1/06/1441 In- Force 410333430000 Rules on Management of Problem Loans 06/01/2020 11/05/1441 In- Force 410333430000 Guidelines on Management of Problem Loans 06/01/2020 11/05/1441 In- Force 410299460000 Prohibiting Seizure of Funds Deposited Under "Hafiz" Program 25/12/2019 28/04/1441 In- Force 410283250000 Cancelling the Requirement for Stamping of Institutions and Companies on Documents Used When Dealing with Customers 19/12/2019 22/04/1441 In- Force 410275110000 Prohibiting Seizure of Agricultural Subsidies 17/12/2019 20/04/1441 In- Force 410270170000 Rules on Outsourcing 15/12/2019 18/04/1441 In- Force 410254330000 Professional Certificates of Financial Institution Employees 09/12/2019 12/04/1441 In- Force 210020000067 POS Payment Service of GCC Net 26/11/2019 29/03/1441 In- Force 170780000067 Regulations for the Handling of Bankcard Refunds 12/11/2019 15/03/1441 In- Force 120500000067 Subscribing in SMS Services 23/10/2019 24/02/1441 In- Force 601300000067 Acceptance of the Customer Signing the Last Page of the Bank Account Agreement Only 30/09/2019 1/02/1441 In- Force 247100000067 Cancelling the License to Transfer Funds Inside and Outside Saudi Arabia for Saeed Mohammed Ali Al-Amoudi & Co, of Its Head Office and Branches 11/09/2019 12/01/1441 In- Force 165100000067 Large Exposure (LEX) Rules for Banks 09/08/2019 09/01/1441 In- Force 684120000067 Receiving Reports and Feedback on ATMs via the Toll-Free 24-Hour Phone 17/07/2019 14/11/1440 In- Force 670640000067 Guidelines for merchants contracted with banks on the confidentiality of credit card information 11/07/2019 8/11/1440 In- Force 605960000067 The Mandatory Requirement of Using Qawaem Program Before Providing Credit Facilities to Commercial Entities 12/06/2019 9/10/1440 In- Force 606670000067 The Electronic Report Approved by the SAFIU 12/06/2019 9/10/1440 In- Force 598780000067 Financing Product for Private Dental Healthcare Facilities 10/06/2019 7/10/1440 In- Force 596080000067 Extending Working Hours of Bank Branches Located in Pilgrims Gathering Areas Near the Two Holy Mosques 09/06/2019 6/10/1440 No longer Applicable 589340000067 Allowing Banks to Continue Providing Finance Lease Activities 29/05/2019 24/09/1440 In- Force 529850000067 Allowing cash withdrawals and ATM card issuance for customers with seizure and ban decisions 29/04/2019 24/08/1440 In- Force 515180000067 Allowing Branches Located in Cities and Military/Air Bases to Operate Outside Official Working Hours 22/04/2019 17/08/1440 In- Force 480030000067 Cancelling the License of Abdulaziz Abdullah Alzamil and his Sons for Exchange Company and Its Branches 07/04/2019 2/08/1440 Superseded 480070000067 Providing Customers with Channels for Communication with Financial Institutions 07/04/2019 2/08/1440 In- Force 476510000067 Preparedness of Banks to Receive Requests from Gas Station Operators and Service Centers to Provide POS Terminals Connected via the National Payment System (Mada) 04/04/2019 28/07/1440 In- Force 444800000067 Compliance with Real Estate Finance Law and Finance lease Law provisions, Implementing Regulations, and Instructions 21/03/2019 15/07/1440 In- Force 439310000067 Cancelling of the Currency Exchange License of Mohamed Mounir Halawani Sons Company and Its Branches 19/03/2019 12/07/1440 Superseded 428800000067 Obtaining the National Address (Residence and Work Address) of Consumers 14/03/2019 7/07/1440 In- Force 384670000067 Cancellation of the Currency Exchange License of Khaled Salem Saleh Abdulaziz Establishment 25/02/2019 20/06/1440 Superseded 374880000067 Prohibiting Seizure of Funds Deposited by Charities Into Bank Accounts Seized Under Court Orders 20/02/2019 15/06/1440 In- Force 375410000067 Regulation of Agent Banking 20/02/2019 15/06/1440 In- Force 340050000067 Exclusion of Expatriates Holding Prepaid Cards and Working for Distressed Companies from the Freezing of Funds 05/02/2019 30/05/1440 In- Force 334220000067 Allowing Bank Branches Located in or Next to Government Buildings to Change Working Hours 03/02/2019 28/05/1440 Modified 309860000067 Interbank Offered Rate (SAIBOR) 23/01/2019 17/05/1440 Superseded 298110000067 Customer Signature on Bank Account Agreements 17/01/2019 11/05/1440 In- Force 268220000067 Marketing of Finance Products That Meet Real Individual Needs 03/01/2019 27/04/1440 In- Force 221290000067 Licensing Banks to Engage in Real Estate Finance or Finance Leasing Activities 17/12/2018 9/04/1440 Modified 217550000041 Saudization of the Jobs of Money Exchangers of class A and B. 14/12/2018 6/05/1440 In- Force 186260000067 Launching the electronic agencies service 02/12/2018 24/03/1440 In- Force 146250000041 Updating the lists of high- risk countries on the website of the AMLPC 14/11/2018 6/03/1440 In- Force 130480000067 Relief and Humanitarian Aid Abroad 07/11/2018 29/02/1440 In- Force 119930000067 Using Commercial Registers for the Same Activity in Many Locations/Stores in the Same Administrative Region 04/11/2018 26/02/1440 In- Force 282000000067 Raising Awareness of Banking Secrecy Regularly Among Bank Employees 27/09/2018 17/01/1440 In- Force 539560000041 Resuming money exchange activities for Salah Al-Din Saleh Kaaki Exchange Establishment 15/08/2018 4/12/1439 In- Force 539570000041 Resuming money exchange activities for Mohamed Hassan Bitar and Sons Exchange Company 15/08/2018 4/12/1439 In- Force 539580000041 Resuming money exchange activities for Lafi Awad Al-Harbi Exchange Establishment 15/08/2018 4/12/1439 In- Force 536990000041 Electronic Verification of Documents, Certificates and Instruments Approved by Riyadh Chamber 13/08/2018 2/12/1439 In- Force 703900000041 POS Payment Service of GCC Net 04/07/2018 20/10/1439 Modified 460760000041 Legal Entity Identifier (LEI) 03/07/2018 19/10/1439 In- Force 230400000041 Working Hours of Banks’ Money Remittance Centers 24/05/2018 9/09/1439 Modified 166000000041 Activation of E-Services for Bank Accounts of Government Entities 20/05/2018 5/09/1439 In- Force 391000090955 Amending the Dates for Paying Entitlements to the Beneficiaries of the GOSI 10/05/2018 24/08/1439 In- Force 391000084411 Using SAMA’s Name When Dealing with Customers 17/04/2018 1/08/1439 In- Force 391000080845 Accepting the National ID Card - Third Generation 04/04/2018 18/07/1439 In- Force 391000079052 Instructions on Providing Government and Non-Government Entities with Documents, Information and Data of Customer Bank Accounts 29/03/2018 13/07/1439 In- Force 391000076259 Acceptance of Company Electronic Contracts 22/03/2018 5/07/1439 In- Force 391000075459 Current 20/03/2018 3/07/1439 In- Force 391000075005 Using MADA through INTERNET for Buying Products 19/03/2018 2/07/1439 In- Force 391000072844 Giudelines for calculating Loan to deposit ratio (LDR). 13/03/2018 26/06/1439 Modified 391000069365 Main Principles of Governance for Banks Operating in Saudi Arabia - Definition of Independent Member 04/03/2018 17/06/1439 Superseded 391000064531 The Finance of MSMEs Based on Cash Flows Through Mada POS Terminals 21/02/2018 5/06/1439 In- Force 391000063139 The Spread of Advertisements for Lending and Debt Repayment from Unlicensed Parties 19/02/2018 3/06/1439 In- Force 391000062299 Raising the Purchase Limit for Mada Debit Card Transactions at POS Terminals 18/02/2018 2/06/1439 In- Force 391000059139 Amending the Dates of Paying Pensions According to the Gregorian Calendar 08/02/2018 22/05/1439 In- Force 391000059150 Rules on Large Exposures of Banks 08/02/2018 23/05/1439 Modified 391000059160 Guidance Document Concerning basel III: THE NET STABLE FUNDING RATIO (NSFR) - Based on BCBS Document of October 2014 08/02/2018 23/05/1439 Modified 391000058636 Non-Linear Multi-leg Forward Structured Transactions 07/02/2018 21/05/1439 In- Force 391000051141 Banks’ Preparedness to Receive Applications for Prepaid Salary Cards of Domestic Workers 20/01/2018 04/05/1439 No longer Applicable 391000047997 Decrease RWA for mortgages from 75% to 50% 11/01/2018 24/04/1439 Superseded 391000045986 Instructions on Documentation and Record Keeping 08/01/2018 21/04/1439 In- Force 391000043836 Verification of Academic and Professional Certificates of the Banking Sector Employees 03/01/2018 16/04/1439 In- Force 391000043643 basel III: Treatment of extraodinary monetary policy operations in the Net Stable Funding Ratio (NSFR) 02/01/2018 15/04/1439 Consultative 391000041142 The Saudization Ratio Calculation Mechanism in Prudential Data 28/12/2017 10/04/1439 In- Force 391000040537 Providing Coins 27/12/2017 9/04/1439 In- Force 391000040699 Establishing a committee within banks for SMEs 27/12/2017 9/04/1439 In- Force 391000040273 Issuance of Clearance Letters 26/12/2017 8/04/1439 In- Force 391000034675 Instructions for Payment of Amounts to Beneficiaries of the Citizen Account Program 13/12/2017 25/03/1439 In- Force 391000031319 The Comprehensive National Campaign to Track Down and Arrest Violators of Residence, Work and Border Security Systems 06/12/2017 18/03/1439 In- Force 391000031596 Requirements for Establishment of Institutions and Companies and Cancellation of the Requirement for Official Stamp 06/12/2017 18/03/1439 In- Force 391000030312 Risk weight for Asian Infrastructure Investment Bank (AIIB) 04/12/2017 16/03/1439 In- Force 391000029618 VAT 06/12/2017 15/03/1439 No longer Applicable 391000029727 Prudential Report Template for Commissions for Deposits, Loans, Bonds and other Instruments 03/12/2017 15/03/1439 Superseded 391000029731 IFRS 9 (International Financial Reporting Standard-9) 03/12/2017 15/03/1439 In- Force 000000000001 Regulations for AML Implementing Regulation to the AML Law IRs AML 08/11/2017 19/02/1439 In- Force 391000016551 Step-in Risk 01/11/2017 12/02/1439 In- Force 391000009803 The Liqudity Coverage Raitio Framework, Frequently Asked Questions 17/10/2017 27/01/1439 In- Force 391000006561 Electronic Services from (Elm-NIC) for KYC. 09/10/2017 19/01/1439 In- Force 391000006163 08/10/2017 18/01/1439 Modified 391000003370 Closure of the State Bank of India Branch 02/10/2017 12/01/1439 No longer Applicable 391000000353 Adjustable-Rate Real Estate Finance Products of Retail Consumers 21/09/2017 1/01/1439 Modified 361000005794 Corporate Governance Principles for Banks 03/11/2014 11/01/1436 Consultative 361000130698 Net Stable Funding Ratio Disclosure Standards 20/09/2017 29/12/1438 Superseded 361000130700 Review of the Credit Valuation Adjustment (CVA) Risk Framework 04/11/2014 12/10/1436 Consultative 361000141528 Net Stable Funding Ratio Minimum Requirements and Disclosure Standards 20/09/2017 29/12/1438 Superseded 371000084720 Account Opening 20/09/2017 1/08/1437 In- Force 351000147075 Principles for Sound Liquidity Risk Management and Supervision 24/09/2014 1/12/1435 In- Force 351000147086 Implementation of Monitoring Tools in Conjunction with Amended LCR 24/09/2014 1/12/1435 In- Force 351000155075 basel III Leverage Ratio Framework 19/09/2017 28/12/1435 Modified 351000112061 Supervision Guidelines for Identifying and dealing with weak banks 25/06/2014 27/08/1435 Consultative 351000118022 General Guidelines for Working of the Banking Committee 09/07/2014 12/09/1435 No longer Applicable 351000119940 Basel - Standards Review of the Pillar3 Disclosure Requirements 14/07/2014 17/09/1435 Superseded 351000121270 Basel III - Internal Rating Based Approaches (IRB) for Credit Risk 18/09/2017 27/12/1438 Superseded 351000126713 Annual Branch Expansion Plan (ABEP) 18/09/2017 11/10/1435 Superseded 351000129057 Margin Requirements for Non-Centrally Cleared Derivatives 18/09/2017 27/12/1438 Superseded 351000133366 Basel Committee on Banking Supervision (BCBS) Document regarding Liquidity Coverage Ratio Disclosure Standards 18/09/2017 27/12/1438 Modified 351000133367 SAMA's Guidence Document and Disclosure Templates concerning the implementation of basel III Leverage Ratio Disclosure Requirments based on BCBS document of January 2014 18/09/2017 27/12/1438 Superseded 351000138356 Framework for banks of regulatory importance 18/09/2017 12/11/1435 In- Force 351000053974 Basel Committee on Banking Supervision Joint Fourm Document Regarding Longevity Risk Transfer Markets: Market Structure, Growth Drivers And Impediments, and Potential Risks 17/09/2017 26/04/1435 In- Force 351000058269 LCR - Liquidity Coverage Ratio 09/03/2014 08/05/1435 Modified 351000075808 Requests for SAMA's NOC to offering banking products 17/09/2017 13/06/1435 Modified 351000095017 Basel - Asked Questions regarding LCR 17/09/2017 26/12/1438 351000095018 Basel III - Capital Requirements for Bank Exposure to Central Counterparties April 2014 17/09/2017 26/12/1438 Modified 351000095021 Basel III - Standardized Approach for Measuring Counterparty Credit Risk Exposure 17/09/2017 26/12/1438 Modified 351000052427 The Principles for Effective Risk Data Aggregation and Risk Reporting - BCBS 13/09/2017 24/04/1435 In- Force 351000052430 Sound Capital Planning Process: Fundamental Elements- BCBS 13/09/2017 24/04/1435 In- Force 381000113853 Update on Correspondent Banking Annex of Guidelines for Sound Management of Risks Related to Money Laundering and Terrorist Financing 09/08/2017 17/11/1438 In- Force 381000099758 IFRS16 17/06/2017 23/09/1438 Informative 381000098932 Cash deposit for Class A Exchange Companies at SAMA branches directly 14/06/2017 20/09/1438 In- Force 381000094106 Micro, Small and Medium Enterprises KPI Return 31/05/2017 6/09/1438 In- Force 381000092226 Record Retention Guidelines 27/05/2017 2/09/1438 In- Force 381000088967 Pillar3 18/05/2017 22/08/1438 Superseded 381000065740 LGD 18/03/2017 20/06/1438 Modified 381000063670 Remuneration for Chairs and Members of Boards of Directors of Local Banks, Insurance Companies and Reinsurance Companies 12/03/2017 14/06/1438 Superseded 381000061976 Acquisition of Real Estate Finance Assets or Rights Arising from Mortgage Finance Companies 08/03/2017 9/06/1438 In- Force 381000058506 Cooperation with Bayan Credit Bureau 28/02/2017 1/06/1438 In- Force 381000053456 Cancelling the Requirement for Stamping of Institutions and Companies on Documents Used for Banking Transactions 14/02/2017 17/05/1438 In- Force 381000040243 Interest Rating Risk in The Banking Book (IRRBB) 12/01/2017 12/04/1438 In- Force 381000025290 Applying KYC Principles to Prepaid Service Product Customers 05/12/2016 6/03/1438 In- Force 381000019428 TLAC Holding Standards 21/11/2016 20/02/1438 In- Force 381000019430 Debts and Loans of Martyrs of Duty and Those with Total Disability 20/11/2016 20/02/1438 In- Force 371000120595 Prepaid Salary Cards for Domestic Workers 24/08/2016 21/11/1437 In- Force 371000115208 Electronic Link Between Banks and the Ministry of Commerce and Investment Related to Some Services 09/08/2016 6/11/1437 In- Force 371000112753 Revisions to the Securitisation Framework 02/08/2016 28/10/1437 In- Force 371000111606 NSFR FAQs 31/07/2016 26/10/1437 In- Force 371000104815 SAIBOR/SAIBID Rates - Implementation of phase 1 New Requirments 29/06/2016 24/09/1437 Superseded 371000101113 Framework on Monitoring Tools for Intraday Liquidity Management 21/06/2016 15/09/1437 In- Force 371000101116 Capital requirments for bank exposures to central counterparties 21/06/2016 16/09/1437 Modified 371000101120 The standardised approach for measuring counterparty credit risk 21/06/2016 15/09/1437 In- Force 371000101108 Capital requirements for banks' equity Investments in funds 20/06/2016 15/09/1437 Superseded 371000094293 SAIBOR/SAIBID Rates - Implementation of phase 1 New Requirment 01/06/2016 25/08/1437 Superseded 371000093889 Guidelines for Records Saving 31/05/2016 24/08/1437 Modified 371000068810 Approval of Arrangements for Activating the Articles Related to Residence and Work addresses 28/03/2016 19/06/1437 Modified 371000050925 Minimum Capital Requirement for Market Risk - New Standard 09/02/2016 2/05/1437 Superseded 371000034973 Applicability of countercyclical Capital Buffer (CCyB) in Saudi Arabia 04/01/2016 24/03/1437 In- Force 371000026618 Revision to Standardised Aproach for Credit Risk - Second Consultative Document 15/12/2015 4/03/1437 Consultative 371000002391 Participation in Qawaem Program Prepared by the Ministry of Commerce 20/10/2015 7/01/1437 In- Force 361000130703 Frequently Asked Quesations (FAQs) on the basel III Laverage Ratio Framework 28/07/2015 12/10/1436 361000127011 Amendment on Liquidity Coverage Ratio - LCR 09/07/2015 22/09/1436 In- Force 361000126260 Treatment of High Quality Liquid Assets in Host Jurisdictions 08/07/2015 21/09/1436 In- Force 361000126265 Repo of Saudi Government Development Bonds, SAMA Bills and Investment in SAMA MURABAH Transactions 08/07/2015 21/09/1436 In- Force 361000126267 Amendment in SAMA Capital Rules 08/07/2015 21/09/1436 In- Force 361000126572 SAMA's Draft Implementation Framwork for Banks Comments Concerning Basel Committe on Banking Supervision (BCBS) Standards of January 2015 regarding Revised Pillar 3 Disclosure Requirements 08/07/2015 22/09/1436 Superseded 361000121873 Margin Requirements for non- centrally cleared derivatives 28/06/2015 12/09/1436 Superseded 361000121876 Interest Rate Risk on Bank Books (IRRBB) 28/06/2015 12/09/1436 Modified 361000104751 SIMAH 20/05/2015 1/08/1436 In- Force 361000067330 Rules on Large Exposures of Banks 25/02/2015 7/05/1436 Superseded 361000058279 Basel Committee on Banking Supervision (BCBS) Consultative Document Entitled " Fundemantal Review of the trading book: Outstanding Issues 09/02/2015 20/04/1436 Consultative 361000045859 Fees for Wage Protection Program Transfers Between Accounts Within the Bank 13/01/2015 23/03/1436 In- Force 361000042432 General Guidelines for the Working Bank committees 08/01/2015 17/03/1436 In- Force 361000036260 SAMA's Finalized Guidance Document and Prudential Returns Concerning Net Stable Funding Ratio (NSFR) based on BCBS Document of October 2014 28/12/2014 7/03/1436 Superseded 361000013257 The New Identity of the Saudi Payment Network (MADA) 17/11/2014 25/01/1436 In- Force 361000009335 SAMA's Revised Amended Liquidity Coverage Ratio Regulations and Guidance Documents 09/11/2014 17/01/1436 In- Force 351000123076 Enhancement of SAMA Circulars Concerning basel II. II.5 and III Capital Adequacy framework 21/07/2014 24/09/1435 In- Force 361000089524 Depositors Protection Fund (DPF) Rules 15/04/2014 26/06/1436 In- Force 351000062501 Customer Credit Records 16/03/2014 16/05/1435 In- Force 351000061537 Emphasis on Opening Bank Accounts for and Providing the Necessary Services and Cooperation to Commercial Enterprises and Private Schools Subject to the Wage Protection Program 13/03/2014 12/05/1435 In- Force 351000052432 Basel Committee on Banking Supervision Document Regarding Capital Requirements for Banks' Equity Investment in Funds 24/02/2014 24/04/1435 Modified 351000050572 Hafiz Program for Supporting Unemployed 19/02/2014 19/04/1435 No longer Applicable 351000036574 Prompt Implementation of Judgments and Judicial Decisions 21/01/2014 20/03/1435 In- Force 351000012318 Emphasis on Opening Bank Accounts for and Providing the Necessary Services and Cooperation to Commercial Enterprises Subject to the Wage Protection Program 01/12/2013 28/01/1435 In- Force 341000059261 Information Release on SIMAH 24/03/2013 11/05/1434 In- Force 341000056407 Basle Committee on Banking Supervision Press Release of 15 February 2013 Concerning its Final Guidance for Managing Risks Associated with Settlement of Foreign exchange transactions 16/03/2013 4/05/1434 In- Force 341000047687 Basel Committee for Banking Supervision (BCBS) Finalized Document entitled "Principles for Effective Risk Data Aggregation and Risk Reporting" 25/02/2013 15/04/1434 In- Force 341000020344 Treasury Agreements 30/12/2012 17/02/1434 In- Force 341000019984 SAMA's Final Guidance Documents Concerning Implementation of Basel 3 Pillar 3 Component 29/12/2012 16/02/1434 Superseded 341000015689 SAMA's Final Guidance Document Concerning Implementation of Capital Reforms Under basel III Framework 19/12/2012 6/02/1434 In- Force 331000025808 Guidance Document Concerning Implementation of Capital Reforms Under Basel III Framework Based on Relevant BCBS Documents 13/11/2012 29/12/1433 Informative 331000025478 SAMAs Finalized Guidance Document for the Implementation of Basel II.5 Standardized and IRB Approaches (Document) 22/10/2012 6/12/1433 In- Force 331000025092 BCBS Finalized Document Entitled "Capital Requirements for Bank Exposures to Central Counterparties" 07/10/2012 22/11/1433 Superseded 331000025009 Basel Committee on Banking Supervision Finalized Document Entitled "Principles for the supervision of financial conglomerates" 01/10/2012 15/11/1433 In- Force 331000024979 SAMAs Consultative Draft Concerning theImplementation of Basel II.5 (Standardized and IRB Approaches) 29/09/2012 14/11/1433 Consultative 331000023294 BCBS Consultative Document Entitled "Monitoring Indicators for Intraday Liquidity Management" 22/07/2012 4/09/1433 Consultative 331000023295 Basel Committee- Final Rules on Bank Disclosures of the Composition of the Capital 22/07/2012 4/09/1433 Superseded 331000022239 BCBS Releases Consultation Document on Measures to Address Domestic Systemically Important Banks (D-SIB) 07/07/2012 18/08/1433 Consultative 331000043833 Basel Committee for Banking Supervision (BCBS) Consultative Document Entitled "Principles for Effective Risk Data Aggregation and Risk Reporting" 04/07/2012 15/08/1433 Consultative 331000018819 Basel Committee on Banking Supervision (BCBS) Consultative Document Entitled "Fundamental Review of the Trading Book" 03/06/2012 14/07/1433 Consultative 331000031199 Establishment of the Bilateral Complaint Handling Process (BCHP) 30/04/2012 9/06/1433 In- Force 331000009526 Joint Forum Report on Intra-Group Support Measures Issued by Basel Committee on Banking Supervision (BCBS) 04/03/2012 15/04/1433 In- Force 331000008724 Basel Committee on Banking Supervision's Document Entitled "Interpretive Issues with Respect to the Revisions to the Market Risk Framework" 22/02/2012 30/03/1433 In- Force 331000007390 SAMAs Prudential Returns Concerning the Monitoring of Basel III Liquidity Risk Through the Minimum Regulatory Liquidity Standard Ratios 08/02/2012 16/03/1433 Modified 331000005318 SAMA's Amended IRB Prudential Returns and Guidance Notes Package and Frequently Asked Questions (FAQs) 18/01/2012 24/02/1433 Modified 331000003859 Consultative Paper on Revised Core Principles for Effective Banking Supervision - Dated 20 December 2011 04/01/2012 10/02/1433 Consultative 331000003229 Enhancement # 1 to SAMAs Bank Disclosure Requirements Under the Basel II Framework pillar 3 component 31/12/2011 6/02/1433 Superseded 321000028747 Rules on Stress Testing 23/11/2011 27/12/1432 In- Force 321000028411 Globally Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement 20/11/2011 24/12/1432 Informative 321000028412 Basel Committee Papers of Relevance to Saudi Banks 20/11/2011 24/12/1432 321000028413 The Joint Forum Report on Asset Securitization 20/11/2011 24/12/1432 Informative 321000028414 Revision to Basel 2 Market Risk Framework - Updated as of 31 December 2010 20/11/2011 24/12/1432 Modified 321000028266 Monitoring Liquidity Risk through Basel 3 Framework Concerning Minimum Regulatory Liquidity Standard Ratios 19/11/2011 23/12/1432 No longer Applicable 321000027885 Basel Committee's Revised Document of June 2011 Entitled "Basel 3: Global Framework for More Resilient Banks and Banking Systems" 12/11/2011 16/12/1432 No longer Applicable 321000027835 Enhancements to the ICAAP Document at End of 2011 10/11/2011 14/12/1432 In- Force 321000023756 Rules and Requirements for Contracting with Civil Security Companies and Institutions 18/09/2011 20/10/1432 In- Force 321000020727 FSB Releases Consultation Documents on Measures to Address Systemically Important Financial Institutions 02/08/2011 3/09/1432 Consultative 321000009006 Instant SMS Notification Service 23/03/2011 18/04/1432 In- Force 321000005944 Announcement of the Basel III Accord and SAMA Plans for its Implementation of Basel II and III in 2011 15/02/2011 12/03/1432 In- Force 321000005611 Basel Committee - Final Elements of the Reform to Raise the Quality of Regulatory Capital - Loss Absorbency at the Point of Non-Viability 13/02/2011 10/03/1432 321000001276 Basel Committee Papers: (1) Sound Practices for Back Testing Counterparty Credit Risk Models; and (2) Capitalization of Bank Exposures to Central Counterparties 21/12/2010 15/01/1432 Consultative 321000001278 basel Committee Documents Published on 16 December 2010: 21/12/2010 15/01/1432 No longer Applicable 311000041148 BCBS Consultative Document: Countercyclical Capital Buffer Proposal 25/07/2010 14/08/1431 Consultative 301000001888 The Process of Counting and Sorting Bank Deposits of Unfit One Riyal Denomination 13/06/2009 20/06/1430 In- Force 301000000464 SAMA Approval to Provide Remittance Services 10/05/2009 15/05/1430 Modified 301000000279 Collecting Donations Through Mobile SMS Originating from Authorized Service Providers 24/03/2009 28/03/1430 No longer Applicable 311000008211 Regulating Banking Employees' Communications With Customers for Payment of Outstanding Debts 17/03/2009 1/04/1431 In- Force 281000000287 Rules for Dealing with Old or Damaged Machines in Local Banks 25/04/2007 8/04/1428 In- Force 271000000743 Controls on the Signature of Customers on the Bonds of the Order Without Data (Blank) in Exchange for Access to Banking Facilities 09/01/2007 19/12/1427 In- Force 251000001755 The indication of the Place Where the Check was Issued( the city in which the drawer resides). 05/06/2004 17/04/1425 In- Force Miscellaneous Regulations(BC)
Provision of Prepaid and Deposit Cards for Endowments
As part of SAMA's ongoing efforts to facilitate access to banking services for all customer segments, including the endowment sector, and recognizing that certain important banking products and services are not available to endowments at some banks, such as prepaid cards and dedicated deposit services, and further to SAMA's instructions communicated through Circular No. (43052802) dated 10/06/1443H regarding the availability of prepaid cards and dedicated deposit services for customers from associations and non-profit organizations.
Accordingly, SAMA reiterates to all banks that there is no restriction on offering the aforementioned products to endowment customers. However, their issuance and funding must be based on requests from the authorized signatories of the bank account.
For your information and act accordingly effective immediately.
The Obligation to Use the Model Contract of the Financial Lease of Vehicles for Individuals
Attached are the instructions from SAMA communicated via email on 4 June 2020G regarding compliance with the standard model for leasing contracts for vehicles for individuals, effective from the date it was communicated to you via email.
Referring to SAMA circular issued under No. 41038534 dated 6/1/1441H, regarding "the Model Contract of the Financial Lease of Vehicles for Individuals." It has been stated that lessors must adhere to this standard model and complete the necessary procedures according to their policies by no later than 30/8/1441H, corresponding to 23 April 2020G, and not enter into any contracts that violate this model or modify it. Additionally, per SAMA's decision dated 13 April 2020G (attached), the obligation to adhere to the standard model contract of the financial lease of vehicles for individuals has been postponed until further notice as part of supporting efforts to address the impacts of the COVID-19 pandemic.
Since SAMA has directed all financial institutions to gradually resume normal operations in their general administrations, in implementation of the gracious approval issued on 3/10/1441H, corresponding to 26 May 2020G, which includes several decisions, including lifting the suspension of attendance for government ministries and agencies and the private sector, and returning to office activities according to the controls set by the Ministry of Human Resources and Social Development, in coordination with the Ministry of Health and related authorities, starting from Sunday 8/10/1441H, corresponding to 31 May 2020G, lessors must adhere to the standard model contracts for leasing of the financial lease of vehicles for individuals as per SAMA circular issued under No. 41038534 dated 6/1/1441H and complete the necessary procedures according to the policies followed by lessors by no later than 30/11/1441H, corresponding to 21 July 2020G.
Readiness to Receive Requests to Provide Electronic Payment Methods for Personal Service Activities
Based on SAMA's strategies for payment systems and the sector development program aimed at enhancing electronic payments and reducing cash transactions, and as part of SAMA's ongoing efforts to activate the use of electronic channels through the implementation of the Integrated Digital Payments Strategy program to improve the level of electronic services provided, in addition to the efforts of the National Program to Combat Commercial Concealment by gradually obliging the retail sector to provide electronic payment methods.
The program, in collaboration with SAMA, the Ministry of Municipal and Rural Affairs, and the Ministry of Commerce, has mandated that all personal service activities in the Kingdom provide electronic payment methods starting from 8/8/1441 H, corresponding to 1/4/2020 G in order to ensure the success of efforts to activate this decision and guarantee full readiness to meet the expected demand, banks, and payment service providers must adhere to the following:
First: Readiness to receive applications for opening bank accounts and electronic wallets for merchants operating in personal service activities.
Second: Readiness to receive requests for providing electronic payment methods authorized by SAMA (Point of Sale devices or QR codes) and respond to them through various channels, such as branches, the official website, and the unified number, to facilitate this requirement for merchants working in personal service activities, and to comply with the regulatory and operational rules for these services.
Third: Compliance when providing payment methods using the Merchant Category Codes specific to this sector, which are as follows: (7210, 7211, 7216, 7217, 7230, 7251, 7276, 7278, 7296, 7297, 7298).
Fourth: Internally circulate this decision among bank staff and payment service providers to ensure their adequate understanding when receiving applications and inquiries in this regard.
Custom Statements
We quote you here below the communique issued by the President of Customs Department No. 9175/5 dated 22-8-1394 and addressed to All Customs Secretariats and Sections:
“Customs have been rejecting customs statements unless accompanied by original invoices certified by Saudi embassies in countries where the invoice was issued, if any, or by chambers of commerce or industrial unions. This was based on the provisions of article (112) of the Implementations Rules of the Customs Regulations.
But article (112) does not require importers to submit certified invoices. It only requires them to submit original invoices, meaning invoices issued by the foreign exporter of the goods and not invoices certified by embassies or other parties.
For the object of facilitating things, in line with the last reduction of the tariff, we hereby authorize you to accept original invoices even if not certified, as this is the real meaning of article 112. Furthermore, we authorize you not to request foreign original invoices if the goods are accompanied by local original invoices.
We remind you that this communique" does not effect certificates of origin, which are still required to be certified, as well as invoices which carry the working of the required certificate, which have to be certified like the certificate of origin.
We hope you carefully implement same.
Cooperation with Security Authorities and Notification to the Nearest Police Station when Attempting to Sell or exchange counterfeit Foreign Currencies
We have received the letter of HE the Acting Minister of State for Finance and National Economy No. 283/R/95
dated 16-8-1395H, referring to the letter of HRH the Minister of Interior No. 2162/R dated 11-8-1395H, requesting us to urge the banks to cooperate with security authorities and notify the nearest police station to arrest any person suspected to be buying or selling counterfeit foreign currency.
Hence, Saudi Central Bank is calling on you to stress on your people in charge to carefully examine any foreign currency presented to you and to notify the police immediately about any one who is suspected of trying to sell counterfeit money to you.
Micro, Small and Medium Size Enterprises (MSMEs) Disclosures in the Annual Report Qualitative Disclosures
No: 391000007761 Date(g): 12/10/2017 | Date(h): 22/1/1439 Small and medium enterprises (SMEs) play a significant role in contributing a substantial portion of the GDP in many global economies. In advanced economies, SMEs contribute approximately 70% to the GDP, while their contribution in Saudi Arabia stands at around 20%. Diversifying income sources and increasing the contribution of the non-oil sector to the Kingdom's economy are among the key goals of Saudi Vision 2030.
The Central Bank, in collaboration with banks, and the General Authority for Small and Medium Enterprises, is working on a thorough review of regulations and guidelines to remove obstacles and enhance the effectiveness of SME units within banks operating in the Kingdom. Reference is made to the Central Bank’s Circular No. 381000064902 dated 16/06/1438H, which approved the new definition of SMEs, also adopted by the Board of Directors of the General Authority for SMEs, to include micro-enterprises. Additionally, performance indicators have been introduced, and prudential data for SMEs and micro-enterprises have been amended as per Circular No. 381000094106 dated 06/09/1438H.
In this context, the Central Bank has introduced a report that includes both quantitative and qualitative data on SMEs, which banks are required to include in their annual Board of Directors' reports starting in 2017G. Details can be found in Appendix (I), while Appendix (II) contains answers to frequently asked questions on this topic.
For any further questions or inquiries, you may contact the Central Bank.
Real estate Financing (%70)
With reference to Article 11 of the Implementing Regulations of the Real Estate Finance Law issued by Royal Decree No. M/50 dated 13/08/1433H, which states that "The real estate finance entity shall not extend credit on any form of finance exceeding 70 percent of the value of the dwelling subject of the real estate finance contract. SAMA may change this percentage according to prevailing market conditions'. and given that some banks are contracting with real estate financing companies to acquire real estate finance assets or the rights arising from such assets, emphasizing the importance of fully complying with the provisions of the aforementioned article.
We would like to clarify that banks are not allowed to acquire real estate finance assets or the rights arising from such assets if they do not meet the provisions of the aforementioned article. This applies in cases of disposition without recourse or with partial recourse, ensuring that the existing financing amount for the assets (or the rights arising from them) at the time of acquisition does not exceed 70% of the value of the housing unit subject to the real estate finance contract at the time of contract execution. It is also important to comply with the Rules for Regulating the Disposition of Financing Assets or the Rights Arising Therefrom issued by SAMA.
Evening Working Hours
In view of the huge economic growth and increased commercial activities witnessed by the Kingdom, it became necessary to enhance banking services that commercial banks offer to the public in a speedy manner by increasing banks morning office hours by adding evening office hours.
Pursuant to paragraph (6) of article (16) of the Banking Control Law, SAMA calls on you to have your branches in Riyadh, Jeddah, Holy Macca, Madina, Dammam and Khobar open for 2 hours in the evening (5:00-7:00 p.m.) daily as of Saturday 2-5-1396 H.
Written Approval is Required when Hiring Saudis Who are Currently Employed by Other Banks
One of the most important objects of the Saudization of foreign banks operating in the Kingdom is to upgrade the banking operation, create Saudi banking cadres and train the largest number of Saudi young men on banking operations.
It has been noticed that some banks try to attract Saudis working for other banks which had invested large amounts of money for training such Saudi employees to have them shoulder higher responsibilities at the bank. SAMA calls on you not to employ any Saudi who is working for another bank unless you receive a written approval from that bank.
Please acknowledge receipt and notify all your branches to act accordingly.
The Importance of Selecting Clearinghouse Representatives who are Adequately Qualified for their Responsibilities
Banking Control Department has noted during on-site visits to clearing houses in the Kingdom, that the banks are not giving due care to the selection of their representatives or upgrading their production efficiency, hence reflecting negatively on work productivity inside the clearing houses. Some banks are also changing their representatives without notifying the Head Office for approval.
SAMA wishes to emphasize on all banks the need for selecting their representative at the clearing houses at a level that qualifies them for the responsibility of their work, in addition to academic qualifications and experience.
For your info.
Agreeing with SAMA on the Percentage of Profit Distribution to Shareholders
I wish to refer to the subject of profit distribution and the best policy to be followed in this respect. In view of the fact that banks have recently been converted to stock companies and have to set aside adequate reserves to face any contingency and to develop its operations, SAMA sees that it is important for the bank to follow a conservative policy and distribute reasonable annual profits at a regular rate, instead of fluctuation from year to year depending on the change in profits. The steady distribution of regular profits will positively reflect on the reputation of the bank and its shareholders.
In the desire to protect the position and standing of the bank and the interest of shareholders, we suggest that you reach understanding with SAMA on the proportion of profit to be distributed before deciding and declaring such a proportion.
Requiring Proficiency in English for Employment
It has been noticed that some banks in advertising for vacant jobs they require Saudi applicants to have knowledge of English, even if the job is for a driver. We believe that this condition is required by banks simply to exclude Saudis and rely on expatriates. SAMA feels that academic qualifications should be the only requirement for holding a job with a bank and that English would be required only if needed. The applicant may only be required to be ready to learn English, and the bank should hold an English course, as part of its training program, to be joined by the new employees who do not know English before they start their work with the bank.
Please acknowledge receipt of this circular, comply with and notify your people in charge to act accordingly.
Non-Saudis Using Saudi Identification Documents for Subscription Purposes
It has been noticed by SAMA that when the shares of new companies are placed for subscription by the public, whether such companies are inside or outside the Kingdom, some non-Saudis are using Saudi IDs to subscribe for their own account under the cover of a Saudi citizen. There is no question this act is illegal and involves great risks which will hurt the Saudi citizen who was negligent in giving his ID to another person.
In order to avoid this practice, we call on all banks handling such subscriptions to accept IDs only from their owners or from the direct head of the family, in case of subscription in the name of women and under-age children to avoid any risk or violation of the law. Otherwise, bank officials have to check the power of attorney of a person subscribing on behalf of another, take a photocopy of such power of attorney and duly verify the identity of the principal.
Please comply and instruct your branches to act accordingly.
Non Acceptance of Cash Payments in SADAD Account for Credit Cards Issued by Banks and Companies Operating in the Kingdom Except Through a Bank Account or Through the Branch
Referring to Rules No. 4, 6, and 5 concerning occasional customers from the Rules Governing Anti-Money Laundering & Combating Terrorist Financing for all Banks and Money Exchangers and Foreign Banks' Branches Operating in the Kingdom of Saudi Arabia, which allow banks and exchange offices to accept payments for public utility bills (electricity, water, and telephone) and government dues, as well as government fees (traffic, passports, etc.) from individuals (citizens or residents) who do not have accounts, visitors with temporary entry/residency visas, and tourists (foreign pilgrims, tourists, businesspeople, and diplomats).
I would like to inform you that SAMA has noticed that some banks operating in the Kingdom have been accepting credit card payments through the SADAD account for occasional customers through bank branches or cash deposit machines.
Since the above-mentioned rule provides for the acceptance of payment of utility bills and government fee dues only. Therefore, SAMA confirms compliance with the provisions of the above-mentioned rule, and that the payment of credit card dues shall be for customers who have opened accounts with the bank only, for credit cards issued by the bank or by companies licensed to issue credit cards, and in the event that credit card dues are paid to non-bank customers, the customer's identity data is completed and verified.
Fees Charged by Banks for Letters of Guarantee As per SAMA Circular No. BC/291 dated 19-9-1399H
SAMA has noticed that banks do not apply a standard method for the collection of service fees on letters of guarantee. Hence and pursuant to the above referred-to circular and the need to have standard rules for collecting such fees, the banks have to observe the following:
- Banks have to collect fees on the actual validity term of the bank guarantee as per annual fees listed in the banking tariff and same applies to the extension of such validity.
- Regarding small amount guarantees, the bank may charge a minimum of SR 25 per each letter of guarantee and same amount for each extension.
- No mail expenses should be collected, since the tariff does not allow for that.
- Guarantees may not be divided into government and non-government since the tariff does not so provide.
Please circulate to all your branches to act accordingly.
Participation in Syndicated Credit Facilities
SAMA has noticed some media advertisement from time to time regarding syndicated loans in SR and other arrangements made in the Kingdom by local banks with foreign banks participation.
It is well known that banking operations in the Kingdom are governed by the Banking Control Law, and that the overall policy of SAMA does not encourage foreign banks to participate in financing operations in SR. Although no restrictions are presently placed on loans and credits granted by local banks to residents, within the limits stipulated in the Banking Control Law, SAMA would like all banks operating in the Kingdom to observe the following:
- The invitation of foreign banks to participate in credit facilities in SR should not be made before obtaining SAMA 's prior approval.
- The participation of local banks in syndicated loans in SR outside the Kingdom, whether to residents or non-residents should not take place before obtaining SAMA 's prior approval.
- The participation of local banks in syndicated loans in foreign currency for non-residents should not take place without the prior approval of SAMA, as per our circular No. 10772/18/M dated 4-8-1395.
Please acknowledge receipt and act accordingly.
Cash Service
In addition to SAMA's efforts in activating electronic channels, as well as the discussions and workshops that took place with local banks to implement the "Naqd" service from POS machines using Mada cards, and further to SAMA's circular No. 371000016319 dated 10/02/1437 H containing the technical and operational procedures document for the application of the service on the Saudi payment network system Mada, SAMA would like to emphasize the following:
- The "Naqd" service is optional and accompanies the purchase process (not an independent process) without imposing any additional fees on the merchant or customer, as it is processed within the purchase processes at the points of sale.
- The service is activated for relevant stores (e.g. supermarkets, pharmacies, highway gas stations, etc.) that meet the service requirements.
- The importance of continuous monitoring of the operations of the "Naqd" service (for both merchants and cardholders) to ensure that they are not used in suspicious transactions or used in matters contrary to the desired purpose.
- Work to activate the service for at least 3% of the Bank's POS devices by the end of March 2016.
- Using the appropriate means to introduce the service, educate customers, and provide stores with appropriate marketing means that clarify its provision, and also requires signing an agreement with the merchant to accept the service before activating it and training accounting staff (cashier) on the method of the process, and for more information you can visit the website mada.com.sa.
New Mechanisms for Pledged and Lost Bonds
In line with SAMA's commitment to enhancing procedures regarding inquiries about lost deeds and reducing the response time for such inquiries, and in reference to the meeting held on this matter with specialists from the Ministry of Justice, the Kingdom's banks, and SAMA on Monday, 08/01/1435H:
We inform you of the following decisions:
- All deeds mortgaged with the bank must be recorded in an Excel file as per the attached format and a copy of the mortgaged deed and the owner's identification document must also be attached and sent to SAMA via email within two weeks from the date of this circular. SAMA will then provide the Ministry of Justice with these files related to mortgaged deeds for registration in their archiving system.
- All banks must comply with the new procedure by mortgaging new deeds with the Ministry of Justice and refraining from holding them physically at the bank.
- The new mechanism for mortgaged deeds will take effect from the date of this circular.
- Inquiries about mortgaged deeds through the SAMANET system will be discontinued once SAMA receives confirmation from the Ministry of Justice that all mortgaged deeds have been added to their system.
For your information and action accordingly.
M
Deed Number
the number without the division mark
Division Number or Symbol
Deed Date
Property location
Name of the Deed's Holder
Type of Identity
ID Number
Notary Source
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
SAMA's Non-Objection that Deduction of the Last Installment from the Fund’s Loans is Different from the Preceding Monthly Installments
Referring to SAMA's circular No. BCS/12180 dated 5/5/1433 H, which includes no objection, provided that the deduction of the last installment of the Fund's loan is different from the previous monthly installments, with the aim of settling the differences arising from the loan in an easy way for borrowers. We inform you that SAMA has received the letter of the Real Estate Development Fund No. 36/72/138724 dated 16/6/1436 AH stating the failure of some banks to implement the above-mentioned SAMA circular.
Therefore, SAMA stresses the need for all banks operating in the Kingdom to abide by its instructions, especially those referred to in Circular No. BCS/12180 dated 5/5/1433 H.
Raising the Level of Knowledge of SADAD Payment System Among Branch Staff Working in Customer Service
SAMA has established a payment system called "SADAD" to enable customers in the banking sector to conduct their transactions with ease and convenience. SAMA and local banks have made efforts to facilitate the inclusion of as many billers as possible in the system. SAMA has also urged banks to activate banking channels to ease these services for citizens and residents.
SAMA has received feedback from some billers indicating a low level of knowledge among some branch employees of banks regarding the available options for payment operations, which include partial payments and advance payments, as well as the payment methods available through cash, account debits, or cheques. Therefore, it is essential for banks to work on enhancing the knowledge of the system among branch employees to improve the level of service provided. They should utilize the attached model for payment operations at the branches (which has previously been sent to the banks). We hope to receive feedback on what actions are being taken in this regard.
Establishing an Integrated Database for Islamic Banking Services Provided by Banks
Considering that all banks operating in the Kingdom offer Islamic banking services and given the importance of establishing an Integrated database on the Islamic banking services provided by these banks to their customers.
Therefore, the Central Bank wishes to direct your specialists to provide it with the necessary data and information on a regular basis according to the attached statement Starting from the data of December 1999G.
Using SAMA's Name when Dealing with Consumers
SAMA has recently noticed the insertion of the name of SAMA by some bank employees (general administrations, regional departments, branches, telephone banking) in order to convince customers of the validity of the action taken by the bank, as this was shown through a number of complaints submitted to SAMA including that they were informed by the bank's employees that the measures taken were based on circulars or instructions of SAMA or according to SAMA reports..... Etc.
Accordingly, SAMA believes that all bank employees should be assured not to include the name of SAMA when dealing with customers, and in the event that circulars or instructions issued by SAMA are relied upon, this must be done by employees who are familiar with the circulars and instructions of SAMA and that the reliance on them is correct. We would also like to note that in the event of any violation by the bank's employees in this regard, SAMA will take appropriate action against the bank and oblige the bank to take the appropriate action against the violating employee in accordance with the powers vested to SAMA under the law. SAMA also hopes to comply with the above-mentioned provisions and to inform SAMA (Bank Inspection Department) of the measures taken in this regard and the mechanisms that will be applied to ensure compliance with this circular within one month from its date.
Ensure that Hijri Dates are Used in All Correspondence and Checks
This section is currently available only in Arabic, please click here to read the Arabic version.Opening Accounts for Iraqi Refugees Using Special Iqama
This section is currently available only in Arabic, please click here to read the Arabic version.Services for those with Special Needs
Based on SAMA's keenness to enhance the role of banking institutions operating in the Kingdom, and to encourage the development of banking services provided to bank customers in general and customers with special needs in particular, and based on the importance of banks performing their humanitarian role towards their customers with special needs, by working to facilitate and ease the means of providing banking services to this dear category of society.
Therefore, SAMA would like to emphasize the need for the bank to give care and priority in providing services to customers with special needs, in addition to the need to take appropriate measures in a manner that ensures facilitating their reception inside the bank's branches and accelerating the procedures for providing banking services to them.
We hope to inform us of the measures taken by the bank in this regard within a month from its date.
Approval for Al Rajhi Banking & Investment Corp. to Establish a Brand with an Abbreviated Name of Al Rajhi Bank
At the request of Al Rajhi Banking Investment Company, a commercial feature shall be established with an abbreviated name (Al Rajhi Bank) so that it is known to everyone in all its dealings and as a front for its branches, advertisements and documents, with the legal name of the company remaining (Al Rajhi Banking Investment Company) in contracts and legal documents.
We would like to note that SAMA has approved the establishment of the above-mentioned feature (Al Rajhi Bank).
No more than One-Third of an Employee's Salary Can Be Deducted from his or her Salary
This section is currently available only in Arabic, please click here to read the Arabic version.Annexure I
Micro, Small and Medium Size Enterprises (MSMEs) disclosures in the annual report Qualitative disclosures
Qualitative information on:
- Currently approved definition of MSMEs
- Initiatives for MSMEs taken by the Bank
- MSME unit and staff in the unit
MSMEs training initiatives and workshops for staffs and customers should be presented in the following format
Number of *man-days training provided to staff Number of *man-days training provided to customers *Man-days means 8 hours per day.
Quantitative disclosures
The below table for MSMEs is required for both current and previous years.
Current Year All in SAR’000
Details Micro Small Medium Total Loans to MSMEs - on Balance Sheet (B/S) Loans to MSMEs - off Balance Sheet (notional amount) On B/S MSMEs Loans as a %age of total on B/S loans Off B/S MSMEs Loans as a %age of total off B/S loans Number of loans (on and off) Number of customers for loans (on and off) Number of loans guaranteed by Kafalah program (on & off) Amount of loans guaranteed by Kafalah program (on & off) Previous Year All in SAR’000
Details Micro Small Medium Total Loans to MSMEs - on Balance Sheet (B/S) Loans to MSMEs - off Balance Sheet On B/S MSMEs Loans as a %age of total on B/S loans Off B/S MSMEs Loans as a %age of total off B/S loans Number of loans (on and off) Number of customers for loans (on and off) Number of loans guaranteed by Kafalah program (on & off) Amount of loans guaranteed by Kafalah program (on & off) Annexure II
Frequently Asked Questions (FAQ)
Q1: Should the quantitative MSME loan figures include both on and off-balance sheet items?
A1: Yes, the figures should include both on and off-balance sheet items. Off balance sheet items should be reported at notional amount. The rows have been expanded in the quantitative tables to include separate information for both on balance sheet and off-balance sheet lines.
Q2: Should the bank apply the recently prescribed definition of MSME?
A2: The Banks should implement the recently prescribed definition of MSME as mentioned in the SAMA circular (381000064902) dated 16/6/1438H starting from 1 January 2018.
If readily available, banks are encouraged to use new definition to populate these tables for 2017 annual report. If the banks don't have available data, they can report using the old definition under SAMA circular (29697\BCS\14849) dated 22/April/2012G. However, in both cases, the banks should clarify this in the notes accompanying the tables.
Q3: Can banks include customer/staff training that last less than the pre-defined 8- hour Man-Day definition?
A3: Yes, banks can include those training hours in the qualitative disclosure segment.
Basel II – SAMA’s Detailed Guidance Document Relating to Pillar 1
No: BCS 290 Date(g): 12/6/2006 | Date(h): 16/5/1427 Status: No longer applicable This Circular contains some requirements that are superseded or conflicting with subsequent circulars.This refers to the earlier SAMA Guidance Document issued on 31 May 2005, entitled “New Basel II Framework Initial Implementation Document for Banks Operating in Saudi Arabia". At that time, SAMA had indicated that additional guidance was to be provided in certain areas following further announcements by the Basel Committee and the Islamic Financial Services Board as well as work done by the Banks’ Working Groups on IRB Approaches, Securitization and Operational Risk.
As a result of these developments and to fill in some of the gaps the Agency is issuing Consultative Document # 2. A number of minor changes, corrections and amendments have been made that were noted by SAMA and the Banks in the review process. Also, the document incorporates additional guidance in the following areas:- Credit Risk Mitigation (Chapter 6)
- Shariah Compliant Banking (Chapter 9)
- Operational Risk (Chapter 10)
- Pillar 2 (Chapter 11)
- Stress Testing (Chapter 12)
There are a few additional areas where guidance from SAMA will be forthcoming in the near future. These will include the work arising from Banks’ Working Group on Pillar 3, Basel Committee pronouncements, National data pooling project, etc.
The Agency expects banks to continue the use of this Guidance Document in their implementation plans and to provide any further comments they may have. Please note that all changes, corrections, amendments and additions have been underlined in this document for ease of reference.1. Introduction and Overview of Approaches Available to Implement Basel-II
1.1 Introduction
Banks should utilize this Draft Document in conjunction with the guidance offered by the Basel Committee on Banking Supervision’s revised framework entitled “International Convergence of Capital Measurement and Capital Standards” of June 2004.
This Document represents an enhanced and revised version of SAMA’s earlier Document issued on 31 May, 2005. These revisions and enhancements have been made as a result of further announcements from the Basel Committee, the Islamic Financial Services Board as well as the work done by Banks’ Working Groups on Credit Risk Mitigation, IRB Approaches, Operational Risk, etc. A number of minor changes amendments and corrections are being made that were noted by SAMA and the banks resulting in the review process. Also, further guidance is being provided in the following areas;
1. Credit Risk Mitigation
2. Shariah Compliant Banking
3. Operational Risk
4. Pillar 2
5. Stress Testing
1.1.1 Final Implementation Document
The Agency would expect the banks to provide further comments, and suggestions to this Draft Document. These comments and others relevant pronouncements would be incorporated in SAMA’s final Detailed Guidance Document.
1.2 Approaches Available to Implement Basel-II
SAMA’s proposes to apply the new Basel Framework to all licensed banks operating in Saudi Arabia, by making available the following approaches for its implementation.
Pillar - I
Pillar - II
Banks operating in Saudi Arabia must have sound, effective and complete strategies and processes to assess and maintain on an ongoing basis the internal capital that they consider adequate to cover their risks. They must perform regular internal reviews of these strategies and processes to ensure that they are proportionate to the nature, scale and complexity of their activities.
SAMA will review and evaluate the risks to which the banks are or might be exposed. Based upon these reviews and evaluations it will determine whether such arrangements and capital levels ensure sound management and coverage of the risks. SAMA will establish the frequency and intensity of these reviews and evaluations, taking into account systemic importance, nature, scale and complexity of banks. It will annually update these reviews and evaluations.
Pillar III
Pillar 3 requirements have been updated by SAMA's pillar 3 disclosure requirements Framework, issued by SAMA circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G.2. Scope of Application of Basel II, and Other Significant Items
2.1 Owned or Controlled Financial Entities
SAMA requires that owned or controlled entities and securities entities should be fully consolidated for Basel II purposes to ensure that it captures the risk of the banking group.
Banking groups are groups that engage predominantly in banking activities and, in some countries, a banking group may be registered as a bank.
Banks are also required to ensure minimum capital adequacy on a consolidated as well as standalone basis by ensuring that the Parent banks also meet the SAMA mandated capital adequacy regulation under Pillar 1 of the Basel guidelines. Going forward all banks would be required to make two sets of prudential returns for Pillar 1 Capital Computations, the first one on a consolidated basis and the other on a standalone basis.
(Refer to Paragraph 21 of International Convergence of Capital Measurement and Capital Standards – June 2006)
2.2. Significant Minority Equity Investments in Non-Insurance Financial Entities
“The new Basel framework requires that significant minority investments in financial entities, where control does not exist, be excluded from a bank’s capital by deduction of the equity and other investments under certain conditions, may be consolidated on a pro rata basis. National accounting and/or regulatory practices would determine the threshold above which minority investments will be deemed significant and be therefore either deducted or consolidated on a pro rata basis”.
SAMA requires that all significant minority interests in banking, securities or other financial entities that exceed 10% of the outstanding equity shares are a substantial minority investment and are to be deducted at 50 percent from Tier 1 capital, and 50 percent from Tier 2 capital.
2.2.1 Subsidiaries and Significant Minority Interests in Insurance Entities
SAMA requires that all subsidiaries and significant minority interest in insurance entities at 10% or more are to be excluded from banks capital at 50% from Tier-I, and 50% from Tier-II capital.
In addition, SAMA would not permit the recognition of surplus capital of an insurance subsidiary for the capital adequacy of the group.
(Refer to Paragraph 33 of International Convergence of Capital Measurement and Capital Standards – June 2006)
SAMA will ensure that majority-owned or controlled insurance subsidiaries, which are not consolidated and for which capital investments are deducted, are themselves adequately capitalized to reduce the possibility of future potential losses to the bank. SAMA, through the parent banks will monitor actions taken by the subsidiary to correct any capital shortfall and, if it is not corrected in a timely manner, the shortfall will also be deducted from the parent bank’s capital.
(Refer to Paragraph 34 of International Convergence of Capital Measurement and Capital Standards – June 2006)
2.3 Significant Investments in Commercial Entities
The new Basel framework provides that significant minority and majority investments in commercial entities, which exceed certain materiality levels, are to be deducted from Banks capital”; that means materiality levels of 10% of the bank’s capital for individual significant investments in commercial entities and 60% of the bank’s capital for the aggregate of such investments. The amount exceeding this threshold would be risk weighted at 1250%.
Investments held below the 10% threshold will be risk weighted at 100% under the Standardized Approach, and as per section 7.2.1 for the IRB Approaches.
(Refer Paragraph 35 of International Convergence of Capital Measurement and Capital Standards – June 2006 & Para 90 of Basel III: A global regulatory framework for more resilient banks and banking systems)
2.4 Stand-Alone Capital
“The new Basel framework highlights the need for supervisors to test that individual Banks are adequately capitalized on a stand-alone basis”.
SAMA recognizes that some Banks are currently in the process of designing the information system architecture required to support the new Basel framework. Banks are therefore encouraged to develop such internal systems that would enable them to provide an internal assessment of their stand-alone capital position on a legal entity basis. These internal systems should be designed to allow the Board, at a minimum, to have an informed view on the adequacy of capital on a legal entity basis including its major subsidiaries.
SAMA plans to discuss with the Banks the development of a framework for the supervisory review of a banks internal assessment of its stand-alone capital adequacy.
2.5 Regulatory Capital and Risk Weighted Assets
Regulatory Capital
Minor changes from the 1988 Accord with respect to treatment of general provisions – refer to IRB Approaches in Section 5.0.
Risk Weighted Assets
Total risk-weighted assets are determined by multiplying the capital requirements for market risk and operational risk by 12.5 (i.e. the reciprocal of the minimum capital ratio of 8%) and adding the resulting figures to the sum of risk-weighted assets for credit risk.
3. Time Frame, Implementation Dates and Parallel Run
SAMA expects all Banks in Saudi Arabia to be Basel II compliant by January 1, 2008 unless they have received special permission from the Agency.
3.1 Standardized Approaches
SAMA expects banks choosing the standardized approach and the simple operational risk approaches to implement the Basel II requirements by 1st January, 2008
3.1.1 Internal Rating Based Approaches
Banks planning to implement the IRB approaches may seek a longer time frame than 1st January 2008. This plans will be approved by SAMA on a case-by-case basis.
[258] “The new Basel framework requires a Banks to produce a formal Bank rollout plan or proposals to implement Basel II for review and approval by the supervisor for the IRB approval. The rollout plan would set out a detailed proposal for implementation of the IRB approaches, specifying to what extent and when it intends to roll out IRB approaches across all significant asset classes and business units over time”.
Banks will continue to use Basel 1 up to the time they are ready to implement Basel II.
Banks using the IRB approach to credit risk and any of the permitted operational risk approaches would be expected to submit capital calculations that are compliant with the new Basel framework.
3.2 Parallel Runs
Banks planning to use the IRB approach together with any of the permitted operational risk approaches would be expected to conduct parallel runs.
SAMA expects different data quality standards for the initial stage parallel run compared to the subsequent stage parallel run; Banks would provide information during the initial year of the parallel run on a best efforts basis. However, for the subsequent stage parallel run information should be of sufficient quality to represent a meaningful dress rehearsal of the Banks IRB approaches.
For the initial year, Capital requirements for Banks using the Foundation Approaches would be 95% of Basel I, and 90% and 80% for each of the following year. For the AIRB credit risk or AMA operational risk would be subject to a floor set at 90 percent of Basel I. However, for the following year, capital requirements would be subject to a floor set at 80 percent of Basel 1;
However, SAMA based on its bi-lateral discussions with the Banks may establish such floors on a bank to bank basis.
3.3 Waivers for Exclusions from IRB
SAMA recognizes that there may also be some limited circumstances where certain exclusions from IRB rollout continue to be warranted. For example, where it can be demonstrated that for asset classes and/or business units operating in jurisdictions where the reliability of the legal framework for collection of defaulted debts does not support the development of robust data for credit risk estimates, SAMA would consider these exemptions. Consequently, SAMA would create a “limited waiver mechanism” to permit Banks to come forward with proposed exceptions of this type, which would then be considered on a case-by-case basis, including an assessment of materiality, with SAMA retaining the right to approve or decline such waivers in its sole discretion.
Scope of Application and Other Issues
Reference to Basel II Document Areas of National Discretion SAMA's Postion Reference to paragraph 24, 26 & 27 - Choice of rule between consolidation and deduction. All relevant financial activities will be consolidated, but, if not consolidated, deducted from capital.
However, where subsidiary holdings are acquired through debt previously contracted and held on a temporary basis, are subject to different regulation, SAMA would require that the same are deducted from the Tier 1 capital base and Tier 2 Capital capital base in equal proportion i.e. 50% and 50%.
SAMA will ensure that the entity that is not consolidated and for which the capital Investment is deducted meets minimum regulatory capital requirements of the concerned regulatory authority.
SAMA will monitor actions taken by the subsidiary to correct any capital shortfall and, if it is not corrected in a timely manner, the shortfall will also be deducted from the parent bank's capital.
(Refer to Paragraph 26 and 27 of International Convergence of Capital Measurement and Capital Standards – June 2006)
Yes 28 Threshold for minority investments to be deemed significant and be either deducted or consolidated on a pro-rata basis. Yes 30 – 34 Scope of application: Treatment of significant investments in insurance subsidiaries. Yes 43 Excess provisions: Recognition of excess of total eligible provisions in Tier 2 capital upto 0.6% of RWA. Yes 49 Flexibility to develop bank-by-bank floors. Yes 4. Standardized Approach to Credit Risk
No: BCS 290 Date(g): 12/6/2006 | Date(h): 16/5/1427 Status: No longer applicable Section 4 and its sub-sections have been updated by Basel Framework, issued by SAMA circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G. Refer to sections (7 to 9) of minimum capital requirements for Credit Risk Framework.Terminology
Abbreviations and other terms used in this document have the following meanings:
• “CRM” means credit risk mitigation, which refers to techniques bank use to reduce the credit risk of their exposures;
• “Principal Amount”1 means the amount of any outstanding claim including accrued commission on, or contingent liability subject to CCF in respect of, the relevant counterparty;
• “Weighted Amount” means the credit risk-weighted amount in terms of which the capital requirement for the credit risk of an exposure is measured;
• “CCF” means credit conversion factor, by which the principal amount of an off- balance sheet exposure is multiplied to derive the credit equivalent amount;
• “ECAI” means an external credit assessment institution recognized by SAMA for capital adequacy purposes;
• “Sovereign” means the central government or the central bank of an economy, or a specified international organization “Specified international organizations” include;
• The bank for International Settlements;
• The International Monetary Fund;
• The European Central Bank;
• The European Community; and
• Other entities as may be specified by SAMA from time to time.
• “Domestic Currency Claim” means any claim which is denominated and funded in the currency used domestically in the place in which the obligor is incorporated;
• “PSE” means a public sector entity which is specified as such either by SAMA. (“domestic PSE”) or by an overseas banking supervisory authority (“foreign PSE”). It principally include regional governments and local authorities. Domestic PSEs are included in the list specified in SAMA’s Guidance Notes on Basel-I the 1988 Accord. For PSES to be considered commercial organizations also refer to this list; Other entities as may be specified by SAMA from time to time.
• “MDB” means a multilateral development bank, which refers to any bank or lending or development body established by agreement between, or guaranteed by, two or more countries, territories or international organizations other than for purely commercial purposes, as specified by SAMA. These include;
• World Bank
• The International Bank for Reconstruction and Development;
• The International Finance Corporation;
• The Asian Development Bank;
• The African Development Bank;
• The European Bank for Reconstruction and Development;
• The Inter-American Development Bank;
• The European Investment Bank;
• The European Investment Fund;
• The Nordic Investment Bank;
• The Caribbean Development Bank;
• The Islamic Development Bank;
• The Council of Europe Development Bank; and
• Other entities as may be specified by SAMA from time to time.
• Also refer to SAMA’s Guidance Notes for the Basel I – 1988 Accord.
• “Licensed Banks” mean those that licensed by SAMA.
• “Securities firm” licensed and supervised by the Capital Market Authority (CMA) or by a relevant overseas supervisory authority.
• “Corporate” refers to any proprietorship, partnership or limited company that is neither a PSE, bank, securities firm nor borrower within the definition of regulatory retail exposures.
• “Past due” is a term used to described any exposure that is overdue for more than 90 days or rescheduled. For the definition of rescheduled loans refer to SAMA’s Definition through its circular BCS # 312 of 19.1.2004
• “Small Business Enterprises” that may be included in the definition of a retail claims should not exceed SR 5 million.
4.1 External Credit Assessment Institutions (ECAI's)
In general, risk-weighting of claims is done on the basis of credit assessments provided by external credit assessment institutions (ECAI’s). Currently these include Moody's, S&P, Fitch and Capital Intelligence.
4.1.1. Claims on Sovereigns
Claims on sovereigns and their central banks will be risk weighted as follows;
Credit Assessment AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Risk Weight 0% 20% 50% 100% 150% 100% “Under the Standardized Approach, the applicable risk weight for claims on sovereigns is based on the rating assigned to the sovereign by a recognized external credit assessment institution (ECAI) such as a rating agency. A national supervisory authority may apply a lower risk weight to its banks’ exposures to their own sovereign when the exposures are denominated in the local currency and funded in the local currency. Other national supervisory authorities may also permit their banks to apply the same risk weight to domestic currency exposures to this sovereign. In these instances, there is no trans-border risk”.
SAMA requires that banks operating in Saudi Arabia, with exposures to other sovereigns meeting the above criteria, to use the preferential risk weight assigned to the sovereign by the relevant national supervisory authority.
“Risk weights for claims on sovereigns can also be determined using the country risk scores assigned by Export Credit Agencies (ECAs).
SAMA will not allow the use of ECAs’ of other countries to provide credit rating for sovereigns.
4.1.2. Claims on Banks and Securities Firms
The new Basel framework allows national supervisory authorities to implement one of two options for risk-weighting claims on banks and securities firms.
Option-1:
Credit Assessment of Sovereign AAA to AA- A+to A- BBB+ to BBB- BB+ to B- Below B- Unrated Risk Weight under Option- 1 20% 50% 100% 100% 150% 100% Under option 1, the risk weight is one category less favorable than that assigned to claims on the Sovereign of the country of incorporation. However, for claims on Banks in countries with sovereign rated BB+ to B- and on banks in unrated countries the risk weight will be capped at 100%.
Option-2:
Credit Assessment of Banks AAA to AA- A+ to A- BBB+ to BBB- BB+ to B- Below B- Unrated Risk Weight under Option- 2 20% 50% 50% 100% 150% 50% Risk weight for short-term claims under Option - 2 20% 20% 20% 50% 150% 20% Under option 2, the risk weight is based on the external rating a bank by a recognized ECAI.
SAMA requires banks operating in Saudi Arabia to use Option 2
National supervisory authorities, who choose to allow preferential treatment for claims on sovereigns may also allow preferential treatment for certain short term claims on banks. To be eligible for this treatment, these exposures must be denominated and funded in the local currency and have an original maturity of three months or less. These exposures may receive a risk weight that is one category less favourable than that assigned to claims on the Sovereign, subject to a floor of 20 percent. However, this preferential treatment is not available for banks risk weighted at 150%.
SAMA will allow banks to adopt the preferential treatment option
4.1.3. Multilateral Development Banks (MDB’s)
A “0” risk weight may be given to those MDB’s that meet qualifying criteria under Basel-II. Alternatively, MDBS will be risk weighted in accordance with their individual ratings as per banks option 2 without any preferential treatments for short-term exposures.
SAMA intends to adopt a 0% risk weight for qualifying MDB’s and in general the risk weights to be determined on the basis of individual MDB rating as for option # 2 for banks.
4.1.4. Claims on Public Sector Entities (PSEs)
SAMA proposes to continue with the current definition of PSEs as specified in its Capital Adequacy Requirements (CAR) guidelines in ERMs-Q-14.
The new Basel framework allows claims on (PSEs) to be risk weighted using either option 1 or option 2 for claims on Banks.
SAMA requires banks operating in Saudi Arabia to use Option -2.
4.1.5. Claims on Corporates
Credit Assessment AAA to AA- A+ to A- BBB+ to BB- Below BB- Unrated Risk Weight 20% 50% 100% 150% 100% Under the new Basel framework, the risk weight for corporate exposures is determined using the rating assigned by a recognized ECAI’s. However, national supervisory authorities may allow banks to use the 100 percent risk weight for all corporate exposures in lieu of using external ratings.
SAMA requires the risk weight for all corporate exposures to be in accordance with their external ratings. Unrated corporate exposures to be at 100%.
4.1.6. Claims Included in the Regulatory Non-Mortgage Retail Portfolios
There are qualifying requirement based on product type, and the size of the exposure itself. These exposure include loans to individuals, leases, small business facilities, or car loans and other consumer loans, etc. In specific the new Basel framework attaches small business facilities enterprises (SBFE) qualifying criteria for claims that may be treated as retail claims for regulatory capital purposes and included in a regulatory retail portfolio. These criteria include a granularity criterion, which requires that the portfolio be sufficiently diversified to reduce the risk to a level warranting the 75 percent risk weight.
Specifically, with respect to exposure size, national supervisory authorities have the option of setting a numerical limits on the amount of gross exposure before taking into account credit risk mitigation to one counterparty1. For example, this limit could be set at 0.2 percent of the total retail portfolio as proposed in the framework.
To meet the 75% RW criteria SAMA requires the non-mortgage retail portfolio claims to meet the above criteria and should not exceed SR. 5 million.
National supervisory authorities should evaluate whether the risk weights in Para 69 are considered to be too low based on default experience for these types of exposures in their jurisdictions. Supervisors therefore may require higher weights. SAMA does not require higher risk weights for such exposures.
1 Aggregate exposure means gross amount subject to the above conditions in para
4.1.7. Claims Secured by Residential Mortgages
“The new Basel framework allows claims secured by residential mortgages to receive a risk weight of 35 percent. Investments in hotel properties and time-share properties would be excluded from the definition of residential mortgage property. However, this reduced risk weight would only be applicable if there is a substantial security margin. Further, the loan default experience should also be considered”.
SAMA will continue to apply a 100 percent retail risk weight to such claims and continue to monitor the default experience of this asset class for future consideration.
4.1.8. Claims Secured by Commercial Real Estate
“Under the new Basel framework, mortgages on commercial real estate are risk weighted at 100 percent. However, national supervisory authorities may apply a preferential risk weight of 50 percent to parts of commercial real estate loans under exceptional circumstances”.
SAMA will continue to apply 100% risk weight.
4.1.9 Past Due Loans
“The new Basel framework proposes the following subject to national discretion.
RW Level of Provisioning 1 % % 150 up to 20% 100 20% to 50% 50 50% and above SAMA requires the above treatment with exception if the level of provisioning is more than 50%; the RW is reduced to 50%. In such cases the RW will be at 100%.
1 On outstanding loans balance
4.1.10 Other Assets
Other Assets
The standard risk weight for all other assets will be 100%.
At national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion, liabilities can be treated as cash and therefore risk- weighted at 0%.
SAMA requires that the treatment of gold bullion to be equivalent to cash.
4.1.11 Off Balance Sheet Items
Off-balance-sheet items under the Standardized Approach will be converted into credit exposure equivalents through the use of credit conversion factors (CCF).
Commitments with an original maturity of up to one year and commitments with an original maturity over one year will receive a CCF of 20% and 50%, respectively. However, any commitments that are unconditionally cancelable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower’s creditworthiness, will receive a 0% CCF.
For short-term self-liquidating trade letters of credit arising from the movement of goods (e.g. documentary credits collateralized by the underlying shipment), a 20% CCF will be applied to both issuing and confirming banks.
Where there is an undertaking to provide a commitment on an off-balance sheet item, banks are to apply the lower of the two applicable CCFs.
CCFs not specified above remain as defined in the 1988 Accord.
The credit equivalent amount of OTC derivatives and SFTs that expose a bank to counterparty credit risk is to be calculated under the rules set forth in Annex 4 of International Convergence of Capital Measurement and Capital Standards, 2006.
(Refer to Paragraph 87 of International Convergence of Capital Measurement and Capital Standards – June 2006).
With regard to unsettled securities, commodities, and foreign exchange transaction, SAMA requires that bank’s prepares its Prudential return submission based on trade date rather than settlement date as per the accounting convention. Banks are encouraged to develop, implement and improve systems for tracking and monitoring the credit risk exposure arising from unsettled transactions as appropriate for producing management information that facilitates action on a timely basis. Furthermore, when such transactions are not processed through a delivery-versus-payment (DvP) or payment-versus-payment (PvP) mechanism, banks must calculate a capital charge as set forth in Annex 3 of International Convergence of Capital Measurement and Capital Standards – June 2006
(Refer to Paragraph 89 of International Convergence of Capital Measurement and Capital Standards – June 2006)
4.2 Domestic and Foreign Currency Assessments
Under the new Basel framework, where unrated exposures are risk-weighted based on the rating of an equivalent exposure to the borrower, generally foreign currency ratings would be used for exposures denominated in foreign currency and domestic currency ratings would only be used for exposures denominated in the domestic currency. However, national supervisory authorities may permit the use of a borrower’s domestic currency rating for exposures denominated in a foreign currency where (i) the bank participated in a loan extended by a qualifying multilateral development bank (MDB) or (ii) the trans-border risk of a loan extended by the bank is guaranteed by a qualifying MDB.
SAMA will allow this treatment.
4.3. Qualifying External Credit Assessments
4.3.1. Eligible ECAIs and the Mapping Process
National supervisory authorities are responsible for determining whether an ECAI’s meets the qualifying criteria specified in the new Basel framework. National supervisory authorities must also assign eligible ECAI assessments to the applicable risk weights available under the Standardized Approach.
SAMA proposes to develop a self-assessment questionnaire incorporating the eligibility criteria, which would be completed by identified rating agencies.
These criteria include:
• Objectivity,
• Independence.
• Transparency.
• Disclosures.
• Resources.
• Credibility
SAMA will work with eligible rating agencies to develop a mapping process for mapping their agency grades to the risk weights of the Standardized Approach.
4.3.2. Use of Unsolicited Ratings
As a general rule, Banks should use solicited ratings from eligible ECAIs. However, the new Basel framework allows national supervisory authorities to permit the use of unsolicited ratings.
SAMA will not allow Banks to use unsolicited ratings.
4.4 National Discretion Items
(Refer to Attached)
National Discretion – The Standardized Approach
Reference to Basel II Document Areas of National Discretion SAMA's Position 54 Lower RW to claims on sovereign (or Central Bank) in domestic currency if funded in that currency. Yes 55 Recognition of ECA's assessments. No 57 Claims on domestic PSEs as if banks. Yes 58 Claims on domestic PSEs as if sovereigns. Listed 60-64 Claims on banks: Opt. 1, RW one category less than sovereign: Opt.2, RW based on the bank's external credit assessment. Option -2 64 Preferential RW treatment for claims on banks with an original maturity of 3 months or less and denominated and funded in the domestic currency. Yes 67 Increase standard RW for unrated claims when a higher RW is warranted by the default experience in their jurisdiction. No 68 To risk weight all corporate claims at 100% without regard to external ratings. No 69 Definition of claims included in regulatory retail portfolio. Yes 70 Granularity criterion for the retail portfolio, limit of 0.2% of the overall retail portfolio. Yes 71 To increase RWs for regulatory retail exposures. No 72 Definition of claims secured by residential mortgages. Yes 72-73 To increase preferential RWs for claims secured by residential properties Yes 74 (FN25) Commercial real estate 50% RW only if strict conditions are met. No 75 & 78 RW for the unsecured portion of a loan past due, net of specific provisions are more than 50%. No 75 (FN26) Past due treatment for non-past due loans to counterparties subject to a 150%RW. No 76 (FN26) Transitional period of three years for recognition of a wider range of collateral for higher risk categories (past due assets). No 77 If a past due loan is fully secured by other forms of collateral, 100% RW may apply when provisions reach 15% of the outstanding amount. Yes 80 150% or higher RW to other assets. No 81 (FN28) RW gold bullion at 0%. Yes 92 Mapping ECAI's assessments to RWs. Yes 102 (FN31) Use a borrower's domestic currency rating for exposure in foreign exchange transactions when loan extended by an MDB. Yes 108 Use of unsolicited ratings. No 201 Lower RW to claims guaranteed by the sovereign (or central bank), when dominated and funded in domestic currency. Yes 5. Internal Rating Based Approaches
Section 5 and its sub-sections have been updated by Basel Framework, issued by SAMA circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G, Refer to sections (10 to 16) of minimum capital requirements for Credit Risk Framework.Section 5.0: Risk Weighting Framework for Credit Risk (IRB Approach)
1. Introduction
1.1 Terminology
1.1.1 Abbreviations and other terms used in this paper have the following meanings:
• “PD” means the probability of default of a counterparty over one year.
• “LGD” means the loss incurred on a facility upon default of a counterparty relative to the amount outstanding at default.
• “EAD” means the expected gross exposure of a facility upon default of a counterparty.
• “M” means the effective maturity which measures the remaining economic maturity of a facility.
• “Dilution Risk” means the possibility that the amount of a receivable is reduced through cash or non-cash credits to the receivable’s obligor.
• “EL” means the expected loss on a facility arising from the potential default of a counterparty or the dilution risk relative to EAD over one year.
• “UL” means the unexpected loss on a facility arising from the potential default of a counterparty.
• “IRB Approach” means Internal Ratings-based Approach.
• “Foundation IRB Approach” means that, in applying the IRB framework, banks provide their own estimates of PD and use supervisory estimates of LGD and EAD, and, unless otherwise specified by SAMA, are not required to take into account the effective maturity of credit facilities.
• “Advanced IRB Approach” means that, in applying the IRB framework, banks use their own estimates of PD, LGD and EAD, and are required to take into account the effective maturity of credit facilities.
• “Standardized Approach” means a methodology for calculating capital requirements for credit risk in a standardized manner, supported by credit assessments made by recognized external credit assessment institutions. It is the default option for calculating capital requirements for credit risk, except for banks that have obtained SAMA’s approval to adopt other available options.
• A “borrower grade” means a category of credit-worthiness to which borrowers are assigned on the basis of a specified and distinct set of rating criteria, from which estimates of PD are derived. The grade definition includes both a description of the degree of default risk typical for borrowers assigned the grade and the criteria used to distinguish that level of credit risk.
1.2 Application
1.2.1 The requirements set out in this document are applicable to bank operating in Saudi Arabia which use or intend to use the IRB Approach to measure capital charges for credit risk.
1.2.2 In the case of branches of foreign banking groups, SAMA will, where appropriate, co-ordinate with the home supervisors of those banking groups regarding the application of the requirements of this paper. If such banks plan to adopt in Saudi Arabia any group-wide IRB systems or models, they will need to satisfy SAMA that the relevant systems or models can adequately capture the specific risk characteristics of their domestic portfolios, and that any differences in applying the IRB requirements will not have a material impact on the risk estimates generated. Similarly, SAMA may co-ordinate with the host supervisory authority of Saudi banks overseas branches and subsidiaries.
1.2.3 The requirements set out in this paper apply generally to the following exposures1:
• Credit exposures from all on- and off-balance sheet transactions in the banking book;
• Counterparty exposures from over-the-counter derivatives;
1.2.4 Banks adopting an IRB approach are expected to continue to employ an IRB approach. A voluntary return to the standardized or foundation approach is permitted only in extraordinary circumstances, such as divestiture of a large fraction of the bank‘s credit related business, and must be approved by the supervisor.
(Refer para 261, International Convergence of Capital Measurement and Capital Standards – June 2006)
1 As the IRB Approach does not cover trading book exposures (such as debt and equity securities, derivatives, commodities and certain repo-style transactions held in the trading book), banks adopting this approach will be subject to the market risk capital adequacy regime for the reporting and calculation of capital charges against these exposures,- Refer to SAMA‘s Market Risk Amendment Document of Dec. 2004
1.3 Background and Scope
1.3.1 The IRB Approach to credit risk relies on banks’ internally generated inputs in determining the capital requirement for a given exposure. Subject to meeting the minimum qualifying requirements, banks may seek SAMA’s approval to use their internal estimates of risk components in the calculation of capital. In some cases, banks may be required to use supervisory estimates for some of the risk components.
1.3.2 This document describes the weighting framework for credit risk under the IRB Approach, including:
• the definitions of asset classes under the IRB Approach;
• the definitions of the risk components which serve as inputs to the risk-weight functions that produce capital requirements for the UL portion for separate asset classes; the IRB treatment for each asset class, which begins with a presentation of the relevant risk-weight function(s) followed by the risk components and other relevant factors.
1.3.3 The requirements set out in this paper apply to both the Foundation IRB Approach and the Advanced IRB Approach and to all asset classes (see subsection 2.1 below), unless stated otherwise.
1.3.4 Where banks adopt the internal models approach to calculate capital charges for equity exposures, the relevant requirements are set out in section 7 of this document.
1.3.5 In cases where an IRB treatment is not specified, the risk weight for those other exposures is 100% and the resulting risk-weighted assets are assumed to represent UL only.
1.3.6 Once a bank adopts an IRB approach for part of its holdings, it is expected to extend it across the entire banking group. SAMA recognizes however, that, for many banks, it may not be practicable for various reasons to implement the IRB approach across all material asset classes and business units at the same time. Furthermore, once on IRB, data limitations may mean that banks can meet the standards for the use of own estimates of LGD and EAD for some but not all of their asset classes/business units at the same time.
As such, SAMA intends to allow banks to adopt a phased rollout of the IRB approach across the banking group. The phased rollout includes (I) adoption of IRB across asset classes within the same business unit (or in the case of retail exposures across individual sub-classes); (ii) adoption of IRB across business units in the same banking group; and (iii) move from the foundation approach to the advanced approach for certain risk components. However, when a bank adopts an IRB approach for an asset class within a particular business unit (or in the case of retail exposures for an individual sub-class), it must apply the IRB approach to all exposures within that asset class (or sub-class) in that unit.
The plan should be exacting, yet realistic, and must be agreed with the supervisor. It should be driven by the practicality and feasibility of moving to the more advanced approaches, and not motivated by a desire to adopt a Pillar 1 approach that minimizes its capital charge. During the roll-out period, supervisors will ensure that no capital relief is granted for intra-group transactions which are designed to reduce a banking group’s aggregate capital charge by transferring credit risk among entities on the standardized approach, foundation and advanced IRB approaches. This includes, but is not limited to, asset sales or cross guarantees.
(Refer para 258, International Convergence of Capital Measurement and Capital Standards – June 2006)
2. Mechanics of the IRB Approach
2.1 Categorization of Exposures
2.1.1 Under the IRB Approach, banks should categorize exposures in the banking book into broad classes of assets with different underlying risk characteristics, subject to the definitions set out below.
2.1.2 The classes of assets are: (i) corporate; (ii) sovereign; (iii) bank; (iv) retail; and (v) equity. Within the corporate asset class, four sub-classes of specialized lending (see paragraph 2.2.4 below) are separately identified. Within the retail asset class, three sub-classes (see paragraph 2.5.2 below) are separately identified.
2.1.3 The classification of exposures mentioned above is broadly consistent with established banking practice. However, some banks may use different definitions in their internal risk management and measurement systems. While it is not the intention of SAMA to require banks to change the way they manage their business and risks, banks are required to apply the appropriate treatment to each exposure for the purpose of deriving their minimum capital requirements. Banks should demonstrate to SAMA that their methodology for assigning exposures to different asset classes is appropriate and consistent over time.
2.1.4 The size or exposure limits used for defining some corporate or retail exposures are denominated in local currency (see paragraphs 2.2.2, and 2.5.4 below). Banks are generally expected to re-classify such exposures when the exposures are no longer within or above the limits, as the case may be. However, SAMA will be flexible if the need for re-classification arises solely from short-term exchange fluctuations for exposures denominated in foreign currencies. Banks should have appropriate policies in place for determining the circumstances for re-classifying the exposures. For example, these may include situations in which the changes are more permanent in nature, having been caused by a major currency revaluation or a natural growth or reduction in size or exposure. Re-classification of an exposure will not be required if its outstanding balance falls below the relevant limit mainly as a result of repayments or write-offs.
2.2 Definition of Corporate Exposures
2.2.1 In general, a corporate exposure is defined as a debt obligation of a corporation, partnership, or proprietorship. Banks are permitted to distinguish separately exposures to small- and medium-sized entities (“SMEs”).
SME exposures
2.2.2 SME is defined as a corporate where the reported sales1 for the consolidated group of which the firm is a part are less than SR. 15 MM and the max claims on the counterparty are at SR. 10 MM. To ensure that the information used is timely and accurate, banks should obtain the consolidated sales figure from the latest available audited financial statements2 and have it updated at least annually. The basis of consolidation for the borrowing group should follow that used by Banks for their risk management purposes.
2.2.2.1 Banks should manage SME on a pooled basis in their internal risk management systems in the same manner as other retail exposures. This could be as part of a portfolio segment or pool of exposures with similar risk characteristics for risk assessment and quantification.
2.2.2.2 VIP and High Net Worth Private Accounts
These are defined to be exposure to VIP accounts and high net worth individuals that do not meet the criteria for retail exposures under Para 2.5.
Specialized lending (“SL”) exposures
2.2.3 Except otherwise specified, a corporate exposure should be classified as SL if it possesses all of the following characteristics, either in legal form or economic substance:
• the exposure is to an entity (often a special purpose entity (“SPE”)) which was created specifically to finance and/or operate physical assets;
• the borrowing entity has little or no other material assets or activities, and therefore little or no independent capacity to repay the obligation, apart from the income that it receives from the asset(s) being financed;
• the terms of the obligation gives the lender a substantial degree of control over the asset(s) and the income that it generates; and
• as a result of the preceding factors, the primary source of repayment of the obligation is the income generated by the asset(s), rather than the independent capacity of a broader commercial enterprise.
2.2.4 The five sub-classes of specialized lending are project finance, object finance, commodities finance, income-producing real estate, and high-volatility commercial real estate. Each of these sub-classes is defined below.
(Refer para 220, International Convergence of Capital Measurement and Capital Standards – June 2006)
Project finance
2.2.5 Project finance (“PF”) is a method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, and telecommunications infrastructure. PF may take the form of financing of the construction of a new capital installation, or refinancing of an existing installation, with or without improvements.
2.2.6 In such transactions, the lender is usually paid solely or almost exclusively out of the money generated by the contracts for the facility’s output, such as the electricity sold by a power plant. The borrower is usually an SPE that is not permitted to perform any function other than developing, owning, and operating the installation. The consequence is that repayment depends primarily on the project’s cash flow and on the collateral value of the project’s assets. In contrast, if repayment of the exposure depends primarily on a well-established, diversified, credit-worthy, contractually obligated end user for repayment, it is considered a secured exposure to that end user.
Object finance
2.2.7 Object finance (“OF”) refers to a method of funding the acquisition of physical assets (e.g. ships, aircraft, etc.) where the repayment of the exposure is dependent on the cash flows generated by the specific assets that have been financed and pledged or assigned to the lender. A primary source of these cash flows might be rental or lease contracts with one or several third parties. In contrast, if the exposure is to a borrower whose financial condition and debt-servicing capacity enables it to repay the debt without undue reliance on the specifically pledged assets, the exposure should be treated as a collateralized corporate exposure.
Commodities finance
2.2.8 Commodities finance (“CF”) refers to structured short-term lending to finance inventories, or receivables of exchange-traded commodities (e.g. crude oil, metals, or crops), where the exposure will be repaid from the proceeds of the sale of the commodity, and the borrower has no independent capacity to repay the exposure. This is the case when the borrower has no other activities and no other material assets on its balance sheet. The structured nature of the financing is designed to compensate for the weak credit quality of the borrower. The exposure’s rating reflects its self-liquidating nature and the lender’s skill in structuring the transaction rather than the credit quality of the borrower.
2.2.9 Such lending can be distinguished from exposures financing the inventories, or receivables of other more diversified corporate borrowers. Banks are able to rate the credit quality of the latter type of borrowers based on their broader ongoing operations. In such cases, the value of the commodity serves as a risk mitigant rather than as the primary source of repayment.
2.2.10 Income-producing real estate (“IPRE”) refers to a method of providing funding to real estate (such as, office buildings, retail shops, residential buildings, industrial or warehouse premises, and hotels) where the prospects for repayment and recovery on the exposure depend primarily on the cash flows generated by the asset. The primary source of these cash flows would generally be lease or rental payments or the sale of the asset. The distinguishing characteristic of IPRE versus other corporate exposures that are collateralized by real estate is the strong positive correlation between the prospects for repayment of the exposure and the prospects for recovery in the event of default, with both depending primarily on the cash flows generated by a property.
2.2.11 High Volatility Commercial Real Estate
High-volatility commercial real estate (HVCRE) lending is the financing of commercial real estate that exhibits higher loss rate volatility (i.e. higher asset correlation) compared to other types of SL. HVCRE includes:
• Commercial real estate exposures secured by properties of types that are categorized by the national supervisor as sharing higher volatilities in portfolio default rates;
• Loans financing any of the land acquisition, development and construction (ADC) phases for properties of those types in such jurisdictions; and
• Loans financing ADC of any other properties where the source of repayment at origination of the exposure is either the future uncertain sale of the property or cash flows whose source of repayment is substantially uncertain (e.g. the property has not yet been leased to the occupancy rate prevailing in that geographic market for that type of commercial real estate), unless the borrower has substantial equity at risk. Commercial ADC loans exempted from treatment as HVCRE loans on the basis of certainty of repayment of borrower equity are, however, ineligible for the additional reductions for SL exposures described in paragraph 277, International Convergence of Capital Measurement and Capital Standards – June 2006
(Refer para 227, International Convergence of Capital Measurement and Capital Standards – June 2006)
Where SAMA would categorize certain types of commercial real estate exposures as HVCRE in their jurisdictions, it would make public such determinations. SAMA would then ensure that such treatment is then applied equally to banks under their supervision when making such HVCRE loans in that jurisdiction.
(Refer para 228, International Convergence of Capital Measurement and Capital Standards – June 2006)
1 This term is used interchangeably with “turnover” or “revenue”.
2 This does not apply to those customers that are not subject to statutory audit (such as a sole proprietor). In such cases, banks should obtain their latest available management accounts2.3 Definition of Sovereign Exposures
2.3.1 This asset class covers all exposures to counterparties treated as sovereigns under the Standardised Approach, including:
• Sovereigns (and their central banks);
• Public sector entities (“PSEs”) that are treated as sovereigns under the Standardised Approach1;
• Multilateral development banks (“MDBs”) that meet the criteria for a 0% risk weight under the Standardised Approach2; and other entities that receive a 0% risk weight under the Standardised Approach, namely, World Bank, the Bank for International Settlements, the International Monetary Fund, the European Central Bank and the European Community, Arab Monetary Fund, the Islamic Development Bank.
1 These mainly refer to claims on foreign PSEs that are regarded by the relevant national supervisors as sovereigns in whose jurisdictions the PSEs were established.
2 Eligible MDBs (Standardized Approach)”. Also refer to the section on terminology2.4 Definition of Bank Exposures
2.4.1 This asset class covers exposures to:
• Banks;
• Regulated securities firms (including all security firms licensed CMA) and by the relevant foreign regulators.
• Domestic PSEs that are treated as banks under the Standardised Approach; and
• MDBs that do not meet the criteria for a 0% risk weight under the Standardised Approach.
2.5 Definition of Retail Exposures
General
2.5.1 For an exposure to be categorized as retail, it should satisfy two general criteria:
• The borrower is an individual or a small business that meets a specified exposure threshold (see paragraphs 2.5.3 and 2.5.4 below); and
• The exposure should be one of a large pool of exposures, which are managed by banks on a pooled or portfolio basis1 (see paragraph 2.5.5 below).
2.5.2 Within the retail asset class, banks are required to identify separately three subclasses of exposures:
• Exposures secured by residential properties (see paragraphs 2.5.5 to 2.5.6 below);
• Qualifying Revolving Retail Exposures (QRRE) - (see paragraph 2.5.9 below); and
• All other retail exposures.
Exposures to individuals
2.5.3 Exposures to individuals are generally eligible for retail treatment regardless of exposure size. Such exposures include residential mortgage loans, revolving credits and lines of credit (e.g. credit cards, overdrafts, and retail facilities secured by financial instruments) as well as personal term loans (e.g. installment loans, auto loans, personal finance, and other exposures with similar characteristics).
Small business enterprise
2.5.4 Loans extended to small businesses enterprise and managed as retail exposures are eligible for retail treatment provided the total exposure (On and Off) items of the banking group2 to a small business borrower (on a consolidated basis where applicable3) is less than 5 million Saudi Riyal. Small business loans extended through or guaranteed by an individual are subject to the same exposure threshold.
Exposures secured by residential properties
2.5.5 Residential mortgage loans are eligible for retail treatment regardless of exposure size so long as the credit is extended to an individual and the property is or will be occupied by the borrower, or rented.
2.5.6 Other exposures secured by residential properties that do not satisfy the above requirements should be classified as other retail or corporate exposures, as appropriate.
Qualifying Revolving Retail Exposures (“QRRE”)
2.5.7 A Bank may regard a sub-portfolio of its retail exposures (which should be consistent with the Banks segmentation of retail activities generally) as QRRE, subject to the following criteria being met:
• The exposures are revolving, unsecured, and uncommitted (both contractually and in practice). In this context, revolving exposures are defined as those where customers’ outstanding balances are permitted to fluctuate based on their decisions to borrow and repay, up to a limit established by banks;
• The exposures are to individuals;
• The maximum exposure to a single individual in the sub-portfolio is SR. 5 million or less;
• Because the asset correlation assumptions for the QRRE risk-weight function are markedly below those for the other retail risk-weight functions at low PD values, banks should demonstrate that the use of the QRRE risk-weight function is constrained to portfolios that have exhibited low volatility of loss rates, relative to their average level of loss rates, especially within the low PD bands. SAMA will, for monitoring purposes, review the relative volatility of loss rates across the QRRE sub-portfolios of banks;
• Data on loss rates for the QRRE sub-portfolio should be retained in order to allow analysis of the volatility of loss rates; and
• Treatment as QRRE is consistent with the underlying risk characteristics of the sub-portfolio.
1 SAMA does not intend to set the minimum number of retail exposures in a portfolio. Banks should establish their internal policies to ensure the granularity and homogeneity of their retail exposures. Also refer to the Standardized Approach.
2 The banking group should, at a minimum, cover all entities within the group that are subject to the capital adequacy regime in Saudi Arabia.
3 The basis of consolidation should follow that used by a bank for its risk management purposes, provided that exposures to the sole proprietors or partners within the borrowing group are included in the consolidation.3. Foundation and Advanced IRB Approaches
3.1 General Requirements
3.1.1 For each of the asset classes covered under the IRB framework, there are three key elements:
• Risk components - estimates of some risk parameters are provided by banks, and some by the supervisory authorities i.e. PD, LGD and EAD.
• Risk-weight functions - the means by which risk components are transformed into risk-weighted assets and therefore capital requirements;
• Minimum requirements - the minimum standards that should be met in order for a bank to use the IRB Approach for a given asset class1
3.1.2 Under the Foundation IRB Approach, as a general rule, Banks provide their own estimates of PD and rely on supervisory estimates for other risk components. Under the Advanced IRB Approach, bank provide their own estimates of PD, LGD and EAD, and their own calculation of M, subject to meeting minimum standards. For both the Foundation and Advanced IRB Approaches, banks should always use the risk-weight functions provided in this paper for the purpose of deriving capital requirements.
1 These minimum requirements are set out in "Minimum Requirements for Internal Rating Systems under IRB Approach" and "Minimum Requirements for Risk Quantification under IRB Approach".
3.2 Corporate, Sovereign and Bank Exposures
3.2.1 Under the Foundation IRB Approach, banks should provide their own estimates of PD associated with each of their borrower grades, but should use supervisory estimates for other risk components, namely, LGD, EAD and M1.
3.2.2 Under the Advanced IRB Approach, Banks should calculate M and provide their own estimates of PD, LGD and EAD.
3.2.3 There is an exception to the general rule for the four sub-classes of assets identified as SL (i.e. PF, OF, CF and IPRE). Banks that do not meet the requirements for the estimation of PD under the Foundation IRB Approach for their SL assets in the corporate asset class are required to map their internal risk grades to five supervisory categories, each of which is associated with a specific risk weight. This is referred to as the “supervisory slotting criteria” approach.
1 Explicit maturity adjustment will not be required under the Foundation IRB Approach. However, SAMA may allow banks which have systems to calculate the adjusted maturities to measure M for each facility.
3.3 Retail Exposures
3.3.1 For retail exposures, banks should provide their own estimates of PD, LGD and EAD. There is no distinction between a foundation and an advanced approach for this asset class.
4. Rules for Corporate, Sovereign and Bank Exposures
4.1 Risk-Weighted Assets for Corporate, Sovereign and Bank Exposures
Formula for derivation of risk-weighted assets
4.1.1 The derivation of risk-weighted assets is dependent on estimates of PD, LGD, EAD and, in some cases, M, for a given exposure. Paragraphs 4.2.7 to 4.2.13 below discuss the circumstances in which the maturity adjustment applies.
4.1.2 Throughout this section, PD and LGD are measured as decimals, and EAD is measured in Saudi Riyals. For exposures not in default, the formula for calculating risk-weighted assets is 1,2
Correlation ® = 0.12 × (1 - EXP (-50 × PD)) / (1 - EXP (-50)) + 0.24 × [1 - (1 - EXP (-50 × PD)) / (1 - EXP (-50))]
Maturity adjustment (b) = (0.11852 - 0.05478 × ln (PD))^2
Capital requirement 3 (K) = [LGD × N [(1 - R)^-0.5 × G (PD) + (R / (1 - R))^0.5 × G (0.999)] - PD x LGD] x (1 - 1.5 x b)^ -1 × (1 + (M - 2.5) × b)
Risk-weighted assets (RWA) = K x 12.5 x EAD
4.1.3 The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD and the bank‘s best estimate of EL (see paragraphs 4.5.1, 4.5.2 and 4.5.5 of ―Minimum Requirements for Risk Quantification under IRB Approach‖). The amount of risk-weighted asset for the defaulted exposure is the product of K, 12.5, and EAD.
4.1.4 Purposely Missing.
4.1.5 Under the IRB Approach for corporate credits, banks are permitted to separately distinguish exposures to SME borrowers (defined as corporate exposures where the reported sales for the consolidated group of which the firm is a part is less than SR 15 million) from those to large firms4. A firm-size adjustment (i.e. 0.04 x (1 - (S-5) / 45)) is made to the corporate risk-weight formula for exposures to SME borrowers. S is expressed as total annual sales in millions of SR with values of S falling in the range of equal to or less than SR 15 million or greater than or equal to SR 5 million. Reported sales of less than SR 5 million will be treated as if they were equivalent to SR 5 million for the purposes of the firm-size adjustment for SME borrowers.
Correlation ® = 0.12 × (1 - EXP (-50 × PD)) / (1 - EXP (-50)) + 0.24 × [1 - (1 - EXP (-50 × PD)) / (1 - EXP (-50))] - 0.04 × (1 - (S - 5) / 10)
In the case where total sales are not a meaningful indicator of firm size for particular companies, SAMA may on an exceptional basis allow banks to substitute total assets of the consolidated group for total sales in calculating the SME threshold and the firm-size adjustment. However, banks should not make use of this special treatment to obtain capital relief.
Risk weights for SL
4.1.6 Banks that do not meet the requirements for the estimation of PD under the IRB Approach for corporate exposures will be required to map their internal grades for the SL exposures to five supervisory categories, each of which is associated with a specific risk weight. The slotting criteria on which this mapping should be based are provided in Table 2.
4.1.7 The risk weights for UL associated with each supervisory category broadly correspond to a range of external credit assessments5 as outlined below:
* Strong Good Satisfactory Weak Default 70% 90% 115% 250% 0% BBB- or better BB+ or BB BB-or B+ B to C- Not applicable 4.1.8 Subject to SAMA approval a Bank may assign preferential risk weights of 50% to ―"strong" exposures, and 70% to ―"good" exposures, provided they have a remaining maturity of less than 2.5 years or if SAMA determines that a Banks' underwriting and other risk characteristics are substantially stronger than specified in the slotting criteria for the relevant supervisory risk category.
4.1.9 Banks that meet the requirements for the estimation of PD are able to use the Foundation IRB Approach for corporate exposures to derive risk weights for SL sub-classes.
4.1.10 Banks that meet the requirements for the estimation of PD and LGD and/or EAD are able to use the Advanced IRB Approach for corporate exposures to derive risk weights for SL sub-classes.
1 In denotes the natural logarithm.
2 N(x) denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x). G(z) denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value of x such that N(x) = z). The normal cumulative distribution function and the inverse of the normal cumulative distribution function are, for example, available in Excel as the functions NORMSDIST and NORMSINV.
3 If this calculation results in a negative capital charge for any individual sovereign exposure, banks should apply a zero capital charge for that exposure.
4 Banks should not apply a firm-size adjustment to a corporate customer which cannot make available the sales figure for the consolidated group of which the customer is a part. Also refer to Table –1 on Page 41 for Illustration.
5 The notations follow the methodology used by Standard & Poor‘s. The use of Standard & Poor‘s credit ratings is for reference only; those of some other SAMA approved external credit assessment institutions ("ECAIs") could equally well be used.
* Refer to Table-2 – Attachment 5.9.4.2 Risk Components
Probability of default (PD)
4.2.1 For corporate and bank exposures, the PD is the greater of the one-year PD associated with the internal borrower grade to which that exposure is assigned, or 0.03%. For sovereign exposures, the PD is the one-year PD associated with the internal borrower grade to which that exposure is assigned. The PD of borrowers assigned to a default grade(s), consistent with the reference definition of default, is 100%. The minimum requirements for the derivation of the PD estimates associated with each internal borrower grade are outlined in paragraphs 4.4.1 to 4.4.9 of “Minimum Requirements for Risk Quantification under IRB Approach”.
Banks where, SAMA has disallowed the application of foundation or advanced approaches to HCVRE must map their internal grades to five supervisory categories, each of which is associated with a specific risk weight. The slotting criteria on which this mapping must be based are the same as those for IPRE, as provided in Annex 6 International Convergence of Capital Measurement and Capital Standards – June 2006, . The risk weights associated with each category are:
Supervisory categories and UL risk weights for high-volatility commercial real estate.
Strong
Good
Satisfactory
Weak
Default
95%
120%
140%
250%
0%
(Refer para 280, International Convergence of Capital Measurement and Capital Standards – June 2006)
Table 1: Illustrative IRB risk weights for UL
Asset Class: Corporate Exposures Residential Mortgages Other Retail Exposures Qualifying Revolving Retail Exposures (%) (%) (%) (%) LGD: 45 45 45 25 45 85 45 85 Maturity 2.5 years Turnover (SR. Mn) 500 50 PD: 0.03 14.44 11.30 4.15 2.30 4.45 8.41 0.98 1.85 0.05 19.65 15.39 6.23 3.46 6.63 12.52 1.51 2.86 0.10 29.65 23.30 10.69 5.94 11.16 21.08 2.71 5.12 0.25 49.47 39.01 21.30 11.83 21.15 39.96 5.76 10.88 0.40 62.72 49.49 29.94 16.64 28.42 53.69 8.41 15.88 0.50 69.61 54.91 35.08 19.49 32.42 61.13 10.04 18.97 0.75 82.78 65.14 46.46 25.81 40.10 75.74 13.08 26.06 1.00 92.32 72.40 56.40 31.33 45.77 86.46 17.22 32.53 1.30 100.95 78.77 67.00 37.22 50.80 95.95 21.02 39.70 1.50 105.59 82.11 73.45 40.80 53.37 100.81 23.40 44.19 2.00 114.86 88.55 87.94 48.85 57.99 109.53 28.92 54.63 2.50 122.16 93.43 100.64 55.91 60.90 115.03 33.98 64.18 3.00 128.44 97.58 111.99 62.22 62.79 118.61 38.66 73.03 4.00 139.58 105.04 131.63 73.13 65.01 122.80 47.16 89.08 5.00 149.86 112.27 148.22 82.35 66.42 125.45 54.75 103.41 6.00 159.61 119.48 162.52 90.29 67.73 127.94 61.61 116.37 10.00 193.09 146.51 204.41 113.56 75.54 142.69 83.89 158.47 15.00 221.54 171.91 235.75 130.96 88.60 167.36 103.89 196.23 20.00 238.23 188.42 253.12 140.62 100.28 189.41 117.99 222.86 Note:
1. The above table provides illustrative risk weights for UL calculated for the corporate asset class and he three retail sub-classes under the IRB Approach to credit risk. Each set of risk weights is produced using the appropriate risk-weight functions set out in this paper. The inputs used to calculate the illustrative risk weights include measures of PD, LGD, and an assumed M of 2.5 years.
2. A firm-size adjustment applies to exposures made to SME borrowers (defined as corporate exposures where the reported sales for the consolidated group of which the firm is a part is less than SR 250 million). Accordingly, the firm-size adjustment is made in determining the second set of risk weights provided in second column of corporate exposures given that the turnover of the firm receiving the exposure is assumed to be SR 5 million.
Loss given default (LGD)
4.2.2 Banks should provide an estimate of the LGD for each corporate, sovereign and bank exposure. There are two approaches for deriving this estimate: the Foundation IRB Approach and the Advanced IRB Approach.
LGD under the Foundation IRB Approach
Treatment of unsecured claims and non-recognised collateral
4.2.3 Under the Foundation IRB Approach, senior claims on corporates, sovereigns and banks not secured by recognised collateral will be assigned a 45% LGD.
4.2.4 All subordinated claims on corporates, sovereigns and banks will be assigned a 75% LGD. A subordinated loan is a facility that is expressly subordinated to another facility.
LGD under the Advanced IRB Approach
4.2.5 Subject to the minimum requirements specified in subsection 4.5 of “Minimum Requirements for Risk Quantification under IRB Approach”, banks are allowed to use their own internal estimates of LGD for corporate, sovereign and bank exposures. The LGD should be measured as a percentage of the EAD. Banks eligible for the IRB Approach that are unable to meet these minimum requirements should utilise the foundation LGD treatment described in paragraphs 4.2.3 to 4.2.4 above.
Exposure at default (EAD)
4.2.6 The following paragraphs on EAD apply to both on and off-balance sheet positions. All exposures are measured gross of specific provisions or partial write-offs. The EAD on drawn amounts should not be less than the sum of:
(i) The amount by which a bank‘s regulatory capital would be reduced if the exposure were written-off fully; and
(ii) Any specific provisions and partial write-offs.
When the difference between the instrument’s EAD and the sum of (i) and (ii) is positive, this amount is termed a discount. The calculation of risk-weighted assets is independent of any discounts. Under the limited circumstances described in paragraph 380, International Convergence of Capital Measurement and Capital Standards – June 2006, discounts may be included in the measurement of total eligible provisions for purposes of the EL-provision calculation set out in Section III.G, International Convergence of Capital Measurement and Capital Standards – June 2006
SAMA hereby intimates that the approaches laid in Annexure 4 (Treatment of Counterparty Credit Risk and Cross-Product Netting), of the International Convergence of Capital Measurement and Capital Standards, 2006, (with the exception of clauses applicable to netting) for the purpose of computing the credit equivalent amount of Securities Financing Transactions and OTC derivatives that expose a bank to counterparty credit risk, are available to banks and constitute an integral part of the "SAMA Detailed Guidance Document Relating to Pillar 1, June 2006.
(Refer para 334, International Convergence of Capital Measurement and Capital Standards – June 2006)
Effective maturity (M)
4.2.7 For Banks using the Foundation IRB Approach for corporate exposures, the M will be 2.5 years except for repo-style transactions where the M will be 6 months. Banks using any element of the Advanced IRB Approach are required to measure the M for each facility as defined below.
4.2.8 M is defined as the greater of one year and the remaining effective maturity in years. In all cases, the M will be no greater than five years.
4.2.9 For an instrument subject to a determined cash flow schedule, the M is defined as:
Where CFt flows (principal, interest payments and fees) contractually payable by the borrower in periodt .
4.2.10 If a bank is not in a position to calculate the M of the contracted payments as noted above, it is allowed to use a more conservative measure of M. An example of this measurement is the maximum remaining time (in years) that the borrower is permitted to take to fully discharge its contractual obligation (principal, interest, and fees) under the terms of the loan agreement. Normally, this will correspond to the nominal maturity of the instrument.
4.2.11 For derivatives subject to a master netting agreement, the weighted average maturity of the transactions should be used when applying the explicit maturity adjustment. Further, the notional amount of each transaction should be used for weighting the maturity.
4.2.12 For repo-style transactions subject to a master netting agreement, the weighted average maturity of the transactions should be used when applying the explicit maturity adjustment. A five-day floor will apply to the average. Further, the notional amount of each transaction should be used for weighting the maturity.
5 Rules for Retail Exposures
5.1 Risk-Weighted Assets for Retail Exposures
5.1.1 There are three separate risk-weight functions for retail exposures, as defined in paragraphs 5.1.2 to 5.1.5 below. Risk weights for retail exposures are based on separate assessments of PD and LGD as inputs to the risk-weight functions. None of the three retail risk-weight functions contains an explicit maturity adjustment. Throughout this section, PD and LGD are measured as decimals, and EAD is measured in Saudi Riyals.
Residential mortgage exposures
5.1.2 For exposures defined in paragraph 2.5.6 above that are not in default and are secured or partly secured1 by residential mortgages, risk weights are assigned based on the following formula:
Correlation ® = 0.15
Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G (PD) + (R / (1 - R))^0.5 × G (0.999)] - PD x LGD
Risk-weighted assets = K x 12.5 x EAD
5.1.3 The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraphs 4.5.1 to 4.5.2 of "Minimum Requirements for Risk Quantification under IRB Approach") and a banks‘ best estimate of EL (described in paragraph 4.5.5 of the same paper). The amount of risk-weighted asset for the defaulted exposure is the product of K, 12.5, and the EAD.
5.1.4 QRRE For QRRE as defined in paragraph 2.5.8 above that are not in default, risk weights are assigned based on the following formula:
Correlation ® = 0.04
Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G (PD) + (R / (1 - R))^0.5 × G (0.999)] - PD x LGD
Risk-weighted assets = K x 12.5 x EAD
5.1.5 The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraphs 4.5.1 to 4.5.2 of ―Minimum Requirements for Risk Quantification under IRB Approach") and a bank‘s best estimate of EL (described in paragraph 4.5.5 of the same paper). The amount of risk-weighted asset for the defaulted exposure is the product of K, 12.5, and the EAD.
Other retail exposures
5.1.6 For all other retail exposures that are not in default, risk weights are assigned based on the following function, which also allows correlation to vary with PD:
Correlation ® = 0.03 × (1 - EXP (-35 × PD)) / (1 - EXP (-35)) + 0.16 × [1 - (1 - EXP (-35 × PD)) / (1 - EXP (-35))]
Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G (PD) + (R / (1 - R))^0.5 × G (0.999)] - PD x LGD
Risk-weighted assets = K x 12.5 x EAD
5.1.7 The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraphs 4.5.1 to 4.5.2 of ―Minimum Requirements for Risk Quantification under IRB Approach") and a banks best estimate of EL (described in paragraph 4.5.5 of the same paper). The amount of risk-weighted asset for the defaulted exposure is the product of K, 12.5, and the EAD. 1 This mean that risks weights for residential mortgages also apply to the unsecured portion of such residential mortgages.
5.2 Risk Components
Probability of default (PD) and loss given default (LGD)
5.2.1 For each identified pool of retail exposures, banks are expected to provide an estimate of the PD and LGD associated with the pool, subject to the minimum requirements as set out in “Minimum Requirements for Risk Quantification under IRB Approach”. Additionally, the PD for retail exposures is the greater of the one- year PD associated with the internal borrower grade to which the pool of retail exposures is assigned or 0.03%.
Banks may reflect the risk-reducing effects of guarantees and credit derivatives, either in support of an individual obligation or a pool of exposures, through an adjustment of either the PD or LGD estimate, subject to the minimum requirements in paragraphs 480 to 489 of the International Convergence of Capital Measurement and Capital Standards – June 2006. Whether adjustments are done through PD or LGD, they must be done in a consistent manner for a given guarantee or credit derivative type.
(Refer para 332, International Convergence of Capital Measurement and Capital Standards – June 2006)
Consistent with the requirements outlined above for corporate, sovereign, and bank exposures, banks must not include the effect of double default in such adjustments. The adjusted risk weight must not be less than that of a comparable direct exposure to the protection provider. Consistent with the standardized approach, banks may choose not to recognize credit protection if doing so would result in a higher capital requirement.
(Refer para 333, International Convergence of Capital Measurement and Capital Standards – June 2006)
6. Treatment of Expected Losses and Recognition of Provisions
Calculation of expected losses
A bank must sum the EL amount (defined as EL multiplied by EAD) associated with its exposures (excluding the EL amount associated with equity exposures under the PD/LGD approach and securitization exposures) to obtain a total EL amount. While the EL amount associated with equity exposures subject to the PD/LGD approach is excluded from the total EL amount, paragraphs 376 and 386, International Convergence of Capital Measurement and Capital Standards – June 2006 apply to such exposures. The treatment of EL for securitization exposures is described in paragraph 563, International Convergence of Capital Measurement and Capital Standards – June 2006.
(Refer para 375, International Convergence of Capital Measurement and Capital Standards – June 2006)
6.1 Expected Loss for Exposures other than SL Subject to the Supervisory Slotting Criteria
Banks should calculate the EL as PD x LGD for corporate, sovereign, bank and retail exposures not in default. For corporate, sovereign, bank and retail exposures that are in default, Banks should use their best estimate of EL as defined in paragraph 4.5.5 of “Minimum Requirements for Risk Quantification under IRB Approach”, and banks on the Foundation IRB Approach should use the supervisory LGD. For SL exposures subject to the supervisory slotting criteria, the EL is calculated as described in paragraph 6.2 below.
6.2 Expected Loss for SL Exposures Subject to the Supervisory Slotting Criteria
For SL exposures subject to the supervisory slotting criteria, the EL amount is determined by multiplying by 8% the risk-weighted assets produced from the appropriate risk weights, as specified in the following paragraph, multiplied by EAD.
The risk weights for SL are as follows:
• Strong
5% • Good
10% • Satisfactory
35% • Weak
100% • Default
625% SAMA may allow banks to assign preferential risk weights to other SL exposures falling into the “strong” and “good” supervisory categories as outlined in paragraph 4.1.8 above. The corresponding EL risk weight is 0% for “strong” exposures, and 5% for “good” exposures.
Supervisory categories and the risk weights for HVCRE:
The risk weights for HVCRE are as follows:
Strong
Good
Satisfactory
Weak
Default
5%
5%
35%
100%
625%
Even where, at national discretion, supervisors allow banks to assign preferential risk weights to HVCRE exposures falling into the “strong” and “good” supervisory categories as outlined in paragraph 282, the corresponding EL risk weight will remain at 5% for both “strong” and “good” exposures.
(Refer para 379, International Convergence of Capital Measurement and Capital Standards – June 2006)
Calculation of provisions
6.3 Exposures Subject to the IRB Approach
Total eligible provisions are defined as the sum of all provisions (e.g. specific provisions, partial write-offs, portfolio-specific general provisions such as country risk provisions or general provisions1) that are attributed to exposures treated under the IRB Approach. Specific provisions set aside against equity should not be included in total eligible provisions.
1 Banks adopting Accounting Standard IAS #39 or other similar standard may wish to note that the accounting changes arising the reform could have implications on the scope and extent of general provisions to be included in Supplementary Capital under the revised capital adequacy framework.
6.4 Treatment of Expected Losses and Provisions
Bank using the IRB Approach should compare the amount of total eligible provisions with the total EL amount as calculated within the IRB Approach. In addition, where a bank is also subject to the Standardized Approach to credit risk for a portion of its credit exposures, general provisions can be included in a bank supplementary capital subject to the limit of 1.25% of risk-weighted assets.
Where the EL amount exceed the total eligible provision, banks should deduct the difference from the capital base at 50% from Tier-1 and 50% from Tier -II.
Where the calculated EL amount is lower than the provisions of the bank, its supervisors must consider whether the EL fully reflects the conditions in the market in which it operates before allowing the difference to be included in Tier 2 capital. If specific provisions exceed the EL amount on defaulted assets this assessment also needs to be made before using the difference to offset the EL amount on non-defaulted assets.
(Refer para 385, International Convergence of Capital Measurement and Capital Standards – June 2006)
The EL amount for equity exposures under the PD/LGD approach is deducted 50% from Tier 1 and 50% from Tier 2. Provisions or write-offs for equity exposures under the PD/LGD approach will not be used in the EL-provision calculation.
The treatment of EL and provisions related to securitization exposures is outlined in paragraph 563.
(Refer para 386, International Convergence of Capital Measurement and Capital Standards – June 2006)
7. Exposure Measurement for Off-Balance Sheet Items
For off-balance sheet items, exposure is calculated as the committed but undrawn amount multiplied by a CCF. There are two approaches for the estimation of CCFs: a foundation approach and an advanced approach.
EAD under the foundation approach
The types of instruments and the CCFs applied to them are the same as those in the standardized approach, with the exception of commitments, Note Issuance Facilities (NIFs) and Revolving Underwriting Facilities (RUFs).
A CCF of 75% will be applied to commitments, NIFs and RUFs regardless of the maturity of the underlying facility. This does not apply to those facilities which are uncommitted, that are unconditionally cancellable, or that effectively provide for automatic cancellation, for the example due to deterioration in a borrower’s creditworthiness, at any time by the bank without prior notice. A CCF of 0% will be applied to these facilities.
The amount to which the CCF is applied is the lower of the value of the unused committed credit line, and the value that reflects any possible constraining availability of the facility, such as the existence of a ceiling on the potential lending amount which is related to a borrower’s reported cash flow. If the facility is constrained in this way, the bank must have sufficient line monitoring and management procedures to support this treatment.
In order to apply a 0% CCF for unconditionally and immediately cancellable corporate overdrafts and other facilities, banks must demonstrate that they actively monitor the financial condition of the borrower, and that their internal control systems are such that they could cancel the facility upon evidence of a deterioration in the credit quality of the borrower.
Where a commitment is obtained on another off-balance sheet exposure, banks under the foundation approach are to apply the lower of the applicable CCFs.
EAD under the advanced approach
Banks which meet the minimum requirements for use of their own estimates of EAD, will be allowed to use their own internal estimates of CCFs across different product types provided the exposure is not subject to a CCF of 100% in the foundation approach.
7.1 Exposure Measurement for FX, Interest Rate, Equity, Credit, and Commodity- Related Derivatives
Measures of exposure for these instruments under the IRB approach will be calculated as per the rules for the calculation of credit equivalent amounts, i.e. based on the replacement cost plus potential future exposure add-ons across the different product types and maturity bonds.
8. Scaling Factor for Risk-Weighted Assets
8.1 Application of scaling factor. In determining the minimum capital requirements for the IRB Approach, SAMA will apply a scaling factor which could be either greater than or less than one, to the total amount of credit risk-weighted assets calculated based on the rules set out for all asset classes under the IRB Approach. The use of this scaling factor is to broadly maintain the aggregate level of minimum capital requirements derived from the revised capital adequacy framework.
8.2 The current best estimate of the scaling factor is 1.06. In applying this scaling factor, banks should multiply the total amount of credit risk-weighted assets calculated under the IRB Approach by 1.06 for the computation of the capital adequacy ratio.
8.3 SAMA will finalize the size of the scaling factor with reference to the results of the Quantitative Impact Survey conducted by the Basel Committee on Banking Supervision.
Major Section 5.1: Implementation Proposals for the IRB Approach and Minimum Requirements for Internal Rating System (Attachment 5.4) and Risk Quantification System (Attachment 5.5)
Attachment 5.1
No: BCS 290 Date(g): 12/6/2006 | Date(h): 16/5/1427 Status: No longer applicable 5.1 Implementation Proposals for the IRB Approach and Minimum Requirements for Internal Rating System (Attachment 5.4) and Risk quantification system (Attachment 5.5)
Purpose
5.1.1 This section sets out the SAMA’s proposals for implementing the IRB Approach, including the minimum qualifying criteria for adoption of the IRB Approach in Saudi Arabia and the manner in which the SAMA intends to exercise national discretions available under the Approach.
5.1.2 The proposals are based on Basel II. SAMA will take into account the banks views and comparable criteria adopted by other supervisors before finalizing these proposals.
Implementation Approach
Availability and choice of approaches
5.1.3 SAMA plans to allow all available IRB Approaches to banks that are capable of meeting the relevant requirements. SAMA aims to make available for adoption by banks the Foundation Approach and the Advanced Approach from 1 January, 2008 and beyond. Exact timing for implementation would be subject to SAMA’s bilateral discussions with banks.
5.1.4 As a general principle, SAMA will not require or mandate any particular bank to adopt the IRB Approach. Banks should conduct their own detailed feasibility study and analysis of the associated costs and benefits in order to decide whether to use this Approach. Nevertheless, for those banks that are building the IRB systems, adopting this Approach will entail significant changes to their existing systems, the collection of extensive data as well as the fulfillment of many other quantitative and qualitative requirements. It would therefore be more practicable for such bank to start with the Foundation Approach rather than going straight to the Advanced Approach. The possibility of moving straight to the Advanced Approach is however not entirely ruled out, if banks concerned can satisfy the more stringent criteria, in particular the ability to measure Loss Given Default (LGD) and Exposures At Default (EAD).
Application / validation procedures
5.1.5 Banks wishing to adopt the IRB Approach should discuss their plans with SAMA and meet the requirements described in Attachment –5.1. Whether they will be able to use the IRB Approach for capital adequacy purposes is subject to the prior approval of SAMA and to their satisfying various qualitative and quantitative requirements relating to internal rating systems and the estimation of Probability of default (PD) Loss Given Default (LGD); Exposure At Default (EAD) and the controls surrounding them. SAMA will conduct on-site validation exercises to ensure that bank internal rating systems and the corresponding risk estimates meet the Basel requirements. It should however be stressed that the primary responsibility for validating and ensuring the quality of bank internal rating systems lies with its management.
5.1.6 In order to allow sufficient time for the SAMA to carry out the necessary validations on their systems, banks should inform SAMA no later than 30 November 2005 of their final plans in writing if they want to use the IRB Approaches. This will be followed by bilateral meetings to discuss the banks Implementation Plans and state of readiness for adopting the IRB Approaches.
5.1.7 In assessing the eligibility of a bank to adopt the IRB Approach, SAMA will adopt the examination processes as outlined in Attachment 5.I. In the case of banks that are branches of foreign banks, SAMA will liaise with the home supervisory authority particularly on the validation arrangements to assess the extent of reliance that it may place on the validation done by the home supervisor. Other aspects will include their Basel II implementation plans, National Discretion, extent of adoption of Saudi portfolios risk characteristic in their internal classification and risk estimates, etc. This approach is consistent with the Basel Concordat and should help keep duplication of supervisory attention to a minimum.
5.1.8 SAMA will provide the banks with more details regarding the application and approval/examination procedures for use of the IRB Approach. Relevant self-assessment questionnaires will also be issued to banks, to assist SAMA in evaluating banks Implementation Plans.
Proposed work programme and implementation timetable
5.1.9 SAMA will discuss with the banks through the Working Groups and bi-laterally concerning their Implementation Plans and strategies relating to the IRB Approach. These guidance rules, cover the proposals on the exercise of national discretions and the minimum qualifying criteria for transition to the IRB Approach.
5.1.10 Regarding the exercise of national discretion, SAMA has provided clear guidance in this document. Banks may seek further clarifications on national discretion items during the Working Groups meetings and on a bi-lateral basis. (Attachment - 5.3.)
5.1.11 Other rules and guidance on the IRB Approach, including the revised capital adequacy returns for users of this Approach will be issued to banks in the future.
Qualifying Criteria for Adoption of IRB Approach
5.1.12 In order for banks to be eligible to use the IRB Approach for capital adequacy purposes, they should comply with a set of minimum qualifying criteria. These requirements generally cover:
(i) The criteria for transition to the IRB Approach; and
(ii) Other requirements relating to the qualitative and quantitative aspects of IRB systems i.e. rating system (Attachment 5.4) and Risk Quantification System (Attachment 5.5).
Criteria for transition to the IRB Approach
Adoption of IRB Approach across the banking group
5.1.13 SAMA would expect banks to adopt the IRB Approach except for immaterial exposures that have been exempted by SAMA. The fundamental principle is that a clear critical mass of bank’s risk-weighted assets (“RWAs”) (as recorded in the banks solo and consolidated capital adequacy returns) would have to be on the IRB Approach before the bank could transition to that Approach for capital adequacy purposes. In this regard, the amount of immaterial exposures that can be exempt from the requirements of the IRB Approach is subject to a maximum limit of 15% of a bank’s risk-weighted assets. Exempt exposures will apply the Standardized Approach.
5.1.14A Given the data limitations associated with SL exposures, a bank may remain on the supervisory slotting criteria approach for one or more of the PF, OF, IPRE or HVCRE sub-classes, and move to the foundation or advanced approach for other sub-classes within the corporate asset class.
(Refer para 262, International Convergence of Capital Measurement and Capital Standards – June 2006)
5.1.14 SAMA current proposal is that the ultimate level of IRB coverage should be at least 85% of a bank’s RWA’s, a bank may be allowed to transition before reaching this level of coverage if it can satisfy the criteria for adopting phased rollout (see paragraphs 5.1.16 to 5.1.18 below).
5.1.15 Prescribing a minimum level of IRB coverage means that some banks might not qualify to adopt IRB immediately (i.e. on 1 January 2008) but might have to wait until they have achieved the requisite level of coverage. This, SAMA believes, is preferable to a situation in which banks are approved to use IRB when in fact a very significant proportion of their RWAs are not actually on IRB. Given that use of IRB-type systems in Saudi Arabia are not well established, a certain degree of caution is considered prudent, and SAMA does not expect banks to rush to adopting IRB when they are not fully ready.
Consequently, banks planning to use the IRB Approach should conduct a well thought out and a comprehensive feasibility study.
5.1.16 Phased rollout and transition period
A bank may be allowed to adopt a phased rollout of the IRB Approach across its banking group within a transition period of up to three years subject to SAMA being satisfied with its final Implementation Plans. The implementation plan should specify, among other things, the extent and timing for rolling out the IRB Approach across significant asset classes (or sub-classes in the case of retail) and business units over time. The plan should be precise and realistic, and must be approved with SAMA. Further, when a bank adopts the IRB Approach for an asset class within a particular business unit (or in the case of retail exposures for an individual sub-class), it must apply the IRB Approach to all exposures within that asset class (or sub-class) in that unit.
5.1.17 Banks adopting phased rollout should have achieved a certain level of IRB coverage (say, at least 85% of their RWAs) before they could be allowed to use the Approach for capital calculation. By the end of the transition period, all of their non-exempt exposures should have been migrated to the IRB Approach.
5.1.18 Banks adopting the foundation or advanced approaches are required to calculate their capital requirement using these approaches, as well as the 1988 Accord for the time period specified in paragraphs 45 to 49, International Convergence of Capital Measurement and Capital Standards – June 2006
(Refer para 263, International Convergence of Capital Measurement and Capital Standards – June 2006)
Under these transitional arrangements banks are required to have a minimum of two years of data at the implementation of this Framework. This requirement will increase by one year for each of three years of transition.
(Refer para 265, International Convergence of Capital Measurement and Capital Standards – June 2006)
Parallel run and capital floor
5.1.19 There will be a parallel run of Basel II – IRB Approach only.
5.1.20 Banks planning to use the IRB Approach will be subject to a single capital floor for the first three years after they have adopted the IRB Approach for capital adequacy purposes. They should calculate the difference between: (i) the floor as defined in paragraphs 5.1.21 and 5.1.22 below; and (ii) the amount as calculated according to paragraph 5.1.23 below. If the floor amount is larger, Banks are required to add 12.5 times the difference to RWAs. See Example-I for a simple illustration of how the floor works.
5.1.21 The capital floor is based on application of the current Accord. It is derived by applying an adjustment factor to the following amount: (i) 8% of the RWAs; (ii) plus Tier 1 and Tier 2 capital deductions; and (iii) less the amount of general provisions that may be recognized in Tier 2 capital. The adjustment factor for banks using the IRB Approach, whether Foundation or Advanced, for the First year is 95%. The adjustment factor for the Second Year is 90%, and for the Third year is 80%. Such adjustment factors will apply to banks adopting the IRB Approaches during the transition period, i.e. 3 years following the initial period. The timeframe for application of the capital floor and adjustment factors proposed here is different from that in paragraph 46 of the Basel II document. SAMA considers that these rules will ensure a level-playing field for banks that adopt the IRB Approach in different years within the transition period.
5.1.22 For banks using the IRB Approach and AMA approach for operational risk, the floor will be based on calculations using the rules of the Standardized Approach for credit risk. The adjustment factor for banks using the IRB Approaches are given below;
Application of Adjustment Factors
1st year of Implementation 2nd year of Implementation 3rd year of Implementation Basis of Comparison Foundation Approach 95% 90% 80% Current Accord Advanced IRB and or operation risk 90% 80% 70% Standardized Approach 5.1.23 In the years in which the floor applies, banks should also calculate: (i) 8% of total RWAs as calculated under Basel II; (ii) less the difference between total provisions and expected loss amount as described in Section III.G in the Basel II document; and (iii) plus other Tier 1 and Tier 2 capital deductions. Where a bank uses the Standardized Approach for credit risk for any portion of its exposures, it also needs to exclude general provisions that may be recognized in Tier 2 capital for that portion from the amount calculated according to the first sentence of this paragraph.
5.1.24 Should problems emerge during the three-year period of applying the capital floors, SAMA will take appropriate measures to address them, and, in particular, will be prepared to keep the floors in place beyond the third year if necessary.
Transition arrangements
5.1.25 The Basel Committee recommends that some minimum requirements for: (i) corporate, sovereign and bank exposures under the Foundation Approach; (ii) retail exposures; and (iii) the PD/LGD Approach to equity can be relaxed during the transition period, subject to national discretion1.
SAMA recognizes that bank wishing to adopt the IRB Approach may need an extended period of time to develop/enhance their internal rating systems to come into line with the Basel requirements and to start building up the required data for estimation of PD/LGD/EAD. Therefore, SAMA proposes to apply the transition requirement of a minimum of two years of data at the time of adopting the foundation IRB Approach.
The table below sets out SAMA’s arrangements:
Item Requirement Transition Arrangement Requirement Observation period for PD for corporate, bank, sovereign and retail exposures At least 2 years 2 years of data during the transition- same as normal requirement LGD/EAD for corporate, bank and sovereign exposures At least 7 years No transition period Reduction LGD and EADs for retail exposure At least 5 years No transition period Reduction 5.1.27 As a 2 year data observation period may not be enough to capture default data during a full credit cycle, SAMA expects banks to exercise conservatism in the assignment of borrower ratings and estimation of risk characteristics. Banks would need to demonstrate and document their methodology and work in this area.
5.1.28 SAMA will incorporate the above proposals in its final implementation document after taking into account the bank’s comments and any further discussions with the bank and after reviewing each bank’s final Implementation Plans.
Qualitative and quantitative requirements on IRB systems
General
5.1.29 The IRB Approach to the measurement of credit risk relies on banks’ internally generated inputs to the calculation of capital. To minimize variation in the way in which the IRB Approach is carried out and to ensure significant comparability across banks, SAMA considers it necessary to establish minimum qualifying criteria regarding the comprehensiveness and integrity of the internal rating systems of banks adopting the IRB Approach, including the ability for those systems to produce reasonably accurate and consistent estimates of risk i.e. PD’s LGD’s and EAD’s. SAMA will employ these criteria for assessing their eligibility to use the IRB Approach.
5.1.30 The minimum IRB requirements focus on a bank’s ability to rank order and quantify risk in a consistent, reliable and valid manner. The qualitative aspects of an internal rating system, such as rating system design and operations, corporate governance and oversight, and use of internal ratings, are detailed in the “Minimum Requirements for Internal Rating Systems under IRB Approach” Attachment-5.4. Other quantitative aspects covering risk quantification requirements and validation of internal estimates are prescribed in the “Minimum Requirements for Risk Quantification under IRB Approach” (Attachment-5.3). Apart from meeting the relevant minimum requirements, banks’ overall credit risk management practices should also be consistent with the guidelines and sound practices issued by SAMA.
5.1.31 The overarching principle behind the requirements is that an IRB compliant rating system should provide for a meaningful assessment of borrower and transaction characteristics, a meaningful differentiation of credit risk, and reasonably accurate and consistent quantitative estimates of risk. Banks using the IRB approach would need to be able to measure the key statistical drivers of credit risk. They should have in place a process that enables them to collect, store and utilize loss statistics over time in a reliable manner.
5.1.32 The proposed requirements are broadly consistent with the Basel standards. Highlighted below are some specific areas of the requirements.
Use of internal ratings
5.1.33 In order to facilitate banks to transition to IRB over time, SAMA would be flexible in applying the “use” test to a Basel II - compliant internal rating system. Banks would need to demonstrate that such a system has been used for three years prior to qualification.
If the internal rating systems of a bank which is owned by a foreign banking group, have been developed and used at the group level for some time, there may be scope for reducing the three year requirement on a case-by-case basis, depending on the level of group support (e.g. in terms of resources and training) provided to the local bank. This, however, will not absolve local management from the responsibility to understand and ensure the effective operation of the IRB systems at the bank level.
Assessment of capital adequacy using stress tests
5.1.34 For the purpose of assessment of capital adequacy using stress tests, it is proposed that stressed scenario chosen by bank should resemble an economic recession and other economic down turns experiences in KSA.
Definition of default
5.1.35 The proposed definition of default is consistent with SAMA’s regulatory definition set at 90 days. Further, there is the setting of a materiality threshold to an obligor’s credit obligations in determining whether a default is considered to have occurred with regard to the obligor after any portion of the obligor’s credit obligations has been past due for more than 90 days. The purpose of applying materiality to the definition of default is to avoid counting as defaulted obligors those that are in past due only for technical reasons. SAMA’s preliminary intention is to apply the materiality level on a conservative basis i.e. 5% or more of the obligor’s outstanding credit obligations, and banks may set a lower threshold if they choose not to apply the threshold based on their individual circumstances.
5.1.36 The second element is the application of the default definition on a “banking group” or consolidated basis. In other words, once an obligor has defaulted on any credit obligation to the banking group, all of its facilities within the group are considered to be in default. SAMA proposes that a banking group should cover all entities within the group that are subject to full consolidation.
5.1.37 The third element relates to the use of different default triggers in the definition. If a bank owned by a foreign banking group wants to use a different default trigger set by its home supervisor for particular exposures (e.g. 180 days for exposures to retail or public sector entities), the banks should be able to satisfy the SAMA that such a difference in the definition of default will not result in any material impact on the default / loss estimates generated.
Internal validation of IRB Approach
5.1.38 With regard to banks’ internal validation of the IRB Approach, SAMA considers that it should be an integral part of a banks rating system architecture to provide reasonable assurances about its rating system. Banks adopting the IRB Approach should have a robust system in place to validate the accuracy and consistency of their rating systems, processes and the estimation of all relevant risk components. They should demonstrate to SAMA that their internal validation process enables them to assess the performance of internal rating and risk estimation systems consistently and meaningfully. It is proposed that the internal validation process should include review of rating system developments, ongoing analysis, and comparison of predicted estimates to actual outcomes i.e. back-testing.
Way Forward
5.1.39 Given that implementation of the IRB Approach is a challenging task and demands significant time and resources, banks planning to use the IRB Approach on 1 January 2008 and beyond should have already completed in sufficient depth their detailed project evaluations, and their implementation plans be well advanced. They should be prepared to provide the SAMA with the full details of their implementation plan and demonstrate how they are monitoring the progress of their Implementation Plans.
5.1.40 SAMA, in the meantime, will carry on with the work of finalizing its relevant guidance (including the risk-weighting framework), the revised capital adequacy return and completion instructions as well as the approval / validation procedures for the IRB Approach for consulting with the banks during 2006.
1 There are no transition arrangements for the Advanced IRB Approach and the Market based Approach to qualify.
Appendix– 5.1
FIGURE - 1
Attachment 5.2: Calculation of Capital Floor - Numerical Example
Assumptions and calculations
Current Accord
• RWAs of a bank under the current Accord = $ 100
• Tier 1 and Tier 2 capital deductions = $ 1
• General provision recognized in Tier 2 capital = $ 0.5
(i) 8% x $ 100 + $ 1 – $ 0.5
= $ 8.5
Basel II
• RWAs of banks under Basel II
• = $ 90
• Tier 1 and Tier 2 capital deductions = $ 1
• Difference between total provisions and expected loss amount (as described in Section III.G in the Basel II Framework) = $ 0.8
(ii) 8% x $ 90 + $ 1 – $ 0.8
= $ 7.4
Calculation of Floor
• Adjustment factor of 95% is applicable
Floor = 95% x $ 8.5 in (i) = $ 8.075
As the Floor is larger than $ 7.4 in (ii), an amount equivalent to 12.5 x ($ 8.075 – $ 7.4) or $ 8.4375 should be added to the RWAs of $ 90.
Therefore, the regulatory RWAs under Basel II for calculation of the capital adequacy ratio should be $ 98.4375 (i.e. $ 90 + $ 8.4375).
Attachment 5.3: National Discretion – IRB Approach
Reference to Basel II Document Areas of National Discretion SAMA's Position 227 Definition of HVCRE. N/A 231 Establish exposure threshold to distinguish between retail and corporate. Yes 231 For residential mortgages, set limits on the maximum number of housing units per exposure. N/A 232 Set a minimum number of exposures within a pool for exposures in that pool to be treated as retail. No 237 (FN59) Debts with economic substance of equity may not be included where directly hedged by an equity holding. Yes 238 Re-characterize debt holding as equities for regulatory purposes. Yes 242 Purchased receivables: Size and concentration limits above which using the "bottom-up" approach. No 249 - 251 & 283 HVCRE: banks will be able to use the foundation or advanced approaches, similar to the corporate approach, but with a separate RW function. N/A 267 - 269 For a maximum of ten years, exempt equity exposures from the IRB treatment. No 274 Firm-size adjustment and threshold for SME based on total assets instead of total sales. Yes 277 Lower SL RWs, 75% to strong exposures and 100% to good exposures. Yes 282 HCVRE: assign preferential RW of 75% to "strong" exposures, and 100% to "good" Exposures. N/A 288 Employ a wider definition of subordinated loan for a 75% LGD under FIRB. Yes 318 - 319 Determine whether to use an explicit or implicit M adjustment under FIRB. Implicit 319 Exemption on explicit M to smaller domestic firms, those with consolidated sales and assets of less than SR. 500 million. No 321 - 322 Determine within the explicit M adjustment which instrument will apply for the carve-out from the one-year maturity floor. Yes 341 -342 Equity: which approach or approaches (market based or PD/LGD approach) will be used. Market 344 - 349 Equity: which market-based approaches [simple risk weight (SRW) or internal models method] to use. Both 356 Exclude equity whose debt obligations qualify for a zero RW under SA. No 357 Exemption for equity under legislative Programmes. No 358 Exemption for equity based on materiality Threshold. Yes 378 Assign preferential RWs to HVCRE. N/A 385 Treatment where calculated EL amount is lower than provisions. Yes 404 Require a greater number of borrowers grades than seven for non-defaulted borrowers and one defaulted. Yes 257 Phase roll out of the IRB approach across the banking group. Yes 259 Exemption from IRB for some exposures in non-significant business units that are immaterial Yes 260 Equity on IRB, even if banks opts for SA. No 264 - 265 Relaxation of data requirement for a transitional period Yes 443 Require an external audit of the bank's rating assignment process and estimation of loss characteristics Yes 452 (FN 82) For retail and PSE, default is considered if past due more than 180 days. For corporate, only for a transitional period of five years No 458 Establish more specific requirements on re-ageing No 467 Mandatory to adjust PD estimates upward for anticipated seasoning effects Yes 521 Determine other physical collateral as risk mitigant under the foundation approach that meet the criteria. Yes Attachment 5.4: Minimum Requirements for Internal Rating Systems Under IRB Approach
1. Introduction
1.1 Terminology
1.1.1 Abbreviations and other terms used in this paper have the following meanings:
• “PD” means the probability of default of a counterparty over one year.
• “LGD” means the loss incurred on a facility upon default of a counterparty relative to the amount outstanding at default.
• “EAD” means the expected gross exposure of a facility upon default of a counterparty.
• “Dilution risk” means the possibility that the amount of a receivable is reduced through cash or non-cash credits to the receivables obligor.
• “EL” means the expected loss on a facility arising from the potential default of a counterparty or the dilution risk relative to EAD over one year “IRB Approach” means Internal Ratings-based Approach.
• “SL” means Specialized lending.
• “Foundation IRB Approach” means that, in applying the IRB framework, banks provide their own estimates of PD and use supervisory estimates of LGD and EAD, and, unless otherwise specified by the SAMA, are not required to take into account the effective maturity of credit facilities.
• “Advanced IRB Approach,” means that, in applying the IRB framework, banks use their own estimates of PD, LGD and EAD, and are required to take into account the effective maturity of credit facilities. A “borrower grade” means a category of creditworthiness to which borrowers are assigned based on a specified and distinct set of rating criteria, from which estimates of PD are derived. The grade definition includes both a description of the degree of default risk typical for borrowers assigned the grade and the criteria used to distinguish that level of credit risk.
• A “facility grade” means a category of loss severity in the event of default (as measured by LGD or EL) to which transactions are assigned on the basis of a specified and distinct set of rating criteria. The grade definition involves assessing the amount of collateral, and reviewing the term and structure of the transaction (such as the lending purpose, repayment structure and seniority of claims).
• A “rating system” means all of the methods, processes, controls, and data collection and IT systems that support the assessment of credit risk, the assignment of internal risk ratings, and the quantification of default and loss estimates. Key aspects of a rating system are summarized in Table 1.
• “Seasoning” means an expected change of risk parameters over the life of a credit exposure.
1.2 Application
1.2.1 The requirements set out in this paper are applicable to locally incorporated banks, which use or intend to use the IRB Approach to measure capital charges for credit risk.
1.2.2 In the case of branches of foreign banks, all or part of their IRB systems may be centrally developed and monitored on a group basis. In applying the requirements of this paper, the SAMA will consider the extent to which reliance can be placed on the work done at the group level. Where necessary, SAMA will co-ordinate with the home supervisors of those banks regarding the assessment of the comprehensiveness and integrity of the group-wide internal rating systems adopted by their branches in Saudi Arabia. SAMA will also assess whether the relevant systems or models can adequately reflect the specific risk characteristics of the banks’ domestic portfolios.
1.3 Background and Scope
1.3.1 The IRB Approach to the measurement of credit risk for capital adequacy purposes relies on banks’ internally generated inputs to the calculation of capital. To minimize variation in the way in which the IRB Approach is carried out and to ensure significant comparability across banks, the SAMA considers it necessary to establish minimum qualifying criteria regarding the comprehensiveness and integrity of the internal rating systems of banks adopting the IRB Approach. The SAMA will employ these criteria for assessing their eligibility to use the IRB Approach.
1.3.2 This Document:
Prescribes the minimum requirements that a banks internal rating system should comply with at the outset and on an ongoing basis if it were to use the IRB Approach to measure credit risk for capital adequacy purposes; and
Sets out SAMA’s supervisory approach where a bank is not in full compliance with the minimum requirements.
1.3.3 The minimum requirements set out herein apply to both the Foundation IRB Approach, and the Advanced IRB Approach and to all asset classes1, unless stated otherwise. The standards related to the process of assigning exposures to borrower or facility grades and the related oversight, validation, etc. apply equally to the process of assigning retail exposures to pools of homogenous exposures, unless noted otherwise.
1.3.4 The minimum requirements for internal rating systems of equity exposures under the PD/LGD Approach are the same as those of the Foundation IRB Approach for corporate exposures, subject to the specifications set out in the “Risk-weighting Framework for IRB Approach”. Where banks adopt the internal models approach to calculate capital charges for equity exposures, the relevant requirements are set out in the “Minimum Requirements for Risk Quantification under IRB Approach”.
1.3.5 The quantification of default and loss estimates described in this paper should be read in conjunction with the “Minimum Requirements for Risk Quantification under IRB Approach”.
1 Under the IRB Approach, assets are broadly categorized into five classes: (i) corporate (with specialized lending as a subclass); (ii) sovereign; (iii) bank; (iv) retail; and (v) equity.
2. Composition of Minimum Requirements
2.1 Overview
2.1.1 The IRB requirements focus on a bank’s ability to rank order and quantify risk in a consistent, reliable and valid manner, and generally fall within the following categories:
(i) Rating system design;
(ii) Rating system operations;
(iii) Corporate governance and oversight;
(iv) Use of internal ratings;
(v) Risk quantification;
(vi) Validation of internal estimates;
(vii) Supervisory LGD and EAD estimates;
(viii) Requirements for recognition of leasing;
(ix) Calculation of capital charges for equity exposures – internal models approach; and
(x) Disclosure requirements.
2.1.2 The minimum requirements under categories (i) to (iv) and (x) are detailed in sections 4 to 8 below while those requirements under categories (v) to (ix) are prescribed in the “Minimum Requirements for Risk Quantification under IRB Approach”.
The overarching principle behind the requirements is that an IRB-compliant rating system should provide for a meaningful assessment of borrower and transaction characteristics, a meaningful differentiation of credit risk, and reasonably accurate and consistent quantitative estimates of risk. Banks using the IRB Approach would need to be able to measure the key statistical drivers of credit risk i.e. PD’s, LGD’s and EAD’s. They should have in place a process that enables them to collect, store and utilize loss statistics over time in a reliable manner.
2.1.4 The internal ratings and risk estimates generated by the rating system should form an integral part of the bank’s daily credit risk measurement and management process.
Generally, all banks adopting the IRB Approach should produce their own estimates of PDs and should adhere to the overall requirements for rating system design, operations, controls, corporate governance, use of internal ratings, recognition of leasing, calculation of capital charges for equity exposures, as well as the requirements for estimation and validation of PD measures. Banks wishing to use their own estimates of LGD and EAD should also meet the additional minimum requirements for these risk factors. See the “Minimum Requirements for Risk Quantification under IRB Approach” for the requirements relating to PD, LGD and EAD estimation.
3. Compliance with Minimum Requirements
3.1 Ongoing Compliance
3.1.1 To be eligible for the IRB Approach, a bank should demonstrate to the SAMA that it meets the minimum requirements at the outset and on an ongoing basis. Bank’s overall credit risk management practices should also be consistent with the guidelines and sound practices issued by the SAMA.
3.2 Supervisory Approach to Non-Compliance
3.2.1 Where a bank adopting the IRB Approach is not in full compliance with the minimum requirements, the bank should produce a plan for a timely return to compliance and seek approval from SAMA. Alternatively, the bank should demonstrate to SAMA that the effect of such non-compliance is immaterial in terms of the risk posed to the bank.
3.2.2 Failure to demonstrate immateriality or to produce and satisfactorily implement an acceptable plan will lead SAMA to reconsider the bank’s eligibility for the IRB Approach. During the period of non-compliance, SAMA will consider the need for the bank to hold additional capital under the supervisory review process, or to take other appropriate supervisory action (such as reducing its credit exposures), depending on the circumstances of each case.
4. Rating System Design
4.1 Rating Dimensions
Corporate, sovereign and bank exposures
4.1.1 Banks adopting the IRB Approach should have a two dimensional rating system that provides separate assessment of borrower and transaction characteristics. This approach assures that the assignment of borrower ratings is not influenced by consideration of transaction specific factors.
Borrower rating
4.1.2 The first dimension should reflect exclusively the risk of borrower default. Collateral and other facility characteristics should not influence the borrower rating.1 Banks should assess and estimate the default risk of a borrower based on the quantitative and qualitative information regarding the borrower’s creditworthiness (see subsection 4.4 below for risk assessment criteria). Banks should rank and group borrowers into individual grades each associated with an average PD.
4.1.3 Separate exposures to the same borrower should be assigned to the same borrower grade, irrespective of any differences in the nature of each specific transaction. Once a borrower has defaulted on any credit obligation <5% threshold> to a bank (or the banking group2 of which it is a part), all of its facilities with that bank (or the banking group of which it is a part) are considered to be in default (see the definition of default in subsection 4.2 of the “Minimum Requirements for Risk Quantification under IRB Approach”).
4.1.4 There are two exceptions that may result in multiple grades for the same borrower. First, to reflect country transfer risk3, a bank may assign different borrower grades depending on whether the facility is denominated in local or foreign currency. Second, the treatment of associated guarantees to a facility may be reflected in an adjusted borrower grade.
4.1.5 In assigning a borrower to a borrower grade, banks should assess the risk of borrower default over a period of at least one year. However, this does not mean that banks should limit their consideration to outcomes for that borrower that are most likely to occur over the next 12 months. Borrower ratings should take into account all possible adverse events that might increase a borrower’s likelihood of default (see subsection 4.5 below).
Facility rating
4.1.6 The second dimension should reflect transaction specific factors (such as collateral, seniority, product type, etc.) that affect the loss severity in the case of borrower default.
4.1.7 For banks adopting the Foundation IRB Approach, this requirement can be fulfilled by the existence of a facility dimension which may take the form of: A facility rating system that provides a measure of EL by incorporating both borrower strength (PD) and loss severity (LGD); or an explicit quantifiable LGD rating dimension,
Representing the conditional severity of loss, should default occur, from the credit facilities.
In calculating the regulatory capital requirements, these banks should use the supervisory estimates of LGD.
4.1.8 For banks using the Advanced IRB Approach, facility ratings should reflect exclusively LGD. These ratings should cover all factors that can influence LGD including, but not limited to, the type of collateral, product, industry, and purpose. Borrower characteristics may be included as LGD rating criteria only to the extent they are predictive of LGD. Banks may alter the factors that influence facility grades across segments of the portfolio as long as they can satisfy the SAMA that it improves the relevance and precision of their estimates.
4.1.9 Banks using the supervisory slotting criteria for the specialized lending (“SL”) exposures need not apply this two-dimensional requirement to these exposures. Given the interdependence between borrower and transaction characteristics in SL, Banks may instead adopt a single rating dimension that reflects EL by incorporating both borrower strength (PD) and loss severity (LGD) considerations.
Retail exposures
4.1.10 Rating systems for retail exposures should reflect both borrower and transaction risks, and capture all relevant borrower and transaction characteristics. Banks should assign each retail exposure to a particular pool. For each pool, banks should estimate PD, LGD and EAD. Multiple pools may share identical PD, LGD and EAD estimates.
4.1.11 Banks should demonstrate that this grouping process provides for a meaningful differentiation of risk and results in sufficiently homogeneous pools that allow for accurate and consistent estimation of loss characteristics at the pool level.
4.1.12 Banks should have specific criteria for slotting an exposure into a pool. These should cover all factors relevant to the risk analysis. At a minimum, banks should consider the following risk drivers when assigning exposures to a pool:
Borrower risk characteristics (e.g. borrower type, demographics such as age/occupation);
Transaction risk characteristics including product and/or collateral type. One example of split by product type is to group exposures into credit cards, installment loans, revolving credits, residential mortgages, and small business facilities. When grouping exposures by collateral type, consideration should be given to factors such as loan-to-value ratios, seasoning4, guarantees and seniority (first vs. second lien). Banks should explicitly address cross-collateral provisions, where present;
Delinquency status: Banks should separately identify delinquent and non-delinquent exposures.
1 For example, in an eight-grade rating system, where default risk increases with the grade number, a borrower whose financial condition warrants the highest investment grade rating should be rated a 1 even if the bank‘s transactions are unsecured and subordinated to other creditors. Likewise, a defaulted borrower with a transaction fully secured by cash should be rated an 8 (i.e. the defaulted grade) regardless of the remote expectation of loss.
2 The banking group covers all entities within the group that are subject to the capital adequacy regime in Saudi Arabia.
3 Country transfer risk is the risk that the borrower may not be able to secure foreign currency to service its external debt obligations due to adverse changes in foreign exchange rates or when the country in which it is operating suffers economic, political or social problems.
4 Seasoning can be a significant element of portfolio risk monitoring, particularly for residential mortgages, which may have a clear time pattern of default rates.4.2 Rating Structure
Corporate, sovereign and bank exposures
4.2.1 Banks should have a meaningful distribution of exposures across grades with no excessive concentrations, on both borrower-rating and facility-rating scales (also see paragraph 4.2.4). The number of borrower and facility grades used in a rating system should be sufficient to ensure that management can meaningfully differentiate risk in the portfolio. Perceived and measured risk should increase as credit quality declines from one grade to the next.
Borrower rating
4.2.2 Rating systems should have a minimum of seven borrower grades for non-defaulted borrowers and one for defaulted borrowers1. While banks with lending activities focused on a particular market segment may satisfy this requirement with the minimum number of grades, bank’s lending to borrowers of diverse credit quality may need to have a greater number of borrower grades.
4.2.3 In defining borrower grades, “+” or “-“ modifiers to alpha or numeric grades will only qualify as distinct grades if the bank has developed complete rating descriptions and criteria for their assignment, and separately quantifies PDs for these modified grades.
4.2.4 Banks with loan portfolios concentrated on a particular market segment and a range of default risk should have enough grades within that range to avoid undue concentration of borrowers in particular grades2. Significant concentration within a single grade should be supported by convincing empirical evidence that the grade covers a reasonably narrow PD band and that the default risk posed by all borrowers in the grade falls within that band.
4.2.5 For banks using the supervisory slotting criteria for SL exposures, the rating system for such exposures should have at least four grades for non-defaulted borrowers and one for defaulted borrowers. SL exposures that qualify as corporate exposures under the Foundation IRB Approach or the Advanced IRB Approach are subject to the same requirements as those for general corporate exposures (i.e. a minimum of seven borrower grades for non-defaulted borrowers and one for defaulted borrowers).
Facility rating
4.2.6 There is no minimum number of facility grades. Banks using the Advanced IRB Approach should ensure that the number of facility grades is sufficient to avoid facilities with widely varying LGDs being grouped into a single grade. The criteria used to define facility grades should be grounded in empirical evidence.
Retail exposures
4.2.7 The level of differentiation for IRB purposes should ensure that the number of exposures in a given pool is sufficient to allow for meaningful quantification and validation of the loss characteristics at the pool level. There should be a meaningful distribution of borrowers and exposures across pools to avoid undue concentration of a bank’s retail exposures in particular pools.
1 For the purpose of reporting under SAMA’s loan classification framework, banks should also be able to identify/differentiate defaulted exposures that fall within different categories of classified assets (i.e. Substandard, Doubtful and Loss).
2 In general, a single corporate borrower grade assigned with more than 30% of the gross exposures (before on-balance sheet netting) could be a sign of excessive concentration.4.3 Multiple Rating Methodologies/Systems
4.3.1 A bank’s size and complexity of business, as well as the range of products it offers, will affect the type and number of rating systems it has to employ. Where necessary, a bank may adopt multiple rating methodologies/systems within each asset class, provided that all exposures are assigned borrower and facility ratings and that each rating system conforms to the IRB requirements at the outset and on an ongoing basis and is validated for accuracy and consistency.
4.3.2 The rationale for assigning a borrower to a particular rating system should also be documented and applied in a manner that best reflects the level of risk of the borrower. Borrowers should not be allocated across rating systems inappropriately to minimize regulatory capital requirements (i.e. cherry-picking by choice of rating system).
4.4 Rating Criteria
4.4.1 To ensure the transparency of individual ratings, banks should have clear and specific rating definitions, processes and criteria for assigning exposures to grades within a rating system. The rating definitions and criteria should be both plausible and intuitive, and have the ability to differentiate risk. In particular, the following requirements should be observed:
• The grade descriptions and criteria should be sufficiently detailed and specific to allow staff responsible for rating assignments to consistently assign the same grade to borrowers or facilities posing similar risk. This consistency should exist across lines of business, departments and geographic locations. If rating criteria and procedures differ for different types of borrowers or facilities, banks should monitor for possible inconsistency, and alter rating criteria to improve consistency when appropriate.
• Written rating definitions should be clear and detailed enough to allow independent third parties (e.g. SAMA, internal or external audit) to understand the rating assignments, replicate them and evaluate their appropriateness. The criteria should be consistent with a banks internal lending standards and its policies for handling troubled borrowers and facilities.
4.4.2 Banks should take into account all relevant and material information that are available to them when assigning ratings to borrowers and facilities1. Information should be current. The less information a bank has, the more conservative should be its rating assignments. An external rating can be the primary factor determining an internal rating assignment. However, the bank should ensure that other relevant information is also taken into account. Banks should refer to Annex A for the relevant factors in assigning borrower and facility ratings.
SL exposures within the corporate asset class
4.4.3 Banks using the supervisory slotting criteria for SL exposures should assign these exposures to internal rating grades based on their own criteria, systems and processes, subject to compliance with the IRB requirements. The internal rating grades of these exposures should then be mapped into five supervisory rating categories. The general assessment factors and characteristics exhibited by exposures falling under each of the supervisory categories are provided Attachment.
Banks should demonstrate that their mapping process has resulted in an alignment of grades consistent with the preponderance of the characteristics in the respective supervisory category. Banks should ensure that any overrides of their internal criteria do not render the mapping process ineffective.
1 It could be difficult to address the qualitative considerations in a structured and consistent manner when assigning ratings to borrowers and facilities. In this regard, banks may choose to cite significant and specific points of comparison by describing how such qualitative considerations can affect the rating. For example, factors for consideration may include whether a borrower‘s financial statements have been audited or are merely compiled from its accounts or whether collateral has been independently valued. Formalizing the process would also be helpful in promoting consistency in determining risk grades. For example, a "risk rating analysis form" can provide a clear structure for identifying and addressing the relevant qualitative and quantitative factors for determining a risk rating, and document how grades are set.
4.5 Rating Assessment Horizon
4.5.1 Although the time horizon used in PD estimation is one year, banks are expected to apply a longer time horizon in assigning ratings. A borrower rating should represent the bank’s assessment of the borrower’s ability and willingness to contractually perform despite adverse economic conditions or the occurrence of unexpected events. In other words, the Bank’s assessment should not be confined to risk factors that may occur in the next 12 months.
4.5.2 Banks may satisfy this requirement by:
basing rating assignments on specific, appropriate stress scenarios (see subsection 5.5 below); or taking appropriate consideration of borrower characteristics that are reflective of the borrower’s vulnerability to adverse economic conditions or unexpected events, without explicitly specifying a stress scenario. The range of economic conditions should be consistent with current conditions and those likely to occur over a business cycle within the respective industry/geographic region.
4.5.3 Given the difficulties in forecasting future events and the influence they will have on a particular borrower’s financial condition, banks should take a conservative view of projected information. Where limited data are available, banks should adopt a conservative bias to their analysis.
4.5.4 Banks should articulate clearly their rating approaches (see Annex B for details of rating approaches) in their credit policies, particularly how quickly ratings are expected to migrate in response to economic cycles and the implications of the rating approaches for their capital planning process. If a bank chooses a rating approach under which the impact of economic cycles would affect rating migrations, its capital management policy should be designed to avoid capital shortfalls in times of economic stress.
4.6 Use of Models
Risk assessment techniques
4.6.1 There are generally two basic methods by which ratings are assigned: (i) a model-based process; and (ii) an expert judgement-based process. The former is a mechanical process, relying primarily on quantitative techniques such as credit scoring/default probability models or specified objective financial analysis. The latter relies primarily on personal experience and subjective judgment of credit officers1.
4.6.2 For IRB purposes, credit scoring models and other mechanical procedures are permissible as the primary or partial basis of rating assignments, and may play a role in the estimation of loss characteristics.
Nevertheless, sufficient human judgment and oversight is necessary to ensure that all relevant and material information is taken into consideration and that the model is used appropriately.
Requirements for using models
4.6.3 Banks should meet the following requirements for use of statistical models and other mechanical methods in rating assignments or in the estimation of PD, LGD or EAD:
• Banks should demonstrate that a model or procedure has good predictive power and its use will not result in distortion in regulatory capital requirements. The model should not have material biases. Its input variables should form a reasonable set of predictors and have explanatory capability.
• Banks should have in place a process for vetting data inputs into a statistical default or loss prediction model. This should include an assessment of data accuracy, completeness and appropriateness.
• The data used to build the model should be representative of the population of the bank’s actual borrowers or facilities.
• When model results are combined with human judgment, the judgment should take into account all relevant information not considered by the model. Banks should have written guidance describing how human judgment and model results are to be combined.
• Banks should have procedures for human review of model-based rating assignments. Such procedures should focus on finding and limiting errors associated with model weaknesses. Banks should have a regular cycle of model validation that includes monitoring of model performance and stability, review of model relationships, and testing of model outputs against outcomes (see section 5 of the ”Minimum Requirements for Risk Quantification under IRB Approach”).
1 In practice, the distinction between the two is not precise. In many model-based processes, personal experience and subjective judgment play a role, at least in developing and implementing models, and in constructing their inputs. In some cases, models are used to provide a baseline rating that serves as the starting point in judgment-based processes.
4.7 Documentation of Rating System Design
4.7.1 Banks should document in writing the design of their rating systems and related operations (see section 5 below on rating system operations) as evidence of their compliance with the requirements of this paper.
4.7.2 The documentation should provide a description of the overarching design of the rating system, including:
the purpose of the rating system;
portfolio differentiation; and
the rating approach and implications for a bank capital planning process.
4.7.3 Rating criteria and definitions should be clearly documented. These include:
• The relationship between borrower grades in terms of the level of risk each grade implies, and the risk of each grade in terms of both a description of the probability of default typical for borrowers assigned the grade and the criteria used to distinguish that level of credit risk;
• The relationship between facility grades in terms of the level of risk each grade implies, and the risk of each grade in terms of both a description of the expected severity of the loss upon default and the criteria used to distinguish that level of credit risk;
• Methodologies and data used in assigning ratings;
• The rationale for choice of the rating criteria and procedures, including analyses demonstrating that those criteria and procedures should be able to provide meaningful risk differentiation;
• Definitions of default and loss, demonstrating that they are consistent with the reference definitions set out in subsections 4.2 and 4.3 of the “Minimum Requirements for Risk Quantification under IRB Approach”; and
• The definition of what constitutes a rating exception (including an override).
4.7.4 Documentation of the rating process should include the following key topics as a minimum. The Format and size is at the discretions of the banks.
• The organization of rating assignment;
• Responsibilities of parties that rate borrowers and facilities;
• Parties that have authority to approve exceptions (including overrides);
• Situations where exceptions and overrides can be approved and the procedures for such approval;
• The procedures and frequency of rating reviews to determine whether they remain fully applicable to the current portfolio and to external conditions, and parties responsible for conducting such reviews;
• The process and procedures for updating borrower and facility information;
• The history of major changes in the rating process and criteria, in particular to support identification of changes made to the rating process subsequent to the last supervisory view1; and
• The rationale for assigning borrowers to a particular rating system if multiple rating systems are used.
4.7.5 In respect of the internal control structure, the documentation should cover the following:
• The organization of the internal control structure;
• Management oversight of the rating process;
• The operational processes ensuring the independence of the rating assignment process; and the procedure, frequency and reporting of performance reviews of The rating system (on rating accuracy, rating criteria, rating processes and operations), and parties responsible for conducting such reviews.
4.7.6 Banks employing statistical models in the rating process should document their methodologies. The documentation should include:
• A detailed outline of the theory, assumptions and/or mathematical and empirical basis of the assignment of estimates to grades, individual borrowers, exposures, or pools, and the data sources used to estimate the model;
• The guidance describing how human judgment and model results are to be combined;
• The procedures for human review of model-based rating assessments;
• A rigorous statistical process for validating the model; and
• Any circumstances under which the model does not work effectively.
4.7.7 Use of a model obtained from a third-party vendor that claims proprietary technology is not a justification for exemption from documentation or any other requirements for internal rating systems. The burden is on the model’s vendor and the bank to satisfy SAMA.
1 The supervisory review could be a review conducted by either the SAMA or the home supervisor of the bank concerned (in the case of a foreign bank branch).
5. Rating System Operations
5.1 Coverage of Ratings
5.1.1 For corporate, sovereign and bank exposures, each borrower and all recognized guarantors should be assigned a rating and each exposure should be associated with a facility rating as part of the loan approval process. Similarly, for retail exposures, each exposure should be assigned to a pool as part of the loan approval process.
5.1.2 Each separate legal entity to which a bank is exposed should be separately rated. A bank should demonstrate to SAMA that it has acceptable policies regarding the treatment of individual entities in a connected group, including circumstances under which the same rating may or may not be assigned to some or all related entities.
5.2 Integrity of Rating Process
Corporate, sovereign and bank exposures
5.2.1 Banks should ensure the independence of the rating assignment process. Rating assignments and periodic rating reviews should be completed or approved by a party that does not stand to benefit from the extension of credit. Credit policies and approval/review procedures should reinforce and foster the independence of the rating process.
5.2.2 Borrowers and facilities must have their ratings refreshed at least on an annual basis. Certain credits, especially higher risk borrowers or problem exposures, must be subject to more frequent review. In addition, banks must initiate a new rating if material information on the borrower or facility comes to light.
(Refer para 425, International Convergence of Capital Measurement and Capital Standards – June 2006)
5.2.3 In addition, borrower and facility ratings should be reviewed whenever material information on the borrower or facility comes to light1. Bank should establish an effective process to obtain and update relevant and material information on the borrower’s financial condition, and on facility characteristics that affect LGD and EAD (e.g. the condition and value of collateral).
Retail exposures
5.2.4 Banks should review the loss characteristics and delinquency status of each identified risk pool at least on an annual basis. It should include a review of the status of individual borrowers within each pool as a means of ensuring that exposures continue to be assigned to the correct pool. This requirement may be satisfied by review of a representative sample of exposures in the pool.
1 The rating should generally be updated within 90 days for performing borrowers and within 30 days for borrowers with weakening or deteriorating financial condition.
5.3 Overrides
5.3.1 Banks should clearly articulate the situations where human judgment may override the inputs or outputs of the rating process. They should identify overrides and separately track their performance.
5.3.2 For model-based ratings, banks should have guidelines and processes for monitoring cases where human judgment has overridden the model’s rating, variables were excluded or inputs altered. These guidelines should include identifying personnel that are responsible for approving the overrides.
5.3.3 For ratings based on expert judgment, banks should clearly articulate the situations where staff may override the outputs of the rating process, including how and to what extent such overrides can be used and by whom.
5.4 Data Maintenance
5.4.1 Banks should collect and store data on key borrowers and facility characteristics to support their internal credit risk measurement and management process and to enable them to meet the requirements of this paper. The data collection and IT systems should serve the following purposes:
• Improve banks’ internally developed data for
• PD/LGD/EAD estimation and validation;
• Provide an audit trail to check compliance with rating criteria;
• Enhance and track predictive power of the rating system;
• Modify risk rating definitions to more accurately address the observed drivers of credit risk; and
• Serve as a basis for supervisory reporting.
5.4.2 The data should be sufficiently detailed to allow retrospective reallocation of borrowers and facilities to grades (e.g. if it becomes necessary to have finer segregation of portfolios in future).
5.4.3 Furthermore, banks should collect and retain data relating to their internal ratings as required under [the disclosure rules].
Corporate, sovereign and bank exposures
5.4.4 Bank should maintain complete rating histories on borrowers and recognized guarantors, which include:
• The ratings since the borrower/guarantor was assigned a grade;
• The dates the ratings were assigned;
• The methodology and key data used to derive the ratings;
• The person/model responsible for the rating assignment;
• The identity of borrowers and facilities that have defaulted, and the date and circumstances of such defaults; and
• data on the PDs and realized default rates associated with rating grades and rating migration.
5.4.5 Banks adopting the Advanced IRB Approach should also collect and store a complete history of data on facility ratings and LGD and EAD estimates associated with each facility. These include:
• The dates the ratings were assigned and the Estimates done;
• The key data and methodology used to derive the facility ratings and estimates;
• The person/model responsible for the rating
• assignment and estimates;
• Data on the estimated and realized LGDs and
• EADs associated with each defaulted facility;
• Data on the LGD of the facility before and after evaluation of the credit risk mitigating effects of the guarantee/credit derivative; and
• Information on the components of loss or recovery for each defaulted exposure, such as amounts recovered, source of recovery (e.g. collateral, liquidation proceeds and guarantees), time period required for recovery, and administrative costs.
5.4.6 Banks utilizing supervisory estimates under the Foundation IRB Approach are encouraged to retain:
• Data on loss and recovery experience for corporate exposures under the Foundation Approach; and
• Data on realized losses for SL exposures where supervisory slotting criteria are applied.
Retail exposures
5.4.7 Banks should collect and store the following data:
• Data used in the process of allocating exposures to pools, including data on borrower and transaction risk characteristics used either directly or through use of a model, as well as data on delinquency;
• Data on the estimated PDs, LGDs and EADs associated with pools of exposures;
• The identity of borrowers and details of exposures that have defaulted; and
• Data on the pools to which defaulted exposures were assigned over the year prior to default and the realized outcomes on LGD and EAD.
5.5 Stress Tests Under IRB Approaches
5.5.1 Banks adopting the IRB Approaches should implement sound stress-testing processes for use in their assessment of capital adequacy. Stress testing should identify possible events or changes in economic conditions that could have unfavorable effects on a banks’ credit exposures, and assess the bank’s ability to withstand such changes. Stress tests conducted by a bank should cover a wide range of external conditions and scenarios, and the sophistication of techniques and stress tests used should be commensurate with the bank’s activities.
5.5.2 Described below are some common risk factors that are relevant to and need to be considered in credit risk stress tests:
• Counterparty risk characterized by the increase in PDs (e.g. the rise in delinquencies and charge offs) and worsening of credit spreads. Banks should be aware of the major drivers of repayment ability, such as economic/industry downturns and significant market shocks, that will affect entire classes of counterparties or credits;
• Concentration risk in terms of the exposures to individual counterparties, industries, market sectors, countries or regions. Banks should assess the contagion effects and possible linkages between different markets, countries and regions as well as the potential vulnerabilities of emerging markets;
• Market or price risk arising from adverse changes in asset prices (e.g. equities, bonds and real estate) and their impact on relevant portfolios, markets and collateral values; and
• Liquidity risk as a result of the tightening of credit lines and market liquidity under stressed situations.
5.5.3 Banks should determine the appropriate assumptions for stress-testing risk factors included in a particular stress scenario, and formulate the stressed conditions based on their own circumstances. In designing stress scenarios, banks should review lessons from history and tailor the events, or develop hypothetical scenarios, to reflect the risks arising from latest market developments.
5.5.4 SAMA will consider the results of stress tests conducted by a bank and how these results relate to its capital plans.
5.5.5 In addition to the general stress tests described above, banks should conduct a regular credit risk stress tests to assess the effect of certain specific conditions on their total regulatory capital requirements for credit risk. The tests should be meaningful and reasonably conservative. For this purpose, banks should at least consider the effect of mild recession scenarios on their PDs, LGDs and EADs. Where a bank operates in several markets, it need not conduct such a stress test in all of those markets, but it should stress portfolios containing the majority of its total exposures.
5.5.6 At a minimum, a mildly stressed scenario chosen by a bank should resemble the economic recession in Saudi Arabia in the past. Banks should assess the impact of this stress scenario based on a one-year time horizon and take into account the lag effect of an economic downturn on their credit exposures.
5.5.7 Banks may use either a static or a dynamic test to calculate the impact of the stress scenario1.
5.5.8 Where the results of a bank’s stress test indicate a deficiency of the capital calculated based on the IRB Approach (i.e. the capital charge cannot cover the losses based on the stress-testing results), SAMA will discuss this deficiency with the bank’s management. Depending on the circumstances of each case, SAMA will require the bank to reduce its risks and/or to hold additional capital/provisions, so that existing capital resources could cover the minimum capital requirements under the IRB Approach plus the result of a recalculated stress test.
5.5.9 Through the review of stress-testing results, regulatory capital could be calculated based on a more forward-looking basis, thereby reducing the impact of rising capital requirements during an economic down turn.
1 A static test considers the impact of a stress scenario on a fixed portfolio. A dynamic test typically involves modeling the evolution of a stress scenario through time (possibly including elements such as changes in the composition of a portfolio).
6. Corporate Governance and Oversight
6.1 Corporate Governance
6.1.1 Effective oversight by a bank’s Board of Directors and senior management is critical for sound risk rating system operations.
6.1.2 The Board (or an appropriate delegated committee i.e. Audit Committee) and senior management should approve key elements of the risk rating and estimation processes. These parties should possess a general understanding of the bank’s risk rating system and detailed comprehension of its associated management reports. Information provided to the Board (or the appropriate delegated committee) should be sufficiently detailed to allow the directors or committee members to confirm the continuing appropriateness of the banks rating approach and to verify the adequacy of the controls supporting the rating system.
6.1.3 Senior management should:
• Have a good understanding of the rating system’s design and operations, and approve material differences between established procedures and actual practice;
• Ensure, on an ongoing basis, that the rating system is operating properly;
• Meet regularly with staff in the credit control function to discuss the performance of the rating process, areas requiring improvement, and the status of efforts to improve previously identified deficiencies; and
• Provide notice to the Board (or the appropriate delegated committee) of material changes or exceptions from established policies that will materially impact the operations of the bank’s rating system.
6.1.4 Information on internal ratings should be reported to the Board (or the appropriate delegated committee) and senior management regularly. The scope and frequency of reporting may vary with the significance and type of information and the rank of the recipient. The reports should cover the following information:
• Risk profile by grade;
• Risk rating migration across grades;
• Estimation of relevant parameters per grade;
• Comparison of realized default rates (LGDs and EADs where applicable) against expectation;
• Reports measuring changes in regulatory and economic capital;
• Results of credit risk stress-testing; and
• Reports generated by rating system review, audit, and other control units.
6.2 Credit Risk Control
6.2.1 Banks should have independent credit risk control units that are responsible for the design or selection, implementation and performance of their internal rating systems. The unit(s) should be functionally independent from the staff and management functions responsible for originating exposures. Areas of responsibility should include:
• Design of the rating system;
• Testing and monitoring internal grades;
• Reviewing the compliance with policies and procedures, including application of rating criteria, processes of overrides and policy exceptions;
• Producing and analyzing summary reports from the banks’ rating system, to include historical default data sorted by rating at the time of default and one year prior to default, grade migration analyses, and monitoring of trends in key rating criteria;
• Implementing procedures to verify that rating definitions are consistently applied across departments and geographic areas;
• Reviewing and documenting any changes to the rating process, including the reasons for changes;
• Reviewing the rating criteria to evaluate if they remain predictive of risk. Changes to the rating process, criteria or individual rating parameters should be documented and retained for SAMA to review; and participating in the development, selection, implementation and validation of rating models; and
• Assuming oversight and supervisory responsibilities for any models used in the rating process, and ultimate responsibility for the ongoing review of and alterations to rating models.
6.3 Internal and External Audit
6.3.1 Internal audit or an equally independent function should review at least annually a bank’s rating system and its operations, including the operations of the credit function and the estimation of PDs, LGDs and EADs. Areas of review include adherence to all applicable minimum requirements.
6.3.2 Internal audit should document its findings and report them to the Board (or the appropriate delegated committee) and senior management. The findings would facilitate the bank to disclose information in relation to its rating processes and controls surrounding these processes, which is required under Pillar-III.
6.3.3 SAMA may commission an external audit under Banking Control Law to review rating assignment process and estimation of loss characteristics or risk drivers i.e. PD, LGDs and EAD’s where necessary.
6.4 Staff Competence
6.4.1 Senior management should ensure that the staff responsible for any aspect of the rating process, including credit risk control and internal validation, are adequately qualified and trained to undertake the role. In particular, staff responsible for assigning or reviewing ratings should receive adequate training to generate consistent and accurate rating assignments.
7 Use of Internal Ratings
7.1 Use Test
7.1.1 Internal ratings and default and loss estimates should play an essential role in the credit approval, risk management, internal capital allocations, and corporate governance functions of bank using the IRB Approach.
7.1.2 Rating systems and estimates designed and implemented exclusively for the purpose of qualifying for the IRB Approach and used only to provide IRB inputs are not acceptable.
7.1.3 It is recognized that bank may not necessarily be using exactly the same estimates for both IRB and all internal purposes. For example, pricing models are likely to use PDs and LGDs relevant to the life of the asset. Where there are such differences, banks should document their justifications.
7.2 Credible Track Record
7.2.1 A bank should have a credible track record in the use of information generated by its internal rating system. The bank should demonstrate that it has been using a rating system that was broadly in line with the requirements of this document for at least three years prior to qualification. Improvements to a bank’s rating system will not render the bank non-compliant with this requirement.
7.2.2 If the internal rating systems of a bank, which is owned by a foreign bank, have been developed and used at the group level for an extended period of time, the bank is still required to meet the “use” test locally. Nevertheless, there may be scope for the SAMA to consider whether the two-year requirement can be reduced on a case-by-case basis, depending on the level of group support (e.g. in terms of resources and training) provided to the local branch.
7.2.3 Banks adopting a phased rollout of the IRB Approach should demonstrate that they have met the “use” test in respect of individual rating systems prior to their rollout. In the case of a rating system that is applicable to different exposures (or segments of a portfolio) with different rollout dates, SAMA will regard the rating system as having met the “use” test if that system has already fulfilled the three- years requirement for a material portion (say, at least 50%) of the exposures covered by the system.
8 Disclosure Requirements
8.1 In order to be eligible for the IRB Approach, banks should meet the requirements set out in the disclosure rules under Pillar III. Failure to meet the disclosure requirements will render a bank ineligible to use the relevant IRB Approach.
Table 1: Summary of Key Aspects of an Internal Rating System
(A) Requirements (B) Rating Process (C) Use of Ratings Rating structure: Rating assignment: Credit risk measurement and management: - Maintain a two-dimensional system.
- Appropriate gradation.
- No excessive concentration in a single grade
- Ratings assigned before lending/investing.
- Independent review of ratings assigned at origination.
- Comprehensive coverage of ratings.
- Credit approval
- Loan pricing
- Reporting of risk profile of portfolio to senior management and board of directors.
- Analysis of capital adequacy, reserving and profitability of Banks
Key data requirements: Rating review: Stress test used in assessment of capital adequacy: - Probability of default (PD)
- Loss given default (LGD)
- Exposure at default (EAD)
- History of borrower defaults
- Rating decisions
- Rating histories
- Rating migration.
- Information used to assign the ratings
- Party/model that assigned the ratings
- PD/LGD estimate histories
- Key borrower characteristics and facility information.
- Independent review (annual or more frequent depending on loan quality and availability of new information) by control functions such as credit risk control unit, internal and external audit.
- Oversight by senior management and board of directors.
- Stress-testing should include specific scenarios that assess the impact of rating migrations.
- Three areas that banks could usefully examine are economic or industry downturns, market risk events and liquidity conditions.
System requirements: Internal Validation: Disclosure of key internal rating information: - The IT system should be able to store and retrieve data for exposure aggregation, data collection, use and management reporting.
- A robust system for validating the accuracy and consistency of rating systems, processes, and risk estimates.
- A process for vetting data inputs.
- Compare realized default rates with estimated PDs.
- Disclosure of items of information as started under (the disclosure rules).
Annex A : Assessment Factors in Assigning Ratings
A1 Borrower Ratings
A1.1 The following are the relevant factors that banks should consider in assigning borrower ratings. However, these factors are not intended to be exhaustive or prescriptive, and certain factors may be of greater relevance for certain borrowers than for others:
• the historical and projected capacity to generate cash to repay a borrower’s debt and support its other cash requirements (e.g. capital expenditures required to keep the borrower a going concern and to sustain its cash flow);
• The capital structure and the likelihood that unforeseen circumstances could exhaust the borrower’s capital cushion and result in insolvency;
• The quality of earnings (i.e. the degree to which the borrower’s revenue and cash flow emanate from core business operations as opposed to unique and nonrecurring sources);
• The quality and timeliness of information about the borrower, including the availability of audited financial statements and their conformity with applicable accounting standards;
• The degree of operating leverage and the resulting impact that deteriorating business and economic conditions might have on the borrower’s profitability and cash flow;
• The borrower’s ability to gain additional funding through access to debt and equity markets;
• The depth and skill of management to effectively respond to changing conditions and deploy resources, and the degree of prudence reflected from business strategies employed;
• The borrower’s position within the industry and its future prospects; and
• The risk characteristics of the country the borrower is operating in, and the extent to which the borrower will be subject to transfer risk or currency risk if it is located in another country.
A2 Facility Ratings
A2.1 Banks should look at the following transaction specific factors, where applicable, when assigning facility ratings:
• The presence of third-party support (e.g. owner/guarantor). Considerable care and caution should be exercised if ratings are to be improved because of the presence of any third-party support. In all cases, banks should be convinced that the third party is committed to ongoing support of the borrower. Banks should establish specific rules for third-party support;
• The maturity of the transaction. It is recognized that higher risk is associated with longer-term facilities while shorter-term facilities tend to have lower risk. A standard approach is to consider further adjustment to the facility rating (after adjusting for third-party support), taking into account the remaining term to maturity;
• The structure and lending purposes of the transaction, which influence positively or negatively the strength and quality of the credit. These may refer to the status of borrower, priority of security, any covenants attached to a facility, etc. Take, for example, a facility that has a lower rating due to the term of a loan. If its facility structure contains very strong covenants which mitigate the effects of its term of maturity (say, by means of default clauses), it may be appropriate to adjust its facility rating to offset (often partially) the effect of the maturity term.
• The presence of recognized collateral. This factor can have a major impact on the final facility rating because of its significant effect on the LGD of a facility. Banks should review carefully the quality of collateral (e.g. documentation and valuation) to determine its likely contribution in reducing any loss. While collateral value is often a function of movements in market rates, it should be assessed in a conservative manner (e.g. based on net realizable value or forced-sale value where necessary).
Annex B : Rating Approaches
B1 Background
B1.1 In choosing the architecture of its rating system, a bank should decide whether borrowers are graded according to their expected default rates over the following year (i.e. a point-in-time rating system) or their expected default rates over a wider range of possible stress outcomes (i.e. a through-the-cycle rating system). Choosing between a point-in-time rating system and a through-the-cycle rating system has implications on the banks capital planning process because of the different impact an economic cycle may have on the rating transitions arising from the two different systems.
B2 Point-in-Time Rating System
B2.1 In a point-in-time rating system, an internal rating reflects an assessment of the borrower’s current condition (such as its financial strength) and/or most likely future condition over the forecast horizon (say one year). As such, the internal rating changes as the borrower’s condition changes over the course of the economic/business cycle. As the economic circumstances of many borrowers reflect the common impact of the general economic environment, the transitions in point-in-time ratings will reflect fluctuations in the economic cycle.
B2.2 A Bank adopting a point-in-time rating system is likely to experience greater changes in its capital requirements in response to fluctuations in an economic cycle than others adopting a through-the-cycle rating system (see subsection B3 below). Therefore, the bank’s capital management policy should be designed to avoid capital shortfall in times of systemic economic stress.
B3 Through-the-Cycle Rating System
B3.1 A through-the-cycle process requires assessment of the borrower’s risk ness based on a worst-case scenario, i.e. the bottom of an economic/business cycle. In this case, a borrower rating would tend to stay the same over the course of an economic cycle unless the borrower experiences a major unexpected shock to its perceived long-term condition or the original “worst” case scenario used to rate the borrower proves to have been too optimistic.
B3.2 Similar to point-in-time ratings, through-the-cycle ratings also change from year to year to reflect changes in borrowers’ circumstances. However, year-to-year transitions in through-the-cycle ratings will be less influenced by changes in the actual economic environment as this approach abstracts from the immediate economic circumstances and considers the implications of hypothetical stressed circumstances.
Attachment 5.5: Minimum Requirements for Risk Quantification Under IRB Approach
1. Introduction
1.1 Terminology
1.1.1 Abbreviations and other terms used in this paper have the following meanings:
• “PD” means the probability of default of a counterparty over one year;
• “LGD” means the loss incurred on a facility upon default of a counterparty relative to the amount outstanding at default;
• “EAD” means the expected gross exposure of a facility upon default of a counterparty;
• “Dilution risk” means the possibility that the amount of a receivable is reduced through cash or non-cash credits to the receivable’s obligor;
• “EL” means the expected loss on a facility arising from the potential default of a counterparty or the dilution risk relative to EAD over one year;
• “IRB Approach” means Internal Ratings-based approach;
• “Foundation IRB Approach” means that, in applying the IRB framework, banks provide their own estimates of PD and use supervisory estimates of LGD and EAD, and, unless otherwise specified by the SAMA, are not required to take into account the effective maturity of credit facilities;
• “Advanced IRB Approach” means that, in applying the IRB framework, banks use their own estimates of PD, LGD and EAD, and are required to take into account the effective maturity of the credit facilities;
• A “borrower grade” means a category of creditworthiness to which borrowers are assigned on the basis of a specified and distinct set of rating criteria, from which estimates of PD are derived. The grade definition includes both a description of the degree of default risk typical for borrowers assigned the grade and the criteria used to distinguish that level of credit risk;
• A “facility grade” means a category of loss severity in the event of default (as measured by LGD or EL) to which transactions are assigned on the basis of a specified and distinct set of rating criteria. The grade definition involves assessing the amount of collateral, and reviewing the term and structure of the transaction (such as the lending purpose, repayment structure and seniority of claims);
• A “rating system” means all of the methods, processes, controls, and data collection and IT systems that support the assessment of credit risk, the assignment of internal risk ratings, and the quantification of default and loss estimates;
• “Seasoning” means an expected change of risk parameters over the life of a credit exposure;
• “VAR” means value-at-risk.
1.2 Application
1.2.1 The requirements set out in this paper are applicable to locally incorporated banks, which use or intend to use the IRB Approach to measure capital changes for credit risk in KSA.
1.2.2 In the case of banks that are branches of foreign banking groups, all or part of their IRB systems may be centrally developed and monitored on a group basis. In applying the requirements of this paper, SAMA will consider the extent to which reliance can be placed on the work done at the group level. Where necessary, SAMA will co-ordinate with the home supervisors of those banking groups regarding the assessment of the comprehensiveness and integrity of the group- wide internal rating systems adopted by their authorized bank in Saudi Arabia. SAMA will also assess whether the relevant systems or models can adequately reflect the specific risk characteristics of the bank’ domestic portfolios.
1.3 Background and Scope
1.3.1 The IRB Approach to the measurement of credit risk for capital adequacy purposes relies on banks’ internally generated inputs to the calculation of capital. To minimize the variation in the way in which the IRB Approach is carried out and to ensure significant comparability across banks, SAMA considers it necessary to establish minimum qualifying criteria concerning the comprehensiveness and integrity of the internal rating systems of banks adopting the IRB Approach. SAMA will employ these criteria for assessing their eligibility to use the IRB Approach.
1.3.2 This paper:
prescribes the minimum requirements relating to risk quantification under the IRB Approach that a bank should comply with at the outset and on an ongoing basis if it were to use the IRB Approach to measure credit risk for capital adequacy purposes; and
Sets out SAMA’s supervisory approach to circumstances where a bank is not in full compliance with the minimum requirements.
1.3.3 The minimum requirements set out herein apply to both the Foundation IRB Approach and the Advanced IRB Approach and to all asset classes1, unless stated otherwise.
1.3.4 The minimum requirements for risk quantification of equity exposures under the PD/LGD Approach are the same as those of the Foundation IRB Approach for corporate exposures, subject to the specifications set out in the Basel II document. The minimum requirements for adopting the internal models approach to calculation of capital charges for equity exposures are set out in section 8 below.
The requirements for internal rating systems described in this paper should be read in conjunction with the “Minimum Requirements for Internal Rating Systems under IRB Approach”.
1 Under the IRB Approach, assets are broadly categorized into five classes: (i) corporate (with specialized lending as a sub-class); (ii) sovereign; (iii) bank; (iv) retail; and (v) equity. Within the corporate and retail asset classes, a distinct treatment for purchased receivables may also apply provided certain conditions are met.
2. Composition of Minimum Requirements
2.1 Overview
2.1.1 The IRB requirements focus on a bank’s ability to rank order and quantify risk in a consistent, reliable and valid manner, and generally fall within the following categories:
(i) Rating system design;
(ii) Rating system operations;
(iii) Corporate governance and oversight;
(iv) Use of internal ratings;
(v) Risk quantification;
(vi) Validation of internal estimates;
(vii) Supervisory LGD and EAD estimates;
(viii) Requirements for recognition of leasing;
(ix) Calculation of capital charges for equity exposures –internal models approach; and
(x) Disclosure requirements.
2.1.2 The minimum requirements under categories (v) to (ix) are detailed in sections 4 to 8 below while those requirements under categories (i) to (iv) and (x) are prescribed in the “Minimum Requirements for Internal Rating Systems under IRB Approach”.
2.1.3 The overarching principle behind the requirements is that an IRB-compliant rating system should provide for a meaningful assessment of borrower and transaction characteristics, a meaningful differentiation of credit risk, and reasonably accurate and consistent quantitative estimates of risk. Banks using the IRB Approach would need to be able to measure the key statistical drivers of credit risk. They should have in place a process that enables them to collect, store and utilize loss statistics over time in a reliable manner.
2.1.4 The internal ratings and risk estimates generated by the rating system should form an integral part of the bank’s daily credit risk measurement and management process.
2.1.5 Generally, all banks adopting the IRB Approach should produce their own estimates of PD1 and should adhere to the overall requirements for rating system design, operations, controls, corporate governance, use of internal ratings, recognition of leasing, calculation of capital charges for equity exposures, as well as the requirements for estimation and validation of PD measures. Banks wishing to use their own estimates of LGD and EAD should also meet the additional minimum requirements for these risk factors. See the “Minimum Requirements for Internal Rating Systems under IRB Approach” for the requirements relating to the overall architecture of internal rating systems.
1 Banks are not required to produce their own estimates of PD for certain equity exposures and certain exposures that fall within the specialized lending sub-class (see the “Risk-weighting Framework for IRB Approach” for details).
3. Compliance with Minimum Requirements
3.1 Ongoing Compliance
3.1.1 To be eligible for the IRB Approach, a bank should demonstrate to SAMA that it meets all minimum requirements at the outset and on an ongoing basis.
Furthermore, the bank’s overall credit risk management practices should be consistent with the guidelines and sound practices issued by SAMA.
3.2 Supervisory Approach to Non-Compliance
3.2.1 Where a bank adopting the IRB Approach is not in full compliance with the minimum requirements, bank should produce a plan for a timely return to compliance and seek approval from SAMA. Alternatively, the bank should demonstrate to SAMA that the effect of such noncompliance is immaterial in terms of the risk posed to the bank.
3.2.2 Failure to demonstrate immateriality or to produce and satisfactorily implement an acceptable plan will lead the SAMA to reconsider the bank eligibility for the IRB Approach. During the period of non-compliance, SAMA will consider the need for the bank to hold additional capital under the supervisory review process, or to take other appropriate supervisory action (such as reducing its credit exposures), depending on the circumstances of each case.
4. Risk Quantification
4.1 Overall Requirements for Estimation
General
4.1.1 This section addresses the broad standards for a bank’s own estimates of PD, LGD, and EAD. Except for certain equity and specialized lending exposures, all banks using the IRB Approach should estimate a PD for each internal borrower grade for corporate, sovereign and bank exposures or for each pool in the case of retail exposures.
4.1.2 PD estimates should be a long run average of one-year default rates for borrowers in the grade, with the exception of retail exposures (see paragraphs 4.4.10 to 4.4.12). Requirements specific to PD estimation are provided in subsection 4.4.
4.1.3 Banks on the Advanced IRB Approach should estimate an appropriate LGD (as defined in paragraph 4.5.1) for each of their facilities (or retail pools). Requirements specific to LGD estimation are set out in subsection 4.5. They should also estimate an appropriate long run default weighted average EAD for each of their facilities (as defined in paragraphs 4.6.1 and 4.6.2). Requirements specific to EAD estimation are set out in subsection 4.6.
4.1.4 Banks that are on the Foundation IRB Approach or do not meet the requirements for their own estimation of EAD or LGD for corporate, sovereign and bank exposures should use the supervisory estimates of these parameters.
4.1.5 The quantification process, including the role and scope of expert judgment, should be fully documented. It should cover all stages of the estimation process including data collection, estimation, mapping and application. Adequate documentation would promote consistency and allow third parties to review and replicate the entire process.
4.1.6 Periodic updates to the quantitative process should be conducted to ensure that new data and analytical techniques and evolving industry practices are incorporated into the process.
PD/LGD/EAD estimation
4.1.7 Estimates of PD, LGD and EAD measured by the quantification process should be updated at least annually or whenever it is considered necessary (e.g. when new data and other information have become available or methods for estimation have changed). The updating process should be documented in banks’ internal policies. Particular attention should be given to new business lines or portfolios in which the mix of obligors is believed to have changed substantially.
4.1.8 Estimates should be grounded in historical experience and empirical evidence, and not based purely on subjective or judgmental considerations. They should incorporate all relevant, material and available data, information and methods. Any changes in lending practice or the process for pursuing recoveries over the data observation period should be taken into account.
4.1.9 Banks may utilize internal data and data from external sources (including pooled data) in there own estimation. Where such data are used, banks should demonstrate that their estimates are representative of long run experience.
4.1.10 The population of exposures represented in the data used for estimation, and the lending standards in use when the data were generated, and other relevant characteristics should be closely matched to or at least comparable with those of a bank’s exposures and standards. The bank should also demonstrate that economic or market conditions underlying the data are relevant to current and foreseeable conditions.
For estimates of LGD and EAD, banks should take into account paragraphs 4.5.1 to 4.5.2 and 4.6.3 to 4.6.9 respectively. The number of exposures in the sample, and the data period used for quantification should be sufficient to provide a bank with confidence in the accuracy and robustness of its estimates. The estimation technique should perform well in out-of-sample tests.
4.1.11 SAMA may allow some flexibility in the application of required standards for data that are collected prior to a bank adoption of the IRB Approach. However, in such cases the bank should demonstrate to the SAMA that appropriate adjustments have been made to achieve broad equivalence with the data without such flexibility. Data collected beyond the date of adoption1 should conform to the minimum standards unless otherwise stated.
4.1.12A Date of adoption is the data a bank starts to accumulate data. For applying IRB approaches.
Conservatism
4.1.13 Judgmental adjustments may form a part of the quantification process, but should not be biased toward lower estimates of risk. Consistent signs of judgmental decisions that lower parameter estimates materially may be evidence of bias. The reasoning and empirical support for any adjustments, as well as the mechanics of the calculation, should be documented. Banks should conduct sensitivity analysis to demonstrate that the adjustment procedure is not biased toward reducing capital requirements. The analysis should consider the impact of any judgmental adjustments on estimates and risk weights, and should be fully documented.
4.1.14 Estimates of PD, LGD and EAD should incorporate a degree of conservatism that is appropriate for the overall robustness of the quantification process. In general, such estimates are likely to involve unpredictable errors. In order to avoid undue optimism, banks should add to their estimates a margin of conservatism that is related to the likely range of errors. Where methods and data are less satisfactory and the likely range of errors is larger, the margin of conservatism should be larger.
4.1.15 There should be an appropriate degree of conservatism to adequately account for all uncertainties and weaknesses relating to risk quantification. Improvements in the quantification process (e.g. use of better data and estimation techniques) may reduce the appropriate degree of conservatism over time.
4.1.16 Estimates of PD, LGD, EAD or other parameters should be presented with statistical indicators that facilitate an assessment of the appropriate degree of conservatism.
Review and validation
4.1.17 Banks should subject all aspects of the quantification process, including design and implementation, to an appropriate degree of independent review and validation. An independent review is an assessment conducted by persons not accountable for the work being reviewed. The reviewers may either be internal or external parties.
4.1.18 The review serves as a check on the quantification process to ensure that it is sound and works as intended; it should be broad-based, and should include all of the elements of the quantification process that lead to the ultimate estimates of PD, LGD and EAD. The review should cover the full scope of validation, including:
• an evaluation of the integrity of data inputs;
• an analysis of the internal logic and consistency of the process;
• a comparison with relevant benchmarks; and
• appropriate back-testing based on actual outcomes.
• Detailed requirements for ongoing validation and back testing of estimates are set out in section 5.
1 Date of adoption is the date a bank start to accumulate data on a prospective basis in conformance with SAMA’s minimum qualitative and quantitative requirements.
4.2 Definition of Default for Different Asset Classes
General definition of default.
4.2.1 A default is considered to have occurred with regard to a particular obligor when either or both of the two following events have taken place:
• A bank considers that the obligor is unlikely to pay in full its credit obligations to the bank (or the banking group1 of which it is a part), without recourse by the bank to actions such as realizing security (if held);
• The obligor is past due for more than 90 days2 on any material portion of its credit obligations to the bank (or the banking group of which it is a part). Past due credit obligations are regarded as material if they represent 5% or more of the obligor’s outstanding credit obligations. Banks may however set a lower threshold or choose not to apply the threshold based on their individual circumstances. Overdrafts will be considered as past due once the customer has breached an advised limit or been advised of a limit smaller than the current outstanding balance (see also paragraph 4.2.7). The criteria for determining overdue assets are set out in SAMA’s circular BCS # 312 of 19.1.2004 entitled “SAMA’s Rules Concerning Loan Classifications, Provisioning and Credit Review”.
4.2.2 The elements to be taken as indicators of unlikeliness to pay include:
A Bank puts the credit obligation on non-accrual status.
• The criteria for putting an obligation on non-accrual status and those for restoring the “accrual” status are set out in SAMA’s circular # 312 of 19.1.2004 entitled “SAMA circular on loan classification, provisioning and credit review”.
• A bank makes a charge-off or account-specific provision resulting from a significant perceived decline in asset quality subsequent to the bank taking on the exposure3;
• A bank sells the credit obligation at a material credit related economic loss;
• A bank gives consent to a distressed restructuring/rescheduling of the credit obligation where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement, of principal, interest or, where relevant, fees.4 The criteria for determining rescheduled assets and those for uplifting the “rescheduled” status are set out SAMA’s circular # 3125.
• A bank has filed for the obligor’s bankruptcy or a similar order in respect of the obligor’s credit obligation to the bank;
• The obligor has sought or has been placed in bankruptcy or similar protection where this would avoid or delay repayment of the credit obligation to the bank.
4.2.3 For retail exposures, the definition of default can be applied at the level of a particular facility, rather than at the level of the obligor. As such, default by a customer on one obligation does not require a bank to treat all other obligations of the customer to the bank (or its banking group) as defaulted.
4.2.4 Banks should record actual defaults on IRB asset classes using the reference definition mentioned above. They should also use the reference definition for their estimation of PDs, and, where relevant, LGDs and EADs. In arriving at these estimations, banks may use external data available to them that are not itself consistent with that definition, subject to the requirements set out in paragraphs 4.4.3 to 4.4.7.
4.2.5 In such cases, however, bank should demonstrate to the SAMA that appropriate adjustments to the data have been made to achieve broad equivalence with the reference definition. The same condition would apply to any internal data used up to the time when a bank adopts the IRB Approach. Larger discrepancies require larger adjustments for the sake of conservatism. Internal data (including those pooled by bank) used in such estimates beyond the date of adoption of the IRB Approach should be consistent with the reference definition.
4.2.6 If a bank considers that the status of a previously defaulted exposure is such that the trigger of the reference definition no longer applies, the bank should rate the borrower and estimate LGD as it would for a non-defaulted facility. Should the reference definition be subsequently triggered, a second default would be deemed to have occurred.
Treatment of overdrafts
4.2.7 Overdraft facilities authorized by a bank to a customer should be subject to a formal credit limit and brought to the knowledge of the customer. Any breach of this limit should be monitored. If the account were not brought under the limit after 90 days, it would be considered as defaulted. Temporary or non-authorized overdrafts will be associated with a zero limit for IRB purposes. Thus, the days past due commence once any credit is granted to the customer concerned. If such credit were not repaid within 90 days, the exposure would be regarded as in default. Banks should have in place rigorous internal policies for assessing the credit-worthiness of customers who are offered overdraft accounts.
Re-ageing
4.2.8 Re-ageing is a process by which the delinquency status of loans, the terms of which have not been changed, is adjusted based on subsequent good performance, even though not all arrears under the original repayment schedule have been paid off.
The bank must have clearly articulated and documented policies in respect of the counting of days past due, in particular in respect of the re-ageing of the facilities and the granting of extensions, deferrals, renewals and rewrites to existing accounts. At a minimum, the re-ageing policy must include: (a) approval authorities and reporting requirements; (b) minimum age of a facility before it is eligible for re-ageing; (c) delinquency levels of facilities that are eligible for re-ageing; (d) maximum number of re-ageings per facility; and (e) a reassessment of the borrower‘s capacity to repay. These policies must be applied consistently over time, and must support the ‘use test’ (i.e. if a bank treats a re-aged exposure in a similar fashion to other delinquent exposures more than the past-due cut off point, this exposure must be recorded as in default for IRB purposes). Some supervisors may choose to establish more specific requirements on re-ageing for banks in their jurisdiction.
(Refer para 458, International Convergence of Capital Measurement and Capital Standards – June 2006).
1 The banking group covers all entities within the group that are subject to the capital adequacy regime in Saudi Arabia.
2 In the event that a branch owned by a foreign banking group wants to use a different default trigger set by its home supervisor for particular exposures (e.g. 180 days for exposures to retail or public sector entities), the bank will need to satisfy SAMA that such a difference in the definition of default will not result in any material impact on the default and loss estimates generated. Where necessary, if the relevant models are centrally developed and validated at the home country, the views of the home supervisor will be sought.
3 Specific provisions on equity exposures set aside for price risk do not necessarily signal default.
4 Including, in the case of equity holdings assessed under a PD/LGD approach, such distressed restructuring of the equity itself.
5 Also see “Rescheduled Loans”, SAMA circular # 312 of 19.1.2004, which provides guidance on the definition of “rescheduled loans”.4.3 Definition of Loss for All Asset Classes
4.3.1 The definition of loss used in estimating LGD is economic loss. When measuring economic loss, all relevant factors should be taken into account. This should include material discount effects and material direct and indirect costs associated with collecting on the exposure.
4.3.2 Banks should not simply measure the loss recorded in accounting records. They should be able to compare accounting and economic losses (some Banks may also adopt the concept of economic loss in their accounting records). Banks’ own workout and collection expertise significantly influences their recovery rates, and should be reflected in their LGD estimates. However, adjustments to estimates for such expertise should be conservative until a bank has maintained sufficient internal empirical evidence to manifest the impact of its expertise.
4.4 Requirements Specific to PD Estimation
Data observation period
4.4.1 Irrespective of whether a bank is using external, internal, or pooled data sources, or a combination of the three, for its PD estimation, the length of the underlying historical observation period used must be at least five years for at least one source. If the available observation period spans a longer period for any source, and this data is relevant and material, this longer period must be used. (Refer para 463, International Convergence of Capital Measurement and Capital Standards – June 2006)
4.4.1A Irrespective of whether banks are using external, internal, pooled data sources, or a combination of the three, for their estimation of loss characteristics, the length of the underlying historical observation period used must be at least five years.
If the available observation spans a longer period for any source, and these data are relevant, this longer period must be used. A bank need not give equal importance to historic data if it can convince its supervisor that more recent data are a better predictor of loss rates.
(Refer para 466, International Convergence of Capital Measurement and Capital Standards – June 2006)
4.4.2 The SAMA applies the transitional requirement of a minimum of two years of data at the time of adopting the Foundation IRB Approach for corporate, sovereign, and bank exposures or the IRB Approach for retail exposures.
Corporate, sovereign, and bank exposures
4.4.3 Bank should use information and techniques that take appropriate account of the long run experience when estimating the average PD for each rating grade. For example, banks may use one or more of the three specific techniques set out below (i.e. internal default experience, mapping to external data, and statistical default models),
4.4.4 Banks may have a primary technique and use others as a point of comparison and potential adjustment. SAMA will not be satisfied by mechanical application of a technique without supporting analysis. Banks should recognize the importance of judgmental considerations in combining results of techniques and in making adjustments for limitations of techniques and information.
4.4.5 Banks may use data on internal default experience for the estimation of PD. They should demonstrate in their analysis that the estimates are reflective of actual default experience and of any differences in the rating system that generated the data and the current rating system. Where only limited data are available, or where underwriting standards or rating systems have changed, Banks should add a greater margin of conservatism in their estimate of PD. The use of pooled data across banks may also be recognized. A bank should demonstrate that the internal rating systems and criteria of other bank in the pool are comparable with its own.
4.4.6 Banks may associate or map their internal grades to the scale used by an external credit assessment institution (“ECAI”) and then attribute the default rate observed for the ECAI’s grades to the bank’s grades. Mappings should be based on a robust comparison of internal rating criteria to the criteria used by the ECAI and on a comparison of the internal and external ratings of any common borrowers. Biases or inconsistencies in the mapping approach or underlying data should be avoided.
4.4.7 The ECAI’s criteria underlying the data used for quantification should be oriented to the risk of the borrower and not reflect transaction characteristics. A bank’s analysis should include a comparison of the default definitions used, subject to the requirements in subsection 4.2 above. The bank should document the basis for the mapping.
4.4.8 Banks that aggregate the PD of individual portfolio obligors when calculating PD estimates for internal grades should have a clear policy governing the aggregation process. A mean of PD estimates for individual borrowers in a given grade should be used. A bank would only be allowed to calculate this estimate differently if it can demonstrate that the alternative method provides a better estimate of the long run average PD. To obtain this evidence, the bank should at least compare the results of both methods.
4.4.9 Banks’ use of default probability models for estimating PD should meet the standards specified in subsection 4.6 of the “Minimum Requirements for Internal Rating Systems under IRB Approach”.
Retail exposures
4.4.10 Given the bank specific basis of assigning exposures to pools, banks should regard internal data as the primary source of information for estimating loss characteristics. Banks are permitted to use external data or statistical models for quantification provided a strong link can be demonstrated between:(i) the bank’s process of assigning exposures to a pool and the process used by the external data source; and (ii) the bank’s internal risk profile and the composition of the external data. In all cases banks should use all relevant and material data sources as points of comparison.
4.4.11 One method for deriving long run average estimates of PD and default-weighted average loss rates given default (as defined in 4.5.1) for retail would be based on an estimate of the expected long run loss rate. A bank may (i) use an appropriate PD estimate to infer the long run default-weighted average loss given default; or (ii) use a long run default-weighted average loss rate given default to infer the appropriate PD. In either case, it is important to recognize that the LGD used for the IRB capital calculation cannot be less than the long run default-weighted average loss rate given default and should be consistent with the concept defined in paragraph 4.5.1.
4.4.12 Seasoning can be quite material for some long-term retail exposures characterized by seasoning effects that peak several years after origination. Banks should anticipate the implications of rapid exposure growth and take steps to ensure that their estimation techniques are accurate, and that their current capital level and earnings and funding prospects are adequate to cover their future capital needs.
4.4.13 In order to avoid gyrations in their required capital positions arising from short-term PD horizons, banks are also encouraged to adjust PD estimates upward for anticipated seasoning effects, provided such adjustments are applied in a consistent fashion over time.
4.4.14 If a bank does not take seasoning effects into account and its own estimates of PD are considered to be too low, SAMA may require banks to use higher values of PD for the calculation of capital charges. PD’s will be considered too low if validation tests, stress tests, back testing indicates lack of predictability,
4.5 Requirements Specific to Own-LGD Estimates
4.5.1 Banks should estimate an LGD for each facility that aims to reflect economic downturn conditions where necessary to capture the relevant risks. This LGD cannot be less than the long run default-weighted average loss rate given default calculated based on the average economic loss of all observed defaults within the data source for that type of facility. In addition, a bank should take into account the potential for the LGD of the facility to be higher than the default-weighted average during a period when credit losses are substantially higher than average.
In all cases, both the borrower and all recognized guarantors must be assigned a borrower rating at the outset and on an ongoing basis. A bank must follow all minimum requirements for assigning borrower ratings set out in this document, including the regular monitoring of the guarantor’s condition and ability and willingness to honor its obligations.
Consistent with the requirements in paragraphs 430 and 431, International Convergence of Capital Measurement and Capital Standards – June 2006, a bank must retain all relevant information on the borrower absent the guarantee and the guarantor. In the case of retail guarantees, these requirements also apply to the assignment of an exposure to a pool, and the estimation of PD.
(Refer para 481, International Convergence of Capital Measurement and Capital Standards – June 2006)
4.5.2 For certain types of exposures, loss severities may not exhibit such cyclical variability and LGD estimates may not differ materially (or possibly at all) from the long run defaulted-weighted average. However, for other exposures, this cyclical variability in loss severities may be important and bank will need to incorporate it into their LGD estimates. For this purpose, banks may use averages of loss severities observed during periods of high credit losses, forecasts based on appropriately conservative assumptions, or other similar methods. Appropriate estimates of LGD during periods of high credit losses might be formed using either internal and/or external data. SAMA will continue to monitor and encourage the development of appropriate approaches to this issue.
4.5.3 In its analysis, a bank should consider the extent of any dependence between the risk of the borrower and that of the collateral or collateral provider. Cases where there is a significant degree of dependence should be addressed in a conservative manner. Any currency mismatch between the underlying obligation and the collateral should also be considered and treated conservatively in the bank’s assessment of LGD.
4.5.4 LGD estimates should be grounded in historical recovery rates and, when applicable, should not solely be based on the estimated market value of collateral. This requirement recognizes the potential inability of banks to gain both control of their collateral and liquidate it expeditiously. To the extent, that LGD estimates take into account the existence of collateral, bank should establish internal requirements for collateral management, operational procedures, legal certainty and risk management process that are generally consistent with those required for the Standardized Approach for calculating credit risk capital changes.
4.5.5 Recognizing the principle that realized losses can at times systematically exceed expected levels, the LGD assigned to a defaulted asset should reflect the possibility that the bank would have to recognize additional, unexpected losses during the recovery period. For each defaulted asset, the bank should also construct its best estimate of the expected loss on that asset based on current economic circumstances and facility status. The amount, if any, by which the LGD on a defaulted asset exceeds the bank’s best estimate of expected loss on the asset represents the capital requirement for that asset, and should be set by the bank on a risk-sensitive basis. Instances where the best estimate of expected loss on a defaulted asset is less than the sum of specific provisions and partial charge- offs on that asset will attract supervisory scrutiny and should be justified by the bank.
4.5.6 Estimation of LGD may involve mapping facility-specific data elements in a bank’s portfolio to the factors in reference data sets used by ECAIs. The mapping process should be based on a robust comparison of available common elements in the reference data and the bank’s portfolio. The bank should also have a policy describing how it combines multiple sets of reference data. Biases or inconsistencies in the mapping approach or underlying data should be avoided.
4.5.7 Banks that aggregate LGD estimates for facility grades from individual exposures should have a clear policy governing the aggregation process. In general, simple averaging is preferred. This requirement is however irrelevant for bank that choose to assign LGD estimates directly to individual exposures rather than grades, because aggregation is not required in that case.
4.5.8 For corporate, sovereign, and bank exposures, estimates of LGD should be based on a minimum data observation period that should ideally cover at least one complete economic cycle but should in any case be no shorter than a period of seven years for at least one source. If the available observation period spans a longer period for any source, and the data are relevant, this longer period should be used.
4.5.9 For retail exposures, the minimum data observation period for LGD estimates is five years. The less data a bank has, the more conservative it should be in its estimation. A bank need not give equal importance to historical data if it can demonstrate to SAMA that more recent data are a better predictor of loss rates.
4.6 Requirements Specific to Own-EAD Estimates
4.6.1 EAD for an on-balance sheet or off-balance sheet item is defined as the expected gross exposure of the facility upon default of the obligor. For on-balance sheet items, banks should estimate EAD at no less than the current drawn amount, subject to recognizing the effects of on balance sheet netting as specified in the Foundation IRB Approach (see the ”Risk-Weighting Framework for IRB Approach”). The minimum requirements for the recognition of netting are the same as those under the Foundation IRB Approach.
4.6.2 The additional minimum requirements for internal estimation of EAD under the Advanced IRB Approach, therefore, focus on the estimation of EAD for off- balance sheet items (excluding derivatives). Banks using the Advanced IRB Approach should have established procedures in place for the estimation of EAD for off balance sheet items. These should specify the estimates of EAD to be used for each facility type. Banks’ estimates of EAD should reflect the possibility of additional drawings by the borrower up to and after the time a default event is triggered. Where estimates of EAD differ by facility type, the delineation of these facilities should be clear and unambiguous.
4.6.3 Banks using the Advanced IRB Approach should assign an estimate of EAD for each facility. It should be an estimate of the long run default-weighted average EAD for similar facilities and borrowers over a sufficiently long period of time, but with a margin of conservatism appropriate to the likely range of errors in the estimate.
4.6.4 If a positive correlation can reasonably be expected between the default frequency and the magnitude of EAD, the EAD estimate should incorporate a larger margin of conservatism. Moreover, for exposures for which EAD estimates are volatile over the economic cycle, banks should use EAD estimates that are appropriate for an economic downturn, if these are more conservative than the long run average.
4.6.5 For banks that have been able to develop their own EAD models, this could be achieved by considering the cyclical nature, if any, of the drivers of such models. Other banks may have sufficient internal data to examine the impact of previous recessions. However, some banks may only have the option of making conservative use of external data.
4.6.6 The criteria by which estimates of EAD are derived should be plausible and intuitive, and represent what banks believe to be the material drivers of EAD. The choices should be supported by banks’ credible internal analysis. Banks should be able to provide a breakdown of their EAD experience by the factors they see as the drivers of EAD. Banks should use all relevant and material information in their derivation of EAD estimates. Across facility types, banks should review their estimates of EAD when material new information comes to light and at least on an annual basis.
4.6.7 Due consideration must be paid by the bank to its specific policies and strategies adopted in respect of account monitoring and payment processing. The bank must also consider its ability and willingness to prevent further drawings in circumstances short of payment default, such as covenant violations or other technical default events. Banks must also have adequate systems and procedures in place to monitor facility amounts, current outstandings against committed lines and changes in outstandings per borrower and per grade. The bank must be able to monitor outstanding balances on a daily basis.
477(i). For transactions that expose banks to counterparty credit risk, estimates of EAD must fulfill the requirements set forth in Annex 4 of this Framework.
(Refer para 477, International Convergence of Capital Measurement and Capital Standards – June 2006)
4.6.8 For corporate, sovereign, and bank exposures, estimates of EAD should be based on a time period that should ideally cover a complete economic cycle but should in any case be no shorter than a period of seven years. If the available observation period spans a longer period for any source, and the data are relevant, this longer period should be used. EAD estimates should be calculated using a default-weighted average and not a time weighted average.
4.6.9 For retail exposures, the minimum data observation period for EAD estimates is five years. The less data a bank, the more conservative it should be in its estimation. A bank need not give equal importance to historical data if it can demonstrate to SAMA that more recent data are a better predictor of draw-downs.
4.6.10 SAMA applies the transitional requirement of a minimum of two years of data at the time of adopting the IRB Approach for retail exposures to banks that can implement such an approach during the period from 1 January 2007 to 31 December 2009. This requirement will increase by one year for each of the three years after year-end 2009.
5. Validation of Internal Estimates
5.1 General Requirements
5.1.1 Validation is an integral part of a bank’s rating system architecture to provide reasonable assurances about its rating system. Banks adopting the IRB Approach should have a robust system in place to validate the accuracy and consistency of their rating systems, processes and the estimation of all relevant risk components. They should demonstrate to SAMA that their internal validation process enables them to assess the performance of internal rating and risk estimation systems consistently and meaningfully.
5.1.2 The validation process should include review of rating system developments (see subsection 5.2), ongoing analysis (see subsection 5.3), and comparison of predicted estimates to actual outcomes (i.e. back-testing, as described paragraphs 5.1.3 and 5.1.4 and subsection 5.4).
5.1.3 Banks should regularly compare realized default rates with estimated PDs for each grade and be able to demonstrate that the realized default rates are within the expected range for that grade. The actual long run average default rate for each rating grade should not be significantly greater than the PD assigned to that grade. The methods and data used in such comparisons by banks should be clearly documented. This analysis and documentation should be updated at least annually.
5.1.4 Similarly, banks using the Advanced IRB Approach should complete such analysis for their estimates of LGD and EAD. Such comparisons should make use of historical data that are over as long a period as possible. The actual loss rates experienced on defaulted facilities should not be significantly greater than the LGD estimates assigned to those facilities.
5.1.5 Banks should also use other quantitative validation tools and comparisons with relevant external data sources. The analysis should be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period. Banks’ internal assessments of the performance of their own rating systems should be based on long data histories, covering a range of economic conditions, and ideally one or more complete business cycles.
5.1.6 Banks should have in place a process for vetting data inputs, including the assessment of accuracy, completeness and appropriateness of the data specific to the assignment of an approved rating. Detailed documentation of exceptions to data input parameters should be maintained and reviewed as part of the process cycle of validation.
5.1.7 The process cycle of validation should also include: ongoing periodic monitoring of rating system performance, including evaluation and rigorous statistical testing of the dynamic stability of the models used and their key coefficients; identifying and documenting individual fixed relationships in the rating system or model that are no longer appropriate; and a rigorous change control process, which stipulates the procedures that should be followed prior to making changes in the rating system or model in response to validation outcomes.
5.1.8 Bank should demonstrate that quantitative testing and other validation methods do not vary systematically with the economic cycle1 which incorporate the general impact of economic downturn and upswings of the subject economy. Changes in methods and data (both data sources and periods covered) should be clearly documented.
5.1.9 Some differences across individual grades between observed outcomes and the estimates can be expected.
However, if systematic differences suggest a bias toward lowering regulatory capital requirements, the integrity of the rating system (of either the PD or LGD dimensions or of both) becomes in doubt.
5.1.10 Bank should have well-articulated internal standards for situations where deviations in realised PDs, LGDs and EADs from expectations become significant enough to call the validity of the estimates into question. These standards should take account of business cycles and similar systematic variability in default experiences. Where realised values continue to be higher than expected values, banks should revise estimates upward to reflect their default and loss experience.
1 Economic cycle refer to ensuring that validation of internal estimates incorporate the general impact of economic downturn and upswings of the subject economy.
5.2 Review of Rating System Developments
5.2.1 The first analytical support for the validity of a bank’s rating system is review of rating system developments, in particular analyzing its design and construction. The aim of the review is to assess whether the rating system could be expected to work reasonably if it is implemented as designed. Such review should be revisited whenever the bank makes a change to its rating system. As the rating system is likely to change over time as the bank learns about the effectiveness of the system, the review is likely to be an ongoing part of the process. The particular steps taken in the review depends on the type of rating system.
5.2.2 Regarding a model-based rating system, the review of rating system developments should include information on the logic that supports the model and an analysis of the statistical model-building techniques. The review should also include empirical evidence on how well the ratings might have worked in the past, as such models are chosen to maximize the fit to outcomes in the development sample. In addition, statistical models should be supported by evidence that they work well outside the development sample. Use of out-of-time and out-of-sample performance tests is a good model-building practice to ensure that the model is not merely a statistical quirk of the particular data set used to build the model. Where a bank uses scoring systems for assigning credit ratings, it should demonstrate that those systems have adequate discriminating power.
5.2.3 Regarding an expert judgment-based rating system, the review of rating system developments requires asking two groups of raters how they would rate credits based on the rating definitions, processes and criteria for assigning exposures to grades within the rating system (see sections 4 and 5 of the “Minimum Requirements for Internal Rating Systems under IRB Approach” on requirements for rating criteria and processes). These two sets of rating results could then be compared to determine whether the ratings were consistent. Conducting such tests would help identify any factors, which may lead to different or inconsistent ratings. While some differences and inconsistencies may arise from the exercise of judgment, those findings should be considered for the development of the rating system.
5.2.4 Where an expert judgment-based rating system which employs quantitative guidelines or model results as inputs, the review of the rating system that features guidance values of financial ratios or scores of a scoring model might include a description of the logic and evidence relating the values of the ratios or scores to past default and loss outcomes.
5.3 Ongoing Analysis
5.3.1 The second analytical support for the validity of a bank’s rating system is the ongoing analysis intended to confirm that the rating system is implemented and continues to perform as intended. Such analysis involves process verification and benchmarking.
Process verification
5.3.2 Specific verification activities depend on the rating approach. If a model is used for rating, verification requires reviewers who are independent of the model development to evaluate the soundness of the model, including the theory, assumptions and mathematical/empirical basis. In addition, the evaluation should include the assessment of the compliance with the requirements set out in subsection 4.6 of the “Minimum Requirements for Internal Rating Systems under IRB Approach” on use of models.
5.3.3 If expert judgment is used for rating, verification requires other individual reviewers to evaluate whether the rater has followed rating policy. The minimum requirements for verification of ratings assigned by individuals are:
• a transparent rating process;
• a database with information used by the rater; and
• documentation of how the decisions were made.
5.3.4 Rating process verification also includes override monitoring. The requirements for overrides are set out in subsection 5.3 of the “Minimum Requirements for Internal Rating Systems under IRB Approach”. A reporting system capturing data on reasons for overrides could facilitate learning about whether overrides improve accuracy.
Benchmarking
5.3.5 Benchmarking is a set of activities that uses alternative tools to draw inferences about the correctness of ratings before outcomes are actually known. Benchmarking of a rating system demonstrates whether another rater or rating method attaches the same rating to a particular obligor or facility. At a minimum, banks should establish a process in which a representative sample of its internal ratings is compared to third-party ratings (e.g. independent internal raters, external rating agencies, models, or other market data sources) of the same credits. Regardless of the rating approach, the benchmark can either be a judgment-based or a model based rating. Examples of such benchmarking include: rating reviewers completely re-rate a sample of credits rated by individuals in a judgment-based system; an internally developed model is used to rate credits rated earlier in a judgment-based system; individuals rate a sample of credits rated by a model; internal ratings are compared against results from external agencies or external models.
Banks can also consider benchmarking which includes activities designed to draw broader inferences about whether the rating system – as opposed to individual ratings – is working as expected. Bank can look for consistency in ranking or consistency in the values of rating characteristics for similarly rated credits. Examples of such benchmarking activities include:
analyzing the characteristics of obligors that have received common ratings; monitoring changes in the distribution of ratings over time;
calculating a transition matrix from changes in ratings in a bank portfolio and comparing it to historical transition matrices from publicly available ratings or external data pools.
5.3.6 If benchmarking evidence suggests a pattern of rating differences, it should lead the bank to investigate the source of the differences. Thus, the benchmarking process illustrates the possibility of feedback from ongoing validation to model development.
5.4 Back-Testing
5.4.1 Back-testing is the comparison of predictions with actual outcomes. It is the empirical test of the accuracy and calibration of the estimates, i.e. PDs, LGDs and EADs, associated with borrower and facility ratings, respectively.
5.4.2 At a minimum, banks should:
• develop their own statistical tests to back-test their rating systems;
• establish internal tolerance limits for differences between expected and actual outcomes; and
• have a policy that requires remedial actions be taken when policy tolerances are exceeded.
5.4.3 However, the data to perform comprehensive back testing would not be available in the early stages of implementing an IRB rating system. Therefore, banks should rely more heavily on review of rating system developments, process verification, and benchmarking to assure themselves and other interested parties that there rating systems are likely to be accurate. Validation in its early stages should also depend on a bank’s management exercising informed judgment about the likelihood of the rating system working — not simply on empirical tests.
5.4.4 Where banks rely on supervisory, rather than internal, estimates of risk parameters, they are encouraged to compare realised LGDs and EADs to those set by the SAMA. The information on realised LGDs and EADs should form part of a bank’s assessment of economic capital.
Major Section 5.2: Application and Examination Procedures for Adoption of the IRB Approach
Purpose
5.2.1 This section sets out:
The application and recognition process that banks will go through if they wish to use the IRB Approach for capital adequacy purposes; and
SAMA’s preliminary approach to conducting IRB validations.
5.2.2 Self-assessment questionnaires (currently in draft form) that will be used by banks for the recognition of their internal rating systems are also provided for reference.
Background
5.2.3 Under its implementation proposals, SAMA plans to allow various IRB Approaches applicable to different asset classes to banks that are capable of meeting the relevant requirements. SAMA will aim to make available for adoption by bank the Foundation IRB Approach based on SAMA’s bi-lateral discussions
5.2.4 Banks wishing to adopt the IRB Approach are expected to discuss their plans with SAMA. Whether they will be able to use the IRB Approach for capital adequacy purposes is subject to the prior approval of SAMA and to their satisfying the minimum qualifying criteria. These criteria are set out in major Section 5.1 Entitled “Implementation Proposed for the IRB Approach”:
(i) The criteria for transition to the IRB Approach (see paragraphs 5.1.13 to 5.1.28) of major section 5.1; and
(ii) Various qualitative and quantitative requirements in relation to internal rating systems and the estimation of probability of default (“PD”) / loss given default (“LGD”) / exposure at default (“EAD”), and the controls surrounding them. (See paragraphs 5.1.29 to 5.1.38 and the guidance papers as Attachment 5.4 and Attachment 5.5 for details.
5.2.5 SAMA will conduct on-site validation and recognition exercises starting some time in 2007 to ensure that banks’ internal rating systems and the corresponding risk estimates meet the minimum requirements. It should however be stressed that a bank’s management has the primary responsibility for validating and ensuring the quality of its internal rating systems.
IRB Recognition Process
5.2.6 The first step of the IRB recognition process is to identify those banks with a firm commitment to implement the IRB Approach for capital adequacy purposes. In order to provide sufficient time for SAMA to conduct the necessary IRB validations, such banks should lodge an application with SAMA, using the IRB recognition request form attached at Attachment 5.6. In completing this form, banks are required to provide information on its IRB implementation plan, the target date for adopting the IRB Approach, the estimated level of IRB coverage, and the contact person for the IRB implementation project.
5.2.7 Banks that are planning to start using the Foundation IRB Approach or the Advanced IRB Approach for capital calculation should submit the IRB recognition request form to SAMA no later than 31 December 2006. This is to ensure that their recognition requests can be taken into account in SAMA’s validation schedule for the next few years. Banks that intend to adopt the IRB Approach in later periods may also submit this form to facilitate SAMA’s scheduling of validation visits, but the priority for conducting IRB validations will be given to those with an earlier IRB adoption date.
5.2.8 Upon receipt of the IRB recognition request, SAMA will work with the bank concerned to satisfy itself that the IRB systems/models and the risk management practices surrounding the use of such systems/models meet the minimum standards specified by SAMA. The IRB recognition process, as depicted under Attachment 5.7, generally includes the following steps:
(i) Pre-examination meeting – SAMA will arrange a meeting with the banks to discuss the details of its Implementation Plan and other matters related to the recognition process. Prior to the meeting, SAMA will provide the Bank with a set of self-assessment questionnaires for its completion;
(ii) Self-assessment – Banks will complete the questionnaire in the stipulated time frame. Completed questionnaire and supporting documentation will be submitted for SAMA’s approval.
(iii) On-site examination – SAMA will conduct the on-site examination to review both the technical details of the systems/models and the risk management practices that govern the use of such systems/models. The examination may take three weeks to a month, depending on the quality of the bank’s self-assessment, the complexity of its IRB systems and any compliance issues identified. After concluding the assessment, SAMA will issue the examination report, including the decision of whether to allow the bank to use the IRB Approach;
5.2.9 In the case of banks that are branches of foreign banking groups, SAMA will liaise with the relevant home supervisor, particularly on their Implementation Plans and validation arrangements, to assess the extent of reliance that it may place on the validation work done by the home supervisor.
Approach to IRB Recognition
5.2.10 While SAMA is still developing its detailed approach to IRB recognition, Attachment-5.8 will facilitate banks’ IRB implementation efforts.
Self-assessment Questionnaires
5.2.11 Self-assessment questionnaires are being developed by SAMA. Banks that would implement the IRB approaches will be given questionnaire. It is important for banks to make a detailed self-assessment and support the assessment with adequate documentation and internal reports.
Final Applications and Executive Procedures
5.2.12 SAMA is planning to issue before Dec. 2005 its final application and assessment procedures for IRB recognition as described in this section.
Attachment 5.6: Request for Recognition of Internal Rating Systems for Measurement of Credit Risk Capital Charge Under the Internal Ratings-Based (“IRB”) Approach
This form is to be completed by “Bank” wishing to adopt the IRB Approach for measurement of credit risk capital charge. SAMA should be notified of any subsequent changes to the information provided in this form and Table 1.
I. Name of the Bank:
___________________________________________________________
II. IRB implementation plan:
(a) Please provide information regarding the bank’s IRB implementation plan by completing Table 1.
(b) What is the bank’s target date for adopting the IRB Approach for capital adequacy purposes? In the case of a phased rollout implementation plan, please specify the target dates for the first and last phases of rollout.
___________________________________________________________
(c) What is the bank’s estimate of the percentage of credit risk-weighted assets covered under IRB on a consolidated basis? Please specify the reference date used for the estimate. In the case of a phased rollout implementation plan, please provide estimates for the first and last phases of rollout.
___________________________________________________________
III. Contact person for the IRB implementation project:
Name: ___________________
Position: ___________________
Telephone no: ___________________
Fax No: ___________________
Email address: ___________________
Signed by:
General Managers or Managing Directors: ___________________
(Name)
(Signature)
____________
Date: ___________________
Table–1 IRB Information Plan
Name of Banks
Asset classes under IRB 1 Type of IRB Approaches to be adopted Exposures as % of credit risk weighted assets ("RWAs") 2 As of ________ Geographical location of exposures Internal Rating Systems Solo basi3 Consolidated basis3 Name Centrally developed by Parent/Group (A)4 or Developed locally Date ready for SAMA's recognition 5 (I) (II) (III) (IV) (V) (VI) (B) (VII) (VIII) I. Corporate Exposures a. Small and medium sized entities (SMEs) b. Specialised lending (SL) project finance object finance commodities finance income producing real estate c. Purchase corporate receivables d. Other corporate exposures II. Bank exposures a. Banks b. Other exposures treated as bank exposures i) Securities firms ii) Public Sector Entities iii) Multilateral development bank III. Sovereign exposures a. Sovereigns (and their central banks) b. Other exposures treated as sovereign exposures i) PSEs ii) MDBs and other qualifying entities IV. Retail exposures a. Exposures secured by residential properties b. Qualifying revolving retail exposures c. Purchased retail receivables d. Other retail exposures (please specify) V. Equity exposures (please specify) VI. Assets under Securitisation (please specify) 1Banks should categories banking book exposures into different asset classes (i.e. corporate, bank, sovereign, retail and equity exposures, as well as assets under securitisation), subject to definitions set out in paragraphs 215-243, 273 and 538-542 of the ―International Convergence of Capital Measurement and Capital Standards : A Revised Framework" issued by the Basel Committee on Banking Supervision in June 2004.
2RWAs should be calculated based on the Current Basel Capital Accord
3 Missing
4In the case of banks that are branch of foreign banking groups, all or part of their IRB systems may be centrally developed by the parent bank and monitored on a group basis.
5For the purpose of this table, an internal rating system is regarded as ready for SAMA's recognition if the bank considers that it meets all the minimum qualifying criteria set out the Implementation Plan of the ―Basel II‖ in Saudi Arabia‖ issued by SAMA in May 2005.Attachment 5.7: IRB Recognition Process
Banks submits IRB recognition request to SAMA Pre-examination meeting between bank and SAMA (Self –assessment questionnaires given to bank) Completion of self-assessment by bank Review of self-assessment by SAMA SAMA conducts on-site examination on bank SAMA issues examination report, including decision on whether to allow bank to use IRB Approach SAMA follows up implementation of recommendations in examination report, and monitors performance of bank‘s systems. Attachment 5.8: The SAMA’s Preliminary Approach to IRB Recognition
Background
1. IRB systems are the cornerstone for calculating regulatory capital charges under the IRB Approach, as they form the basis of determining a borrower’s probability of default (“PD”) and, where applicable, two other risk components, namely, a facility’s loss given default (“LGD”) and exposure at default (“EAD”). As a consequence, validation of these three parameters, which are key inputs to the calculation of regulatory capital, and the underlying rating system is a major part of the IRB recognition process.
2. It is useful to differentiate from the outset a bank’s internal IRB validation from the SAMA’s IRB recognition and ongoing monitoring (which refer to the SAMA’s first evaluation exercise and subsequent reviews). The primary responsibility for conducting internal validation to ensure the quality of a bank’s internal rating systems lies with its management.
3. Explicit requirements in SAMA’s guidance paper “Minimum Requirements for Risk Quantification under IRB Approach” underline the need for banks to validate internal rating systems. Banks should demonstrate to SAMA that they can assess the performance of their internal rating and risk estimation systems consistently and meaningfully. More detailed requirements demand, for example, that realized default rates have to be within an expected range; that banks should use different quantitative validation tools; and that well-articulated internal standards should exist for situations where significant deviations occur between observed values of the key risk components and their estimates.
4. The design of a validation methodology (Figure-1 Page 124) depends on the type of rating system and its underlying data. Rating systems can differ in various ways, depending on the borrower type, the materiality of the exposure, the dynamic properties of the estimation methodology (point-in-time versus through- the-cycle), and the availability of default data and external credit quality assessments (external ratings or vendor models). For example, the ratings for retail lending will typically be of a more quantitative nature, based on a rather large quantity of data. Sovereign ratings instead will typically put more emphasis on qualitative aspects because these borrowers are more opaque and default data are scarce.
5. As a result, issues in relation to the internal IRB validation conducted by banks and the IRB recognition conducted by SAMA are relatively complex and require a good understanding of the rating system and its properties. Some of the issues are not currently well developed thus posing many challenges to both banks and supervisors. It is SAMA’s aim to work with banks to raise the standards of IRB recognition in Saudi Arabia. The following paragraphs set out the key components of IRB recognition to be conducted by SAMA.
Key components of IRB recognition
6. Figure 1 shows the key components of SAMA’s validation of IRB systems. The examination process mainly includes a review of the self-assessment questionnaires completed by a bank and an on-site examination to review both the technical details of the bank’s IRB systems/models and the risk management practices that govern the use of those systems/models.
Qualitative aspects
7. The qualitative aspects of the recognition process can be broken down into three areas:
IRB coverage of assets – This should meet the criteria for transition to the IRB Approach.
Rating system design - This involves evaluating the development of the rating method and monitoring of its ongoing performance. In the case of a model-based rating system, this includes a review of the economic plausibility of the risk factors and the treatment of problems in data quality. The stability of a rating system, whether based on expert judgment or models, is a central issue that can be analyzed (for example by looking at the rating migrations over time).
Rating assignment process and the controls surrounding it -
Important issues to be examined include the consistent application of a rating methodology across the bank and the requirement that these validation activities are subject to independent internal review. Underlying the controls should be adequate corporate governance and audit. Equally important are the transparency of the rating procedures and use of internal ratings, which should be supported by proper documentation. Use of internal ratings relates in particular to issues like internal reporting and how the rating system is being used by the credit officers. Furthermore, the rating system should be integrated into the bank’s policies and procedures, which deal with such aspects as the training of credit officers and specialists responsible for operating the rating system and measures to ensure a uniform application of the rating system across different branches and business units of the bank.
8. Banks are expected to evaluate the above aspects in their self-assessment. SAMA will review banks’ self-assessment results, and check for compliance during the on-site visit based on the criteria for transition to IRB Approach and other requirements set out in the guidance paper “Minimum Requirements for Internal Rating Systems under IRB Approach”.
Quantitative aspects – Banks’ internal validation
9. SAMA considers that internal validation of the IRB Approach should be an integral part of a bank’s rating system architecture to provide reasonable assurances about its rating system. Banks adopting the IRB Approach should have a robust system in place to validate the accuracy and consistency of their rating systems, and the estimation of all relevant risk measures (i.e. PD/LGD/EAD). In addition, Banks should demonstrate the assessment of the discriminatory power (a measure of a rating system’s ability to distinguish between good and bad credits) of their rating systems (including credit scoring systems) based on quantitative methods.1
10. In the guidance paper “Minimum Requirements for Risk Quantification under IRB Approach”, it is proposed that the internal validation process should include review of rating system developments, ongoing analysis, and comparison of predicted estimates to actual outcomes (i.e. back-testing).
Quantitative aspects – banks’ internal stress-testing
11. For the purpose of assessment of capital adequacy using stress tests, it is proposed that a stressed scenario chosen by a bank should resemble the economic recession in Saudi Arabia. (see subsection 5.5 of “Minimum Requirements for Internal Rating Systems under IRB Approach” for details) entitled stress test.
12. In reviewing the stress tests conducted by a bank, SAMA will have regard to the following:
• The complexity and level of risks of a bank’s activities;
• The adequacy of stress tests (e.g. stress scenarios and parameters chosen) employed by the bank in relation to its activities;
• The appropriateness of the assumptions used in the stress tests;
• The adequacy of the bank’s risk management policies and stress testing procedures;
• The level of oversight exercised by the Board and senior management on the stress-testing programme and results generated; and
• The adequacy of the bank’s internal review and audit of its stress testing programme.
Quantitative aspects – data quality
13. Another key component of an IRB system is an advanced data management system that produces credible and reliable risk information. The standard governing an IRB data maintenance system is that it should support the requirements for the other IRB system components, as well as the bank’s broader risk management and reporting needs. (See subsection of “Minimum Requirements for Internal Rating Systems under IRB Approach” for details.)
14. The SAMA recognizes that the data quality challenge for IRB is significant. Perfection is therefore not its goal. The underlying requirement is that data should be fit for purpose. Banks are expected to produce information that is reliable and takes proper account of the different users of the information produced (the Board and senior management, customers, shareholders, regulators and other market participants).
15. SAMA’s assessment of data accuracy and completeness will include an evaluation of the systems and controls that banks have in place to produce IRB information. SAMA will require that where an asset has a PD, LGD and EAD risk measure, this can be relied on and has been appropriately validated, captured and reported, both internally and externally.
16. Banks are encouraged to develop automated data capture processes to safeguard the integrity of the calculation and reporting process with full and appropriate levels of documentation, suitably audited. Formal documentation should also be prepared for all manual or spreadsheet based approaches, including appropriate risk mitigating action taken.
17. SAMA will require banks to self-assess against demonstrable measures (tests) on data quality as part of the overall approach to implementation of IRB. Banks should identify key risk areas in the regulatory capital calculation and underlying processes in relation to their data maintenance systems. SAMA will work with banks to establish a set of tests for assessing data quality, including the appropriate quantifiable measures that can truly reflect banks’ specific differences. It aims for a consistent approach for assessing data quality among banks through development of the set of tests, and allows banks the scope to tackle other areas of data quality in accordance with their internal priorities and scale of operations.
18. Tests on data quality should be designed principally to cover the quality and integrity of the data, including associated risk controls, used in the capital calculation processes, and the integrity of the supporting processes themselves. The challenge will be for banks to demonstrate compliance with their internal policies in a quantitative way. In addition, there are some common tests that are appropriate for all banks, for example, that all areas of the balance sheet are appropriately covered in their data maintenance systems.
Quantitative aspects – SAMA’s validation of PD/LGD//EAD estimates
19. SAMA’s validation of PD/LGD//EAD estimates can be broken down into the two areas listed below:
• Back-testing means the use of statistical methods to compare estimates of the three risk estimates to realized outcomes. It is the empirical test of the accuracy and calibration of the estimates associated with borrower and facility ratings, respectively.
• Benchmarking refers to a comparison of internal estimates across banks and/or with external benchmarks (e.g. external ratings or vendor models used by banks).
20. The data to perform comprehensive back-testing would not be available in the early stages of implementing an IRB system. This is due to the infrequency of default events and the impact of default correlation1. Even if the data requirements of Basel II for the length of time series for the risk estimates are met, the explanatory power of statistical tests will still be limited. Therefore, statistical tests alone will be insufficient to establish supervisory acceptance of an internal rating system.
21. Due to the limitations of using statistical tests to verify the accuracy of risk quantification, benchmarking can be a complementary tool for the validation and/or calibration of risk estimates. Benchmarking involves the comparison of a bank’s risk estimates to results from alternative sources. It is quite flexible in the sense that it gives banks and SAMA latitude to select an appropriate benchmark. An important technical issue is the design of the mapping from a bank’s estimates to the benchmark. Benchmarking can be a promising validation technique that would enable SAMA to make inferences about the characteristics of the internal rating system.
22. Benchmarking may also from a part of the whole process of producing internally generated estimates from banks’ IRB systems. For example, banks could use external and independent references to calibrate their own IRB systems in terms of PD. Benchmarking internal risk estimates with external and independent risk estimates is implicitly given a special credibility, and deviations from this benchmark (in particular where the internal estimates are systematically lower than the benchmarking values) provide a reason to review the internal risk estimates.
23. SAMA will work with individual banks to establish standards and techniques of benchmarking for validation purposes. It aims for a consistent approach among banks through development of such standards and techniques. The benchmarking techniques would largely be based on those used by banks internally. SAMA will also compare banks’ internal estimates of risk components (e.g. PD) across a panel. For example, it will compare PD estimates on corporates with respect to a peer group of banks. The main purpose of such comparison is to assess the correlation of the estimates or conversely the identification of potential “outliers” (e.g. variance analysis or robust regression) but not to determine if these estimates are accurate or not.
24. If bank’s benchmarking is not sufficient to establish supervisory acceptance of its internal risk estimates (for example, the requirements regarding benchmarking set out in section 5 of “Minimum Requirements for Risk Quantification under IRB Approach” have not been met), the SAMA would consider to use supervisory benchmarking models as a complementary tool for the validation of the risk estimates. SAMA will let the bank understand the methodologies (including the theories and empirical data used) of the supervisory benchmarking models.
Way Forward
25. IRB validation and recognition should be understood as an ongoing process. As rating systems become more refined, the validation methodology will also develop. It will be useful for SAMA to monitor this process by staying in close contact with the banks. In addition, there are two areas where further action is warranted. One area concerns developments of qualitative and quantitative techniques and collection of historical data that are necessary for estimation and validation. This is the responsibility of banks.
26. The other area is further guidance on the implementation of the IRB minimum requirements. In particular, the requirements for the estimation of the three risk components, which will have a strong impact on the validation/recognition methodology, are not yet fully understood by banks. Providing on-going guidance to banks is the foremost responsibility of SAMA.
1 Due to correlation between defaults in a portfolio, observed default rates can systematically exceed the critical PD values if these are determined under the assumption of independence of the default events.
Attachment-5.9
Table 2: Supervisory Slotting Criteria for Specialized Lending
Table 2.1 – Supervisory Rating Grades for Project Finance Exposures
Strong Good Satisfactory Weak I. Financial strength Market Conditions Few competing suppliers OR substantial and durable advantage in location, cost, or technology. Demand is strong and growing. Few competing suppliers OR better than average location, cost, or technology but this situation may not last. Demand is strong and stable. Project has no advantage in location, cost, or technology. Demand is adequate and stable. Project has worse than average location, cost, or technology. Demand is weak and declining. Financial ratios (e. g debt service coverage ratio (DSCR), loan life coverage ration (LLCR), project life coverage ration (PLCR), and debt-to-equity ratio) Strong financial ratios considering the level of project risk; very robust economic assumptions Strong to acceptable financial ratios considering the level of project risk; robust project economic assumptions Standard financial ratios considering the level of project risk Aggressive financial ratios considering the level of project risk Stress analysis The project can meet its financial obligations under sustained, severely stressed economic or sect oral conditions. The project can meet its financial obligations under normal stressed economic or sect oral conditions. The project is only likely to default under severe economic conditions. The project is vulnerable to stresses that are not uncommon through an economic cycle, and may default in a normal downturn. The project is likely to default unless conditions improve soon. Financial structure • Duration of the credit compared to the duration of the project Useful life of the project significantly exceeds tenor of the loan. Useful life of the project exceeds tenor of the loan. Useful life of the project exceeds tenor of the loan. Useful life of the project may not exceed tenor of the loan. • Amortization schedule Amortizing debt Amortizing debt Amortizing debt repayments with limited bullet payment Bullet repayment or amortizing debt repayments with high bullet repayment II. Political and legal environment Political risk, including transfer risk, considering project type and mitigants Very low Exposure; strong mitigation instruments, if needed Low exposure; satisfactory mitigation instruments, if needed Moderate exposure; fair mitigation instruments High exposure; no or weak mitigation instruments Force majored risk (war, civil unrest, etc) Project of strategic importance for the country (preferably export-oriented). Strong support from Government Project considered important for the country. Good level of support from Government Project may not be strategic but brings unquestionable benefits for the country. Support from Government may not be explicit Project not key to the country. No or weak support from Government Stability of legal and regulatory environment (risk of change in law) Favorable and stable regulatory environment over the long term Favorable and stable regulatory environment over the medium-term Regulatory changes can be predicted with a fair level of certainty Current of future regulatory issues may affect the project. Acquisition of all necessary supports and approvals for such relief from local content laws Strong Satisfactory Fair Weak Enforceability of contracts, collateral and security Contracts, collateral and security are enforceable. Contracts, collateral and security are enforceable. Contracts, collateral and security are considered enforceable even if certain non-key issues may exist. There are unresolved key issues in respect of actual enforcement of contracts, collateral and security. III. Transaction characteristics Design and technology risk Fully proven technology and design Fully proven technology and design Proven technology and design – startup issues are mitigated by a strong completion package Unproven technology and design; technology issues exist and/or complex design. Construction risk • Permitting and sitting All permits have been obtained. Some permits are still outstanding but their receipt is considered very likely. Some permits are still outstanding but the permitting process is well defined and they are considered routine. Key permits still need to be obtained and are not considered routine. Significant conditions may be attached. • Type of construction contract Fixed-price date-certain turnkey construction EPC (engineering and procurement contract) Fixed-price date-certain turnkey construction EPC Fixed-price date-certain turnkey construction contract with one or several contractors No or partial fixed-price turnkey contract and/or interfacing issues with multiple contractors Completion Guarantees Substantial liquidated damages supported by financial substance AND/OR strong completion guarantee from sponsors with excellent financial standing Significant liquidated damages supported by financial substance AND/OR Completion guarantee from sponsors with good financial standing Adequate liquidated damages supported by financial substance AND/OR Completion guarantee from sponsors with good financial standing Inadequate liquidated damages or not supported by financial substance OR weak completion guarantees Track record and financial strength of contractor in constructing similar projects Strong Good Satisfactory Weak Operating risk • Scope and nature of operations and maintenance (O&M) contracts Strong long-term O&M contract, preferably with contractual performance incentives, and/or O&M reserve accounts Long-term O&M contract, and/or O&M reserve accounts Limited O&M contract or O&M reserve account No O&M contract: risk of high operational cost overruns beyond mitigants • Operator‘s expertise, track record, and financial strength Very strong, OR committed technical assistance of the sponsors Strong Acceptable Limited/weak, OR local operator dependent on local authorities Off-take risk (a) If there is a take-or-pay or fixed-price offtake contract: Excellent creditworthiness of off-taker; strong termination clauses; tenor of contract comfortably exceeds the maturity of the debt. Good Credit worthiness of off-taker; strong termination clauses; tenor of contract exceeds the maturity of the debt. Acceptable financial standing of off-taker; normal termination clauses; tenor of contract generally matches the maturity of the debt. Weak off-taker; weak termination clauses; tenor of contract does not exceed the maturity of the debt. (b) If there is no take-or-pay or fixed-price offtake contract: Project produces essential services or a commodity sold widely on a world market; output can readily be absorbed at projected prices even at lower than historic market growth rates. Project produces essential services or a commodity sold widely on a regional market that will absorb it at projected prices at historical growth rates. Commodity is sold on a limited market that may absorb it only at lower than projected prices. Project output is demanded by only one or a few buyers OR is not generally sold on an organized market. Supply risk • Price, volume and transportation risk of feedstocks; supplier's track record and financial strength Long-term supply contract with supplier of excellent financial standing Long-term supply contract with supplier of good financial standing Long-term supply contract with supplier of good financial standing – a degree of price risk may remain Short-term supply contract or long-term supply contract with financially weak supplier - a degree of price risk definitely remains • Reserve risks (e.g. natural resource development) Independently audited, proven and developed reserves well in excess of requirements over lifetime of the project Independently audited, proven and developed reserves in excess of requirements over lifetime of the project Proven reserves can supply the project adequately through the maturity of the debt. Project relies to some extent on potential and undeveloped reserves. IV. Strength of sponsor Sponsor‘s track record, financial strength, and country/sector experience Strong sponsor with excellent track record and high financial standing Good sponsor with satisfactory track record and good financial standing Adequate sponsor with adequate track record and good financial standing Weak sponsor with no or questionable track record and/or financial weaknesses Sponsor support, as evidenced by equity, ownership clause and incentive to inject additional cash if necessary Strong. Project is highly strategic for the sponsor (core business -long-term strategy). Good. Project is strategic for the sponsor (core business - long-term strategy). Acceptable. Project is considered important for the sponsor (core business). Limited. Project is not key to sponsor‘s long-term strategy or core business. V. Security package Assignment of contracts and Accounts Fully comprehensive Comprehensive Acceptable Weak Pledge of assets, taking into account quality, value and liquidity of assets First perfected security interest in all project assets, contracts, permits and accounts necessary to run the project Perfected security interest In all project assets, contracts, permits and accounts necessary to run the project Acceptable security interest in all project assets, contracts, permits and accounts necessary to run the project Little security or collateral for lenders; weak negative pledge clause lender‘s control over cash flow (e.g. cash sweeps, independent escrow Accounts) Strong Satisfactory Fair Weak Strength of the covenant package (mandatory prepayments, Payment deferrals, Payment cascade, Dividend restrictions, etc) Covenant package is strong for this type of project. Project may issue no additional debt. Covenant package is satisfactory for this type of project. Project may issue extremely limited additional debt. Covenant package is fair for this type of project. Project may issue limited additional debt. Covenant package is insufficient for this type of project. Project may issue unlimited additional debt. Reserve funds (debt service, O&M, renewal and replacement, unforeseen events, etc) Longer than Average coverage period, all reserve funds fully funded in cash or letters of credit from highly rated bank Average coverage period, all reserve funds fully funded Average coverage period, all reserve funds fully funded Shorter than average coverage period, reserve funds funded from operating cash flows Table 2.2 - Supervisory Rating Grades for Income-Producing Real Estate Exposures
Strong Good Satisfactory Weak 1. Financial strength Market conditions The supply and demand for the project's type and location are currently in equilibrium. The number of competitive properties coming to market is equal or lower than forecasted demand. The supply and demand for the project‘s type and location are currently in equilibrium. The number of competitive properties coming to market is roughly equal to forecasted demand. Market conditions are roughly in equilibrium. Competitive properties are coming on the market and others are in the planning stages. The project's design and capabilities may not be state of the art compared to new projects. Market conditions are weak. It is uncertain when conditions will improve and return to equilibrium. The project is losing tenants at lease expiration. New lease terms are less favourable compared to those expiring. The supply and demand for the project‘s type and location are currently in equilibrium. The number of competitive properties coming to market is equal or lower than forecasted demand. Financial ratios and advance rate The property‘s debt service coverage ratio (DSCR) is considered strong (DSCR is not relevant for the construction phase) and its loan to value ratio (LTV) is considered low given its property type. Where a secondary market exists, the transaction is underwritten to market standards. The DSCR (not relevant for development real estate) and L TV are satisfactory. Where a secondary market exists, the transaction is underwritten to market standards. The property‘s DSCR has deteriorated and its value has fallen, increasing its L TV. The property‘s DSCR has deteriorated significantly and its L TV is well above underwriting standards for new loans. Stress analysis The property‘s resources, contingencies and liability structure allow it to meet its financial obligations during a period of severe financial stress (e.g. interest rates, economic growth). The property can meet its financial obligations under a sustained period of financial stress (e.g. interest rates, economic growth). The property is likely to default only under severe economic conditions. During an economic downturn, the property would suffer a decline in revenue that would limit its ability to fund capital expenditures and significantly increase the risk of default. The property‘s financial condition is strained and is likely to default unless conditions improve in the near term. Cashflow predictability (a) For complete and stabilised property: The property's leases are longterm with creditworthy tenants and their maturity dates are scattered. The property has a track record of tenant retention upon lease expiration. Its vacancy rate is low. Expenses (maintenance, insurance, security, and property taxes) are predictable. Most of the property‘s leases are long-term, with tenants that range in creditworthiness. The property experiences a normal level of tenant turnover upon lease expiration. Its vacancy rate is low. Expenses are predictable. Most of the property‘s leases are medium rather than long-term with tenants that range in creditworthiness. The property experiences a moderate level of tenant turnover upon lease expiration. Its vacancy rate is moderate. Expenses are relatively predictable but vary in relation to revenue. The property‘s leases are of various terms with tenants that range in creditworthiness. The property experiences a very high level of tenant turnover upon lease expiration. Its vacancy rate is high. Significant expenses are incurred preparing space for new tenants. (b) For complete but not stabilised property: Leasing activity meets or exceeds projections. The project should achieve stabilisation in the near future. Leasing activity meets or exceeds projections. The project should achieve stabilisation in the near future. Most leasing activity is within projections; however, stabilisation will not occur for some time. Market rents do not meet expectations. Despite achieving target occupancy rate, cash flow coverage is tight due to disappointing revenue. (c) For construction phase: The property is entirely preleased through the tenor of the loan or pre-sold to an investment grade tenant or buyer, or the bank has a binding commitment for take-out financing from an investment grade lender. The property is entirely preleased or presold to a creditworthy tenant or buyer, or the bank has a binding commitment for permanent financing from a creditworthy lender. Leasing activity is within projections, but the building may not be preleased and there may not exist a take-out financing. The bank may be the permanent lender. The property is deteriorating due to cost overruns, market deterioration, tenant cancellations or other factors. There may be a dispute with the party providing the permanent financing. II. Asset characteristics Location Property is located in highly desirable location that is convenient to services that tenants desire. Property is located in desirable location that is convenient to services that tenants desire. The property location lacks a competitive advantage. The property's location, configuration, design and maintenance have contributed to the property's difficulties. Design and condition Property is favoured due to its design, configuration, and maintenance, and is highly competitive with new properties. Property is appropriate in terms of its design, configuration and maintenance. The property's design and capabilities are competitive with new properties. Property is adequate in terms of its configuration, design and maintenance. Weaknesses exist in the property's configuration, design or maintenance. Property is under construction Construction budget is conservative and technical hazards are limited. Contractors are highly qualified. Construction budget is conservative and technical hazards are limited. Contractors are highly qualified. Construction budget is adequate, and contractors are ordinarily qualified. Project is over budget or unrealistic given its technical hazards. Contractors may be under qualified. III. Strength of sponsor/developer Financial capacity and willingness to support the property The sponsor/developer made a substantial cash contribution to the construction or purchase of the property. The sponsor/developer has substantial resources and limited direct and contingent liabilities. The sponsor/developer's properties are diversified geographically and by property type. The sponsor/developer made a material cash contribution to the construction of the property. The sponsor/developer's financial condition allows it to support the property in the event of a cash flow shortfall. The sponsor/developer's properties are located in several geographic regions. The sponsor/developer's contribution may be immediate or non-cash. The sponsor/developer is average to below average in financial resources. The sponsor/developer lacks capacity or willingness to support the property. Reputation and track record with similar properties Experienced management and high sponsors’ quality. Strong reputation and lengthy and successful record with similar properties. Appropriate management and sponsors’ quality. The sponsor or management has a successful record with similar properties. Moderate management and sponsors’ quality. Management or sponsor track record does not raise serious concerns. Ineffective management and substandard sponsors’ quality. Management and sponsor difficulties have contributed to difficulties in managing properties in the past. Relationships with relevant real estate actors Strong relationships with leading actors such as leasing agents. Proven relationships with leading actors such as leasing agents. Adequate relationships with leasing agents and other parties providing important real estate services. Poor relationships with leasing agents and/or other parties providing important real estate services. IV. Security package Nature of lien Perfect first lien* Perfect first lien* Perfect first lien* Ability of lender to foreclose is constrained. Assignment of rents (for projects leased to long-term tenants) The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to remit rents directly to the lender, such as a current rent roll and copies of the project's leases. The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to the tenants to remit rents directly to the lender, such as a current rent roll and copies of the project's leases. The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to the tenants to remit rents directly to the lender, such as a current rent roll and copies of the project's leases. The lender has not obtained and assignment of the leases or has not maintained the information necessary to readily provide notice to the building's tenants. Quality of the insurance coverage. Appropriate Appropriate Appropriate Substandard Table 2.3 – Supervisory Rating Grades for Object Finance Exposures
Strong Good Satisfactory Weak I. Financial Strength Market conditions Demand is strong and growing, strong entry barriers, low sensitivity to changes in technology and economic outlook Demand is strong and stable, some entry barriers, some sensitivity to changes in technology and economic outlook Demand is adequate and stable, limited entry barriers, significant sensitivity to changes in technology and economic outlook. Demand is weak and declining, vulnerable to changes in technology and economic outlook, highly uncertain environment Financial ratios (debt service coverage ratio and loan-to-value ratio) Strong financial ratios considering the type of asset. Very robust economic assumptions Strong/acceptable financial ratios considering the type of asset. Robust project economic assumptions. Standard financial ratios for the asset type. Aggressive financial ratios considering the type of asset Stress analysis Stable long-term revenues, capable of withstanding severely stressed conditions through an economic cycle. Satisfactory short-term revenues. Loan can withstand some financial adversity. Default is only likely under severe economic conditions. Uncertain short-term revenues. Cash flows are vulnerable to stresses that are not uncommon through an economic cycle. The loan may default in a normal downturn. Revenues subject to strong uncertainties; even in normal economic conditions the asset may default, unless conditions improve. Market liquidity Market is structure on a world-wide basis; assets are highly liquid Market is world wide or regional; assets are relatively liquid. Market is regional with limited prospects in the short term, implying lower liquidity. Local market and/or poor visibility. Low or no liquidity, particularly on niche markets. II. Political and legal environment Political risk, including transfer risk Very low; strong mitigation instruments, if needed. Low; satisfactory mitigation instruments, if needed. Moderate; fair mitigation instruments. High; no or weak mitigation instruments. Legal and regulatory risk. Jurisdiction is favourable to repossession and enforcement of contracts. Jurisdiction is favourable to repossession and enforcement of contracts. Jurisdiction is generally favourable to repossession and enforcement of contracts, even if repossession might be long and/or difficult. Poor or unstable legal and regulatory environment. Jurisdiction may make repossession and enforcement of contracts lengthy or impossible. III. Transaction characteristics Financing term compared to the economic life of the asset. Full payout profile/minimum balloon. No grace period. Balloon more significant, but still at satisfactory levels. Important balloon with potentially grace periods. Repayment in fine or high balloon. IV. Operational Risk Permits/licensing. All permits have been obtained; asset meets current and foreseeable safety regulations. All permits obtained or in the process of being obtained; asset meets current and foreseeable safety regulations. Most permits obtained or in process of being obtained, outstanding ones considered routine, asset meets current safety regulations. Problems in obtaining all required permits, part of the planned configuration and/or planned operations might need to be revised. Scope and nature of O&M contracts. Strong long-term O&M contract, preferably with contractual performance incentives, and/or O&M reserve accounts (if needed). Long-term O&M contract, and/or O&M reserve accounts (if needed). Limited O&M contract or O&M reserve account (if needed). No O&M contract: risk of high operational cost overruns beyond mitigants. Operator's financial strength, track record in managing the asset type and capability to remarket asset when it comes off-lease. Excellent track record and strong remarketing capability Satisfactory track record and remarketing capability. Weak or short track record and uncertain remarketing capability. No or unknown track record and inability re-market the asset. V. Asset characteristics Configuration, size, design and maintenance (i.e. age, size for a plane) compared to other assets on the same market Strong advantage in design and maintenance. Configuration is standard such that the object meets a liquid market. Above average design and maintenance. Standard configuration, maybe with very limited exceptions-such that the object meets a liquid market. Average design and maintenance. Configuration is somewhat specific, and thus might cause a narrower market for the object. Below average design and maintenance. Asset is near the end of its economic life. Configuration is very specific; the market for the object is very narrow. Real value Current resale value is well above debt value. Resale value is moderately above debt value. Resale value is slightly above debt value. Resale value is below debt value. Sensitivity of the asset value and liquidity to economic cycles. Asset value and liquidity are relatively insensitive to economic cycles. Asset value and liquidity are sensitive to economic cycles. Asset value and liquidity are quite sensitive to economic cycles. Asset value and liquidity are highly sensitive to economic cycles. VI. Strength of sponsor Operators' financial strength, track record in managing the asset type and capability to remarket asset when it comes off-lease. Excellent track record and strong re-marketing capability. Satisfactory track record and re-marketing capability. Weak or short track record and uncertain re-marketing capability. No or unknown tract record and inability to remarket the asset. Sponsors' track record and financial strength. Sponsors with excellent track record and high financial standing Sponsors with good track record and good financial standing. Sponsors with adequate track record and good financial standing. Sponsors with no or questionable track record and/or financial weaknesses. VII. Security package Asset control Legal documentation provides the lender effective control (e.g. a first perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it. Legal documentation provides the lender effective control (e.g. a perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it. Legal documentation provides the lender effective control (e.g. a perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it. The contract provides little security to the lender and leaves room to some risk of losing control on the asset. Rights and means at the lender's disposal to monitor the location and condition of the asset. The lender is able to monitor the location and condition of the asset, at any time and place (regular reports, possibility to lead inspections). The lender is able to monitor the location and condition of the asset, almost at any time and place. The lender is able to monitor the location and condition of the asset, almost at any time and place. The lender is able to monitor the location and condition of the asset is limited. Insurance against damages Strong insurance coverage including collateral damages with top quality insurance companies. Satisfactory insurance coverage (not including collateral damages) with good quality insurance companies. Fair insurance coverage (not including collateral damages) with acceptable quality insurance companies. Weak insurance coverage (not including collateral damages) or with weak quality insurance companies. Table 2.4 – Supervisory Rating Grades for Commodities Finance Exposures
Strong Good Satisfactory Weak I. Financial strength Degree of overcollateralization of trade. Strong Good Satisfactory Weak II. Political and legal environment Country risk No country risk Limited exposure to country risks (in particular, offshore location of reserves in an emerging country) Exposure to country risk (in particular, offshore location of reserves in an emerging country) Strong exposure to country risk (in particular, inland reserves in an emerging country) Mitigation of country risk Very strong mitigation: Strong offshore mechanism Strategic commodity 1st class buyer Strong mitigation: Acceptable mitigation: Only partial mitigation: Offshore mechanisms Offshore mechanisms No offshore mechanisms Strategic commodity Less strategic commodity Non-strategic commodity Strong buyer Acceptable buyer Weak buyer III. Asset characteristics Liquidity and susceptibility to damage Commodity is quoted and can be hedged through futures or OTC instruments. Commodity is not susceptible to damage. Commodity is quoted and can be hedged through OTC instruments. Commodity is not susceptible to damage. Commodity is not quoted but is liquid. There is uncertainty about the possibility of hedging. Commodity is not susceptible to damage. Commodity is not quoted. Liquidity is limited given the size and depth of the market. No appropriate hedging instruments. Commodity is susceptible to damage. IV. Strength of sponsor Financial strength of trader Very strong, relative to trading philosophy and risks. Strong Adequate Weak Track record, including ability to manage the logistic process Extensive experience with the types of transaction in question. Strong record of operating success and cost efficiency. Sufficient experience with the type of transaction in question. Above average record of operating success and cost efficiency. Limited experience with the type of transaction in question. Average record of operating success and cost efficiency. Limited or uncertain track record in general. Volatile costs and profits. Trading controls and hedging policies Strong standards for counterparty selection, hedging and monitoring. Adequate standards for counterparty selection, hedging, and monitoring. Past deals have experienced no or minor problems. Trader has experienced significant losses on past deals. Quality of financial disclosure Excellent Good Satisfactory Financial disclosure contains some uncertainties or is insufficient. V. Security package Asset control First perfected security interest provides the lender legal control of the assets at any time if needed. First perfected security interest provides the lender legal control of the assets at any time if needed. At some point in the process, there is a rupture in the control of the assets by the lender. The rupture is mitigated by knowledge of the trade process or a third party undertaking as the case may be. Contract leaves room for some risk of losing control over the assets. Recovery could be jeopardized. Insurance against damages Strong insurance coverage including collateral damages with top quality insurance companies Satisfactory insurance coverage (not including collateral damages) with good quality insurance companies Fairs insurance coverage (not including collateral damages) with acceptable quality insurance companies. Weak insurance coverage (not including collateral damages) or with weak quality insurance companies. 6. Credit Risk Mitigation
Section 6 and its sub-sections have been updated by Basel Framework, issued by SAMA circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G, Refer to section (9) of minimum capital requirements for Credit Risk Framework.Collateral Management
The new Basel framework identifies two primary types of credit risk mitigation (CRM): guarantees and collateral.
Guarantees are legally binding promises from a third party that the loan obligations of the borrower would be met. The conditions for a guarantee to be eligible are the same as those in current Accord requiring that they are direct, explicit, irrevocable and unconditional. Under the new Basel framework, eligible guarantees would also include additional operational requirements and a treatment for maturity mismatches. The principle of substitution has been retained from current requirements.
The guarantee must be evidenced in writing, non-cancellable on the part of the guarantor, in force until the debt is satisfied in full (to the extent of the amount and tenor of the guarantee) and legally enforceable against the guarantor in a jurisdiction where the guarantor has assets to attach and enforce a judgment. However, in contrast to the foundation approach to corporate, bank, and sovereign exposures, guarantees prescribing conditions under which the guarantor may not be obliged to perform (conditional guarantees) may be recognized under certain conditions. Specifically, the onus is on the bank to demonstrate that the assignment criteria adequately address any potential reduction in the risk mitigation effect.
Under the new Basel framework, eligible guarantees would also include additional operational requirements and a treatment for maturity mismatches. The principle of substitution has been retained from current requirements.
(Refer para 484, International Convergence of Capital Measurement and Capital Standards – June 2006)
Collateral, on the other hand, can be thought of as using financial assets to secure a loan. With collateral, there is the chance that under certain circumstances risk can be eliminated. However, since the financial collateral is subject to valuation changes due to market prices additional criteria has been introduced to account for these changes in value.
No transaction in which CRM techniques are used should receive a higher capital requirement than an otherwise identical transaction where such techniques are not used.
(Refer para 113, International Convergence of Capital Measurement and Capital Standards – June 2006)
The effects of CRM will not be double counted. Therefore, no additional supervisory recognition of CRM for regulatory capital purposes will be granted on claims for which an issue-specific rating is used that already reflects that CRM. As stated in paragraph 100, International Convergence of Capital Measurement and Capital Standards – June 2006 of the section on the standardized approach, principal-only ratings will also not be allowed within the framework of CRM.
(Refer para 114, International Convergence of Capital Measurement and Capital Standards – June 2006)
While the use of CRM techniques reduces or transfers credit risk, it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks. Therefore, it is imperative that banks employ robust procedures and processes to control these risks, including strategy; consideration of the underlying credit; valuation; policies and procedures; systems; control of roll-off risks; and management of concentration risk arising from the bank ‘s use of CRM techniques and its interaction with the bank ‘s overall credit risk profile. Where these risks are not adequately controlled, SAMA may impose additional capital charges or take other supervisory actions as outlined in Pillar 2.
(Refer para 115, International Convergence of Capital Measurement and Capital Standards – June 2006)
A collateralized transaction is one in which:
■ Banks have a credit exposure or potential credit exposure; and
■ That credit exposure or potential credit exposure is hedged in whole or in part by collateral posted by a counterparty or by a third party on behalf of the counterparty.
Here "counterparty” is used to denote a party to whom a bank has an on- or off- balance sheet credit exposure or a potential credit exposure. That exposure may, for example, take the form of a loan of cash or securities (where the counterparty would traditionally be called the borrower), of securities posted as collateral, of a commitment or of exposure under an OTC derivatives contract.
(Refer para 119, International Convergence of Capital Measurement and Capital Standards – June 2006)
6.1 Financial Collateral
The options in the new Basel framework for recognizing financial collateral are, the Simple Approach and the Comprehensive Approach. For the IRB approaches, only the Comprehensive Approach is applicable. For the Standardized Approach both the Simple and the Comprehensive Approaches are available
i) Simple Approach:
In this method the approach of substitution is maintained.
This method requires the collateral to be pledged for at least the life of the exposure and that it is marked to market and revalued at least every six months. The collateralized portion of the loan is subject to the risk weight of the collateral, with a floor on the risk-weighting of 20 percent. For detail refer to Para 182 to Para 185 of the Basel II document.
ii) Comprehensive Approach:
The comprehensive approach for the treatment of collateral (Also refer to paragraphs 130 to 138 and 145 to 181 - International Convergence of Capital Measurement and Capital Standards – June 2006) will also be applied to calculate the counterparty risk charges for OTC Derivatives and repo-style transactions booked in the trading book.
(Refer para 112, International Convergence of Capital Measurement and Capital Standards – June 2006)
Further, the comprehensive approach calculates their adjusted exposure to a counterparty for capital adequacy purposes in order to take account of the effects of that collateral. Using haircuts, banks are required to adjust both the amount of the exposure to the counterparty and the value of any collateral received in support of that counterparty to take account of possible future fluctuations in the value of either1 occasioned by market movements. This will produce volatility adjusted amounts for both exposure and collateral. Unless either side of the transaction is cash, the volatility adjusted amount for the exposure will be higher than the exposure and for the collateral it will be lower.
Additionally, where the exposure and collateral are held in different currencies an additional downwards adjustment must be made to the volatility adjusted collateral amount to take account of possible future fluctuations in exchange rates.
Where the volatility adjusted exposure amount is greater than the volatility adjusted collateral amount including any further adjustment for foreign exchange risk banks shall calculate their risk weighted assets as the difference between the two multiplied by the risk weight of the counterparty.
In principle, banks have two ways of calculating the haircuts: (i) standard supervisory haircuts using parameters set by Basel-II and (ii) bank’s own internal estimate haircuts, using banks’ own internal estimates of market price volatility. Supervisors will allow banks to use own-estimate haircuts only when they fulfil certain qualitative and quantitative criteria.
A bank may choose to use standard or own estimate haircuts independently of the choice it has made between the standardized approach and the foundation IRB approach to credit risk. However, if banks seek to use their own-estimate haircuts, they must do so far the full range of instrument types for which they would be eligible to use own estimates, the exception being immaterial portfolios where they may use the standard supervisory haircuts.
The size of the individual haircuts will depend on the type of instrument, type of transaction and the frequency of marking to market and remargining. For example, repostyple transactions subject to daily marking to market and to daily remargining will receive a haircut based on a 5-business day holding period and secured lending transactions with daily mark to market and no re-margining clauses will receive a haircut based on a 20-business day holding period. These haircut numbers will be scaled up using the square root of time formula depending on the frequency of remargining or marking to market.
As a further alternative to standard supervisory haircuts and own estimate haircuts, banks may use VaR models for calculating potential price volatility for repo style transactions.
In specific, approach relies on giving the banks the option to use one of three methods to discount the value of the collateral: Supervisory specified haircuts, own estimate haircuts, and a Value at Risk (VaR) model available only for repo-style transactions at national discretion. The three methods are as follows:
a. Supervisory Supplied Haircuts
Banks should follow the requirements described in Para 151 of the Basel II document subject to amendments and conditions prescribed by the Agency on Page 148.
b. Own estimate haircuts
This option allows the banks to develop their own haircuts to be applied to the collateral they have against loans.
This option would be available only to banks that satisfy minimum qualitative and quantitative standard described in the Basel II document from Para 154 to Para 177.
Some of the criteria include a 99 percentile one-tailed confidence interval as well as minimum data observations of one year.
c. VAR modeling
• VAR is an estimate of the maximum potential loss expected at a 1 percent confidence interval.
• VAR models aggregate several components of price risk into a single measure of the potential for loss.
• Banks must follow the requirements set in Para 178 to Para 181 of the Basel II document.
1 Exposure amounts may vary where, for example, securities are being lent.
6.2 On Balance Sheet Netting
Where banks have legally enforceable netting arrangements for loans and deposits they may calculate capital requirements on the basis of net credit exposures subject to the conditions in Basel II.
6.3 Guarantees and Credit Derivatives
Where guarantees or credit derivatives are direct, explicit, irrevocable and unconditional, and supervisors are satisfied that banks fulfil certain minimum operational conditions relating to risk management processes they may allow banks to take account of such credit protection in calculating capital requirements.
A range of guarantors and protection providers are recognized. As under the 1988 Accord, a substitution approach will be applied. Thus, only guarantees issued by or protection provided by entities with a lower risk weight than the counterparty will lead to reduced capital charges since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor or protection provider, whereas the uncovered portion retains the risk weight of the underlying counterparty.
Banks are permitted to recognize guarantees but not collateral obtained on an equity position wherein the capital requirement is determined through use of the market-based approach.
(Refer para 349, International Convergence of Capital Measurement and Capital Standards – June 2006).
In addition to the legal certainty requirements in in International Convergence of Capital Measurement and Capital Standards – June 2006 , paragraphs 117 and 118, in order for a guarantee to be recognized, the following conditions must be satisfied:
(a) On the qualifying default/non-payment of the counterparty, the bank may in a timely manner pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterparty for payment.
(b) The guarantee is an explicitly documented obligation assumed by the guarantor.
(c) Except as noted in the following sentence, the guarantee covers all types of payments the underlying obligor is expected to make under the documentation governing the transaction, for example notional amount, margin payments etc. where a guarantee covers payment of principal only, interests and other uncovered payments should be treated as an unsecured amount in accordance with BIS guidelines – in International Convergence of Capital Measurement and Capital Standards – June 2006, paragraph 198.
(Refer para 190, International Convergence of Capital Measurement and Capital Standards – June 2006)
For Credit derivatives and guarantees, materiality thresholds on payments below which no payment is made in the event of loss are equivalent to retained first loss positions and must be deducted in full from the capital of the bank purchasing the credit protection. (Refer para 197, International Convergence of Capital Measurement and Capital Standards – June 2006)
Where the bank transfers a portion of the risk of an exposure in one or more tranches to a protection seller or sellers and retains some level of risk of the loan and the risk transferred and the risk retained are of different seniority, banks may obtain credit protection for either the senior tranches (e.g. second loss portion) or the junior tranche (e.g. first loss portion). In this case the rules as set out in Section IV (Credit risk ─ securitization framework) will apply.
(Refer para 199, International Convergence of Capital Measurement and Capital Standards – June 2006)
Currency mismatches
Where the credit protection is denominated in a currency different from that in which the exposure is denominated — i.e. there is a currency mismatch — the amount of the exposure deemed to be protected will be reduced by the application of a haircut HFX, i.e.
GA = G x (1 – HFX)
where: G = nominal amount of the credit protection
HFX = haircut appropriate for currency mismatch between the credit protection and underlying obligation.
The appropriate haircut based on a 10-business day holding period (assuming daily marking-to- market) will be applied. If a bank uses the supervisory haircuts, it will be 8%. The haircuts must be scaled up using the square root of time formula, depending on the frequency of revaluation of the credit protection as described in paragraph 168, International Convergence of Capital Measurement and Capital Standards – June 2006
(Refer para 200, International Convergence of Capital Measurement and Capital Standards – June 2006).
6.3.1 Additional Capital Requirements for Credit Derivatives
In order for a credit derivative contract to be recognized, the following conditions must be satisfied:
(a) The credit events specified by the contracting parties must at a minimum cover:
• failure to pay the amounts due under terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with the grace period in the underlying obligation);
• bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and
• restructuring of the underlying obligation involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account). When restructuring is not specified as a credit event, refer to paragraph 192, International Convergence of Capital Measurement and Capital Standards – June 2006
(b) If the credit derivative covers obligations that do not include the underlying obligation, section (g) below governs whether the asset mismatch is permissible.
(c) The credit derivative shall not terminate prior to expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay, subject to the provisions of paragraph 203, International Convergence of Capital Measurement and Capital Standards – June 2006
(d) Credit derivatives allowing for cash settlement are recognized for capital purposes insofar as a robust valuation process is in place in order to estimate loss reliably. There must be a clearly specified period for obtaining post-credit event valuations of the underlying obligation. If the reference obligation specified in the credit derivative for purposes of cash settlement is different than the underlying obligation, section (g) below governs whether the asset mismatch is permissible.
(e) If the protection purchaser‘s right/ability to transfer the underlying obligation to the protection provider is required for settlement, the terms of the underlying obligation must provide that any required consent to such transfer may not be unreasonably withheld.
(f) The identity of the parties responsible for determining whether a credit event has occurred must be clearly defined. This determination must not be the sole responsibility of the protection seller. The protection buyer must have the right/ability to inform the protection provider of the occurrence of a credit event.
(g) A mismatch between the underlying obligation and the reference obligation under the credit derivative (i.e. the obligation used for purposes of determining cash settlement value or the deliverable obligation) is permissible if (1) the reference obligation ranks pari passu with or is junior to the underlying obligation, and (2) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.
(h) A mismatch between the underlying obligation and the obligation used for purposes of determining whether a credit event has occurred is permissible if (1) the latter obligation ranks pari passu with or is junior to the underlying obligation, and (2) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross acceleration clauses are in place.
When the restructuring of the underlying obligation is not covered by the credit derivative, but the other requirements in paragraph 191 are met, partial recognition of the credit derivative will be allowed. If the amount of the credit derivative is less than or equal to the amount of the underlying obligation, 60% of the amount of the hedge can be recognized as covered. If the amount of the credit derivative is larger than that of the underlying obligation, then the amount of eligible hedge is capped at 60% of the amount of the underlying obligation.
Only credit default swaps and total return swaps that provide credit protection equivalent to guarantees will be eligible for recognition. The following exception applies.
Where a bank buys credit protection through a total return swap and records the net payments received on the swap as net income but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection will not be recognized. The treatment of first-to-default and second-to-default products is covered separately in paragraphs 207 to 210, International Convergence of Capital Measurement and Capital Standards – June 2006
Other types of credit derivatives will not be eligible for recognition at this time.
(Refer para 191-194, International Convergence of Capital Measurement and Capital Standards – June 2006)
6.4 Legal and Operational Certainty
All documentation used in collateralized transactions and for documenting, guarantees and credit derivatives must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well-founded legal basis to reach this conclusion and undertake such further review as necessary to ensure continuing enforceability.(Refer para 118, International Convergence of Capital Measurement and Capital Standards – June 2006)
In addition to the general requirements for legal certainty set out in paragraphs 117 and 118 of International Convergence of Capital Measurement and Capital Standards – June 2006, the legal mechanism by which collateral is pledged or transferred must ensure that the bank has the right to liquidate or take legal possession of it, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the counterparty (and, where applicable, of the custodian holding the collateral). Furthermore, banks must take all steps necessary to fulfil these requirements under the law applicable to the bank’s interest in the collateral for obtaining and maintaining an enforceable security interest, e.g. by registering it with a registrar, or for exercising a right to net or set off in relation to title transfer collateral. (Refer para 123, International Convergence of Capital Measurement and Capital Standards – June 2006)
In order for collateral to provide protection, the credit quality of the counterparty and the value of the collateral must not have a material positive correlation. For example, securities issued by the counterparty ─ or by any related group entity ─ would provide little protection and so would be ineligible. (Refer para 124, International Convergence of Capital Measurement and Capital Standards – June 2006)
Banks must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the collateral are observed, and that collateral can be liquidated promptly. .(Refer para 125, International Convergence of Capital Measurement and Capital Standards – June 2006
Where the collateral is held by a custodian, banks must take reasonable steps to ensure that the custodian segregates the collateral from its own assets.
(Refer para 126, International Convergence of Capital Measurement and Capital Standards – June 2006)
6.4.1 Repo Style Transaction
Where a bank, acting as an agent, arranges a repo-style transaction (i.e. repurchase/reverse repurchase and securities lending/borrowing transactions) between a customer and a third party and provides a guarantee to the customer that the third party will perform on its obligations, then the risk to the bank is the same as if the bank had entered into the transaction as a principal. In such circumstances, a bank will be required to calculate capital requirements as if it were itself the principal.
(Refer para 128, International Convergence of Capital Measurement and Capital Standards – June 2006)
6.5 Maturity Mismatch
For the purposes of calculating risk-weighted assets, a maturity mismatch occurs when the residual maturity of a hedge is less than that of the underlying exposure.
Definition of maturity
The maturity of the underlying exposure and the maturity of the hedge should both be defined conservatively. The effective maturity of the underlying should be gauged as the longest possible remaining time before the counterparty is scheduled to fulfil its obligation, taking into account any applicable grace period. For the hedge, embedded options which may reduce the term of the hedge should be taken into account so that the shortest possible effective maturity is used.
Where a call is at the discretion of the protection seller, the maturity will always be at the first call date. If the call is at the discretion of the protection buying bank but the terms of the arrangement at origination of the hedge contain a positive incentive for the bank to call the transaction before contractual maturity, the remaining time to the first call date will be deemed to be the effective maturity. For example, where there is a step-up in cost in conjunction with a call feature or where the effective cost of cover increases over time even if credit quality remains the same or increases, the effective maturity will be the remaining time to the first call.
Risk weights for maturity mismatches
As outlined in paragraph 143 of the International Convergence of Capital Measurement and Capital Standards – June 2006, hedges with maturity mismatches are only recognized when their original maturities are greater than or equal to one year. As a result, the maturity of hedges for exposures with original maturities of less than one year must be matched to be recognized. In all cases, hedges with maturity mismatches will no longer be recognized when they have a residual maturity of three months or less.
When there is a maturity mismatch with recognized credit risk mitigants (collateral, on-balance sheet netting, guarantees and credit derivatives) the following adjustment will be applied.
Pa = P x (t – 0.25) / (T – 0.25)
where:
Pa = value of the credit protection adjusted for maturity mismatch
P = credit protection (e.g. collateral amount, guarantee amount) adjusted for any haircuts
t = min (T, residual maturity of the credit protection arrangement) expressed in years
T = min (5, residual maturity of the exposure) expressed in years
(Refer para 202-205, International Convergence of Capital Measurement and Capital Standards – June 2006)
6.6 Other Items Related to CRM Techniques
Treatment of pools of CRM techniques
In the case where a bank has multiple CRM techniques covering a single exposure (e.g. a bank has both collateral and guarantee partially covering an exposure), the bank will be required to subdivide the exposure into portions covered by each type of CRM technique (e.g. portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately. When credit protection provided by a single protection provider has differing maturities, they must be subdivided into separate protection as well.
First-to-default credit derivatives
There are cases where a bank obtains credit protection for a basket of reference names and where the first default among the reference names triggers the credit protection and the credit event also terminates the contract. In this case, the bank may recognize regulatory capital relief for the asset within the basket with the lowest risk-weighted amount, but only if the notional amount is less than or equal to the notional amount of the credit derivative.
With regard to the bank providing credit protection through such an instrument, if the product has an external credit assessment from an eligible credit assessment institution, the risk weight in paragraph 567, International Convergence of Capital Measurement and Capital Standards – June 2006 applied to securitization tranches will be applied. If the product
Second-to-default credit derivatives
is not rated by an eligible external credit assessment institution, the risk weights of the assets included in the basket will be aggregated up to a maximum of 1250% and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted asset amount.
In the case where the second default among the assets within the basket triggers the credit protection, the bank obtaining credit protection through such a product will only be able to recognize any capital relief if first-default-protection has also be obtained or when one of the assets within the basket has already defaulted.
For banks providing credit protection through such a product, the capital treatment is the same as in paragraph 208, International Convergence of Capital Measurement and Capital Standards – June 2006 with one exception. The exception is that, in aggregating the risk weights, the asset with the lowest risk weighted amount can be excluded from the calculation.
(Refer para 206-210, International Convergence of Capital Measurement and Capital Standards – June 2006)
Credit Risk Mitigants
A. HAIRCUTS TO COLLATERALS
. Debt Securities • As per issuer, maturity, and rating from 0.5% up to 15%. (Para 151)
• However, KSA Government bonds and bonds of Public Sector Entities (PSEs) eligible for sovereign treatment in local currency to be at 0% haircut.
B. ADDITIONAL COLLATERALS
2nd mortgage-SIDF (Junior Lien) Residual value to be eligible CRM as per existing Basel II.
7. Banking Book Equity
7.1. Definition of Equity Exposures
[235] In general, equity exposures are distinguished from other types of exposures based on the economic substance of the exposure. Equity exposures would include both direct and indirect ownership interests, whether voting or nonvoting, in the assets or income of a commercial enterprise or financial institution that are not consolidated or deducted for regulatory capital purposes. An instrument generally would be considered to be an equity exposure if it (1) qualifies as Tier 1 capital; (2) is irredeemable in the sense that the return of invested funds can be achieved only by the sale of the investment or sale of the rights to the investment or in the event of the liquidation of the issuer; (3) conveys a residual claim on the assets or income of the issuer; and (4) does not embody an obligation on the part of the issuer.
[236] An instrument that embodies an obligation of the issuer is considered an equity exposure if the instrument meets any of the following conditions: (1) the issuer may defer indefinitely the settlement of the obligation; (2) the obligations requires, or permits at the issuer’s discretion, settlement by issuance of a fixed number of the issuer’s equity interests; (3) the obligation requires, or permits at the issuer’s discretion, settlement by the issuance of a variable number of the issuer’s equity interests, and all things being equal, any change in the value of the obligation is attributable to, and in the same direction as, the change in the value of a fixed number of the issuer’s equity shares; or (4) the holder has the option to require that the obligation be settled by issuance of the issuer’s equity interests.
[237] Debt obligations and other securities, derivatives, or other instruments structured with the intent of conveying the economic substance of equity ownership would be considered equity exposures. Equity instruments that are structured with the intent of conveying the economic substance of debt holdings would not be considered an equity exposure.
7.2. Market-based Approach (MBA) and PD/LGD Approach
[341] Supervisors may choose any of the two Approaches - MBA or a PD/LGD Approach - would be used by a Banks to calculate risk-weighted assets for equity exposures not held in the trading book. The PD/LGD Approach is designed to capture risks from credit-related losses only; this approach is more suited for use in cases where credit-related issues are seen as the main focus. The MBA is designed to capture a wide range of risks (e.g., interest rates, general market movements, etc), in addition to credit-related losses.
SAMA proposes that the MBA should be used for determining capital requirements for equity exposures in the banking book.
7.2.1 MBA Based Approach
Under the market-based approach, institutions are permitted to calculate the minimum capital requirements for their banking book equity holdings using one or both of two separate and distinct methods: a simple risk weight method or an internal models method.
The method used should be consistent with the amount and complexity of the institution’s equity holdings and commensurate with the overall size and sophistication of the institution.
Supervisors may require the use of either method based on the individual circumstances of an institution.
(Refer para 343, International Convergence of Capital Measurement and Capital Standards – June 2006)
• Under the simple risk weight method, a 300% risk weight to be applied to publicly traded, and 400% for all others.
• If an internal model is used, minimum quantitative and qualitative requirements would have to be met on an ongoing basis, including a minimum capital charge be no less than the capital charge that would be calculated under the simple approach at a risk weight of 200% for publicly traded, and 300% for other equities.
7.2.2 PD/LGD Approach
The minimum requirements and methodology for the PD/LGD approach for equity exposures are the same as those for the IRB foundation approach for corporate exposures subject to some constraints. These include the bank’s estimate of the PD of a corporate entity in which it holds an equity position must satisfy the same requirements as the bank estimate of the PD of a corporate entity where the bank holds debt. In practice, if there is both an equity exposure and an IRB credit exposure to the same counterparty, a default on the credit exposure would thus trigger a simultaneous default for regulatory purposes on the equity exposure. If a bank does not hold debt of the company in whose equity it has invested and does not have sufficient information on the position of that company to be able to use the applicable definition of default in practice but meets the other standards, a 1.5 scaling factor will be applied to the risk weights derived from the corporate risk weight function, given the PD set by the bank. If, however, the bank’s equity holding are material and it is permitted to use a PD/LGD approach for regulatory purposes, but the bank has not yet met the relevant standards, the simple risk weight method under the market-based approach apply.
7.3. Exclusions to the MBA
Nationally legislated programmes
[357] Supervisors may exclude from the IRB capital charge certain equity exposures made under legislated programs. These equity holdings can only be excluded from the IRB Approach up to an aggregate of 10 percent of Tier 1 plus Tier 2 capital.
In KSA, such investments made would not qualify for this exclusion.
Materiality
[358] Supervisors may exclude equity exposures of a banks from IRB treatment based on materiality. SAMA proposes that a Banks would not be required to use the IRB Approach if the aggregate carrying value, including holdings subject to exclusions and transitional provisions (see transitional arrangement), is less than or equal to 10 percent of Tier 1 and Tier 2 capital. A bank would risk weight at 100 percent equity exposures that qualify for this exclusion.
SAMA require that a bank qualifying for this exemption would not be eligible.
8. Purchased Receivables
8.1. Definition of Eligible Purchased Receivables
Eligible purchased receivables1 are divided into retail and corporate receivables as defined below.
Retail receivables
Purchased retail receivables, provided the purchasing bank complies with the IRB rules for retail exposures, are eligible for the top-down approach as permitted within the existing standards for retail exposures (i.e. estimation of risk components on a pooled basis). The banks should also apply the minimum operational requirements as set out in Section 8.2 below and “Minimum Requirements for Risk Quantification under IRB Approach”.
Corporate receivables
In general, for purchased corporate receivables, banks are expected to assess the default risk of individual obligors as specified in subsection 4.1 of the IRB approaches consistent with the treatment of other corporate exposures. Banks are not allowed to use the top-down approach.
1 Such receivables include both self-liquidating debit arising from the sale of goods or services linked to a commercial transaction and general amounts owned by buyers, suppliers, renters, governmental authorities, or other non-affiliated parties not related to the sale of goods or services linked to a commercial transaction. Eligible receivables do not include those associated with securitisations.
8.2. Rules for Purchased Receivables
Risk-weighted assets for default risk
For receivables belonging unambiguously to one asset class, the risk weight for default risk is based on the risk-weight function applicable to that particular exposure type, as long as banks can meet the qualification standards for this particular risk-weight function. For example, if banks cannot comply with the standards for QRRE (defined in paragraph 2.5.7 of section 5.0 above), they should use the risk-weight function for other retail exposures. For hybrid pools containing a mixture of exposure types, if the purchasing bank cannot separate the exposures by type, the risk-weight function producing the highest capital requirements for the exposure types in the receivable pool applies.
Purchased retail receivables
For purchased retail receivables, the purchasing bank should meet the risk quantification standards for retail exposures but can utilize external and internal reference data to estimate the PDs and LGDs. The estimates for PD and LGD (orEL) should be calculated for the receivables on a stand-along basis; that is, without regard to any assumption of recourse or guarantees from the seller or other parties.
Foundation IRB Treatment (FIRB)
If the purchasing bank is unable to decompose EL into its PD and LGD components in a reliable manner, the risk weight is determined from the corporate risk-weight function using the following specifications: if the bank can demonstrate that the exposures are exclusively senior claims to corporate borrowers, an LGD of 45% can be used. PD will be calculated by dividing the EL using this LGD. EAD will be calculated as the outstanding amount minus the capital charge for dilution prior to credit risk mitigation (KDilution). Otherwise, PD is the bank’s estimate of EL; LGD will be 100%; and EAD is the amount outstanding minus KDilution. EAD for a revolving purchase facility is the sum of the current amount of receivables purchased plus 75% of any undrawn purchase commitments minus KDilution. If the purchasing bank is able to estimate PD in a reliable manner, the risk weight is determined from the corporate risk-weight functions according to the specifications for LGD, M and the treatment of guarantees under the foundation approach as given in paragraphs 287 to 296, 299, 300 to 305, and 318, International Convergence of Capital Measurement and Capital Standards – June 2006.
(Refer para 366, International Convergence of Capital Measurement and Capital Standards – June 2006)
Advance IRB Treatment (AIRB)
If the purchasing bank can estimate either the pool’s default-weighted average loss rates given default (as defined in paragraph 468) or average PD in a reliable manner, the bank may estimate the other parameter based on an estimate of the expected long-run loss rate. The bank may (i) use an appropriate PD estimate to infer the long-run default-weighted average loss rate given default, or (ii) use a long-run default-weighted average loss rate given default to infer the appropriate PD. In either case, it is important to recognize that the LGD used for the IRB capital calculation for purchased receivables cannot be less than the long-run default-weighted average loss rate given default and must be consistent with the concepts defined in paragraph 468. The risk weight for the purchased receivables will be determined using the bank‘s estimated PD and LGD as inputs to the corporate risk-weight function. Similar to the foundation IRB treatment, EAD will be the amount outstanding minus KDilution. EAD for a revolving purchase facility will be the sum of the current amount of receivables purchased plus 75% of any undrawn purchase commitments minus KDilution (thus, banks using the advanced IRB approach will not be permitted to use their internal EAD estimates for undrawn purchase commitments).
(Refer para 367, International Convergence of Capital Measurement and Capital Standards – June 2006)
For drawn amounts, M will equal the pool’s exposure-weighted average effective maturity (as defined in paragraphs 320 to 324, International Convergence of Capital Measurement and Capital Standards – June 2006). This same value of M will also be used for undrawn amounts under a committed purchase facility provided the facility contains effective covenants, early amortization triggers, or other features that protect the purchasing bank against a significant deterioration in the quality of the future receivables it is required to purchase over the facility‘s term. Absent such effective protections, the M for undrawn amounts will be calculated as the sum of (a) the longest-dated potential receivable under the purchase agreement and (b) the remaining maturity of the purchase facility.
(Refer para 368, International Convergence of Capital Measurement and Capital Standards – June 2006)
Purchased corporate receivables
For purchased corporate receivables, the purchasing bank should apply the risk quantification standards for corporate exposures under the bottom-up approach.
Dilution risk and treatment of purchase price discounts.
For the treatment of dilution risk and purchase price discounts under Basel II, please refer to Sections 369 to 372 to Basel II document of June, 2004.
9. Shariah Compliant Banking
SAMA is a member of the Islamic Financial Services Board and its Working Group that prepared the "Capital Adequacy Standard for Institutions Offering Only Islamic Financial Services". In this regard, this IFSB Standard is intended to be applied to non-insurance institutions offering only Islamic financial products and services. Supervisors may also choose to apply these to 'Islamic Window' operations in their jurisdictions. The Capital Adequacy Standard (CAS) is not intended to be applied at the consolidated level to a group or a sub-group that consists of entities other than IIFS.
The CAS provides for Capital Adequacy calculations for seven (7) Shariah compliant financing and investment instruments as follows:
• Murabaha
• Salam
• Istisna
• Ijarah and Ijarah Muntahia Bitlamleek
• Musharaka and Diminishing Musharaka
• Mudarabah
• Sukuk
Also the CAS separately sets out the requirements for Operational Risk and the treatment of Profit-Sharing Investment Accounts (PSIA). The CAS proposes a Capital adequacy framework for IIFS that compares with the Standardized Approach for credit risk and the Basic Indicator approach for operational risk under the Basel II Capital Adequacy Standard.
As the CAS applies to banks that 'only' offer Islamic financial products and services, currently this is relevant to a few banks in Saudi Arabia. These banks would be largely compliant to IFSB CAS, if they apply the Basel II Standardized Approach for credit risk and the Basic Indicator approach for operational risk.
Banks that only provide Islamic Financial services are encouraged to compute their Capital Adequacy according to IFSB Standard using the proposed method for assigning risk to their shariah compliant assets. The calculation under the CAS could then permit comparison between the capital requirements under CAS and Basel II. At that stage, SAMA will discuss with the banks the relevance of the two methodologies and make a decision on the banks' final choice of the Capital Adequacy framework. Banks choosing to proceed under IFSB CAS, should discuss their plans and approaches with SAMA to decide on an appropriate timetable.
10. Operational Risk
Sub-sections ( 10.1 to 10.4.7) have been updated by Basel Framework, issued by SAMA circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G, Refer to the Minimum Capital Requirements for Operational Risk Framework.10.1. Introduction
10.1.1 Scope and application
This section sets out the framework for measuring capital requirements for operational risk of banks. It describes the framework in terms of the availability and choice of measurement approaches; the qualifying criteria for adoption of the more advanced approaches; and the measurement methodologies under each of the available approaches.
10.1.2 Four approaches are being made available by SAMA for measuring capital charge for operational risk.
• The Basic Indicator Approach (BIA);
• The Standardized Approach (STA); and
• The Alternative Standardized Approach (ASA)
• The Advanced Management Approaches (AMA)
10.1.3 A bank is expected to use the BIA unless it has prior approval of SAMA to adopt a more advanced approach. Banks proposing to apply the BIA approach must have internal operational risk management systems in compliance with the requirements set out in the paper issued by the Basel committee in 2003 entitled “Sound Practices for the Management and Supervision of Operational Risk”.
10.1.4 Banks proposing to use the STA, ASA or AMA must satisfy SAMA that they meet the minimum qualifying criteria set out in section 2 below.
10.1.5 The risk-weighted exposure for operational risk of a bank will be summed together with the risk-weighted exposures for credit and market risk to yield the total risk- weighted exposures which will then be used to calculate the Capital Adequacy Ratio (CAR).
10.2. Qualifying Criteria for the Standardised Approach (STA), Alternative Standardised Approach (ASA), and Advance Management Approaches (AMA)
10.2.1 Subject to meeting the minimum qualifying requirements, banks may seek SAMA’s approval to use either the STA, or ASA or AMA approaches.
10.2.2 To use the STA, ASA or AMA which are more advanced approaches for measuring the capital charge for operational risk, a bank must have in place adequate internal operational risk management systems that are commensurate with the nature, volume and complexity of its business activities. In particular, it should meet the criteria set out in Basel II document.
1. Standardized Approach
In order to qualify for the Standardized Approach or the Alternative Standardized Approach a bank must satisfy SAMA that the conditions described in Para’s 660 to 663 of Basel II Document have been fully met or complied with.
2. Advance Management Approaches (AMA)
In order to qualify for the AMA, banks must satisfy SAMA that the requirements under Para’s 664 to Para 679 of Basel II Document are satisfied.
10.3. Measurement Methodologies
10.3.1 BIA, STA or AMA
Gross income is used as a broad indicator for the scale of a bank's operational risk exposure. The capital charge is calculated by multiplying gross income by a factor (denoted as alpha or beta). The factor serves as a proxy for the relationship between operational losses and the gross income of a bank. In the BIA gross income is measured on an aggregate basis, whereas in the STA or ASA gross income is measured for each business line, not the whole bank. The detailed measurement methodologies for each of the approaches are described in Basel II document from Para 645 to 659.
10.3.2 Advance Measurement Approach (AMA)
While the AMA as an approach incorporates extensive and sophisticated data assembly and models, the Agency has permitted its use as an option. Consequently, banks planning to implement the AMA should refer to the measurement methodology relative to data and models and other minimum measurement standards described in the Basel document from Para 664 to Para 679.Further guidance in this area would be made available in due course by SAMA.
10.4. Partial Use
[680-683] The new Basel framework permits a Basic Indicator Approach, a Standardized Approach and an Advanced Management Approach (AMA). SAMA initially expects banks to move to the Basic Indicator or the Standardized Approach and thereafter to the more advanced AMA approach supervisor. However, the new Basel framework also permits banks to use an AMA for some parts of its operations and the Basic Indicator Approach or Standardized Approach for the balance (“partial use”), on both a transitional and permanent basis, subject to certain conditions.
These conditions include:
• All operational risks of the bank‘s global, consolidated operations are captured;
• All of the bank‘s operations that are covered by the AMA meet the qualitative criteria for using an AMA, while those parts of its operations that are using one of the simpler approaches meet the qualifying criteria for that approach;
• On implementation date, a significant part of the Banks operational risk should be captured by the AMA, and;
• The Bank must provide a timetable outlining how it intends to roll out the AMA across all but on immaterial part of its operations. A Bank may determine which parts of its operations would use an AMA based on a business line, legal entity, geographical or other internally determined basis.
(Refer para 680-683, International Convergence of Capital Measurement and Capital Standards – June 2006)
10.4.1 Basis for Determining Partial Use
Banks generally tend to manage operational risk on a business line basis. The business line management approach lends itself to a business line approach for partial use purposes. However, there may be valid reasons, such as the cost associated with implementing an AMA relative to the materiality of the risk, to exclude a legal entity that engages in the banks business lines but represents only a small part of each business line. Therefore, SAMA proposes to permit domestic banks to determine partial use on a business line or legal entity basis, or a combination of the two. Any activity that is excluded from the AMA calculation could not be included in the determination of group-wide diversification benefits within the AMA. For simplicity and ease of implementation, SAMA does not propose to make available other bases for determining partial use.
10.4.2 Definition of “Significance” and “Material” for Partial Use Purposes
The operational risk section of the new Basel framework does not define the terms significant and material. It is left to national supervisory authorities to define these terms for their Banks.
SAMA defines “significant” as that part of a bank on operations that represents 75 percent of the Banks operational risk and “material” as that part representing 90 percent. It is proposed that a Banks should have five years from its implementation of an AMA to reach the 90 percent threshold and that it should demonstrate progress in moving from 75 percent to 90 percent during that period. A banks operational risk and these thresholds would be measured in terms of the minimum regulatory capital calculated using the Standardized Approach. This would require an AMA Bank to continue calculating capital using the Standardized Approach for up to 5 years post-implementation. SAMA accepts this proposal as both a practical and reasonable approach to the definition of “significant” and “material” for this section of the new Basel framework.
10.4.3 Partial Use for Banks Using the Standardized Approach
The new Basel framework permits the partial use of operational risk approaches only for banks implementing an AMA. However, the BCBS recognizes that there may be instances where a bank that chooses to adopt the Standardized Approach for its global, consolidated operations is required to implement an AMA for a branch operating in another jurisdiction. In these cases, a bank would be permitted to incorporate that AMA capital amount in its global consolidated capital calculation, with supervisory approval. SAMA proposes to make this flexibility available to its domestic banks, subject to any conditions laid out in the new Basel framework.
Apart from these instances, SAMA requires to permit a banks using the Standardized approach to use Basic Indicator Approach for parts of its operations on a transitional basis only, for a period not exceeding 3 years. SAMA would permit partial use only where the Bank can demonstrate that it is not being implemented for capital arbitrage purposes.
10.4.4 Available Approaches for Partial Use
The new Basel framework allows a bank to adopt partial use between an AMA and the Standardized Approach or an AMA and the Basic Indicator Approach. However, SAMA proposes to permit a bank to choose either the Basic Indicator Approach or the Standardized Approach for a given part of the Bank not using the AMA, and would not restrict a Bank to only one of these approaches. This would be subject to the condition that the Bank is able to demonstrate that this partial use is not intended for capital arbitrage.
The new Basel framework does not specify whether the Alternative Standardized Approach can be used for partial use purposes. For greater clarity, SAMA does propose to allow banks operating in Saudi Arabia to use the Alternative Standardized Approach for any part of its operations in calculating its global, consolidated operational risk capital requirements.
10.4.5 AMA Specific Issues
10.4.6 Recognition of Insurance
[677-679] Consistent with the new Basel framework, SAMA proposes to permit banks using an AMA to recognize the risk mitigating impacts of insurance against operational risk. This amount is limited to 20 percent of the total AMA operational risk capital charge. A bank should meet the conditions stated in the new Basel framework to be eligible to use insurance as a risk mitigant.
10.4.7 Recognition of Internally Determined Correlations
This paragraph describes a series of quantitative standards that will apply to internally generated operational risk measures for purposes of calculating the regulatory minimum capital charge.
(a) Any internal operational risk measurement system must be consistent with the scope of operational risk defined by the Committee in paragraph 644, International Convergence of Capital Measurement and Capital Standards – June 2006, and the loss event types defined in Annex 9, International Convergence of Capital Measurement and Capital Standards – June 2006
(b) Supervisors will require the bank to calculate its regulatory capital requirement as the sum of expected loss (EL) and unexpected loss (UL), unless the bank can demonstrate that it is adequately capturing EL in its internal business practices. That is, to base the minimum regulatory capital requirement on UL alone, the bank must be able to demonstrate to the satisfaction of its national supervisor that it has measured and accounted for its EL exposure.
(c) A bank‘s risk measurement system must be sufficiently “granular” to capture the major drivers of operational risk affecting the shape of the tail of the loss estimates.
(d) Risk measures for different operational risk estimates must be added for purposes of calculating the regulatory minimum capital requirement. However, the bank may be permitted to use internally determined correlations in operational risk losses across individual operational risk estimates, provided it can demonstrate to the satisfaction of the national supervisor that its systems for determining correlations are sound, implemented with integrity, and take into account the uncertainty surrounding any such correlation estimates (particularly in periods of stress). The bank must validate its correlation assumptions using appropriate quantitative and qualitative techniques.
(e) Any operational risk measurement system must have certain key features to meet the supervisory soundness standard set out in this section. These elements must include the use of internal data, relevant external data, scenario analysis and factors reflecting the business environment and internal control systems.
(f) A bank needs to have a credible, transparent, well-documented and verifiable approach for weighting these fundamental elements in its overall operational risk measurement system. For example, there may be cases where estimates of the 99.9th percentile confidence interval based primarily on internal and external loss event data would be unreliable for business lines with a heavy-tailed loss distribution and a small number of observed losses. In such cases, scenario analysis, and business environment and control factors, may play a more dominant role in the risk measurement system. Conversely, operational loss event data may play a more dominant role in the risk measurement system for business lines where estimates of the 99.9th percentile confidence interval based primarily on such data are deemed reliable. In all cases, the bank‘s approach for weighting the four fundamental elements should be internally consistent and avoid the double counting of qualitative assessments or risk mitigants already recognized in other elements of the framework.
(Refer para 669, International Convergence of Capital Measurement and Capital Standards – June 2006)
10.4.8 Other Operational Risk National Discretion Issues
SAMA has provided guidance in this area.
National Discretion Items Operational Risk
Reference to Basel-II Document Areas of National Discretion SAMA’s
Position652 (FN 97) Op. Risk: allow a bank to use the ASA. Yes 654 (FN 98) Op. Risk: Treatment of negative gross income. Yes 663 (FN 101) Op. Risk: Impose criteria in Para 663 on non-internationally active banks using SA or ASA. Yes 663 (C ) Reporting format and frequency of Op risk, OP losses, etc., as per banks judgment ensuring completeness and integrity Yes 669 (b) Op. Risk: Calculate regulatory capital requirement as the sum of EL and UL. Yes 669 (d) Op Risk: Use internally determined correlations across individual estimates. Yes 673 Op. Risk: Appropriate de minimum gross loss threshold for internal loss data collection, for example 10,000 SR. Yes 673 Op. Risk: Boundary Issue-definition of operational risk losses that have historically been included in the banks‘ credit databases and that will continue to be treated as credit. Yes 661 Standardized Approach – Initial Monitoring period Yes
2 years673 Threshold for operational risk data collection – banks discretion Yes 650 Intra group fees received from outsourcing be include or excluded Yes 664 AMA - Model validation criteria – Refer to Paras 654 to 679. Yes 11. Pillar 2
11.1 Supervisory Review Process
The underlying intent of the Supervisory Review Process in Pillar 2 of the new Basel Framework is to promote and support a more rigorous process in banks for determining the adequacy of the actual capital held and to make this process subject to a somewhat more focused supervisory review. Pillar 2 requires SAMA to satisfy itself as to the appropriateness of banks capital adequacy assessment processes and the adequacy of capital and to intervene, if appropriate, under the authority of the Banking Control Law. Where SAMA determine there are weaknesses in the banks’ internal capital adequacy assessment processes and strategies, SAMA will require that they be remedied. SAMA will not necessarily require additional capital; however, increased capital might be used as a measure including other measures to improve the banks’ position.
Pillar 1 defines the minimum capital requirements for Banks operating Saudi Arabia. Banks face risks not explicitly included under Pillar 1 and many banks’ choose to operate at capital levels above those implied by Pillar 1 minimums. Pillar 2 thus expresses an expectation that all banks should operate above the Pillar 1 minimum.
11.2 Banks Internal Targets
Saudi banks are expected to conduct their own internal capital adequacy assessment process and establish their own internal target capital levels taking account of their risk profile and capital strategy. SAMA supervisory staff will assess whether such capital adequacy assessment processes and internal target capital levels are commensurate with the banks’ risk profiles. There is no single correct approach to a capital adequacy assessment process; the expectation is that a bank conducts its assessment in a comprehensive, well thought out manner. An economic capital model is not required; however, it is one option available to help more complex banks’ develop their judgment in support of their capital adequacy assessment process. Judgment continues to be important in this process and banks’ are expected to ensure that its use is adequately recorded and documented. While the approaches may vary from bank to bank, it is expected that all material risks to the bank and its subsidiaries would be considered and that the approach would have integrity. SAMA anticipates initially that internal banks’ practices, procedures and systems to establish an internal target would vary depending on the complexity and range of business. It is expected banks would use appropriate stress and scenario testing to determine for them the level of capital necessary to mitigate the risk. While a bank may employ an economic capital model to set its own internal target, SAMA does not expect to employ an explicit model approval process under Pillar 2.
The level of sophistication in internal assessments of target capital levels for small domestic banks should be commensurate with the more focused and less complex nature of their business. Many of these banks’ will likely continue to be constrained by the assets-to-capital multiple. Therefore, their internal capital assessments may be materially simpler although they will need to demonstrate that they have analyzed the risks not covered by Pillar 1 and those risks are adequately covered by a reasonable cushion above the minimum.
A foreign banks’ branch may be able to employ the methodology used by its parent bank. However, the foreign banks’ branch would be responsible for explaining how the data and methodology have been modified to reflect its business strategy and the risks to which it is exposed in Saudi Arabia.
11.3 Substantial Compliance with Pillar 2
SAMA expects all Saudi Banks to identify, quantify, manage and monitor the relevant risks not covered under Pillar 1. Banks are expected to have a view on the importance of these risks and related risk mitigants in the context of their businesses and their operations. Also banks should be prepared to allocate appropriate capital for these risks. SAMA will examine the processes in the banks to manage Pillar II risks, compare these with its own assessment and agree on a suitable level of capital to be held for such risks. These risks include but are not limited to the following;
• Interest Rate
• Commission Rate
• Liquidity
• Reputation
• Strategic
• Concentration
• Underwriting
• Settlements
• Macroeconomic
• External Shocks
SAMA expects all banks to attain a risk-based tier 1 capital ratio in excess of the international minimums of 4 percent and 8 percent respectively. For some banks, however, higher target levels will be appropriate from time to time. Upon initial implementation of the advanced approaches to credit and operational risk, SAMA expects system-wide target risk ratios to remain at the high level.
11.4 Assessment Criteria for Capital
The capital ratio itself is an important factor in the SAMA's assessment of capital, but it is not the only factor. Assessment criteria include, for example: the quality of capital; the adequacy of capital to support the bank business plans and risk profile; the ability to access capital at reasonable rates to meet projected needs; and the strength of the bank’s capital management processes. Trends and the outlook regarding a company’s capital and earnings are also relevant in assessing the adequacy of a company’s current capital position. The various factors should all be considered in the context of the nature, scope, complexity and risk profile of the particular bank.
SAMA expects banks’ capital processes to encompass all major Pillar 1 and Pillar 2 risks and related risk mitigants to estimate a target capital level or range. It is expected that all banks will take a view on the level of additional capital to be provided for Pillar 1 risks beyond the Basel II calculations. The banks are expected to demonstrate the adequacy of the process and the methodology to SAMA. SAMA will make an independent assessment to arrive at additional capital for each bank.
SAMA will also consider information from a bank’s own internal assessments of risk or individual risks in its assessment of target capital levels; and evaluate how relevant and comprehensive a bank internal stress testing is, based on the nature of its risk-taking activities. SAMA expects the rating criteria will not become a formula-driven process of add-ons. Expert judgment will continue to be necessary for operationalizing the assessment criteria and integrate those results into the overall assessment.
12. Stress Testing
No: BCS 290 Date(g): 12/6/2006 | Date(h): 16/5/1427 Status: No longer applicable Please Refer to SAMA's Rules on stress testing for the updated requirements on stress testing.Stress Testing is a generic term for the assessment of vulnerability of individual financial institutions and the financial system to internal and external shocks. Typically, it applies 'What if' scenarios and attempts to estimate expected losses from shocks, including capturing the impact of 'large, but plausible events'. Stress testing methods include scenario tests based on historical events and information on hypothetical future events. They may also include sensitivity tests. A good stress test should have attributes of plausibility and consistency and ease of reporting for managerial decisions.
12.1 Stress Testing Under Pillar 1
The Basel II document has several references for banks to develop and use stress testing methodology to support their work on credit, market and operational risks. There are several reference to stress testing under Pillar 1 which are summarized hereunder:
Para 434 An IRB Bank must have in place sound stress testing processes for use in the assessment of capital adequacy. Examples of scenarios that could be used are (i) economic or industry downturn (b) market-risk events (c) liquidity conditions. Para 435 The bank must perform a credit risk stress test to assess the effect of certain specific conditions on its IRB regulatory capital requirements. The bank's stress test in this context should consider at least the effect of a mild recession scenario e.g. two consecutive quarters of zero growth to assess the impact on its PD's, LGD's and EAD's. Para 436 The bank's method should consider the following sources of information: bank's own data should allow estimation of the ratings migration; impact of a small deterioration in credit environment on a bank's rating; evaluate evidence of rating migration in external ratings. Para 437 National discretion with supervisors to issue guidance on design of stress tests. 12.2 Additional Pillar 1 Guidance on Stress Testing
Para 527(j) For calculation of capital charge for equity exposures where internal models are used there are some minimum quantitative standards to be applied. One of these standards requires that a rigorous and comprehensive stress testing program must be in place. In addition, under the Basel Market Risk Amendment document of 1996 there are stress testing requirements for banks using the internal models. These are contained in Section B.5 of the (1996) Amendment and are as follows:
• Among more qualitative criteria that banks would have to meet before they are permitted to use a models based approach are the following:
• Rigorous and comprehensive stress testing program should be in place.
• Cover a range of factors that can create extraordinary losses or gains in trading portfolios.
• Major goals of stress testing are to evaluate the capacity of the bank's capital to absorb potential large losses and to identify steps the bank can take to reduce its risk and conserve capital.
• Results of stress testing should be routinely communicated to senior management and periodically, to the bank's board of directors.
• Results of stress tests should be reflected in the policies and limits set by the management.
• Prompt steps are expected for managing revealed risks appropriately, e.g.
• Hedging
• Reducing size of exposures
• Scenarios to be employed:
• Historical without simulation (largest losses experienced)
• Historical with simulation (assessing effects of crisis scenarios or changes in underlying parameters on current portfolios)
• Mostly for adverse events, based on individual portfolio characteristics of institutions
12.3 Stress Testing Under Pillar 2
Under the Supervisory Review Process SAMA will initially review the Pillar 1 stress testing requirement for credit and market risks. How-ever, the Basel II document also covers stress testing under Pillar 2 and the relevant references are included in the following paragraphs:.
Para 726 In assessing capital adequacy, bank management needs to be mindful of the particular stage of the business cycle in which the bank is operating. Rigorous, forward looking stress testing that identifies possible events or changes in market conditions that could adversely impact the bank should be performed. Bank management clearly bears primary responsibility for ensuring that the bank has adequate capital to support its risks. Para 738 For market risk this assessment is based largely on the bank's own measure of value-at-risk or the standardised approach for market risk. Emphasis should also be placed on the institution performing stress testing in evaluating the adequacy of capital to support the trading function. Para 775 For credit concentration risk a bank's management should conduct periodic stress tests of its major credit risk concentrations and review the results of those tests to identify and respond to potential changes in market conditions that could adversely impact the bank's performance. Para 777 In the course of their activities, supervisors should assess the extent of a bank's credit risk concentrations, how they are managed, and the extent to which the bank considers them in its internal assessment of capital adequacy under Pillar 2. Such assessments should include reviews of the results of a bank's stress tests. Para 804 Under Securitization banks should use techniques such as static pool cash collections analyses and stress tests to better understand pool performance. These techniques can highlight adverse trends or potential adverse impacts. Banks should have policies in place to respond promptly to adverse or unanticipated changes. Supervisors will take appropriate action where they do not consider these policies adequate. Such action may include, but is not limited to, directing a bank to obtain a dedicated liquidity line or raising the early amortisation credit conversion factor, thus, increasing the bank's capital requirements. 12.4 Other Aspects Related to Stress Testing
12.4.1 There are no specific or explicit requirements in the Basel II document on stress testing for liquidity risk although some banks may wish to develop 'What if' scenarios for liquidity under stress conditions.
12.4.2 SAMA expects all banks to closely review the above Basel II recommendations on stress testing and develop specific strategies and methodologies to implement those that are relevant and appropriate for their operations. The Agency in its evaluation of banks method and systems under Pillar I will examine the implementation of these stress test requirements. It will also review the stress test methodologies and systems as part of its Supervisory Review Process.
12.4.3 As a minimum banks should carryout stress tests at least on an annual basis.
Implementation of the account verification service through the Instant Payments System (IPS) and the Saudi Rapid Financial Transfers System (RTGS)
In reference to SAMA circular No. (42047169) dated 06/07/1442H regarding the launch of the instant payments system "SARIE"; and SAMA's continuous efforts to develop financial services, increase the efficiency of the financial system, and enhance the growth of electronic transactions as part of the Financial Sector Development Program, SAMA emphasizes to all banks and financial institutions the need to adhere to the following:
1. Implement the account verification service before completing the addition and activation of the beneficiary for all financial transfers executed through the Instant Payment System (IPS) and the Saudi Rapid Financial Transfer System (RTGS), in accordance with the operational and technical requirements document for the service.
2. Provide the service in accordance with the rules of the SARIE system and its periodic updates.
3. Raise public awareness about the new service in coordination with Saudi Payments to achieve the desired benefits.
SAMA also emphasizes that all banks must complete the technical approvals for the account verification service and all necessary procedures before the date of 11/5/2023G. This should be done in coordination with Saudi Payments via email (onboarding@saudipayments.com).
Enabling Civil Society Organizations to Issue Prepaid and Deposit Cards
In line with SAMA's commitment to facilitating access to banking services for all customer segments, including the non-profit sector, and recognizing that certain important banking products and services, such as prepaid cards and dedicated deposit services, are not available to associations and non-profit organizations at some banks.
Accordingly, SAMA reiterates to all banks that there is no restriction on offering the aforementioned products to customers from associations and non-profit organizations. The issuance of these products must be based on the joint signatures of the authorized signatories on the bank account, as required by Rules for Bank Accounts. Prepaid cards must also be funded based on joint signatures of the authorized signatories through the available banking channels.
The Customer's Signature on all Pages of Contracts and Agreements
Based on the powers vested to the Central Bank under its Law issued by Royal Decree No. (M/36) dated 11/04/1442H, the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386H, and in line with the Financial Consumer Protection Principles and Rules, which encourage disclosure, transparency, customer education and awareness, including ensuring that the customer reads all terms and conditions before committing to the services and products provided by the financial institution, which are referred to in the third section (general conduct rules) of the Financial Consumer Protection Principles and Rules,
In order for SAMA to ensure that the customer (the natural person*) who deals with financial institutions receives fair treatment with transparency and honesty, banks and financing companies shall obtain the customer’s signature on all pages of contracts and agreements to which he/she is a party. The financial institution has the option of applying this requirement to legal persons, while emphasizing the financial institution’s responsibility for the risks related to legal person customers not signing all pages of contracts and agreements.
Special provisions for bank account opening agreements.Pursuant to SAMA's Circular No. (29811/67) dated 11/05/1493H, and to facilitate the process of opening bank accounts, it has been decided to allow the client to sign only once on the last page of the bank account opening agreement instead of signing each page, according to the following controls:
First: Each agreement must have a reference number (issuance number) clearly and prominently written on every page, including the last page signed by the client.
Second: The total number of pages of the agreement must be clearly and prominently stated on the page where the client signs.
Third: The bank must retain all models of bank account opening agreements in their various versions and updates, and publish them on the bank's website for clients to access and read.
Fourth: The last page signed by the client must include a statement confirming that the client has reviewed and agrees to all terms of the agreement.
And pursuant to SAMA's circular N0. (6013/67) dated 01/02/1441H, SAMA emphasizes that all banks operating in the Kingdom must adhere to the aforementioned instructions. It is also important for relevant departments to educate branch staff that the customer needs to sign only once on the last page of the bank account opening agreement. Please note that SAMA will take legal action if there is non-compliance.
*According to Circular No. (391000080993) dated 19/07/1439H.
Emphasizing the Importance to Be Prepared to Link with Open Banking Service Providers
Based on SAMA's efforts to achieve the strategic objectives of the Financial Sector Development Program, one of the programs of Saudi Vision 2030, and to support innovation and confidence in the financial sector, enhance competition and raise efficiency. With reference to SAMA's announcement dated 02/11/2022G regarding the issuance of the Open Banking Framework to enable banks and financial technology companies to provide Open Banking services.
SAMA emphasizes the importance of verifying the preparation of internal systems, procedures and policies to ensure technical readiness to start the tests, and to issue the necessary permits in coordination with the Permit Center in Saudi Payments by the end of December 2022G. In accordance with the technical standards contained in the Open Banking Framework, and in preparation for linking with Open Banking service providers during the first quarter of 2023G.
Controls for the Distribution of Public Investment Funds
Further to SAMA's instructions issued via Circular No. (63996/67) dated 27/10/1440H, which included SAMA's non-objection to contracting with persons licensed by the Capital Market Authority (CMA) for the purpose of distributing publicly offered investment funds ("the funds") through the banks' electronic channels.
Accordingly, SAMA would like to confirm that all banks must abide by the aforementioned circular in accordance with the following controls:
- The contract must be with the person licensed by the (CMA) solely for distributing publicly offered investment funds.
- The distribution of the funds must be exclusively through electronic channels, and the bank should not be a party to the relationship between the customer and the person licensed by the (CMA) while informing the customer about the banks status and that the funds are considered investment products of the licensed person, not banking products.
- The customer should not be able to open an investment account for the person licensed by the (CMA) via the bank's electronic channels, and the role of the bank should be limited to filling out and signing related documents only.
- customers should be able to subscribe to the funds through the bank's electronic channels without the ability to dispose of it, such as selling or cancelling their subscription.
- The subscription process for the funds should not be complete until the licensed person by the (CMA) contacts the customer and informs him of the fund's suitability.
For your information and action accordingly as of this date. SAMA also emphasizes the necessity of maintaining a separation between banking activities and investment activities.
- The contract must be with the person licensed by the (CMA) solely for distributing publicly offered investment funds.
Facilitation and Acceleration of the Bank Account Opening Process for Foreign Companies
Referring to the program aimed at attracting regional headquarters of foreign companies to the Kingdom, a joint initiative between the Ministry of Investment and the Royal Commission for Riyadh City, which aims to enhance the Kingdom's economy, job opportunities, national capabilities and expertise. This program recognizes the need for these companies to deal with banks to facilitate their banking transactions and benefit from various banking services and products.
Accordingly, SAMA would like to emphasize that all banks should facilitate and expedite the procedures for opening bank accounts for foreign companies, enabling them to benefit from various services and products, and discussing the possibility of allocating units or establishing offices within the ministry to facilitate the provision of banking services to this category of customers.
For your information and action accordingly, and provide SAMA with the bank's plan to support the aforementioned initiative via email before the date of 20/11/2022.
Approved Documents and Certificates
Acceptance of Conciliation Documents Including Proof of Custody Issued by the Reconciliation Center
In reference to SAMA's receipt of the Ministry of Justice telegram No. (446842135) dated 18/10/1444H, which includes a request to instruct banks to accept conciliation documents issued by the Reconciliation Center that confirm custody, based on the working rules and procedures in reconciliation offices issued by the Minister of Justice's decision No. (5595) dated 29/11/1440H.
Therefore, SAMA emphasizes that all banks must accept the conciliation documents issued by the Reconciliation Center that confirm custody, applicable for banking transactions that the custodian can conclude on behalf of the ward. The documents can be verified electronically through the Taradhi Platform Portal.
Approval of "Apostille" Authentication for Foreign Public Documents
In reference to Royal Decree No. (M/40) dated 26/05/1443H, approving the Kingdom of Saudi Arabia's accession to the Hague Convention on the Abolishment of the Requirement for authentication of Foreign Public Documents ("Apostille"), and to the Ministry of Foreign Affairs telegram No. (226041-44-001) dated 24/08/1444H, which included a request to accept the "Apostille" certificate as an accredited certification for the aforementioned documents without the need for further authentication by the Ministry of Foreign Affairs or relevant diplomatic and consular missions. Additionally, the telegram outlined a mechanism for verifying the validity of the certificate, aligning with the goals of the convention to replace the traditional authentication process with a streamlined procedure through the issuance of a certificate called "Apostille."
Accordingly, SAMA confirms to all banks that there is no need for authentication by the Ministry of Foreign Affairs or relevant embassies for documents issued abroad that bear the "Apostille" certificate, provided that they meet the formal requirements set forth in the convention. The validity of the certificate can be verified independently through any of the following means:
1. The Quick Response (QR) code or contact information available on the "Apostille" certificate.
2. The website of the Hague Conference on Private International Law
Acceptance of the Digital Family Registry on Absher platform and Tawakkalna Application
Further to SAMA's instructions issued via Circular No. (43010538) dated 02/02/1443 H regarding the acceptance of the digital ID on Absher platform and Tawakkalna application, we inform you that the Ministry of Interior has launched an electronic copy of the (Family Register for Citizens) document issued by the (Absher) platform on the (Tawakkalna) application in partnership with the Data and Artificial Intelligence Authority, in order to facilitate citizens by enabling the relevant authorities to view the family registry data by simply reviewing and reading the binary code (QR code).
It is required that all financial institutions accept the (Family Registry for Citizens) document available through the (Absher) platform and the (Tawakkalna) application for transactions that do not require a physical copy of the document, subject to the same regulations and provisions applicable to hard copies of these documents.
Enabling Holders of Self-Employment Certificates to Open Bank Accounts
Further to SAMA's instructions issued via Circular No. (42009007) dated 18/02/1442H, which emphasize the adopting the self-employment certificate and enabling its holder to open bank accounts to manage their financial operations, and referring to the continuous challenges faced by holders of this document when opening bank accounts through branches, such as being directed to electronic channels to open an account, with some banks’ electronic channels lacking the option to open an account electronically for this category, which enable them to practice their specific business specified for them in the Freelance Work Document.
Therefore, SAMA emphasizes that all banks and financial institutions must accept the opening of bank accounts for holders of the Freelance Work Document in accordance with Rule No. (300-1-1-4) of the Rules for Bank Accounts, whether through branches or electronic services. They should also facilitate the provision of electronic payment methods for them through point-of-sale devices or other means and ensure that branch employees are informed about enabling holders of the self-employment certificate to open accounts within one working day after completing the requirements outlined in the aforementioned rule.
Acceptance of the Digital ID on Absher Platform and Tawakklna Application
In reference to the launch of the Ministry of Interior's electronic version of the national identity in the (Absher/Individuals) application, under the name of the digital identity, in cooperation with the National Information Center in order to facilitate citizens to verify their identities by allowing the beneficiary to view the national identity data electronically, and to adopt the digital identity of citizens from the Absher platform which includes a Quick Response (QR) code as a personal identification card, subject to the provisions outlined in the Civil Status Law and its Executive Regulation regarding the proof of the identity of the holder, as well as its acceptance in the Tawakkalna application.
I would like to inform you that financial institutions must accept the electronic identity for existing customers in transactions that do not require taking a copy of it. It is also necessary to continue assessing and reviewing the risks that may arise from relying on the electronic identity and to establish a suitable mechanism for obtaining a copy of the identity electronically for transactions that require a copy.
According to Circular No. (43075379) dated 14/08/1443H, and in reference to the launch of the electronic version of the (Family Registry for Citizens) document issued from the (Absher) platform on the (Tawakkalna) application in collaboration with the Data and Artificial Intelligence Authority; this facilitates citizens by enabling relevant entities to access Family Registry data by simply scanning the QR code.
It is also required that all financial institutions accept the (Family Registry for Citizens) document available through the (Absher) platform and the (Tawakkalna) application, within the scope of operations that do not require a copy of the document, subject to the same regulations and provisions applicable to printed copies of these documents.
Approval of Documents, Instruments and Certificates Electronically Approved by Chambers of Commerce
In reference to the electronic services provided by the Chambers of Commerce for the authentication of documents, certificates, and records issued by the membership sector through the chamber's website.
SAMA emphasizes that all banks operating in the Kingdom must accept all documents and records authenticated electronically by the Chambers of Commerce. Verification of the authentication can be done through the electronic links provided in the accompanying list.
List of Chambers and Electronic Links
No.
Chamber
Electronic Link
1
Riyadh Chamber* 2
Jeddah Chamber 3
Eastern Province Chamber 4
Makkah Chamber 5
Jazan Chamber 6
Arar Chamber 7
Abha Chamber 8
Al-Ahsa Chamber 9
Hail Chamber 10
Al-Jawf Chamber 11
Hafar Al-Batin Chamber 12
Najran Chamber 13
Al-Kharj Chamber 14
Al-Zulfi Chamber 15
Al-Majma'ah Chamber 16
Yanbu Chamber 17
Bisha Chamber 18
Unaizah Chamber 19
Medina Chamber 20
Qassim Chamber 21
Al-Qurayyat Chamber 22
Al-Baha Chamber 23
Taif Chamber 24
Tabuk Chamber 25
Al-Mukhwah Chamber 26
Al-Buqayriah Chamber es.bukcci.org.sa/#/DocumentVerify
27
Al-Rass Chamber 28
Al-Quwayiyah Chamber No electronic link available; manual authentication is used.
*Please refer to Circular No. 53699/41 dated 2/12/1439 H regarding the electronic verification service for documents, certificates, and authenticated records from the Riyadh Chamber.
Use the English Translation of Commercial Register for Commercial Entities
Based on SAMA's supervisory and regulatory role over banks operating in the Kingdom in organizing and protecting the sector, and to avoid the exploitation of similar names among commercial entities for the purpose of obtaining banking facilities or products.
Therefore, SAMA emphasizes that banks operating in the Kingdom must adopt the specified English name in the translated commercial registry service issued by the Ministry of Commerce when entering into salary transfer agreements with customers from commercial institutions and companies.
For your information and action accordingly within one month from its date.
Acceptance of Documents from the Social Development Centers Regarding the Accounts of Associations, Civil Institutions and Cooperative Societies
Referring to Rule No. (300-1-5-2) concerning private associations, Rule No. (300-1-5-3) concerning private foundations, and Rule No. (300-1-5-6) concerning cooperative associations and funds, as stated in the banking account rules communicated by SAMA (67/65681) dated 1440/11/01 H, and referring to SAMA Circular No. (371000010677) dated 1437/01/26 H regarding the acceptance of documents from social development centers upon fulfilling the requirements of the aforementioned rules.
We inform you that social development centers are authorized by the Ministry of Human Resources and Social Development to approve the election, formation, reformation, and extension of the boards of directors of charitable associations and institutions, as well as cooperative societies, and to approve the persons authorized to sign on behalf of these entities' accounts.
Accordingly, we would like to confirm the acceptance of documents from social development centers in the Kingdom upon fulfilling the requirements of the aforementioned rules, as follows:
- Decision to form, re-form, and extend the boards of directors of charitable associations and institutions, as well as cooperative societies.
- Approval to sign on the accounts of charitable associations and institutions for individuals other than those designated in the aforementioned rules, as well as opening sub-accounts for expenses or identifying those authorized to sign on them.
Adopting the Self-Employment Document and Enabling its Holder to Open Bank Accounts
The instructions of SAMA communicated via email on 5/5/2020G regarding the approval of the freelance work document and enabling its holder to open bank accounts to manage their financial operations. These instructions are effective from the date they were communicated to you via email.
Referring to" Rule No. (300-1-1-4) for bank accounts of Freelance Job Permit Holder contained within Account Opening Rules reported under SAMA's Circular No. (65681/67) dated 01/11/1440H
SAMA emphasizes on the importance of accepting the opening of bank accounts for holders of these documents in accordance with the provisions of the above-mentioned rule. The validity of these documents can be verified through the Freelance platform at the following link: (Freelance.sa), through the QR Code shown on the document, or through technical integration with the Freelance Portal.
Electronic Powers of Attorney
Attached are the instructions from SAMA communicated via email on 22/03/2020G regarding the acceptance of electronic powers of attorney, which are effective from the date of notification to you via email.
Referring to the instructions from SAMA communicated through Circular No. 18626/67 dated 24/03/1440H regarding the Launch of Electronic Powers of Attorney Service provided by the Ministry of Justice, which allows beneficiaries to issue the powers of attorney electronically without the need to visit notary offices or notaries, and that the issuance of paper deeds for the powers of attorney has been canceled, with their information stored electronically and made available for verification through the ministry's website. Additionally, the (Wathiq) service allows for the electronic verification of the powers of attorney in accordance with the Electronic Transactions Law issued by Royal Decree No. (M/18) dated 8/3/1428H and its implementing regulation.
Given the observed requests from some banks for paper powers of attorney from their customers, which does not align with the aforementioned instructions, SAMA confirms that all banks operating in the Kingdom must comply with the acceptance of electronic powers of attorney and verify them through reliable means.
Launching E-Service of Verdicts and Terminations
Referring to the launch of Ministry of Justice's service "Electronic Service of Verdicts and Terminations" starting from 17/10/1440 H gradually in the courts, which allows beneficiaries to receive verdicts and termination certificates electronically via a text message to their mobile phones without the need to visit the court. The issuance of paper verdicts for rulings and terminations has been discontinued, with the information being saved electronically and made available through the electronic verification means provided by the ministry to all government entities via the Government Integration Channel (GSB) under the Government Electronic Transactions Program (Yesser) through the service (Verification of Judgment Verdict), and for other entities through the Najiz portal, with automatic responses from the ministry's systems confirming the accuracy of the information, status, and details of the verdict, as well as recording the verification information, the entity that conducted the verification, and the result in the ministry's systems for future reference.
Accordingly, SAMA emphasizes the importance for all banks operating in the Kingdom to accept the electronic verdicts issued as mentioned above and to verify them through the available means referred to above. It is noted that SAMA will take legal action in the event of non-compliance with these instructions.
Establishing Limited Liability Companies Does not Require Opening a Bank Account
Further to SAMA's instructions issued under Circular No. 381000053455 dated 17/05/1438 H regarding procedures of the Ministry of Commerce and Investment for the establishment of institutions and companies , as well as the conditions and requirements for obtaining a commercial register and company bylaw, and to the efforts of the National Competitiveness Center to improve the Kingdom's ranking in global competitiveness indicators, SAMA is keen to achieve the first rank in the "Starting a Business" indicator, which is one of the key measures in the World Bank's Doing Business report.
SAMA would like to confirm that there are no prior requirements for establishing limited liability companies, partnerships, professional companies, or limited partnership companies, including the opening of bank accounts. The deposit of capital is no longer a condition for obtaining commercial registrations for these companies, enabling entrepreneurs to establish these companies easily and without any prior requirements, while adhering to the provisions set forth in the banking account rules in this regard.
The Mandatory Requirement of Using Qawaem Program Before Providing Credit Facilities to Commercial Entities
Further to the instructions issued by SAMA under Circular No. 371000002391 dated 7/1/1437 H regarding urging banks operating in the Kingdom to participate in "Qawaem" program prepared by the Ministry of Commerce and to rely solely on the reliable financial statements available in this program, which aims to enhance and increase work efficiency, benefit from deposited financial statements, and strengthen the credibility and reliability of accounting information, in addition to raising the level of transparency for commercial entities.
Given the program's contribution to improving the quality and reliability of accounting information, which is considered one of the main sources for assessing credit risks for commercial entities, SAMA emphasizes that all banks operating in the Kingdom must commit to using the "Qawaem" program as a source for obtaining the financial statements of commercial entities required to be deposited in the program before granting any credit facilities or during the periodic internal update process for assessing credit risks.
For your information and action accordingly as of 16/8/2019.
Launch of Electronic Powers of Attorney Service
Referring to the letter from His Excellency the Minister of Justice, No. 748034/40, dated 3/3/1440 H, which mentions the ministry's efforts to develop and improve the quality of services provided to beneficiaries and enhance their reliability to support the ministry's objectives in the electronic transformation of notarization services.
I would like to inform you that the Ministry of Justice launched the Electronic Power of Attorney Service on Sunday, corresponding to 10/3/1440 H. This service will allow beneficiaries to issue Powers of Attorney electronically without the need to visit notary offices or notaries. The issuance of paper deeds for the Powers of Attorney has been cancelled, and their information will be stored electronically and made available for verification through the ministry's website. Additionally, the (Wathiq) service provided by Thiqah for Business Services will allow for the electronic verification of Powers of Attorney in line with the Electronic Transactions Law issued by Royal Decree No. (M/18) dated 8/3/1428 H and its Implementing Regulation.
I hope to ensure compliance with the acceptance of electronic Powers of Attorney and to verify them using the available methods mentioned above.
Electronic Verification of Documents, Certificates and Instruments Approved by Riyadh Chamber
Referring to the electronic services provided by the Riyadh Chamber for verifying and authenticating documents, certificates, and records through the E-SERVICE portal.
We inform you that the Riyadh Chamber is in the process of fully transitioning to electronically authenticating documents, certificates, and records, replacing the previous authentication method (security sticker) available through the link mybusiness.chamber.sa. Accordingly, SAMA emphasizes the necessity for banks operating in the Kingdom to adopt the electronic authentication method and to develop internal procedures and policies to align with the introductory guide from the Riyadh Chamber.
Acceptance of Electronically Documented Contracts for the Establishment of Limited Liability Companies
In reference to the Ministry of Commerce and Investment telegram No. 30417 dated 05/06/1439 H regarding some amendments to the documentation of companies' bylaws, allowing these contracts to be documented electronically for limited liability companies with Saudi partners (not minors) or a Saudi individual or resident registered with a residency number.
SAMA confirms that finance companies must accept companies' bylaws for limited liability companies that have been documented electronically and do not contain notarization stamps but only the stamp of the Ministry of Commerce and Investment. Verification of the incorporation contract data should be conducted using the currently applicable service used by banks and financial institutions operating in the Kingdom or by visiting (Aamaly) Magazine at this link (attached is a model of company bylaw for reference).
Acceptance of Company Electronic Incorporation Contracts
In reference to the Ministry of Commerce and Investment telegram No. 30417 dated 05/06/1439 H regarding some amendments to the documentation of incorporation contracts, allowing these contracts to be documented electronically for limited liability companies established by Saudi partners (not minors) or a Saudi individual or resident registered with a residency number.
SAMA emphasizes that banks must accept incorporation contracts for limited liability companies that have been documented electronically and do not contain notarization stamps but only the stamp of the Ministry of Commerce and Investment. Verification of the incorporation contract data should be conducted using the currently applicable service used by banks or through the "My Business" portal via the link provided in the incorporation contracts (attached is a sample incorporation contract for reference).
Approved Electronic Services for Identity Verification (KYC)
In reference to SAMA Circular No. 37100018071 dated 12/02/1437H and Circular No. 381000025290 dated 06/03/1438H regarding the use of the electronic service approved by the National Information Center to verify customer identities electronically.
SAMA would like to emphasize that utilizing the aforementioned electronic services enhances the support and effectiveness of the supervisory process in the banking sector, ensuring security requirements and continuous monitoring to receive appropriate real-time alerts whenever there is a change in customer data. Additionally, there is no need for the customer to visit the bank to verify their identification when renewing or updating their account, provided that the bank verifies identity information using the electronic services mentioned above. The bank must comply with all other regulatory requirements and assess risks to determine the necessity of further documentation.
The Service of Issuing Electronic Certificates through the Employer’s Account on the General Organization for Social Insurance Website
SAMA received the circular of H.E. the Governor of the General Organization for Social Insurance No. 37441, dated 27/06/1437H, addressed to all ministries and government agencies. The circular states that in an effort by GOSI to provide possible electronic services to employers that enable them to obtain GOSI services electronically without the need to visit GOSI offices in order to save time and effort on employers, the electronic certificate issuance service will be launched for employers through the employer’s account on GOSI website. Without the need for the employer to revert to GOSI. Note that this certificate is considered an official document that does not require authentication or signature.
The entity requesting this certificate shall verify its authenticity by accessing GOSI website through the link gosi.gov.sa/portal/web/guest/238, and you will find accompanied by a sample of this certificate.
On 03/07/1437 H, corresponding to 10/04/2016 G, the electronic certificate issuance service for employers was launched through the employer’s account on GOSI website.
Cancellation of the Requirement for Official Stamps on Documents and Papers Submitted for Financing Transactions
In reference to the Ministry of Commerce and Investment letter No. (23475) dated 05/05/1438 H, which refers to Ministerial Decision No. (22895) dated 03/05/1438 H, amending Ministerial Decision No. (817) dated 19/07/1417 H regarding the identification of certificates, documents, and papers issued and certified by the chambers of commerce and industry in the Kingdom. The decision included the removal of the requirement for an official stamp to authenticate certificates, documents, and papers issued by private sector establishments. Also, in referring to the letter of Ministry of Commerce and Investment No. (16266) dated 28/03/1438 H, which refers to the Royal Order No. (11154) dated 29/02/1437 H, approving the recommendations of the Economic and Development Affairs Council regarding the competitiveness of the Kingdom's investment environment, and the proposed recommendations to enhance competitiveness and facilitate the start of business activities, including the cancellation of the official stamp requirement for institutions and companies.
It has been observed that some financing companies are requesting the official stamp of institutions and companies on the documents submitted during financing transactions without a regulatory requirement for this, which negatively impacts the competitiveness of the investment environment in the Kingdom.
Therefore, SAMA emphasizes to licensed financing companies not to request the official stamp of institutions and companies on the documents submitted during financing transactions, without compromising the requirements of the Know Your Customer principle.
Document Approval of Title Issued by the Economic Cities Authority
Based on Article 21 of the Finance Companies Control Law and Article 22 of the Implementing Regulations of the Finance Lease Law, and in reference to Articles 13 and 14 of the Regulation of the Economic Cities Authorities issued by Royal Order No. A/19 dated 10/03/1431 H, which states that: "The Authority shall issue a certified official document for each owner or beneficiary of a property registered in the real estate records in the economic city. The document shall fully record its data in the notary records of the Authority and be certified according to the rules for issuing ownership documents approved by the Authority. The Authority requires every owner or beneficiary of a property or those disposing of it within the economic cities to present the necessary documents and papers."
Therefore, all real estate financing companies must accept the ownership document issued by the Authority of Economic Cities for any property or land owner within the economic cities as an officially recognized ownership document that serves in place of the property title recognized outside the economic cities.
Approval of the Electronic Commercial Register
SAMA received a letter from the Ministry of Commerce and Industry No. 267/3/1/39/A dated 13/01/1436 H, which states that the ministry is fully prepared to launch the new version of the electronic commercial register, which will be applied across all regions of the Kingdom during the month of November 2014, in an effort to develop its electronic services to the business sector and to provide convenient and easy services for all customers and beneficiaries. Through this new version, the commercial register certificate will be issued as a document with electronic encoding (QR code), so that it can be printed by the applicant without the need to obtain a traditional commercial registration certificate.
Therefore, we hope to adopt the electronic commercial register certificate as an official document. It can be verified by entering the registration number or by scanning the QR code through the ministry's website.
The Ministry of Social Affairs Issuing a New Facility Called (Shahadah)
SAMA received a letter from the Governor of the General Organization for Social Insurance No. 192359/5/M dated 19/01/1434 H, stating that the General Organization for Social Insurance has launched a new service called (Shahadah), which allows for the electronic issuance of duration certificates. As of 17/01/1434 H, subscribers or beneficiaries can print the certificate electronically by accessing their account on the General Organization for Social Insurance website, and banks can verify the validity of these certificates through the organization's website. The General Organization for Social Insurance wishes to inform banks to accept these certificates.
Therefore, we would like to inform you that SAMA has no objection to accepting the issuance of duration certificates and verifying the validity of the data on these certificates electronically through the General Organization for Social Insurance website.
Family Record Document to be Accepted as an Updated Version of the Family ID Document
SAMA received a copy of the circular of His Royal Highness the Minister of Interior Telegram No. 20882/C dated 07/12/1428 H stating that the family book has been developed to become the size of the national identity card under the name of "Family Record", where it can accommodate the addition of (11) family members whose names are printed on the front and back sides of the record, and in the event that the number of family members is more than that, the names are printed on an additional copy of the family record bearing the same data and photo of the owner of the record. The new version adds more security protection, so that the photograph of its holder is printed, in addition to adding many features in it, and its small size was taken into account for ease of carrying with clarity of data. His Highness directed the approval of the acceptance of the family register with the continuation of the family book for those who did not obtain the family register until instructions were issued to determine the expiry date of the family book.
With reference to the second update of the rules for opening bank accounts in commercial banks and the general rules for their operation in commercial banks reported to banks operating in the Kingdom under circular No. 5555/BCI/95 dated 08/02/1428 H, and with reference to Rule No. (200-1-1) of the third – procedural rules for Saudi citizens, we inform you of the adoption of the acceptance of the (family record) as an identification document for citizens in cases where it has been stipulated to accept the (family book) as an identification document, in accordance with the above-mentioned rules.
Accepting Iqamas Having Two First Names for Opening Accounts
In reference to the instructions contained in the rules for opening accounts in commercial banks regarding the opening of accounts for residents, which state that the bank must match the name on the residency permit with that written in the passport when opening the account for a resident. If there is a discrepancy, the account should not be opened, and the client should be advised to make corrections through the Passport Department.
We would like to inform you that recently issued magnetic residency permits include only the binary name of the expatriate. Therefore, there is no objection to accepting the opening of accounts with these residency permits for residents, provided that the first and second names contained on the residency permit match those in the passport. The date of account opening should be considered as a substitute for the residency issue date, and it is essential to maintain the field for the validity of the identity as a time for beginning of freezing and updating the account.
Documents Issued by Private Sector Organisations and Certified by the Chamber of Commerce
SAMA received a letter from the Secretary-General of the Council of Saudi Chambers regarding the restriction of authentication of signatures from companies and private sector institutions to the Chambers of Commerce only, and the non-acceptance of any document unless it has been authenticated by the Chambers of Commerce, as stated in the circular issued by His Royal Highness the Minister of Interior in this regard.
Under Circular No. (42085168), dated 2/12/1442H, corresponding to 11/07/2021G, SAMA emphasizes that all banks operating in the Kingdom must accept all documents and records authenticated electronically by the Chambers of Commerce.
Granting the US-Saudi Business Council the Authority to Certify Commercial Documents for American Exports to KSA
SAMA received the letter of HE the co-chairman of the Board of Directors of the US Saudi Arabian Business Council No. M/126/97 dated 11-6-1418H, based on the approval of the Council of Ministers, in its decision No. 5/B/1788 dated 6-2-1418H, to grant the Council the power to certify shipping documents for US goods exported to the Kingdom of Saudi Arabia, which is now practiced by the US Arab Chamber of Commerce.
Consequently the certification by the Council of shipping documents for US exports to the Kingdom of Saudi Arabia shall be applicable instead of the certification by the US Arab Chamber of Commerce as of 3 November, 1997. Saudi embassies and consulates in the USA will not accept the certification of the US Arab Chamber of Commerce after this date.
Acceptance of the Premium Residency as an Approved ID
In reference to the Central Bank's supervisory and regulatory role over the financial institutions under its oversight, based on the powers granted to it under the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386H, the Cooperative Insurance Companies Control Law issued by Royal Decree No. (M/32) dated 02/06/1424 H, the Financing Companies Control Law issued by Royal Decree No. (M/51) dated 13/08/1433H, the Rules governing Money changing Business issued by Minister of Finance Decision No. (1357) dated 01/05/1432H, and Council of Ministers Decision No. (266) dated 02/05/1440H regarding SAMA's authority to supervise and regulate the payments sector. Additionally, referring to Royal Decree No. (M/106) dated 10/09/1440 H approving the Premium Residency Permit Law.
SAMA would like to confirm the acceptance of the Premium Residency, both (permanent and temporary), issued by the Premium Residency Permit Center as an approved identification allowing its holder to benefit from the financial products and services offered by financial institutions. (Attached is the model of the permanent and temporary Premium Residency Card).
Supporting the Programs of the Martyrs, Wounded, Prisoners of War and Missing Persons Fund
Referring to Cabinet decision No. (366) dated 14/08/1436H, which approved the establishment of the Fund for Martyrs, Injured, Prisoners, and Missing Persons, granting it legal personality and financial and administrative independence.
In recognition of the efforts of our brave soldiers stationed at the borders of the Kingdom of Saudi Arabia for its security and protection, and out of a desire to support this cherished group, SAMA requests support for the Fund's programs through the bank's corporate social responsibility initiatives. Coordination in this regard can be made with the Fund's representative.
Data Quality Improvement Project in the e-Commerce Sector in the Kingdom
Based on the tasks and powers vested to SAMA under the Saudi Central Bank Law issued by Royal Decree No. (M/36) dated 11/04/1442H and the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386H, and referring to SAMA Circular No. (3910000075005) dated 02/07/1439H, regarding the use of MADA bank cards for buying products through internet, and in view of the growth of the e-commerce sector in the Kingdom and the desire to improve the mechanism of data collection related to e-commerce.
SAMA stresses to all banks the importance of adhering to the operational framework and technical and operational rules of the Data Quality Improvement Project, which was shared with all banks in April 2022 by Saudi Payments company taking into account the commitment to the following:
- First: Complete all requirements mentioned in the operational framework, and the technical and operational rules of the Data Quality Project.
- Second: Commit to sharing data based on the mechanism of sending data agreed upon with Saudi Payments.
For your information and action accordingly as of this date, with emphasis on the commitment of all parties to the provisions of the Personal Data Protection Law issued by Royal Decree No. (M/19) dated 09/02/1443H concerning the retention, collection, processing, and sharing of personal data; provided that the requirements must be completed, and the above-mentioned commitments is complied with within (20) working days and provide Saudi Payments with the procedures that have been adopted in this regard via email: BusinessOps@saudipayments.com.
- First: Complete all requirements mentioned in the operational framework, and the technical and operational rules of the Data Quality Project.
Unified Instructions for Amounts Excluded from Seizure under Judicial Orders
No: 43043372 Date(g): 19/12/2021 | Date(h): 15/5/1443 Status: In-Force Translated Document
Further to SAMA's Circular No. (42073079) dated 21/10/1442H, which includes a list of all amounts excluded from seizure under judicial orders, and in reference to SAMA's receipt of the letter from His Excellency the Deputy Minister of Justice No. (439351559) dated 23/04/1443H regarding the exemption of amounts deposited by the Ministry of Health for beneficiaries as compensation for residence outside the city for medical treatment from seizure under judicial orders, considering these amounts fall under Article 21 of the Enforcement Law, which prohibits the seizure or execution against funds related to the debtor's basic needs.
Attached is the updated table for the instructions mentioned above, which includes the amounts deposited by the Ministry of Health for beneficiaries as compensation for residing outside the city for medical treatment, excluded from seizure under judicial orders, along with its identification code in the SARIE system to distinguish it from other transfers.
Amounts Excluded from Seizure under Judicial Orders
Amounts Excluded from Seizure under Judicial Orders
#
Depositing Entity
Purpose of Deposit
Applicable Percentage for the Client
Identification Code
1
Ministry of Municipal and Rural Affairs and Housing
Housing Support
100%
(Code (SAK) in field 26T and code/SAKANI/ in field 70)
2
Social Development Bank
Social Funding
100%
(Code (SDB) in field 26T and code/SOCIALFUNDING/in field 70)
3
Ministry of Finance
Housing and Living Allowance for Evacuees from the Southern Border
100%
(Code (SUB) in field 26T and code/SUBSISTENCE/ in field 70)
4
Ministry of Human Resources and Social Development
Social Security Pension
100%
(Code (SSP) in field 26T and code/SOCIALSECURITY/ in field 70)
5
Human Resources Development Fund
Hafiz Support
100%
(Code (HFZ) in field 26T and code/HAFIZ/ in field 70)
6
Ministry of Environment, Water and Agriculture
Agricultural Subsidy
100%
(Code (AGR) in field 26T and code/AGRSUBSIDY/ in field 70)
7
Misk Foundation
Financial Support from the Sanad Muhammad bin Salman Program
100%
(Code (SND) in field 26T and code/SANAD/ in field 70)
8
Charitable Organizations
Donations, Grants
100%
(Code (CHA) in field 26T and code/CHARITY/ in field 70)
9
Quran Memorization Schools – Ministry of Education
Allowance for Children Deposited in Parents' Frozen Accounts
100%
(Code (MOE) in field 26T and code/STUDENTREWARDS/ in field 70)
10
Alimony Fund
Alimony Payments
100%
(Code (NFQ) in field 26T and code/NAFAQAH/ in field 70)
11
Ministry of Health
Compensation for Residency Outside the City for Medical Treatment
100%
(Code (MOH) in field 26T and code/REFFERRALEXPENSES/ in field 70)
12
Ministry of Finance
Monthly Returns
67%
(Code (BEN) in field 26T and code/MONTHLYBENEFIT/ in field 70)
13
General Organization for Social Insurance
Professional Compensation
67%
(Code (GOS) in field 26T and code/OCCUPATIONALALLOWANCE/ in field 70)
14
Ministry of Human Resources and Social Development
Sanid Support
67%
(Code (SND) in field 26T and code/SANID/ in field 70)
FATCA - Registration and GIIN
We refer to our memo dated 30 June 2014, related to Foreign Account Tax Compliance Act (USA), in which we had informed you that the Governments of the Kingdom of Saudi Arabia and the United States of America had reached an Agreement in Substance and that KSA had consented to be included on the list of jurisdictions treated as having a Model 1 Inter-Governmental Agreement (IGA) in substance.
We have now received communication from the US Department of Treasury through the Ministry of Finance that the extension given to countries that have an agreement in substance to sign an IGA does not include any extension of deadline for their financial institutions to register with the IRS. After reviewing the registration form and based on external legal advice, SAMA does not have any objection for Saudi Banks to register with the IRS and obtain a Global Intermediary Identification Number (GIIN).
Use of Fair Value Model or Revaluation Model to Measure Property and Investment Property
Referring to the Capital Market Authority Circular No. (S/7/5/61/20) dated 02/01/2020G, which allows listed companies to use the fair value model or revaluation to measure real estate and investment properties for financial periods starting in 2022 or later, along with the related requirements.
We would like to emphasize that local banks listed on the Saudi Stock Exchange (Tadawul) must coordinate in advance with SAMA in case of a change to using the fair value model or revaluation to measure real estate and investment properties.
Use MADA Bank Cards for Buying Products through Internet
Referring to the five-year strategy of the National Payments System "MADA", which includes several pathways, one of which is the growth and expansion pathway aimed at providing payment services via the Internet through MADA bank cards to target new sectors within the fields of e-commerce in alignment with the aspirations of the Kingdom as part of Vision 2030 regarding digital transformation.
SAMA has decided to allow all banks to start activating MADA bank cards for completing online payment transactions starting from 01/04/2018, while considering the following points:
- Payment transactions for electronic stores within the Kingdom must be processed through the national payments system MADA in accordance with the commercial requirements, rules, and technical specifications that have been shared with banks during the past period. This should be done after completing the necessary tests and permits and obtaining the required approvals from the MADA Authorization Center at the General Directorate of Payment Systems.
- Purchasing transactions for electronic stores outside the Kingdom must be processed through international payment companies and laws according to the relevant rules and requirements.
- Approve the pricing schedule accompanying the transactions executed locally using MADA bank cards while considering any previous agreements signed with electronic stores for accepting electronic payment services.
- Enable cardholders to control the allowed limit for online purchases through electronic channels before the date mentioned in SAMA Circular No. 391000062299 dated 02/06/1439H.
- Continue to notify customers of transactions executed online through SMS while adhering to SAMA Circular No. 381000060893 dated 07/06/1438H regarding the transaction type "Purchase via the Internet".
SAMA also hopes that all banks will actively contribute in the coming period to educate their customers, both individuals and electronic stores, about how to benefit from the service and how to subscribe to it, including dedicating marketing and awareness campaigns for this purpose.
Approved Pricing Model for MADA Bank Card Transactions in E-commerce Environment
(1) MADA Network Fees
Brief Definition These are the fees paid by banks to SAMA for e-commerce transactions through MADA cards and consist of (a) Settlement Fees and (b) Authorization Fees. Pricing Model
• Authorization Fees
• Settlement Fees
Same pricing schedule as the basic pricing model for MADA devices for point of sale regarding MADA debit cards and MADA prepaid cards. (2) Bank Interchange Fees
Brief Definition These are the fees paid between banks. They refer to the fees paid by the acquiring bank to the issuing bank for each transaction conducted in the e-commerce environment, calculated based on the transaction value. Pricing Model
• Interchange Fees • 0.70% of the purchase transaction value is paid by the acquiring bank to the issuing bank for each transaction conducted through MADA cards in the e-commerce environment.
• There is no cap on bank interchange fees.
(3) Merchant Service Charge – MSC
Brief Definition These are the fees paid by the electronic store to the acquiring bank for each purchase made through MADA cards in the e-commerce environment, calculated based on the transaction value. Pricing Model
• Merchant Service Charge – MSC • 1.75% maximum for each purchase paid to the acquiring bank (Acquirer), as the liability percentage is negotiable between the acquiring bank and the merchant.
• There is no cap on merchant service charges.
According to SAMA Circular No. (43096118) dated 20/11/1443H, and due to the growth of the e-commerce sector in the Kingdom and the desire to improve the mechanism for collecting data related to e-commerce, SAMA emphasizes the importance for all banks to comply with the operational framework, and technical and operational rules related to the Data Quality Development Project, which was shared with all banks in April 2022 by the Saudi Payments Company, while ensuring compliance with the following:
- First: Complete all requirements mentioned in the operational framework and technical and operational rules related to the Data Quality Project.
- Second: Commit to sharing data based on the agreed mechanism for sending data with Saudi Payments.
With emphasis on the commitment of all parties to the provisions of the Personal Data Protection Law issued by Royal Decree No. (M/19) dated 09/02/1443H concerning the retention, collection, processing, and sharing of personal data.
Banks' Approvals for Licensed External Auditors in Saudi Arabia
Given the importance of collaborating with external auditors to support their opinions regarding financial statements by providing bank approvals.
SAMA hopes for the cooperation of banks with licensed external auditors in the Kingdom by providing bank approvals for the accounts and balances of customers under review, after obtaining the customer's documented approval of the authentication request.
Subsequent Letter on Remote Work Requirements for Customer Service Jobs
Following the instructions issued by SAMA as per Circular No. (42032166) dated 14/05/1442H, which emphasizes the registration of remote workers in customer service professions in the official records of the financial institution and the General Organization for Social Insurance, as well as the documentation of contracts for those workers in the electronic portal designated by the relevant authority. Additionally, referring to Decision of the Minister of Human Resources and Social Development No. (112203) dated 18/06/1442H, which restricts remote work in customer service professions to Saudi nationals.
Therefore, SAMA emphasizes that all financial institutions must adhere with the instructions mentioned above, along with the ministerial decision.
The Electronic Link with “Mudad”Platform
We inform you that SAMA has received a letter from the Minister of Human Resources and Social Development No. (187807), dated 18/10/1442H, including a request to direct banks to support the solutions provided by Mudad Business and to expedite the connection with the Mudad platform. This includes providing all necessary banking services for establishments and individuals. The platform offers a payroll management program that enables and facilitates employers and small and medium-sized establishments to conduct wage transfers for workers at nominal fees in a secure and documented manner. This contributes to increasing transparency and protecting workers' wages in the Kingdom, as well as helping combat commercial concealment and money laundering operations.
Accordingly, SAMA urges all banks operating in the Kingdom to electronically connect with the Mudad platform to enable it to provide necessary services for small and micro-establishments and individuals.
For your information and action accordingly, effective from this date.
Definition of the “Saudi Central Bank” as a Participant Bank in the Saudi Arabian Riyal Interbank Express
Based on the powers vested to SAMA under the Banking Control Law issued by Royal Decree No. (M/5) dated 22/2/1386H and Minister Council Decision No. (226) dated 2/5/1440H.
I would like to inform that banks should define "Saudi Central Bank" as a participating bank that receives customer payments via the Saudi Rapid Money Transfers System (RTGS) on the bank's electronic channels and allow individuals or companies to define accounts at SAMA among the entities to which transfers are allowed.
No Authentication Required by the Ministry of Foreign Affairs or Relevant Embassies for Foreign Documents Bearing an "Apostille" Certificate
Further to the instructions of SAMA communicated by Circular No. (44073468) dated 15/09/1444 H, which stipulates that the Ministry of Foreign Affairs or the relevant embassies do not need to certify foreign documents bearing the “Apostille” certificate.
Accordingly, in view of the observed failure of some banks to accept foreign public documents bearing the “Apostille” certificate due to the lack of Ministry of Foreign Affairs endorsement, SAMA emphasizes to all banks to abide by the above-mentioned instructions and to sensitize all branches and departments concerned about the same.Providing Backup Generators in Branches and Remittance Centers
Further to SAMA Circular No. 381000058504 dated 1/6/1438H, reporting the regulatory guide of Business Continuity Management Framework in the banking sector, and based on SAMA's supervisory and regulatory role in seeking to maintain the continuity of banking operations and reduce the risks that the banking sector may face from disasters and business interruptions
I would like to inform you that local banks must implement the necessary precautionary measures to ensure the continuity of branch services by finding alternative solutions and plans in the event of a power outage by the service provider – God forbid-. SAMA also hopes that efforts will continue to ensure the continuity of banking operations by providing backup generators for branches and main operating centers in various regions of the Kingdom, based on the bank's assessment, and to ensure service delivery to customers as required, ensuring that the backup generators can work and their absorptive capacity, and conducting the necessary periodic tests and maintenance to ensure the readiness of the backup generator to work in the event of any power outage by the service provider, in addition to coordinating with the Saudi Electricity Company to include the main and backup data centers and the bank's headquarters on a priority list and to discuss possible options with the company to provide full support and reduce the impact of scheduled and unscheduled power outages, ensuring a swift return to operations without affecting banking services.
Please take note and act accordingly as of 1/1/2022, and to provide SAMA within three months from its date with a list of branches that will be provided with backup generators, along with the designated timeline for this plan, ensuring it does not exceed the targeted date referred to above.
Establishing Policies and Procedures for Pledging Shares as Collateral Against Credit Facilities
Based on the supervisory and regulatory role of SAMA over banks operating in the Kingdom, and as an extension of the ongoing coordination between the SAMA and the Capital Market Authority to implement the responsibilities entrusted to both entities in a manner that enhances supervision and control of the financial sector and contributes to its development, and in consideration of the safety and stability of the financial sector; SAMA emphasizes the necessity for banks to establish internal policies and procedures for pledging shares as collateral against credit facilities, which should include – at a minimum – the following:
- A mechanism for accepting shares as collateral against credit facilities.
- Coverage rates for the pledged shares.
- Clarification of the provisions and mechanisms for execution on the pledged shares.
- Registration of the pledged shares in the Securities Depository Center through one of the investment companies that are members of the center.
- The pledge agreements should be independent from the financing agreements (to maintain the principle of banking secrecy), without prejudice to the aspects and principles related to the subordination of the pledge to the secured financing, and the agreements should be clear to protect the rights of all parties.
Enable the Mothers to Open Sub-Bank Accounts Linked to Their Main Account for Their Minor Children
Based on SAMA's keenness to provide banks various banking services that meet all customer needs, and with the aim of contributing to enabling mothers to manage their children's affairs, SAMA emphasizes the availability of opening sub-accounts under the main mother's account, designating these accounts in the name of the minor and for their benefit.
For your information and action accordingly as of its date.
Scope of Supervision and Control of Unlisted Financial Derivatives in Saudi Arabia
Based on the role of SAMA and the Capital Market Authority (CMA) in accordance with the relevant regulations to control and supervise a number of financial sectors and products in the Kingdom of Saudi Arabia, including banking and financial products, and in continuation of the cooperation between the two authorities and the importance of clarifying the regulatory and supervisory scope of unlisted derivatives contracts, products and services that represent banking products subject to the supervision and control of SAMA, and securities products subject to the supervision and control of the CMA.
We would like to inform you that the scope and supervisory mechanism for over-the-counter (OTC) derivatives in the Kingdom of Saudi Arabia is determined according to the type of product and the nature of the transaction, as follows:
First: The supervisory and regulatory scope of SAMA:
- Financial derivatives linked to currency and interest rates.
- Financial derivatives practiced by banks operating in the Kingdom if the practice of the business or part of it is practiced by the bank in accordance with the following criteria:
a. The bank's engagement in activities related to financial derivatives must be conducted within the context of its operations as a bank or as part of the banking activities and services it provides.
b. The bank's engagement in activities related to financial derivatives must be linked to other services it provides in the course of conducting its banking operations.
c. The bank's engagement in activities related to financial derivatives must be conducted as ancillary banking activities.3. Structured financial derivatives related to currency and/or interest rates.
Second: The supervisory and regulatory scope of the Authority:
- Financial derivatives linked to securities or their indices.
- Financial derivatives linked to commodities or their indices.
- Except for the structured financial derivatives contracts referred to in paragraph (3) of section "First" of this circular, structured financial derivatives contracts are subject to the supervision and oversight of the Authority.
Third: Handling complaints and protecting customers and clients:
SAMA and the Authority will handle complaints in accordance with the supervisory and supervisory scope outlined in this circular.To complete implementation within six (6) months from this date, we request all banks to inventory the contracts, products, and services related to unlisted financial derivatives provided by the bank, identify their nature, and classify them according to the clarifications mentioned above. Banks are also required to provide SAMA with the inventory results and their plan for compliance with the provisions of this circular via email at (BankingDataSection@SAMA.GOV.SA) within two (2) months from this date.
- Financial derivatives linked to currency and interest rates.
Instant Payments Launch (SARIE)
Referring to SAMA's role in overseeing and supervising the development of payment systems infrastructure and supporting non-cash transactions to achieve the objectives of the Financial Sector Development Program as part of Saudi Vision 2030 and enhancing the national payment systems in the Kingdom with the latest technologies in this vital and important field.
We would like to begin by thanking you for all the efforts made during the past period in various stages of developing the Instant Payment System (Sarie), which we have chosen to name as an extension of the significant developmental leaps witnessed by our national systems since 1997 when the Saudi Financial Transfers System was launched as the latest payment and settlement system at that time. Today, the launch of the system with its developed features for instant payments represents a new generation of payment services in the Kingdom. Its importance is embodied by the qualitative leap that (Sarie) will bring to the services provided to the banking sector, thanks to the utmost flexibility and high efficiency that the system will provide, along with multiple areas of innovation.
As we approach the official launch date of the Instant Payment System (Sarie) on February 21, 2021G, and due to its importance as a fundamental building block towards achieving the Kingdom's ambitious vision, confirming its global position in electronic payment systems, SAMA emphasizes the necessity for all participating members in the system to adhere to the following:
- Sign the membership agreement for the system and adhere to the latest technical and operational documents and service level agreements shared by the Saudi Payments team during the final stages of the project.
- Adherence to the maximum transaction limits for financial dealings through the system, such as the Single Transaction Limit and the Quick Transfer Limit for transactions executed without the need to activate the beneficiary.
- Adopt the maximum transfer fees for customers through the system at half a riyal for transactions equal to or less than 500 riyals, and one riyal only for transactions exceeding 500 riyals, while allowing for the retention of fees outlined in the previously circulated tariff for transactions exceeding the single transaction limit.
- Adhere to the guidelines of the branding document for the Instant Payment System (Sarie), and the related documents concerning the customer journey when dealing with the various services of the system, as shared by the specialized team at Saudi Payments.
- Inform all bank employees about the importance of the system and the benefits it provides, ensuring their comprehensive understanding of its mechanisms and preparing for anticipated customer inquiries.
- Take all necessary measures and adjustments to reference the Instant Payment System when using the term (Sarie) across all banking channels and bank publications directed at the public, instead of the Saudi Financial Transfers System.
For your information and to act accordingly, completing the necessary technical approvals before the launch on February 20, 2021G.
Financial Frauds Through Prior Authorization and Notification Features
Referring to the role of SAMA in combating financial fraud and overseeing financial transactions executed through various payment tools such as credit cards or debit cards, and similar instruments via point-of-sale devices available in stores and commercial sectors in the Kingdom.
It has been noted recently that some parties have been executing suspicious transactions via point-of-sale devices through fraudulent practices by exploiting the feature of the Preauthorization Transaction and the subsequent Capture/Purchase Advice using bank cards affiliated with global payment networks.
In order to protect banks, and financial technology companies hosting electronic payment operations, as well as their customers from any suspicious activities that may expose these entities to the consequences of financial fraud, SAMA emphasizes the importance of all providers of acquiring services for point-of-sale operations to comply with the relevant requirements and instructions pertaining to international payment networks when permitting this type of transaction. They must ensure that such transactions are exclusively available to targeted sectors according to the relevant standards. All service providers should monitor transactions executed through the preauthorization feature capture and investigate suspicious and high-risk transactions based on the customer segment and transaction amount. Additionally, they should develop fraud monitoring and detection systems in accordance with these standards, with a full commitment to the Guide to Combating Financial Fraud communicated under SAMA's Circular No. 41071315 dated 27/12/1441H.
Cancellation of the Requirement for the Official Stamp of Institutions and Companies on Documents and Papers Submitted in Dealings with Customers
Referring to the instructions issued by SAMA circular No. 41028325 dated 22/04/1441H, No. 391000031596 dated 18/03/1439H, No. 381000053456 dated 17/5/1438H, which includes the cancellation of the requirement for the official stamp of institutions and companies on documents and papers submitted in dealings with customers and emphasizing that.
Given the observed non-compliance by some banks with the aforementioned instructions, SAMA confirms that is sufficient to obtain the endorsement of the Chamber of Commerce alone, and not request the official stamp from institutions and companies on the documents and papers submitted in dealings with customers without compromising the requirements of the Know Your Customer (KYC) principle and due diligence procedures for customers, and to announce through available means.
For your information and action accordingly, and to notify all concerned departments and branches, and to provide SAMA with evidence of compliance with the content within a maximum period of five working days from its date via email (bankingpolicy@sama.gov.sa), noting that regulatory measures will be taken in case of non-compliance.
Instruction Not to Seize Alimony Payments Made by the Alimony Fund
SAMA has received a letter from the Ministry of Justice regarding the exemption of amounts deposited from the Alimony Fund into the bank accounts of beneficiaries. The funds that the competent court orders to be disbursed to the beneficiary are originally intended for the family and do not fall within the debtor's assets. The fund pays these amounts during the litigation period until they are recovered from the obligor.
Therefore, SAMA emphasizes to all banks operating in the Kingdom not to seize or enforce any amounts deposited from the Alimony Fund for beneficiaries. Please note that you will be provided via email with the identification code for the "SARIE" system to recognize these transfers and distinguish them from other transfers.
Please refer to the attached table in SAMA's circular No. (43043372), dated 15/05/1443H, corresponding to 19/12/2021G, to view the list of amounts exempt from seizure.
Suspension of Paragraphs 1 and 2 and Resumption of Implementation of the Provisions of Rule 3 on Freezing of Bank Accounts Contained in Chapter II of the Rules for Bank Accounts
Referring to SAMA's instructions notified via email on 19/08/1441H regarding the suspension of freezing bank accounts until further notice, extension the validity of expired ATM cards, and providing digital cards (virtual cards) for online shopping.
I would like to inform you that it has been decided to suspend the implementation of paragraphs (1) and (2) mentioned in the above instructions, and to resume operations as per Rule No. (3) of chapter two contained in the account opening rules related to the provisions of freezing of bank accounts.
To take note and act accordingly from its date, with emphasis on the necessity of notifying customers 90 days prior to any freezing procedure.
Companies and Institutions Must Not Be Required to Retrieve Canceled Commercial Registers
Referring to the request from banks for companies and institutions whose commercial records have been canceled to retrieve those records in order to collect their financial entitlements, whether through cheques or other means. In continuation of the ongoing coordination between SAMA and the Ministry of Commerce, it is required that all banks do not demand that companies and institutions retrieve canceled commercial records to receive their financial entitlements, with the following considerations:
1. If the beneficiary is a company, the financial entitlement shall be delivered to the authorized representative of the partners, after verifying the names of the partners according to the latest company bylaw using the services provided by the WATHIQ portal. 2. If the beneficiary is an institution, the financial entitlement shall be delivered to its owner, after verifying their identity using the services provided by the WATHIQ portal. Extension of Business Days to Include Saturdays to Provide Subsidized Real Estate Finance Products
Based on Article 16 of the Banking Control Law, and further to SAMA instructions issued by Circular No. (24543/67) dated 18/04/1440H, and Circular No. (41028596) dated 25/04/1441H, which included the provision of additional working hours on Saturdays to offer services related to the "Subsidized Financing" mortgage loan program under specific regulations.
I would like to inform you that it has been decided to extend Saturday working hours for providing services related to the mortgage loan program "Subsidized Financing" in accordance with the regulations outlined in the aforementioned instructions for another year from its date.
Non-Refusal to Seize the Bank Guarantee Letter to Initiate Bankruptcy Proceedings and Suspend Claims Against the Issuing Customer
Based on SAMA's supervisory and regulatory role in the banking sector, and in order to maintain financial and economic stability in the Kingdom, and relying on established judicial principles and banking customs regarding bank guarantee letter, which represent an original, direct, and independent commitment of the issuing bank regardless of the circumstances surrounding the customer who requested the issuance of the guarantee, this type of credit tool grants acceptance and trust among beneficiaries in both the public and private sectors. Acting otherwise would adversely affect the credit reputation in the Kingdom and the stability of transactions.
Accordingly, and after coordination with the relevant authorities, SAMA emphasizes that all banks operating in the Kingdom must not refrain from confiscating bank guarantee letter due to the initiation of any bankruptcy procedures or the suspension of claims against the customer who requested the issuance of the guarantee. Banks must continue to fulfill their obligations as stipulated in the terms and conditions of the bank guarantee letter.
Issuance of Saudi Central Bank Law
Referring to the approval issued by the Custodian of the Two Holy Mosques, King Salman bin Abdulaziz Al Saud - may God protect him - on The Saudi Central Bank Law which replaces The Saudi Arabian Monetary Authority Law issued by Royal Decree No. (23) dated 23/5/1377H.
I inform you that the new law does not affect the functions and powers of the Saudi Central Bank (formerly the Saudi Arabian Monetary Agency) and its supervisory and regulatory role stipulated in the relevant current regulations such as the Banking Control Law and the Finance Companies Control Law and the Cooperative Insurance Companies Control Law and other related laws. Therefore, all regulations, rules, and instructions issued by SAMA shall apply.
I also inform you that the Royal Decree stipulated that:
1. The Saudi Central Bank shall replace the Saudi Arabian Monetary Authority in its rights and obligations, and wherever the name appears in related laws, regulations, orders, and decisions.
2. The Saudi Central Bank retains the abbreviation SAMA.
3. The current Board of Directors of SAMA shall continue to exercise all its powers until a new Board of Directors for the bank is formed in accordance with Article (8) of its regulation.
4. Taking into account what is stated in paragraph (1) of Article (4) of the Saudi Central bank Law, the currency issued by SAMA has the feature of circulation and the legal tender power against others, in accordance with the provisions of The Saudi Arabian Monetary Law.
Accordingly, all financial institutions are required to adopt the aforementioned new designation within (90) days from the date hereof in all their internal and external communications. It should also be noted that you must update all your documents to reflect SAMA's new initiative.
I hope you respond to this notice in writing to confirm (1) acknowledgment of the contents of this notice, and (2) agreement to comply from this date.
Classification of Accounts for Auto Exhibitions, Showrooms, Agents and Trucks, Heavy Machinery and Motorcycles as High Risk
Referring to the strategic objectives of the Financial Sector Development Program aimed at reducing cash transactions by enhancing electronic payments, and in continuation of SAMA's efforts to activate the use of electronic channels through the implementation of the Integrated Digital Payments Strategy to enhance the level of electronic services provided.
Given that the sale of cars, trucks, heavy machinery, and motorcycles is among the activities where cash is widely used, we advise that all banks operating in the Kingdom must classify bank accounts for this activity as high-risk accounts and apply strict due diligence measures accordingly.
The Importance of Adhering to Regulations Related to the Commercial Environment and Credit Transactions
Referring to the Registered Real Estate Mortgage Law issued by Royal Decree No. (M/49) dated 13/08/1433H, the Insolvency Law issued by Royal Decree No. (M/50) dated 28/05/1439H, the Law of Commercial Pledge issued by Royal Decree No. (M/86) dated 08/08/1439H, and the Movable Property Security Law issued by Royal Decree No. (M/94) dated 15/08/1441H and their implementing regulations.
Given the importance of these laws in preserving and stabilizing the commercial environment in the Kingdom, the link of many credit transactions to their provisions, the importance of compliance with these laws, and the aim of achieving financial stability and protecting transactions; SAMA would like to emphasize to all financing entities the following:
1. Inclusion of credit risk assessments for the risks associated with the initiation of bankruptcy procedures, and verification of the existence and adequacy of procedures and mechanisms in this regard. 2. Ensure that transactions related to mortgages and guarantees comply with the provisions of the laws mentioned above, and the provisions of other relevant laws. Customer Signature on All Pages of Contracts and Agreements
This section is currently available only in Arabic, please click here to read the Arabic version.Re-Activation of Bank Accounts of Customers from Displaced Tribes, Ar Rub' al-Khali Tribes, the Beluchis and Turkistanians
In reference to Banking Account Rules communicated via Central Bank Circular No. (65681/67) dated 01/11/1440 H, and further to SAMA's instructions communicated via Circular No. (68621/67) dated 15/11/1440 H, which stipulate enabling customers from the displaced tribes whose Iqama has expired, who work in the public and private sectors, to conduct banking transactions on their accounts under specific regulations.
Except as provided in the rules mentioned above, we would like to inform you that it has been decided to enable customers who previously opened bank accounts with valid documents from displaced tribes, Ar Rub' al-Khali Tribes, the Beluchis and Turkistanians, to reactivate those accounts and conduct all banking transactions for a period of two years from this date.
For your information and action accordingly as of this date.
Procedure for Verifying the Beneficiary's Information in Transfers Made by legal Entities Through the Saudi Fast Payments System (SARIE)
Based on the Banking Control Law issued by Royal Decree No. M/5 dated 22/2/1386H, and based on Cabinet Resolution No. 226 dated 2/5/1440H, which confirms that SAMA is the competent authority by law to operate payment and financial settlement systems and their services in the Kingdom, oversee and monitor them, and issue rules, instructions, and licenses according to the standards applied by SAMA in this regard.
In its efforts to enhance the application of automated processing for customer transfers executed through the "Sarie" system under the concept of Straight Through Processing (STP), ensuring the speed and accuracy of deposit operations, we would like to inform you of the amendment to paragraphs (4.4.3) and (4.4.6) of the rules and regulations for operating the Saudi Fast Money Transfer System "Sarie" as follows:
4.4.3 Identification of Beneficiary: Identification details of the Beneficiary Customer, provided in the Payment Message, will be used by the Receiving Participant to identify the Beneficiary of the funds, which include at a minimum identification of the Beneficiary’s name and IBAN. However, if the remitter is a legal entity, the ID No. of the beneficiary can be used instead of the name.
4.4.6 Anti Money Laundering and Combatting Terrorist Financing: Participants must comply with the relevant laws and regulations regarding Anti-Money Laundering and Combating Terrorist Financing.
For your information and to act accordingly from this date. If you have any inquiries, please contact the Electronic Payment Systems Operations Division at the email (sarie-business@SAMA.GOV.SA ).
Raising the Purchase Limit for MADA Atheer Service without the Need for Password Entry
Based on the role of SAMA's supervisory and regulatory role in implementing the preventive and precautionary measures issued by the competent authorities to combat the spread of the COVID-19 virus, and referring to the payment service through bank cards via Near Field Communication (NFC) technology, known as "MADA Atheer," on point-of-sale devices, which allows cardholders to complete their payments for amounts less than 100 SAR without needing to enter the card's PIN. This aligns with SAMA's aim to implement precautionary measures to ensure the safety of all users of electronic payment tools.
Based on what serves the public interest, we inform you that it has been decided to raise the limit for executing transactions without the need to enter the PIN from 100 SAR to 300 SAR per transaction, while maintaining the cumulative limit of 300 SAR. Accordingly, all relevant parties must adhere to the following:
The Saudi Payments Company shall begin implementing the necessary adjustments to comply with the requirements starting Wednesday, March 18, 2020G, gradually until the update is completed on all devices supporting this technology.
All banks, payment companies, and financial institutions issuing all bank cards must make the necessary adjustments within their technical systems and prepare them as soon as possible, no later than March 20, 2020G, and confirm completion by communicating via email at (Operations@SaudiPayments.com).
All hosting banks and licensed payment service providers must coordinate immediately with the operational support team at the Saudi Payments Company via the email mentioned above to ensure the required update reaches their point-of-sale devices. All banks and payment service providers must update the relevant terms and conditions starting from this date, promptly notify customers, and communicate through marketing officials with the relevant parties, including customers, merchants, and individuals, to inform them of the new developments and the desired objectives in accordance with SAMA's instructions, after obtaining the necessary approvals for the marketing plan via email (MKT@saudipayments.com).
For your information and action accordingly from this date. Please note that a paper copy of the circular will be provided later due to the current precautionary measures regarding the COVID-19 virus.
Empowering the Non-Profit Sector to Use Electronic Channels
Referring to paragraph (3) of the regulations governing the management of the main account from rule (300-1-5-2) related to Private Associations, and to paragraph (1) of the regulations governing the management of the main account from rule (300-1-5-3) related to Private Foundations, as stated in the Account Opening Rules communicated under SAMA's circular number (65681/67) dated 1/11/1440H.
SAMA would like to clarify that the aforementioned paragraphs aim to allow withdrawals from the main accounts of private associations and private foundations through various channels, including electronic channels, based on dual authorization from those authorized to manage and operate the account.
Accordingly, SAMA emphasizes the importance of providing electronic services to private associations and private foundation through various channels, including electronic channels, and offering the necessary support to activate these electronic services, while ensuring compliance with the requirements related to providing electronic services in the bank.
Procedures for Technical Amendments to the 'Furijat' Initiative
Attached are the instructions from SAMA communicated via email dated 12/04/2020G regarding technical modifications to the "Furijat" initiative, which will take effect from the specified date in the email.
Referring to the "Furijat" initiative launched in partnership between SAMA, the General Directorate of Prisons, the Ministry of Justice, and the Ministry of Interior, which aims to involve all segments of society in assisting prisoners in financial distress by helping to settle their debts within a payment list for creditors under judicial enforcement with a biller code number 16. Additionally, referring to the letter from Saudi Payments number 41045188 dated 30/6/1441H directed to the bank, which includes a request for technical improvements to the "Furijat" service, including displaying the total claim amount for the bank's customer and adding a new mandatory field for the required payment amount to be "zero" according to the mechanism detailed in the attachment, and to implement this amendment before the date 13/03/2020G.
Given the importance of the matter and to avoid any negative impact on the community's interaction with this charitable initiative, and with the approach of the holy month of Ramadan, the bank must promptly complete these modifications before the date 23/04/2020G, emphasizing the importance of conducting technical tests with the technical team at Saudi Payments via the email (serviceintegration@saudipayments.com) to ensure the adequacy of the technical requirements, and informing SAMA of the implementation plan within three days of receiving this circular.
Emphasis on Adherence to Rule No. 300-1-3-6
Attached are SAMA's instructions communicated via email on 29/04/2020G regarding the Emphasis on complying with Rule No. (300-1-3-6) concerning Real Estate Development Escrow Accounts, which will take effect from the date of notification to you via email.
In reference to Rule No. (300-1-3-6) concerning Real Estate Development Escrow Accounts included in the Banking Account Rules communicated via SAMA Circular No. (65681/67) dated 01/11/1440H, the provisions stipulate that withdrawals from Real Estate Development Escrow Accounts may only occur upon submission of a payment document provided by the real estate developer, certified by the consulting office and the certified public accountant. Additionally, not seizing these accounts in favor of the bank or the real estate developer's creditors, nor transferring any funds from them to any other accounts except for the designated sub-accounts with specified purposes.
SAMA emphasizes the importance of adhering to the provisions of the aforementioned rule and that withdrawals from the escrow accounts should only be made in accordance with its provisions and the agreement concluded between the bank ("Account Custodian") and the real estate developer.
Service for Verifying Bank Guarantees
Attached are the instructions from SAMA communicated via email on 28/4/2020G regarding the bank Guarantee Verification service, effective from the date it was communicated to you via email.
SAMA has received a letter from the Ministry of Finance stating that the development of the bank Guarantee Verification service for government tenders and procurements via the Etimad Platform has been completed, in line with the applied precautionary measures, which enable the government sector to verify the validity of the bank guarantee by sending a verification request to the bank. The letter requests that banks connect to the platform to benefit from this service.
Therefore, SAMA confirms that all banks operating in the Kingdom must take the necessary steps and register on the Etimad Platform to benefit from the bank Guarantee Verification service for government tenders and procurements.
Preparations for Providing Electronic Payment Methods for the Grocery Sector
In line with SAMA's strategies for payment systems and the financial sector development program aimed at enhancing electronic payments and reducing cash transactions. In order to enhance the current efforts and initiatives to address the impacts of the spread of the COVID-19 virus, as well as continuing the national efforts to combat commercial concealment by gradually requiring the retail sector to provide electronic payment methods.
The program, in cooperation with SAMA, the Ministry of Municipal and Rural Affairs, and the Ministry of Commerce, has mandated all grocery stores and supply shops in the Kingdom to provide electronic payment methods starting from 17 Ramadan 1441H, corresponding to May 10, 2020G, to ensure the success of these efforts and readiness to meet the expected demand, all banks, and payment service providers must adhere to the following:
- Readiness to respond to requests for opening bank accounts and electronic wallets for traders operating in the grocery and supply sector.
- Readiness to receive requests for providing electronic payment methods approved by SAMA (POS devices or QR codes) and to respond to them through various channels such as branches, the official website, and the unified number, among others, to facilitate this requirement for traders working in this sector, while adhering to the regulatory and operational rules for these services.
- Commitment to using the merchant category code (Merchant Category Code) designated for this activity, which is 5411.
- Internally communicate this decision to bank employees and payment service providers to ensure they fully understand it when receiving requests and inquiries in this regard.
Extending the Exception for Primary Dealers in Local Sovereign Securities
Referring to the decision of the Capital Market Authority Council issued on 22/09/1439H corresponding to 06/06/2018G approving the exemption of local banks from the requirements of Articles 5 and 17 of the Securities Business Regulations issued by the council when conducting activities as a principal or as an agent, or in arranging transactions with the Ministry of Finance as primary dealers in local sovereign securities issued by the Government of the Kingdom of Saudi Arabia, concerning their dealings with the customer categories specified in the table below:
Customer Category
Duration of Exemption
Investment companies, except for the two customer categories mentioned below 18 months The General Organization for Social Insurance, the Public Pension Agency, or Saudi Aramco 24 months Local banks 60 months We would like to inform you of the receipt of a letter from His Excellency the Minister of Finance, Chairman of the National Debt Management Center, No. 8497 dated 26/08/1441H, stating the issuance of a decision by the Capital Market Authority Council on 01/07/1441H corresponding to 25/2/2020G approving the extension of the exemption period granted under the Council’s decision dated 22/9/1439H corresponding to 06/06/2018G mentioned above, concerning the dealings of banks with the customer categories specified in the table below:
customer Category
Additional Duration of Exemption
Investment companies, except for the General Organization for Social Insurance, the Public Pension Agency, Saudi Aramco, and local banks 12 months from the expiration of the exemption period granted according to the aforementioned decision
The General Organization for Social Insurance, the Public Pension Agency, and Saudi Aramco
24 months from the expiration of the exemption period granted according to the aforementioned decision Acceptance of Primary and Final Guarantees via the Etimad Platform
In reference to Minister of Finance Decision No. (3555) dated 16/08/1441 H concerning the acceptance of the preliminary or final guarantee submitted by the competitor through the Electronic Portal (Etimad Platform) in accordance with specific regulations. This includes what is stipulated in paragraph (1) of item (First), which states: "The preliminary or final guarantee must include the following clause: 'We hereby unconditionally and irrevocably undertake that this guarantee shall not be released or disposed of upon the client's request or by submitting the original guarantee to us, except after obtaining your written consent or upon its expiration without a written request for extension from you, delivered to us either directly or through electronic means.'"
SAMA would like to confirm the implementation of the provisions of paragraph (1) of item (First) mentioned in the above Minister of Finance Decision.
Accepting Electronic Real Estate Deeds
Attached SAMA's instructions communicated via email on 5/4/2020G. regarding the acceptance of electronic real estate deeds, which come into effect from the date of their notification to you via email.
Referring to the Ministry of Justice's launch of the electronic real estate sale and transfer of ownership service without the need to visit notaries or certified attorneys, in accordance with the regulations mentioned in the terms and conditions of the service, as well as the electronic title deed service aimed at dispensing with the printing of deeds on paper and relying on electronically storing their information, with the possibility of inquiring about them through the "Wathiq" platform or the ministry's "Najiz" portal.
Accordingly, SAMA hopes to accept electronic real estate deeds and not require property owners to present the original real estate deeds for the cases covered by the service. Verification should be conducted through the available means mentioned above.
Establishing Electronic Linkage with the 'Withaq' Platform
Please refer to the instructions from SAMA notified via email on 2/4/2020G regarding electronic link-up with the Withaq platform, which will be effective from the date of its notification to you via email.
I would like to inform you that SAMA has received a telegram from the Minister of Finance and Chairman of the Board of Directors of the General Authority of Customs, number 7981 dated 8/8/1441H including the request to direct banks to quickly link and integrate with the "Withaq" platform for bank guarantees within thirty days for the purpose of verifying bank guarantees and to fully cooperate with the Saudi Company for Electronic Information Exchange in this regard.
Accordingly, SAMA urges all banks operating in the Kingdom to take the necessary action and integrate with the (Withaq) platform for bank guarantees urgently within thirty days to verify the bank guarantee, emphasizing full cooperation with the Saudi Company for Electronic Information Exchange (Tabadul).
Increase the Exposure Limit for the Group of Connected Counterparties - Aramco Group
Referring to the Large Exposure (LEX) Rules for Banks issued under SAMA's Circular No. 1651/67 dated 09/01/1441 H.
As a result of Saudi Aramco acquiring more than 50% of the shares of the Saudi Basic Industries Corporation (SABIC), which leads to the classification of the two companies as a group of connected counterparties according to the aforementioned Large Exposures rules, we inform you that it has been decided to increase the total exposure limits for the group of connected counterparties—Aramco Group—from 25% to 35% of the bank's qualifying capital. However, the exposure to each company individually must not exceed the exposure limits stipulated in the rules, with an emphasis on the importance of adhering to sound policies and procedures for managing concentration risks.
The Mechanism for Verifying the Identity of the Partner or Shareholder when Establishing Limited Liability Companies and Joint Stock Companies, and any Amendment to the Articles of Association
Reference to SAMA's receipt of the letter from His Excellency the Minister of Commerce No. (00196) dated 05/01/1442H, which mentions the issuance of his Excellency's decision number (632) dated 16/11/1441 H, which includes the development of a mechanism for verifying the identities of partners or shareholders when establishing companies or amending their bylaws.
Attached is a copy of the Ministerial Decision mentioned above.
Fulfillment of the Licensing Requirements Issued by the Ministry of Human Resources and Social Development when Opening or Updating Bank Accounts for Committees of Patients’ Friends
Referring to Rule No. (300-1-5-4) concerning Public Welfare Committees included in the Account Opening Rules communicated via SAMA's Circular No. (65681/67) dated 01/11/1440H, and to SAMA's receipt of the letter from the Ministry of Human Resources and Social Development No. (169562) dated 23/11/1441H, which states that the ministry is the authorized entity to license Committees of Patients’ Friends under the Law of Civil Society Associations and Organizations issued by Royal Decree No. (M/8) dated 19/02/1437 H, and its invitation to all Committees of Patients’ Friends to align with the aforementioned law and its Implementing regulations and to register in the associations' registry at the ministry.
We would like to inform you that the Ministry of Human Resources and Social Development is the sole authorized entity to license Committees of Patients’ Friends. Accordingly, we hope to ensure that the license issued by the ministry is obtained when opening or updating bank accounts for these committees.
Providing Services for Issuing and Verifying Documents Electronically
Based on the powers vested in SAMA under The Saudi Arabian Monetary Authority Law issued by Royal Decree No. (23) dated 23/05/1377 H, and the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386 H and based on the objectives of the vision supporting the development of digital infrastructure, and due to SAMA’s keenness to develop the financial sector and keep up with the latest digital technologies. Since banks issue a number of documents upon their customers' requests, these documents include, for example, a clearance certificate, a no-objection certificate for salary transfers, and a customer account verification certificate. To facilitate business processes and contribute to transaction security, all banks should offer the service of issuing and verifying these documents electronically. It is important that these documents include elements that ensure the confidentiality of the information and the responsibility of the holder to maintain its integrity.
For your information and action accordingly, and provide SAMA with an implementation plan within one month from its date.
Subscription to Natheer E-Service
Based on the powers vested to SAMA under its Law issued by Royal Decree No. (23) dated 23/5/1377H, and The Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386 H, and further to the instructions of SAMA communicated pursuant to Circular No. 5365/67 dated 27/1/1441 H regarding utilization of the electronic “Natheer” service, which enables banks to know the status of customer's data and update it by notifying them of events that occur via electronic linking with the official entity's data by providing alerts about a number of events, including:
-The status of residents' final exit before and after crossing the border.
- The status of canceling the final exit visa after it has been issued.
- The status of Issued exit and re-entry visa and did not return.
Based on SAMA's supervisory and regulatory role in monitoring compliance with the laws and instructions related to bank accounts and remittance memberships, and considering the potential misuse of bank accounts or remittance memberships of expatriates who have left the Kingdom, which could involve financial transactions and activities that do not reflect the true beneficiary, whether for well-intentioned or fraudulent purposes, it is imperative for all banks operating in the Kingdom to adhere to using the "Natheer" electronic service. This service enables them to enforce bank account rules and related instructions as soon as the status of the expatriate account holder or remittance membership is known.
For your information and action accordingly by no later than Thursday, 30/07/2020 G.
Fees for Banking Services Provided to Companies and SMEs
Based on the powers vested in SAMA under its law issued by Royal Decree No. (23) dated 23/5/1377 H, and The Banking Control Law issued by Royal Decree No. M/5 dated 22/2/1386 H.
And based on the role of SAMA in supporting and developing the private sector and its institutions, and in overcoming the difficulties it faces, in addition to enabling easy and convenient access to all banking services, we inform you that approval from SAMA must be obtained before imposing any fees on banking services provided to companies and small and medium enterprises, taking into account that these fees do not impact the achievement of SAMA's objectives referred to above.
Controls and Procedures to Be Followed when Handling Banknotes and Coins
Based on the authorities granted to SAMA under its Law issued by Royal Decree No. (23) dated 23/5/1377 H and the related regulations, and in light of SAMA's commitment to protecting currency traders among citizens and residents, especially during times of spreading diseases and viruses, including the new coronavirus (COVID-19), it is essential to take precautionary and preventive measures when dealing with banknotes and coins, whether in banks or cash centers.
We inform you that banks and cash centers must adhere to the following controls and procedures:
- Ensure health safety measures.
- Provide masks for all employees.
- Provide plastic gloves for those handling currency.
- Provide sanitizing and disinfecting materials, ensuring that the alcohol content is not less than 60% of the sanitizer's formulation.
- Provide a contactless thermometer to measure the temperature of all employees.
- Continuously disinfect and sanitize the flooring in the cash operation area.
- Sanitize and disinfect containers designated for currency storage after each use.
- Continuously disinfect surfaces of tables and areas designated for arranging and placing currency.
- Continuously disinfect and clean the surfaces of counting and sorting machines.
- Provide gloves, masks, and sanitizers for employees inside cash transport vehicles.
- Use hazardous materials suits (Hazmat Suit) if a currency isolation area is designated in cash centers located in high-risk virus areas.
For your information, please act accordingly from this date. Additionally, it has been decided to form a working team involving banks to coordinate efforts regarding currency handling. Therefore, I hope you can urgently nominate specialists in cash operations to participate in the team, in coordination with the Director of the Currency Supervision Department.
Emphasizing Commitment to the Unified Regulation of Women’s Work Environment
In reference to the requests submitted to SAMA by banks to provide banking services to clients of both genders (men/women) through a unified service outlet.
We inform you that SAMA has received a telegram from His Excellency the Minister of Finance, No. (4161) dated 18/04/1441 H, which includes an emphasis on adhering to the unified regulations for the women’s work environment issued by the Ministry of Human Resources and Social Development under Ministerial Decision No. (215739) dated 05/12/1440 H.
Based on the above, we would like to emphasize on the importance of adhering to the ministerial decision mentioned above, in addition to the following:
- Preparing a space that ensures the privacy of female customers for identity verification in accordance with the Know Your Customer (KYC) principle.
- Creating waiting areas that maintain the privacy of customers of both genders.
- Not affecting localization rates and finding suitable solutions for that.
Including Additional Violations in the National Violations Platform
In reference to the agreement between SAMA and the Ministry of Finance regarding the development and inclusion of the National Violations Platform via the banking channels of banks connected to the SADAD payment system, with the aim of unifying the mechanism for collecting violations issued by government entities under one invoice to be included under government payment services. And with reference to the letter from the Saudi Payments Company No. 41025630 dated 31/04/1441 H addressed to banks, which includes the technical requirements for this platform.
In order to achieve the role of SAMA in providing modern payment services that meet the needs of the local market through the Saudi Payments Company, SAMA emphasizes on the importance of completing all technical requirements that were shared with you on 13/12/2019 G to include additional violations as part of the platform, namely: (public decency violations, payment violations in the White Land Fees Program, and violations of Article No. (62) The Social Insurance Law, and violations of the General Administration of Weapons and Explosives) and the completion of all project requirements, working on concluding the trial tests and launching the service before March 10, 2020G. In case of any technical inquiries, you can contact the technical team at the Saudi Payments Company via email.
"NAFITH" Electronic Platform Approved by the Ministry of Justice
Referring to the Executive Bonds Platform "Nafith" approved by the Ministry of Justice and government entities, which provides the service of issuing and managing executive bonds entirely electronically with ease and convenience.
Based on SAMA's strategy to promote the use of electronic channels to enhance the level of services provided, contributing to achieving Saudi Vision 2030, we would like to inform you that banks can connect to the electronic "Nafith" platform approved by the Ministry of Justice and benefit from the services offered through it, taking into account compliance with the instructions issued by SAMA regarding remote account opening, which stipulates that no credit or financing transactions should be conducted only after the customer visits the branch.
Encouraging Cooperation in Publishing Awareness Phrases and Slogans on ATM Screens
In line with SAMA's keenness to raise the social contribution of banks in the awareness for important national campaigns, and following SAMA's instructions communicated to banks regarding publishing awareness phrases and slogans on ATM screens.
Due to the observed decline in the level of engagement in publishing awareness phrases and slogans related to campaigns sponsored by government entities, SAMA urges all banks operating in the Kingdom to actively contribute to these campaigns.
Procedures for Depositing Salary Payments
Based on the supervisory and regulatory role of SAMA, and to improve practices related to salary deposit operations from various entities to different beneficiaries, it has been noted recently that some banks have been delaying salary payments.
Therefore, SAMA confirms its commitment to the relevant instructions and procedures, in addition to the following:
- The work on implementing the processes of depositing salary collections immediately after completing the data from the relevant entities.
- Providing qualified human resources and the necessary technical resources to ensure the safety of salary deposit and transfer operations, with an aim to enhance the readiness of system performance monitoring both technically and operationally during the salary transfer and deposit processes. This includes taking the necessary measures and developing effective alternative plans for salary deposits without delay in the event of any technical problems.
- Establishing an appropriate mechanism for the internal escalation of problems that prevent or delay the process of salary deposit and transfer, and immediately informing the Financial Sector IT Risk Supervision Management about the nature of the problem and the actions taken to address it.
- Conduct the necessary assessments for any changes or operations on the systems and ensure that they do not affect the bank's systems during the salary deposit and transfer period. In the event of any disruption in the deposit process, the bank must send an electronic message (TSM) via the "SARIE" system to SAMA, specifying the expected deposit time and stating the reasons for the delay, so that SAMA can submit the necessary reports for the relevant authorities.
Prohibiting Seizure of Funds Deposited Under /HAFIZ Program
The Central Bank received a letter from His Excellency the Minister of Justice, No. 419273054, dated 19/4/1441 H, stating that funds deposited from the (Hafiz) program cannot be seized, as they represent assistance from the state to individuals seeking employment. And this financial entitlement from the program is not subject to enforcement, as it falls under the provisions of Article 21 of the Enforcement Law.
Accordingly, SAMA emphasizes to all banks operating in the Kingdom that it is absolutely prohibited to seize the amounts deposited from the (Hafiz) program in the accounts of individuals subject to enforcement under court orders. We also hope to enable beneficiaries of the (Hafiz) program to access the amounts deposited in their accounts before the issuance of these instructions when they request it.
Please refer to circular No. (43043372), dated 15/05/1443H, Corresponding To 19/12/2021G for the list of Amounts Excluded from Seizure.
Record the Identification Number When Opening Bank Accounts for Saudi Government Entities
Reference to Paragraph (1-4) regarding the electronic register of legal persons from the supervisory and regulatory rules stating: "For accounts opened under approvals or official requests, it is required to include the reference number, date, and name of the issuing authority," and Rule (500-1) regarding the opening and management of bank accounts for ministries and government entities, as mentioned in the banking accounts regulations communicated via Circular No. 65681/67 dated 1440/11/1H.
This is to inform you that SAMA has received a letter from the Minister of Finance No. 847 dated 1441/1/26H, indicating that the ministry has issued identification numbers for government entities consisting of ten digits, and has directed all government entities to update their bank accounts to include these numbers.
Therefore, we hope you will assign the relevant department to coordinate with those authorized to manage and operate government accounts to update the current accounts by adding the accompanying identification numbers within (3) months from this date, after which the activation of non-updated accounts will be suspended.
Please ensure that no new bank account is opened for any government entity without obtaining its identification number issued by the Ministry of Finance. Attached is the list of identification numbers for government entities for the purpose of matching with the data provided by the government entities.
Identification Numbers for Government Entities
#
Name of Entity
Section Number – Branch – Department after adding zero
1
Royal Diwan 0001001000
2
Private Affairs of the Custodian of the Two Holy Mosques 0001002000
3
Private Affairs of His Royal Highness the Crown Prince 0001004000
4
Royal Protocol 0001005000
5
Shura Council 0002000000
6
General Secretariat of the Council of Ministers 0003002000
7
Experts Authority at the Council of Ministers 0003003000
8
King Fahd National Library 0003005000
9
Board of Grievances 0005000000
10
General Auditing Bureau 0006000000
11
Ministry of Civil Service – General Diwan 0007001000
12
Authority for Control and Investigation 0009000000
13
General Sports Authority 0010000000
14
King Faisal Specialist Hospital and Research Center 0014000000
15
Ministry of Foreign Affairs – General Diwan 0015001000
16
Ministry of Health – General Diwan 0022001000
17
Broadcasting and Television Authority 0023002000
18
Saudi Press Agency 0023003000
19
General Authority for Audiovisual Media 0023004000
20
Ministry of Justice – General Diwan 0034001000
21
General Presidency for Scientific Research and Fatwa 0035000000
22
General Presidency for the Affairs of the Grand Mosque and the Prophet's Mosque 0037000000
23
General Expenditures Administration 0045000000
24
Saudi Food and Drug Authority 0064000000
25
Ministry of Labor and Social Development (Labor) 0066001000
26
Ministry of Labor and Social Development (Social Development) 0067000000
27
Supreme Judicial Council 0071000000
28
King Abdulaziz Foundation 0072000000
29
Saudi Red Crescent Authority 0074000000
30
Saudi Health Council 0079000000
31
General Entertainment Authority 0081000000
32
General Culture Authority 0089000000
33
Ministry of Culture – General Diwan 0098001000
34
Public Prosecution 0097000000
35
General Presidency for the Promotion of Virtue and Prevention of Vice 0036000000
36
Ministry of Islamic Affairs, Call, and Guidance 0043000000
37
Ministry of Hajj and Umrah 0044000000
38
National Center for Performance Measurement of Government Agencies 0003006000
39
Self Salaries and General Rules 0047000000
40
Repayment of Installments and Returns of Development Bonds 0058000000
41
National Anti-Corruption Authority 0073000000
42
Human Rights Commission 0068000000
43
General Authority for the Custody of the Funds of Minors and those under their Protection 0077000000
44
Ministry of Media – General Diwan 0023001000
45
General Authority of Ports 0011000000
46
Presidency of the Royal Commission for Jubail and Yanbu 0013001000
47
Jubail Project 0013002001
48
Ras Al Khair Program 0013002002
49
Yanbu Project 0013003000
50
Jazat City for Basic and Transformational Industries 0013004000
51
Ministry of Economy and Planning – General Diwan 0016001000
52
General Authority for Statistics 0016002000
53
Ministry of Municipal and Rural Affairs – General Diwan 0019001000
54
Ministry of Transport – General Diwan 0027001000
55
Saudi Railways Organization 0027002000
56
General Authority for Transport 0027003000
57
Ministry of Communications and Information Technology 0028001000
58
Saudi Post Corporation 0028002000
59
Communications and Information Technology Authority 0028003000
60
Ministry of Energy 0029001000
61
Ministry of Industry and Mineral Resources 0029002000
62
Saudi Geological Survey 0029004000
63
Ministry of Commerce and Investment – General Diwan 0030001000
64
Saudi Standards, Metrology and Quality Organization 0030002000
65
General Authority for Small and Medium Enterprises 0030004000
66
Saudi Export Development Authority 0030300000
67
Ministry of Environment, Water and Agriculture (Agriculture Sector) 0032001000
68
General Authority for Irrigation 0032003000
69
Grains Silos and Flour Mills Organization 0032004000
70
Saudi Projects Office in Yemen 0038000000
71
Ministry of Finance – General Diwan 0041001000
72
General Customs Authority 0041002000
73
General Authority of Zakat and Income 0041003000
74
Saudi Wildlife Authority 0042000000
75
General Investment Authority 0059000000
76
General Authority for Tourism and National Heritage 0060000000
77
General Authority for Meteorology and Environmental Protection 0062000000
78
Ministry of Environment, Water and Agriculture (Water Sector) 0063001000
79
Saline Water Conversion Corporation 0063002000
80
Ministry of Housing 0069000000
81
King Abdullah City for Atomic and Renewable Energy 0070000000
82
General Authority of Civil Aviation 0075000000
83
Real Estate Development Fund 0076000000
84
General Authority for Real Estate 0082000000
85
Royal Commission for AlUla Governorate 0093000000
86
Human Resources Development Fund 0101000000
87
Competition Authority 0102000000
88
Social Development Bank 0080000000
89
Royal Commission for Makkah and Holy Sites 0119000000
90
Diriyah Gate Development Authority 0118000000
91
Diplomatic Quarter Authority 0117000000
92
Premium Residency Center 0120000000
93
Institute of Public Administration 0007002000
94
King Abdulaziz City for Science and Technology 0012000000
95
Prince Saud Al-Faisal Institute for Diplomatic Studies 0015002000
96
Ministry of Education 0026001000
97
King Saud University 0026002000
98
King Abdulaziz University 0026003000
99
King Fahd University of Petroleum and Minerals 0026004000
100
Imam Muhammad bin Saud Islamic University 0026005000
101
King Faisal University 0026006000
102
Umm Al-Qura University 0026007000
103
Islamic University 0026008000
104
King Khalid University 0026009000
105
Taibah University 0026011000
106
Qassim University 0026012000
107
Taif University 0026013000
108
Jazan University 0026015000
109
Al-Jouf University 0026016000
110
Hail University 0026017000
111
Tabuk University 0026018000
112
Al-Baha University 0026019000
113
Najran University 0026020000
114
Princess Nourah bint Abdulrahman University 0026021000
115
Northern Borders University 0026023000
116
Imam Abdulrahman bin Faisal University 0026024000
117
Prince Sattam bin Abdulaziz University 0026025000
118
Al-Majmaah University 0026026000
119
Shaqra University 0026027000
120
Saudi Electronic University 0026028000
121
Jeddah University 0026029000
122
Hafr Al-Batin University 0026030000
123
Bisha University 0026031000
124
Technical and Vocational Training Corporation 0066002000
125
Education Evaluation Authority 0078000000
126
Royal Guard 0001008000
127
National Security Center 0001009000
128
Ministry of National Guard 0004001000
129
King Khalid Military College 0004002000
130
General Intelligence Presidency 0008000000
131
Ministry of Defense – General Office 0017001000
132
General Staff Presidency 0017002000
133
Ground Forces 0017003000
134
Air Forces 0017004000
135
Naval Forces 0017005000
136
Air Defense Forces 0017006000
137
King Abdulaziz Military Academy 0017007000
138
King Faisal Air Academy 0017008000
139
General Directorate of Medical Services for Armed Forces 0017009000
140
General Organization for Military Industries 0017013000
141
King Fahd Naval Academy 0017014000
142
King Abdullah Air Defense College 0017015000
143
General Authority for Survey 0017017000
144
Ministry of Interior – General Office 0018001000
145
General Security 0018002000
146
Civil Defense 0018003000
147
Border Guard 0018005000
148
King Fahd Security College 0018006000
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General Directorate of Passports 0018009000
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General Directorate of Mujahideen 0018010000
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Emirate of Riyadh Region 0018011000
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Emirate of Makkah Region 0018012000
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Emirate of Eastern Region 0018013000
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Emirate of Al-Madinah Region 0018014000
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Emirate of Hail Region 0018015000
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Emirate of Al-Qassim Region 0018016000
157
Emirate of Northern Borders Region 0018017000
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Emirate of Asir Region 0018018000
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Emirate of Al-Baha Region 0018019000
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Emirate of Tabuk Region 0018020000
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Emirate of Al-Jouf Region 0018021000
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Emirate of Jazan Region 0018023000
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Emirate of Najran Region 0018024000
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General Directorate of Expatriates 0018026000
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General Directorate of Civil Affairs 0018027000
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Security Forces for Facilities 0018028000
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General Directorate for Drug Control 0018029000
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Presidency of State Security 0091000000
169
Special Emergency Forces 0091003000
170
General Investigation 0091002000
171
Special Security Forces 0091004000
172
National Cybersecurity Authority 0092000000
173
Allocation for Entitlements Disbursement 0094000000
174
Allocation for General Budget Support 0095000000
175
Allocation for Vision 2030 Realization Programs 0096000000
176
Hail Development Authority 0104000000
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Makkah Development Authority 0105000000
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Madinah Development Authority 0106000000
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Riyadh Development Authority 0107000000
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Madinah Region Municipality 0019003001
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Yanbu Municipality 0019003101
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Al-Ula Municipality 0019003201
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Badr Municipality 0019003301
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Khaybar Municipality 0019003302
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Al-Hunakiya Municipality 0019003303
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Al-Mahd Municipality 0019003401
187
Yanbu Al-Nakhl Municipality 0019003501
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Wadi Al-Far Municipality 0019003601
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Al-Eis Municipality 0019003701
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Al-Hasu Municipality 0019003702
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Al-Nakheel Municipality 0019003703
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Al-Masijid and Al-Qaha Municipality 0019003704
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Al-Ishash Municipality 0019003705
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Thurb Municipality 0019003706
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Al-Superqiyah Municipality 0019003707
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Abu Rakah Municipality 0019003708
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Al-Salsilah Municipality 0019003709
198
Sulaylah Jahina and Al-Murabba Municipality 0019003710
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Eastern Province Municipality 0019006001
200
Qatif Municipality 0019006103
201
Al-Khafji Municipality 0019006201
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Al-Jubail Municipality 0019006202
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Al-Biqaiq Municipality 0019006203
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Al-Nairiyah Municipality 0019006301
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Ras Tanura Municipality 0019006302
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Al-Rufaiyah Municipality 0019006701
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Al-Qurayyat Municipality 0019006702
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Al-Malijah Municipality 0019006704
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Al-Sarari Municipality 0019006705
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Al-Lahabah Municipality 0019006707
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Al-Ari'yarah Municipality 0019006708
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Al-Jauf Bani Hajar Municipality 0019006709
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Al-Qalib Municipality 0019006710
214
Ain Dar Municipality 0019006711
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Al-Qassim Municipality 0019008001
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Unaizah Municipality 0019008101
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Al-Rass Municipality 0019008201
218
Al-Bukayriyah Municipality 0019008202
219
Al-Mudunb Municipality 0019008203
220
Al-Asyah Municipality 0019008301
221
Al-Bada'i Municipality 0019008302
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Al-Riyadh Al-Khobar Municipality 0019008303
223
Al-Khobar and Al-Suhab Municipality 0019008304
224
Al-Uyun Al-Jawaa Municipality 0019008401
225
Al-Dharia Municipality 0019008501
226
Al-Basr Municipality 0019008601
227
Dukhna Municipality 0019008602
228
Uqlat Al-Suqur Municipality 0019008603
229
Al-Nahaniyah Municipality 0019008604
230
Al-Shamasiyah Municipality 0019008701
231
Quba Municipality 0019008702
232
Al-Qawara Municipality 0019008703
233
Abanat (Dhil' Rashid) Municipality 0019008704
234
Al-Fawarah Municipality 0019008705
235
Al-Amar Municipality 0019008706
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Shari Municipality 0019008707
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Al-Fuwailiq Municipality 0019008708
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Qusiba Municipality 0019008709
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Qasr Bin Aqeel Municipality 0019008710
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Al-Dulimiya Municipality 0019008711
241
Al-Zahiriyah Municipality 0019008712
242
Al-Batin Municipality 0019008713
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Al-Ahsa Municipality 0019017001
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Yabreen Municipality 0019017703
245
Salwa Municipality 0019017704
246
Al-Bathaa Municipality 0019017705
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Al-Hafar Municipality 0019018001
248
Al-Qaysumah Municipality 0019018701
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Al-Sadawee Municipality 0019018702
250
Al-Dhiabiya Municipality 0019018703
251
Al-Sa'ira Municipality 0019018704
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Makkah Municipality 0019002001
253
Al-Jumum Municipality 0019002401
254
Asqan Municipality 0019002705
255
Mudrikah Municipality 0019002706
256
Riyadh Municipality 0019004001
257
Al-Kharj Municipality 0019004101
258
Al-Dawadimi Municipality 0019004201
259
Afif Municipality 0019004202
260
Al-Mujamma Municipality 0019004203
261
Al-Zulfi Municipality 0019004204
262
Wadi Al-Dawasir Municipality 0019004205
263
Shuqra Municipality 0019004206
264
Al-Qawiyah Municipality 0019004207
265
Al-Duriyah Municipality 0019004208
266
Al-Aflaj Municipality 0019004301
267
Al-Houtah Bani Tamim Municipality 0019004302
268
Houtah Sudair Municipality 0019004303
269
Al-Dahl Municipality 0019004304
270
Al-Salil Municipality 0019004305
271
Al-Huraimlah Municipality 0019004306
272
Al-Dharma Municipality 0019004307
273
Marat Municipality 0019004308
274
Al-Muzahmiyya Municipality 0019004309
275
Al-Ghat Municipality 0019004310
276
Tamir Municipality 0019004311
277
Thadiq Municipality 0019004312
278
Al-Jalajel Municipality 0019004313
279
Al-Hariq Municipality 0019004314
280
Al-Rawdah Municipality 0019004315
281
Al-Rain Municipality 0019004316
282
Al-Halwah Municipality 0019004401
283
Al-Ruwaida Municipality 0019004402
284
Al-A'yina and Al-Jubail Municipality 0019004403
285
Al-Hayatham Municipality 0019004404
286
Al-Bajadiyah Municipality 0019004405
287
Sajar Municipality 0019004406
288
Al-Rumah Municipality 0019004407
289
Nafi Municipality 0019004501
290
Al-Qasib Municipality 0019004701
291
Al-Hidar Municipality 0019004702
292
Al-Artaweiyah Municipality 0019004703
293
Al-Jumush Municipality 0019004704
294
Al-Halaban Municipality 0019004705
295
Ashaqar Municipality 0019004706
296
Al-Ahmar Municipality 0019004707
297
Uruwa Municipality 0019004708
298
Al-Hisa Municipality 0019004709
299
Al-Dahi Al-Odayan Municipality 0019004710
300
Al-Jalah and Tabarak Municipality 0019004711
301
Al-Badeea Municipality 0019004712
302
Al-Sar Municipality 0019004713
303
Al-Hayaniah and Al-Barrak Municipality 0019004714
304
Jeddah Municipality 0019005001
305
Rabigh Municipality 0019005201
306
Al-Qunfudhah Municipality 0019005301
307
Al-Lith Municipality 0019005302
308
Khulais Municipality 0019005303
309
Al-Qouz Municipality (Al-Qunfudhah) 0019005401
310
Al-Kamil Municipality 0019005601
311
Amd Municipality 0019005701
312
Southern Al-Ardiyah Municipality 0019005702
313
Hajar Municipality 0019005703
314
Al-Muzaylif Municipality 0019005704
315
Al-Hala Municipality 0019005705
316
Al-Shawq Municipality 0019005706
317
Northern Al-Ardiyah Municipality 0019005707
318
Ghamayqah Municipality 0019005708
319
Sabt Al-Jarah Municipality 0019005709
320
Asir Region Municipality 0019007001
321
Khamis Mushait Municipality 0019007101
322
Bisha Municipality 0019007201
323
Dhahran Al-Janub Municipality 0019007202
324
An-Namas Municipality 0019007203
325
Muhayil Aseer Municipality 0019007204
326
Ahd Rufaida Municipality 0019007301
327
Tathleeth Municipality 0019007302
328
Tanumah Municipality 0019007303
329
Sara Al-Abida Municipality 0019007304
330
Balqarn Municipality 0019007401
331
Rajal Al-Ma Municipality 0019007402
332
Al-Majardah Municipality 0019007403
333
Al-Harjah Municipality 0019007501
334
Al-Rabu'ah Municipality 0019007701
335
Balasmar Municipality 0019007702
336
Tareeb Municipality 0019007703
337
Al-Bashair Municipality 0019007704
338
Barq Municipality 0019007705
339
Bahr Abu Sakinah Municipality 0019007706
340
Wadi Bin Hashbal Municipality 0019007707
341
Al-Birk Municipality 0019007708
342
Al-Hazmi Municipality 0019007709
343
Sobah Balalhmar Municipality 0019007710
344
Al-Fardah Municipality 0019007711
345
Qana Municipality 0019007712
346
Al-Sabikhah Municipality 0019007713
347
Al-Thania and Tabala Municipality 0019007714
348
Al-Naqi Municipality 0019007715
349
Samakh Municipality 0019007716
350
Bani Amr Municipality 0019007717
351
Al-Sahil Municipality 0019007718
352
Al-Wadiain Municipality 0019007719
353
Al-Amwah Municipality 0019007720
354
Al-Jouf Region Municipality 0019010001
355
Al-Qurayyat Municipality 0019010201
356
Duma Al-Jandal Municipality 0019010301
357
Tabarjal Municipality 0019010302
358
Suwaire Municipality 0019010601
359
Al-Eysawiyah Municipality 0019010701
360
Abu Ajeram Municipality 0019010702
361
Al-Nasifah Municipality 0019010703
362
Zuloom Municipality 0019010704
363
Al-Haditha Municipality 0019010705
364
Tabuk Region Municipality 0019011001
365
Tayma Municipality 0019011201
366
Umluj Municipality 0019011301
367
Dhaba Municipality 0019011302
368
Al-Wajh Municipality 0019011303
369
Haql Municipality 0019011304
370
Al-Bad' Municipality 0019011701
371
Bir Bin Harmas Municipality 0019011702
372
Al-Qalibah Municipality 0019011703
373
Al-Shawq Municipality 0019011704
374
Al-Manjur Municipality 0019011705
375
Al-Shabha Municipality 0019011706
376
Badah Municipality 0019011707
377
Abu Rakkeh Municipality 0019011708
378
Hail Region Municipality 0019012001
379
Al-Buqay'a Municipality 0019012301
380
Turbah Municipality in Hail Region 0019012302
381
Jabah Municipality 0019012401
382
Al-Ha'it Municipality 0019012601
383
Al-Khattah Municipality 0019012602
384
Al-Rawda Municipality 0019012603
385
Al-Salimi Municipality 0019012604
386
Al-Shamli Municipality 0019012605
387
Al-Kahfah Municipality 0019012606
388
Muwiq Municipality 0019012607
389
Samira Municipality 0019012701
390
Al-Shanan Municipality 0019012702
391
Al-Ghazalah Municipality 0019012703
392
Al-Hulifah Al-Suflah Municipality 0019012704
393
Faid Municipality 0019012705
394
Al-Ajfar Municipality 0019012706
395
Anbwan Municipality 0019012707
396
Northern Borders Region Municipality 0019013001
397
Rafha Municipality 0019013301
398
Tarif Municipality 0019013302
399
Al-Owayqilah Municipality 0019013701
400
Shubbat Nasab Municipality 0019013702
401
Laynah Municipality 0019013703
402
Talat Al-Tumayyat Municipality 0019013704
403
Qaryat Bin Shuraim Municipality 0019013705
404
Rawdat Habas Municipality 0019013706
405
Um Khunsar Municipality 0019013707
406
Jazan Region Municipality 0019009001
407
Sabya Municipality 0019009201
408
Vifa Municipality 0019009202
409
Abha Municipality 0019009301
410
Bisha Municipality 0019009302
411
Samta Municipality 0019009303
412
Al-Ahd Al-Masari Municipality 0019009401
413
Al-Tawal Municipality 0019009601
414
Farasan Municipality 0019009602
415
Wadi Jazan Municipality 0019009603
416
Al-Mawsim Municipality 0019009701
417
Dhamad Municipality 0019009702
418
Al-Aridah Municipality 0019009703
419
Al-Darb Municipality 0019009704
420
Al-Khubah Municipality 0019009705
421
Al-Dair Bani Malik Municipality 0019009706
422
Al-Shuqaiq Municipality 0019009707
423
Al-Eidabi Municipality 0019009708
424
Harub Municipality 0019009709
425
Al-Suha Municipality 0019009710
426
Al-Rith Municipality 0019009711
427
Al-Mudaya Municipality 0019009712
428
Al-Aliyah Municipality 0019009713
429
Al-Haqou Municipality 0019009714
430
Qouz Al-Ja'afrah Municipality 0019009715
431
Al-Quffal Municipality 0019009716
432
Al-Baha Region Municipality 0019014001
433
Baljurashi Municipality 0019014201
434
Qalwa Municipality 0019014301
435
Al-Mundaq Municipality 0019014302
436
Al-Mukhawwa Municipality 0019014501
437
Al-Aqiq Municipality 0019014601
438
Al-Qura Municipality 0019014701
439
Bani Kabir Municipality 0019014702
440
Al-Hajrah Municipality 0019014703
441
Ghamid Al-Zinad Municipality 0019014704
442
Bani Hasan Municipality 0019014705
443
Al-Ma'ashuqah Municipality 0019014706
444
Najran Region Municipality 0019015001
445
Sharurah Municipality 0019015301
446
Yadmah Municipality 0019015601
447
Habouna Municipality 0019015701
448
Saltanah Municipality 0019015702
449
Badr Al-Janub Municipality 0019015703
450
Thar Municipality 0019015704
451
Khabbash Municipality 0019015705
452
Al-Wadi'ah Municipality 0019015706
453
Al-Husainiyah Municipality 0019015707
454
Bir Askar Municipality 0019015708
455
Taif Municipality 0019016001
456
Turbah Municipality 0019016301
457
Al-Khurmah Municipality 0019016302
458
Al-Rania Municipality 0019016303
459
Al-Muhay Municipality 0019016701
460
Maysan Municipality 0019016702
461
Bani Saad Municipality 0019016703
462
Al-Mahani Municipality 0019016704
463
Qiya Municipality 0019016705
464
Al-Qurayyah Bani Malik Municipality 0019016706
465
Dhulmah Municipality 0019016707
Subscribing in SMS Services
Referring to the telegram from the Minister of Communications and Information Technology No. 1/41/338 dated 13/01/1441H regarding the regulation of subscriptions to SMS services in accordance with the terms and conditions of class licenses type (B)*, which stipulates contracting only with service providers licensed by the Communications and Information Technology Commission.
It is required that all financial institutions operating in the Kingdom contract only with short messaging service providers licensed by the Communications and Information Technology Commission. You can verify the license by visiting the CST website.
* To read "the regulations of the Provision of the Short Messaging Service", click here.
Approval of Companies Articles of Incorporation and its Amendments
SAMA received a letter from the esteemed Undersecretary of the Ministry of Commerce and Investment for Commercial Affairs and Investment No. 2638 dated 03/02/1441 H, indicating that instructions have been issued for the documentation of company bylaws and amendments through the ministry's employee, in accordance with Article (12) of the Companies Law amended by Royal Decree No. (M/79) dated 25/07/1439 H*.
Therefore, I hope that the bylaws of companies and their amendments, authenticated by the ministry employee, will be accepted, verification of the bylaws and amendments can be done through AAMALY E-Magazine.
* The companies Law issued by Royal Decree No.(M/3) dated 28/01/1437H, has been replaced by the Companies Law issued by the Royal Decree No. (M/132), dated 01/12/1443.
Acceptance of the Customer Signing the Last Page of the Bank Account Agreement Only
In reference to SAMA's instructions issued by Circular No. 29811/67 dated 11/05/1440 H regarding the requirement for the customer to sign only once on the last page of the bank account opening agreement instead of signing each page, as per specified regulations. It has been observed that some banks are requiring the customer to sign each page of the account opening agreement, which does not align with these instructions, as reported to SAMA by various banks in this regard.
Therefore, SAMA emphasizes that all banks operating in the Kingdom must adhere to the aforementioned instructions. It is also important for relevant departments to educate branch staff that the customer needs to sign only once on the last page of the bank account opening agreement. Please note that SAMA will take legal measures in the event of non-compliance.
Utilization of the Electronic “Natheer” Service
In reference to SAMA's Circular No. 391000006561 dated 19/01/1439 H regarding the approved electronic services for identity verification by the National Information Center for the electronic verification of customer identities. It has been observed that there are a number of active accounts belonging to expatriates who have left the Kingdom without closing these accounts, resulting in the collection of funds through fraudulent activities. Consequently, these funds are transferred abroad using electronic services, making it difficult to trace and return them to the defrauded owners.
Wheras, the "Natheer" electronic service enables banks to be aware of the status of customer data and update it by notifying them of events affecting them through electronic linkage with official data, providing alerts about various events, including:
- The status of expatriates' final exit before and after crossing the borders.
- The status of cancellation of the final exit visa after it has been issued.
- The status of issuing a return visa without the individual having returned.
Therefore, SAMA urges all banks operating in the Kingdom to utilize this service, which will facilitate compliance with the provisions of the banking account rules regarding expatriate customer accounts, such as freezing accounts immediately upon final exit, in order to mitigate the exploitation of these accounts after their owners have departed.
Educating Clients About the Risks of Carrying Large Amounts of Cash
Further to SAMA's instructions issued under Circular No. 26948/67 dated 30/4/1440H regarding Educating Consumers About the Risks of Carrying Large Sums of Cash, and in light of the observed decline in awareness levels and the ineffectiveness of measures taken by banks operating in the Kingdom.
SAMA emphasizes the importance of enhancing customer awareness about the risks of carrying large amounts of cash and encourages the use of electronic services instead of cash through various means, including but not limited to: (instructional boards in branches, telephone banking, ATMs, websites, text messages, mobile applications, and social media platforms).
For your information and act accordingly, and provide SAMA with an awareness plan within one month from the date of this notice.
Bank Accounts for Members of Displaced Tribes with Expired Iqama
In reference to the telegram from His Royal Highness the Minister of Interior No. 206572 dated 18/09/1440 H, which includes permission to reactivate bank accounts for bank customers from the displaced tribes whose Iqama has expired, who work in the public and private sectors, according to specified regulations.
Exceptionally from Rule No. (200-1-4) concerning Tribe Members: Displaced Tribes/Ar Rub' Al-Khali Tribes, as outlined in the rules on bank accounts issued by Circular No. 65681/67 dated 01/11/1440 H, which states: "The bank may open accounts for those tribal individuals residing in Saudi Arabia, and the validity of their accounts should be linked to the validity of their Iqamas. The bank must obtain the individual’s Iqama...", the following has been decided:
First: Individuals from the displaced tribes who receive monthly salaries deposited into their bank accounts for their work in government entities are allowed to conduct all banking operations on these accounts.
Second: Individuals from the displaced tribes who receive monthly salaries deposited into their bank accounts for their work in the private sector or government subsidies are permitted to perform only two cash withdrawal transactions for these deposits each month.
Receiving Reports and Feedback on ATMs via the Toll-Free 24-Hour Phone
Referring to the Royal Minister of Interior's Circular No. 200498 dated 11/09/1440H regarding appropriate measures to reduce the recurrence of ATM theft and vandalism, and to SAMA's instructions issued under Circular No. 361000032167 dated 30/02/1436H concerning the recommendations of the security committee to limit the recurrence of ATM theft and vandalism, as well as previous circulars on this matter, and in continuation of SAMA's instructions issued under Circular No. 48007/67 dated 02/08/1440H regarding providing customers with channels for communication with financial institutions
SAMA emphasizes that all banks operating in the Kingdom must ensure the availability of a 24-hour hotline for receiving reports and feedback on ATMs via the bank's toll-free phone number.
Merchants Contracting with Banks to Provide e-Payment Services Must Not Photocopy Credit Cards or Copy or Record Confidential Information on Credit Cards
Referring to the Regulations of Issuance and Operations of Credit and Charge Cards and monthly deduction cards issued by the Circular No. 361000090389 dated 26/6/1436 H and Banking Consumers Protection Principles issued by the Circular No. 341000095960 dated 3/8/1434 H.
In light of the observation that some merchants are photographing credit cards, copying their data, and recording confidential information, SAMA emphasizes that all banks operating in the Kingdom must ensure that their contracted merchants providing electronic payment services do not photograph or copy or record confidential information in credit cards, without prejudice to the terms of the contractual agreement between the bank and the merchant.
Contracting with Licensed Persons for the Distribution of Public Investment Funds through the Electronic Channels of Banks
Based on the authorities granted to SAMA to supervise and regulate the banking sector in the Kingdom under the provisions of the Saudi Arabian Monetary Authority Law, issued by Royal Decree No. (23) dated 23/05/1377 H, and the Banking Control Law, issued by Royal Decree No. (M/5) dated 22/02/1386 H, and in light of SAMA's role in achieving the initiatives of the Financial Sector Development Program that support the goals of Saudi Vision 2030 including expanding access to collective investment program products and based on coordination between SAMA and the Capital Market Authority and for the purpose of facilitating access to investment fund products by expanding the channels for obtaining these products.
We would like to inform you that the bank may contract with persons licensed by the Authority for the purpose of distributing these products exclusively through electronic channels, provided that the bank implements the necessary due diligence related to these products. The contracting agreement must stipulate that the responsibility lies with the licensed persons under the supervision of the Authority.
The Electronic Report Approved by the SAFIU
Referring to Council of Ministers Decision No. (42) dated 15/1/1440 H, which includes approval of the national strategic objectives for combating money laundering and terrorist financing, and the national action plan to achieve these objectives, which includes enhancing technical systems in the field of combating money laundering and financing terrorism. Based on Article 15 of the Anti-Money Laundering Law issued by Royal Decree No. (M/20) dated 5/2/1439 H, Article 15/4 of its implementing regulations, Article 70 of the Law on combating the financing of terrorism issued by Royal Decree No. (M/21) dated 12/2/1439 H, and Article 23 of its implementing regulations.
I would like to inform you that the application of the first phase of electronic reporting has started through the link starting from Wednesday 24/9/1440 H, provided that the experience will be evaluated by the end of July 2019.
For your information and action accordingly, and communicate with the General Directorate of Financial Investigations if you encounter any difficulties in the reporting process via the link provided above. Additionally, please inform the Anti-Money Laundering and Terrorism Financing Department at SAMA of any updates in this regard.
Allowing Banks to Continue Providing Finance Lease Activities
Referring to SAMA Circular No. 44480/67 dated 14/07/1440 H, which emphasizes on compliance to the provisions of the Real Estate Finance Law, the Finance Lease Law, Implementing Regulations and Instructions. Further to SAMA Circular No. 22129/67 dated 09/04/1440 H, which includes licensing banks to engage in real estate finance or finance leasing activities until issuance of instructions by SAMA in this regard, provided that letters of non-objection are obtained from SAMA to offer related financing products in accordance with the provisions of the relevant laws, regulations, and instructions.
SAMA would like to inform you that licensed banks may continue to engage in finance lease activities without the need to renew the license granted for finance lease or to obtain a separate license for that purpose, provided that they obtain letters of non-objection from SAMA to offer related financing products in accordance with the provisions of the relevant laws, regulations, and instructions.
Allowing Cash Withdrawals and ATM Card Issuance for Customers with Seizure and Ban Decisions
Referring to the arrangements made between SAMA and the Ministry of Justice regarding the procedures for benefiting from the statutory percentage of the salary deposited in the customer's account subject to a seizure or ban decision. I would like to inform you of the following:
First: Allow cash withdrawals of amounts exempted from seizure in bank accounts seized by judicial orders, including the statutory percentage of salaries through ATM cards.
Second: Exempt the issuance or renewal of ATM cards from the services prohibited for those subject to a ban decision.
Third: Establish procedures and controls to ensure that what is mentioned in paragraphs (First) and (Second) does not violate the application of the rules for seizure and ban decision.
For your information, and to act accordingly by the end of the second quarter of 2019.
Requirements for Requesting Extensions of Retention Periods for Real Estate Transferred to Banks for Debt Settlement
Based on the Saudi Arabian Monetary Authority Law issued by Royal Decree No. (23) dated 23/05/1377 H, and in accordance with Article 10 of the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386 H.
SAMA emphasizes that all banks operating in the Kingdom must submit a request to SAMA for an extension of the period for retaining properties acquired in settlement of debts at least 60 days before the expiration of the legal period. The request must include details of those properties according to the accompanying form.
Information on properties for which the bank requests an extension of the retention period acquired as a result of debt settlements with others
Bank Name Type of Property
City
Date of Property Acquisition by the Bank
Date of Last Non-Objection Letter Received by the Bank for Retaining the Property (attach proof)
Is the property considered a commercial, industrial, agricultural project, or any other type of project
Book Value
Market Value
Reason the Bank Cannot Dispose of the Property (attach proof)
Efforts Made by the Bank to Dispose of the Property (attach proof)
Bank's Plan for Disposing of the Property
Land Building Allowing Branches Located in Cities and Military/Air Bases to Operate Outside Official Working Hours
In line with SAMA's active contributions to national programs and in support of the vision of His Royal Highness Prince Mohammed bin Salman's "Eatizaz" program, as mentioned in SAMA circular number 24543/99 dated 18/4/1440 H, which aims to provide an exceptional level of care and attention to all military forces, ensuring the well-being and esteemed status they deserve.
According to Article 16 of the Banking Control Law and further to SAMA circular No. 35487/M A Sh/586 dated 9/10/1427H regarding the working hours for Tadawul and SAMA circular No. 33422/67 dated 28/5/1440H regarding Allowing Bank Branches Located in or Next to Government Buildings to Change Working Hours. I inform you that it has been decided to provide additional working hours for the branches located in cities and military/air bases, according to the following regulations:
- The branch should be located in a city or at a military/air base.
- The additional hours for branch work should be during official working days and should not exceed three hours of work.
- The work during the additional hours shall be limited exclusively to providing services related to financing and credit products without offering any other banking services.
- The addition of working hours should not result in a violation of the provisions of the Labor Law and its implementing regulations.
- SAMA is informed of the list of branches whose working hours have been extended and their specific working hours.
Exemption Of Cash Allocations Deposited by the Misk Charitable Foundation from Seizure or Deduction
Further to SAMA instructions issued under Circular No. 37488/67 dated 15/6/1440 H regarding Prohibiting Seizure of Funds Deposited by Charities into Bank Accounts Seized Under Court Orders. Referring to the social and charitable initiatives adopted by His Royal Highness Prince Mohammed bin Salman bin Abdulaziz – may God protect him – which range from financial and moral support for various segments of society, including the "Sanad Mohammed bin Salman" program to support newlyweds couples and reduce the burdens of marriage.
SAMA wishes to confirm that no amounts received from the "Sanad Mohammed bin Salman" program or the "Misk" charitable foundation should be seized or deducted in the beneficiaries' accounts against any court orders or decisions. SAMA also urges all banks not to deduct from these amounts for the repayment of personal loans and other financial obligations.
I hope you will instruct your specialists to comply with this and act accordingly.
Exempting Customers at Bank Branches and Airports Traveling Outside the Kingdom from Presenting their National ID
Following the instructions from SAMA communicated via Circular No. 341000033788 dated 15/3/1434 H regarding the confirmation of identity verification documents.
We would like to inform you that SAMA has received a letter from his Royal Highness the Minister of Interior No. 140456 dated 26/6/1440H, which includes approval to exempt only customers of bank branches at airports traveling outside the Kingdom from providing a national identity for executing various banking operations and suffice by requesting to present their passport and boarding pass, ensuring both match the customer's name.
Foreign Bank Branches' Committee (FBBC)
Foreign Bank Branches (FBBs) play an important role in the Kingdom of Saudi Arabia (KSA)'s banking system. They improve competition and choice in the banking sector and have been at the forefront of introducing leading-edge banking services. They have also provided KSA consumers with improved access to international capital markets. SAMA is cognizant of these key contributions of the FBBs and will continue to facilitate the continued participation of FBBs in the domestic financial sector.
In order to ensure that the views of FBBs are represented to policy makers, and that they have the opportunity to engage in and help shape their activities with the industry's key stakeholders, SAMA requires that the FBBs form a Foreign Bank Branches' Committee (FBBC). The FBBC will provide a platform for the FBBs to discuss key industry topics and share information which may be of mutual benefit to the sector. It will also help to ensure that FBBs continue to thrive in KSA and the country's vision to become a major global financial centre is realised.
All Heads of FBBs would, therefore, be required to become members of the FBBC. As is the case for all bank committees, SAMA would play an observer role in the FBBC. The inaugural meeting of the committee will take place sometime in Q2, 2019. SAMA will confirm the exact date, time and venue of the meeting during which, also, further explanations about the mandate and purpose of the committee would be provided. It is expected that the FBBs would, during the inaugural meeting, select the FBBC chair and secretary.
Exclusion of Expatriates Holding Prepaid Cards and Working for Distressed Companies from the Freezing of Funds
Further to SAMA's circular No. 25265/67 dated 20/04/1440 H regarding the exemption of expatriate labor accounts from freezing for employees of certain distressed companies, and allowing banks to activate the accounts and relationships they hold for employees of those companies who have become distressed, whose residency permits have expired, and to open and activate accounts for those who do not have residency permits and work under temporary residency in their passports.
We would like to inform you that it has been decided to include the exemption mentioned in SAMA's circular for laborers holding prepaid salary cards, allowing the deposit of salaries and entitlements for those workers and permitting the exceptional activation of those cards for employees of distressed companies. We would also like to emphasize that the exemption period previously set for expatriate labor from freezing for employees of certain distressed companies is limited to six months only from this date. For coordination or inquiries regarding this matter, please contact the specialist in the Banking Licensing Department at SAMA.
Allowing Bank Branches Located in or Next to Government Buildings to Change Working Hours
Based on Article Sixteen of the Banking Control Law and following up on SAMA's circular No. 35487/BCH/586 dated 9/10/1427H regarding the working hours of bank branches for the public.
We would like to inform you that it has been decided to allow changes to the working hours of branches located within or adjacent to government entities, in accordance with the working hours of these entities, under the following conditions:
1- The branch must be located within a government entity or adjacent to it.
2- The branch must primarily aim to serve the employees or customers of that entity.
3- The branch's working hours must be flexible for eight hours, from 7:00 AM to 5:00 PM.
4- The working hours of the branch must be clearly displayed at the entrance and through other suitable advertising means.
5- SAMA must be informed of the list of branches whose working hours have been changed.
Statutory Deposits Reserves Calculation
In reference to Article 7 of Banking Control Law, which states that every bank is required to maintain with SAMA, at all times, a statutory deposit of a sum not less than fifteen percent of its deposit liabilities, and which has been reduced to (4%) for time and savings deposits and (7%) for demand deposits.
To better enhance liquidity management by banks, SAMA is requiring the statutory reserve reported in M6-l return to be based on average end of day balance of reserve for the month (daily averaging) instead of end of month balance. Weekends and public holidays are to be included in the calculation of the daily averaging.
Please be advised this requirement is effective immediately.
Customer Signature on Bank Account Agreements
Further to instructions issued by SAMA under Circular No. 391000020013 dated 20/2/1439H, which stipulates that the customer must sign all pages of contracts and agreements to which they are a party, ensuring that they are aware of all terms of the agreement.
To facilitate the process of opening bank accounts, it has been decided to allow the customer to sign only once on the last page of the bank account opening agreement instead of signing on each page, according to the following controls:
First: Each agreement must have a reference number (issuance number) clearly and prominently written on every page, including the last page signed by the client.
Second: The total number of pages of the agreement must be clearly and prominently stated on the page where the client signs.
Third: The bank must keep all forms of bank account opening agreements in their various issuances and updates and publish them on the bank website to allow them to be viewed and read by customers. Fourth: The last page signed by the client must include a statement confirming that the client has reviewed and agrees to all terms of the agreement.
For your information and to act accordingly within (40) working days from its date.
Marketing of Finance Products That Meet Real Individual Needs
SAMA has noticed that banks are focusing on the marketing aspect of consumer financing products through SMS and other means in a way that does not serve the actual needs of individuals and is not aligned with the goals of Saudi Vision 2030.
Therefore, SAMA hopes that banks will adopt a balanced approach in marketing their financing products through all marketing channels and refrain from concentrating on marketing consumer financing products.
Educating Customers About the Risks of Carrying Large Sums of Cash
In reference to SAMA Circular No. 3293/MAT/27 dated 14/02/1422 H and Circular No. 26029/MAT/313 dated 11/10/1425 H regarding educating bank customers about handling cash, we would like to inform you that SAMA continues to receive reports from relevant authorities in the Kingdom about the exposure of some bank customers to theft due to carrying large sums of cash.
Given the risks associated with carrying large sums of cash, which can lead to various crimes that may negatively impact the security and economic reputation of the country, it is essential to activate the aforementioned SAMA circulars, educate the customers about the dangers of carrying large sums of cash and urge to use various electronic services when dealing with cash, while also clarifying that there are safe ways to carry large sums of cash represented in the use of licensed companies and institutions for transporting cash and precious metals.
Controls for Banks and Real Estate Finance Companies Owning Real Estate Located within the Cities of Makkah and AL-Madinah
No: 598900000099 Date(g): 2/1/2019 | Date(h): 25/4/1440 Status: In-Force Translated Document
Based on the powers granted to SAMA under the Banking Control Law issued by Royal Decree No. (M/5) dated 22/2/1386H, the Real Estate Finance Law issued by Royal Decree No. (M/50) dated 13/8/1433H, and the Finance Companies Control Law issued by Royal Decree No. (M/51) dated 13/8/1433H, and in implementation of the Council of Ministers’ Decision No. (494) dated 14/9/1439H, which approved the amendment of Article (5) of the Law of Real Estate Ownership and Investment by Non-Saudis, where paragraph (1/c/2) of the same article includes "Banks and real estate financing companies licensed by the Central Bank are exempt from the restriction placed on non-Saudis from owning real estate in the cities of Mecca and Medina, in accordance with regulations set by the Central Bank. However, this exemption is limited to the ownership of real estate for the purpose of financing it for individuals holding Saudi nationality, as well as properties designated for their headquarters or branches, or those required for conducting their activities."
Attached is a copy of the Controls for Banks and Real Estate Finance Companies Owning Real Estate Located within the Cities of Makkah and AL-Madinah. SAMA emphasizes that banks and real estate financing companies must immediately take the necessary actions to ensure full compliance with these regulations.
Introduction
These controls apply to banks and real estate financing companies operating in the Kingdom when owning properties located in the areas of Makkah and AL-Madinah. SAMA is considered the supervisory authority authorized to implement these controls and take necessary actions as deemed appropriate regarding any violations of these controls, including imposing penalties in accordance with the applicable provisions of the Banking Control Law issued by Royal Decree No. (M/5) dated 22/2/1386H, Implementation Rules for Banking Control Law issued by Ministerial Resolution No. (3/2149) dated 14/10/1406H, the Real Estate Finance Law issued by Royal Decree No. (M/50) dated 13/8/1433H, the Finance Companies Control Law issued by Royal Decree No. (M/51) dated 13/8/1433H, and it's implementing regulation issued by the the Governor of Saudi Central Bank Resolution No. (2/MFC), dated 14/04/1434H, the Law of Real Estate Ownership and Investment by Non-Saudis issued by Royal Decree No.(M/15), dated 17/04/1421H, and the Council of Ministers’ Decision No. (494) dated 14/9/1439H, which approved the amendment of Article (5) of the Law of Real Estate Ownership and Investment by Non-Saudis.
Chapter One: Definitions
The following words and phrases, wherever mentioned in these controls, shall have the meanings set forth opposite each, unless the context indicates otherwise.
Controls: Controls for Banks and Real Estate Finance Companies Owning Real Estate Located within the Cities of Makkah and AL-Madinah.
Central Bank: The Saudi Central Bank*.
Banks: Banks operating in the Kingdom.
Real Estate Finance Companies: Joint-stock companies licensed to practice real estate financing activities.
Non-Saudi: A natural person who does not hold Saudi citizenship, or a non-Saudi company, or a Saudi company founded or participated in by a natural or legal person who does not hold Saudi citizenship.
* The "Saudi Arabian Monetary Agency" was replaced By the "Saudi Central Bank" in accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding to 26/11/2020G.
Chapter Two: General Provisions
2- Without prejudice to related regulations, banks and real estate finance companies may own properties located in the cities of Mecca and Medina for the purpose of financing them to beneficiaries, or such ownership may be specific to their headquarters, branch offices, or necessary for their operations.
3- Without prejudice to the provisions of the Law of Real Estate Ownership and Investment by Non-Saudis, the financing referred to in paragraph (2) of these controls is limited to natural or legal persons holding Saudi nationality only, in accordance with the applicable regulations set forth by the relevant authorities.
4- Banks and real estate finance companies are prohibited from selling -properties they own in the cities of Makkah and AL-Madinah for the purpose of using them as (branches or employee housing)- to non-Saudis.
5- Banks and real estate finance companies are prohibited from selling -Regarding properties that are transferred to their ownership in the cities of Makkah and AL-Madinah due to customer defaults on payments or customers’ unwillingness to own the property at the end of the lease term in cases where the real estate financing contract is structured as a lease (Ejarah)-, to non-Saudis .
6- Banks and real estate finance companies must conduct due diligence to ensure that the actual beneficiary of the real estate financing in the cities of Makkah and AL-Madinah holds Saudi nationality concerning properties owned by the bank or real estate finance company related to active financing contracts.
7- Banks and real estate finance companies must limit real estate financing contracts for individuals to the Mortgage Finance Model Contracts according to what is issued by SAMA in this regard.
8- Banks and real estate finance companies must notify SAMA well in advance before acquiring or selling properties located in the cities of Makkah and AL-Madinah, and provide sufficient information about the property and the buyer.
9- Banks and real estate finance companies must provide SAMA with quarterly reports that include cases of (ownership/sale/transfer) of properties located in the cities of Makkah and AL-Madinah.
Chapter Three: Final Provisions
10- Banks and real estate finance companies must implement what is stated in these controls, in addition to complying with all relevant laws, regulations, rules, and instructions issued by the relevant authorities.
11- Banks and real estate finance companies must adhere to the mandatory instructions when providing real estate finance products to individuals as issued in Circular No. 46544/99 dated 02/09/1439H.
12- Banks and real estate finance companies must comply with SAMA Circular No. 381000074831 dated 14/07/1438H regarding the Definition of Commercial Mortgage.
Chapter Four: Enforcement
13- These controls shall take effect from the date of their issuance.
Exclusion of Expatriates Working for Distressed Companies from the Freezing of Funds
Reference to paragraph (3-1-2) of Freezing of Banks Accounts Rules No. (3-1) from the Banking Account Opening Rules, which states that "the accounts and all transactions of non-Saudi individuals must be frozen upon the expiration of the expatriate's residence permit," and what is included in the general instructions for freezing of bank accounts rules No. (3-2), which do not allow non-Saudi individuals to withdraw their balances and close their accounts after the expiration of their residence while they are in the Kingdom except after presenting either a final exit visa or a letter from the Passport Department, security authorities, or regional governorates directing the bank to allow the withdrawal of the account balance based on their passport.
I inform you that, in accordance with the powers vested to SAMA under the letter from the Ministry of Interior No. 12515 dated 20/2/1435 H to open accounts for those whose residence permits have expired, and based on the ongoing coordination between SAMA, the Ministry of Labor and Social Development, and the Ministry of Interior, the following has been decided:
1- Allow banks to activate the accounts and relationships they have opened for the employees of companies that have become distressed, whose residence permits have expired and the companies have been unable to renew them, for the purpose of depositing their salaries and dues and enabling them to use these accounts. 2- Allow banks to open and activate the accounts and relationships they have for employees of distressed companies who have not been issued residence permits and are working under temporary residence based on their border number (for three months) for the purpose of depositing their salaries and dues and enabling them to use these accounts. 3- Require a copy of the expired residence document for the worker who has an expired residence and a copy of the document indicating temporary residence and the border number when visiting to use or activate the account, ensuring that the worker is under the sponsorship of the company. SAMA will provide banks via email with a list of names of distressed companies, and the Ministry of Labor and Social Development will approve the designated representatives from the companies authorized by the ministry to visit banks to provide them with the names of employees and their accounts. Please note that the deposit of salaries and dues for these employees will be through accounts in the name of the Ministry of Labor and Social Development / Labor Wage Settlement Committees.
For your information and action accordingly, and for coordination or inquiries in this regard, please contact the specialist in the Banking Licensing Department at SAMA.
Extending Working Hours on Saturdays for Services Related to Subsidized Real Estate Loans
Based on Article 16 of the Banking Control Law, and further to SAMA Circular No. 35487/BCS/586 dated 09/10/1427 H regarding the working hours of bank branches for the public, and in continuation of SAMA's role in achieving the national goals included in Vision 2030.
I would like to inform you that it has been decided to provide additional working hours on Saturdays to provide services related to real estate products associated with the "Subsidized Financing" mortgage program provided by the Ministry of Housing and the Real Estate Development Fund, for a period of one year from this date, according to the following controls:
- The additional hours shall consist of five flexible working hours, from 12:00 PM to 8:00 PM.
- Work during the additional Saturday hours shall be limited to providing services related to real estate products associated with the "Subsidized Financing" mortgage program, with no other banking services offered.
- The branches operating during the additional hours shall be geographically distributed to cover all regions of the Kingdom.
- Sufficient bank employees must be available to serve customers.
- Announcement of the branches operating during the additional hours and the services provided.
- Notify SAMA of the number of branches operating and their specific working hours.
Licensing Banks to Engage in Real Estate Finance or Finance Leasing Activities
Based on the powers vested to SAMA under the Banking Control Law issued by Royal Decree No. (M/5) dated 22/2/1386 H, the Finance Companies Control Law issued by Royal Decree (M/51) dated 13/8/1433H and its Implementing Regulations, the Real Estate Finance Law issued by Royal Decree No. (M/50) dated 13/8/1433H and its Implementing Regulations, the Finance Lease Law issued by Royal Decree No. (M/48) dated 13/8/1433H and its Implementing Regulations, and further to SAMA Circular No. 341000082695 dated 3/7/1434 H containing the obligation to banks operating in the Kingdom to apply to SAMA for a license to conduct mortgage financing and leasing activities, and in reference to Circular No. 39100070455 dated 19/6/1439 H containing the procedural requirements for mortgage registration, I inform you of the following:
First: Licensed banks shall continue to practice real estate financing activity without the need to renew the license granted to them to practice real estate financing activity or obtain an independent license to do so, provided that letters of no objection are obtained from SAMA to offer the relevant financing products in accordance with the provisions of the relevant laws, regulations and instructions. Second: Licensed banks shall continue to practice financial leasing activity until SAMA's instructions are issued in this regard, provided that letters of no objection from SAMA are obtained to offer the relevant financing products in accordance with the provisions of the relevant laws, regulations and instructions. Guidelines on Holding Salaries of Customers
Referring to SAMA Circular No. BCL/129 dated 10/8/1421 H, which includes working and adhering to the directives of His Excellency the Minister of Finance and National Economy in his letter No. 1/9532 dated 4/8/1421 H, so that no more than one third of the employee's salary is seized, and to the supplementary circular No. BCL/45 dated 11/3/1422 H in the same regard.
We inform you that SAMA has received the letter of His Excellency No. 1/10039 dated 14/8/1422 H regarding the request of some persons wishing to obtain loans from banks to deduct from their salaries more than the percentage specified by the law at one third of the salary. Therefore, His Excellency confirmed that the reservation will continue at the same rate, which represents 33% of the employee's net monthly salary, and if the employee wishes to increase it, it will be in his own manner agreed upon with the lending bank, provided that it is known to the lending bank that in the event that the borrowing employee is unable to continue to pay the agreed rate, although the reservation will not exceed the percentage specified in the aforementioned law, His Excellency has requested to inform the banks of this.
To take note and adopt the directives of His Excellency and act according to them and inform your branches of that, and we hope to inform us of your receipt of this circular.
Updating the Lists of High- Risk Countries on the Website of the AMLPC
In reference to paragraph (1) of Article Eleven of the Anti-Money Laundering Law issued by Royal Decree No. (M/20) dated 05/02/1439 H, which states: "Financial institutions and designated non-financial businesses and professions shall apply enhanced due diligence measures proportionate to the risks involving business relationships and transactions with a person from a country that was identified as high risk by the FI or DNFBP or the Anti-Money Laundering Permanent Committee."
We would like to inform you that the Permanent Committee for Anti-Money Laundering continuously updates its lists of high-risk countries on its website. SAMA emphasizes the necessity of taking appropriate measures to monitor the committee's website regarding the countries identified as high-risk, in order to enhance the measures taken by you to identify the risks of high-risk countries.
We hope you review this and take the necessary actions.
Relief and Humanitarian Aid Abroad
In reference to the Royal Order No. 55871 dated 09/11/1436 H, which stipulates that the King Salman Humanitarian Aid and Relief Center is the only entity responsible for receiving any relief, humanitarian or charitable donations, whether from government or private sources, to ensure they reach those in need abroad in accordance with the regulations.
We would like to inform you that SAMA has received a telegram from His Excellency the Advisor at the Royal Court, the General Supervisor of the King Salman Humanitarian Aid and Relief Center No. 40200287 dated 08/02/1440 H, reaffirming the center's role and position as the only authorized entity responsible for receiving humanitarian, charitable, or relief donations-whether governmental or private-to ensure they reach those in need abroad in accordance with the regulations. Therefore, SAMA emphasizes to all banks, and exchange companies the need to implement the aforementioned Royal Order.
Using Commercial Registers for the Same Activity in Many Locations/Stores in the Same Administrative Region
SAMA received the telegram of His Excellency the Minister of Commerce and Investment, No. 1061 dated 7/1/1440 H, referring to the ministry's efforts to facilitate the requirements of practicing commercial activities and to reduce associated costs, which positively impacts the improvement of the Kingdom's global economic indicators. The ministry studied the issue of mandating the issuance of branch commercial registrations for each establishment or location, even if they are in the same city and engaged in the same activity, as stipulated in Article Two of the Law of Commercial Register.
The Ministry of Commerce and Investment clarified that the issuance of branch commercial registrations is only mandatory if a (location or establishment) engages in activities different from the main activity, or if a (location or establishment) is opened in administrative areas outside the administrative region of the main center. The Law of Commercial Register does not require the issuance of a branch commercial registration for each (location or establishment) opened, and the procedures for each (location or establishment) can be completed with the main or branch registration in the same area that corresponds to the activity.
Dates for Quarterly and Annual Financial Statement Submissions
Further to SAMA's instructions issued under Circular No. 371000104967 dated 26/09/1437 H regarding the report timing for bank financial statement (annually & quarterly) to SAMA, we would like to inform you that the periods for submitting financial statements for branches of foreign banks to SAMA have been extended as follows:
First: Quarterly financial statements must be submitted to SAMA within a period not exceeding (30) working days from the end of each quarter.
Second: Annual financial statements must be submitted to SAMA within a period not exceeding three months from the end of the financial year.
Money Transfer Facility for Customers
This section is currently available only in Arabic, please click here to read the Arabic version.Removing the Ministry of Commerce and Investment Logo from Company bylaws
SAMA received a letter from His Excellency the Undersecretary of the Ministry of Commerce and Investment for Internal Trade in charge, No. 60537 dated 23/12/1439 H, informing that the ministry has made an amendment to the technical system related to company contracts in general, where companies are currently issued and amended bylaws (partner decisions) are issued without the logo of the Ministry of Commerce and Investment.
For your information and to take necessary action.
Raising Awareness of Banking Secrecy Regularly Among Bank Employees
Further to the previous instructions from SAMA issued under Circular No. 371000018717 dated 14/02/1437 H regarding the confirmation of banking information confidentiality instructions and the non-disclosure of customer data and information without obtaining SAMA's non-objection, and Circular No. 391000079052 dated 18/07/1439 H concerning the instructions for providing government and non-government entities with documents, information, and data related to customers' bank accounts.
SAMA emphasizes the importance of the commitment of banks to the following:
First: Regularly raising awareness of its employees on the principles of banking secrecy, the instructions issued in this regard, and the penalties resulting from violations, and following up on compliance through periodic surveys.
Second: Develop an internal policy for banking secrecy that includes at a minimum the following: (the importance of banking information confidentiality, the mechanism for dealing with banking information, the mechanism for disclosing these data and banking information, the penalties resulting from violating the issued instructions in this regard, and the mechanism for following up on employee compliance with banking secrecy instructions on a regular basis).
Increasing the Credit Concentration Limit for the Saudi Electricity Company to 25%
With reference to SAMA's Circular No. 361000067330 dated 07/05/1436H regarding the maximum credit exposures for banks, paragraph three of the rules attached to the circular stipulates that the credit exposure limit for a single entity, whether an individual establishment or a group of establishments, is 15% of total shareholders' equity.
Given the important role played by the Saudi Electricity Company in achieving Saudi Vision 2030, SAMA has decided to raise the credit limit granted to the company and its subsidiaries to 25% of total shareholders' equity until further notice. It is emphasized that the responsibility for granting financing and assessing its soundness and appropriateness lies solely with the lender.
Launching an Awareness Campaign for Small and Medium Enterprises to Register for Value-Added Tax
SAMA received a letter from His Excellency the Governor of the General Authority of Zakat and Income, No. 33393/16/1439 dated 16/11/1439 H, regarding the launch of an awareness campaign targeting small and medium enterprises "with annual revenues ranging between 375,000 and 1 million Riyals" to register for Value Added Tax by no later than December 20, 2018 G. This initiative emphasizes the importance of raising awareness among enterprises about this national project by informing bank customers about the significance of registering for VAT, along with publishing the following message:
(Registration for Value Added Tax for enterprises with annual revenues between 375,000 and 1 million Riyals ends on December 20, 2018G. For more information and to register your establishment, please visit the website (VAT.GOV.SA).
SAMA hopes to cooperate and publish the above awareness message on ATM screens and websites that serve individuals and companies, in addition to sending text messages and emails to customers throughout the Kingdom, starting from its date until December 20, 2018G.
Operating Hours of Bank-Related Remittance Centers
Referring to SAMA Circular No. 381000063572 dated 14/6/1438 H, which includes the guide to rules governing bank's remittance centers (First Edition), and Circular No. 381000098190 dated 18/9/1438 H regarding the exemption of certain branches of remittance centers to operate on Fridays.
I would like to inform you of the following:
1. The amendment to paragraph (4) concerning the operating hours of remittance centers is as follows:
- Official working days are from Sunday to Thursday.
- Saturday is an optional additional working day, subject to SAMA's approval for each branch.
- Friday is considered an official weekly holiday for all remittance centers.
-The working hours for the centers' branches are from 9:30 AM to 5:30 PM.
2. The exemption for certain branches of remittance centers to operate on Fridays is extended for one year, provided that it complies with the approved guidelines above for working hours. Requests to SAMA for non-objection must include the names of the branches, their locations, and the desired working hours, and must not exceed 10% of the total number of branches of the bank's remittance centers*.
For your information and action accordingly, effective from Sunday 17/10/1439 H, corresponding to 1/7/2018 G.
*The exemption has been extended for an additional year under SAMA Circular No. 49029/67 dated 5/8/1440 H.
Activation of E-Services for Bank Accounts of Government Entities
SAMA received a letter from His Excellency the Undersecretary of the Ministry of Finance for Financial Affairs and Accounts No. 86373 dated 15/08/1439 H, which includes the Ministry of Finance's approval to provide electronic banking services directly to all governmental entities without requiring approval for each case separately. This is in line with the Ministry's efforts to facilitate and expedite the work for these entities. These services are to be provided in accordance with the following:
1- Banking transactions will be conducted through electronic services based on joint orders from authorized signatories according to the approved levels of security. 2- The services provided to governmental entities will include: (inquiries, internal transfers, and payment of utility bills). 3- Compliance with the instructions issued in this regard, especially the rules governing electronic banking services. Frequently Asked Questions on the Basel III Standardised Approach for Measuring Counterparty Credit Risk Exposures
Referring to SAMA Circular No. 351000095021 dated 22/7/1435 H regarding the Standardized Approach for Measuring Counterparty Credit Risk Exposure - BCBS March 2014G.
In light of the numerous inquiries received on this matter, the Basel Committee on Banking Supervision has decided to periodically review and publish the frequently asked questions with their answers, as well as any technical explanations or clarifications to enhance consistency at the international level in the application of these requirements. The Committee published the second version of the frequently asked questions on March 22, 2018G. Therefore, SAMA emphasizes the importance of reviewing them via the website of the Bank for International Settlements. I would like also to inform you that the local assessment mentioned in the document will be determined by SAMA for each bank separately whenever needed.
Linking SADAD Account to the Current Account
Referring to "SADAD Account," one of the services provided through the SADAD payments system aimed at developing and enhancing the e-commerce environment in the Kingdom as a secure and convenient payment method for processing electronic payment transactions. Given that some banks treat it as a separate account from current credit accounts when applying the updated requirements in the rules for opening bank accounts and the general rules for their operation, it becomes frozen even though the current account is updated, leading to burdens on both customers and banks.
Therefore, SAMA emphasizes that the "SADAD Account" should be treated according to the status of the main current account when applying the updated requirements in the rules for opening bank accounts and the general rules for their operation, as well as the requirements for "inactive accounts and banking relationships" updated under Circular No. 371000120064 dated 20/11/1437 H, and the requirements of the rules and instructions for combating money laundering and terrorist financing, and the instructions for disclosing banking relationships and their attachment.
For your information and action accordingly, and to inform the relevant departments of its contents, and to share with SAMA the action plan for implementing these changes.
Ensuring that Cost-of-Living Allowances or Bonuses are not Seized
Further to SAMA Circular No. 391000050920 dated 4/5/1439 H regarding the Ensuring that Cost-of-Living Allowances and Bonuses Remain Unaffected as mentioned in the Royal Decree No. (A/86) dated 4/18/1439 H, which included the disbursement of a monthly cost-of-living allowance of one thousand riyals for Saudi civilian and military employees for one year, an additional monthly cost-of-living allowance of five hundred riyals for retirees’ pensions disbursed by the Public Pension Agency and the General Organization for Social Insurance to eligible Saudi citizens for one year, a cost-of-living allowance for the monthly allocation for beneficiaries of social security for one year, as well as the disbursement of a bonus of five thousand riyals for military personnel participating on the front lines of military operations in the southern border.
We would like to inform you that, following coordination between the Ministry of Justice and SAMA, a letter was issued by His Excellency the Minister of Justice, No. 39/31726390, dated 26/5/1439H, stating that the cost-of-living allowance and bonus shall be treated under Article (21) of the Enforcement Law as they fall within the compensation and government support programs for citizens. Accordingly, they are covered by this article.
Therefore, SAMA emphasizes the contents of the above-mentioned circular and the prohibition of deducting or withholding any amounts from the cost-of-living allowance or bonus for any judicial or other seizures. Banks are also required to immediately lift any previous seizures imposed on the cost-of-living allowance or bonus.
Independence of the Reviewing Partner and Changing it Every Three Years
Referring to SAMA Circular No. 03496/BCI/196 dated 12/3/1417H, which includes the rules regulating audit committees in Saudi banks.
SAMA wishes to emphasize to all banks the importance of complying with the provisions of the seventh rule regulation of the audit committee regulations, which states the independence of the external auditor, and that the bank's audit committee must request a change of the audit partner every three years.
For your information, SAMA will implement the necessary regulatory procedures in case of non-compliance.
Non-Linear Multi-leg Forward Structured Transactions
This circular is aimed at all Banks undertaking Non-Linear Multi-Leg Forward Structured OTC Derivatives transactions with their customers in the Kingdom of Saudi Arabia, whether their operations are located in Saudi Arabia or elsewhere.
This circular replaces our Circular #371000088317 dated 09/08/1437H (16 May 2016G) on the subject of “Multi-Leg USD/SAR forward structured product”. Following a request from some banks seeking clarification on the above Circular, SAMA is now providing the following guidance:
(1) USD/SAR Non-Linear Multi-leg Forward Structured Transactions: SAMA’s policy continues to prohibit all Banks from undertaking such transactions, which involve any optionality in USD/SAR FX products with their customers in the KSA.
(2) USD/Other Foreign Currency Non-Linear Multi-leg Forward Structured Transactions: For Non-Linear forward structured transactions involving USD and other currencies, Banks are required to ensure that no leverage¹ is created.
(3) Hedging/Speculation: All non-leveraged transactions under (2) above involving non-SAR currency pairs should not exceed the underlying commercial needs² of the customers. Banks are required to fully document the purpose of each transaction. Banks are further required to obtain customers’ written confirmation that they are not undertaking similar transactions with other banks so that the maximum aggregate exposure remains within their commercial needs. Transactions by any local or foreign banks engaging with local clients that create leverage¹ or are for speculative purposes will risk considerable regulatory financial penalties.
(4) Product Class: These rules apply to FX products, and to interest rate products that are designed to achieve the same or similar end-result as using an FX product.
Banks should continue to comply with the requirements of Circular #391000006163 dated 18/01/1439H (8 October 2017G) on new products.
¹ “Leverage” means a transaction that at any point of time may lead the client to transact more than the underlying commercial needs”.
² “Commercial needs” are defined as clients’ needs on an ongoing business based upon its history or pattern of similar transactions.
Approving the Acceptance of Contributions from the Social Development Center in Rijal Almaa
Further to SAMA Circular No. 371000010677 dated 26/01/1437H, which approved the acceptance of documents issued by Social Development Centers in the Kingdom (a total of 41 centers) when fulfilling the requirements of the rules for opening bank accounts related to charitable and cooperative organizations.
We would like to inform you that SAMA has received a letter from the Assistant Undersecretary of the Ministry of Labor for Social Development No. 74998 dated 13/04/1439H, referring to the Minister of Labor's Decision No. 97536 dated 09/09/1434H, which includes the transfer of the Social Development Center in Al-Haridah, along with all its employees, to the Governorate of Rijal Alma’a, and the approval of the Social Development Center in Rijal Alma’a as a replacement for the former Social Development Center in Al-Haridah.
Fo your information and proceed to accept documents issued by the Social Development Center in Rijal Alma’a.
Ensuring that Cost-of-Living Allowances and Bonuses Remain Unaffected
Referring to the Royal Order No. (A/86) dated 18/4/1439H, which included the allocation disbursement of a monthly cost of living allowance of one thousand riyals for citizens among civil and military employees for a period of one year, and an additional monthly cost of living allowance of five hundred riyals for retirement pension receiving pensions from the Public Pension Agency and the General Organization for Social Insurance for citizens for one year, as well as a cost of living allowance for the monthly allocation for social security beneficiaries for one year, along with a bonus of five thousand riyals for military personnel participating in frontline military operations in the southern border.
SAMA would like to emphasize that the cost of living allowances and bonuses mentioned in the above Royal Order should not be subject to deductions or similar actions. Furthermore, the cost-of-living allowance should not be considered in financing requests and future obligations. In the event of incorrect deductions, banks are required to refund the deducted amounts within a maximum period of 48 hours.
we hope that your specialists will abide by the above.
Municipalities Must Be Reviewed to Obtain New Licenses and Renew Expired Ones for Banking Services, Paying all Fees in all Regions
In addition to SAMA Circular No. 381000058270 dated 1/6/1438 H. regarding the emphasis on bank officials directing all your branches in all regions of the Kingdom to renew expired municipal licenses and obtain licenses for those branches that do not have them, failure to comply with this will expose the bank to regulatory actions against it. The provisions of Article (2/1/3) of the schedule of fines and procedures for violations issued by the municipality under Cabinet Decision No. 218 dated 06/08/1422H will be applied. Additionally, it constitutes a violation of SAMA's instructions.
In view of the continued receipt of letters from other governmental bodies urging banks to review their processes after obtaining approval or extracting the necessary licenses or paying the due fees, SAMA would like to emphasize the necessity of adhering to the aforementioned circular. It is necessary to complete all required approvals, extract all governmental licenses, and settle all due fees for the bank, its branches, centers, and affiliated equipment without any delay. Please notify SAMA of the completion of all these requirements no later than 30/03/2018G. SAMA will take regulatory actions in case of non-compliance or if any observations are received from those bodies in this regard.
For your information and action accordingly.
Instructions on Documentation and Record Keeping
Further to SAMA Circular No. (381000092226) dated 02/09/1438H and No. (371000093889) dated 24/08/1437H regarding the retention of records and paper documents for at least ten years, records and documents must thereafter be stored electronically through secure and highly reliable preservation methods.
Attached are the instructions for electronically preserving records and documents for your information and action accordingly, and feedback on the measures taken within a maximum period of six months from this date.
Instructions on Documentation and Record Keeping
SAMA has issued these instructions based on the Royal Order No. (32749) dated 16/07/1438H, and in accordance with the powers granted to SAMA by the Saudi Arabian Monetary Authority Law issued by Royal Decree No. (23) dated 23/05/1377H and by the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386H. These instructions represent the minimum procedures that banks operating in the Kingdom must adhere to in electronically documentation and record keeping after ten years of paper storage.
Banks operating in the Kingdom must adhere to the following instructions:
First: Establish internal policies and regulations to organize the processes for electronically preserving records and documents, including at least the following:
- Procedures for creating, documentation and record keeping through electronic systems (preparing documents, imaging, data entry, uploading records to the system, retrieving records from the system).
- Indexing and classifying records and documents (operations, subjects, document types, confidentiality levels, keywords, source, etc.).
- Access permissions for electronic systems and the mechanisms for granting them.
- Clear and documented standards to ensure the integrity and quality of documentation and record keeping.
- Information security policy and backup policy that includes the use of digital certificates and conducting electronic encryption processes, ensuring no unauthorized access or inspection, while providing maximum protection and recovery capability in case of disasters.
Second: Consider the following as a minimum for documentation and record keeping electronically:
- Keeping the record or document in the form it was created, sent, or delivered without any addition, deletion, or modification.
- Ensure the electronic record or document remains preserved in a clear and sound manner, allowing for later use and reference.
- The electronic record or document must be kept alongside information enabling the identification of the creator and recipient, along with the date and time of sending and receiving, according to both the Hijri and Gregorian calendars, specifying the time down to the hour, minute, and second, without allowing modifications to this data.
- All operations performed on electronic records and documents must be recorded and kept without allowing modifications to this data.
Third: Access to and handling of electronic records, documents, and data is prohibited for unauthorized employees.
Fourth: Employees authorized to access electronic records, documents, and data must maintain their confidentiality during their work or after leaving the job.
Fifth: At least two levels of permissions must be specified when dealing with electronic records, documents, and data in any procedure, where, for example, there is a permission for action and a permission for approval of the action.
Sixth: The bank must authenticate copies of electronic records and documents that have been stored for more than ten years when requested by SAMA, certifying that they match the original, with the bank's stamp and signatures of authorized individuals (e.g., Compliance Department Manager, Legal Department Manager), ensuring the clarity and integrity of the provided copies.
Seventh: There should be periodic reviews by the Internal Audit and Compliance Departments on an annual basis to verify the integrity and completeness of Retention and compliance with the provisions of these instructions and the internal policies of the bank mentioned above.
- Procedures for creating, documentation and record keeping through electronic systems (preparing documents, imaging, data entry, uploading records to the system, retrieving records from the system).
Verification of Academic and Professional Certificates of the Banking Sector Employees
Reference to the Penal Code for Forgery Offenses 1435H issued by Royal Decree No. (M/11) dated 18/2/1435H, and the importance of attracting competencies and technical expertise to enhance the efficiency of the banking sector, and as the use of forged certificates is considered a criminal offense under the law and reflects on the efficiency and credibility of the certificate provider. To ensure the authenticity and accuracy of the information contained in the documents submitted to the bank, and to limit the use of forged certificates, banks should follow the following verification mechanism for certificates:
- Verify the documentation of academic certificates issued from outside the Kingdom of Saudi Arabia by certifying the certificate from the issuing authority (educational institution) with an official seal, and then certifying it by a governmental authority, such as the Ministry of Foreign Affairs or the Ministry of Education if the holder is a citizen of the issuing country, or certifying it from the cultural attaché at the embassy of the certificate holder if they are not a citizen of the issuing country.
- Verify the documentation of professional certificates through the official website of the professional certificate issuing authorities if available or through direct communication with the issuing authorities via email.
- Verify through intermediary agencies that perform verification operations of the authenticity of documents and academic or professional certificates issued by various educational institutions and professional societies to ensure the authenticity and validity of the documents. Some of these agencies include:▪ Dataflow Group
▪ Global Verification Services, Inc
▪ EY
▪ Verification Services Inc
▪ ASI
▪ Global Verification Network
Therefore, SAMA emphasizes that banks should not proceed with employment until the verification of the academic and professional certificates is completed. A grace period should be given to Saudi citizens and those treated as Saudis according to labor law to present the required documents, while certification of academic certificates and verification of professional certificates must be a prerequisite for employment for expatriates. Additionally, the files of current employees must be corrected and any deficiencies completed within a year from this date, with a strong emphasis on adherence to appointment requirements for leadership positions.
Providing Coins
Referring to the replacement of paper riyals with coin riyals and the initiation of its circulation, and the necessity of circulating the coin as an integral part of the national currency, whether the one-riyal denomination, its parts, and multiples. It has been observed the lack of currency in the vaults of some bank branches when requested by bank customers and shops, and the importance of banks providing coin currency to all their customers.
Therefore, you are required to ensure the availability of coin currency in all denominations at all bank branches, and it should be available to tellers as part of their daily cash holdings. SAMA will verify compliance through inspection tours. You can request coin currency through SAMA Net, knowing that the branches of SAMA are ready to meet all your needs.
Establishing a Committee within Banks for SMEs
SAMA continuously collaborates with banks and the General Authority for Small and Medium Enterprises to review regulations and policies to eliminate obstacles and increase available funding for these institutions, enabling youth and entrepreneurs to market their ideas and products. This effort contributes to achieving one of the goals of Saudi Vision 2030 by increasing the contribution of the small and medium enterprises sector to the Kingdom's GDP.
Therefore, SAMA has decided that banks should establish an internal committee dedicated to the small and medium enterprises sector, according to the following regulations:
- The committee shall be chaired by the Chief Executive Officer/Managing Director of the bank, with membership including heads of relevant departments, such as: (Corporate Banking Manager, Retail Banking Manager, Compliance Manager, etc.).
- The committee shall meet at least once a month to discuss and review any relevant issues in the sector, in addition to monitoring the financial data submitted by the bank regarding small and medium enterprises.
- The bank's board of directors shall approve the committee's policy and Key Performance Indicators (KPIs), and provide SAMA with these indicators and their results on a quarterly basis.
Issuance of Clearance Letters
Based on the powers vested to SAMA under the Saudi Arabian Monetary Authority Law issued by Royal Decree No. (23) dated 1377/5/23 H, and the Banking Control Law issued by Royal Decree No. (M/5) dated 1386/2/22H, and Ministerial Decision No. (3/2149) dated 14/10/1406 H.
In light of requests received by SAMA from various governmental and private entities regarding the possibility of verifying clearance letters to ensure the rights of all parties.
Therefore, banks must establish a mechanism to ensure the proper and legal issuance of clearance letters by printing them on official paper, including a reference number, contact numbers, and an email address through which the bank can be contacted to verify the authenticity of the clearance letter. SAMA also emphasizes the necessity of cooperating in this area with governmental and private entities.
Instructions for Payment of Amounts to Beneficiaries of the Citizen Account Program
This circular has been amended by SAMA Circular No. (391000044874), dated 17/4/1439 H, corresponding to 4/1/2018 G.Referring to Cabinet Resolution No. 197 dated 23/03/1438 H, which established the Citizen Account Program and assigned the Ministry of Labor and Social Development as the implementing agency for the program, and referring to the letter from the Assistant Minister of Finance for Financial Affairs and Accounts, No. 92444, dated 22/08/1438 H, based on the letter from the Minister of Labor and Social Development, No. 54996, dated 7/8/1438 H, regarding the disbursement of financial entitlements for beneficiaries of the Citizen Account Program.
In preparation for the disbursement of financial entitlements for beneficiaries of the Citizen Account Program, the identification code has been set as Code (CIT) in field 26T and code /CITIZEN/ in field 70. This will identify the amounts to be transferred from the Citizen Account Program at Al Rajhi Bank to the beneficiaries' accounts, facilitating the identification of the purpose of the transfer and distinguishing it from other transfers, such as salary transfers. Banks must comply with the following instructions:
First/ Do not deduct or withhold any amounts for debts owed to the bank from the amounts transferred from the Citizen Account Program to the beneficiaries' accounts. Second/ Do not consider the financial entitlements of the beneficiaries of the program in their financial solvency and creditworthiness. Third/ Do not deduct or withhold any amounts from the entitlements of beneficiaries of the Citizen Account Program due to any judicial or other attachments.* For your information and action accordingly. SAMA hopes for the cooperation of all banks in supporting the national program "Citizen Account."
* This clause has been amended by SAMA Circular No. (391000044874), dated 17/4/1439 H, corresponding to 4/1/2018 G.
Requirements for Establishment of Institutions and Companies and Cancellation of the Requirement for Official Stamp
Further to SAMA Circular No. 381000053455 dated 17/5/1438 H regarding procedures of the Ministry of Commerce and Investment for the establishment of institutions and companies, as well as the conditions and requirements for obtaining the commercial register and the company bylaw, and Circular No. 381000053456 dated 17/5/1438 H regarding cancelling the requirement for stamping of institutions and companies on documents used for banking transactions
SAMA has noticed that some banks are not adhering to the instructions stated in the aforementioned circulars. Therefore, SAMA emphasizes that all operating banks must comply with these instructions, adhering to the following:
First: It is required to have a commercial register to open a bank account for the establishment, ensuring that the account is activated (complete) and that no account under establishment is opened, specifically for the following companies and institutions: - Limited liability companies (local, Gulf, foreign, mixed) established within the Kingdom. - Joint Venture companies and professional companies. - Limited Partnership companies. - Sole proprietorships. Second: Do not request the official stamp from institutions and companies on documents submitted when opening accounts or during banking transactions. Third: Inform clients about the unnecessary need for an official stamp on the documents submitted to open accounts or during banking transactions. For your information, SAMA will implement the necessary regulatory procedures in the event of non-compliance.
Implementation of the Provisions of the Regulation for Addressing Non-Disclosure of Information for Tax Purposes in Accordance with the Provisions of Agreements to which the Kingdom of Saudi Arabia is a Party
No: 391000026161 Date(g): 23/11/2017 | Date(h): 5/3/1439 This section is currently available only in Arabic, please click here to read the Arabic version.SAMA Approval to Provide Remittance Services
Referring to SAMA Circular No. M/107 dated 14/02/1428 H and Circular No. 44102/MAT/830, dated 9/11/1428 H regarding the importance of knowing the status of money transfer companies and agencies operating in the Kingdom and linked to a number of local banks, and clarification of the legal status of companies and financial transfer agencies that deal with licensed local banks and exchange shops.
In view of the potential consequences that may arise when banks and licensed currency exchange shops engage in contracts with international companies specializing in providing remittance services without obtaining prior approval from SAMA, including increased risks and regulatory responsibilities associated with transfer operations for banks and licensed currency exchange shops specifically, and the overall safety and reputation of the banking sector in the kingdom.
Therefore, we would like to emphasize to all banks and licensed currency exchange shops involved in remittance operations the necessity of obtaining approval from SAMA before contracting with any specialized money transfer companies. Banks and licensed currency exchange shops with existing contracts must also review these contracts to ensure they comply with all regulatory requirements in force within the Kingdom, as well as with the related instructions and regulations issued by SAMA. This includes circulars related to remittance operations. Account Opening Rules and The Guidance of Anti Money Laundering and Combating Terrorist Financing and Rules on Outsourcing and then submit it to SAMA to obtain its approval to continue dealing with these companies, and provide feedback on the actions taken in this regard within one month from its date.
Reporting Security Incidents
Due to SAMA's observation that some banks have not reported to security authorities and SAMA when a security incident occurs at the bank's facilities, such as tampering, vandalism, theft, armed robbery, or the removal of ATMs, among other incidents.
Therefore, we hope that the bank will notify the security authorities of any incident that occurs in all bank facilities or on cash transport vehicles in the future and inform SAMA (Cash Centers and Operations Supervision Department) in accordance with the attached form via email at (multibankcashcenter@sama.gov.sa).
Emphasis on Identity Verification Documents when Opening Accounts for Saudi Citizens
Further to SAMA circular No. 341000033788 dated 15/03/1434H, supplementary to circular No. 18000/M A T/9200 dated 04/04/1433H, through which the Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia, Fourth Amendment, emphasizing the documentation required for identity verification and modifying some requirements of the related rules and paragraphs in the mentioned update. Referring to the letter received from the Director General of the General Administration of Civil Affairs in the Al-Qassim region, No. 7039 dated 27/08/1436H, regarding the influx of a number of citizens to the General Administration of Civil Affairs in Al-Qassim and its affiliated offices, both men and women, requesting a printout (data chip) under the claim that it is required by some local banks. The instructions from the Civil Affairs Administration indicate that a printout cannot be issued to any citizen without an official letter that is stamped and certified by the requesting entity for such information, and it's not considered as proof of identity for the person carrying it. Moreover, there is no need to print a slip for any citizen holding a national ID unless in special cases.
We would like to emphasize the importance of adhering to the contents of the aforementioned circular regarding the documentation required for identity verification for Saudi citizens, as well as circular No. M/A/T 14156 dated 20/06/1432H concerning the same subject issued by the General Administration of Civil Affairs in the Al-Qassim region. Additionally, it is crucial to comply with the requirements of Rule No. (200-1-1) of the Rules Governing the Opening of Bank Accounts and General Operational Guidelines related to opening accounts for individuals/citizens (both males and females), and to limit the request for the certified copy of the civil registry to female citizens only in the specific cases outlined in that rule.
Monitoring of Transactions for Money Collection with no Approval & Inform SAFIU
Reference to SAMA's circulars No. 15674/MAT/279 dated 27/03/1430 H, No. MAT/27332 dated 03/12/1432 H, No. MAT/25760 dated 26/12/1433 H, No. 341000001986 dated 05/01/1434 H, and No. 341000134322 dated 25/11/1434 H regarding the phenomenon of individuals (natural or legal) advertising the collection of donations using SMS technology or social media (Twitter, WhatsApp, etc.) or the internet in general, or through various visual and print media without obtaining approval from the relevant authorities. This issue has increased during the Holy month of Ramadan and the Hajj season, and directives have been issued by the Ministry of Interior to take necessary measures to impose a precautionary seizure on any account whose owner calls for collecting donations through it, as well as summoning the relevant authorities to address any violations, in accordance with the royal order from the Minister of Interior No. 1/7/3/57993/S dated 24-25/10/1427 H.
SAMA has recently noted the continued spread of advertisements - via social media and media in general - calling for collecting donations through bank accounts for various purposes without obtaining approval from the relevant authorities. These accounts have been reported by the Ministry of Interior without being detected and reported in advance by the banks that holds them, which indicates a lack of control procedures in some banks regarding the operations conducted on their customers' accounts, as well as in tracking the media through which these advertisements are made.
Therefore, SAMA emphasizes the necessity of adhering to the instructions issued in the aforementioned circulars and monitoring suspicious operations, including those related to fundraising operations discovered through bank account movements or noticed through SMS, social media, or various media without prior approval from the relevant authorities. Banks are required to study and report such activities to the General Administration for Financial Investigation in accordance with Article 9 of the Anti-Money Laundering Law issued by Royal Decree No. M/31 dated 11/05/1433 H, and to dedicate sufficient attention to monitoring various media to identify and track accounts advertised for collecting donations.
Yaqeen for ID Verification
Referring to the (Yaqeen) service provided by Elm Company for electronically verifying customer identities without the need to visit the bank unless there is a change in the data.
We inform you that the bank can benefit from the (Yaqeen) service as an additional option for electronically verifying customer identities according to the following instructions:
- The service is optional for the bank, and customer approval must be obtained in advance to access identity information electronically without any additional fees for the customer. - The (Yaqeen) service can be utilized without violating the bank's periodic update requirements. - Provide the institution with any feedback or suggestions during the initial phases of implementing the service. It is worth noting that the bank can also complete the procedures for verifying customer identities and the printed documents submitted by them after renewing their identities via the Ministry of Interior's website.
Expediting the Procedures for Opening Bank Accounts for Juristic Persons
Referring to the Royal Order No. (42563) dated 15/10/1435H regarding the continuation of government agencies to coordinate with the General Investment Authority and agree on suitable mechanisms to enhance the competitiveness of the investment environment in the Kingdom, aiming to rank among the best countries globally according to international competitiveness standards and indicators. This includes proposed recommendations to accelerate the process of opening bank accounts for licensed legal persons.
SAMA emphasizes the necessity for all banks operating in the Kingdom to take the necessary measures to expedite the opening of bank accounts for legal entities, without compromising the requirements of the rules for opening bank accounts and other related regulations and instructions. Banks must complete the process of opening a bank account for the legal persons and provide them with the account number and details within one business day of fulfilling the account opening requirements. Furthermore, appropriate procedures and controls must be established to ensure compliance, including providing the account applicant with the necessary requirements for opening the account and notifying them of any deficiencies or additional requirements immediately upon application, with documentation of this in writing.
To inform and notify all relevant departments and branches to act accordingly.
Not to Interfere with the Entitlements of Beneficiaries from Social Security
Referring to what was received from the Ministry of Labor and Social Development regarding the allowances and grants provided by the state to beneficiaries in social security programs, which are not considered income but rather assistance paid by the government to those entitled under specific conditions and regulations.
Please instruct your specialists not to interfere with the entitlements of social security beneficiaries in any way.
Implementation of Monitoring Tools in Conjunction with the Amended LCR
You are aware that SAMA issued through its Circular # 341000107020 dated 10 July 2013 its implementation document concerning the Amended LCR for Banks.
In addition to the LCR which is the main BCBS regulatory standard concerning liquidity, this Circular refers to the "Monitoring Tools" to capture additional information relating to banks cash flows, balance sheet structures, available unencumbered collateral and certain market indicators. These metrics, together with the LCR Standard, provide the cornerstone of information that will aid SAMA in assessing the liquidity risk of a bank. Consequently, by utilizing these metrics on a timely basis, supervisory actions can be taken when potential liquidity difficulties are signaled.
The attached metrics as identified below are to be used as monitoring tools to aid SAMA in assessing the liquidity risk of banks.
1. Contractual Maturity Mismatch 2. Concentration of funding 3. Available unencumbered assets 4. LCR by significant currency
These reporting Templates will be sent to SAMA on a monthly basis. All required reporting under this circular should be undertaken within 30 days of the relevant period end. The effective date of their reporting template is 1st January 2015 and the first return will be as of 31 January 2015.
In order to obtain a further understanding of the underlying BCBS document, banks should access from BIS website. SARIE Pricing Policy
Reference to the circular issued by SAMA No. 1233 dated 23/07/2006 G regarding the approval of the tariff and pricing policy for the Saudi Rapid Money Transfer System "SARIE," Version 4.
Attached to this circular is the fifth edition of the tariff of the "SARIE" system service (update only in item 6, page 9). All banks are required to apply what is included in the fifth edition as of 12/04/1436 H, corresponding to 01/02/2015 G.
ATM Cassette Swap
Referring to the complaint received by SAMA from cash-in-transit companies responsible for transporting funds and replenishing ATMs, which includes the failure of banks to claim and collect the excess amounts dispensed to customers through ATMs due to cases of reversed cash denominations in the ATMs.
SAMA emphasizes the importance of taking all precautionary measures to reduce the occurrence of such cases and requires banks to adhere to the following:
- The bank must provide test cards (Test Card) that allow the cash replenishment team to conduct a trial withdrawal after each replenishment to ensure the correct denomination of cash in the cassettes.
- Compliance with the use of administrative supervisor cards (Supervisor Card) that enable the ATM matching process by the cash replenishment team in real-time, without waiting for the supporting departments to match the machines.
- It is recommended to utilize modern technology that allows users to test the cassettes, identify the cash denomination, and verify their usability.
- Adherence to the replenishment of cash cassettes and their securing under dual control within cash centers.
- Compliance with SAMA's circular No. 351000144643 dated 23/11/1435H, which amends the procedures for settling claims and complaints related to Saudi network operations, ensuring that the bank obtains a documented acknowledgment from the customer for the deduction from their account instead of obtaining a written approval.
- Cooperation between banks and contracted companies, providing them with customers details for whom collection of amounts was unsuccessful (customer name, national ID, ATM card number) to enable the contracted companies to pursue claims outside the Saudi Payment Network (CPS) system.
If there are any inquiries regarding this matter, please contact the Currency Management Advisor at SAMA.
International Banking Statistics (IBS)
We would like to inform you that a team from the Information Technology Department at SAMA will visit the banks to install the International Banking Statistics (IBS) system. Therefore, we hope to take note and facilitate the team's task, and that this data will be sent by the end of the following month at the end of each quarter, starting from the data for the month of July 2014G.
Please find attached a guide for the IBS system for guidance, and in case of any inquiries or comments, please contact SAMA.
Foreign Account Tax Compliance Act Update
The Government of the Kingdom of Saudi Arabia and the United States of America (US) have reached an agreement in substance and KSA has consented to being included on the list of jurisdictions treated as having a Model 1 Intergovernmental Agreement (IGA) in substance.
Implications of KSA being treated as having an IGA in effect
The IGA has not yet been signed and, as such, is not yet in force. However, KSA and the United States have agreed to treat KSA as having a Model 1 IGA in effect. Financial institutions within KSA should rely on the provisions of the Model 1 IGA when complying with FATCA.
Registration
KSA Financial Institutions that are required to register with the IRS have until 31 December 2014 to complete and submit their registration. In order to be included on the IRS published list of registered Financial Institutions to be released on 1 January 2015, KSA Financial institutions should register by 22 December 2014.
New customer onboarding processes
As per Annex 1 of the IGA, we urge all financial institutions (Fl’s) to implement the required changes to their individual customer onboarding processes by 1 July 2014.
SAMA will permit KSA financial institutions to apply the alternative procedures for new entity accounts opened on or after 1 July 2014 and before 1 January 2015 should such KSA financial institutions wish to treat such accounts as preexisting entity accounts and apply the due diligence procedures related to preexisting entity accounts.
KSA financial institutions should be ready for implementation of their new entity account opening procedures latest by 31 December 2014.
Preexisting customer classification
Preexisting individual customers with an aggregate account balance exceeding $1million must be reviewed and classified by 30 June 2015. All other in scope preexisting customers, including all in scope entity customers, must be reviewed and classified by 30 June 2016.
Implementation guidance
Guidance notes are intended to be issued in the near future to provide financial institutions with practical assistance in relation to complying with their requirements under the IGA and local implementing legislation.
Instructions for Responding to Banking Procedure Requests via the SAMANet System
In reference to the Central Bank's instructions conveyed to banks through Circular No.341000057482/CT/81 dated 6/5/1434H, emphasizing the necessity of promptly responding to legal procedure requests sent to banks via the SAMA Net system. The response time for requests regarding inquiries about balances, accounts, trusts, deposits, and account freezes must not exceed one business day. Banks are required to take all measures to ensure compliance with this directive.
Also referring to the Enforcement Law issued by Royal Decree No. (M/53) dated 13/8/1433H and its Implementing Regulations* issued by Ministerial Decision No. (9892) dated 17/4/1434H, particularly Article 88 of this law, which states that anyone who assists or aids a debtor in evading execution or intentionally obstructing the execution shall be punished with imprisonment for up to seven years. The Implementing Regulations* clarify that this article applies to the legal representative of a private legal entity or anyone among its staff who causes the obstruction of execution.
Further referring to the meeting held at the Central Bank's headquarters on Sunday, 16/9/1435H, attended by representatives from all banks operating in the Kingdom, to coordinate the urgent handling of all legal procedure requests according to the arrangements discussed during the meeting. Given the Central Bank's keenness on the importance of ensuring that the Central Bank and banks complete all required execution procedures from judicial authorities within the specified timeframe, this is necessary to protect banks and their employees from the penalties specified in the Enforcement Law and its Implementing Regulations*.
Therefore, banks must:
Comply with the Central Bank's instructions regarding execution and respond to all incoming requests within one business day.
Provide the necessary resources, including human and technological resources, to execute all requests referred by the Central Bank to the banks.
Please ensure immediate compliance with these instructions. Additionally, we request a report within two business days detailing all measures taken by the bank in this regard. The Central Bank will follow up to verify the compliance of banks with these instructions and take necessary actions if required.*The Implementing Regulations of the Enforcement Law issued by the Ministerial Decision No. 9892, dated 17/04/1434 H was replaced by the Implementing Regulations issued by the Ministerial Decision No.526, dated 20/02/1439 H
Virtual Currencies - Bitcoin
We would like to inform you that SAMA is monitoring certain financial transactions taking place outside the Kingdom of Saudi Arabia using what is known as virtual currencies (Virtual Currencies - Bitcoin). Engaging in these transactions within the Kingdom, particularly at the banking sector level, is considered a violation of local laws, regulations, and instructions. Due to the various negative consequences on the financial and banking sectors, SAMA emphasizes that banks should monitor such activities and exercise caution. Additionally, any observations or practices related to this matter within the Saudi banking sector should be reported to SAMA.
Letter of Credit and Guarantees
We would like to inform you that SAMA has received complaints from certain government entities regarding delays by some banks in responding to requests related to letters of guarantee, whether for extensions or confiscations.
Accordingly, we urge compliance with the Bank Guarantees Rules, as well as SAMA's instructions in this regard, and prompt responsiveness to requests submitted by government entities for extensions or confiscations.
Amendment of Some Paragraphs of the Articles of the Implementing Regulations of Income Tax Law
We would like to inform you that Ministerial Decision No. 1776 dated 18/5/1435H, issued by His Excellency the Minister of Finance, has amended certain clauses of Articles (5, 10, 16, 58, 59, 63) of the Implementing Regulations of the Income Tax Law, issued under Ministerial Decision No. 1535 dated 11/6/1425H, in line with the requirements of business interests, so that Clause (1) of Article 5 and Clause (10/b) of Article 10 of the Regulations become as follows:
1-The following text is added to the end of Clause (1) of Article 5 of the Regulations:
(This excludes interest on loans resulting from interbank deposits if the deposits remain with the borrowing resident bank for a maximum period of ninety days, provided that an annual statement is submitted, certified by SAMA, detailing the names and addresses of the lending banks, the loan duration, and the amount of interest paid on the loans).2-The following text is added to the end of Clause (10/b) of Article 10 of the Regulations:
(Excluding interest on loans paid by branches of foreign banks operating in the Kingdom to their headquarters abroad)."Accordingly, SAMA emphasizes the necessity of complying with the amendments stated in the above ministerial decision regarding the provisions of the Implementing Regulations of the Income Tax Law, effective immediately.
In need (Handicap) Cash Withdrawal and Deposit in ATM
Further to SAMA’s Circular No. 19809/MAT/383 dated 11/5/1428H regarding the importance of giving priority and attention to providing services to customers with special needs, and taking appropriate measures to facilitate their reception at bank branches and expedite the provision of banking services to them.
SAMA has received a letter from His Excellency the Mayor of Riyadh, No. 1435/173234 dated 1/7/1435H, regarding the absence of ramps for people with special needs to facilitate cash withdrawal and deposit operations at ATMs, as well as the lack of dedicated ATMs for them.
Accordingly, SAMA emphasizes the necessity for all bank branches to ensure the installation of ramps for people with special needs and to provide all necessary facilities for them. Please provide us with updates on the measures taken by the bank in this regard within one month from the date of this notice.
Increasing the Daily Limit for Purchases via Point-of-Sale devices
We would like to inform you that starting 3/8/1435 H corresponding 1/6/2014 G, banks can amend and increase the daily maximum limit for purchases made through point-of-sale devices on the Saudi Payments Network as follows:
- Banks can raise the daily limit allowed for purchases at point-of-sale devices from twenty thousand Riyals to sixty thousand Riyals based on customer requests and the bank's discretion.
-Enabling the customers through direct communications channel (phone and online banking) to choose and set the desired limit for purchases above twenty thousand Riyals, provided that the maximum limit does not exceed sixty thousand Riyals. This request is subject to the bank's discretion for applicability.
- The bank must implement appropriate control measures and monitor purchase transactions directly and continuously to detect any violations and avoid risks, especially for external transactions that may not require a PIN while explaining this to the customer and obtaining his prior approval.
- Technical coordination with SAMA should be conducted, along with necessary pre-testing, and monthly reports should be submitted for the first three months regarding the implementation results of the aforementioned regulations.
According to Circular No. (391000062299) dated 2/6/1439 H, SAMA has decided to allow banks to raise the maximum payment limit via point-of-sale devices to 200,000 Riyals based on customer requests and the bank's discretion, with the following considerations:
- Complete the necessary technical requirements in coordination with the Mada Authorization Center in the General Directorate of Payment Systems and conduct pre-testing, as well as submit monthly reports for the first three months on the implementation results.
- All banks must allow the purchase limit adjustment without additional fees through one of the bank's electronic channels, enabling customers to access the service from within and outside the Kingdom. These channels should be mentioned in the terms and conditions agreements at the start of the banking relationship with the customer after this circular's date.
- Banks should conduct awareness campaigns across all electronic channels for their customers in both individual and merchant categories regarding the possibility of raising the purchase limit.
- All banks should develop fraud monitoring and detection systems in accordance with these new amendments.
Additionally, starting from 30/09/2018G, all banks can control increasing this limit to more than 200,000 Riyals for customer segments wishing to increase it according to their risk assessment, and they must notify SAMA regarding the approved purchase limits for each category of their customers accordingly.
Clarification on Changes in the Accounting Treatment of Lease Contracts (IFRS 16)
Referring to the review conducted by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) in 2016 regarding the accounting treatment of lease contracts, which resulted in the issuance of "International Financial Reporting Standard No. 16 - Leases" and the update of Accounting Standards No. 2016-2, which will be effective from January 1, 2019, for establishments with fiscal years ending on that date, with the possibility of early application of the two standards.
We would like to inform you that both standards require the recognition of lease contracts in the financial statements, with lease payments recorded as liabilities on the balance sheet, while the right-of-use assets are recorded as assets.
Given the many inquiries regarding these standards, the Basel Committee on Banking Supervision has reviewed the frequently asked questions (FAQs) and published their answers in April 2017. Therefore, SAMA emphasizes the importance of reviewing the questions and answers on the Bank for International Settlements website.
Electronic Linkage with the Ministry of Interior
Referring to the electronic linkage project between the Ministry of Interior and SAMA (MOI), in accordance with the operational requirements of Article 13 of the Anti-Terrorism and Money Laundering Law, previously communicated to you via email dated 25/8/1438 H, and as the linkage project commenced in the production environment on Monday, 26/8/1438 H, I would like to inform you of the necessity for banks operating in the Kingdom to adhere to the timelines for responding to the tasks sent, as follows:
- (Provisional seizure, transaction ban, account and deposit freezing, and safe deposit boxes) within one business day (8 working hours).
- (Lifting of provisional seizure, lifting of transaction ban, and lifting of freezes on accounts and deposits) within one business day (8 working hours).
- (Request to close a previously frozen or seized bank account due to non-compliance with donation regulations) within 15 business days.
- Inquiry about account balances, deposits, and safe deposit boxes (bank transaction statements – inquiry about banking relationship data) within one business day (8 working hours).
- Request for account statements and technical reports within 5 business days.
- Request for details of a specific banking transaction, video footage, or identification of an ATM location within 8 business days.
Banking Business Continuity Committee
As part of SAMA’s supervisory and regulatory role and in an effort to ensure the continuity of banking operations and mitigate the risks faced by the banking sector in this regard, SAMA has established a specialized Banking Business Continuity Committee to facilitate discussions on developments and challenges facing the banking sector and to share information with the aim of achieving a resilient banking sector in the face of disasters and incidents.
Accordingly, we request the nomination and appointment of the Bank's Business Continuity Manager as a member of the Banking Business Continuity Committee. Additionally, nominate the Chief Information Officer (CIO) to participate in the committee's activities if necessary.
Should you have any inquiries in this regard, you may contact the Manager of the Banking IT Risk Division or the Head of the Banking Business Continuity Section at SAMA.
Micro, Small and Medium Enterprises KPI Return
Referring to SAMA's circular No. 381000064902 dated 16/6/1438H, regarding SAMA's adoption of the definition set by the Board of Directors of the General Authority for Small and Medium Enterprises, which includes micro-enterprises, employee count criteria, and an increase in the revenue classification criteria for types of enterprises. We inform you that SAMA has developed key performance indicators and modified data related to small and medium enterprises, along with a list of answers to frequently asked questions on the subject as per the attached appendices:
Appendix (1): Introduction of quarterly key performance indicators linked to the precautionary data of small and medium and micro-enterprises to monitor financial and non-financial indicators related to loans and deposits of these enterprises.
Appendix (2): Establishment of a new group for micro-enterprises and modification of data for small and medium enterprises (Data: Q18).
Appendix (3): Guideline notes regarding the modified data in Q18.
Please note that these requirements will take effect from January 1, 2018G.
Under the circular No. 391000007761 dated 22/01/1439 AH, SAMA has introduced a report that includes quantitative and qualitative data about small and medium enterprises for banks to add to the annual report for the Board of Directors starting from 2017G, as attached in Appendix (I) of the mentioned circular, and included Appendix (II) which contains a list of answers to frequently asked questions on the subject.
Record Retention Guidelines
Referring to the Royal Decree No. 32749 dated 16/7/1438 H, which states in paragraph (1) that "SAMA shall take the necessary measures to inform banks that they must retain records and documents for a minimum of ten years, and that records should be stored electronically through secure and highly reliable storage means, in coordination with the Ministry of Communications and Information Technology."
Accordingly, SAMA emphasizes to all banks operating in the Kingdom the necessity of complying with what was mentioned in the Royal Decree, and more detailed information will be provided later after coordination with the Ministry of Communications and Information Technology in this regard. *
*Please refer to the instructions on documentation and record keeping issued under circular No. (391000045986) dated 21/10/1439 H.
Reducing the Risk-Weighted Assets Ratio Related to Real Estate Financing for Home Ownership from 100% to 75%
Further to SAMA Circular No. 290, dated 12/6/2006 G including the detailed guidance document relating to Pillar 1 of (Basel II) for calculating risk-weighted assets (RWA) under (Pillar 1), which set a rate of 100% for real estate financing against mortgage.
Given the decrease in the default levels for this asset class, which has improved due to regulatory developments in real estate financing and implementation on mortgages, as well as impact analysis studies conducted by SAMA on other regulatory ratios and rates compliant with the existing and new Basel requirements, SAMA has decided to reduce the risk-weighted assets (RWA) ratio related to residential mortgage financing from 100% to 75% starting from April 1, 2017G. This will be reflected in the prudential data models (Q17) for the second quarter of 2017.
* Please refer to the Minimum Capital Requirements for Credit Risk to read the updated requirements.
Increasing the Credit Concentration Limit for Saudi Aramco from 21% to 25%
Referring to SAMA Circular No. 361000067330 dated 07/05/1436 H regarding the credit limits for facilities granted by banks, the circular included in its third paragraph that the credit limit for facilities granted to a single entity is 21% of shareholders' equity (2017).
Given the important role played by Aramco in achieving Saudi Arabia's Vision 2030, SAMA has decided to raise the credit limit granted to Aramco and its subsidiaries to 25% of shareholders' equity until further notice.
For coordination and inquiries, you can contact SAMA.
The Necessity of Reviewing Municipalities to Obtain New Licenses and Renew Expired Ones for Banking Services in all Regions of the Kingdom
SAMA received two letters from the Minister of Municipal and Rural Affairs, No. 21650 dated 04/05/1438H and No. 23597 dated 17/05/1438H, urging banks operating in the Kingdom to coordinate with the relevant municipalities to obtain the necessary licenses and renew expired ones for banking services in all regions of the Kingdom.
Therefore, SAMA would like to emphasize that bank officials should direct their branches in all regions of the Kingdom to renew expired municipal licenses and obtain licenses for those that do not have any. Failure to comply with this may expose the bank to regulatory measures, including the application of Article (3/1/2) of the Penalties and Sanctions Regulations for Municipal Violations issued by Cabinet Decision No. 218 dated 06/08/1422H, in addition to being a violation of SAMA instructions.
Procedures of the Ministry of Commerce and Investment for the Establishment of Institutions and Companies
SAMA received a letter from the Ministry of Commerce and Investment, No. (21879) and dated 26/04/1438H, which includes the current procedures followed by the ministry for establishing all types of institutions and companies, and the requirements and conditions for obtaining a commercial registration and company bylaw, with the aim of circulating this information to the banks and operating in the Kingdom. The Ministry of Commerce and Investment has developed procedures for the establishment of institutions and companies to increase the attractiveness of the local investment environment and facilitate the commencement of business activities, aiming to achieve the goal of reaching competitiveness of the investment environment in the Kingdom to the ranks of the best countries in the world in accordance with global competitiveness standards and indicators.
The Ministry of Commerce and Investment has developed the procedures for establishing institutions and companies to be electronic for all types of institutions and companies (except for joint-stock companies, branches of Gulf companies, and branches of foreign companies). These procedures have been developed as follows:
1- Creating an electronic founding contract through the Ministry of Commerce and Investment website.
2- Contract notarization by the notary public or certified notaries from lawyers.
3- Issuing an electronic payment invoice that includes the financial fee for issuing the commercial registration certificate, the cost of electronic publication, and the subscription fees for the Chamber of Commerce.
4- Issuing the electronic record in PDF format, which can be printed from the personal account in the electronic services of the Ministry of Commerce and Investment.
Accordingly, SAMA emphasizes to the banks operating in the Kingdom the necessity to adhere to the following:
First The cessation of issuing a certificate of capital deposit for limited liability companies is due to the Ministry of Commerce and Investment canceling this requirement for this type of company before issuing the commercial registration. Second Compliance with the attached schedule prepared by the Ministry of Commerce and Investment, which explains the method of establishing institutions and companies according to the type of legal entity and nationality, regarding the requirement for the prior deposit of capital and the deposit certificate for issuing the commercial register. Third Compliance with the rules for opening bank accounts and the general rules for their operation in commercial banks in the Kingdom with respect to opening bank accounts for legal entities. For your information, and to act accordingly from its date, noting that commercial records can be verified electronically through the (Wathq) service.
An illustrative table for the method of establishing companies and institutions based on the type of legal entity and nationality
Type of legal entity Establishment Service Does the issuance of the commercial registration require the prior deposit of capital and the issuance of a deposit certificate The initial procedure for setting up a company bank account. Electronic verification service for deposit status (electronic linkage service between banks and the Ministry of Commerce and Investment) The Project of Automating the Establishment Service Individual enterprises Electronic No Completed (activated) account Available The project has been completed The companies with limited liability (Local, External, Foreign, Mixed)
"The companies that are established within Saudi Arabia"
Electronic No. Completed account (activated) Available The project has been completed Partnership firms and professional companies Electronic No Complete (active) account Available The project has been completed Limited partnership companies Electronic No. account Under establishment Available The project has been completed Joint-stock companies Handmade Yes Account under establishment Not available Within the strategic plan Gulf company branches "For all types of legal entities, the system of the home country should be good." Manual Yes Account under establishment Not available Within the strategic plan Foreign companies Branches (For all types of legal entities according to the regulations of the home country Manual Yes Account under establishment Not available within the strategic plan Notice: The new Companies Law, which came into effect on May 2, 2016G, permits the establishment of companies owned by a single natural or legal person, applicable only to limited liability companies or joint-stock companies.
Cancelling the Requirement for Stamping of Institutions and Companies on Documents Used for Banking Transactions
In reference to the letter from the Ministry of Commerce and Investment No. (23475) dated 05/05/1438H, which refers to Ministerial Decision No. (22895) dated 03/05/1438H amending Ministerial Decision No. (817) dated 19/07/1417H regarding the determination of certificates, documents, and papers issued and authenticated by the chambers of commerce and industry in the Kingdom. The decision included the non-mandatory nature of the official stamp for certifying the certificates, documents, and papers issued by private sector establishments. Also, in reference to the letter of the Ministry of Commerce and Investment No. (16266) dated 28/03/1438H, which refers to the Royal Order No. (11154) dated 29/02/1437H, approving the recommendations of the Council of Economic Affairs and Development regarding the competitiveness of the investment environment in the Kingdom, and to the proposed recommendations to enhance competitiveness and facilitate the start of commercial activities, including the cancellation of the official stamp requirement for institutions and companies.
It has been observed that some banks are requesting the official stamp of institutions and companies on documents and papers submitted during banking transactions without a regulatory requirement for this. This negatively affects the competitiveness of the investment environment in the Kingdom.
Therefore, SAMA emphasizes to banks operating in the Kingdom not to require the official stamp of institutions and companies on documents and papers submitted when opening bank accounts and during banking transactions, without compromising the "Know Your Customer" principle and due diligence procedures for customers.
Service for People with Special Needs
Referring to SAMA Circular No. 19809/M A T/383 dated 11/05/1428 H regarding services for with Special Needs. Given the ongoing complaints received by SAMA about some banks' lack of compliance in providing advanced and secure banking services for their customers with Special Needs and women, as well as various segments of society.
SAMA emphasizes the need to give special care and priority to customers with Special Needs and women, ensuring that service areas are equipped with appropriate parking, pathways, and facilities to welcome them and provide the best services with ease and comfort. Additionally, it is important to inform and guide them on using available electronic means, including devices, channels, websites, and mobile applications that assist them in performing their transactions without difficulty.
Operating the Unified Processing Mechanism in SAMANet System
Referring to the "Unified Processing Mechanism" project for freezing and unfreezing balances and accounts, which will be implemented by the Banking Execution Management. This project aims to streamline and improve work procedures at banks by sending multiple requests at once through SAMA Net concerning persons against whom enforcement actions are taken but who have no banking relationship with the bank. Additionally, referring to the training program for this project attended by representatives from all banks operating in the Kingdom at SAMA’s headquarters on Tuesday and Wednesday (29/1/1438H – 1/2/1438H, corresponding to 29-30 November 2016G), it was agreed during the session that representatives of each bank who attended the training will transfer the same training to their bank’s employees responsible for handling requests received from SAMA through the "Judicial Banking Procedures" system via SAMA Net. The program also provided a testing environment for this purpose and for evaluating the mechanism's efficiency according to specific plans and schedules.
You are informed that the operation of the Unified Processing Mechanism will occur in two phases:
Phase One (Initial Operation): Sunday, 10/4/1438H, corresponding to 8 January 2017G.
Phase Two (Final Operation): Sunday, 17/4/1438H, corresponding to 15 January 2017G.
Given the importance of banks executing all judicial decisions within the specified time and manner, adhering to the timeline set forth in the Enforcement Law, and considering the sensitivity and significance of these requests and their direct impact on bank customers, the following must be adhered to in order to protect banks and their employees from being subject to the procedures or penalties stipulated in the Enforcement Law and its Implementing regulations:
- Requests received from SAMA through the SAMA Net system under the category of "Judicial Banking Procedures" must be processed immediately upon receipt, as stipulated in Circular No. 361000102851 dated 24/7/1436H.
- The mechanism must not be used for purposes other than what it was specifically designed for. It should only be applied to requests concerning persons against whom enforcement actions are taken and who have no banking relationship with the bank.
- Requests for freezing balances and accounts, as well as requests for unfreezing balances and accounts, must be processed separately through the mechanism.
- The content of the requests processed through the mechanism must be executed in the bank's internal systems, such as enforcing or lifting prohibitions on account transactions (where applicable). The action taken must also be clearly indicated in the bank's systems within the general remarks field when sending requests back to SAMA.
SAMA emphasizes that the responsibility lies with the banks toward the judicial authority, SAMA, and the customer in cases where the mechanism is used for purposes other than its intended design. SAMA will conduct continuous monitoring to ensure banks adhere to these instructions and will implement necessary regulatory actions in cases of delays in processing requests, providing inaccurate or incorrect information. The existing mechanism can be used to process requests related to individuals against whom enforcement actions are taken and who have no banking relationship with the bank through the same request.
In the event of any technical obstacles, please report them to the helpdesk at the General Directorate of Information Technology at SAMA via email at samasd@sama.gov.sa. The subject of the report should be labeled as "Report regarding the 'Unified Processing Mechanism'", and a screenshot showing the issue should be attached.
Please ensure compliance with these instructions and confirm receipt within one business day from the date of this notice.
Security Safety Committees
In reference to the Ministry of Interior circular No. 2058/D/R dated 28/11/1411H regarding the formation of a committee in each region represented by a representative from the region's Emirate, local police, and SAMA to conduct field visits to all banks to ensure their security status and submit a report to the region's Emirate, and referring to SAMA circular No. 361000032167 dated 30/02/1436H concerning the recommendations of the security committee formed by the Public Security, the Ministry of Municipal and Rural Affairs, and SAMA regarding preventive security measures to reduce the recurrence of ATM thefts and vandalism, this includes the approval of His Royal Highness the Crown Prince, Deputy Prime Minister, and Minister of Interior on the findings of the security committee in its latest report, which outlines additional modifications to be integrated with previous instructions and recommendations communicated to all banks.
We would like to inform you that the work of these committees is focused on security safety without the need to enter the area of the tellers or the vault in the bank branches. These visits should take place during official banking hours, and the bank manager or their representative should be informed of this task. Additionally, it is emphasized that if the committees require any information related to security services, cash transportation, or any matters concerning the operations of private companies (security companies or cash transport companies), they should refer to the overseeing security authorities.
We hope to inform all bank branches to cooperate with these committees and facilitate their task.
Applying KYC Principles to Prepaid Service Product Customers
Reference to SAMA's Circular No. BCT/15631 dated 11/6/1433H Regarding the implementation of Regulatory Rules for Prepaid Payment Services, and Circular No. 361000092918 dated 2/7/1436H Regarding the update of those rules for the payroll card product and what it includes about the application of the Know Your Customer (KYC) principle. In accordance with the desire to support and develop prepaid payment services and to expand the offering of these products without violating supervisory and regulatory requirements, it has been decided as follows:
-The principle of "Know Your Customer" is applied to the primary account holder (the contracting entity, whether it is a legal entity or individuals), not to the cardholder, provided that there are no credit services for the product and no deposits are accepted except from the account of the contracting entity.
-The bank requests the contracting party to provide the necessary data required for the issuance process, which it deems sufficient to verify the cardholder. Additionally, the contracting party must authenticate and confirm the accuracy of the information and data provided, and commit to notifying the bank of any modifications made. The contracting party must also ensure appropriate procedures are in place to enable the bank to access or audit this data when needed.
-The issuing bank of the card must verify and match the information provided by the contracting entity with the information available at the National Information Center to ensure that the requested cards are not issued unless the information matches. Excluded from this requirement are closed-loop prepaid products.
- The issuing bank must develop monitoring systems for the transactions carried out through these products to ensure their integrity and consistency with the purpose for which they were issued and to ensure they are free from any incorrect practices.
As for the procedures for delivering and activating these cards, the issuing bank can deliver and activate them by personally meeting the beneficiary at the branches or at the premises of the contracting entity. Alternatively, the bank can deliver the cards in an inactive state to the contracting entity, its authorized representatives, or an entity contracted by the bank. The cards can then be activated through the bank's electronic channels after verifying the beneficiary's identity using the registered mobile number if it was obtained directly from the beneficiary, or through fingerprint matching systems and solutions available at the National Information Center.
Ensuring that SAMA's Non-Objection is Received Before Providing Information, Supervisory, and Statistical Data to Governmental and Non-Governmental Entities
Referring to the periodic supervisory data provided to SAMA by banks, which plays a crucial role in SAMA's supervisory and regulatory functions over the banking sector by enhancing its stability and financial solvency, as well as improving the level of banking and financial services. Additionally, SAMA is keen on increasing the efficiency of reports and statistical bulletins by implementing the best measures to verify the accuracy of this data and seeking to enhance the principle of transparency and clarity by publishing it across all available channels, and in view of what has been observed that some banks have provided governmental and non-governmental entities with certain supervisory and statistical information based on requests from those entities before officially approving or publishing them through SAMA or through periodic reports issued by the banks after completing all verification procedures regarding the accuracy and integrity of the data.
SAMA emphasizes that all banks must obtain SAMA's non-objection before providing governmental and non-governmental entities with the supervisory data that is periodically submitted to SAMA, as well as unpublished statistical data.
Debts and Loans of Martyrs of Duty and Those with Total Disability
In reference to the debts and loans of the martyrs of duty and the injured participants in the operations of Decisive Storm and Restoring Hope(عاصفة الحزم و إعادة الأمل), and from the standpoint of national duty and the social responsibility of banks, especially concerning the martyrs of duty and those who are totally disabled, and in recognition and pride of their role and sacrifices made to protect the security and stability of the nation, and due to the importance of giving this category of bank customers and their families ample care and attention.
SAMA hopes that all banks will pay attention to those with total disability and the families of martyrs of duty during the operations of (Decisive Storm and Restoring Hope) in settling their debts and loans. It also urges the expedited processing of requests they receive regarding debts and loans from the date of martyrdom or injury, and the mechanisms and procedures for addressing these issues whether they are covered by insurance or not. Furthermore, SAMA requests updates on these matters within a month from the date of this notice.
Saudi Arabian Interbank Offered Rate (“SAIBOR”) - Appointment of Benchmark Administrator and Calculation Agent
As stated in SAMA Circular # 371000104815, the International Organization of Securities Commissions (IOSCO) has issued The Principles for Financial Benchmarks (FR07/13) ("IOSCO Principles"), containing principles concerning the governance, oversight and surveillance of Benchmarks. It is SAMA's intention to enhance the governance framework for SAIBOR, a benchmark inter-bank offered reference interest rate for Saudi Riyals, which is referred to in a range of Saudi Riyal related financial transactions. The new governance framework is intended to ensure that SAIBOR complies with the IOSCO Principles, and is administered and calculated by an independent third party. Thomson Reuters Benchmark Services Limited ("Thomson Reuters"), based in the United Kingdom, has been selected by SAMA and representatives of the Saudi Arabian banking industry as the independent administrator and calculation agent.
SAMA has determined that the appropriate course is for a representative of the Saudi Arabian banking industry to enter into the commercial contractual arrangements to appoint Thomson Reuters to provide the SAIBOR administration services. As agreed with representatives of the Saudi Arabian banking industry, SAMA has requested Riyad Bank to perform the function of contracting with Thomson Reuters.
Notwithstanding that Riyad Bank is the contracting party with Thomson Reuters. SAMA expects certain banks, to be determined from time to time by the Treasurer's Committee (the "Member Banks"), to enter into back-to-back bilateral commercial arrangements with Riyad Bank, in order to ensure that each Member Bank provides the necessary authority to Riyad Bank to engage with Thomson Reuters on its behalf. The Member Banks may change from time to time.
Riyad Bank shall not represent or act for SAMA. However, since Riyad Bank shall act in a representative capacity. SAMA hereby authorises Riyad Bank to enter into arrangements with Thomson Reuters and the Member Banks for the purpose of giving effect to a new SAIBOR governance framework and to reflect the representative capacity in which Riyad Bank acts.
SAMA hereby (1) provides to Riyad Bank all such authority as Riyad Bank may require from SAMA, to appoint Thomson Reuters as Administrator and Calculation Agent of SAIBOR (the "Appointment"): and (2) orders that all Member Banks provide all such authority to Riyad Bank as Riyad Bank may require in order to make the Appointment.
1. Thomson Reuters
Thomson Reuters is regulated in the UK as a benchmark administrator. By the authority vested in SAMA under the Banking Control Law, it is hereby expressly acknowledged by SAMA that Thomson Reuters may act in this capacity in respect of SAIBOR. Thomson Reuters and SAMA shall work together in good faith in the interests of SAIBOR. its integrity and governance. As part of this, Thomson Reuters shall have an open channel of communication to SAMA and endeavour to notify SAMA on a prompt basis of (i) material issues relating to SAIBOR including suspicions of misconduct so that appropriate action can be taken by SAMA and any required assistance provided to Thomson Reuters, and (ii) relevant information pertaining to its relationship with Riyad Bank.
2. Riyad Bank
Riyad Bank is to enter into an agreement with Thomson Reuters to appoint Thomson Reuters to perform administration and calculation agent services for SAIBOR.
The agreement between Riyad Bank and Thomson Reuters, shall place an obligation on Thomson Reuters to use its reasonable efforts to operate SAIBOR in compliance with the IOSCO Principles.
SAMA, as the sole owner of intellectual property rights in the SAIBOR Benchmark, hereby authorises and grants an exclusive and revocable license to Riyad Bank to use and to sub-license or authorise the use of any such intellectual property rights to Thomson Reuters, insofar as required by Thomson Reuters to enable it to perform its contractually agreed functions in respect of SAIBOR.
Riyad Bank shall have an open channel of communication to SAMA and SAMA expects that Riyad Bank shall provide such information as SAMA may reasonably expect with respect to Riyad Bank's relationship with Thomson Reuters.
Riyad Bank shall implement appropriate policies and procedures to identify, prevent and manage any conflicts of interest arising from its appointment by SAMA to contract with Thomson Reuters, given that Riyad Bank will also perform the duties of a Member Bank in relation to SAIBOR. For the avoidance of doubt, Riyad Bank shall not itself perform (or be required to perform) any of the functions of an Administrator or Calculation Agent in respect of SAIBOR.
3. Member Banks
Riyad Bank is required to pay fees, on behalf of the Kingdom's banking industry, to Thomson Reuters in consideration of Thomson Reuters performing its duties as Administrator and Calculation Agent. The Member Banks shall be responsible for all fees, costs, expenses, litigation and other liabilities incurred by Riyad Bank on a basis to be determined by the Treasurer's Committee and agreed with Riyad Bank and shall indemnify Riyad Bank accordingly. Member Banks are hereby required to enter into agreements with Riyad Bank (each a "Bilateral Agreement" and collectively the "Bilateral Agreements") in order to ensure that (1) Riyad Bank is compensated and indemnified in respect of the aforementioned liabilities and (2) that appropriate authority is provided to Riyad Bank on behalf of the Member Banks to make the Appointment.
Each Member Bank shall also (A) provide all reasonable assistance and cooperation to Riyad Bank as may be required in order to enable Riyad Bank to perform its functions and fulfil its obligations to Thomson Reuters; and (B) provide such consents or approvals as Thomson Reuters may reasonably require in order to process personal or other data to the extent necessary for Thomson Reuters to perform its role as Administrator and Calculation Agent for SAIBOR .
SAMA expects to be notified of any known or suspected breach, by any party, of any Bilateral Agreement.
4. Contributing Banks
To the extent that any Member Bank that makes SAIBOR submissions ("Contributing Bank"), has any claim to intellectual property rights in respect of such SAIBOR submissions or other data that it provides to Thomson Reuters, such Member Bank in entering into its Bilateral Agreement with Riyad Bank shall authorise Riyad Bank to license to Thomson Reuters the use of such information for the purposes of calculating SAIBOR and for such other purposes as may be agreed between Riyad Bank and Thomson Reuters for the duration of the Appointment.
IFRS 9-Financial Instruments
Background
IFRS 9 (International Financial Reporting Standard) - Financial instruments issued on 24 July 2014 is the lASB's (International Accounting Standards Board) replacement of IAS 39 - Financial Instruments: Recognition and Measurement. This standard includes requirements for recognition and measurement, impairment, de-recognition and general hedge accounting.
IFRS 9 does not replace requirements for portfolio fair value hedge accounting for interest rate risk since this phase of the project was separated from the IFRS 9 project due to longer-term nature of the macro-hedging project, which is currently at the discussion paper stage of the due process. Consequently, the exception in IAS 39 for a fair value hedge of an interest rate exposure of a portfolio of financial assets or financial liabilities continues to apply. The version of IFRS 9 issued in 2014 supersedes all the previous versions and is effective for accounting periods beginning on or after 1 January 2018 with early adoption permitted.
SAMA has undertaken a consultation process with the Saudi Banks for the implementation of this accounting standard by conducting a detailed quantitative impact study. SAMA has also encouraged banks to engage an external consultant for developing an industry guidance document taking into account local practices. This document covers the following sections, which provide useful information for implementation of the IFRS requirements:
• IFRS 9 governance and risk frameworks highlighting the roles and ownership of finance, risk and various other functions • Classification and measurement of assets • Impairment of assets • Hedge accounting • Disclosures applicable from December 2016 onwards
Implementation date
SAMA expects banks to use this guidance in developing their own specific plans and processes for implementing IFRS 9. As mentioned above, the standard is applicable in Saudi Arabia from 1 January 2018 with limited qualitative disclosures required from December 2016 as clarified in the guidance document.
Formulation of Policies by Banks
1) SAMA has been encouraging banks from time to time to formulate policies for undertaking various business activities. This circular is aimed at consolidating and updating the regulatory requirements on formulation of policies by banks. The ultimate objective is to institutionalize the process and set out the minimum requirements on policy formulation in banks, to achieve consistency in practices across the banking industry. This circular is being issued under Article 3(d) of the SAMA Charter issued by Royal Decree No. 23 dated 23-5-1377 H (15 December 1957 G) and Article 16(3) of the Banking Control Law issued by Royal Decree No. M/5 dated 22-2-1386 H (11 June 1966 G).
2) All banks are required to formulate policies in the following areas, as a minimum, and ensure their regular updating:
i) Credit Policy;
ii) Treasury and Investment Policy;
iii) Risk Management Policy;
iv) Compensation Policy;
v) Human Resources Policy;
vi) Liquidity Management Policy;
vii) Internal Audit and Control Policy;
viii) Accounting & Disclosure Policy;
ix) Know Your Customer(KYC) Policy;
xi) Anti-Money Laundering(AML) and Counter-Terrorism Financing Policy;
xi) I.T./Information Security Policy;
xii) Compliance Policy;
xiii) Stress Testing Policy;
Xiv) Outsourcing Policy;
xv) Business Continuity Plan/Policy;
xvi) Consumer Protection Policy;
3) Banks may choose to formulate other policies, in addition to those listed above, as may be warranted by the nature and complexity of their business and in line with international standards/best practices. Furthermore, they may have a consolidated policy covering more than one of the above areas.
4) Banks are required to comply with the following minimum requirements in formulation of the above policies:
i) Each policy should fully describe the bank’s imperative in conducting business in the relevant area;
ii) The policy document should focus specifically on policy parameters/guiding principles in order to distinguish it from a process/procedural manual. Furthermore, the existence of a process/procedural manual in any area should not be deemed a substitute for the policy document;
iii) Detailed guidelines / requirements separately issued by SAMA for preparation of certain policies e.g. credit policy, risk management policy, compensation policy, consumer protection policy, etc. should also be incorporated in the policy document;
iv) All proposed policy documents should be approved by the Bank’s Board of Directors. The Board may, however, delegate the responsibility to review/approve any policy to a relevant Board Committee provided that the policy so approved is subsequently ratified by the Board. In the case of foreign branches licensed and operating in Saudi Arabia, the policies should be authorized by the function responsible for that policy and approved by Head Office;
v) The Board should clearly define the frequency for review / updating of these policies. All policies should be reviewed/updated, at least every three years or more frequently if the bank deems it necessary;
vi) The Board should require the senior management to put in place a well- defined governance structure and process to ensure implementation of the approved policies;
vii) The Board should also ensure that the Bank has appropriate internal procedures in place to comply with the requirements of this circular.
5) The requirements set out under this circular shall be applicable to the locally incorporated banks as well as foreign branches licensed and operating in Saudi Arabia. Banks are required to review their existing policies in light of this circular to ensure that all such policies are consistent with the requirements set out under this circular. In case a bank has not yet formulated any of the policies listed at Para 2 above, it should do so by 31st December 2015 and submit a confirmation in this regard to SAMA by 31st January 2016.
Prepaid Salary Cards for Domestic Workers
Referring to the Royal Order No. 22393 dated 11/06/1433 H regarding the opening of prepaid accounts (salary card product) for domestic workers as a mechanism for the employer to deposit the monthly salary for domestic workers into prepaid accounts, in coordination with SAMA and the Ministry of Interior. Further to the workshops held with representatives of the banks on 10/06/1436 H and 06/03/1437 H to discuss the mechanism of the product and the developments and sharing of the salary card specifications for this category of workers.
In view of the importance of this national program and its compatibility with SAMA's strategy aimed at implementing the principle of financial inclusion, reducing the percentage of cash transactions, and developing banking products in line with the needs of the local market, SAMA hopes that all participating banks will launch a salary card product for domestic workers in accordance with relevant instructions and regulations, and with the specifications discussed in workshops and follow the necessary procedures and capabilities required to meet requests for opening bank accounts, including the use of various banking technologies, and the availability of cash through ATMs and other services required of the beneficiaries of the program. All banks must be ready to launch the product no later than 01/03/1438H corresponding to 30/11/2016G. The Ministry of Labour and Social Development will work to oblige sponsors, citizens and residents, to open prepaid bank accounts for their domestic workers and will launch a media campaign.
Electronic Link Between Banks and the Ministry of Commerce and Investment Related to Some Services
Further to SAMA Circular No. 361000082486 dated 10/6/1436H regarding the guidelines for implementing the electronic linking project with the Ministry of Commerce and Industry for joint stock company formation, and Circular No. 361000021850 dated 11/2/1436H regarding the adoption of the electronic commercial register certificate as an official document. Referring to the requirement for copies of the commercial register and the founding contract for resident establishments operating in the Kingdom as stated in the fourth update of the rules for opening bank accounts and the general rules for their operation in banks operating in the Kingdom.
SAMA emphasizes that all banks must comply with the directives mentioned in the above circulars and implement the following:
- Service for documenting capital deposit certificates.
- Service for electronically documenting commercial registration information for all establishments via direct linking with the Ministry of Commerce and Investment system (Wathiq Service).
- Acceptance of the electronic commercial register and electronic company bylaws as legal documents in all procedures and transactions requiring the acquisition of the commercial register document and company bylaws, and verifying their data electronically, and keeping hard copies in the customer's file.
Regulating the Process of Exchanging Bank Checks Between Banks, Used in Place of Remittances or Credit Advices.
Reference to para (1) of circular No 224/BC/138, dated 14/6/1413 H, regarding bankers checks, and pursuant to the recommendation by the Banking Operations Managers Committee, regarding the regulation of bankers checks exchange operation between banks, instead of drafts or credit notes, it is decided as follows:
The representative of the drawee bank must bring all bankers checks drawn thereat fully coded, with the exception of the amount, along with the name of the beneficiary bank which appears on the face of the check, and distribute same to the representatives of the beneficiary banks at the clearing house. The representative of the beneficiary bank shall code only the space devoted for the amount and then submit the check for electronic clearing at 9:30 A.M. at the latest. Check in time shall be recorded and then each representative shall submit his package of checks starting from 9:30 to 10:00 A.M. at the latest in order to complete clearing on time.
For your information and compliance as of this date.
The Enhanced System for Operations and Accounting Entries Between the Branches of the Saudi Central Bank (SAMA) And Its Main Center
SAMA wishes to remind you of its circular No. 16857/ND, dated 30/6/1414 H. regarding the application of the updated system for accounting operations and entires among SAMA branches and SAMA's head office. Article (9) of the circular stated that government revenue checks submitted to the Head Office in local currency shall be deducted directly out of the local bank account with the Head Office and shall be sent back to the bank with a notice. Article (10) stated that government revenue checks presented for collection to Head Office in foreign currency shall be sent to the local banks for collection and shall be debited after collection to the bank account with Head Office in Saudi Riyal.
Please be informed, and advise your branches that government revenue checks may be issued and paid by any bank branch, with the understanding that the bank and its branches can issue government revenue checks on the bank Head Office account and shall be deducted from the head office current account at SAMA's Head Office.
Please be informed and notify your branches accordingly.
Amendment of the Declaration Form Attached to the Bill of Lading
Re SAMA Circular No. BC/144 dated 4-6-1414H in connection with the amendment of the appended declaration to bills of lading.
SAMA has received the letter of HE the Minister of Finance & National Economy No. 27/7331 dated 2-11-1414H, noting that the United Arab Shipping Co. (in Kuwait) is a stock, company owned partly by the Kingdom of Saudi Arabia. HE requested that Saudi banks be instructed not to ask said company to submit the declaration referred-to in paragraph (b) of article I of the letters of credit conditions.
Please be informed and comply.
"Complaint" Definition
Based on SAMA's supervisory and regulatory responsibilities over all banks operating in the Kingdom under the Charter of the Saudi Arabian Monetary Authority Law issued by Royal Decree No. 23 dated 23/05/1377H, and the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386H, and pursuant to SAMA’s Circular No. 351000145194 dated 26/11/1435H regarding the Regulations of Complaints Handling and the Establishment of Complaints Units in the Banks, and with reference to a study on the quality of services provided by banks to their customers, which revealed disparities in how banks handle customer dissatisfaction ("complaints") due to differing interpretations and definitions of the term "complaint," the following objectives are set:
Ensure the customer's right to lodge a complaint with the bank in cases of dissatisfaction with the level of service or banking product, or when these do not meet their expectations.
Guarantee consistency in understanding and handling customer dissatisfaction across all banks, ensuring that all cases are recorded and studied without disparities in approach.
Emphasize that complaints are a vital source of insight into customer expectations and areas of deficiency. They serve as a tool for improving banking services and products, enhancing relationships with customers, and educating them about their rights and responsibilities.
We inform you that the definition of the term "complaint" is (Any expression of dissatisfaction related to the provided service, whether justified or unjustified, made in writing or verbally). We request that the relevant personnel at your bank revise the bank's policies and procedures to align with the above definition and objectives. Emphasis should be placed on recording and addressing complaints and treating them as a tool for improving banking services and products and for strengthening relationships with customers, which will positively reflect on the bank's performance. Please confirm receipt of this notice within one week and provide evidence of implementation within one month from the date of this notice.
Certain Banks Failing to Attend Deposit and Withdrawal Appointments at SAMA's Branches
Recently, it has been noted that some banks do not adhere to attending the appointments they booked through the SAMANet system to deposit or withdraw cash from SAMA's branches, and as this matter entails many negative aspects represented in the waste of energies and available human resources, and the disruption of the use of devices and equipment provided by SAMA to meet the requests of banks, as well as the loss of the opportunity to give the appointment to another bank that can benefit from it.
Therefore, we would like to emphasize to the bank's officials the importance of fully adhering to the appointments booked by you, and to ensure the development of accurate future forecasts for cash and dealing with the branches of SAMA.
Promoting the Projects of Joint-Stock Companies Under Formation and Opening Accounts in Banks Before Obtaining a License from the Ministry of Commerce.
SAMA has received a letter from HE the Minister of Finance & National Economy No. 3/6768, dated 9/10/1414 H, stating that HE had received a letter from HE the Minister of Commerce saying that the Ministry has noticed that some people are promoting stock companies under constitution and are opening accounts in banks to deposit subscriptions by those who desire to buy stocks in those companies before they are licensed by HE the Minister of Commerce pursuant to article 52 of the Companies Regulations.
HE the Minister of Finance & National Economy has requested SAMA to instruct the banks not to open accounts for such companies unless they present evidence of having been licensed by HE the Minister of Commerce, and they further present evidence that the banks in which the opening of accounts is requested are among banks designated by HE for depositing the amounts of subscription in the stocks of such companies, pursuant to articles 52 and 57 of the Saudi Companies Regulations issued by Royal Decree No. M/6, dated 22/3/1385 H.
For info and compliance with the directives of HE
Publishing the Quarterly and Annual Reports on their Specified Dates
Reference decision of the Securities Supervisory Committees in the Kingdom, which requests stock companies to publish their quarterly reports within a maximum period of 3 weeks from the end of each quarter, including the 4th quarter, and provide SAMA’s Securities Department with such reports, as soon as prepared, to be published through the Saudi electronic information systems (“ESIS"),
Since it was noticed by the Committee that some stock companies have failed to comply with this deadline, Committee has decided to instruct Securities to publish through ESIS the names of stock companies that fail to publish their quarterly and annual reports within the specified period, in accordance with the Ministry of Commerce circular No. 222/221/3429 dated 29-6-1413 H.
Please be informed and see to it that quarterly and annual reports are published on time to provide shareholders with the necessary information.
Accepting the Certificate of Origin Issued by the Exporting Entity, Provided that the Certificate Includes the Name of the Producer for Each Item and The Country of Production.
SAMA has received the letter of HE the Minister of Finance & National Economy No. 27/7327 dating 6-11-1413H, regarding the acceptance of certificates of origin issued by the exporter of goods, provided that the certificate carries the name of each product and the country of production and that the goods themselves carry a regular evidence of origin in accordance with what was stated in the certificate of origin, and the application of same to the letters of credit (the positive version). HE requested the notification of banks.
Please be informed and notify your people in charge to act accordingly.
Include in all Documentary Credits Issue by all Banks a Provision which Commits all Shippers to Stick a Card on the Inner Side of the Container's Door
SAMA has received the letter of HE the Minister of Finance & National Economy No. 3/5750 dated 13-8-1412H, referring to the letter of HE the Minister of State and President of the General Port Authority No. 16/130 dated 9-7-1412H, noting that article (7/6/3) of Part II of the Sea Ports Instructions & Rules in the GCC states requires owners of goods shipped in containers to instruct shippers to stick cards on the inner side of the container's door stating the names of goods owners, their cable & telex address and the package list. An item in this respect should be mentioned in their documentary credits.
H.E has asked us to instruct all banks to include in all documentary credits they issue a provision which commits all shippers to stick this card on the inner side of the container's door.
Please instruct your people in charge to act accordingly.
Forms Used by Banks for Transfers and Cash Deposits
Further to our circulars No. BC/376 dated 18-8-1409H and No. BC/6 dated 4-1-1410H regarding forms used by Saudi banks for remittances and deposits, we wish to inform you that upon reviewing such forms, SAMA saw the need for some amendments to the existing forms to be filled by the clients who desire to buy foreign currency (as per attached form).
Regarding the sale of foreign currencies (cash or traveller checks, the identity of the buyer should be defined as follows:
- Saudi ( ) - Non-Saudi ( ) Please be informed and do the necessary to use the attached form instead of the old form as of the end of March, 1992, adding at the end of each form the phrase 'requested information is solely for statistical purposes'.
Please acknowledge receipt.
Enhancing the Auditor's Report
On 15 January 2015, the International Auditing and Assurance Standards Board (IAASB) issued new requirements on auditor reporting. These standards are responsive to calls from investors and other users of audited financial statements for more informative and relevant auditor's reports based on the audit that was performed. This new and revised Auditor Reporting standards include new ISA 701, Communicating Key Audit Matters in the Independent Auditor's Report, and a number of revised ISAs, including ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, and ISA 570 (Revised), Going Concern.
Without changing the scope of an independent audit, these requirements open the door for the auditor to give users more insight into the audit and improve transparency. By clarifying what the independent audit really is, the new auditor's report will help enhance the nature of communications with stakeholders and enable users to recognise the value of audit. These changes are mainly around:
• Report reordering - opinion required to go first • Revised descriptions of management and auditors responsibilities • Description of work performed on other information such as the annual report • Description of key audit matters • Disclosure of the engagement partner's name • Disclosure of other information not received before report date and of related auditor responsibilities
These new requirements apply for audits of financial statements for the periods ending on or after 15 December 2016 with an early application permitted under the auditing standards. Saudi Banks should work with their Auditors to produce a proforma audit report based on 31 December 2015 financials and provide these to Saudi Central Bank by 30 September 2016. The full implementation of these requirements should be applicable on 31 December 2016 annual report onwards.
Banks should access this document from IFAC website.
Clarifying What is Stated in the Cabinet's Decision, Particularly the Meaning of the Term "External Security".
In his letter to SAMA No. 738 dated 22-6-1412H, HE the Director of General Security explained what was meant by the first paragraph of the Council of Ministers Decision No. 15 dated 9-2-1412 which reads as follows: 'Banks and other important companies and establishments, to be defined by the Minister of Interior, must keep special civil security guards on their premises within the scope that shall be defined by the Minister of Interior, provided such guards shall be stationed inside and at the doors of banks and other companies and establishments. The outside security will be handled by the security forces'.
HE explained that 'outside security' means motorized and foot patrols and that the rules which will be issued soon will explain this point. In view of the importance of keeping outside security at the doors of banks for 24 hours a day. during and outside regular office hours, to protect these premises and timely notify security authorities of any suspected person, HE asked us to instruct the banks to keep practicing the same outside security measures as before,
Hence. SAMA urges you to comply with the directions of HE the Director of General Security in this regard and to notify your branches accordingly to keep security guards at the door of banks and branches for 24 hours a day. Please acknowledge receipt.
The Monthly Statement of Letters of Credit Opened for the Importation of Foodstuffs and Construction Materials
Reference the monthly statement of documentary credits opened for the import of food supplies and construction materials and submitted directly to the Ministry of Commerce.
The Ministry of Commerce, according to a letter received therefrom No. 115/3/2 dated 28-3-1412 H, has noticed that some banks are not submitting this statement regularly, and some banks are filling out the statement by hand writing which is not clear.
In order to achieve the intended object of the statement, HE requested us to notify the banks and their branches to submit the statement on a regular monthly basis, within one week at the latest from the end of the previous Gregorian month, addressed to:
The General Directorate of Food Supplies, Ministry of Commerce, Riyadh 11162.
HE also called on banks to submit the statement in Arabic, typed, not hand written, with the full name of the importer in accordance with currently used form.
We kindly request you to instruct your concerned people accordingly and acknowledge receipt.
Multi-Leg USD/SAR Forward Structured Product
It has been drawn to our attention that recently some banks have been engaged in multi-leg USD/SAR forward structured product. In this regard, for the Banks that have engaged in this activity, SAMA would like them to explain the rationale and relevance of this product for the economy by answering the following questions and responding back to us by 22 May 2016:
1. How is this multi-leg forward structured product with conditionality different from non-linear structured product with optionality? 2. What is the basis of entering into this product without recourse to SAMA? Do you consider this forward structure akin to “plain vanilla” forwards? If so, please explain. 3. Provide SAMA with transaction details (notional amount, counterparty, mark to market value etc.) since January 18, 2016 to date along with outstanding position in this specific derivative, if any. 4. What is the impact of this activity on your USD buy positions from SAMA? 5. What are the potential risks to customers and the Bank arising from this product?
In future, any structured derivative products should be submitted to SAMA for review and approval before their launch.
If your Bank has not engaged in this product, submit a Nil response.
Using the Term "Guarantee Hold" Instead of "Guarantee Confiscation"
SAMA has noticed that some government agencies request the confiscation of letters of guarantee issued in their favor through forms other than those prepared for this purpose and use sometimes the terms “attaching the guarantee" instead of “confiscating the guarantee“.
Since the word “attaching "may cause some legal problems, HE the Minister of Finance & National Economy has notified government agencies through circular No.17/22 dated 18-1-1412H as follows:
“If the government agency decides finally to confiscate the guarantee to cover amounts due from the contractor, it must ask the issuing bank specifically to confiscate the guarantee by using the term "confiscation of the guarantee“.
But if the government agency did not actually desire to confiscate the guarantee, but is simply afraid the guarantee may expire before taking a final decision on confiscation, it may simply request the extension of the guarantee to remain valid until such a final decision is made.
In both cases, the government agency must use the forms related to confiscation and request of extension attached to the circular of the Ministry No. 144 dated 6- 7-1411H.
Matters Related to Banking Operations and their Relationship with Clients
According to the circular of HRH the Minister of Interior No. 17/11517 dated 9-2-1411H, circulated to us through the letter of HE the Minister of Finance and National Economy, all cases related to the relation between banks and their clients have to be discussed with banks, or through SAMA and the Ministry of Finance and National Economy with no need to arrest bank employees personally.
Transfer and Cash Deposit Forms
Further to our circular No. BC/376, dated 18th Shaban, 1409 H., regarding the standardization and use of money transfer and deposit coupon forms, proposal by SAMA, as of Muharram 1410 H., and in view of remarks by some banks regarding the data contained in such forms, we call on you to observe the following when using the proposed samples:
I. Transfer Forms
- Amend "Guarantor's Address" to read "Sponsor's Address".
- Regarding the conditions referred-to at the end of the transferor's section, which require the transferor's approval, each bank is free to put its own conditions and reservations.
- In case the beneficiary has no account number available, it is enough to state 'not available'.
II. Cash Deposit Form
- This form applies to all deposits irrespective of their term.
- If the form is used by the client himself, the data available at the bank on him shall be sufficient. But regarding corporate representatives, the bank should ask for information about them.
SAMA would like to note that the preparation and standardization of these samples in such a manner is to gather statistical and security data to refer back to if need be.
We hope banks will fully comply with the use of the proposed forms and advise their branches to act accordingly.
The Adoption of the Hijri Calendar in all Operations of Companies, Institutions, Banks and other Entities
SAMA has received the letter of HE the Minister of Finance and National Economy No. 3/8047 dated 1-12-1409H, referring to Royal Order No. 2191/M dated 25-11-1409H, regarding the requirement to use the Hejira Calendar by all companies, establishments and other institutions, noting that the Gregorian date may be added to the Hejira date in correspondences and communications.
Please be informed and act accordingly.
Pricing Policy for SADAD Account Service
No: 371000078648 Date(g): 20/4/2016 | Date(h): 14/7/1437 Status: In-Force In reference to the SADAD Account service provided by the SADAD payment system, which allows customers to make local payments online through current accounts.
Attached is the first release of the SADAD Account Pricing Policy (SADAD Account Pricing Policy V1.0), and all banks are required to implement the provisions of this first release of the policy as of this date.
1- Introduction - SADAD Account Pricing Objective
This document defines the pricing scheme that will be applied for SADAD Account, ensuring a financially incentivized ecosystem for all stakeholders.
The SADAD Account fee consists of a transaction fee, which is a variable fee calculation with criteria around minimum and maximum fee levels. In addition there are separate criteria for the distribution of the Fee amongst the participating stakeholders.
These fees are intended to encourage market uptake, ensure optimal levels of service and enable the efficient operation of the SADAD Account system for the benefit of all stakeholders.
SAMA will review the SADAD Account pricing scheme on a regular basis. Amendments to the SADAD Account service fees will be communicated to all stakeholders in advance.
2- SADAD Account Overview
As part of its mission to ensure "One solution for all Payments" across KSA, SADAD has embarked on a strategic journey designed to propel KSA to the same level of electronic payments adoption as leading e- Commerce countries.
SADAD introduced "Next Horizon", a number of innovative e٠Payment services aimed at increasing cashless transactions across KSA. As the first service in the Next Horizon portfolio, SADAD Account aims at ensuring a seamless Consumer and Merchant experience while fostering e-Commerce growth. SADAD Account enables merchant websites to provide a SADAD 'checkout' option, which is used by consumers to complete digital purchases using a 'light' Bank account.
As a secure, non-card based payment option, SADAD Account allows all Consumers in KSA to safely transact over the Internet through their Issuing Bank at participating Merchant eCommerce websites.
SADAD Account offers a cost-effective method for Merchants to accept payments through their Acquiring Bank. The initial integration efforts with SADAD Account are minimal, enabling internet merchants across all levels of KSA business and e-Commerce maturity to quickly and easily adopt SADAD Account as their preferred e-Payment platform.
3- SADAD Account Pricing Philosophy
SADAD's Account pricing philosophy is to incentivize the ecosystem of stakeholders to drive market uptake, enable the adoption of Online Payments and encourage SME build-up across KSA.
Transaction fees are the core element of the SADAD Account pricing policy, with account management fees muted to encourage Consumer and Merchant adoption. The transaction fees will apply to all Merchants.
The Online Payment pricing is a collaborative effort, developed in conjunction with the KSA Banks. The costs incurred by SADAD and the Banks, as well as the market uptake forecast were taken into account to ensure a positive value proposition for all stakeholders.
4- Pricing Methodology
SADAD has used a number of differing models between the SADAD Account "Pilot" and "Public" phases.
During the pilot phase SADAD has operated interim pricing which was approved by SAMA. The fee methodology utilized by SADAD during the "Pilot Phase" was a "Hybrid fee" model, combining a transaction fixed fee and an additional variable fee component. In addition there was a "Price cap" fee value applied to large value transactions.
For the "Public" phase a new "Variable fee" model will be used. This key change is a move from the hybrid pricing (fixed and variable) to the variable price basis and in addition a number of changes have been added to both the fee criteria and the fee allocation split.
We are confident that this new pricing will be a positive support to both the Merchant and KSA Banks following the public launch.
5- SADAD Account - Pricing details
5.1- SADAD Account - Fee calculation
The SADAD Account fee will be charged to the Merchant on a per transaction basis.
From the Merchant perspective the Total fee is calculated as follows:
- The fee is calculated as 1.50% of the OLP transaction SAR value.
- There is a minimum fee charge per transaction of SAR 0.50.
- The maximum fee CAP remains at SAR 75. (i.e. a SAR 5,000 transaction value)
In summary, the SADAD Account transaction fee comprises a number of elements. The pricing comprises the fee charge, transaction fee caps and minimum and maximum fee criteria.
The enclosed table outlines the fee criteria.
Oil-Fee Summary
Fee elements
Fee Variable
Variable Fee
1.50%
Fixed fee
SAR 0.00
Max fee
SAR 75.00
Min Fee
SAR 0.50
SADAD fee cap
SAR 0.30
Issuer Fee Cap
SAR 5.00
Table 1 -SADAD ACCOUNT Pricing Structure
5.2- SADAD Account - Fee split
Fees are split among stakeholders, in order to effectively incentivize Banks and allow SADAD to sustain its operations while continuing to innovate.
Step 1 - The SADAD fee is calculated as 20% of the Fee value subject to a SADAD CAP of SAR 0.30.
Step 2 -The SADAD fee is deducted from the Total Fee.
The "remaining fee" will then be split between the Banks in the following order:
- The Issuing Bank receives 33% of the "remaining fee" subject to a fee CAP of SAR 5.00.
- The Acquiring Bank receives the balance of the "remaining fee" after the deduction of the Issuing Bank share. The Acquiring Bank share will equate to 67% of the "remaining fee" subject to the issuing CAP fee restriction (i.e. SAR 5.00).
- The fee calculation process and the distribution of the fee amongst the parties will continue in line with the Pilot operating procedure.
The revised pricing should support the KSA Banks in the role out of the service.
6- SADAD Account - Account Management Fees
In addition to the transaction fees, account management fees are also defined, as per the below.
Account Management Fee Description Value One Time Merchant Fee One time initial onboarding fee to be paid by the merchant The one-time merchant fee will be up to SAR 1,500. The Bank can decide whether to charge the full amount, a portion of it or wave it Annual Merchant Fee Annual account fee to be paid by the merchant The merchant will not be charged an annual fee, except for value-added services provided by the Bank One Time Consumer Fee One time initial registration fee to be paid by the consumer None Annual Consumer Fee Annual account fee to be paid by the consumer None Refund Fee Refund transaction fee to be paid by the merchant Fixed fee of SAR 1 Table 2: SADAD Account - Management Fees
Stressing on Banks to Prevent the Re-Election of Board of Chairman More than Once
Reference our letter No. BC/1725 dated 12-8-1408H regarding the cable of HE the Minister of Finance and National Economy No. 3/5999 dated 28-7-1408 H, further to HE letter No. 2722/405 dated 16-7-1405 H, which provided SAMA with a copy of Royal Decree M/46 dated 4-7-1405 H, which approved the Council of Ministers Decision No. 80, dated 30-4-1405 H, amending article (79) of the Companies Regulations promulgated by Royal Decree M/6 dated 22-3-1385 H to read as per our aforementioned letter (copy attached),
SAMA has received the letter of HE the Minister of Finance and National Economy No. 3/5733 dated 20-8-1409 H, wherein HE requested us to stress once more on banks to comply with the article which prevents the re-election of the board chairman for more than one time with no exception.
Please be informed and act accordingly.
Information Confidentiality
Further to SAMA Circulars No. B C I/150 dated 29/6/1422 H, No. B C I/97 dated 13/3/1424 H, No. B C S/207 dated 5/3/1430 H, No. B C I/15969 dated 3/7/1431 H, and No. B C I/6442 dated 19/3/1432 H, and the previous circulars regarding the mechanism of disclosure of banking data and information, and the necessity to comply with not to provide any information about customers without first addressing SAMA and obtaining no objection.
Therefore, SAMA emphasizes the importance to abide by the aforementioned circulars and not to provide any financial or banking information about your customers or their banking transactions to any party, whether individuals, institutions, governmental entities, or any other local or foreign parties, unless after referring to SAMA and obtaining no objection.
We hope to take note and inform all departments and branches to act accordingly, and to report n this within a week from its date.
The Effect that Investment in Government Bonds is Not Subject to Bank Zakat since they Amount to Property
Saudi Central Bank has received the letter of HE the Minister of Finance & National Economy No. 32/3689 dated 25-5-1409 H regarding ministerial decision No. 32/925 dated 25-5-1409 H to the effect that investment in government bonds is not subject to bank Zakat, since they amount to property.
We attach herewith a copy of said letter to act accordingly.
Procedures for Writing off Loans and Debts for Martyrs and Those with Total Disability
Referring to the letter of the General Director of the General Directorate of Retirees Affairs in the Armed Forces No. 2/22/2/20741 dated 19/06/1437 H referring to the directive of His Royal Highness the Crown Prince, Second Deputy Prime Minister and Minister of Defense to exert more attention, diligence and follow-up and to complete all procedures for settling the dues of martyrs of duty and the injured in return for their efforts in defense of the homeland and the protection of its sanctities. The letter of the administration referred to above included several inquiries received from the families of martyrs and the injured to inform them about the cancellation of debts and loans owed by martyrs or those with total disability at banks operating in the Kingdom.
We hope to benefit from the bank's views in the event that the legal representative for the heirs of the martyr of duty or who is totally disabled submits a request for exemption from the debts and loans that owed to the bank from the date of death or the date of disability, as the case may be and the procedures followed in this regard, and inform us within three working days from its date.
Meaning of Lawsuits and Cases (Between Banks and their Clients)
SAMA has received the letter of HE the Minister of Finance and National Economy No. 3/733 dated 17-1-1409H, attached therewith a copy of the Royal Order No. 4/110 dated 2-1-1409H, indicating that the term 'cases and lawsuits between the bank and their clients', as referred to in the first and second paragraphs of the Royal Order No. 729/8 dated 10-7-1408H, and in Royal Order No. 732/8 dated 10-7-1408H, is intended to mean cases and lawsuits of a banking nature arising from the bank's practice of its pure banking operations.
SAMA calls on you to abstain from filing any case or lawsuit with the Committee for the Settlement of Banking Disputes against any client unless that case or lawsuit is of a banking nature arising from the bank's practice of its pure banking operations.
Adherence to Including the Mandatory Information in Commercial Documents
Reference our circular No. 4399/BC/55 dated 11-3-1408 H, which reminded local banks to include in commercial papers they use with their clients all regularly required data and make sure of this before taking legal action against their clients,
SAMA has received the letter of HE the Minister of Finance and National Economy No. 3/7996 dated 23-10-1408 H, stating that the Ministry of Commerce has specifically noted that some banks fail to mention the word “check” on checks issued thereby, which makes lawsuits related to such checks unacceptable by the Saudi Committees for the Settlement of Commercial Papers Disputes. The word “check” is a basic data in each check, pursuant to article 91 of the Commercial Papers Law.
Please be informed and make sure all commercial papers carry all required data, specifically the word “check” in the same language, pursuant to article (91) of the Commercial Paper Law.
Standard Contract for Public Works.
SAMA has received the letter of HE the Minister of Finance & National Economy No. 17/7129 dated 11-9-1408H regarding the Ministry circular No. 17/180 dated 26-8-1408H, based on article (53) of the public works standard contract issued by the Council of Ministers decision No. 136 dated 13-6-1408 regarding procedures regulating the withdrawal of work from the contractor.
The circular notified project departments, tender committees and consultants to government agencies that in the event works have to be withdrawn from contractors, the party in charge of supervision must prepare a comprehensive report and then invite the tender committee to discuss such report and make recommendations which should cover the procedures of treating the project, the need for confiscating or attaching the guarantee, in whole or part, and the way to handle contractors materials and equipment on site. In reviewing the reason for withdrawing the works, the tender committee must observe all the circumstances and implications of the project implementation and the effects thereof on both parties. The Ministry advised that banks must be notified accordingly.
Saudi Central Bank feels that the contents of the circular concern only the project owner and the bank which issued the guarantee is not entitled to see the afore-mentioned report or to postpone the payment of the guarantee value until it is sure the report is issued by the tender committee in favor of confiscation because this violates the bank commitment to pay the value of the guarantee, notwithstanding any objection by the client.
Resumption the Opening of Letters of Credit for the Import of Barely
Re SAMA Circular No. BC/10 dated 7-1-1408H, which banned the opening of letters of credit for the import of barley as of Tuesday 8-1-1408H (1-9-1987A.D), we hereby notify you, in accordance with the instructions by the Ministry of Finance and National Economy that the opening of such letters of credit may be resumed.
Including the Contractors a Certificate from a Local Bank in their Bids Showing their Financial Capability and Credit Standing
According to a letter received by SAMA from HE the Minister of Finance & National Economy, No. 860/3 along with a copy of his circular addressed to all Ministries & Government agencies, the Ministry of Finance & National Economy has reviewed a proposal to the effect that contractors must include in their bids a certificate from a local bank evidencing their financial capability and credit standing, as per regulations and instructions, in order to sign government contracts and meet the requirements. The Ministry concluded that the most suitable procedure for that purpose is to require the bidder to submit a certificate from the Saudi bank he deals with attesting to his financial position, credit standing and ability to fulfill his obligations to third parties in general. The Ministry of Finance & National Economy recommends that such a certificate must be added to government tender conditions and instructions issued by tender committees. HE requested SAMA to communicate this to all banks operating in the Kingdom.
Please be informed and notify your branches accordingly.
Automization of Bank Guarantee for Government Contracts
Based on communications with several government entities, SAMA has recognized the difficulties faced by these entities regarding bank guarantees and the urgent need to find technical solutions since Ramadan 1436H. As a result, it was deemed appropriate to add the feature of guarantee management to the "Monafasat" electronic government procurement system project, which is being developed by the "Tabadul" company, in order to integrate with government initiatives.
Several meetings were also held with "Tabadul", during which the initial conceptualization of the guarantee management procedures was developed, and an agreement was made to include the guarantee management feature within the project. "Tabadul" conducted a workshop with local banks, attended by representatives from SAMA, on 2/12/1436H. The local banks provided their insights on the proposed mechanism and welcomed this initiative to achieve optimal service for government entities.
Reference to the Letter from His Excellency the Deputy Minister of Finance for Financial Affairs and Accounts, No. 42092, dated 25/4/1437H , we hope your excellency will direct the specialists to fully cooperate with the Saudi Company for Exchanging Digital Information, "Tabadul," in order to ensure the success of the project and the launch of the resulting services within the framework of the Monafasat platform.
Launching the Electronic Salary Identification Service by the Ministry of Education
SAMA received The letter of His Excellency the General Supervisor of Administrative and Financial Affairs at the Ministry of Education No. 73749, dated 1437/03/05H. Regarding the launch of the Ministry's electronic salary verification service in the "Ain" system for teacher services, to facilitate the process of requesting and issuing the verification from the places of residence of the Ministry's staff with ease and convenience.
It was noted that the only authorized signature on the salary certificate for the electronic version is the signature of the Director General of Employee Affairs at the ministry, as in the attached document, please note that there is a link in the identification certificate through which the validity of the identification can be verified.
Referring to SAMA whenever a Supply with a Statement of Account is Requested from the Commercial Disputes Committee and Commercial Papers Committee
Saudi Central Bank has received a letter from HE the Minister of Finance & National Economy No. 3/10070, dated 27/11/1406 H., regarding requests by bank clients, in connection with disputes with banks over loans, to supply the Commercial Papers Committees and the Settlement of Commercial Disputes Committees with a statement of account from the bank covering the whole period of dealing with that bank. Since most of these requests are not justified and do not effect the outcome of the lawsuit and its only purpose could be just to delay court procedures, the banks should deal carefully with such requests and refer any such requests to Saudi Central Bank.
You are, therefore, requested to refer the matter to SAMA whenever you receive such requests.
The Formation of a Committee to Study the Confiscation of Any Bank Guarantee
In view of several inquires about the Ministry of Finance & National Economy circular No. 11/4601 dated 16-5-1406H, which provided for the formation of a committee to study the confiscation of any bank guarantee, SAMA has received a letter by HE the Minister of Finance & National Economy No. 17/10222 dated 29-11-1406, noting that the formation of such committee is an internal matter which does not entitle the issuing bank or its client to have access to. Neither it does permit the bank to refuse or delay the payment of the guarantee value until it is notified of the confiscation recommendation by the committee, because, otherwise, the bank will be in default of its obligation to pay the value of guarantee, notwithstanding any objection by the client, upon the receipt of a request from the government agency to this effect, and to do this immediately and notify SAMA accordingly.
Please comply and advise your branches to act accordingly.
Zakat on Doubtful Depts
The copy of the letter of HE the Minister of Finance and National Economy No. 17/6220 dated 14-7-1406, which was originally addressed to HE the Director General of DZIT, regarding Zakat on bad and doubtful debts, provides as follows:
(A). With Regard to Zakat on Saudi Partners:
The balance of bad and doubtful debts at the start of the year, in addition to provisions estimated by the bank to cover new debts in the profit and loss statement, are not subject to Zakat. If any of such debts are collected, Zakat thereon shall be paid for one year only with regard to all other years for which the final assessment of Zakat has not been issued yet.
(B). With Regard to Income Tax on Foreign Partners:
Doubtful debts are deducted from gross income to estimate net profit. Consequently, such debts are not subject to income tax.
This is done after the bank would have submitted a statement by its board of directors on the estimated amount of doubtful debts and such statement is approved by SAMA.
Please act accordingly.
Statement on Real Estate Transferred to Banks for Debt Settlement
This section is currently available only in Arabic, please click here to read the Arabic version.SAMA Quarterly Data Return for Depositors Protection Fund (DPF) Rules
No: 371000017911 Date(g): 23/11/2015 | Date(h): 12/2/1437 We refer to Section 11 of SAMA Depositors Protection Fund (DPF) Rules issued vide Circular No. 361000089524 dated 25-06-1436H. Under this section, all banks in Saudi Arabia are required to submit a duly completed quarterly return to SAMA providing information on their deposits and calculation of premium payable to the DPF, within 30 days of the end of every calendar quarter.
In this regard, a data template for submission of the above return is attached. Banks are required to submit the attached return template on a quarterly basis. The first submission shall be for Q4/2015 for testing purposes. Thereafter, banks shall submit this return every quarter, and the premium payable will be debited to each banks account with SAMA on the first business day following the date of submission.
Should you need further clarifications, please contact SAMA.
FAQ
Do total deposits referred to in “Deposit Protection Fund’ return require any reconciliation with any of the ERMS returns?
Total deposits referred to in the Deposit Protection Fund return should be the equal to ‘Total Deposit’ figures reported in ERMS.
What is the list of “Government and Quasi Government entities excluded in the calculation of DPF premium?
To maintain consistency, the list of Government and Quasi Government entities will be the same list used for other SAMA returns, such as ERMS.
Is the premium calculation only up to SAR 200,000 for each depositor?
Premium calculation is on the entire balance of the account of each eligible depositor, and is not limited to SAR 200,000.
Are ‘Other Deposits” such as margins on LC and LG, transfers payable, etc., excluded from the from premium calculation of the deposit base?
The only exclusions to the deposit base are those mentioned in the ‘Deposit Protection Fund Rules’, please refer to paragraph 1-v of these Rules.
Transfer of Margin Lending to Authorized Persons (AP)
SAMA and the Capital Market Authority (CMA) have agreed that all margin-lending activities are to be carried out by Authorized Persons (APs). Consequently, Banks that are carrying out such activities themselves should arrange to have these activities transferred to their APs. Please note that you will be advised by SAMA in due course of the timelines for the said transfer. However, banks are expected to start the preparation for this transfer from now.
While the APs will be subject to the existing and future regulations of the CMA, it is expected by SAMA that the Banks will ensure that their APs will have appropriate Corporate Governance including Credit Administration, Risk Management, Compliance and Reporting system in place to handle these activities.
-Monetary Policies and Financial Stability
Participation in Qawaem Program Prepared by the Ministry of Commerce
Referring to the "Qawaem" program established by the Ministry of Commerce and Industry in collaboration with the Saudi Organization for Certified Public Accountants, which aims to provide a range of services related to financial statements and establishment information, which aims to improve and increase work efficiency and benefit from the deposited financial statements to provide outstanding information and services to beneficiaries, stakeholders, and parties involved, by raising the level of transparency and accuracy of financial information for establishments.
Given the higher credibility and confidence achieved by this program in the financial statements, SAMA urges all banks operating in the Kingdom to benefit from this program, subscribe to it, and rely solely on the reliable financial statements available in this program, starting from the financial statements for the year 2014.
Properties Transferred to Banks for Debt Settlement
kindly provide SAMA with a detailed statement of the properties that were transferred to the Bank in exchange for the settlement of its debts and recorded in the books of the Bank or one of its subsidiaries as of the end of September 2015 G, according to the attached form, no later than the end of the day on Wednesday, 15/1/1437 H, and this data should be sent to SAMA.
Real estate acquired by the bank or one of its subsidiaries as a result of partial/full settlement of customer indebtedness and recorded in the accounts of the bank or one of its subsidiaries
Property type
Deed number
City Date of acquisition Book value of the properties on the date of acquisition
Current market value of the properties as per the latest valuation Real Estate Disposal Plan a) Lands 1 2 b) buildings 1 2 Inquiries about the Status of Mortgaged Bonds
In reference to the transactions received from the esteemed presidents of courts addressed to SAMA inquiring about whether property deeds are mortgaged with banks operating in the Kingdom or not.
I would like to inform you that the tasks of processing Sukuk status inquiry transactions have been transferred from the Banking Supervision Department to the Banking Implementation Procedures Department. These tasks will continue to be processed through the SAMANet system.
For your information and to confirm receipt and acknowledgment. In case of any inquiries, you can contact SAMA.
Treatment of High Quality Liquid Assets (HQLA) in Host Jurisdictions
SAMA has issued a circular dated 8 July 2015 regarding a change in repo facility for level 1 HQLA assets from 75% to 100%. This means that Banks in the KSA can now access liquidity from SAMA for up to 100 % of their investment in Saudi Government Bonds and SAMA Bills.
SAMA is aware that Saudi banks with overseas branches and subsidiaries have to meet LCR requirements of their host jurisdictions. However, these requirements concerning haircuts on level 1 HQLA or related repo facility may not be totally in sync with SAMA requirements.
Consequently in view of the section as stated below:
Scope Of Application (paragraphs 164 to 172) of the Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tool dated January 2013
SAMA would like Saudi banks to apply the more conservative treatment of the rules of SAMA or host jurisdiction for level 1 HQLA and its repo facility for the purpose of consolidated LCR calculation.
Repo of Saudi Government Development Bonds, SAMA Bills and Investment in SAMA Murabaha Transactions
Following a review of international markets and liquidity practices in the Basel peer group countries, SAMA has decided to revise the amount of repo facility available to Saudi Banks on their investments in Saudi Government Development Bonds and SAMA Bills. With effect from 31st July 2015, SAMA repo facility will stand at a maximum of 100% of nominal value of holdings in Government Development Bonds and SAMA Bills versus the current ruling of up to 75%.
For the Shariah Compliant banks that have a cash management account with SAMA in the form of Murabaha, such Murabaha transactions will be subject to a maximum of 100% repo facility versus the current ruling of 75%.
Operational Date for the Developed Mechanism for Seizing and Lifting Seizure of Banking Relations
Further to SAMA Circular No. 361000102851 dated 24/7/1436 H regarding Instructions for the New Mechanism for Seizing and Lifting Seizure of Banking Relations, which includes the imminent operation of the mechanism, and that you will be notified of the date of its operation from the Banking Execution Department.
We inform you that it was decided to operate the developed mechanism on Tuesday 22/8/1436 H corresponding to 9/6/2015 G, and we would like to emphasize the necessity to comply with the requirements mentioned in SAMA circular referred to above.
For information, and acknowledgment of receipt within two working days from its date.
Instructions for the New Mechanism for Seizing and Lifting Seizure of Banking Relations
In reference to the meeting held at the headquarters of SAMA on 26/5/1436 H regarding several topics related to banking procedures, including the developed mechanism to seize and lift the seizure of banking relations sent through the SAMANet system within the category of "judicial banking procedures", through which automatic updates appear to banks through the SAMANet system stating the completion of the claimed amount executed against him or part of it in one or more banks, on which bank representatives were trained at the headquarters of SAMA during the period from 13/6/1436 H to 16/6/1436 H. They were allowed to work on its mechanisms through the experimental environment of the SAMANet system.
I inform you about the imminent operation of the mechanism and you will be notified by the Bank Execution Department of its date. Based on SAMA's keenness on the importance of it and banks completing all executive judicial orders in a timely manner and in the form specified in compliance with the provisions of the Enforcement Law, and in view of the sensitivity and importance of such requests and their direct impact on bank customers, and in accordance with ensuring the protection of banks and their employees from exposure to the procedures or penalties stipulated in the Enforcement Law and its Implementing Regulations, banks must comply with the following requirements:
- Processing requests received from SAMA through the SAMANet system regarding the category of "judicial banking procedures" as soon as they are received.
- Dealing with each application separately, and implementing the content of the application on the bank's law immediately upon receipt.
- Fill in the fields in the application in accordance with the required.
- In the event that the Bank receives a request to seize banking relations for a customer whose accounts are previously seized, the available balance in the customer's account must be filled in in the "Seized Amount" field for the specified order after deducting the balances reserved for another application or requests, so that the full balances are indicated in the "Balance" field and the reference or other references for the reservation on the customer's banking relations are indicated in the notes field. In the event that the remaining amount of the total amount of debt to be reserved is available in the customer's account, it will be reserved on the remaining amount only, and enables the customer to transact.
SAMA confirms that the responsibility lies with the banks towards the judicial authority, towards SAMA and towards the customer in the event of a delay in reviewing the SAMANet system and the updated notifications in the application and implementing their content, and SAMA will periodically follow up to verify the bank's compliance with these instructions through direct reports through which the time it takes for banks to process each request separately is measured, and other reports that measure the bank's performance level in processing applications during a specific period, and the regulatory procedures will be applied in the event of delaying the processing of the application and failure to follow up on its updates, and providing inaccurate information including the required information in all application fields.
To review and act accordingly, and to provide adequate human resources and the necessary technical systems.
Deduction and Default Rates
Referring to SAMA's instructions regulating the process of deducting the installments of amounts due to borrowing customers, including the instructions issued within the regulations for consumer financing, and referring to SAMA's observation that some banks withhold the full salary of some defaulting customers, including employees and retirees, as a result of their failure to pay their financial obligations, and as the practices violate the instructions issued in this regard and may cause negative repercussions on the borrowing customer and his family.
We would like to emphasize the bank's responsibility to abide by these instructions in all cases and not to deduct the full salary for defaulters, and to reschedule the distressed amounts so that the monthly deduction rate does not exceed (33%) of the employee's salary and (25%) of the retiree's salary, and to reschedule the employee's premium upon his retirement to (25%) of the salary, and not to be exposed to any other amounts deposited in customers' accounts. In the event of receiving any complaint related to the seizure of the borrower's full monthly salary or the deduction of amounts deposited in his account, SAMA will take immediate and firm action against the violating banks.
Request for Monthly Reports on Margin Lending and Facilities for Local Share Purchases
Referring to SAMA Circular No. 10422/MASH/466 dated 24/8/1416 H, which includes providing SAMA with quarterly data on the facilities granted to finance the purchase of local shares, and the relevant supplementary circulars.
We inform you of SAMA's desire to provide it with a monthly report on margin lending as well as the facilities granted with a guarantee of shares, starting from the data for the month of April 2015, provided that the date of sending these data is within a period not exceeding ten days from the end of each Gregorian month. Note that this report will replace the share purchase financing report that is provided to SAMA monthly, and an Excel file will be sent to the directors of financial departments in banks via e-mail, we hope to send this data to SAMA via e-mail. In case of inquiries, you can contact SAMA.
Electronic Linkage Project Between Banks and the Ministry of Commerce and Industry for Joint Stock Company Formation
In reference to SAMA Circular No. 351000052529 dated 24/4/1435 H regarding the project of Banks Electronic Link with Ministry of Commerce & Investment as one of the procedures for establishing joint stock companies in its pilot phase, I hope to adhere to the following controls:
1. The electronic linkage project is limited to two services: A– Documenting capital deposit certificates. B– Documenting commercial register information. 2. Applying all regulations, laws and instructions issued by SAMA to the project. 3. Compliance with the general principles of confidentiality of information and the relevant instructions of SAMA. 4. The mandatory implementation of the project begins at the beginning of July 2015, with the necessity for the bank to circulate to all its branches to begin the implementation process. 5. Banks shall provide SAMA with evaluation reports for the project as a whole, including observations on the negatives to be avoided and proposals on ways to raise the level of quality of the system within a maximum of three months from the date of the circular. If you have any inquiries, you can contact SAMA or representatives of the Ministry of Commerce and Industry
Adherence to Total Salary Calculation for Consumer Financing
In reference to the updated regulations for consumer financing issued in Ramadan 1435 H, which stipulated that "Total Salary: The monthly basic salary (after deducting retirement benefits and insurance) in addition to all fixed allowances given to the employee by his employer on a monthly basis."
Therefore, we hope to fully comply with the provisions of the definition of the total salary referred to above in the updated regulations for consumer financing, noting that SAMA will verify the extent of compliance with this and take regulatory measures against violating banks.
Create an E-mail to Follow Up Banking Transactions Via SAMANet System
In reference to Circular No. 351000121021 dated 19/9/1435 H, referring to Circular No. 341000057482/AK/81 dated 06/05/1434 H, regarding the emphasis on the speed of response to requests for banking procedures sent to banks through the SAMANet system.
Given the need to communicate with the bank's employees specialized in responding to banking procedures transactions sent through the system, we hope to create an e-mail address for following up on banking procedures transactions, inform us of it and provide us with the names and data of the persons authorized to deal with it, within five working days from its date.
Treating Saudi Chambers of Commerce as Private Sector Entities
We would like to note that the Chambers of Commerce and Industry are non-profit entities that represent within their jurisdiction the commercial and industrial interests of the public authorities, and work to protect and develop them and serve the regions and businessmen they represent. Therefore, they are classified within the private sector and treated on this basis.
Fees for Wage Protection Program Transfers Between Accounts Within the Bank
In reference to SAMA Circular No. 351000012318 dated 28/1/1435 H, Circular No. 351000061537 dated 12/5/1435 H and also the circular number 351000063555 dated 17/05/1435 H which emphasizes the importance of cooperation and supporting the national program "Wage Protection Program". In view of the complaints received by SAMA regarding the fees imposed on money transfers to internal accounts (current or prepaid) through this program.
Therefore, SAMA emphasizes compliance with the following instructions:
First: The transfer from one account to another within the same bank is free of charge for all types of bank accounts. Second: Compliance with the service fees mentioned in the SARIE Pricing Policy document issued by SAMA concerning interbank financial transfers. Third: There should be a "Service Provision Agreement" for this program, and the bank shall clarify all its terms and the fees it will charge for it, ensuring acceptance from the other party before signing the agreement. Fourth: Comply with the prepaid card fees stated in the SPAN Pricing Policy document issued by SAMA and do not impose any additional fees. Granting Bank Employees Personal Finance in Amounts Exceeding Four Salaries
In view of the large number of inquiries received by SAMA from banks about the possibility of granting their employees personal loans exceeding four salaries, in accordance with the provisions of paragraph (3) of Article 9 of the Banking Control Law, which stipulates that "Granting, without security, a loan or a credit facility or giving a guarantee or incurring any other financial liability in favor of any of its officials or employees for amounts exceeding a four month salary of any such concerned person".
We inform you that the prohibition referred to in paragraph (3) of Article 9 of the Banking Control Law is limited to loans, facilities and unsecured financial obligations only, while loans and secured facilities are subject to the discretion of granting them to employees to the internal management and policies of the Bank, provided that such facilities are consistent with the instructions issued by SAMA in this regard.
Emphasis on Opening Bank Accounts for and Providing the Necessary Services and Cooperation to Commercial Enterprises Subject to the Wage Protection Program -2014
Referring to the Wage Protection Project, which is one of the initiatives of the Ministry of Labor to monitor the monthly wage payments for all employees in private sector establishments. The aim is to determine the extent to which establishments are committed to paying wages on time and at the agreed value, and further to SAMA circular No. 35100012318, dated 28/1/1435 H. Regarding the necessity for all banks to comply and be ready to receive and process payroll files for the "Wage Protection System" from commercial establishments.
We inform you of the receipt of complaints to SAMA of commercial establishments regarding the lack of readiness of some bank branches to answer inquiries related to the mechanism of participation in the Wages Protection System program and the lack of knowledge of branch employees about it, SAMA would like to emphasize the importance of this national project, and the need for the concerned departments in banks to provide the necessary training for the bank's employees from branch employees to do the necessary if applications are received to join by commercial establishments.
We would also like to highlight the importance of designating specific communication channels to receive and respond to inquiries related to the program in the future.
We hope to act accordingly and inform it to all relevant departments and branches, and provide SAMA with the above-mentioned contact addresses within two weeks from its date.
Emphasis on Opening Bank Accounts for and Providing the Necessary Services and Cooperation to Commercial Enterprises and Private Schools Subject to the Wage Protection Program-2013
In reference to the Ministry of Labor's project "Wage Protection Program," which is one of the national initiatives aimed at ensuring the rights of workers in private sector establishments to receive their wages on time and at the agreed value by monitoring the monthly wage disbursement operations and determining the extent of the establishments' compliance. Following the workshops held with banks to discuss the project and implementation plan, as well as the presentations submitted to the relevant banking committees and the developments of the project mechanism.
SAMA would like to emphasize the importance of this national project and the necessity for all banks to commit and be ready to receive the payroll files for the "Wage Protection System" program from commercial establishments as per the approved format in the "WPS Technical Specification Document." This document has been prepared according to the plan prescribed by the Ministry of Labor, which involves several phases, starting with the first phase on 25/10/1434 AH corresponding to 1/9/2013, targeting commercial establishments with more than 3000 workers and private schools. SAMA also emphasizes the importance of following the necessary procedures to provide the required capabilities to handle account opening requests and ensure the availability of cash through ATMs and other services required by the beneficiaries of the program, such as ATM cards and more.
Hoping to act accordingly and to notify to all concerned departments and branches
Amendment of Working days for the Saudi Rapid Money Transfer System
This section is currently available only in Arabic, please click here to read the Arabic version.SPAN Operating Rules and Regulations
Based on the supervision and control of SAMA over the business of commercial banks in accordance with the Saudi Arabian Monetary Authority Law issued by Royal Decree No. 23 dated 23/5/1377 H, the Banking Control Law issued by Royal Decree No. M/5 dated 22/2/1386 H and the Anti-Money Laundering Law issued by Royal Decree No. M/39 dated 25/6/1424 H and its implementing regulations, and in accordance with the Council of Ministers Resolution No. (59) dated 28/3/1420 H, which authorized SAMA to license the issuance of electronic cash cards and the like, and supervise them according to the instructions and standards it adopts.
We inform you of the issuance of the operating rules and regulations of the Saudi Payment Network (Sixth Edition) (attached) approved by SAMA, provided that they are applied to all services and products of the Saudi Payment Network as of its date, and work to comply with them and the updates received from time to time, and amend the related services and products available in the local market within a period not exceeding six months from its date.
Information Release on SIMAH
Referring to the Credit Information Law issued by Royal Decree No. M/37 dated 1429 H, and further to SAMA's circular No. BCS/55 dated 29/1/1428 H regarding the full compliance with the operating rules and the membership agreement signed with the Saudi Credit Information Company (SIMAH). We inform you that SAMA has recently observed that some banks are using unprofessional methods to collect distressed debts, misleading distressed customers by claiming that their names will be removed from "SIMAH's list" upon settling their debts.
Whereas following such methods with distressed bank customers reinforces a false understanding of the role of credit information companies and negatively impacts the efforts made to educate beneficiaries about the reality of credit reports and their contents. Therefore, SAMA emphasizes the necessity for all banks operating in the Kingdom, particularly the employees of the collection department and contracted collection companies, as well as other relevant departments, to refrain from using unprofessional methods to collect distressed debts. This includes misleading distressed customers into believing that their names will be removed from "SIMAH's list" upon debt settlement, which contradicts the actual mechanisms of the credit reporting system in place.
Supplementary Circular -SAMA’s No-Objection to Banks Accepting and Verifying Certificates of Duration Electronically
Further to Circular No. 341000018447 dated 12/2/1434 H regarding the Central Bank's no objection to banks accepting the issuance of duration certificates and verifying their data electronically through the website of the General Organization for Social Insurance (GOSI).
In view of the information received by the Central Bank that some banks do not accept these certificates, we hope to confirm the acceptance of issuing the above-mentioned certificates and verifying their authenticity electronically through the website of the General Organization for Social Insurance (illustrative guide).
Draft Regulations to Enhance the Level of Services Provided to Bank Customers
No: 341000028157 Date(g): 13/1/2013 | Date(h): 2/3/1434 Status: No longer applicable This circular is currently available only in Arabic, please click here to read the Arabic version.The Processing of Notes Related to Attachments for the Conduct of Anti-Money Laundering Requests
Further to SAMA's Circular No. 40016/T, dated 26/7/1433 H. regarding the official implementation of the Sama-Net system starting from Saturday, 3/8/1433H, and relying on it for executing all transactions related to the procedures of the first phase of the system.
We inform you that it has been found through the application of the system that there are some observations regarding the attachments received from banks concerning anti-money laundering requests.
Based on this, we hope that banks will adhere to and consider the following:
1- Send all attachments within the specified period in the system (10 working days).
2- Write the name of the bank or print the logo on all attachments sent to SAMA related to anti-money laundering requests, which include the following attachments (account statements – technical reports – account opening documents – images of notable transactions – all internal and external transfers – other attachments).
3- The first page of the bank's response to requests for disclosure of customer accounts must include a statement that indicates the name of each customer, the number of their accounts, the detailed and arranged account numbers, and it should specify the number of attachments sent for each account.
4- Label each attachment that needs to be sent before uploading it to the system in the following format and order: (Bank Name – Customer Name – Attachment Type – Account Number) to ensure that the file saved and sent by the bank is clearly saved when the attachment is opened.
5-The cover letter addressed to SAMA, which includes the name, signature, and approval of the report preparer, should be attached under the "Other Attachments" section, as it is separated from the technical report and labeled as the bank's response to SAMA.
6- In the event that some required attachments are not available, sending a blank page is not sufficient. Instead, the bank must prepare a form explaining the reasons for the absence of those attachments to be included in place of the blank page.
Treasury Agreements
In terms of SAMA Circular dated 29th July 2000, Banks are required to have all their customer transactions for Treasury Products governed by the agreements specified thereunder.
In consonance with the ongoing global initiatives to improve transparency and regulatory oversight in financial markets and in order to adopt international standards and best practices and to achieve uniformity and standardization, Saudi Central Bank (SAMA) has finalized the revised Customer Agreements for Treasury Products in coordination with the Banks’ Treasurers Committee. Accordingly, in pursuance of Article 16 (3) of Banking Control Law, Banks are required to use the attached Customer Agreements in all their customer transactions for Treasury Products as applicable:
• ISDA Master Agreement and its schedule • ISDA/IIFM Tahawwut Master Agreement and its schedule
Banks are allowed to amend the schedules to the Master Agreements in accordance with the transaction type and/or customer profile as needed, however, no amendments are to be made to the text of the respective Master Agreements. Please note that these Customer Agreements are governed under Saudi Law and applicable for all such customer transactions where both the Bank and the Customer are domiciled in Saudi Arabia. Banks are required to use the new ISDA and/or ISDA/IIFM Master Agreements (as applicable) for all future transactions with new customers domiciled in Saudi Arabia. Furthermore, Banks are also required to replace all existing CTA agreements with the new ISDA and/or ISDA/IIFM Master Agreements (as applicable) as and when there is a new transaction with any existing customer domiciled in Saudi Arabia and in any case have all existing CTA Agreements replaced no later than 12 months from the date of this circular.
This circular comes into effect immediately and it supersedes our earlier circular dated 29th July 2000.
Guidelines For Selling Real Estate
Referring to the Council of Ministers Resolution No. (73) dated 12/03/1430 H approving the controls for the sale of real estate units off-plan, and the stipulation of Article (18) of the regulation issued by Ministerial Resolution No. (983) on 2/2/1431 H that "The developer and the account trustee shall prepare the following records:
- A record for each buyer that includes: the name of the buyer, the number of the unit sold, the value of the unit sold, the amount paid, the payments delivered.
- A record of the cash flows of the escrow account.
- A record of the construction payments for the project from the account and the documentary basis on which the disbursement process is based.
- A record of payments for administrative expenses or any other expenses. The Ministry shall be provided with a periodic statement of account on the movement of these records.
We hope to comply with the above-mentioned regulation.
Approval of Ownership Documents Issued by the Economic Cities Authority
SAMA received the letter of His Excellency the General Secretary of the Economic Cities Authority No. 190 dated 2/1/1433 H and No. 435 dated 12/7/1433 H and No. 525 dated 17/10/1433 H regarding the Authority's request to direct banks operating in the Kingdom to adopt the ownership document issued by the Economic Cities Authority for any property or land within the Economic Cities in accordance with Article (Fourteen) of the Economic Cities Organization issued by Royal Decree No. A/19 dated 10/3/1431 H and to adopt it as an official approved ownership document.
Accordingly, SAMA hopes that all banks operating in the Kingdom will adopt the title deed issued by the Economic Cities Authority for any owner of real estate or land inside the economic cities and adopt it as an official approved ownership document that replaces the approved title deed outside the economic cities.
Establishment of the Bilateral Complaint Handling Process (BCHP) on Compensation Practices
No: 331000031199 Date(g): 30/4/2012 | Date(h): 9/6/1433 Status: In-Force Compensation practices at large financial institutions were a key contributing factor to the global financial crisis. The FSB Principles for Sound Compensation Practices1 and their Implementation Standards2 (Principles and Standards, P&S) were developed to align compensation with prudent risk-taking, particularly at significant financial institutions. The October 2011 FSB Peer review on compensation practices3 found that concerns by the firms over inconsistent implementation of the P&S across jurisdictions might hinder their full adherence to the P&S and give rise to an uneven playing field in the market for highly skilled employees. The peer review report recommended the establishment of a bilateral complaint handling process (BCHP) among national supervisory authorities in FSB member jurisdictions to address level playing field concerns of individual firms. This recommendation was endorsed by G20 Leaders at their Cannes Summit in November 2011.
The purpose of this letter is to inform banks operating in Saudi Arabia of the main features of the BCHP and how it will be applied in Saudi Arabia. Under the BCHP, national supervisors will address evidence-based complaints raised by financial institutions that document a competitive disadvantage as a result of the inconsistent implementation of the P&S by firms headquartered in other jurisdictions, particularly with regard to Standards 6-9, 11 and 14.
The BCHP is effective immediately and will address complaints involving compensation practices that occurred since January 2012.
The BCHP is expected to generate evidence-based information on specific cases of inconsistent implementation of the P&S that have been brought to the attention of national supervisors and to encourage supervisory dialogue on these issues. Specific sources of concern relative to the application of the P&S will be verified and addressed by bilateral exchanges among supervisory authorities. Over time, the analysis of firm-specific cases is expected to provide more clarity on the application of the P&S across firms and jurisdictions.
Saudi banks wishing to file a complaint should provide to SAMA evidence substantiating why the specific compensation practice at the competitor firm located in another jurisdiction might be deemed to be inconsistent with the P&S. The complaint should include detailed information on the relevant elements of the pay package offered by the firm to the employee and (where available) elements of the pay package offered by the competitor firm. A difference in the level of pay is not in itself deemed to be evidence of an uneven playing field, nor are improvements in the pay package attributable to general career moves that involve promotions in title and level of responsibility. Annex I provides a template of the information required for filing the complaint.
SAMA will examine the information received and may request to discuss the information with the bank filing the complaint.
Complaints that are deemed by SAMA to be well substantiated based on the information provided will be brought by SAMA to the attention of the authority having supervisory responsibility for the competitor firm. The purpose of the bilateral exchange will be to share information on the specific source of concerns relative to the application of the P&S, in order to verify those concerns and to address them as needed. Under normal circumstances, the BCHP is expected to resolve the complaint within three months of the date it is brought to the attention of the supervisory authority having responsibility for the competitor firm. Once the process is concluded, the outcome of the complaint will be communicated by SAMA to the Saudi bank that has filed the complaint.
More information on the objectives of the BCHP and its main features, including on the treatment of confidential information submitted by the firms, as well as on public reporting by the FSB on compensation practices can be found on the FSB’s website (financialstabilityboard.org/activities/compensation/).
The BCHP complaints should be addressed to the Director of our Banking Supervision Department.
1 See financialstabilityboard.org/publications/r_0904b.pdf.
2 See financialstabilityboard.org/publications/r_090925c.pdf.
3 See financialstabilityboard.org/publications/r_111011a.pdfAnnex I
Information template to be completed by banks filing a complaint
1. Date the complaint is filed 2. Date(s) of the events that are the object of complaint 3. Identity of complaining bank (Firm 1) 4. Identity of firm that is object of the complaint (Firm 2) 5. Home jurisdiction of Firms 1 and 2 6. Jurisdiction where the complaint has arisen 7. Description of the complaint, including the specific P&S involved and the reason why the specific compensation practice is inconsistent with the P&S. 8. Nature and magnitude of the competitive disadvantage caused by the inconsistent application of the P&S 9. Information about the employee(s) at Firm 1 (rank, title, function, whether designated as Material Risk Taker) 10. If relevant, information on the employee(s) at Firm 2 (rank, title, function, whether designated as Material Risk Taker) 11. Information on relevant elements of the pay practices or package at Firm 1, including for example:
12. Information on relevant elements of the pay practices or package at Firm 2 (on a best effort basis), including for example:
• Actual payouts and bonus
• Relationship between fixed and variable remuneration
• Deferral arrangements
• Clawbacks
• Guarantees
• Actual payouts and bonus
• Relationship between fixed and variable remuneration
• Deferral arrangements
• Clawbacks
• Guarantees
If relevant elements of the pay package are not available, please provide other evidence that supports the complaint.
13. Other information (applicable in the case of an employee move), for example:
• Whether the firm can confirm that the difference in pay package is the most important / an important reason for an employee move.
• Whether the employee received a higher base salary, a higher expected bonus or a promotion in title by moving to the new firm.
Prudential Return on Small and Medium Enterprises (SMEs)
No: 331000014849 Date(g): 22/4/2012 | Date(h): 1/6/1433 It is generally accepted that Small and Medium Enterprises (SMEs) have great impact on the economic development in an economy. SMEs are not only a new source of employment, but also help develop managerial skills, create favorable economic environment and enhance competition. The importance of SMEs for further development of Saudi economy has been recognized by the Saudi Government and has also been emphasized in the 5-year national plans.
In order to determine the flow of financing to this important sector of the economy, the Agency wishes to collect quarterly information through the attached prudential return #Q.18 on the SMEs. The information to be provided includes the total credit facilities, as well as that component of the portfolio which is under the Guarantee Fund program (Kafalah Fund) operated by the Saudi Industrial Development Fund (SIDF).
For the purpose of these Returns, SAMA is adopting the following definitions:
1. Small Enterprises: Any Enterprise designed to generate profit with a maximum annual turnover of SR 30,000,000 (Only Thirty Million Saudi Riyals). This definition is also used by the SIDF and by the Saudi Credit Bureau (SIMAH). 2. Medium Enterprises: Any Enterprise designed to generate profit with a maximum annual turnover of SR 100,000,000 (Only One Hundred Million Saudi Riyals).
The Banks are required to complete items 2 and 3 of this return effective 1st July 2012 and submit the quarterly Prudential Return from the quarter ending 30 September 2012, within 30 calendar days of the end of the quarter. For item 1, the Banks are required to complete this section from 1st January 2013 and submit it as at 31st March 2013. This extra period is being granted to facilitate the development and implementation of systems to collect this data.
SAMA Banking Supervision Department Prudential Returns on Small and Medium Size Enterprises Data as at the End of (xxx)
Q.18
SMALL MEDIUM Value in SR Millions No. of Accounts Value in SR Millions No. of Accounts 2012 2011 2012 2011 2012 2011 2012 2011 1 Funding _____ _____ _____ _____ _____ _____ _____ _____ 1.1 Demand Deposits _____ _____ _____ _____ _____ _____ _____ _____ 1.2 Savings Deposits _____ _____ _____ _____ _____ _____ _____ _____ 1.3 Time Deposits _____ _____ _____ _____ _____ _____ _____ _____ 1.4 Others _____ _____ _____ _____ _____ _____ _____ _____ 1.5 Total Deposits _____ _____ _____ _____ _____ _____ _____ _____ 1.6 Type of Customer _____ _____ _____ _____ _____ _____ _____ _____ 1.6.1 Sole Proprietor _____ _____ _____ _____ _____ _____ _____ _____ 1.6.2 Partnership _____ _____ _____ _____ _____ _____ _____ _____ 1.6.3 Joint Stock Company _____ _____ _____ _____ _____ _____ _____ _____ 2. Assets _____ _____ _____ _____ _____ _____ _____ _____ 2.1 Credit Facilities (Outstanding) _____ _____ _____ _____ _____ _____ _____ _____ 2.1.1 Bill's discounted _____ _____ _____ _____ _____ _____ _____ _____ 2.1.2 Overdrafts _____ _____ _____ _____ _____ _____ _____ _____ 2.1.3 Loans and advances _____ _____ _____ _____ _____ _____ _____ _____ 2.2 Off Balance Sheet Items (Outstanding) _____ _____ _____ _____ _____ _____ _____ _____ 2.2.1 Letters of Credit1 _____ _____ _____ _____ _____ _____ _____ _____ 2.2.2 Guarantees' _____ _____ _____ _____ _____ _____ _____ _____ 2.2.3 Commitments' _____ _____ _____ _____ _____ _____ _____ _____ 2.2.4 Others _____ _____ _____ _____ _____ _____ _____ _____ 2.2.5 Total of 2.2 _____ _____ _____ _____ _____ _____ _____ _____ 2.3 Total of 2.1 and 2.2 _____ _____ _____ _____ _____ _____ _____ _____ 2.4 Credit Facilities by Sectors _____ _____ _____ _____ _____ _____ _____ _____ ■ Agriculture and Fishing _____ _____ _____ _____ _____ _____ _____ _____ ■ Manufacturing and Processing _____ _____ _____ _____ _____ _____ _____ _____ ■ Mining and Quarrying _____ _____ _____ _____ _____ _____ _____ _____ ■ Electric, Water, Gas, Health Services _____ _____ _____ _____ _____ _____ _____ _____ ■ Building and Construction _____ _____ _____ _____ _____ _____ _____ _____ ■ Commerce _____ _____ _____ _____ _____ _____ _____ _____ ■ Transport and Communication _____ _____ _____ _____ _____ _____ _____ _____ ■ Finance _____ _____ _____ _____ _____ _____ _____ _____ ■ Services _____ _____ _____ _____ _____ _____ _____ _____ ■ Miscellaneous (Retail) _____ _____ _____ _____ _____ _____ _____ _____ 2.5 Provisions for Losses (outstanding balance)2 _____ _____ _____ _____ _____ _____ _____ _____ 2.6 Non-performing Credits _____ _____ _____ _____ _____ _____ _____ _____ 3. SIDF Loan Guarantee Program _____ _____ _____ _____ _____ _____ _____ _____ 3.1 Outstanding Loans and Advances _____ _____ _____ _____ _____ _____ _____ _____ 3.2 Loan Defaults (during the period) _____ _____ _____ _____ _____ _____ _____ _____ 3.3 Losses taken by the Bank (during the period) _____ _____ _____ _____ _____ _____ _____ _____ 3.4 Losses taken by the SIDF (during the period) _____ _____ _____ _____ _____ _____ _____ _____ 1 Note: number of Accounts at the end of the period.
2 Note: Specific ProvisionsSAMA Banking Supervision Department Small and Medium Size Enterprise
Guidance Notes
1. This return is to be completed by All Banks in Saudi Arabia and submitted to Saudi Central Bank, Director of Banking Supervision Department, on a quarterly basis within 30 calendar days from the end of the quarter.
2. Banks that are not receiving funding or are not lending to SMEs may submit a Nil Return.
3. Funding:
2.2.1 to 2.2.4 These may be number of accounts outstanding at the end of the period.
4. 2.5 These are outstanding specific Provisions for losses on SME portfolio.
5. 3.2 This line is for loan default during the reporting year.
6. The Amounts or values or account numbers reported should be as of and outstanding at the Quarter end. For period end numbers, these should be accumulated on a year-to-date basis. (For example, in case of a 30 June reporting period, the as of balance at 30 June should be reported. The periodend numbers should be year-to-date for the six months.)
7. No comparatives are required in the first year of reporting.
Request for Granting Access to Work on SAMANet System
No: 331000000137 Date(g): 4/4/2012 | Date(h): 13/5/1433 This section is currently available only in Arabic, please click here to read the Arabic version.
The Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Guide
Based on the supervisory and regulatory role of the Central Bank, and its commitment to protecting the financial sector and its reputation from misuse in money laundering or terrorism financing operations, and based on the powers granted to the Central Bank under Article 24 of the Anti-Money Laundering Law issued by Royal Decree No. (M/20) dated 5/2/1439 H, and Article 82 of the Anti-Terrorism and Financing Law issued by Royal Decree No. (M/21) dated 12/2/1439 H.
Referring to the Anti-Money Laundering and Terrorism Financing Rules for banks, exchange offices, and branches of foreign banks (third update) issued under Circular No. 18147/M.A.T/9201 dated 4/4/1433 H, the Anti-Money Laundering and Terrorism Financing Rules for financing companies (first update) issued under Circular No. 18516/M.A.T/9253 dated 6/4/1433 H, and the Anti-Money Laundering and Terrorism Financing Rules for insurance and reinsurance companies and liberal professions (first update) issued under Circular No. T.A.M 22/201202 dated 7/4/1433 H.
The attached Anti-Money Laundering and Terrorism Financing Guide includes the minimum requirements of the Anti-Money Laundering Law and the Anti-Terrorism and Financing Law that financial institutions must adhere to, replacing the aforementioned rules. Financial institutions must present the guide to their board of directors and define responsibilities for the board, senior management, and employees regarding the guide, as well as raise awareness among their staff about their obligations as outlined in the guide.
Security Safety Committees
In reference to the Ministry of Interior's circular No. 2058/ض/ر dated 28/11/1411H, regarding the formation of a committee in each region consisting of a representative from the regional emirate, the regional police, and the central bank to conduct field inspections of all banks to ensure their security status and to submit a report to the regional emirate.
We would like to inform you that the work of these committees is specifically related to security and safety, without the need to enter the tellers' and treasury areas in the bank branches. These rounds should be conducted during the official working hours of the banks, and the bank manager or their representative should be informed of this task. It is emphasized that if these committees need any data related to security guards, cash transport, or any matters related to the services provided by private companies (security guard companies or cash transport companies), they must refer to the supervising security authorities.
We hope you review and inform all branches of the bank to cooperate with those committees and facilitate their task.
Emphasis on GA, PI, PC, or Companies Contributing to Them, and JSC's Requiring Their Employer to Submit a Certificate From the Competent Insurance Office Confirming That Their Establishment is Registered in the Institution
SAMA has received a letter from the esteemed Governor of the General Organization for Social Insurance, No.177896/5 M dated 19/11/1432H, referring to the two circulars issued by the Supreme Authority, No. 7907/MB dated 11/10/1429H, and No. 4325/MB dated 10/06/1427H. emphasizing on all ministries, governmental departments, authorities, public institutions, and related entities, along with state-owned or state-contributed companies, and joint-stock companies, to comply with the provisions of paragraph (6) of article (19) of the Social Insurance Law issued by Royal Decree No. (M/33) dated 03/09/1421H. which stipulates that government entities, public institutions, and state-owned or state-contributed companies, as well as joint-stock companies, must require employers dealing with them to present a certificate issued by the relevant social insurance office proving that the employer's establishment is registered with the organization and has fulfilled all its obligations, or that it is not subject to the provisions of this law, in the following situations:
1- Applying to receive his entitlements in accordance with the procedures and rules followed in collecting the rights of the Zakat and Income Authority. 2- Submitting any bid for the execution of any projects related to works, supply, operation, or maintenance. 3- Submit a request to amend, renew, or add any information to your commercial registration. 4- Applying to receive the assistance granted to him by the state. 5- Consider the liquidation of the employer's facility or facilities. 6- Submitting a request to the competent authorities for approval to recruit workers from abroad. 7- Applying for a license for any project or when renewing this license. SAMA hopes to comply with the provisions of the law and the two circulars issued by the supreme authority mentioned above and requires from employers who contract with banks to carry out projects specific to the banks to provide a certificate issued by the relevant social insurance office proving that the establishment is registered with the General Organization for Social Insurance and that it has fulfilled all its obligations towards it. SAMA should be informed of the measures taken in this regard.
Including in Official Correspondence the Name and Job Title of the Approver
It was noted that some banks do not mention the job title of the accredited official writings issued by them, and this violates the principles recognized in official dealings, and the importance of including the name of the accredited and his job position in the book for his contribution to providing one of the necessary requirements for documentation.
Therefore, SAMA emphasizes to all banks operating in the Kingdom the necessity to mention the name of the letter's authorizer and his job title in the official correspondence with SAMA or customers and other parties, and we hope to emphasize that the specialists and those authorized to approve all official correspondence must abide by that.
Procedures for Settling Claims and Complaints for Saudi Network Operations Gulf Network Instructions for Exceptional Cases
No: 321000027331 Date(g): 30/10/2011 | Date(h): 3/12/1432 Translated Document
SAMA noticed the large number of complaints from bank customers using ATMs and POS machines, and after SAMA studied these complaints, it became clear that most of them are due to the banks' failure to comply with the instructions for settling ATM and POS transactions through the CPS system for processing claims. In order to ensure that banks provide their banking services through electronic channels in a way that ensures the quality of the service provided to customers.
SAMA hopes that banks adhere to the instructions previously issued in this regard, especially Circular No. 19886/MA/214 dated 1/8/1414 H, Circular No. 8504/MA/353 dated 10/7/1415 H and Circular No. 2193/MAT/102 dated 13/2/1419 H. SAMA is keen to ensure that customers recover the amounts of their stalled transactions through ATMs and POS terminals promptly. SAMA issued the document accompanying this circular, which includes the procedures for settling claims and complaints for the operations of the Saudi network and the Gulf network and the instructions for exceptional cases, and we hope that everyone will comply with what is stated therein.
For your information and action, and to inform SAMA of the Bank's action plan within a timetable to implement what is stated in the document within a month from the date of its issuance.
Saudi Network Clearing and Settlement
Saudi Network Operations Clearing: A procedure carried out by the Saudi Network to settle the amounts of daily transactions executed through the Saudi Payments Network (SPAN) for all banks operating in the Kingdom within 24 hours according to the working day of the Saudi Network.
SPAN sends the output of the clearing amounts for POS and ATM operations to the SARIE system to settle them on the bank's account by debiting or crediting according to the nature of the entry (the amount represents the net between the amounts of the bank's card operations and the amounts of the bank's machine operations). The result of clearing operations is credited to the bank's account at the institution for each business day on a daily basis, except for weekends and public holidays of the operating banks.
Network reports and reconciliations
1. Operations Reports:
Banks upload detailed reports of daily operations through the SPAN Web Website and perform daily reconciliations between the bank's reports and the Saudi Network's reports automatically and reconcile the differences, if any, through the CPS claims system.
2. Fee reports:
Banks upload daily fee reports for SPAN and other card transactions through the SPAN Web Website and monitor them on a monthly basis, taking into account interchange fees for ATM and POS transactions.
3. Clearing reports:
Banks perform daily reconciliations between the Saudi Network's clearing and the banks' internal reports and notify the Saudi Network of any discrepancy resulting from the reconciliations within seven working days from the date of the day of the transaction in question.
Automated Claims Processing System for Saudi Network Operations (CPS)
The Saudi Network Processing System delayed due to operational or human reasons is a specialized system that connects all operating banks participating in the Saudi Network to each other to exchange customer claims between banks in an automated and real-time manner through terminals at all participating banks. The Saudi Network settles the outcome of the claims amounts through a fast system on a monthly basis on the banks' accounts with SAMA.
Procedures for the exchange of claims between banks
1. Issuing Banks: 1,1 The claim shall be submitted within a maximum of two working days from the date of the customer's objection to the transaction after confirming the integrity of the transaction in SAMA's reports. In case the transaction is not recognized in SAMA's reports, the issuing bank will credit the transaction amount to the client's account within one working day. 1,2 Issuing banks can request the Saudi network administrators to open any claim that has been subjectively rejected by the host banks through the CPS system and attach supporting documents to support the invalidity of the rejection. 1,3 Credit the amounts of accepted and paid claims submitted by host banks to customer accounts within one business day from the date of receipt of the response. 1,4 Issuing banks can inform the Saudi network administrators about host banks that have not complied with the objective response to claims after confirming that the rejection is incorrect so that SAMA can take the appropriate action for each case. 2. Acquiring Banks: 2,1 Objective response to the card-issuing bank customers claims within a maximum of seven working days from the date of receipt of the claim, and in case the claim is rejected, the documents (ATM tape and Saudi Network report) supporting the rejection of the claim must be submitted via the CPS system. 2,2 Pay the increases resulting from ATM inventories to the issuing banks and do not wait for a claim from them. 3. Eligibility of Saudi Network users to file a claim:
The customer has the right to file a claim within a maximum of one hundred and eighty days from the date of the withdrawal or purchase, and the merchant has the right to file a claim within a maximum of ninety days from the date of the purchase through the CPS system.
GCC Network Clearing and Settlement
GCC Network Transaction Clearing: A procedure carried out by the Saudi Network to settle the amounts and fees of the daily operations carried out through the cards issued by banks operating in the Kingdom on the Gulf networks, as well as the settlement of the amounts and fees of the operations of the customers of the Gulf networks on the SPAN devices of all banks operating in the Kingdom within 24 hours according to the working day of the Saudi Network.
The Saudi Network sends the result of the clearing amounts for GCC Network operations to the SARIE system for settlement on bank accounts by debiting or crediting according to the nature of the entry (the amount represents the net between the amounts of network card operations on GCC Network devices and the amounts of Saudi Network devices operations using cards issued by the GCC Networks). The result of clearing operations is credited to the banks' accounts at SAMA for each working day on a daily basis, except for weekends and public holidays of the operating banks.
GCC Network Reports and Matching Processes
1. Operations reports:
Banks upload daily reports through the SPAN Web Website and perform daily reconciliations of bank reports and SPAN reports automatically in a manner deemed appropriate by the banks.
2. Clearing reports and reconciliation process:
Banks perform daily reconciliations between network reports and internal bank reports and notify Saudi Network of any discrepancies resulting from the reconciliations within seven business days from the date of the day of the transaction in question.
Claims Processing System for Gulf Network Operations on its website
The GCC Network Claims Exchange System delayed due to operational or human reasons is a specialized system that links all participating GCC banks and networks with each other to exchange customer claims between banks and networks in an automated manner through the GCC Network website. The Saudi network settles the outcome of the claims amounts through "SARIE" system after determining the due dates for them from the Saudi network.
Procedures for exchanging claims through the Gulf Network website
1. Issuing Banks: 1,1 Claims shall be submitted within a maximum of two working days from the date of the customer's objection to the transaction after verifying the integrity of the transaction in the institution's reports. In the event that the transaction does not appear in the institution's reports, the bank will credit the transaction amount to the customer's account within one working day from the receipt date of the reports. 1,2 Accepted claims and payment amounts submitted by Gulf Networks are credited to customers' accounts within one business day from the receipt date of the response. 1,3 Local banks shall inform the Saudi Network about any member of the Gulf Network in case of failure to objectively respond to claims after ensuring that the rejection is not valid, so that the Saudi Network can take whatever action it deems appropriate. 2. Acquiring Banks: 2,1 Host banks must objectively respond to the claims of GCC Network customers within a maximum period of fourteen working days from the date of receipt of the claim, and in case the claim is rejected, the documents (ATM tape and Saudi Network report) that support the rejection of the claim must be submitted via the GCC Network's website. The network will deduct the amounts of the claims that the bank fails to respond to within the specified period of fourteen working days. 2,2 Paying all overages resulting from ATM inventories to their owners who are customers of other GCC networks and not waiting for a claim from them. 2,3 Host banks can submit claims for reversed transactions after confirming that the GCC Networks customers have received their amounts and have not been credited to their account, within a maximum period of fifteen working days from the date of the transaction, provided that the host banks submit the documents that support the reversal process, namely the device tape of the transaction and SAMA report documenting the reversal of the transaction in the records of SAMA through the GCC Networks website. Special Cases in Saudi Network Users' Claims
a) The reversal of the cash denomination boxes during the feeding of the ATM and the occurrence of a shortage at the host bank (Acquirer Bank) and customers receiving more than the required amounts (Wrong Cassette): After proving the reversal of the boxes and officially informing SAMA, the host bank can claim the issuing bank of the card through the CPS system to recover the amount of the deficit within a maximum period of fifteen working days from the date of the error, indicating that this claim (Wrong Cassette) in the notes field, and the issuing bank is not entitled to accept the claim unless it takes written consent from the customer to deduct the amount from his account, and in case the customer refuses or does not have sufficient balance in his account, the host bank bears the result of the error and can recover the amount from the customer through regular methods outside the CPS system. b) A reversal of the transaction (after the customer has received the amount from the ATM, and therefore not credited to the host bank's account) (ATM false reversal): The host bank can claim the issuing bank of the card through the CPS system to recover the amount of the deficit within a maximum period of fifteen working days from the date of the transaction, provided that the type of claim (False Reversal) is selected in the CPS system, and in case there is not enough balance in the customer's account, the host bank bears the result of the error and can recover the amount from the customer through regular methods outside the scope of the CPS system. c) A reversal of the transaction (after the customer has received the purchases from the POS merchant and the amount is not credited to the merchant's account) (POS false reversal): The host bank can submit a claim on behalf of the merchant to the issuing bank of the card through the CPS system to recover the amount of the deficit within a maximum period of ninety days from the date of the transaction, provided that the claim type (False Reversal) is selected in the CPS system, and if there is not enough balance in the customer's account, the issuing bank of the card bears the full amount, and the issuing bank of the card can recover the amount from its customer through regular methods outside the scope of CPS. d) The merchant enters an amount less than the original transaction amount (Amount undervalued) and incurs a deficit due to the difference between the original amount and the amount entered at the point of sale (Amount undervalued): After proving the merchant's error according to the rules and regulations, the host bank can claim the issuing bank of the card through the CPS system to recover the amount of the deficit within a maximum period of ninety days from the date of the error, provided that the claim type (Wrong Amount) is selected in the CPS system, and the issuing bank is not entitled to accept the claim until after taking written consent from the customer to deduct the amount from his/her account. In case the customer refuses or does not have sufficient balance in his account, the merchant shall bear the result of the error and can recover the amount from the customer through regular methods outside the CPS system. e) Reverse transactions and the issuing bank's inability to receive and process these transactions: In this case, the issuing bank of the customer's card must deposit the amounts of these transactions to the accounts of the affected customers directly and automatically after receiving the details of these transactions from the Saudi Network. f) The existence of troubled operations at the host bank that led to the deduction of amounts from customers' accounts and their failure to receive the required amounts: If the amount of such transactions for one business day exceeds SAR 500,000 or 100 withdrawals, the host bank for the withdrawals must prepare a list for all issuing banks, including the details of the transactions at issue, and authorize the Saudi Network to deduct from the host bank's account and add to the accounts of the issuing banks. The host bank must prepare these lists and send them to all issuing banks within seven working days from the day the issue occurred. The issuing banks are obligated to deposit the amounts of these transactions in the customer accounts within two working days of receiving the details of these transactions. g) Cash returned by the ATM: If the amount of the transaction is returned to the Returned Amounts Fund and is visible on the ATM tape, the Host Bank shall be liable for the full amount unless otherwise proven by physical evidence. Use of the Word ‘Bank’ in Adverts for Bank-Affiliated Brokerage Firms
Referring to Article V of the Banking Control Law, which stipulates that "Any person not authorized basically to carry on banking business in the Kingdom is not allowed to use the word "Bank", or its synonyms, or any similar term in any language on his papers or printed matter, or in his commercial address, or his name or in his advertisements."
We would like to inform you that SAMA has recently noticed that persons licensed by the Capital Market Authority use the word "bank" in their visual and written advertisements. Accordingly, SAMA stresses that all banks operating in the Kingdom and their subsidiaries must comply with the provisions of Article V of the above-mentioned Banking Control Law.
Rules and Requirements for Contracting with Civil Security Companies and Institutions
Further to SAMA's Circular No. BCI/811 dated 1/11/1428 H, attached is a copy of the Law of Private Security Services and its implementing regulations, to ensure the effective performance of private security guards in the banking sector, we hope to include the following conditions and requirements in contracts with private security companies and institutions:
- Security guards of the company/institution must be trained and hold training and qualification certificates from the General Security Training Centers or accredited training centers.
- The working hours of the civil security guard should comply with the Ministry of Labor's Decision No. (142) dated 21/9/1416 H.
- The company/institution must have experience in providing private security services.
- Adherence to the uniform dress code for the activity according to the relevant instructions and regulations.
- Provide a certificate from the competent General Security authority indicating that there are no observations or violations against the company/institution.
- The contract for private security must be independent of any other contracts and should not be included in contracts for cleaning, maintenance, or operations specifically.
- Provide a certificate of social insurance subscription for all security personnel in the company or institution.
- Provide health insurance for all security personnel.
- Create shaded and air-conditioned booths with services for external security locations.
- The company or institution must obtain certificates proving the absence of criminal records for its guards and staff.
- The company or institution must provide all necessary equipment for private civil security guards, including wired and wireless communication devices, firearms, electric or wooden sticks, security patrol vehicles, or any other equipment as needed at the site.
Definition of Nomadic Numbers
Referring to the letter from his Excellency the Governor of the Communications and Information Technology Commission, No. 2335, dated 12/2/1432H, regarding the nomadic telephone service and the regulations for its use, and based on the tasks and responsibilities of the Communications and Information Technology Commission as specified in Telecommunications Law* and its implementing regulations, the commission has licensed for a number of fixed communication service providers, approved the structure of roving communication service numbers, and set their usage guidelines. The roving telephone service is one of the fixed communication services that allows the subscriber to benefit from the provider's services without being tied to a specific geographic location, enabling the user to move the terminal used for communication between different locations. The approved roving phone numbers are in line with relevant recommendations from the International Telecommunication Union and consist of 11 digits starting with (08).
The commercial introduction of mobile phone services was carried out in the Kingdom by licensed service providers, and their numbers began to be used as contact numbers for their subscribers. However, it has been observed that the information technology systems in some government and private sector entities are not compatible with the structure of mobile numbers. Consequently, these entities refuse to register these numbers in their systems due to the difference in the number of digits compared to mobile and landline numbers (11 digits). This has led to complaints and dissatisfaction among the users of these numbers, subsequently affecting their interests.
SAMA hopes that the operating banks in the Kingdom will review and update their systems to comply with the requirements of the Communications and Information Technology Commission.
* The Telecommunications Law, issued by royal decree No. (M/12), dated 12/03/1422H, has been replaced by the Law of Telecommunications and Information Technology, issued by royal decree No. (M/106), dated 02/11/1443H.
Pens Whose Ink Disappears After a Short Time
SAMA received the letter of His Excellency the Director of Public Security No. 3/8156 dated 04/07/1432 H, which includes that Chinese-made pens have currently appeared in the Kingdom that do not differ in shape from ordinary pens, but their ink is of the pilot type, as it disappears from papers and others after writing in it within a period extending from an hour to several days of writing and is called magic pens, and these pens can be written on any type of paper, plastic and hard surfaces.
In view of the possibility of using these pens in fraudulent operations in official, banking, commercial and financial papers, contracts and other documents, making them worthless and exposing banks and their customers to high risks.
SAMA hopes to be cautious against the use of these pens when writing or dispensing checks and bank documents, take appropriate preventive measures, provide pens for official use during work, educate customers about the dangers of using this type of pens and take the necessary precautions to avoid falling victim to bad faith.
Property Ownership for Non-Saudis under Mortgage Contracts
SAMA received the telegram of His Royal Highness the Second Deputy Prime Minister and Minister of Interior No. 67570 dated 21/6/1432 AH, regarding the receipt of a number of applications for ownership of real estate for non-Saudis under the installment system and leasing ending with ownership through banks operating in the Kingdom before the issuance of approval from the Ministry, which is contrary to Article 2 of the Law of Real Estate Ownership and investment by Non-Saudis issued by Royal Decree No. M/15 dated 17/4/1421 H, which states (Non-Saudi natural persons legally residing in the Kingdom shall be allowed to acquire real estate for their private residence, after obtaining permission from the Ministry of Interior.).
Therefore, no real estate financing contract that would lead to non-Saudis owning the property should be made without the prior approval of the Ministry of Interior, and this should be included in the bank's regulations and procedures, and inform within one month from its date of what has been taken.
Instant SMS Notification Service
Referring to the steady increase in the use of electronic channels by banks operating in the Kingdom and in continuation of what has been implemented in SAMA's Circular No. 40690/MAT/789 dated 15/08/1430 H regarding the application of multiple identity verification standards for electronic banking services and in the interest of SAMA in continually enhancing the level of protection for banking services provided to customers by banks operating in the Kingdom, and continuing to SAMA's approach for adopting the latest globally applied protection technologies in this regard (Best Practice), and given that providing instantaneous notification services to customers through SMS can help reduce financial fraud crimes, in addition to increasing the level of trust in banking channels (E-Trust) and enhancing the level of transparency between banks and their customers , and after studying the recommendations of the Banking Committee for Information Security (BCIS) on the subject.
We inform you that the bank must implement an automated notification service through SMS for all banking transactions conducted on personal bank accounts and credit card accounts (both credits and debits), while taking precautionary measures to prevent the misuse of the content of the text messages sent to customers, including, for example, the following procedures:
- The current account balance is not included in the text message.
- Masking the full credit card number, current account number, or ATM card number in accordance with the specifications outlined in the Payment Card Industry Data Security Standard (PCI DSS).
- The text should include the date, time, amount, and type of transaction.
- The bank is committed to automatically activating the service for all customers, while notifying them of the option to request its cancellation in writing if they do not wish to have it.
- To provide the service to all bank customers without charging them any additional fees, while taking into account the need to inform customers before implementing it.
- Adherence to the implementation of these requirements must be completed by no later than 1/9/2011G.
Follow-up Circular - Regarding the Necessity of Adhering to the Confidentiality of Banking Information-1432
Referring to SAMA circular No. BCI/150, dated 29/6/1422 H, No. BCI/97, dated 13/03/1424 H, No. BCS/207 dated 05/03/1430H, No. BCI/15969, date 03/07/1431H and all previous circulars concerning the mechanisms of disclosure of banking data and information, and the emphasis of adhering to not providing any information about customers except after addressing SAMA and obtaining a non-objection.
In the interest of ensuring that banks comply with the directive not to provide any local or foreign entities (such as international payment companies) with information about customers' transactions and personal data, based solely on the presence of the logo of those entities on some banking products, including bank cards, SAMA wishes to emphasize the necessity of adhering to the aforementioned circulars. It is imperative not to disclose customers' data and transactions except after consulting SAMA and obtaining its approval.
For information, we hope to fully comply with the aforementioned and instruct the relevant administration to verify that the various departments and branches of the bank adhere to its content and provide feedback within a month from its date.
Notification to SAMA
A Bank must notify SAMA immediately it becomes aware, or has information which reasonably suggests, that any of the following has occurred, may have occurred or may occur in the foreseeable future:
(1) The Bank failing to satisfy one or more of its license conditions; or
(2) Any matter which could have a significant adverse impact on the Bank's reputation; or
(3) Any matter which could affect the Bank's ability to continue to provide adequate services to its customers and which could result in serious detriment to a customer of the Bank; or
(4) Any matter in respect of the Bank which could result in serious financial consequences to the financial system or to other Banks; or
(5) Any breach of Rules and or Regulations by the Bank; or
(6) Any civil or criminal proceedings are brought against the Bank and the amount of claim is significant in relation to the Bank's financial resources and or its reputation; or
(7) Any disciplinary measures and or sanctions have been imposed on the Bank by any statutory or regulatory body both inside and or outside the Kingdom: or
(8) Any event which has or may have a significant impact on the Bank's financial condition and or ability to provide services to its customers.
In determining whether an event that may occur in the foreseeable future should be notified to SAMA, a Bank should consider both the probability of the event happening and the severity of the outcome should it happen.
A notification under the aforementioned requirement may be given orally to SAMA (depending on the urgency and severity of the event) to be followed by a written confirmation.
It is the responsibility of the Bank to ensure that matters reported to SAMA are properly and clearly communicated within 2 working days.
Guidelines for Combating Counterfeit Letter of Credit
The Ministry of Finance has received reports from certain government entities regarding the increasing phenomenon of forged or falsified letters of guarantee when submitted by the beneficiary government entities to the banks alleged to have issued them. To protect the rights of government entities and mitigate potential risks to the banking sector from the spread of this issue, the guidelines for combating the forgery of letters of guarantee are attached.
We request compliance with these guidelines, incorporating them into the bank's systems and procedures, and providing feedback within one month from the date of this notice regarding the actions taken.
Guidelines for Combating the Forgery of Letters of Guarantee
1- Restrict the issuance of letters of guarantee to the headquarters, regional offices, and main branches only. 2- The bank must establish an effective internal control system specifically for the issuance of letters of guarantee, including dual control mechanisms, to combat internal forgery attempts. 3- Issuing the letter of guarantee on documents bearing the name of the issuing bank, featuring high-security attributes such as: - Special Security Features That Are Tamper-Proof
- Special inks.
- Electronic Seals.
- Embossed Features for Text and Signature.
- Using Encoding and Authentication Machines (checker).
4- Include Contact Information in the Letter of Guarantee:
The letter of guarantee must include the following contact details (Phone number, Fax number, P.O. Box, Email address). This information enables the beneficiary to verify the authenticity of the letter of guarantee using the designated verification form, a copy of which is attached.
5- Promptly respond to requests from beneficiary entities to verify the authenticity of submitted letters of guarantee and establish internal procedures to ensure the effectiveness of this process. 6- The beneficiary entity is responsible for monitoring the letter of guarantee and verifying its details in coordination with the issuing bank. 7- The bank shall retain a certified true copy of the letters of guarantee issued by it in its records. 8- The letter of guarantee may be canceled during its validity period based on an official request submitted to the bank by the beneficiary entity, accompanied by the original letter of guarantee and any amendments, if applicable. - Reporting Fraud and Forgery in Letters of Guarantee:
a- Respond to the government agency requesting verification of the authenticity of the letter of guarantee by immediately denying its authenticity and requesting them to report it to the investigation authorities in order to preserve their rights.
b- Reporting the forgery incident to the competent security authorities (district police) to ensure that it is investigated in accordance with the established regulations.
c- Notify and provide the Bank Inspection Department at SAMA with a copy of the bank's report to the competent security authorities, a copy of the invalid bank guarantee letter, and a technical report on the forgery incident. d- The bank must develop mechanisms to facilitate and encourage customers to report suspected forgery cases. Subject: Verification of Guarantee Data
Sirs/Bank
Peace and blessings be upon you,
We kindly request your confirmation regarding the authenticity of the following guarantee(s) issued in our favor on behalf of the entity named in the guarantee. A copy of the guarantee(s) is attached for your reference:
Issuing Order Guarantee No. Date Validity Amount Purpose Provide us with a response as soon as possible on fax ext. no:
For inquiries telephone:
Beneficiary Name Beneficiary Seal
________________________________________________________________________________________________________________________
Honorable/ Director
Having examined the guarantee provided to you, we inform you that the (guarantee(s) shown above:
( ) are valid, and is on the beneficiary of the original letter.
( ) There is no data for the above guarantees in the bank's records, and the relevant authorities should be notified accordingly.
( ) Other information.
Telephone: Fax:
Authorized Signatories Seal of the Bank
Guidelines To The Financial Entities Regarding Making Calls To Consumers To Collect The Debts
Further to SAMA Circular No. 17456/MAT/8211 dated 01/03/1431H regarding the regulation of bank employees' communication with customers to urge them to pay their outstanding debts, and due to complaints received by SAMA from bank customers indicating that they were threatened by collection employees working for the banks or contracted with them, with the intent to record remarks on their credit records with the credit information company "SIMAH" to pressure them into settling their debts.
SAMA would like to emphasize the necessity of adhering to the provisions mentioned in the above circular and for banks to refrain from involving the name of SAMA or credit information companies or any other supervisory authorities in the communications of debt collectors with customers.
Raising Awareness of Elderly and Illiterate Customers when Dealing with Cash and Using ATMs
This section is currently available only in Arabic, please click here to read the Arabic version.Not to Block Stipends and Social Benefits
SAMA received inquiries from banks regarding requests for seizure of accounts received from SAMA, indicating that some accounts receive deposits of children's academic stipends in Quran memorization schools, social security entitlements, and the like, and requested guidance regarding enabling the customer to withdraw these bonuses similar to the monthly salary.
We inform you that Article (20) of the Civil Service Law stipulates that the percentage of seizure does not exceed one third of the employee's net salary except for alimony debt, and for the retiree, Article (37) of the Civil Retirement Law stipulates that the percentage of attachment does not exceed a quarter of his net salary, and as for children's educational stipends, they belong to the children of the owners of these accounts and are deposited in the accounts of their parents as they are their legitimate guardians and guardians of their affairs, in addition to the fact that social security entitlements are subsidies paid by the state to their beneficiaries in accordance with certain conditions and controls.
Therefore, social security entitlements and the like and children's stipends of those whose accounts are seized should not be seized unless SAMA's request stipulates otherwise.
To comply with.
Appointment of External Auditors and their Coordination With SAMA
Based on Article 14 of the Banking Control Law and the important role that the external auditor plays in supporting supervisory efforts over banks, and with the aim of enhancing the concept of oversight and role integration between SAMA and external auditors, banks must include in the contracts they sign with external auditors a clause obligating the external auditor to coordinate directly with SAMA as the supervisory and regulatory authority over banks. This includes providing SAMA with any information regarding the banks under review, and notifying it of any violations or non-compliance with applicable regulations or instructions, or any observations related to supervisory aspects that may affect the performance and reputation of the banks. This should be done through a quarterly report sent directly to SAMA. The external auditor bears full responsibility towards SAMA in the event of lack of transparency or incompleteness of the necessary information included in the report.
I hope you acknowledge and act accordingly starting from the beginning of the 2011 fiscal year. SAMA also hopes to be informed of the measures that will be taken in this regard.
Principles for Enhancing Corporate Governance
The Basel Committee on Banking Supervision (BCBS) has issued its finalized document entitled "Principles for enhancing corporate governance". This paper sets out best international practices concerning corporate governance and suggests that banks should use the Principles as a reference point for their own corporate governance efforts. The key areas where the Committee believes the greatest focus is necessary are; board practices, senior management, risk management and internal controls, compensation, complex or opaque corporate structures, disclosure and transparency. The principles also stress the importance of board and senior management having a clear knowledge and understanding of the bank's operational structure and risks. This includes risks arising from special purpose entities or related structures.
The BCBS document maybe obtained from the BIS website.
Providing Bank Customers Their IBAN Numbers
In reference to SAMA's instructions regarding dealing with the International Bank Account Number (IBAN), we would like to inform you that banks can provide their clients with the IBAN and verify it to avoid errors that arise from its manual entry. This should be done according to one of the following:
First: Fill out the bank's part in the claims settlement form (retirement or any type prepared by the government or private entity) provided that the required information does not exceed the following: 1. Client's name and civil registration number or residency number. 2. Account number and International Bank Account Number (IBAN). 3. Bank name and branch. 4. Signature of the responsible employee and bank stamp. No other financial or credit information should be recorded. Second: Issue an electronic certificate on the bank's letterhead provided to the client (retired or otherwise) to present to the relevant authority, ensuring this certificate contains the following information: 1. The entity to which the certificate is addressed. 2. Client's name and civil registration number or residency number. 3. Account number and International Bank Account Number (IBAN). 4. Signature of the responsible employee and bank stamp. The certificate should not include any other financial or credit information. Disclosure of Banking Information and Data
Reference to SAMA circulars No. BCI/150 dated 29/6/1422H, BCI/97 dated 13/3/1424H, and number BCS/207 dated 5/3/1430H, and the previous circulars regarding the necessity of adhering to the rule of not providing any financial or banking information about bank customers or their banking transactions except through SAMA, and that SAMA should be immediately notified of any requests made directly to the banks in this regard, and to obtain prior approval from SAMA before taking any action.
Given the numerous requests received by SAMA from relevant authorities for information not covered under the aforementioned circulars, or from customers regarding their banking relationships with the bank, SAMA wishes to inform that the scope of the aforementioned circulars pertains to any request for information that might directly or indirectly affect banking confidence and confidentiality, potentially leading to risks to the interests of the Kingdom, the bank, its customers, investors, or employees. For other requests related to providing additional information or data, these require review by the bank's relevant legal department, which will decide on the appropriate action regarding the feasibility of providing the requested information. This decision will consider the nature of the request, the circumstances surrounding it, and the regulatory authorities that the requesting parties have, without the need to refer back to SAMA.
SAMA hopes for full compliance with the provisions of this circular and assigns the relevant department within the bank to develop appropriate mechanisms and procedures to operate accordingly. SAMA should be informed of the actions taken in this regard within one month from the date of this circular.
Emphasize to all Banks Operating in the Kingdom the Necessity of Using the New form for Slip of Dishonored Cheque
Referring to SAMA Circular No. BCI/796, dated 23/12/1429H which includes the new Slip of Dishonored Cheque Form that should be implemented and used by branches of SAMA and operating banks in the Kingdom starting from 1/1/1430H, this form should be attached when returning the cheque to the clearinghouse or to the customer who presented the cheque, for each cheque individually.
We would like to inform you that SAMA has noticed that a number of bank branches are still using the old Slip of Dishonored Cheque Form, and that the branches using the new form do not complete all the necessary data concerning the drawer. SAMA has received a letter from the Ministry of Commerce and Industry indicating the importance of this data and the need for its completion, as issuing a cheque without sufficient funds is considered bad faith by the issuer and constitutes a crime that requires the drawer or issuer of the cheque to be punished according to the following articles: 94, 118, and 121 of The commercial paper Law. The penalties include a monetary fine not exceeding 50,000 Riyals, imprisonment for a period not exceeding three years, and Defamation through the commercial and industrial chambers of the Kingdom. Demanding the enforcement of these penalties requires completing the details of the drawer and the cheque's signatory.
We hope to adhere to what is stated in the above-mentioned circular from SAMA and to take action according to the new Slip of Dishonored Cheque Form. Please note that SAMA will impose a suitable penalty on any bank that does not use the new Slip of Dishonored Cheque Form or does not complete all the required information.
Regulation for Selling Real Estate Included in the Map
This section is currently available only in Arabic, please click here to read the Arabic version.Implementation of the Decision to Form the Board of Directors from the Ministry of Islamic Affairs
Further to SAMA Circular No. BCI/969 dated 23/10/1430 H regarding the clarification of paragraph No. (4) of Rule No. (300-1-5-2) of the third amendment to the rules for opening and operating bank accounts under Circular No. 55777/BCI/ 777 dated 16/12/1429 H regarding the opening of accounts of "public payment charitable associations", which stipulated "the completion of the decision to form the board of directors of the association and the appointment of its officials and approved by the Ministry of Social Affairs and the bank's approval of A copy of it", indicating that the decision to form the Board of Directors of the Association is signed by His Excellency the Minister of Social Affairs, His Excellency the Undersecretary of the Ministry or the General Director of Charitable Associations only, as the approval issued by the General Director of the Ministry's branch in the Association's area is not considered.
We would like to inform you that the requirement to issue a decision to form the Board of Directors signed by His Excellency the Minister, His Excellency the Undersecretary or the Genera Director of Associations at the Ministry also applies to associations and advocacy offices and the like licensed by the Ministry of Islamic Affairs, Endowments, advocacy and Guidance.
To take note of this and inform all concerned departments and branches, and to report what has been taken.
The Technical Portfolio for Writings
SAMA received a letter from the Director General of Forensic Evidence, number 37/2509, dated 12/11/1430H referring to the work of their forgery and falsification experts on a project called "The Technical Folder for Writing Samples." Once completed, this project, God willing, will address the errors and obstacles associated with the procedures for examining handwriting and signatures in official, customary, and banking documents. The components of this folder require original copies of all forms that a bank customer might sign or write, such as (account opening forms, financing contracts, guarantee letters, letters of credit, cheques, withdrawal, and deposit orders, etc.) from all the local banks and all their versions. These will be used, in addition to the Technical Folder for Writing Samples, to establish a central database and as standard samples for reference when needed. The letter requested directing the operating banks in the Kingdom to send the required forms.
Accordingly, SAMA hopes to be provided with two files, each containing the following:
First The attached form, after being filled out using the (Excel) program and printed on the official bank papers. Second A copy of the form referred to in paragraph (First) on a (CD). Third The assets that can be signed or written by your customers in all their categories, whether they are (natural or legal persons), should be arranged based on the filled-in form according to paragraphs (First and Second) referred to above. Provided that it is within ten working days from its date, taking into account accuracy in providing SAMA with what is required.
M
Name of the Original Document
Purpose
Attachments
Companies Owned by Single Individual
We would like to inform you of the issuance of the Royal Decree No. (M/49) dated 18/9/1430 H approving the Council of Ministers Resolution No. (319) dated 17/9/1430 H, which includes the following:
"As an exception to the provisions stipulated in Articles (1), (48) and (157) of the Companies Law, issued by Royal Decree No. (M/6) dated 22/3/1385 H*, and without prejudice to the provisions of the Banking Control Law issued by Royal Decree No. (M/5) dated 22/2/1386 H, any licensed bank in the Kingdom is allowed to establish a one-person company wholly owned by the Bank, provided that this company takes the form of a limited liability company or a closed joint stock company, and that its activity is within the limits of the licensed activities. The Bank may practice it by a decision issued by the Minister of Commerce and Industry, based on the approval of SAMA."
Accordingly, we hope that banks will correct the situation of their existing companies in accordance with the above-mentioned Cabinet decision, as soon as possible.
* The Companies Law issued by Royal Decree No. (M/132), dated 01/12/1443H replace the Companies Law issued by Royal Decree No. (M/6), dated 22/03/1385H.
The Use of Names and Images of Holy Places by Some Banks for Marketing Purposes
SAMA received the telegram of His Royal Highness the Minister of Interior No. 1/7/3/74720/2SH dated 20/12/1429 H which included his Highness's directive not to use the names and images of the holy places for marketing purposes for banking products.
Therefore, SAMA affirms that all banks operating in the Kingdom must commit not to use the names and images of the holy places for marketing purposes for their products.
Commercial Credit Bureau Reports
This section is currently available only in Arabic, please click here to read the Arabic version.Amendment of the Initial Letter of Guarantee Form and the Extension Request Form of its Validity Period
We would like to inform you that the Ministry of Finance, in coordination with SAMA, has modified the primary guarantee letter template as well as the request form for extending the primary guarantee. This is in accordance with the Government Tenders and Procurement Law issued by Royal Decree No. (M/58) dated 4/9/1427H* and its implementing regulations**.
Accordingly, we hope to adopt the initial guarantee letter template and the initial guarantee extension request template after their modifications (attached), and to implement them sixty days from the date of this circular, and inform all your branches of this.
Form (A)
"Preliminary Guarantee Letter"
Dear Sirs, (Ministry or Government Agency), Location ..................
Letter bond number ....................
The date ...............
Whereas our esteemed clients ............. have submitted their bid to execute (or supply) .......... (specific information regarding the purpose of the operation is provided)."
We, (the bank), hereby unconditionally and irrevocably undertake to pay you an amount of .......... Saudi Riyals (only Saudi Riyals) which is equivalent to (......%) of the value of their offer submitted under the tender conditions, as follows:
(A) To pay you immediately upon your written request, regardless of any objection from the contractor or any other party, this amount or any amounts you request, provided that the total does not exceed the aforementioned amount of .......... Saudi Riyals (only .......... Saudi Riyals). This payment will be transferred to your account at any bank in the Kingdom of Saudi Arabia or by any other acceptable method to you. (B) Any payments made at your request shall be net and free of, without any deduction whatsoever, whether current or future, for the settlement of any taxes, executions, fees, expenses, charges, withholdings, or seizures, regardless of their nature or the entity imposing them. (C) The undertakings provided in this guarantee constitute essential and direct obligations on our part, unconditional and irrevocable. We shall not be released from all or part of these obligations for any reason whatsoever, regardless of its nature or source, such as a change in contract terms, extension, change in the scope or nature of the work required to be done, or any default or action taken by you or by a third party that would release or exonerate us from our obligations and responsibilities. (D) This warranty remains valid and in effect until the end of the day ............. of the month of ............. in the year ............... (E) We will respond to your request to extend this guarantee immediately. If the works are awarded and you provide us with a written and signed notice on or before the mentioned expiration date of this guarantee (or any subsequent extensions), we will: (a) By automatically extending this warranty for the required period (not to exceed 365 days) from the original warranty expiration date or from the expiration date of subsequent extensions as specified in the extension request, or (b) by paying you the value of the warranty. (F) We state and confirm that the value of this guarantee does not exceed 20% (twenty percent) of the bank's total paid-up capital and reserves. (G) Any dispute regarding this warranty shall be exclusively resolved by the competent authorities in the Kingdom of Saudi Arabia and in accordance with the applicable laws, decisions, regulations, and instructions in force therein. The bank
The authorized signatories
Model (B)
(Sample Request for Extension of Initial Guarantee)
Number:
Date: ... / ... / 14.. H
The date: ... / ... / 20.. G
Dear Sirs / (Bank)
In reference to the preliminary letter of guarantee presented in our favor with number ........... dated ............. and for the amount of ............. Saudi Riyals (only .................... Saudi Riyals) as requested by your client ............... about their offer for the process of .........................
The validity of this warranty expires on .............., and the works covered by this warranty have been awarded to the issuer as per the award letter number .................. dated ................
Based on Article (50/d) of the executive regulations for the Government Tenders and Procurement Law issued by Royal Decree No. (M/58) dated 4/9/1427H**, which states that: "The entity shall request an extension of the initial guarantee from the successful bidder if its validity period expires before the final guarantee is submitted."
Based on the terms of this guarantee, we request that you extend this guarantee for a period of ............... starting from the expiration date indicated above. If you do not carry out the requested extension and provide us with proof of it before the guarantee's validity period expires, we hope it will be forfeited and you provide us with its value.
Name: .....................
Signature: .....................
*The Government Tenders and Procurement Law issued by Royal Decree No. (M/128) dated 13/11/1440H. has replaced the Government Procurement and Competitions Law issued under Royal Decree No. (M/58) dated 4/9/1427 H.
**The Executive Regulations for the Government Tenders and Procurement Law No. (3479), dated 11/08/1441H. has replaced the Executive Regulation of the Government Procurement and Competitions Law issued under Royal Decree No. (M/58) dated 4/9/1427H.
Form of Bid Bond
No: 301000000977 Date(g): 13/10/2009 | Date(h): 24/10/1430 Referring to the cable from the Ministry of Petroleum and Mineral Resources No. 2/3049 dated 17/10/1430 AH (corresponding to 6/10/2009 AD), which mentions the Royal directive to the Ministry of Petroleum and Mineral Resources to study the establishment of a petroleum refinery in the Jazan region, and the ministry's progress toward the final stages of licensing investors for the construction and operation of the project in accordance with the bid documents approved by the Royal Court.
As the bid documents approved by the Royal Court included specific formats for the Bid Bond, the First license Performance Bond, and the Project Company First license Performance, and the Second license Performance Bond which align with the requirements for implementing the Jazan refinery project.
We hereby attach the formats for the Guarantee Letters mentioned above in English. We kindly request their approval and application for purposes related to the petroleum refinery project in the Jazan region.
FORM OF BID BOND
[Insert date]
The Ministry of Petroleum
and Mineral Resources of the Government
of the Kingdom of Saudi Arabia
Place:
Letter of Guarantee No.
Date:
Our client [insert full name(s)of Consortium members ](the “Applicant”) intends to submit to you its proposal for a license to design, develop ,finance, procure, construct, own insure operate and maintain a world-class refinery in the Jazan Region in the Kingdom of Saudi Arbia, in response to your Request for proposals dated [],2008 (the “REP”)Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the RFP.
We [insert name of bank] do hereby guarantee unconditionally and irrevocably to pay you he aggregate sum of Four Million Saudi Riyals (SAR 4,000,000), in accordance with the following:
A. Immediately upon receipt of your written request stating either that the Applicant; (i) has withdrawn its Proposal prior to the expiration hereof; or (ii) was selected by the Ministry as the Successful Applicant but has failed to perform all of its obligations specified in Section 6.2 of the RFP “A ward of the License”, notwithstanding any objection of the Applicant or of any other party, we shall pay you the full amount stipulated above, by transfer to your account with any bank in the Kingdom of Saudi Arabia designated in your written request ,or by any other method which is acceptable to you". B. Any payments made upon your request shall be net and free of and without any present and future deductions such as for the payment of any taxes, executions, duties, expenses, fees, deductions or retentions regardless of the nature thereof or the authority levying the same. C. The undertakings in this guarantee constitute direct, unconditional and irrevocable obligations on our part. We shall not be released from all or any part of our obligations hereunder for any reason or cause whatsoever including, without limitation, changes in the terms and conditions of the RFP
or extension of the Period of Validity of the Proposal or changes in the scope of the Project or failure to perform of the carrying out of any act or procedure by you or by a third party that would or release us from our unconditional and irrevocable obligations and liabilities stipulated in this guarantee.
D. This guarantee shall remain valid and effective until the earlier to occur of: (i) submission of the First License Performance Bond, as set forth in Section 6.6(a) of the RFP; or (ii) the date that is sixty (60) days following the declaration of the Successful Applicant. E. Any dispute concerning this guarantee will be settled by the laws of the Kingdom of Saudi Arabia.
[NAME OF BANK]__________________1
By:_____________________
Name:_____________________
Title:______________________
Date:______________________
1 The Bank must be listed on Appendix 1 to the RFP or be otherwise acceptable to the Ministry.
Forms of Bonds
APPENDIX F-l
FORM OF FIRST LICENSE PERFORMANCE BOND1
[insert date]
The Ministry of Petroleum and Mineral Resources
The Kingdom of Saudi Arabia
Place:
Letter of Guarantee No.:_________________________
Date:_____________________________________________
Our client [Insert name of Consortium Member] (a ''Consortium Member”) is a Consortium Member of the Consortium that has been declared as the Successful Applicant in connection With the Request for Proposal dated [•], 200[•] in relation to the design, development financing, procurement, construction, ownership, insurance, operation and maintenance of a crude oil refinery project (the “project”)in the Jazan region of The Kingdom of Saudi Arabia (“ The Kingdom”) and intends to apply for a license from you with respect thereto (the “License”)
We_____________ (bank) do hereby guarantee unconditionally and irrevocably to pay you the aggregate sum of One Hundred Fifty Million Saudi Riyals (SAR. 150,000 ,000) in accordance with the following:
A. Immediately upon receipt of your written request stating either: (1) that a Formation Default (as such term is defined in the License) has occurred and is continuing under the License; or (2) you have given notice to the Consortium Member or the Successful Applicant to extend the duration of this guarantee and the Consortium Member or Successful Applicant has failed to deliver the extended guarantee to you within fourteen (14) days of your notice or at least seven (7) days prior to the expiration date of this guarantee, not withstanding any objection of the Successful Applicant or the Consortium Member or of any other party, we shall pay you the full amount stipulated above, by transfer to your account with any bank in The Kingdom designated in your written request, or by any other method which is acceptable to you. B. Any payments made upon your request shall be net and free of and without any present and future deductions, such as for the payment of any taxes, executions, duties, expenses, fees, deductions or retentions regardless of the nature there of or the authority levying the same. C. The Undertakings in this guarantee constitute direct, unconditional and irrevocable obligations on our part. We shall not be released from all or any part of our obligations hereunder for any reason or cause whatsoever, including, without limitation, as changes in the terms and conditions of the License or change in the scope of the Project or nature of the work required to be executed by the Consortium Member or the Successful Applicant or the failure to perform or the carrying out of any act or procedure by you or by a third party that would or could, as the case may be, exempt or release us from our unconditional and irrevocable obligations and liabilities stipulated in this guarantee. D. This guarantee shall remain valid and effective until the delivery to MinPet of the Project Company First License Performance Bond. According to the terms of this guarantee, you give us a written and signed notice on or before the date of expiration of this guarantee or any subsequent extension thereof pursuant to the stipulation to extend the guarantee we shall pursuant to your written instruction: (i) automatically extend the guarantee for the period requested (provided it shall not exceed three hundred and sixty-five (365) days) from e original date of expiration of the guarantee or from the expiration date of the extension(s) which may have been subsequently made as indicated in the request for extension, or (ii) pay you the amount of the guarantee. E. Any dispute concerning this guarantee will be settled by the Board of Grievances in The Kingdom in accordance with the laws of the Kingdom. [The Bank]
Authorized signatories
1MINPET NOTE TO APPLICANTS: This First License Performance Bond is intended to cover the period from the License Award through the delivery of the Project Company First License Performance Bond (i.e, Novation). Also, the First License Performance Bond may be provided by (a) the Successful Applicant in the aggregate amount of SAR 150 Million or (b) by each Consortium Member of the Successful Applicant in a pro rata amount that corresponds to such Consortium Member’s anticipated equity ownership in the Project Company, provided that the aggregate amount of the First Performance License Bonds provided by the Consortium members collectively in the case of (b) shall equal SAR 150 Million.
APPENDIX F-2
FORM OF PROJECT COMPANY FIRST LICENSE PERFORMANCE BOND2
[insert date]
The Ministry of Petroleum and Mineral Resources
The Kingdom of Saudi Arabia
Place:
Letter of Guarantee No.:______________
Date: _________________________________
Our client [insert name of the project company](“project Company “)is the holder of the license (the “License”) for the design ,development, financing, procurement, construction, ownership, insurance ,operation and maintenance of a crude oil refinery project (the”project”) in the Jazan region of The Kingdom of Saudi Arabia ("The Kingdom"). The License, in accordance with its terms and conditions, was novated to the Project Company pursuant to the Novation Agreement executed on [•].
We_______________________________(bank) to hereby guarantee unconditionally and irrevocably to pay you the aggregate sum of One Hundred Fifty Million Saudi Riyals (SAR, 150,000,000), in accordance with the following:
A. Immediately upon receipt of your written request stating either: (1) that a Special Termination Event or an uncured Default (as such terms are defined in the License) has occurred and is continuing under the License; or (2) you have given notice to the Project Company to extend the duration of this guarantee and the Project Company has failed to deliver the extended guarantee to you within fourteen (14) days of your notice or at least seven (7) days prior to the expiration date of this guarantee, notwithstanding any objection of the Project Company or of any other party, we shall Pay die full amount stipulated above, by transfer to your account with any bank in The designated in your written request, or by any other method which is acceptable to you. B. Any payments made upon your request shall be net and free of and without any present and future deductions, such as for the payment of any taxes, executions, duties, expenses, fees, deductions or retentions regardless of the nature thereof or the authority levying the same. C. The undertakings in this guarantee constitute direct, unconditional and irrevocable obligations on our part. We shall not be released from all or any part of our obligations hereunder for any reason or causer whatsoever, including, without limitation, as changes in the terms and conditions of the License or change in the scope of the Project or native of the work required to be executed by the Project Company or the failure to perform or the carrying out of any act or procedure by you or by a third party that would or could, as the case may be, exempt or release us from our unconditional and irrevocable obligations and liabilities stipulated in this guarantee. D. This guarantee shall remain valid and effective until [insert the target Financial closing Date]. According to the terms of this guarantee, if you give us a written and signed notice on or before the date of expiration of this guarantee or any subsequent extension thereof pursuant to the stipulation to extend the guarantee, we shall, pursuant to your written instruction: (i) automatically extend the guarantee for the period requested (provided it shall not exceed three hundred and sixty-five (365) days) from the original date of expiration of the guarantee or from the expiration date of the extension(s) which may have been subsequently made as indicated in the request for extension, or (ii) pay you the amount of the guarantee. E. Any dispute concerning this guarantee will be settled by the Board of Grievances in The Kingdom in accordance with the laws of The Kingdom. [The Bank]
Authorized signatories
2 MINPET NOTE TO APPLICANTS: This Project Company First License Performance Bond is intended to cover the period from the expiration of the First License Performance Bond (i.e„ Novation) until the later to occur of (i) the Financial Closing Date and (ii) the award of all the EPC Contract(s), upon which the Project Company shall provide Minpet with the Second License Performance Bond, together with (x) certified copies of all the Financing Documents and an original certificate signed by the Financing Parties or their duly authorized representative(S)certifying that the Financial Closing has been achieved and (y) certified copies of all the EPC Contract(s) and an original certificate signed by the authorized signatory(ies) of the EPC Contractor(s) certifying the completeness and authenticity of the EPC contract (s) , in exchange for this Project Company First License Performance Bond.
APPENDIX F-3
FORM OF SECOND LICENSE PERFORMANCE BOND
[insert date]3
The Ministry of Petroleum and Mineral Resources
The Kingdom of Saudi Arabia
Place:
Letter of Guarantee No.:______________
Date: _________________________________
Our client [insert name of the Project Company] ("Project Company”) has been awarded a license (the “License” ) on [•], 200[•] in relation to the design, development, financing procurement, construction, ownership, insurance, operation and maintenance of a crude oil refinery project (the “project”) in the Jazan region of The Kingdom of Saudi Arabia ("The kningdom” ).
We_______________________________(bank) to hereby guarantee unconditionally and irrevocably to pay you the aggregate sum of Seventy-five Million Saudi Riyals (SAR, 75,000,000), in accordance with the following:
A. Immediately upon receipt of your written request stating either: (1) that a Special Termination Event or an uncured Default (as such terms are defined in the License) has occurred and is continuing under the License; or (2) you have given notice to the Project Company to extend the duration of this guarantee and the Project Company has failed to deliver the extended guarantee to you within fourteen (14) days of your notice or at least seven (7) days prior to the expiration date of this guarantee, notwithstanding any objection of the Project Company or of any other party, we shall Pay die full amount stipulated above, by transfer to your account with any bank in The designated in your written request, or by any other method which is acceptable to you. B. Any payments made upon your request shall be net and free of and without any present and future deductions, such as for the payment of any taxes, executions, duties, expenses, fees deductions or retentions regardless of the nature thereof or the authority levying the same. ’ C. The undertakings is this guarantee constitute direct, unconditional and irrevocable obligations on our part. We shall not be released front all or any part . We shall not be released from all or any part of our obligations hereunder for any reason any reason or cause whatsoever, including, without limitation, as changes in the terms and conditions of the License or change in the scope of the Project or nature of the work required to be executed by the Project Company or the failure to perform or the carrying out of any act or procedure by you or by a third party that would or could, as the case may be exempt or release us from our unconditional and irrevocable obligations and liabilities stipulated in this guarantee. D. This guarantee shall remain valid and effective until [insert the target date of Commencement of Commercial Operation],According to the terms of this guarantee ,if you give us a written and signed notice on or before the date of expiration of this guarantee or any subsequent extension thereof pursuant to the stipulation to extend the guarantee, we shall, pursuant to your written instruction: (i) automatically extend the guarantee for the period requested (provided it shall not exceed three hundred and sixty-five (365) days) from the original date of expiration of the guarantee or from the expiration date of the extension(s) which may have been subsequently made as indicated in the request for extension, or (ii) pay you the amount of the guarantee. E. Any dispute concerning this guarantee will be settled by the Board of Grievances in The Kingdom in accordance with the laws of The Kingdom. [The Bank]
Authorized signatories
3 See Minpet’s footnote above. This date should be the (i) Financial Closing Date or (ii) the date when all the EPC contract (S) have been awarded, whichever is later.
Kingdom of Saudi Arabia
Ministry of Petroleum and Mineral Resources
Minister's Office
List of Transaction Attachments
Number Reference Date Type Source Entity
Subject From 1 to 10 None 17/10/1430 H Copy Ministry of Petroleum and Mineral Resources Bank Guarantee Letter Formats Supervisory Guidance for Assessing Banks' Financial Instrument Fair Value Practices
The Basel Committee on Banking Supervision has issued the above named finalized Document, which provides supervisory expectations relevant to Financial Instrument Valuations. The document addresses the subjects of Governance and Controls, Risk management and Reporting for Valuation and Supervisory Assessment of Valuation Practices.
The purpose of SAMA in issuing this document at this time is to provide the Banks with further guidance to strengthen their valuation policies and processes in order to enhance both reliability and consistency. It should be noted that this Guidance does not intend to include additional accounting requirements beyond those already set by the Agency which includes International Accounting Standards.
This document may be obtained from the BIS website.
Implementing a System for Deducting Monthly Instalments From Customers Who Have Taken Loans
This section is currently available only in Arabic, please click here to read the Arabic version.Continue Opening Bank Accounts for Residents Who Have the Term 'Resident' in the 'Religion' Field in Their Iqama
With reference to the receipt of letters from some banks operating in the Kingdom regarding the review of certain individuals attempting to open or update bank accounts, and who present identification cards showing "Resident" in the nationality field, causing difficulties in determining the nationality of the holder in accordance with the requirements of the "Know Your Customer" standards and the fields in the banks' automated systems, and their inquiry about the possibility of opening bank accounts or continuing existing accounts for those holding these residency permits.
With reference to the telegram of His Royal Highness, the Second Deputy Prime Minister and Minister of Interior, No. 56323 dated 15/05/1430H, which includes approval to open bank accounts for resident individuals holding magnetic residency permits that have the term "Resident" noted in the nationality field, and to add this designation to the nationality identification fields in the banks' records and automated systems.
We would like to inform you that it is allowed to open and maintain accounts for individuals who hold residency cards that state "Resident" in the nationality field, provided that a copy of the valid residency permit is obtained. They are not required to present the original passport or a copy of it. A clear address specifying the place of residence within the Kingdom must be provided, along with a certification from the entity they work for, endorsed by the Chamber of Commerce or the official entity employing them. If the individual is not employed and the residency card does not list an employer, a certification issued by the mayor of the area (neighborhood, governorate, or town) where they reside is required, certified by the police department to which the mayor is affiliated. The addresses must be clear to ensure the ability to reach the individual when needed. Please note that these requirements need to be updated annually.
Sports Centers and Clubs Belonging to Banks Must be Under Supervision of the General Presidency of Youth
Referring to the approval of His Royal Highness the Minister of Interior No. 211112 /9/17 on 17/2/1430 H regarding the findings of the committee formed to study the status of centers and clubs affiliated to some entities, including banks, so that the entity supervising them athletically is the General Presidency of Youth Welfare.
Based on the directives of His Royal Highness, the General President of Youth Welfare, based on the above-mentioned telegram, to include these clubs and centres under the supervision of the General Presidency for Youth Welfare and to grant them the necessary licenses by the Presidency to be able to carry out their activities after correcting their situation.
Therefore, we hope to provide SAMA with data on all centers, gyms and clubs affiliated with the Bank so that it can be submitted to the General Presidency of Youth Welfare.
Conditions and Supervisory Procedures for Establishing Trust Funds
With reference to the written telegram from His Royal Highness Prince Nayef bin Abdulaziz, the Second Deputy Prime Minister and Minister of Interior, number 42383 dated 10/4/1430H, concerning the regulations and conditions for the establishment of trust funds by the private sector, a copy of which was provided to SAMA.
We hope the bank adheres to the following regulations, conditions, and supervisory procedures when establishing trust funds:
- Setting a list of terms of use on the service provision website.
- Draft a rental contract or receipt that includes user data, the amount of fees for this service, specifies the rental period in the contract, and includes the customer's (lessee's) signature.
- Inspect and verify the contents of the materials deposited in the trust funds before storing them to ensure that there are no prohibited items inside.
- Providing, installing, and maintaining these trust funds, and implementing advanced monitoring systems to oversee and follow up on these trust funds via closed-circuit television systems, equipping them with the necessary security measures for theft and fire detection, and assigning special civilian security guards to them.
- The insurance of these trust funds should be provided by one of the licensed insurance companies in the Kingdom, and the beneficiary of the service (the lessee) should be compensated for the loss or damage of their belongings, provided that these belongings are specified in advance in the rental agreement.
- In the event that the beneficiary of the service (the lessee) does not come forward to collect their belongings or to renew their contract after the rental period has ended, they are notified to rectify this situation. If they do not come forward within the specified period, they are given another notice subsequently, the police are notified, and the trust fund is opened, and the contents are seized and recorded in an official report documenting the incident.
- In the event that the key is lost by the service beneficiary (the lessee), the holder of the trust fund must prove their identity in a written statement, and a replacement key will be provided for a fee determined by the rental agreement.
- All documents, including the user data logs of the trust funds, should be kept in secure locations for ten years for future reference if needed. Additionally, surveillance tapes must be kept for at least six months.
- These trust funds may not be opened, nor their contents handled, except in coordination with the police.
- The necessity of informing security authorities when suspicious or abnormal activities are detected.
Commercial Credit Bureau
This section is currently available only in Arabic, please click here to read the Arabic version.Collecting Donations via Mobile Messages (SMS) Sent from Non-Service Providers
SAMA received a telegram from His Excellency the Minister of Finance, No. 1/S/2055 dated 03/03/1430 H, based on a telegram from His Royal Highness the Minister of Interior, No. 1/7/3/13084 dated 27/02/1430 H Which includes His Highness's approval of the recommendations of the committee formed to study the phenomenon of receiving text messages on mobile phones calling for financial donations for charitable projects and requesting their deposit in bank accounts at local banks, as well as the phenomenon of some individuals announcing their account numbers to be used for collecting donations without obtaining official approval from supervisory authorities including His Highness's approval of the committee's recommendations.
We would like to inform you that the recommendation (First) related to text messages that do not originate from service provider companies, but rather from individuals or entities using mobile or internet messaging technology, stipulates that the provisions of His Highness's telegram No. 1/7/3/157993 dated 25/10/1427 H shall apply. This means that soliciting donations via mobile messages or similar methods without prior approval is considered a violation of regulations and instructions, and that fundraising is restricted to the premises of institutions and charitable organizations or through their bank accounts.
Therefore, we hope to take this into consideration and monitor will be conducted regarding any occurrences. Efforts should be made to identify cases reported through the available announced channels or through account activity, and to emphasize on your branches and staff to be attentive and maintain continuous observation.
The Necessity of Adhering to the Confidentiality of Financial Information
Further to SAMA circular number BCI/150 dated 29/06/1422 H, and in order to ensure the confidentiality of financial information, we would like to emphasize the need to commit not to provide any financial or banking information about your customers or your banking transactions to any party, whether individuals, institutions, governmental entities, or others. Such disclosures should only occur through SAMA, and you must notify us immediately of any requests you receive from any entity to obtain prior approval from SAMA before taking any action.
We hope to adopt this and report on what has been taken to act on within a week from its date.
Response Instructions to Circulars and Letters from the Legal Department of SAMA
Referring to the circulars and letters from SAMA's Legal Department regarding the activities of the Banking Execution Section, which include requests for disclosures and seizures of balances, accounts, deposits, and trust funds, as well as requests for the execution of judicial rulings related to the deduction of expenses or debts from salaries deposited in banks. It also includes inquiries about banking transactions (withdrawals, transfers, deposits, cheques deposits and cashing, etc.), requests for account statements, issuance or renewal of cheques, requests for original documents, requests for information concerning complaints within the jurisdiction of the Legal Department, and other matters issued to the banks operating within the Kingdom.
It has been observed recently that some banks have delayed responding to SAMA's circulars and letters mentioned above, which may indicate a lack of sufficient priority and attention given to them.
The circulars and letters referred to above are issued based on requests from competent judicial authorities or executive bodies authorized by regulations and instructions to make such requests. Additionally, some of the circulars and letters pertain to prisoners and cover topics of significant importance.
Based on this, the banks' responses to the circulars and letters must be as follows:
-First: The bank's response must be within a period not exceeding three working days from the date of the circular or letter related to the freezing of balances, accounts, deposits, and trust funds, or the circular or letter lifting the seizure on them.
-Second: The bank's response should be within a period not exceeding five business days from the date of the circular or letter related to the disclosure of balances, accounts, deposits, trust funds, loans, and credit cards.
-Third: The bank's response shall be within a period not exceeding six working days from the date of the letter related to the enforcement of judicial rulings or decisions, which include requests for the execution of the deduction of expenses or debts from the salaries deposited in the banks, or requests for issuing bank cheques deducted from accounts or renewing them, or requests for account statements, or inquiries about banking transactions (withdrawals, transfers, deposits, cheque deposits and cashing, etc.).
-Fourth: SAMA is provided with the original documents (account opening files, signature forms, cheques, deposit forms, withdrawal forms, transfer forms...) within a period not exceeding eight working days from the date of the letter or circular.
-Fifth: The bank will respond within a period not exceeding ten business days from the date of the letter that includes the request for information regarding bank customers' complaints.
-Sixth: Pay attention to the circulars and very urgent letters sent by fax, or those for which the response time has been shortened.
Kindly confirm receipt after reviewing and take all necessary actions to implement it starting from 1/4/1430H, including providing the necessary human resources to complete the aforementioned tasks.
Rules for Handling Private Accounts Related to the Collection of Donations for Supporting Closure of Death Cases
SAMA received a letter from His Excellency the Minister of Finance, No. 1/9778 dated 18/12/1429H, attached with it a copy of the Royal Decree No. 9869/MB dated 15/12/1429H, approving the conclusions reached by the committee formed to study the phenomenon of excessive settlement in murder cases, including the regulations for opening and managing bank accounts to accept and collect donations for such cases.
Attached is a summary of the regulations that banks must abide by and consider when opening accounts for the purpose of collecting blood money for reconciliation in murder cases, whether in terms of the documents required for opening the bank account or in terms of the financial aspects and account management that must be complied with.
For your information and strict adherence, as stipulated by these regulations.
Regulations for accounts for collecting donations for the purposes of paying reconciliation blood money in murder cases:
The regulations related to bank accounts included in Royal Decree No. 9869/MB dated 15/12/1429H, which banks must adhere to when opening accounts for the purpose of accepting donations for blood money reconciliation in murder cases, both in terms of the required documentation for the bank account and the financial aspects and account management that must be followed, are as follows:
First: That any process for collecting financial amounts for reconciliation in blood money should only occur with the approval of His Highness the Minister of Interior, and only after it has been presented by the region's emirate.
Second: If approval from His Highness the Minister of Interior is granted, the regional emirate will contact SAMA to open the donations account after fulfilling the following requirements:
1- Approval of the Ministry of Interior to open the account (specifying the bank name and the account opening duration).
2- A copy of the legal document indicating the victim's heirs have renounced retribution and agreed on the amount of the financial compensation for the requested Diyya for reconciliation. The document should specify the agreed-upon timeframe for providing the amount.
3- The calculation of the settlement amount in the Diyya shall be under the supervision of the regional emirate, and none of the parties involved in the case shall have any authority over the account whatsoever.
4- The regional emirate determines the names of the authorized individuals to manage the account (overseeing the account and monitoring deposits) by attaching copies of their IDs and signature specimens (joint signature) along with their contact information.
5- No checkbooks or ATM cards will be issued for the account, and no transfers can be made from it.
6- The account name should be in the following format (emirate of region..... Diyya Donations" followed by the full name of the deceased).
7- The bank will automatically suspend the account once the amount of the Diyya is completed, so that no additional amount exceeding the Diyya will be accepted.
8- The account's validity should be for a maximum of one year from the date of its opening. After this period ends, the account will be suspended, with continued transactions being allowed only upon a letter from SAMA based on a request from the regional governate to specify another one-year period.
9- If the Diyya amount is completed, the emirate of the region will issue a bank cheque that will be delivered to the beneficiary through the court.
10- If the amount of the settlement for the Diyya is not completed and the victim's heirs are not satisfied with it, or if the victim's heirs forfeit the blood money, the deposited amounts whose owners are known from the deposit forms shall be returned. As for the amounts deposited by donors under the name of "Good Samaritan," the matter shall be referred by the regional emirate to the Grand Mufti to be dealt with based on a Sharia fatwa. (This requirement is executed by the bank pursuant to the directive from the regional emirate delivered to the bank by the authorized individuals).
Use of Counterfeit ATM Cards to Withdraw from Customer Accounts
Given the recent observation of cases of copying ATM card data of customers of some banks outside the Kingdom with the aim of using these counterfeit cards to make automatic withdrawals and purchases from the accounts of customers who own those original cards without their knowledge.
Therefore, SAMA hopes that all banks operating in the Kingdom should take precaution and caution about such operations, take the necessary precautionary measures to monitor operations, activate all appropriate measures to protect customer cards and reduce the damage and risks of copying ATM card data on the bank and its customers, and take the necessary measures to communicate with customers and educate them on ways to avoid falling into such operations.
We hope to inform SAMA in the event of any similar operations that the bank or its customers may be exposed to, and to report on the action taken by the bank in this regard within two weeks from its date.
Storing IP Address and Caller ID for All Phone Banking Activities
In reference to the Anti-Cyber Crime Law issued by Royal Decree No. M/17 dated 8/3/1428 H, which aims to reduce the occurrence of information crimes, and in view of the importance of banks providing:
- IP address for all electronic transactions.
- (Caller ID) for all transactions carried out by phone banking.
In order to assist the security authorities when investigating embezzlement and financial fraud, so banks must carry out the necessary procedures that lead to the provision of (IP Address) for all electronic operations as well as the caller number for all operations carried out through phone banking before the beginning of September 2008 and keep it for a period of one year from the date of the operation, and accordingly, when any financial claim is received for an electronic transaction that took place through the Internet banking service or phone banking affiliated for the bank, where the presence of the IP address is necessary or requires knowing the caller number, the bank will bear the amount of the claim if the IP address or (caller number) is not available.
Exclusion of a Condition for the Opening of Letters of Credit
SAMA received the letter of His Excellency the General Director of the Customs Authority No. 52776/11 dated 29/12/1428 H regarding the cancellation of the requirement to certify documents from Saudi representations or the Federation of Chambers of Commerce Industries and related fees from the conditions for opening letters of credit, in line with the Kingdom's obligations with the World Trade Organization.
To inform and act accordingly and inform all your branches.
Validity of Preliminary Guarantees Issued by Banks
SAMA received a letter from His Excellency the Undersecretary of the Ministry of Finance for Financial Affairs and Accounts, No. 8/2/94466, dated 25/11/1428H, regarding the validity period of preliminary guarantees issued by banks, which is systemically set at approximately (90 days). It has been observed that in some cases, this period is reduced due to differences between the Hijri and Gregorian calendars and the fact that some months have fewer than (30 days). This discrepancy leads to the exclusion of some bids submitted by companies or contractors for the execution of certain government projects.
Accordingly, SAMA hopes that all banks will ensure that the validity period of the preliminary guarantees they issue is no less than (90) actual days to avoid problems of the shortage of days in some Hijri or Gregorian months.
Exercising Caution when Dealing with the US Dollar
We would like to inform you that SAMA has received a letter from His Excellency the Director of Police of Taif Governorate, No. 472/20/3S T dated 18/10/1428 H, regarding the availability of information about the circulation of large amounts of the original (carbon) version of the US dollar in the denomination of (100) dollars. These dollars are being sold at the price of one riyal per dollar on the condition of purchasing large amounts. They are sold in bundles, each containing (2,500,000) dollars, along with instructions for a washing substance to reveal the original. One of the conditions of purchase is that the money must pass through currency inspection devices in banks. There are also attempts to smuggle part of these amounts to neighboring countries.
Accordingly, SAMA wishes to warn everyone to exercise vigilance and caution when presented with currencies of this type at the bank. It is important to verify the identity of the holders, report to the nearest police station to investigate the bearer, and immediately notify the security authorities of any information that bank employees receive about these currencies. SAMA should also be immediately informed of what is received from those currencies.
Exempting the Organization of Islamic Conference, the Arabian Crescent and Red Cross from International Transfer Regulations
This section is currently available only in Arabic, please click here to read the Arabic version.Cooperating with the Arab Foundation to Guarantee Investment to Achieve their Goals
SAMA received the letter of His Excellency the Minister of Finance No. 5/3/6751 dated 24/7/1428 H, based on the letter of His Excellency the Director General of the Arab Investment Guarantee Corporation No. 1343 dated 15/7/2007 containing the request of the Arab Investment Guarantee Corporation to cooperate with Saudi banks to benefit Saudi exporters and importers, improve the level of insurance services provided to them, and work to link them with the services provided by Saudi banks and financial institutions.
We would like to note that the Arab Investment Guarantee Corporation - an Arab regional institution based in the State of Kuwait - wishes to raise the degree of access of Saudi exporters and investors to its services in the field of (guarantee, insurance services, enhancing payment methods, facilitating commercial transactions, providing credit information, and expanding trade exchanges between Arab countries).
Therefore, SAMA hopes that all banks will cooperate with the Arab Investment Guarantee Corporation in order to expand the base of beneficiaries in the Kingdom of Saudi Arabia, raise the degree of their competition in foreign markets, and enhance trade exchange between Arab countries and investment operations. The services of the Arab Investment Guarantee Corporation can be accessed.
Account Opening Instructions for Charity Organizations and Institutions and Amendment in Authorized Signatories
This section is currently available only in Arabic, please click here to read the Arabic version.Amendment of Paragraph Five for the Second Update of the Rules and Regulations for Opening Accounts for Visually Impaired Customers
Further to The Central Bank Circular No. 5555/BCI/ 95, dated 8/2/ H Regarding the Second Amendment for Opening and Operating Bank Accounts in the Kingdom in commercial banks and the general rules for their operation, and referring to the provisions of Rule No. 100 and Rule No. 200 – 1 – 1 of Clause Three concerning accounts for the visually impaired, we would like to inform you that some paragraphs of these rules have been amended as follows:
First: The text of the fifth paragraph concerning customer service for visually impaired individuals from rule number 100 (page 33) is amended to read as follows:
Service and interaction with the blind.
The bank must open an account for any blind customer who requests it and provide them with an ATM card and a checkbook upon request. The blind customer has the right to access any banking services (telephone banking, internet banking, and credit cards) provided they are informed of the terms and conditions related to these services. The customer must sign that they have been granted these services based on their desire, choice, understanding of the risks involved, and their legal responsibility for all transactions conducted through these types of services. In case that the blind customer is a female, their personal identifier must adhere to the provisions outlined for personally identifying veiled women (where the person and information are veiled). The bank must obtain a copy of the identifier’s ID card, as well as their address and signature.
Second: The text of the paragraph related to personal identification in the procedures for the visually impaired and illiterate individuals from rule number 200-1-1 (page 38) is amended to read as follows:
Personal identification procedures for the blind and illiterate:
A visually impaired and illiterate customer is informed about banking procedures when opening an account or conducting any subsequent banking transactions by one of the customer service employees. This information is authenticated by one of the branch officials with authorized signatures (branch manager or operations manager) confirming that the customer has been informed of all account opening details, terms, and account management rules. If the customer wishes to seek help from an identifier outside the bank, they are entitled to do so, provided the identifier has a national ID card (15 Hijri years) and is educated and capable of reading aloud to the visually impaired or illiterate customer and witnesses this process. If the visually impaired or illiterate customer is female, her personal identifier must comply with the stipulations outlined for identifiers for veiled women (regarding personal and informational privacy). The bank must obtain a copy of the identifier’s ID card, along with their address and signature.
Third: The text of the paragraph regarding the signature of the blind person from regulation number 200-1-1 (page 39) is amended to read as follows:
"The signature of the blind person"
The blind person must provide a thumbprint and a personal seal as a model for their signature. If the customer wishes to use a personal (handwritten) signature, they are allowed to do so, provided that it is documented that this was done according to their desire and choice and at their own responsibility. In the case of a blind woman, her identifier should be in accordance with the paragraph related to the personal identifier for veiled women (protecting personal identity and information). The bank must obtain a copy of the identifier's ID card, along with their address and signature.
For your information and necessary action, we hope to be informed of the actions taken by the bank in this regard within a month from the date hereof.
Continued Financing of All Economic Activities by Banks, Including Projects that Contribute to Supporting the Activities of the National Science, Technology and Innovation Ecosystem in the Kingdom
SAMA received a telegram from His Excellency the Minister of Economy and Planning, and His Excellency the President of King Abdulaziz City for Science and Technology No. 134088/M/10 dated 12/11/1427 H, referring to the Council of Ministers Resolution No. 112 dated 27/4/1423 H approving the National Science and Technology Policy Document "in preparation for completing the work in developing the strategy and plans necessary to implement the policies contained therein", and the Council of Ministers Resolution No. 251 dated 19/10/1426 H containing "Approval of the Eighth Development Plan" and what it included. From programs and projects for science, technology and innovation in the Kingdom.
Based on the aforementioned, the importance of the project stems from the National Policy for Science and Technology in the Kingdom, as it is related in particular to the fifth strategic basis of this policy, which requires "working to strengthen, develop and diversify the sources of financial support allocated to the activities of the national system for science, technology and innovation", where the diversification of commercial bank financing on a profitable or non-profit basis is a major source of funding for the science, technology and innovation system in the countries of the world, and this project aims to find products, services, and financial facilities. Banking on a profitable and non-profit basis, which achieves a return for the banking and science and technology sectors, in order to enhance and diversify the sources of support for the activities of the national system of science, technology and innovation such as research and development, higher and technical education, and various scientific and technical services, and from this point of view, SAMA would like to emphasize that banks continue to finance all economic activities, including projects that contribute to supporting the activities of the national system for science, technology and innovation in the Kingdom.
Opening Account Procedures for Red Crescent and Red Cross
In reference to the telegram from His Excellency the Minister of Finance No. 1/S/9430 dated 23/10/1427H, attached herewith a copy of the royal decree No. 7513/MB dated 21/10/1427H, approving the recommendation of the specialized committee of the Saudi National Authority for Relief and Charitable Work Abroad regarding the request from the General Secretariat of the Arab Organization for the Red Crescent and Red Cross to enable it to carry out money transfer operations abroad. The decree includes the recommendation to treat the Arab Organization for the Red Crescent and Red Cross in the matter of carrying out money transfer operations abroad in accordance with the practices applied to the accounts of international organizations and other non-charitable political entities operating in the Kingdom based on the supreme directive communicated by the telegram from His Royal Highness the President of the Royal Court of the Council of Ministers No. 32739/B dated 19/7/1427H.
And with reference to paragraph 300-1-6-5 of the rules for opening bank accounts and the general operational rules communicated to banks under Circular No. 12164/BCI/185 dated 4/6/1424H concerning multilateral international organizations.
We inform you that in accordance with the gracious directive mentioned above, SAMA has updated the requirements of this paragraph, including setting specific requirements for opening and managing the accounts of the Arab Red Crescent and International Red Cross organization, as follows:
The bank is permitted to open accounts in Saudi Riyals and foreign currencies for this organization, provided that the following conditions and procedures are met:
- Obtaining an account opening request from the president or vice president of the organization, office, or program in the Kingdom.
- The image of the Headquarters Agreement (the authorization) for its presence in the Kingdom.
- The signature must be joint.
- The provision of copies of identification for those authorized to manage the account, as well as the identification of the head of the organization, program, office, or the vice president as per the submitted request.
- SAMA approval for opening the account.
Thus, the paragraph is in line with the directive regarding allowing transfers outside the Kingdom and treating them according to the practices followed in the accounts of international organizations and other non-charitable political entities operating in the Kingdom. This paragraph will be included in the future update of the rules for opening bank accounts and the general rules for their operation (the second), which are intended to be circulated soon.
Phone Banking
This section is currently available only in Arabic, please click here to read the Arabic version.Controls on the Signature of Customers on the Bonds of the Order Without Data (Blank) in Exchange for Access to Banking Facilities
We would like to inform you of the issuance of the Royal Order No. 8195/M.B. dated 13/11/1427H, which includes the approval of the recommendations stated in the report of the ministerial committee formed to study the issue of some bank customers signing promissory notes without data (blank) in exchange for obtaining bank facilities. It was concluded that signing blank is permissible based on Article 5 of the Anti-Forgery Law* issued by Royal Decree No. M/114 dated 26/11/1380H, as well as what is stated in Article 14 of the Commercial Papers Law issued by Royal Decree No. M/37 dated 11/10/1383H and the judicial decisions issued by the committees for settling commercial paper disputes.
Based on the aforementioned Royal Order and the recommendations aimed at preventing the misuse of signing blank, it is required that banks operating in the Kingdom observe the following controls when conducting banking transactions:
- In the case of loans and credit facilities with specified limits and due dates, the bank must ensure that all data on the promissory note or notes is filled out upon signing in accordance with the loan amount or the limit of the facilities.
- In the case of renewing the relationship with the customer or modifying the loan or facility, the bank must return the promissory note or notes related to the renewed or modified contract to the customer and obtain another note in light of the new relationship as mentioned in paragraphs (1 and 2).
- The bank must limit claims under the promissory note or notes to the amount owed by the customer according to the relationship documents and account statements when filing a lawsuit.
- The bank must not use the promissory note for purposes other than those for which it was created.
Therefore, SAMA hopes to implement the above controls and operate under them as of this date, and to inform all your branches accordingly.
* The Anti-Forgery Law issued by Royal Decree No. M/114 dated 26/11/1380H, was replaced by the Penal Code for Forgery Offenses, issued by Royal Decree No. (M/11) dated 18/02/1435H.
Bank Bidding on Locations for Branches and ATMs
Reference to SAMA Circular No. 12130/M/A/274 dated 23/9/1406H corresponding to 31/5/1986G regarding the entry of some banks into biddings announced by some entities to lease some of their sites, whether to open new branches of banks or to install ATMs, without obtaining the prior approval of SAMA.
SAMA stresses the need to take into account that banks should not enter into such biddings without obtaining their prior written approval, and SAMA will not consider any application for a license for these sites in the event that the bidding is awarded to a bank that has not obtained prior permission to enter it.
Working Hours for Tadawul
Further to SAMA Circular No. 1321/M/A/38 dated 02/02/1407 H corresponding to 05/07/1986 G regarding the operating hours of bank branches for the public, and based on Article (16) of the Banking Control Law, and in light of the decision to amend the period of trading shares in the local market, and considering the connection between the operations of most bank branches and stock trading activities, it has been decided that the operating hours of bank branches for the public will be from 9:30 AM to 4:30 PM starting Saturday, 11 Dhul-Qi'dah 1427 H corresponding to 02 December 2006 G. In the event that any bank wishes to identify certain branches to operate during evening or additional hours, it may submit the names, locations, and required hours of those branches to SAMA for approval.
The period from 6 Shawwal 1427 H corresponding to 28 October 2006 G to 8 Dhul-Qi'dah 1427 H corresponding to 29 November 2006 G will be a transitional period during which banks can arrange their operations and coordinate with SAMA regarding branches that require additional operating hours.
We hope you acknowledge receipt of this and remind all your branches to adhere to the specified hours.
Meeting Customers when Updating Their Information
This section is currently available only in Arabic, please click here to read the Arabic version.Not to Provide Services to Customers Without Face to Face Interaction With Bank's Employees and Ensuring Correctness of Customer Data
This section is currently available only in Arabic, please click here to read the Arabic version.Recording ID Number for Agent Having Power of Attorney While Opening and Operating Bank Account
SAMA received the circular of His Excellency the Minister of Justice addressed to the courts and notaries No. 13/T/2905 dated 5/6/1427 H based on SAMA's letter No. 20 / MT / MAT on 2/1/1427 H containing the approval of adding the civil registration number of the agent in public and open agencies related to financial matters only.
Therefore, we hope that public agencies issued for the purpose of opening and operating bank accounts and other agencies whose provisions include this purpose and in which the civil registration number of the agent has not been recorded as of the beginning of 2007 will not be accepted, and your customers who have public agencies in which the civil registration number is not stipulated should be urged to amend those agencies in accordance with these instructions.
Warning of Fraud and Scam
SAMA received several inquiries from various entities regarding an unknown party exploiting the name of the European Defense Agency and requesting the completion of a form with the financial and personal data of the targets.
Given that these actions are intended for fraud and deception, we hope to exercise caution and avoid responding to that entity. We also urge bank customers to be warned against falling for these attempts. For more information, you can refer to the warning statement issued by the European Defense Agency through Its website. (Attached a copy of the letter and the mentioned form).
Compliance and the Compliance Function In Banks
The Basel Committee on Banking Supervision has issued a document in April 2005 entitled “Compliance and the Compliance Function In Banks”. This paper sets out the best international practices, and suggests that international banks should have policies and procedures tor compliance function and strengthen their practices in this area.
In the past, SAMA has issued a circular on this subject, and already banks have developed their practices for the compliance function. SAMA would like all banks to examine their current practices in light of these new BCBS guidelines and ensure that their practices are in line with these recommendations. Any major differences or deviations from the Basel recommendations should be reported to SAMA. In evaluating banks’ practices in future, SAMA supervisors will take into account these guidelines.
Data Request on the Number and Rates of Saudization in the Banking Sector
SAMA monitors the status of Saudi employment in local banks and ways to develop it, as well as measures the improvement in the results achieved in this regard.
Therefore, we hope to receive promptly the data that clarifies the number and total of Saudi and non-Saudi employees (male/female) according to the attached table from 1970 G until 2004 G, along with the Saudization percentage. This should be done urgently.
Accounts Opening Controls for Expatriates Holding Saudi Passport
Referring to Paragraph No. 200-1-3 of the Rules for Opening Accounts in Commercial Banks the accounts of individual expatriates and includes the provision that "No bank account may be opened by presenting a Saudi passport issued to some expatriate individuals. Such an expatriate must present a valid Iqama. where the expatriate has no identification document except his/her Saudi passport, the approval of SAMA shall be obtained for opening the account".
We would like to inform you that a committee has been formed at the Ministry of Interior to study the issue of requests submitted by non-Saudis who hold regular residencies to have the Saudi passport granted to them recognized as a document to complete their banking transactions and open accounts. The committee has submitted its views to His Royal Highness the Minister of Interior, and His Highness has approved the regulations for opening accounts for this category based on telegram No. 16/3053/2S dated 14-15/1/1426 H, communicated to SAMA pursuant to the letter of His Excellency the Minister of Finance No. 1/S/694 dated 19/1/1426 H, approving the committee's recommendations and His Highness’s desire to proceed with them according to the following:
A- Their requests should not be answered. They must present the residence permits they hold to the bank in order to open accounts for them according to the issued instructions in this regard. B- If the applicant for opening an account does not hold a residency permit or any of the previously approved identifications, but only holds a Saudi passport, it is necessary to report each case to His Royal Highness the Minister of Interior or His Royal Highness the Deputy Minister. A copy of the passport and any identification the applicant holds must be attached in order to obtain approval. C- In case of approval of what is stated in paragraph (B), the Ministry of Interior shall notify the name of the bank where the account is to be opened, its address, and the account number. SAMA shall inform the bank to categorize the account as a high-risk account to ensure its monitoring and reporting of any violations that occur through it. The instructions were circulated to the regional Emirates, which in turn communicated them to some bank branches. Consequently, SAMA received a number of inquiries from these banks seeking clarification on the required procedures and whether to report cases presented to them through the regional Emirates or SAMA. Therefore, we inform you that the instructions in this matter stipulate that the bank should write to SAMA, which will, in turn, contact His Royal Highness the Minister of Interior or His Highness the Deputy Minister to obtain the necessary approvals in accordance with the instructions mentioned in the telegram from His Highness the Minister of Interior referred to above.
For your information and action accordingly, the text of these instructions will be included in the upcoming update of the rules for opening bank accounts and the general rules for their operation.
Requests for Disclosure or Attachment of Funds Held by Bank Customers
Referring to the circulars of SAMA related to requests for disclosure or seizure of the balances of bank customers, it has been noted that some banks delay in responding to these circulars, and since such transactions relate to cases in which there are often prisoners and the decision on their cases depends on the banks' answers, so SAMA hopes to direct your specialists to quickly respond to their circulars within a maximum of one week from its date, and the bank will bear the responsibility for the delay, in light of which a fine will be applied to the bank based on the powers vested to SAMA under the Law.
Banks Must Provide Civil Guards at their Governorate Locations and Equipped Vehicles to Transport Funds
SAMA received the letter of His Excellency the Minister of Finance No. 1/S/15584 dated 1/12/1425 H accompanied by a copy of the telegram of His Royal Highness the Governor of Riyadh Region No. 19418 A SH dated 27/11/1425 H referring to the telegram of His Royal Highness the Minister of Interior No. 52939 dated 28/12/1422 H and to the telegram of the Director of Riyadh Police No. 7299 dated 27/11/1425 H containing the need to assign banks to secure civil guards on their positions in the governorates and provide equipped vehicles to transport money and secure it with guarding so that it is not exposed to robbery and attack, especially in the governorates, and the desire of His Highness to baptize banks operating in the Kingdom to do so.
Therefore, we hope to abide by these instructions and take the necessary action in this regard.
Passport Stamp for Flight Attendants as ID Document
With reference to the telegram of His Excellency the Undersecretary of the Ministry of Interior No. 53/68281 dated 29/7/1425 H in response to our letter No. 616 M / M A T dated 27/3/1425 H, in which His Excellency referred to the approval of His Royal Highness the Minister of Interior to approve the visas registered on the passports of (Saudi) flight attendants if they are valid as an alternative to residency as an approved identity when opening and managing bank accounts after matching the visa with the Saudi Airlines cards granted to them.
Therefore, we hope to abide by the content of the telegram referred to above and to adopt the visas registered on the passports of flight attendants of (Saudia) if they are valid as an alternative to residency as an approved identity when opening and managing bank accounts after matching the visa with the Saudi Airlines cards granted to them.
Acceptance of Certified Letters from the Central Committee for Civil Identification as an Identity
With reference to the telegram of His Highness the Deputy Minister of Interior No. 17/54082 dated 10/6/1425 H based on the telegram of the General Director of Passports No. 4152/C dated 18/5/1425 H regarding the approval of the certified letters issued by the Central Committee for National IDs as proof of identity when reviewing banks so that the interests of applicants for citizenship are not disrupted during the period of consideration of their applications.
Accordingly, we hope that you will adhere to the content of the telegram referred to above and adopt the letters issued by the Central Committee for National IDs as proof of identity when opening and continuing to deal with bank accounts.
Verification of Civil Status Cards when Withdrawing any Amount of Money
SAMA received the letter of His Excellency the Acting Minister of Finance No. 1/S/8604 dated 8/6/1425 H, accompanied by a copy of the telegram of His Royal Highness the Minister of Interior No. 16/31340/2SH dated 3/6/1425 H, which includes that due to the financial issues, forgery and other issues received by the Ministry of Interior from some regions of the Kingdom, the phenomenon of using forged civil status cards to disburse sums of money from the accounts of some citizens has recently increased, causing embarrassment to banks and security services. His Highness requested a circular to banks to verify the civil status cards when withdrawing any sums of money for fear of using them for matters that disturb security.
Therefore, we hope to work and abide by the directives of His Highness, which is that civil status cards must be checked when withdrawing any amounts of money from the bank.
Complaints Against Banks
It is reported that it has recently been noted that complaints against banks have increased, and that their processing and litigation procedures is a costly work and affects the adequacy of work and the reputation of banks, and therefore banks must be careful in the work procedures, whether with full clarity with the customer, and not to exceed the fees, and not to include the customer in the list of distressed customers except in the narrowest limits and after the issuance of a judgment or recognition by the debtor.
We hope to abide by this and inform your branches to act accordingly.
Accepting New National IDs
SAMA received a letter from His Excellency the Minister of Finance No. 5623/1 dated 12/4/1425H, based on a letter from the Ministry of Interior telegram No. 562/JH dated 5/4/1425H, regarding the adoption of the new National ID cards for citizens, which will gradually replace the personal identification card (Civil Status Card) that will remain valid as long as it is active.
We inform you that SAMA approves the adoption of the new National ID.
Adoption of the New Name of the Public Pension Organisation in the Arabic and English languages
SAMA received the letter of His Excellency the General Director of the Public Pension Organization No. 3/6/1/4/4824 dated 23/2/1425 H referring to the Council of Ministers Resolution No. 277 dated 30/12/1423 H to transform the Pension Authority into a public institution with legal personality, culminating by the Council of Ministers' decision held on 3/1/1425 H approving the organization of the Public Pension Organization and containing the request to approve the new name of the Public Pension Organization in both Arabic and English, as follows:
PUBLIC PENSION AGENCY المؤسسة العامة للتقاعد
Website for New Opportunities for the Private Sector to Work with the World Bank Group
I would like to report that the World Bank recently launched a new website to introduce new opportunities for the private sector to work with the World Bank Group.
This website provides all the information that the private sector needs to work with the World Bank Group, whether in providing advice, selling directly to the Bank, participating in the implementation of the Bank's projects or searching for other job opportunities with the Bank.
Documentary Credits Opened by Saudi Banks for Food Supplies
Reference circular of HE the Governor No. BC/25 dated 24-1-1398 H, regarding the submission of the statement on documentary credits opened for by Saudi banks for food supplies to the Ministry of Commerce during the first week of each month, together with all amendments thereto,
SAMA has received the letter of HE the Minister of Commerce No. 274/3/2 dated 11-4-1398 H, noting that such statements are delivered to the Ministry in delay, not in a regular way and not covering all food supply items, as defined earlier. The letter further notes that the delay in sending these statements does not enable the Ministry to gather the statements and determine the status of food supplies to decide if urgent measures have to be taken.
Hence, SAMA calls on all Saudi banks to supply the Ministry of Commerce with the required information on the third day of the following month, at the latest, with a copy to the Ministry branches in Jeddah and Dammam, and to instruct your people in charge to comply with these instructions.
Without SAMA's Written Consent, Banks' Systems Shall Not be Linked to any Entity
This section is currently available only in Arabic, please click here to read the Arabic version.Renaming (Ministry of Water Branch)
SAMA received the letter of His Excellency the General Director of the General Directorate of Water in the Eastern Region No. 1/4546 dated 11/9/1424 H, in which reference is made to the circular of His Excellency the Deputy Minister of Water and Electricity No. 2055/1dated 12/5/1424 H to change the name of the branch of the Ministry of Water in the Eastern Region to the new name (General Directorate of Water in the Eastern Region) and given that some banks in the region are still issuing checks with the first name (Ministry of Water Branch).
Therefore, we hope to confirm to your specialists to adopt changing the name of the branch of the Ministry of Water in the Eastern Region to the new name (General Directorate of Water in the Eastern Region) and inform us of what is done.
Competence of the Banking Dispute Resolution Committee for the Examination of Cases Between Banks and their Customers
SAMA received the letter of His Excellency the Undersecretary of the Emirate of the Eastern Province No. 14/25111 dated 29/4/1424 H, regarding the lawsuits filed against the Emirate by banks against their customers, whether to claim amounts resulting from loans or facilities, and due to the large number of lawsuits filed against them without the jurisdiction of the Emirate.
We would like to emphasize the contents of Article II of the Royal Decree No. 729/8 dated 10/7/1407 H to form a committee at SAMA of three specialized persons to study issues between the two parties in accordance with the agreements signed between them.
Therefore, SAMA hopes to comply and abide by the instructions stipulated in the Royal Order, as well as inform the branches of its content.
Writing of "AL Madinah AL Munawwarah" in English
SAMA received the circular of His Royal Highness the Governor of Al Madinah Region No. 56649/2 dated 4/4/1424 AH, which includes the desire of His Highness to adhere to the writing of AL Madinah AL Munawwarah in English as follows (Almadinah).
License to Issue All Electronic Bank Cards
Here attached a copy of Council of Ministers Decision No. 59 dated 28/03/1420H, which stipulates that SAMA is the authority responsible for licensing the issuance of all electronic cash cards and similar products and overseeing them according to the instructions, standards, and conditions approved by SAMA.
Since that there are some cards in the local market used for online shopping and issued by non-banking entities, SAMA confirms that these cards are unauthorized and Local banks are required not to provide any facilities, including opening accounts for these entities, and to close any existing accounts. Additionally, they must provide the necessary information about this activity to SAMA.
Maintaining Confidential Information
Referring to SAMA's circular No. MAT 150 dated 29/6/1423 AH, which requests banks not to provide any financial or banking information about their clients to any entity, whether individuals, institutions, government agencies, or others, without obtaining SAMA's approval. Due to some inquiries from local banks regarding requests they received from their correspondents related to information about some clients of local banks.
We would like to emphasize that banks must differentiate between two types of requests. The first type pertains to credit inquiries, which usually occur between banks and do not require consulting SAMA. For other types of requests, the bank must conduct a comprehensive study of the concerned clients being inquired about and the transactions they have executed, clarifying all essential information available regarding their operations. Additionally, the bank should review the content of the request from the external entity to verify the nature of the questions included in the request, the purpose of the inquiry, and whether these questions align with or contradict the limits established under the principle of banking secrecy. Subsequently, the bank should present its views on the matter and forward it to SAMA for guidance, enabling SAMA to take the necessary action in this regard.
Security Instructions Regarding Providing Banking Services to Prisoners
SAMA received a letter from the Director General of Prisons No. 9/13346/11 dated 26/6/1423H, stating that some Prisoners wish to carry out certain banking services such as receiving remittances, withdrawing from their accounts, or opening bank accounts, Security instructions allow for their transfer to banks accompanied by guards, provided that the prisoner remains inside the vehicle and does not exit. Banking services should be provided to them within the vehicle by a bank employee, who will verify their identity and obtain their signature. However, some banks have refused to offer such service. Given the difficulties of bringing prisoners handcuffed and the associated security risks, a request was made to SAMA to approve the provision of these services to prison inmates.
In the interest of public welfare and the humanitarian circumstances of this segment of society, SAMA agrees that banks may fulfill requests for banking services for a prisoner, accompanied by security guards from the General Administration of Prisons, in security vehicles outside the branches, subject to the following conditions:
First: Obtain a letter from the accompanying guards from the prison administration in the city where the prison is located, addressed to the branch, specifying the prisoner's name, ID number, and the type of service requested. This letter should be kept in the customer file or with the transaction record for that day, according to the service.
Second: The primary teller at the branch or any higher official should be assigned to meet the prisoner in the security vehicle outside the branch premises. They must verify the prisoner’s identity and complete the necessary data according to the bank's usual procedures, matching it with the records. The interaction should be direct with the prisoner for the requested service, including receipt and delivery. If the requested service is to open a new bank account, the guidelines outlined in the Commercial Banks Account Opening Rules Guide issued in Circular No. 5082/BCI/55 dated 2/3/1423H must be followed, regarding the required documents, ID validity, and necessary addresses, including referencing the prison location at the time of the account opening request.
Third: SAMA encourages bank branches to expedite the requested services for the prisoner upon their arrival.
The Amount Withheld from the Monthly Salary of an Employee
This section is currently available only in Arabic, please click here to read the Arabic version.Obtaining a License from SAMA to Use Images of Saudi Currency for Advertisement Purposes to Market Banking Services
It was noted lately that some local banks are using photos of Saudi banknotes for promotional purposes to market banking products. Since this procedure is subject to control and requires a prior license from SAMA, banks must comply with the following requirements:
- A written bank undertaking not to photograph any Saudi or foreign currency in circulation before actually obtaining a license therefor.
- Application must be accompanied by the item to be manufactured or printed explaining technical specifications, regarding form, color and size to be published, along with the purpose of publishing photos of such currency and the connection between such item and the currency.
- In case of reduced photographing of the banknote, the size of the photographed banknote sample should not exceed two thirds of the regular size of the original banknote. But in case of enlargement, the size of the sample should not be less than one and a half times the regular size of the banknote.
- The separation of the original colors of any currency in circulation inside the Kingdom, in the process of photographing, is considered a violation subject to penalty.
- The signature of the minister or governor on the photographed banknote, as well as the words "undertaking" or issued as per", is not allowed to appear.
- The banknote photo must not appear all-alone but as a part of a large general view that is directly connected to the produced item.
- The publishing of a full three-dimensional photo of the banknote, as well as the producing of any piece of jewelry or a manufactured or non - manufactured item in the form of a full-size banknote, is not allowed. In case of publishing a three-dimensional photo of the banknote, the size of the photos should not exceed half the size of the banknote, provided it is published in a diametrical or inclined shape to exclude the possibility of using it as a banknote.
- All approved cliches and plates must have the word "sample" engraved thereon diametrically. The applicant must undertake not to use such cliches or plates for any purpose other than the approved one, keep same in a safe place and return to SAMA after fulfilling its purpose to be destroyed.
The licensing authority is entitled to withhold approval, without giving any reason, or to withdraw the license if it is discovered that the photo copying process or the material used in the production constitutes a means for misleading the public and encouraging others to use it in forgery operations. Any violation of these instructions shall fall under the criminal law for counterfeiting of currency as per Royal Decree No. 12, dated 20-7-1379 and the Anti-Counterfeiting Regulations promulgated by Royal Decree No. 114, dated 26-11-1380*.
*This Circular has been superseded by the Penal Code for Forgery Offenses issued by the Royal Decree No.(M/11), dated 18/02/1435H.Trading and Regulatory Aspects Governing Treasury Bills (T/Bills), Government Development Bonds (GDBs) and Floating Rate Notes (FRNs)
From time to time, Saudi Banks have raised queries on certain aspects of trading and regulations related to marketable Government Securities. The purpose of this circular is to clarify and in some cases re-state the official position on these issues. This circular should be read as a supplement to the previous circulars issued by SAMA on Government Securities.
1. Trading
All Government instruments (including Special Government Bonds) are marketable instruments (Government marketables). These are no restrictions on the size of holding or the type of investor. All resident and non-resident investors are eligible to buy T/Bills, GDBs, FRNs and Special Government Bonds.
2. Repo Facility
T/Bills carry a repo facility from SAMA for up to 75% of gross nominal holdings. GDBs and FRNs each carry a maximum repo facility of 25% of gross nominal holdings. Banks should seek approval from the beneficial owners for using their holdings for repurchase transactions.
3. Minimum Reserve Requirements
There are no minimum reserve requirements on funds received by the Banks from repos, as they are to be shown as repo liabilities and not customer deposits (hence exempted from Article 7(a) of the Banking Control Law). Funds provided to counterparties under reverse repos should be shown as secured lending.
4. Liquidity Ratio
Net Government marketables (Bank's gross holdings less customer holdings less repos) are treated as liquid assets and hence qualify for the liquidity ratio calculation under Article 7(b) of the Banking Control Law.
5. Capital/Deposit Ratio
The liabilities arising from the repo arrangements are not treated as deposit liabilities, and consequently they are not included in the calculation of the capital/deposit ratio under Article 6 of the Banking Control Law.
6. Capital Adequacy Ratio
Government marketables held by the banks for their own account and reverse repos (secured loans to counterparties) draw zero percent weight for calculating risk weighted assets for the purpose of risk weighted capital adequacy ratio.
7. Zakat Treatment
Saudi Banks and corporates are permitted to deduct nominal holdings of GDBs, FRNs and Special Government Bonds from their net assets (net worth) before Zakat is calculated. To avoid manipulation of Zakat calculations over the year-end, a 12-month moving average is used as the basis of this deduction. No deductions are permitted for securities held in the Trading Account. Customer's temporary holdings of securities via repos would not be eligible for Zakat deduction. Banks are required to issue certificates in the prescribed format for eligible securities sold to Saudi counterparties to enable them to claim Zakat deduction. This circular should be widely distributed to all relevant departments within the bank, its branches and its customers.
Amendment of Articles Related to Penalties for Cheques Issued without Sufficient Funds
Pursuant to Royal Decree No. 45 dated 12-9-1409 H, amending articles 118, 120 and 121 of the Commercial Papers Law.
We attach herewith a copy of these articles in Arabic and English, re penalties for checks issued without sufficient funds. You are requested to have them printed in Arabic on the front cover page and in English on the back cover page of the new checkbooks. For old checkbooks, you have to print them on a sticker.
Please be informed and act accordingly.
Dear Cheque Book Bearer :
In accordance with the provisions of the Saudi Commercial Papers Law, amended under Royal Decree No. 45 dated 12.9.1409H, the Cheque is for the beneficiary a payment instrument that is payable immediately on presentation. For any violation to this function, the drawer and endorser shall be subject to one of the following penalties:
Article 118 : Whosever draws a cheque having insufficient funds in his account for payment thereof, or withdraws such funds in whole or in part after delivering the cheque, or orders the drawee not to pay the cheque amount, or writes the cheque in such a way that impedes payment thereof, or endorses the cheque while knowing that it is unpayable or that there are insufficient funds in the account for payment thereof, shall be liable to imprisonment for a term not exceeding three years and a fine not exceeding SR 50,000. A repeat offense shall result in a doubling of the imprisonment and the penalties.
Article 120 : Whoever draws a cheque bearing an incorrect date, or no date, or drawn on a non-bank drawee shall be liable to a fine not exceeding SR 10,000.
Article 121 : Names of persons contravening the above Articles may be publicized according to the manner as specified in the related judgment.
Manual Transaction on Point of Sale
This circular is to advise and to clarify to all flic banks the initiatives SAMA is undertaking in relation with the various aspects of Point-of-Sale (POS) manual transactions. These initiatives are geared to improve controls against fraudulent transactions at POS, and are described below;
1.Manual transactions to be made optional at POS Terminals,.
It would be optional for banks to have manual transaction facilities at any POS terminated. Consequently, bank can at their own discretion, inform SAMA if they wish to terminate the manual feature at any POS terminal.
2.Purchase Advise Transactions (PAT)
This occurs when the normal processing of a POS transaction is not possible and involves the processing of PAT transactions. The transaction is based on a voice pre-authorization from the card issuing bank, where the issuing bank preapproves transactions by giving voice approval number.
In order to facilitate the settlement of such transaction, a special feature had been provided via which all the pertinent information of a transaction including the authorized transaction number provided by die issuing bank is transmitted via tile SPAN network from the merchant to the issuing bank as opposed to processing a voucher for settlement.
A number of merchants have been defrauding banks by utilizing this feature and using fraudulent approval number.
Accordingly, SAMA has initiated, with immediate effect, that this option can be terminated at any POS location at the discretion of the bank.
SAMA is also working on to modify the phrase on customer receipt for these types of transactions from “Approved” to Acknowledged”’
3.Other Measures:
SAMA is also advocating to all the banks that they educate their retailers on the following aspects of PAT.
- Explain this service in details to retailers who use POS terminals.
- Demonstrate the steps to perform this service.
- Conditions and circumstances to use this service.
- PAT will not be settled by the bank before making sure that the retailer has given an authorization code by the bank.
- That the result of misusing this service will be the retailer’s responsibility, as per the agreement between the bank and the retailer.
The Agency also urges the banks to alert its staff including the marketing people who promote POS terminals and also those who monitor the process of receiving and accepting credit card transactions on POS terminals as to the technical details of PAT. Banks should also try to ensure that their relevant staff is aware that the PAT transactions have valid authorization codes which are given to the retailers.
If you have any questions, please contact our Technology Department.
Updating Client Information Every Five Years at Most
This section is currently available only in Arabic, please click here to read the Arabic version.Follow-up Circular- Regarding Printing Transfer of Bank Customer Checks from the Government Printing Service to Commercial Printing Presses
Further to circular No. BC/200 dated 20/7/1414H regarding the transfer of printing bank customers' checks from the Government Printing Service to commercial printing presses, and in the desire of SAMA to continue the development process of the automated system in clearing rooms at SAMA branches in Riyadh, Jeddah, and Dammam by improving the cheque printing specifications.
Therefore, SAMA – General Administration for Bank Supervision/Banking Technology Department – must be provided with a monthly periodic statistic that includes the following:
- Total number of printed cheques for the bank (Customer cheques - Special cheques - Bank cheques - Unified account.... etc.)
- The total number of cheques to be paid at the counter (the customer receives the cheques value directly from the branch).
- The total number of cheques cleared internally (where the drawer and the beneficiary are customers of the same bank).
To be sent according to the attached forms (in Arabic or English).
ERMS
In order to further automate its prudential reporting system, SAMA will introduce the Electronic Returns Management System (ERMS) which will enable Saudi Banks to transmit data electronically through a telephone link thus replacing the diskettes currently utilized for this purpose.
The Agency also wishes to streamline the existing reporting requirements, to respond to recent developments in the banking environment, introduction of new banking products and services, and rapid expansion in derivatives and off-balance sheet items. In this regard SAMA has decided to amend its Prudential Returns package, and has accordingly deleted, merged, amended existing returns and introduced new returns. Consequently, the attached revised list of returns describes the changes made. This new package of Prudential Returns has also been integrated into the ERMS, and accordingly Saudi Banks are expected to transmit all prudential information including amended and new returns through the ERMS.
The Agency expects all Banks to be in a position to use the ERMS by the end of June 1995 A.D. Accordingly, commencing July 1995 A.D., the Agency expects the Banks to submit their June 1995 A.D. data utilizing both the ERMS and diskettes. This parallel run will be for a period of three months staring July 1995 A.D. and will enable the Agency to ensure the proper implementation of the ERMS.
We do not expect Banks to face any major problems in implementing this amended package as the Banks have already been submitting the additional information requirements including data related to derivatives, large exposures, etc. through existing means. However, if there are still any questions or clarifications, the staff in our Banking Control Dept, will be available to discuss these requirements with you.
SAMA
Returns Description of Changes
Return Description
No Change
Amend
New
WK1 Money Supply Return √
χ
χ
WK2 Foreign Currency Exposure √
χ
χ
Ml Statement of Assets & Liabilities χ
√
χ
M2.1 Maturity Schedule - Analysis for Credit Facilities χ
√
χ
M2.2 Maturity Schedule - Analysis for Investments √
χ
χ
M2.3 Maturity Schedule-Analysis for Deposits √
χ
χ
M2.4 Marketability Schedule for Investments √
χ
χ
M3 Analysis of Govt. Bonds, Treasury Bills & Floating Rate Notes χ
√
χ
M4 Purchase & Sale of Foreign Currency √
χ
χ
M5 Capital Adequacy Pursuant to Article #6 of Banking Control Law √
χ
χ
M6.1 Statutory Deposits Pursuant to Article #7 of Banking Control Law √
χ
χ
M6.2 Liquid Reserves Pursuant to Article #7 of Banking Control Law √
χ
χ
M7 Secured & Unsecured Loans √
χ
χ
M8 Analysis of Secured Loans by Underlying Collateral √
χ
χ
M9.1 Summary of Guarantees Issued by Banks in Favor of Govt. & Quasi Govt. Agencies √
χ
χ
M9.2 Details of Change to Guarantees Issued by Banks in Favor of Govt. & Quasi Govt. Agencies √
χ
χ
M10 Import Financing Statistics √
χ
χ
M11 Other Assets √
χ
χ
M12 Other Liabilities √
χ
χ
M13 Risk Concentration (10 Largest Exposures) - Banking √
χ
χ
M14 Exposures to Non-Banking Counterparties in Excess of 10% of Capital & Reserves χ
χ
√
M15 Foreign Currency Exposure Analysis by Currency of Reporting Institutions. √
χ
χ
M16 Derivative Activity χ
χ
√
M17.1 Deposits/Placings. Net Interest/Arbitrage Swaps & Net Off Balance Sheet Items By Maturity √
χ
χ
M17.2 Deposits/Placings. Net Interest/Arbitrage Swaps & Net Off Balance Sheet Items By Maturity √
χ
χ
M18 Exposures to Connected Non-Banking Counterparties in Excess of 5% of Capital & Reserves χ
χ
√
Q1.l Summary Statements of Revenues & Expenses √
χ
χ
Q1.2 Statement of Revenues & Expenses by Currency χ
√
χ
Q2 Non-Resident Assets by country χ
√
χ
Q3 Non-Residents Exposures by Country χ
√
χ
Q4 Non-Resident Liabilities by Country χ
√
χ
Q5 Net Non-Resident Assets/Liabilities χ
√
χ
Q6 Maturity Schedule of Assets & Liabilities by Major Currencies √
χ
χ
Q7 Statement of Government Deposit √
χ
χ
Q8 Deposit Structure by Amount & Number of Accounts for Non-Banks √
χ
χ
Q9 Deposit Structure by Amount & Number of Accounts for Banks √
χ
χ
Q10 Credit Facilities Structure √
χ
χ
Q11 Collective Investment Schemes √
χ
χ
Q12 Related Party Transactions √
χ
χ
Q13 Portfolio Management √
χ
χ
Q14.1 Capital Adequacy Return/Summary √
χ
χ
Q14.2 Capital Adequacy Return/Detailed √
χ
χ
Q14.3 Capital Adequacy Return/Liabilities & Capital √
χ
χ
Q14.4 Capital Adequacy Return/Replacement Cost Method √
χ
χ
Return Description
No Change
Amend
New
Q14.5 Capital Adequacy Return/Original Exposure Method √
χ
χ
Q15.1 Statement of Private Sector Imports Financed through Commercial Banks by Type of Goods χ
χ
√
Q15.2 Statement of Private Sector Imports Financed through Commercial Banks by Exporting Country χ
χ
√
Q15.3 Statement of Private Sector Export Financing through Commercial Banks by Type of Goods χ
χ
√
Q15.4 Statement of Private Sector Export Financing through Commercial Banks by Importing Country χ
χ
√
Q16 Credit Facilities by Economic Activity χ
χ
√
S1 Analysis of Doubtful Loans & Advances √
χ
χ
S2 Loan Loss Provisions-Specific by Major Categories of Loans √
χ
χ
S3 Loan Loss Provision (LLP)- Specific by Economic Sector √
χ
χ
S4 Classification of Credit Facilities Investments & Commitments by Economic Sectors √
χ
χ
S5 Permanent Capital or Long-Term Loans to Overseas Subsidiaries, Agencies & Branches √
χ
χ
S6 Due from/Due to Head office/Branches/Subsidiaries Exclusive of Permanent Capital χ
√
χ
S7 Investments by Country √
χ
χ
S8 All Employee Information χ
√
χ
Al Significant Shareholding χ
√
χ
A2 Summary of Strategic & Operational Plans √
χ
χ
A3 Summary Organization Chart √
χ
χ
A4 Assets Held or Taken Over by Banks Pursuant to Settlement on Claims χ
√
χ
A5 Fixed Assets, Disposals & Acquisitions √
χ
χ
A6 Lease Obligations of Banks √
χ
χ
A7 Board of Directors √
χ
χ
Note :
Old M14 replaced by new M14
M15.1 and M15.2 merged into M15
Old M16 deleted
S8.1 and S8.2 merged into S8
A4.1 and A4.2 merged into A4
The New Forms for Letters of Guarantee (Preliminary - Final - Advance Payment)
Re SAMA circular 8260/BC/152 dated 15-6-1408H (3-2-1988), and the attached letter of HE the Minister of Finance & National Economy No. 17/67 dated 2-4-1408H related to the rules of bank guarantees, we hereby attach the new forms of bank guarantees (preliminary, final and advance payment) and the relevant extension forms.
We wish to advise you that HE the Minister of Finance & National Economy has approved in his letter No. 3/3321 dated 14-5-1411 the use of these forms instead of the currently used forms attached to the old bank guarantees rules circulated to the banks via the above-mentioned circular.
The new forms contained some material amendments aimed at regulating the procedures of confiscation and extension and enhancing confidence in letters of guarantee. Among such material amendments are the following:
Emphasizing that the relation between the bank issuing the letter of guarantee and the beneficiary is a direct relation independent of any other relation between any of the two parities and third parties. This means the extension request must be addressed by the beneficiary directly to the issuing bank which will effect the extension for a period not exceeding 365 days each time. It further means that the issuing bank, in the event it fails to effect extension, has to pay the value of the guarantee to the beneficiary.
In order for the issuing bank to be able to collect the value of the confiscated guarantee from its client, banks should insist on the client who requests the issuance of a letter of guarantee to irrevocably agree that the issuing
bank can extend the validity of the guarantee, at beneficiary request for any period (s), without the consent of the client and notwithstanding any objection thereby, provided the extension should not exceed 365 days each time. In the event the bank fails to extend before the expiry of the guarantee, it shall have to pay the guarantee value to the beneficiary.
- The new forms did not include the provision which required the beneficiary, in its sole discretion, to prove any default in the performance of the contract between beneficiary and the opener of the guarantee, in order not to be construed as a conditional letter of guarantee or used as a means to weaken the guarantee.
The new forms specifically provided for the sole jurisprudence of Saudi courts to rule on any dispute according to Saudi laws and regulations.
Banks are not allowed to issue new letters of guarantee or to accept foreign guarantees not in conformity with the new forms, unless SAMA otherwise approves. Guarantees submitted by foreign banks in English may be accepted, if in conformity with the new forms (with Arabic translation attached). The covering letter sent by the local bank to the beneficiary must be accompanied by an Arabic translation certified by the bank so that the contents of the guarantee could be understood.
With the exception of above-mentioned amendments, all other rules related to bank guarantees, as per circular 8260/BC/152 dated 15-6-1408H shall remain in force.
Letter of Guarantee for Advance Payment
His Excellency Place.......................Number ..………………… Date….………………… Since your have awarded our clients Messrs ("the Contractor") a contract ("the Contract") for…………….(Description and Identity of the Project) and since you have agreed to reimburse to the Contractor an advance payment ("the Advance Payment") up to % of the value of the Contract we………………. ("the Guarantor") hereby irrevocably and unconditionally guarantee the payment to you of Saudi Riyals………………representing the amount of the Advance Payment and accordingly covenant and agree as follows:
(a) The guarantor shall forthwith on demand made by you in writing and notwithstanding any objection by the Contractor pay you such amount or amounts as you shall require not exceeding in aggregate the above-mentioned amount of Saudi Riyals …………………. by transfer to an account in your name at such bank in Saudi Arabia as you shall stipulate or in such other manner as shall be acceptable to you.
(b) Any payment made hereunder shall be made free and clear of, and without deduction for or on account of, any present or future taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature whatsoever and by whomsoever imposed.
(c) The covenants herein contained constitute unconditional and irrevocable direct primary obligations of the Guarantor. No alteration in the terms of the Contract and no modification or extension of the Contract or in the extent or nature of the work to be performed thereunder and no indulgence, allowance of time by you or other forbearance or concession or any other act or omission by you which but for this provision might exonerate or discharge the Guarantor shall in any way release the Guarantor from any liability hereunder.
(d) This guarantee shall remain valid and in full force and effect up to the end of the …………… day of ……………… of the year ………… provided that it is a condition of this guarantee that, in the event you give the guarantor on or prior to the said expiry date of this guarantee (or any subsequent extension of that expiry date in accordance with this proviso) signed written notification requesting an extension, the Guarantor will (a) automatically extend this guarantee for such period (not exceeding 365 days) from that expiry date or extension as you may specify in that notification or (b) pay the amount of the guarantee.
(e) The Guarantor represents and warrants that the amount of the guarantee gerein contained does not exceed 20 per cent of the total of the paid-up Capital and Reserves of the Guarantor.
(f) This guarantee is governed by and shall be construed in accordance with the laws and regulations of the Kingdom of Saudi Arabia.
(Authorised Signature)
(Bank)
Head Office
Letter of Guarantee for Advance Payment
His Excellency.... Place …………………. Number …………………. Date …………………. Since your have awarded our clients Messrs …………………. ("the Contractor") a contract ("the Contract") for …………………. (Description and Identity of the Project) and since you have agreed to reimburse to the Contractor an advance payment ("the Advance Payment") up to % of the value of the Contract we …………………. ("the Guarantor") hereby irrevocably and unconditionally guarantee the payment to you of Saudi Riyals …………………. representing the amount of the Advance Payment and accordingly covenant and agree as follows:
(a) The guarantor shall forthwith on demand made by you in writing and notwithstanding any objection by the Contractor pay you such amount or amounts as you shall require not exceeding in aggregate the above mentioned amount of Saudi Riyals …………………. by transfer to an account in your name at such bank in Saudi Arabia as you shall stipulate or in such other manner as shall be acceptable to you.
(b) Any payment made hereunder shall be made free and clear of, and without deduction for or on account of, any present or future taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature whatsoever and by whomsoever imposed.
(c) The covenants herein contained constitute unconditional and irrevocable direct primary obligations of the Guarantor. No alteration in the terms of the Contract and no modification or extension of the Contract or in the extent or nature of the work to be performed thereunder and no indulgence, allowance of time by you or other forbearance or concession or any other act or omission by you which but for this provision might exonerate or discharge the Guarantor shall in any way release the Guarantor from any liability hereunder.
(d) This guarantee shall remain valid and in full force and effect up to the end of the …………………. day of …………………. of the year …………………. provided that it is a condition of this guarantee that, in the event you give the guarantor on or prior to the said expiry date of this guarantee (or any subsequent extension of that expiry date in accordance with this proviso) signed written notification requesting an extension, the Guarantor will (a) automatically extend this guarantee for such period (not exceeding 365 days) from that expiry date or extension as you may specify in that notification or (b) pay the amount of the guarantee.
(e) The Guarantor represents and warrants that the amount of the guarantee gerein contained does not exceed 20 per cent of the total of the paid up Capital and Reserves of the Guarantor.
(f) This guarantee is governed by and shall be construed in accordance with the laws and regulations of the Kingdom of Saudi Arabia.
(Authorised Signature)
(Bank)
Head Office
Letter of Preliminary Guarantee
His Excellency.....................Place. Number ………… Date ………… Since our clients Messrs …………………. ("the Contractor") have submitted their bid to perform (or supply). (State information concerning the purpose of operation) we …………………. ("the Guarantor") hereby (name of Bank)
irrevocably and unconditionally guarantee the payment to you of Saudi Riyals ……………….…… being ……………% of the value of the bid they submitted pursuant to the tender invitation, and accordingly covenant and agree as follows:
(a) The guarantor shall forthwith on demand made by you in writing and notwithstanding any objection by the Contractor pay you such amount or amounts as you shall require not exceeding in aggregate the above-mentioned amount of Saudi Riyals …………………. by transfer to an account in your name at such bank in Saudi Arabia as you shall stipulate or in such other manner as shall be acceptable to you.
(b) Any payment made hereunder shall be made free and clear of, and without deduction for or on account of, any present or future taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any nature whatsoever and by whomsoever imposed.
(c) The covenants herein contained constitute unconditional and irrevocable direct primary obligations of the Guarantor. No alteration in the terms of the Contract and no modification or extension of the Contract or in the extent or nature of the work to be performed thereunder and no indulgence, allowance of time by you or other forbearance or concession or any other act or omission by you which but for this provision might exonerate or discharge the Guarantor shall in any way release the Guarantor from any liability hereunder.
(d) This guarantee shall remain valid and in full force and effect up to the end of the …………………. day of …………………. of the year …………………. provided that it is a condition of this guarantee that, in the event you give the guarantor on or prior to the said expiry date of this guarantee (or any subsequent extension of that expiry date in accordance with this proviso) signed written notification requesting an extension, the Guarantor will (a) automatically extend this guarantee for such period (not exceeding 365 days) from that expiry date or extension as you may specify in that notification or (b) pay the amount of the guarantee.
(d) The Guarantor represents and warrants that the amount of the guarantee gerein contained does not exceed 20 per cent of the total of the paid up Capital and Reserves of the Guarantor.
(e) This guarantee is governed by and shall be construed in accordance with the laws and regulations of the Kingdom of Saudi Arabia.
(Authorised Signature)
(Bank)
Head Office
Form of Request for Extension of A Preliminary Guarantee
Ref: --------------------------------------
Date://14 H
//
Messrs : ( The Bank)
Greetings :
With reference to the preliminary guarantee issued by you in our favour by you under No. _____________ dated __________________ for the sum of SR.
(SR____________________only) as requested by your clients, , in connection with their offer for _____(operation)____; and
Whereas, the said guarantee expires on ___/___/___; and we have not been able to decide on the above mentioned tender; and
Whereas, we have not yet received from the applicant for the guarantee any evidence of the withdrawal of their offer, and in accordance with Article (9) of the Implementing Rules of the Regulation for Procurement of Government Purchases, which provides that a preliminary guarantee should remain valid until the date specified for deciding upon the tender; and
Pursuant to Article (10) of the above-mentioned Rules, which provides that an offer should remain valid and irrevocable until the date specified for deciding upon the offers, and that the concerned authority can request the offeror to extend the validity of his offer and that if the offeror has not requested that his offer be withdrawn and his guarantee returned after the expiration date of the guarantee he will be considered willing to remain committed to his offer:
We hereby request you to extend this guarantee for a period of with effect from its expiry date mentioned above and in the event you do not effect the required extension and provide us with evidence thereof before the expiration of the period of validity of the guarantee, we wish that the guarantee be called and that we be paid its value.
Regards:
Name:
Signature:
Extension of Final Guarantee Form
No.: / /
Date: / /
Corresponding to: / /
Messrs. (The Bank)
Greetings,
Re unconditional letter of guarantee issued in our favor No. dated// in the amount of SR (only Saudi Riyal) which expires on ; and
Re paragraph (d) of this guarantee, under which you undertook to extend its validity upon our request for a period not exceeding 365 days,
We hereby request you to extend this guarantee for a period of as of the date of its expiry set forth above. In the event you fail to effect the requested extension and provide us with documentary evidence before the expiry date of the guarantee, we kindly request you to confiscate the guarantee and advise us accordingly.
Regards:
Name:
Signature:
Extension of Advance Payment Guarantee Form
No.: / /
Date: / /
Corresponding to: / /
Messrs. (The Bank)
Greetings,
Re unconditional advance payment letter of guarantee issued in our Favor No. dated ____/____/_____ in the amount of SR(only Saudi Riyal ___________) which expires on; and
Re paragraph (d) of this guarantee, under which you undertook to extend its validity upon our request for a period not exceeding 365 days,
We hereby request you to extend this guarantee for a period of starting as of its date of expiry set forth above, reducing its value by the same amount already recovered to become SR ___________ (Saudi Riyal_____________). In the event you fail to effect the requested extension and provide us with documentary evidence before the expiry date of the guarantee, we kindly request you to confiscate the guarantee and advise us accordingly.
Regards:
Name:
Signature:
Ensure Accuracy in Preparing the Weekly Statement for Documentary Credits and Collection Letters
Reference our circular No. BC/201 dated 2-6-1411 H, regarding the daily statement banks are supposed to submit to SAMA on documentary credits and letters of collection according to the attached new form starting the week ending 10-6-1411 H,
By reviewing the statements submitted in the two weeks ending 10 & 17-6-1411 H the following was noticed:
1- Some statements were submitted according to the old form.
2-Some banks did not submit the letters of collection.
3-Some banks did not exercise accuracy in preparing the statements, especially with regard to amount.
Given the importance of the required statement, SAMA calls on you to instruct your people in charge to practice accuracy in preparing this statement and to submit it to us every Saturday, according to the new form so that we can prepare a consolidated statement for timely submittal to the concerned authorities.
The New Model for the Weekly Statement of Documentary Credit and Letters of Collection by the Bank Execution and all its Branches for (Rice, Sugar, Frozen and Chilled Meat, Vegetable Oil and Milk Powder)
Further to our circular No. 1734/BC/52, dated 14-2-1411 H, regarding the weekly statement of documentary credit and letters of collection executed by the bank and all its branches for rice, sugar, frozen and chilled meat, vegetable oil and milk powder, we would like you to submit this statement according to the attached new form starting the week ending 10-6-1411 H.
Banking Control
Documentary Credit Opened by The Bank during
The Period from ------------to ----------- in SR 1000
Name of Item
Type
Quantity in Tons
Value in SR
Remarks
Rice American
Siamese
Basmati
Australian
Others
Indicate exporting countries and currency of transaction Sugar Check
Chinese
European
Others
The transaction (if possible) Meat Poultry Chilled
and FrozenVegetable Oil Milk Powder Total Banking Control
No.
Date:
Att.
Letters of Collection Executed through Bank Branches during the period from ------ to ------- in SR 1000
Name of Item
Type
Quantity in Tons
Value
in SR
Remarks
Rice American
Siamese
Basmati
Australian
Others
Indicate exporting countries and currency of transaction Sugar Check
Chinese
European
Others
The transaction (if possible) Meat Poultry Chilled and Frozen Vegetable Oil Milk Powder Total Recommendations of the Committee Represented by the Ministry of Finance and National Economy, MOPTT, the General Audit Bureau and SAMA
Following are the recommendations made by a committee representing the Ministry of Finance and National Economy, MOPTT, the General Audit Bureau and SAMA to set forth the controls related to the payment of telephone and telex invoices through the banks:
- Banks should use both the Hejira and Gregorian calendars.
- Banks main branches should prepare a daily statement (Form (1)) representing a summary of revenues collected by their branches, as one of the documents to be delivered to the telecommunications representative, together with payment coupons and bank payment records. Bank branches must practice accuracy in preparing such a statement which will help in expediting the process of matching daily collections with final collections.
- Banks should stamp all documents related with the collection of telephone and telex charges with the stamp 'paid' or 'collected' as agreed with the General Management of Telecommunications.
- Banks should fully comply with specific deadlines for the transfer of collected revenues to SAMA.
- Banks should assign one person in each main branch for the Financial Department in the telecommunication area to interface therewith regarding collection, transfer of funds and matching to avoid problems in this respect.
- Adding (2) extra working days to the present period of (2) days for matching revenues collected by banks with revenues that ought to be transferred to SAMA. This means that the bank has to deposit the collections of the 1st period (1-15 of each month) on the 19th day of that month at the latest, if this date does not fall on a Thursday or Friday. Transfer of funds collected during the second period (16-30 of each month) should be effected on the 4th day of the following month at the latest. In other words, the deposit of revenues should take place twice a month on the 4th and 19th day of the month.
Please be informed and instruct your people in charge to comply with these recommendations.
Arm-Carrying Controls for Saudi Guards of Banks
Reference our circulars No. BC/288 dated 22-8-1407H and No. BC/243 dated 18-9-1408H, regarding compliance with the controls of arm-carrying by Saudi guards of banks and money-exchange firms,
SAMA has received the letter of HE the Director of General Security No. 475/A dated 19-3-1411H, noting that some banks are not complying with such instructions. HE asked us to notify banks and money exchangers and stress on them the need to comply with the controls of arm carrying by the guards of banks and money exchange firms and to supply their guards and the guards of their branches with adequate fire arms and electric sticks.
SAMA, therefore, calls on you to implement these instructions and to notify your branches to act accordingly. You may apply to the Ministry of Interior to obtain your need of these items if you do not have them.
Submitting Order Confirmation Receipts to Clients
The examiners of the Securities Department have noticed through their inspection visits to central units for share trading and some branches licensed to act as brokers that clients are not provided with an order conformation receipt.
Since such receipt is the basic document that gives the client full information on the order status, regarding the price at which the order was concluded, the number of shares concluded, date of the conclusion of transaction and due commission.
We, therefore, stress on central units and branches to provide clients with such receipts to enable them to follow up on the status of their orders.
Guarantees Submitted to DZIT by Taxpayers
SAMA has received the Income Tax Department ('DZIT') letter No. 8272/5 dated 16-10-1410H stating that DZIT is facing some difficulties which effect the acceptance of above-mentioned guarantees and need to be returned to the issuing bank or tax payer to be completed, As a result, DZIT cannot respond in time to tax payers' request for tax certificates.
DZIT summed up these difficulties as follows:
The difficulty of verifying the signatures on the guarantee;
The variation between the authorized signatures and the signature samples in the booklet delivered to DZIT;
Issuing of the guarantee with a single signature;
Guarantee is not stamped by the bank;
What is meant by category 'A' and category 'B' signatures.
SAMA, therefore, stresses on banks to use special DZIT bank guarantee forms communicated to you via SAMA circular No. BC/143 dated 17-3-1410H and to issue bank guarantees in a regular way in conformity with the internal laws of the bank. Banks are further required to supply DZIT with samples of authorized signatures and any amendments thereof, to be able to verify same. DZIT, however, is not responsible for the non-validity of signatures on guarantees issued in its favor since this the sole responsibility of the bank. We hope banks will respond and cooperate with DZIT in all matters related to guarantees issued in its favor and to explain to DZIT
what is meant by category 'A' and category 'B' signatures and whether each category is authorized to sign on a specific amount.
SAMA Advises all Bank Specialists to Practice Care and Accuracy When Preparing Vouchers of Government Revenues Collected Through Their Channels
SAMA has received several remarks from its branches regarding errors or violations committed by some banks in transferring government revenues (such as telephone and telex invoices revenues) which are collected by their branches. Among such errors or violations are the following examples:
- The delay of some banks in transferring said revenues to SAMA account in a timely manner according to signed agreements in this respect.
- Transferring revenues sometimes in excess or short of their actual amount.
- Errors in vouchers such as misquoting the number of the main or sub account, or quoting telephone fees as telex fees or invoices settled by subscribers in one city and recorded in the name of another city in the same region of the bank.
SAMA would like the banks to instruct all those in charge to practice care in preparing vouchers of government revenues collected thereby and to avoid such errors and violations.
Adhering to Attaching the Promissory Note and Bill of Exchange Models Prepared by the Ministry of Commerce
Reference our circular No. 15361/BC/307 dated 19-11-1405 H (5-8-1985A.D) regarding the samples of bill of exchange and promissory notes prepared by the Ministry of Commerce for guidance.
The Ministry of Commerce has noticed that the bills of exchange and promissory notes used by banks do not fulfill the conditions stated in the Commercial Papers Law, and, as a result, the banks are loosing cases connected with such Commercial Papers. The Ministry, therefore, has prepared two forms for bills of exchange and promissory notes and recommended their use.
We attach herewith copy of the bill of exchange and promissory note for guidance.
Some Banks, Investment Companies, Financial Institutions and Other Entities Residing Outside KSA are Marketing Investment Funds and Various Investment Services to Citizens and Residents Within KSA
It was noted lately by SAMA that some banks, investment firms, financial establishments and others, residing abroad, are marketing investment funds and various investment services to Saudi nationals and residents.
Hence, SAMA would like to remind banks not to open any account to any such firms and establishments to practice such activities without a prior written approval by SAMA.
In the event one of the banks had opened any account connected with such activities, we request such bank to provide us with the balances and information related to such activities.
The Format of the Guarantee for Final Settlement of Income Tax, Late Penalties and Zakat
Attached herewith please find forms of guarantees for final assessment of income tax, delay penalties and Zakat, as proposed by DZIT.
Please be informed, use this form when issuing guarantees in favor of DZIT and instruct your branches to act accordingly.
Number and Photocopy of ID, and Photocopy of Family Booklet To be Taken by Central Unit Employees and Branches
The share trading system requires that full information about the trader be taken and made easily accessible in the event an ED is available.
We kindly request you to notify all your brokers to comply herewith by taking the ID number for each client who desires to buy shares and has reached the legal age for carrying an ID, along with a copy thereof and a copy of the family booklet for members of his family. In case no such family booklet is available, a copy of the ID for family members included therein may be attached.
Regulation of Attachment Procedures on Debtors, Individuals and Companies
We attach a copy of Royal Decree M/4 dated 1-3-1410 H regarding the regulation of attachment procedures on debtors, individuals and companies.
Delivery of Cargo to Importers Shipped by Shipping Documents Issued for The Banks
We inform you that the General Port Authority has issued circular No. 117/T/1 dated 9-12-1409H to all shipping agents saying that ship owners and shipping agents should not deliver to importers cargo covered by shipping documents for the order of a bank, unless the shipping documents are endorsed by the bank for the importer or the importer submits a bank guarantee of a value equal to the value of the cargo mentioned in the shipping documents.
Please be informed and notify your branches accordingly.
Banks Must Refrain from Providing Loans to their Clients Unless they Have Consistent Financial Data About them
SAMA has noticed that some banks are extending loans to their clients who do not keep regular account books and records and, consequently, no financial statements are available to assist the bank in determining their credit standing.
Pursuant to para (1) of article I of the Rules for Enforcing the Provisions of the Banking Control Law, banks are requested to stop granting any credit facilities exceeding SR ten million to any borrower who does not keep regular financial statements and records on his financial position and current obligations.
Please acknowledge receipt and notify all your branches to act accordingly.
Investment Funds Programs
In the last few months Saudi banks started establishing and marketing investment funds programs to investors in the Kingdom. Such programs included all open-ended multi-purpose and specialized close-end investment funds in various investments domains.
To make sure that such programs have met the minimum basic values and disclosure criteria, SAMA is requesting all banks to apply thereto for approval of any mutual investment fund to be established at least 45 days in advance. Such application shall be addressed to the Director General of banking Control, containing the following information:
- Promotional publications or explanatory memos on the investment program. - The agreement with the client in accordance with the terms and conditions of the program. - A description of arrangements made with the custodian bank or any sub-agreement with investment managers of another financial or investment institution. SAMA will study this information and discuss them with bank officials, if need be, before final approval. Banks are also required to seek SAMA's approval for any future material amendment in the program terms and conditions.
Furthermore, the banks are required to provide SAMA with a quarterly report on investment funds now existing, or to be established later, as per attached form. Such report must be completed and delivered within 30 days from the end of each quarter. Banks must also provide, within 90 days from the end of the fiscal year of the fund, with audited annual statements for each fund, containing the financial position of the fund, a profit and loss statement, a list of the fund assets at market price and cost.
Ensuring that No Credit Facilities or Financial Obligations are Extended in Favor of a Single Client or a Group of Related Clients
Reference the provisions of articles (8) and (16) of the Banking Control Law, SAMA would like all Saudi banks to refrain from granting any credit facilities or incurring any other direct or indirect financial liabilities with respect to any single client or a group of related clients for amounts aggregating more than 25% of the bank's total paid-up capital and reserves.
The term "credit facilities and financial liabilities" covers all current overdraft accounts, term loans, accepted and discounted commercial papers, the part of letters guarantee and documentary credits that is not covered by cash guarantee, current documentary credit, over-draft client accounts and any other financial obligations, in addition to the client obligations toward other bank clients, irrespective of the currency in which such facilities and obligations are granted, or of any kind of guarantees available therefor. It is to be noted that this covers facilities and liabilities granted by all bank branches inside or outside the Kingdom.
The term "group of related clients" means all the interrelated accounts of the client as follows:
If the client who receives the facility, or the bank is incurring the liabilities on his behalf, is a natural or juristic person, the concept covers all the individual establishments owned by the client, the companies in which the client is a general partner, pursuant to the provision of the Companies Regulations, as amended, and limited liability companies in which he owns more than 50% of its capital shares, manages or is a directly or indirectly controlling partner irrespective of his share therein.
With regard to facilities and liabilities existing before the relationship between the bank and the board of directors member or auditor, the bank should not renew or extend such facilities or liabilities unless the guarantees referred-to in the previous paragraph are honored. With regard to facilities and liabilities for which the bank and the client did not make any maturity arrangements, such arrangements should be made promptly upon the establishment of the afore-mentioned relationship whereby payment should be effected within one year, unless such guarantee have been already paid. SAMA may extend this period under its own conditions, if it sees any justifications for such extension. In this respect, the bank has to obtain the prior written approval from SAMA on a case by case basis.
The power to renew or extend the afore-mentioned credit facilities or financial liabilities shall be restricted to the board of directors of the bank and may not be delegated to any of the bank managers or board members.
Each board member or accounts controller shall have, upon choosing to hold such an office, to disclose his relationship with the establishments afore mentioned.
All representatives of a foreign partner in the bank shall have to disclose their relationships with the establishments afore mentioned.
Please be informed, act accordingly and notify your accounts controllers. SAMA is prepared to provide you with any explanations in this regard.
Regulations Governing Import Operations
Re SAMA Circular No. BC/196 dated 28-3-1398H in connection with the letter of HE the Minister of Commerce No. 920 dated 12-3-1398H, containing the provisions regulating import operations, including the terms of letters of credit,
SAMA has received the approval of HE the Minister of Finance & National Economy of the amendment of paragraph (a) of article I of letters of credit terms, which was notified to you via SAMA circular referred-to above, to the effect of accepting certificates of origin from the exporting country, provided the production source of each product is mentioned along with evidence of origin stamped on the goods themselves.
We hope this amendment is adopted and your regional management and branches in all Saudi cities and points of entry are notified to act accordingly.
Banks are Instructed Not to Hire Any Employee Without Obtaining a Certificate of Conduct and Character from their Previous Employer
Reference our circular No. BC/198 dated 12-11-1400H, and in view of inquiries by the banks about employment applications by some Saudis who were working for other banks, we wish to refer you to our above mentioned circular to comply therewith, particularly in connection with the provision which requires the applicant to obtain a written approval from the bank he was working with, along with a good conduct certificate, before the bank is allowed to employ him.
Please be informed, notify all your branches of same and acknowledge receipt.
Depositing Banks' Revenues into the Branches of SAMA
SAMA was informed that some banks are delivering their deposits to SAMA branches under the cards of other banks. In order to define responsibility, the deliveries of each bank should be counted and delivered under its own card. The same must be practiced among banks.
Banning the Confiscation of the Bank Guarantee Operation Before Referring to a Specific Committee Appointed by the Government Agency
SAMA has received the letter of HE the Minister of Finance & National Economy No. 11/4601 dated 16-5-1406H, along with Ministry of Finance & National Economy circular No. 17/2740 dated 20-10-1405H, which aims at regulating the confiscation of the bank guarantee operation to protect the financial position of issuing banks, without causing them any unnecessary encumbrances. The circular bans the confiscation of any guarantee before referring the matter to a committee, appointed by the government agency, to study the confiscation request, make its recommendations thereon and refer the matter to the party which signed the contract to take the adequate decision.
Arab and Foreign Airlines are Exempted from Presenting the certificate of Means of Shipment
Re SAMA Circular No. BC/196 dated 28-3-1398, in connection with new provisions regulating imports, including the terms for opening letters of credits, as per the letter of HE the Minister of Commerce No. 930 dated 12-3-1398, addressed to HE the Minister of Finance & National Economy,
Saudi Central Bank has received the letter of HE the Minister of Finance & National Economy No. 28/4349 dated 8-5-1406 regarding the cable addressed by HE the Minister of Commerce to HRH the Minister of Foreign Affairs No. 460/25 dated 8-1-1400, in which paragraph (1) reads as follows:
‘Arab and foreign airlines are exempted from presenting the certificate of means of shipment because paragraph (b) of the letter of credit terms limited the certificate to sea shipping means only'.
The letter of HE the Minister of Finance and National Economy referred-to above requested that banks be notified as follows:
"The Saudi importer does not have to ask the foreign exporter to attach a certificate from Arab and foreign air-lines similar to the certificate requested from the owners of shipping vessels. Please inform foreign banks with which Saudi banks are dealing in case of inquiry about this subject".
Please comply and instruct your branches to act accordingly.
Issuance by Banks of Share Deposit Certificates in Limited Liability Companies
In his letter to Saudi Central bank No. 28/1690, dated 11/3/1406 H, HE the Minister of Finance & National Economy indicated, in reference to the above mentioned subject, that a number of foreign partners in limited liability companies do not deposit their cash shares in Saudi banks, pursuant to article (162) of the Companies Regulations promulgated by Royal Decree M/6, dated 22/3/1385 H, as amended by Royal Decree M/5, dated 12/3/1387 H, and M/33, dated 8/6/1402 H.
Article 162 reads as follows:
"The Partnership shall be considered duly formed only after all the contributions in cash and in kind have been allotted to all the partners and paid up in full.
Contributions in cash shall be deposited in one of the banks to be designated by the Minister of Commerce and Industry. Such bank shall remit them only to the managers of the partnership after submission of the documents evidencing that the publication (formalities) prescribed in Article 164 have been fulfilled".
Instead they agree with some banks to obtain a certificate evidencing that the amount has been deposited, against an interest from the date of issuance of such certificate until the CR is obtained.
Hence, Saudi Central Bank would like you to pay attention to this matter and to instruct all your branches not to issue such certificates unless the value of shares is deposited.
Employees of Central Units and Branches of Banks are Required to Record the Number of IDs and Take a Photocopy thereof, along with a Photocopy of the Family Booklet for Family Members
Since the Stock Exchange Regulations require the banks to obtain full information about the client, so that such information can be easily accessible if and when needed, if the civil status card is not available.
SAMA, therefore, calls on all stock brokers working for you to record the number of civil status card for each client who wishes to buy stocks and has attained the legal age which entitles him to carry an ID, with a copy thereof and a copy of the family booklet for his family members. A photocopy of the ID for family members may be attached for members of the family included in the ID in case the family booklet is not available.
Please be informed and act accordingly.
Currency Exchange Rate Board
Pursuant to decisions taken by the Committee of GCC Monetary Agencies and Central Banks in its meeting in Kuwait Thursday & Wednesday 11 & 12 Shaban, 1405H, SAMA calls on all banks and Money Exchangers to accept GCC currencies (UAE Dirham, Bahrain Dinar, Omani Riyal, Qatari Riyal and Kuwaiti Dinar) and include them in their list of prices and to publish the price of these currencies daily along with other foreign currencies at the currency price board displayed by the bank or money exchanger.
Please advise your employees in charge to comply with these instructions.
Collecting Full Zakat from all Companies, Establishments and Individuals
SAMA has received the letter of HE the Minister of Finance and National Economy No. 26020/405 dated 7-7-1405H, originally addressed to HE the Director General of DZIT, referring to the letter by HE the President of the Council of Ministers Office No. 11750/R dated 4-7-1405H, stating that Zakat should be collected in full from all companies, establishments and individuals subject to Zakat.
Please be informed, act accordingly and acknowledge receipt.
High Seas Piracy in its New Form and Relevant Precautions
Further to our circular No. BC/74 dated 21-3-1405, in connection with high seas piracy in its new form and relevant precautions, we hope you amend the last paragraph of the circular to read as follows:
"In view of the fact that such incidents usually occur during shipping on irregular vessels that are not members of international navigation unions, the council of Saudi Chamber of Commerce and Industries urges all banks to alert their clients to this phenomenon and advise openers of letters of credit for imports to the Kingdom of Saudi Arabia to take all necessary precautions and guarantees to avoid such risks, such as shipping their cargo on vessels owned by the National Saudi Shipping Company in the first place. If this is not available, on regular Gulf shipping lines or regular Arab shipping lines or, otherwise, on regular foreign lines operating in the Gulf area".
Please advise all your branches accordingly.
Trading of Company Shares Through Local Banks
Further to our circulars regarding the regulation of share trading operations through local banks, SAMA would like to inform all banks to completely refrain from certifying signatures on any trading operation unless the bank is the broker.
SAMA further would like to stress on all local banks to designate space in their branches to receive trading orders and inquiries of clients in this regard with directions about the location of such designated space.
Please circulate this to all your branches to act accordingly.
Documentary Credits Opened by Saudi Banks for Subsidized Food Supplies
Reference our two circulars No. 2693/BC/36 dated 19-2-1402 H and No. 2693/BC/62 dated 17-3-1394 H, regarding above subject and the requirement to provide the Subsidy Department at the Ministry of Finance and National Economy with a copy of such documentary credits on a regular basis during the first week of the following month,
SAMA has received the letter of HE the Deputy Minister of Finance and National Economy for Financial Affairs and Accounts No. 30/4235 dated 10-1-1405 H, noting that the Ministry has not been able to benefit from such statements because they do not concentrate on subsidized food items.
In order for these statements to be useful, they must cover subsidized food supplies and cattle feed (corn, barley) vegetable oil, milk power, liquid milk, baby milk and flour.
Hence, SAMA would like you to concentrate on these items, prepare the statement according to the attached form and send it to the Subsidy Department at the Ministry on a regular basis on time.
Name of Importer Credit Quantity Kind Unit Price Total Value Exchange Rate Shipping Destination Port of Arrival No. Date Ton Cartoon Statement of Import Financing (Which is Classified per Each Financed Category)
It has been noticed that some banks are submitting to us a consolidated statement of import financing (which is classified per each financed category) arranged differently from what is required in the form which was attached to our circular in this respect. Some banks are deleting some items and others are adding goods that are not listed in the referred-to form.
In order to standardize such a statement and be able to obtain computer-produced statistics on these statements, we call on you to provide us regularly with this statement prepared in accordance with the attached form without any amendment of the listed item or their sequence.
Consolidated Statement for Financing Import
during The Month _____________Year __________
Categories of Financed Goods
Letters of Credit
Collection of Documents Received
Opened Letters of Credit
Already Paid
1 - Cereals 2 - Fruits and Vegetables Sugar, Tea and Coffee Cattle & Meat Other Foodstuffs Textile and Clothes Construction Material 3 - Cars Equipment Machines All Other Goods Total 1- Includes: cereals, rice, wheat and all other cereals including flour.
2- Includes: fresh, canned and conserved in any way fruits and vegetables.
3- Includes: cars, buses, lorries, tractors and their spare parts.
Avoiding Stamping Over Basic Particulars of the Check
Re to SAMA Circular No. 2894/BC/39, dated 23/2/1403 H, regarding the stamp of certain banks and branches on checks sent to the clearing house and concealing some of the basic particulars of such checks, it was noted that some branches are still putting their stamp over basic particulars of the check, thus making the reading and examining of such checks a difficult job.
We hope you make sure that your branches in the Kingdom would avoid this phenomenon in order to protect the check and facilitate the work of the clearing house.
SAMA's Request on Holding the Cashing of any Counterfeit Check
We refer to our circular No. 14241/BC/389 dated 3-11-1395H, based on the letter of HE the Minister of Commerce No. 865/T dated 23-10-1395H. referring to the letter of HRH the Minister of Interior No. 2/B/3/16013 dated 15-10-1395H, whereby SAMA has required all Saudi banks to hold the cashing of any counterfeit check and send it to the Emirate in the region of the bank.
SAMA calls on you to comply with the above, notify all your branches accordingly and acknowledge receipt.
Complaints by Banks Branches against Each Other
SAMA has recently noticed the increase of cases referred thereto directly by bank branches in various regions, especially those related to complaints by one branch against the other, which, in most cases, may be settled amicably by mutual understanding.
SAMA advises those branches to refer the case first to their general management to attempt solving it through them. Failing that they can then refer the case to SAMA.
Please acknowledge receipt and notify all your branches to act accordingly.
Opening Bank Credits for Importing Wheat Seeds if the Conditions Stipulated in the Regulatory Provisions are Met
Re our circular No. 8620/BC/116 dated 2-6-1403H in connection with opening letters of credit for the import of wheat,
SAMA has received the letter of HE the Minister of Finance & National Economy No. 319/404 dated 23-1-1404H, allowing the import of wheat seeds if the credit opener fulfills the conditions stated in the relevant provisions of the Implementation Rules of the Customs Regulations and the Rules of Agricultural Restrictions, and if such imports are approved by the Ministry of Agriculture and Waters, as the import of wheat seeds is not covered by Royal Order No. 12292 dated 24-5-1403H which limits the import of wheat to the General Institution of Silos and Flour Mills.
Hence, we hope you comply and instruct all your branches to act accordingly.
Letters of Credits for the Import of Sugar
Re our circular No. 286 dated 14-9-1399H which banned the opening of credits to import sugar without a license approved by HE the Minister of Commerce or HE the Deputy Minister for Food Supplies,
SAMA has received the cable of HE the Minister of Finance & National Economy No. 22/404 dated 2-1-1404H requesting us to notify the banks that such license is no longer needed and that they may now open letters of credits for the import of sugar without a license by the importer from the Ministry of Commerce.
Please comply, instruct all your branches to act accordingly and provide the Ministry of Commerce constantly with statements of credits opened for the import of sugar.
The Capital Shares of Government Agencies and Institutions are Subject to Legal Zakat
Reference the letter of HE the Director General of Public Revenues No. 5/1598 dated 22-9-1403H, and the letter of HE the Minister of Finance and National Economy to HE the Deputy General of DZIT No. 4/2740 dated 28-8-1403H attached thereto, the capital share of government agencies and institutions in local companies and banks is subject to legal Zakat, exactly like other partners, and must be paid to Treasury.
We wish to inform you that shareholdings of government agencies and departments in profit-making independent companies and banks do not amount to public properties that are not subject to Zakat. Hence Zakat must be assessed on the possessions of companies in which government agencies are shareholders, including the government share which has to be collected and paid to the Treasury exactly like other partners. Banks have to comply with this procedure.
Please acknowledge receipt and notify your people in charge to act accordingly.
Required the Use of Arabic in Drafting Contracts
Saudi Central Bank has received the letter of HE the Minister of Finance and National Economy No. 4/2880 dated 9-10-1403H, based on Royal Order No. 3/K/9574 dated 27-4-1401H, further to Royal Order No. 3/K/15351 dated 20-6-1400H, which required the use of Arabic in drafting contracts and attachments thereto and documents thereof and all correspondence by government agencies, departments and state-owned companies with foreign companies and establishments and their branches in the Kingdom.
Pursuant to the afore-mentioned letter and further to our circulars No. BC/120 dated 6-7-1400H and No. 14592/BC/188 dated 22-9-1402H we instruct all banks to use only Arabic in keeping their accounts or the accounts of their clients. Any violation shall be subject to penalty pursuant to the Council of Ministers Decision No. 266 dated 21-2-1398H.
Please acknowledge receipt and notify all your branches in the Kingdom to act accordingly.
Observe the First Review of the Checks issued by the Ministry of Finance and National Economy before Presentation to SAMA
SAMA has received from some of its branches information noting that some local banks are not cooperating with SAMA during the preliminary review of checks issued by the Ministry of Finance and National Economy that are often submitted to SAMA branches with obvious discrepancy in the name of the beneficiary on the face of the check and the name of the endorser at the back of the check, hence requiring the branch to return the check to the local bank for necessary amendments. This thing results in hurting the interest of the beneficiary and increasing the work of banks and SAMA branches.
We hope you inform all your branches to observe the first review of such checks before presentation to SAMA branches for collection in order not to disrupt the interest of the beneficiary of such checks.
Delayed Responses to SAMA Circulars
SAMA noticed the delay of some banks in answering its circulars regarding the attachment of accounts. Since such circulars are related to people accused of certain illegal actions and since the failure of the bank to gradually provide answers to these circulars is hindering our work and does not enable us to answer the official authorities on time,
SAMA, therefore, calls on the concerned persons in the bank to answer its circulars, related to the attachment of accounts or disclosure of client balances, within one month at the latest from the date of the circular.
Please inform all your branches accordingly, noting that the answer must be consolidated and covering all branches.
Not Opening Bank Credits for Importing Weat
SAMA has received the letter of HE the Minister of Finance & National Economy No. 2693/403 dated 1-6-1403H, based on the order of His Majesty the President of the Council of Ministers No. 12292 dated 24-5-1403H, to the effect that the import of wheat shall be restricted to the General Institution of Silos and Flour Mills.
Hence, we hope you will not open bank credits for importing wheat and instruct all your branches to act accordingly.
Non-Acceptance of Subscriptions for Shares in Joint-Stock Companies that Have Not Been Established by a Royal Decree or a Decision from the Minister of Commerce
According to the letter of HE the Minister of Finance & National Economy No. 2245/403 dated 7-5-1403 H, referring to the letter of HE the Minister of Commerce No. 222/967/3335 dated 23-4-1403 H the Ministry of Commerce has noticed that some banks are advertising in the press the placement of real estate shares through local banks.
Since only the shares of stock companies and partnerships limited by shares are placed for subscription, and only after adopting legal procedures pursuant to the Saudi Companies Regulations; and
Since afore-mentioned advertisement involves the offering of negotiable shares in violation of the Regulations; and
Since this leads the public to imagine that a stock company is offering its shares for subscription, which is not true; and
Since the advertising of such real estate operations opens the door for Freeplay and causes damage to participants in such operations, specially when the amount deposited at the bank exceeds the value of the real estate offered for subscription, and the advertiser does not declare how to dispose with the surplus,
SAMA calls on all banks to refrain from accepting subscriptions in stock companies that have not yet been established by a Royal Decree, or a ministerial decision in accordance with the Companies Regulations promulgated by Royal Decree M/6 dated 22-3-1385 H*, as amended by Royal Decree M/23 dated 28-6-1402 H. Please comply herewith, instruct all your branches to act accordingly and acknowledge receipt.
* The Companies Law issued by Royal Decree No. (M/132), dated 01/12/1443 H replace the Companies Law issued by Royal Decree No. (M/6), dated 22/03/1385 H.
Credits for the Import of all Goods
Re circular of HE the Governor No. BC/312 dated 27-10-1399H, in connection with the cable of HE the Minister of Finance & National Economy No. 596/S/99 dated 23-10-1399H, requesting that all Saudi banks and branches be notified of the fact that all matters related to credits for the import of all goods in all circumstances and under any relevant condition must rely solely on what they receive from SAMA in line with instructions issued by the Ministry of Finance & National Economy under the signature of the Minister only, and nothing else will be taken into consideration. Any contacts they receive from other parties must be referred back to the Ministry of Finance.
Hence, SAMA would like to stress on banks to comply with the afore-mentioned circular issued by HE the Governor and instruct all their branches to act accordingly.
Monthly Statement of Documentary Credits by Saudi Banks
Reference our two circulars BC/142 dated 6-4-1399H and No. BC/340 dated 29-11-1399 H, regarding submitting to the Ministry of Commerce of the monthly statement of documentary credits opened by Saudi banks for the import of food supplies and construction materials,
SAMA has received the letter of HE the Deputy Minister of Commerce for Food Supplies No. 104/3/2 dated 7-2-1403 H, noting that most banks do not send such statements on time and some banks do not send them to all, and that each bank prepares such statements in its own way, omitting some subsidized items and adding other items for which the Ministry does not require any statement.
Hence, we call on all Saudi banks to directly supply the Ministry of Commerce with the required statement, in accordance with the attached form, addressed to the Directorate General of Food Supply, Ministry of Commerce, Riyadh, within the first week of each month, at the latest, taking note of the following:
A) Food Items.
Rice, Sugar, Flour, Wheat, Corn, Barley, Vegetable Oil, Dairy Products, Tea, Coffee, Cardamon, Live stocks, Frozen and Chilled Mutton in one piece.
B) Construction Materials.
Reinforced steel (in tons), lumber (in cubic meters) cement (in tons).
C) Remarks on How to Fill Out the Form.
- Each item shall be filled out separately, followed by the next item.
- For Rice, its kind should be specified (American, Basmati, Siamese, Indian, Australian, others) and the quantity should be quoted in tons.
- Sugar: Specify kind such as: Chech, English, Chinese, French, Belgian, others and quote quantity in tons.
- Flour: Specify kind such as: American, European, others and quote quantity in tons.
- Corn: Specify kind: Sudanese, Thai, others, and quote quantity in tons.
- Barley: Specify kind: Australian, Swiss, Belgian, others and quote quantity in tons.
- Live stocks: Specify kind and source: mutton, beef, buffalo, camel and number of pieces.
- Frozen and Chilled Mutton: Specify source, number and weight in tons.
- Reinforced Steel: Specify source and weight in tons.
- Lumber: Specify source and weight in cubic meters
- Cement: Specify if packed or bulk and weight in tons.
- Other materials: Specify kind, source and quantity in tons.
SAMA calls on all banks to fully cooperate therewith in sending the required statements on time as per the attached form in order to enable the concerned authorities to make use of the required information.
Accounts in Arabic and the Hejira and Gregorian Dates
Since Saudi Banks have become Saudi stock companies and they have to use the national language in their operations, we call on all banks to take the necessary measures to keep their accounts in Arabic and to use Arabic and the Hejira and Gregorian dates in all their correspondence with local clients.
Please acknowledge receipt and notify all your branches to act accordingly.
Stop Opening or Accepting Letters of Credit for the Import of liquid Gas Cylinders
SAMA has received the letter of HE the Minister of Finance & National Economy No. 24/1735 dated 10-5-1401H, referring to the letter of HE the Minister of Commerce No. 1014/16/5/33 dated 24-4-1401H, based on Royal Decree No. M/16 dated 14-5-1399H and the Decision of the Council of Ministers No. 107 dated 15-4-1399H, to the effect that the import of gas cylinders shall be limited to the National Gas and Manufacturing Co., HE requested in his letter that banks be notified to stop opening or accepting letters of credit for the import of liquid gas cylinders of 11 and 22 kilos capacity for use at homes and restaurants other than to said company. This ban does not cover gas cylinders of smaller capacity.
Hence, we hope you comply with these instructions starting one week after the issuance of this circular and you notify all your branches to act accordingly.
Allocating Banks' Loans and Facilities to Small Traders and Businessmen
The letter of HE the Minister of Finance & National Economy No. 863/401 dated 26-2-1401H expresses HE's desire to have the banks assist small merchants and businessmen.
The fact is that there are small merchants and businessmen in the market who are quite active, prudent, honest and covetous to honor their obligations. Some of them deal with basic commercial items such as foodstuffs, clothing and ready wear, such as children clothes and school supplies and others. Others are grocers in remote areas who render important services to the citizens and residents in these areas.
Granting adequate credit facilities to this category of small merchants and businessmen, therefore, amounts to rendering a service to the citizens, encouraging beginners and expanding the commercial base in general. This constitutes a public service to be considered by local banks.
Saudi Central Bank, therefore, calls on all banks to set aside for those small merchants and businessmen an adequate part of their loans and credit facilities and win them as clients, provided this is done in accordance with applicable banking rules and traditions for granting credit facilities.
Adherence to Using Arabic Language for Bank Guarantees
SAMA has received the letter of HE the Deputy Minister of Finance for Administrative Affairs No. 14/13913 dated 18-7-1400H, noting that a number of local and foreign banks often submit bank guarantees in English only.
This is in violation of the Royal Order which requires correspondence with government agencies in Arabic.
In this regard, SAMA wishes to refer to its circulars to banks No. BC/200 dated 5-4-1398H, No. BC/19 dated 12-1-1399H and No. BC/120 dated 6-7-1400H and to stress the need to observe the following:
- Compliance with the Council of Ministers decision No. 266 dated 21-2-1398H which instructs banks, companies and their branches and offices in the Kingdom to use the Arabic language in their correspondence with Government Agencies, or otherwise be subject to relevant penalties.
- Regarding bank guarantees submitted by approved foreign banks and insurance companies, through local banks, the letter of HE the Minister of Finance & National Economy No. 5067/98 dated 11-11-1398H, circulated to you via our second circular referred-to above, shall be applicable to the effect that guarantees submitted by foreign banks and insurance companies may be in English, provided the covering letter of the local bank to the government agency has to be accompanied with an Arabic translation so that the contents may be understood by the government agency, in compliance with the above mentioned Council of Ministers decision.
Please comply fully and notify all your branches to act accordingly.
Non-Acceptance of Deposit of Revenues of any Subscriptions without Prior Written Approval by the Ministry of Commerce
Reference to SAMA's Circulars No. 1593/BC/515 dated 28-12-1396 H and No.6089/BC/214 dated 19-4-97 A.D, regarding article 228 of the Saudi Companies Regulations which forbids foreign companies from issuing or offering securities for subscription or sale in the Kingdom without a license from the Ministry of Commerce.
SAMA has received the letter of HE the Minister of Commerce No.222/9166/5061 dated 13-6-1400 H, which requested us to instruct all local banks not to accept the deposit of revenues of any subscriptions in foreign companies shares unless a prior written approval by the Ministry of Commerce is obtained.
Please comply herewith, notify your branches to act accordingly and acknowledge receipt.
Decisions Taken by the Saudi Regional Office of the Israeli Boycott
SAMA has been providing the banks with the above-mentioned decisions in sufficient copies to their branches. Since this procedure consumes long time and efforts by SAMA; and
Since SAMA has been informed by the letter of HE the Director General of the Saudi Regional Israeli Boycott Office No. 1000 dated 19-5-1399H stating that decisions issued on the boycott of Israel do not go into force until they are published by the Official Gazette (Um Al-Qura), and that any letter of credit opened before publication in the Official Gazette is valid in accordance with currently effective procedures,
SAMA, therefore, calls on banks to follow-up by themselves on boycott decisions published in the Official Gazette and, for this purpose, subscribe, together with their branches that have the power to issue documentary credits, in this Gazette.
Please acknowledge receipt and act accordingly.
Notifying Foreign Beneficiaries of the Required Certificates for Import Operations
Re our circulars No. BC/196 dated 28-3-1398H and No. BC/420 dated 17-8-98, in connection with the new provisions regulating import operations, including the terms and conditions of credit opening,
SAMA has received the letter of HE the Minister of Commerce No. 994 dated 19-5-99, which says that Saudi customs authorities have noticed that the foreign beneficiary abroad is not complying with the terms provided for in letters of credit. With regard to the certificate of origin, the foreign beneficiary is failing to mention the name of the manufacturer. With regard to the certificate required from the insurance company to the effect that the goods described in the insurance policy have been insured by an insurance company that has an agent or representative residing in the KSA, the foreign beneficiary is not complying with this provision.
Hence, we hope you notify your correspondents abroad to comply with the provisions of the letters of credit mentioned in our two circulars referred-to above, and to obtain the required certificates in accordance with these two circulars and the forms sent to you. Any shipment that is not accompanied with shipping documents filled out in accordance with the instructions contained in the two circulars shall not be cleared by customs authorities.
We also hope you notify your importing clients that they should request foreign exporters to obtain the required certificates afore mentioned to avoid the retention of their goods.
Procedures Followed by Banks Regarding the Over-Subscription to the Bank's Capital Increase Shares
SAMA has received the letter of HE the Deputy Minister of Commerce No. 3/9/S/91/1/3733 dated 30-4-1399H, regarding the procedures followed by banks in case of over-subscription in the increase of the capital shares of the bank after allocating the required increase to original shareholders according to their priority in subscribing to the new cash shares, pursuant to the Companies Regulations and the By-Laws of the bank as follows:
- The right of first refusal of the original shareholders in subscribing to the required increase of share capital shall be declared as per article 136 of the Companies Regulations. The shareholder may also express his desire regarding the number of shares he wishes to subscribe to in case of over subscription.
- The original shareholders, who had expressed the desire to subscribe in over-subscribed shares, shall be notified of the of shares allocated to them and shall be required to pay the price of such shares.
- In the event some shareholders, who had expressed the desire to subscribe to the over-subscribed shares, later back down or fail to pay the value of the shares allocated to them, such shares shall be allocated to shareholders who had applied for more shares than what was allocated to them, pro rata with their original shareholding within the limits of the shares requested by them, and they shall be required to pay the value of such shares within the period specified by the board of directors of the bank.
In the event any shares are left un-subscribed-to by the original shareholders, such shares shall be placed for public subscription.
SAMA hopes that the subscription placement will comply with the above procedures and that the bank will provide SAMA with the subscription placement to review from the legal point of view before publishing it in the daily press.
SAMA also hopes that banks will inform it about the details of the subscription in new shares, the method of allocating such shares, the name of subscribers and the number of shares allocated to each before such allocation is approved by the bank's board of directors.
Issuing Instructions to Current Account Staff to Take all Necessary Personal Information from the Bank's Customers
Re our circular No. BC/204 dated 16-4-98 H, regarding procedures and instructions related to the careful examination of checks, verifying the identity of its holder when presented for cashing and recording the number and issuance date of his passport or ID,
SAMA has received the letter of HE the Minister of Finance & National Economy No. 36/99 dated 6-1-1399H requesting the notification of banks to take all the necessary personal information about their clients to be available to the concerned authorities if and when needed,
Hence, SAMA calls on you to issue instructions to your current accounts staff to take all the necessary personal information about the clients and to provide SAMA with a copy of this information.
Using Arabic Language in all Correspondences with Government Authorities
SAMA has received the letter of HE the Minister of Finance and National Economy, No. 1093/98 dated 6-3-1398 attached thereto a copy of the Council of Ministers Decision No. 266 dated 21-2-1398, which contained the following provisions:
Instructing all foreign companies and establishments, and their branches, operating in the Kingdom to use Arabic in their correspondence with government authorities.
Any violation shall be subject to a penalty of up to SR 10,000 for each violation, doubled if repeated. In addition to this penalty, the violator may be banned of dealing with the government for one year. A repeated violation is one that occurs within 3 years from the previous final penalty.
The Committee for the Settlement of Commercial Disputes is the competent authority to rule on these violations.
The violation shall be referred by the government agency to the Ministry of Commerce which, in turn, refers it to the Committee for the Settlement of Commercial Disputes through the public attorney.
SAMA calls on you to comply with the above provisions, acknowledge receipt and notify all your branches and offices in the Kingdom to act accordingly.
New Provisions Regulating Import Operations
Reference our circular No. 5708/BC/72 dated 18-10-1986 regarding the decision of the Ministry of Commerce No. 1584 dated 23-8-1386H, which regulates imports from abroad, SAMA has received a copy of the letter of HE the Minister of Commerce No. 920 dated 12-3-1398H, addressed to HE the Minister of Finance & National Economy, and containing the new provisions regulating import operations, including the terms and conditions for opening letters of credit as follows:
I. Saudi importer must ask the foreign exporter to deliver the following certificates: a) A certificate of origin issued by manufacturer or ex porting company, approved by the exporting country, testifying that the exported goods to the Kingdom are of a pure national origin, and mentioning the name of manufacturer or producer in the certificate.
In the event the exported goods are not of a pure national origin, manufacturer or foreign exporter must identify the non-national components and their source
(attached herewith is a sample of the required certificate in Arabic and English (attachment No. one)).
b) A certificate issued by the vessel owner, agent or captain testifying that the vessel carrying the shipment is not registered in Israel or owned by Israeli nationals or residents and that the vessel will not stop at any Israeli port enroute to the Kingdom of Saudi Arabia. The signatory of this certificates must also confirm that the vessel is permitted to enter Saudi ports in accordance with Saudi laws and regulations (attached is a sample of the required certificate in Arabic & English (attachment No. 2)). c) A certificate issued by an insurance company confirming that the goods described in the insurance policy have been insured with an insurance company that has an agent or representative residing in the Kingdom.
(attached herewith is a sample of the certificate in Arabic and English (attachment No. 3))
II. Certificates mentioned above must be certified by Saudi diplomatic missions in the city in which the certificate was issued or where the exporter resides in the first place. In the event such missions are not available in the exporting country, the signature of the chamber of commerce or industrial union in the city where the certificate was issued or where the exporter resides shall be sufficient. III. In the event of COD imports through banks or direct COD imports, where the whole value of the goods, or any part thereof, is paid, Saudi banks must take a statement from the collector of all the documents mentioned in I & II above. When the importer receives these documents as delivered, he, not the banks, shall become responsible for any shortage. IV In the event of import from Arabic or foreign free zones, the certificates mentioned in I item (a) above, or a photocopy thereof, must be presented certified by a Saudi diplomatic mission, in the country of export, if any, or, otherwise, the certification of the chamber of commerce or industrial union shall be sufficient V. The provisions of (I) above is not applicable to goods and products manufactured in the Arab League Country Members and exported therefrom because these countries apply the provisions of Israel Boycott. VI. These procedures and instructions supersede all the provisions of the Ministry of Commerce decision No. 15 84 dated 23-8-13 86 with no prejudice to the provisions of VII below. VII. For those importers who may have been committed to letters of credits under prior procedures and instructions, they are allowed to act accordingly for six months from the date of this letter.
We hope you comply with the above provisions and provide your correspondents abroad with the English samples of the certificates so that the procedures will be standardized with all the correspondents of Saudi banks. Please instruct your branches to act accordingly.
Notifying SAMA before Commitment to any Loan Requested by a Non-Resident
Further to our circular No. 10772/18/M dated 4-8-1395H, regarding the notification of Saudi Central Bank before commitment to any loan requested by a non-resident, and the submittal of information regarding the loan in preparation for discussing the loan with Saudi Central Bank officials, we stress on you to comply with the above and not to grant any loan before receiving written approval from Saudi Central Bank in this regard.
Please comply and instruct all your branches to act accordingly.
Recognized American Chambers of Commerce Authorized to Certify Commercial Documents
According to a letter received from the Director of the Saudi Regional Office for the Boycott of Israel No. 271 dated 19-9-1396H, the Boycott authorities have noticed that a number of Arabs residing in the USA are forming establishments in various American cities under the name "The Arab-US Chamber of Commerce" to certify shipping documents of goods exported to the Arab Countries, mainly the oil-producing ones that enjoy a reputable financial name and purchasing capacity.
For fear such Chambers of Commerce would exploit Boycott regulations for personal benefits, the Director of the Saudi Regional Office for the Boycott of Israel has requested us to notify all banks that the recognized Arab-US Chambers of Commerce that are authorized by the Arab League to certify commercial documents are:
1- The Arab-US Chamber of Commerce in New York, N.Y.
2- The Arab-US Chamber of Commerce for Central America in Chicago, Illinois
3- The Arab-US Chamber of Commerce in Houston, Texas
4- The Arab-US Chamber of Commerce in San Francisco, California
Please be informed, comply and notify your branches and your American bank correspondents to act accordingly.
Necessity of Fulfilment all Customs Requirements
We quote you here below the circular issued by HE the Deputy Minister of Agriculture & Water Resources for Agriculture and Water Affairs No. 10/1879/1 dated 16-4-1395H:
"Pursuant to article I of the Council of Ministers decision No. 77 dated 28-1-1395H regarding the importation and sales of agricultural equipment, which limited the import of such equipment to those approved by the Ministry, we attach herewith a list of equipment available in and importable to the country, which was circulated to Customs to act accordingly. The import of any other brand is subject to a prior license by the Ministry.
We wish to confirm previous instructions to the effect that documents presented to Customs in compliance with all Ministry requirements are:
Invoices and sufficient copies clear and legible, along with other documents such as bill of lading, certificate of origin and packing list indicating serial numbers of the equipment and their weight and the insurance invoice if insured locally.
Certificate by the bank stating the price of the goods, the exchange rate and bank commissions.
No shipment not adequately documented as per above instructions, or missing any other documents required by Customs, will be cleared".
We hope you comply with paragraph (2) above, act accordingly, instruct your branches to do the same and acknowledge receipt.
DIESEL MACHINES (1)
Serial No. Machine Serial No. Machine 1 Blackstone 37 Agit 2 Rohson 38 Wilson 3 Yalmar 39 Loumix 4 Assa 40 Master 5 Folkstone 41 Sauji 6 Bolkstone 42 Teckma 7 Backstone 43 Vegas 8 Yang chiang 44 Raja 9 Boch 45 Kojex 10 International 46 Kojraj 11 Ruston 47 Rocket 12 Volvo 48 Corona 13 Starger 49 Swat 14 Dorman 50 Star 15 Perkins 51 Chakteman 16 Kemaz 52 Behafani 17 Bosher 53 Automan 18 Dwittes 54 HTC 19 Lester 55 Bejalz 20 Peter 56 Lifter 21 Caterpiller 57 GM 22 Painfords 58 Kosaki 23 Suma 59 Cheyslen 24 Rakashmartin 60 Kohler 25 Alfa 61 Bragati 26 Anil 62 Kohler 27 Fulmarked 63 Textool 28 Amco 64 Baxo 29 Cooper 65 Dister 30 Banfords 66 Tiradanoda 31 Jico 67 Todes 32 Kinlasker 68 Swagi 33 Dihco 69 Kliton 34 Mincorse 70 Minon 35 Kifri 71 Engersol 36 Yusha 72 Pacific (2)
FUEL MACHINES (2)
PUMPS (3)
Serial No. Machine Serial No. Machine 1 Wisconsin 1 Buras 2 Ralf Carter 2 Johnston 3 Marlo 3 Western (Singer) 4 Garver 4 Western Land 5 Bernard 5 Western Line 6 Brigco & Straton 6 Land 7 Flairs 7 Lime 8 Jap 8 A.N.C. 9 Fineshory 9 Alta 10 Clinton 10 Tormt 11 Piersford 11 Ideal 12 Holland 12 Andoj 13 Korman 13 golds 14 Destico 15 Jibouti 16 Ranglson 17 Daita 18 Adham 19 Allas 20 Zeneth 21 Carona 22 Niton 23 Wothing Con 24 Morinon 25 Rafatti 26 Graudfos 27 Engersal 28 Dohati 29 Maframati 30 Jitta 31 Rotos 32 Jacanzi 33 Chlach 34 Orban 35 Laurance 36 Corona (3)
(4) Centrifugal Pumps
(5) Electrical Pumps
(6) Tractors, Harvesters
Serial No. Machine Serial No. Machine Serial No. Machine 1 Andig 1 Ritter 1 Caterpillar 2 WadiRain 2 Benjar 2 Comatso 3 Kirlesco 3 Gama 3 Alice Chaimarz 4 PSG 4 Carnit 4 International 5 Anil 5 K.S.B. 5 mac Firgson 6 Wetson 6 Michigan 7 Marlo 7 Volvo 8 Varona 8 Fiat 9 Porat 9 David Brown 10 Carter 10 Delaa Rus 11 Universal 11 Apro 12 Garvar 12 Butor 13 Orly 13 Holder 14 Girdlstone 14 Joniffer 15 Good Wapne 15 Klaison 16 Marland 16 New Holland 17 Victar 17 Harfoster 18 Rainbow 18 Ransoner 19 Howard Documentary Credits Opened by Saudi Banks for Food Supplies
Further to our circulars No. 1611/BC/110 dated 28-3-1387 H, No. 4100/BC/l 13 dated 19-4-1393 H and No. 8756/BC/242 dated 7-9-1393 H, which called on banks to supply the Ministry of Commerce by the first week of each month with a statement of letters of credit opened for food supplies, together with all amendments thereto,
We wish to inform you that according to a letter we received from HE the Deputy Minister of Commerce and Industry for Trade and Food Supplies No. 3071/3/2 dated 14-2-95 H, some of the statements sent to the Ministry fail to mention the name of the importer or the date of opening the letter of credit, or some of the required data, and that some statements are not dated at all.
Hence, we have to notify the banks to do everything necessary to supply the Ministry of Commerce and Industry with such statements by the first week of the following month including all data, namely: number and date of the letter of credit, value in foreign currency and SR, quantity, kind and source of the item, date of shipment, arrival date, port of arrival and the name and address of the opener of the credit.
Attached is a statement form that specify all the required information. We draw your attention that you have to supply the Ministry with all amendments made in the letter of credit.
Statement Of Documentary Credits Opened For Food Supplies
Name and Address of Credit Opener :
Item Letter of Credit Standard Unit Quantity Total Value Source Period of Shipment Date pf Shipment Approximate Date of Arrival Port of Arrival Remarks Date No. In SR In Foreign Currency Establishment of a Center for the Registration and Disclosure of Over-the-Counter Derivative Transactions
Based on the powers granted to SAMA under the Saudi Arabian Monetary Authority Law issued by Royal Decree No. (23) dated 23/05/1377H, the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386H, and the Credit Information Law issued by Royal Decree No. (M/37) dated 05/07/1429H,
We inform you of the approval granted to SIMAH (Saudi Credit Bureau) to establish a center for the registration and disclosure of over-the-counter derivative transactions, in compliance with the attached (Trade Repository Operator Rules and Regulations)*.
* These Rules have been replaced by the Principles on Trade Repositories, issued by SAMA circular No. (000045049500), dated 27/07/1445H, corresponding to 06/02/2024G.
Accounts of Charities, Charities and Cooperative Societies Under the Supervision of the Ministry of Social Affairs
No: 371000010677 Date(g): 7/11/2015 | Date(h): 26/1/1437 Status: Modified Translated Document
Following SAMA's Circular No. 361000048994 dated 29/03/1436H, supplementary to Circular No. 18000/BCI/9200 dated 04/04/1433H, regarding the Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia, Fourth Amendment, and the amendment of the requirements of Rule No. (300-1-5-2) related to the accounts of "Public Benefit Charities and Da'wah Offices. Referring to the aforementioned rule, along with Rule No. (300-1-5-3) regarding the accounts of "Private Foundations licensed by the Ministry of Social Affairs," and Rule No. (300-1-5-6) related to the accounts of "Cooperative Associations and Funds."
I would like to inform you that SAMA has received a letter from His Excellency the Minister of Social Affairs No. 115433 dated 21/12/1436H referring to the esteemed Cabinet Decision No. (221) dated 25/07/1432 H regarding the independence of the Social Development Agency from the Social Welfare and Family Agency, according to which the Ministry's Social Development Agency supervises the activities of charitable societies, cooperative societies, charitable institutions, and community development committees through the 41 Social Development Centers in the Kingdom, and accordingly these centers are authorized to delegate individuals to sign, open, activate, and manage the accounts of charitable societies, cooperative societies, charitable institutions, and community development committees. They also have the authority to approve the election, formation, reformation, and extension of the boards of directors of these entities. The Ministry wishes to formalize this regarding the organization of opening and managing accounts for the aforementioned benefit entities.
We hope to take note and approve the acceptance of submissions from the Social Development Centers in the Kingdom (as specified in the attached list) when fulfilling the requirements of the three rules referred to above concerning requests to open accounts for charitable and cooperative entities subject to the supervision of the Ministry of Social Affairs and the delegation of individuals authorized to sign on them, as well as the approval of the formation, reformation, and extension of the boards of directors of those entities. The Social Development Centers should be considered the authorized entity supervising those requirements.
A list of names of social development centers affiliated with the Ministry of Social Affairs
M Name of the Center 1 Social Development Center in Riyadh 2 Social Development Center in Rawdat Sedr 3 Social Development Center in Al-Aflaj 4 Social Development Center in Shuqra 5 Social Development Center in Al-Qassim 6 Social Development Center in Afif 7 Social Development Center in Diriyah 8 Social Development Center in Al-Dulm 9 Social Development Center in Wadi Al-Dawasir 10 Social Development Center in Mecca 11 Social Development Center in Jeddah 12 Social Development Center in Al-Qouz 13 Social Development Center in Turbah 14 Social Development Center in Wadi Fatimah 15 Social Development Center in Taif 16 Social Development Center in Medina 17 Social Development Center in Al-Ays 18 Social Development Center in Badr 19 Social Development Center in Al-Ula 20 Social Development Center in Buraidah 21 Social Development Center in Unaizah 22 Social Development Center in Al-Ahsa 23 Social Development Center in Hafr Al-Batin 24 Social Development Center in Dammam 25 Social Development Center in Al-Qatif 26 Social Development Center in Khamis Mushait 27 Social Development Center in Bisha 28 Social Development Center in Al-Haridah 29 Social Development Center in Al-Wajh 30 Social Development Center in Tabuk 31 Social Development Center in Hail 32 Social Development Center in Arar 33 Social Development Center in Jazan 34 Social Development Center in Najran 35 Social Development Center in Sharurah 36 Social Development Center in Barrah 37 Social Development Center in Al-Qurayyat 38 Social Development Center in Duma Al-Jandal 39 Social Development Center in Abha 40 Social Development Center in Al-Baha 41 Social Development Center in Al-Dawadm Banks' Compliance with the Rules Regulating Audit Committees
In reference to SAMA's circular No. 3496/BCI/196 dated 12/3/1417H, attached with it are the rules organizing the audit committees in local banks, which include the necessity of obtaining SAMA's non-objection for the members nominated for these committees.
Given the importance of compliance and controls, particularly those listed in paragraph 4-1 of the rules governing audit committees concerning the selection of committee members and their chairman, and the importance of sending the names of candidates and their CVs to SAMA before the beginning of the new session, it is crucial to avoid any delays in the process of deciding on the names of candidates and thus disrupt the work of the committees until the completion of their study by SAMA.
Therefore, SAMA believes that banks should strictly adhere to the rules of organizing audit committees when nominating these committees. As well as the speed of submitting the names of candidates for membership of the audit committees, accompanied by their CVs well before the beginning of the new future sessions of the committees, so that SAMA can study and decide on them before the beginning of the new session, thus ensuring the continuation of the committees' work smoothly to enable them to perform the tasks entrusted to them to the fullest and without delay.
Suspension of Direct Supplies Operations to the Ministry of Finance Current Account
Further to the instructions from SAMA communicated through Circular No. (391000036855) dated 01/04/1439H, regarding linking the transfer from the pooled accounts of government entities with direct revenues at the bank to the direct revenue account number (SA2501100001230102000037) at SAMA, and to the supplementary circular No. (42056093) dated 10/08/1442H. Based on the Ministry of Finance letter number (32277) dated 27/07/1442H, which includes the cancellation of the link between transferring from certain aggregated accounts of governmental entities with direct revenues to the aforementioned account, and the Ministry of Finance letter number (27495) dated 27/06/1442H, which entails informing all governmental entities to transfer all their revenues to the current account of the Ministry of Finance with SAMA instead of the revenue account mentioned above.
I inform you that SAMA has received the Ministry of Finance's letter No. (10999) dated 05/11/1444H, which includes in paragraph No. (4) a request to circularize local banks to make available the service of transferring from the bank accounts of government entities opened in local banks to the aggregate account of the government entity at SAMA, and to halt direct transfer operations to the current account of the Ministry of Finance.
Accordingly, all banks and financial institutions are required to adhere to the following:
- Suspension of fund transfers from the consolidated bank accounts for revenue of governmental entities at local banks to the current account of the Ministry of Finance with SAMA, account number (SA9401100001230101002023)."
- The facilitation of transfer operations from the consolidated bank accounts for government entities' revenues held in local banks to the consolidated account of the government entity at SAMA.
For your information and to act accordingly as of its date, and for inquiries and further clarifications in this regard, please contact the email address for the State’s Unified Treasury Account (TSA.INFO@mof.gov.sa).
The Requirement for Obtaining the Approval of the Ministry of Human Resources and Social Development to Open Bank Accounts, Transfer or Issue Checks Outside the Kingdom Shall not Apply to the King Faisal Foundation
In reference to Rule No. (300-1-5-3) stated within the Account Opening Rules, communicated according to SAMA circular No. (65681/67) dated 01/11/1440H including the requirements for opening and managing bank accounts for Private Foundations, the restrictions which mandate obtaining approval from the Ministry of Human Resources and Social Development for opening subsidiary accounts, and its approval along with that of the supervising authority for transferring and issuing funds outside the kingdom, and the challenges faced by the King Faisal Foundation in this regard while conducting its activities."
I inform you that, based on coordination with the relevant authorities and the directives issued in this regard, it has been decided that the two requirements mentioned above will not apply to the bank accounts affiliated with the King Faisal Foundation. This is to enable it to conduct its activities, while ensuring compliance with the Royal Decree No. (55871) dated 09/11/1436H, which stipulates that the King Salman Humanitarian Aid and Relief Centre shall be the only entity responsible for receiving any relief, charitable, or humanitarian donations, whether their source is governmental or private, to deliver them to those in need abroad.
For your information and to act accordingly from this date, knowing that SAMA is working with relevant entities to review the requirements for opening and managing bank accounts for Private Associations and Foundations, and considering amending them to align with regulatory developments and facilitate the procedures for opening and managing bank accounts for these entities.
Exemption of Bank Accounts for Enforcement Courts Established for the Purpose of Collecting Enforcement Amounts from the Stages of Classifying Inoperative Accounts
In reference to the Account Opening Rules communicated through Circular No. (65681/67) dated 01/11/1440H, and subsequent updates, which include Rule (5) related to Inoperative Accounts and Article (8) concerning the Opening an Account without Making a Deposit from Rule (100). Also, in reference to the banking accounts for enforcement courts for the purpose of depositing funds. Given the special nature of these types of banking accounts, as their purpose is to collect the enforcement amount and is terminated upon its completion, with the amount being disbursed to the ministry or the beneficiary according to the aforementioned rules.
I would like to inform you that it has been decided to exempt the banking accounts of the enforcement courts, which are established for the purpose of collecting enforcement amounts, from Article (5-2) related to the rules of 'Durations, Periods and Requirements for Dealing with Inoperative Accounts' as outlined in the aforementioned rules, as well as from the requirement to close the account if no deposits are made within a period of (90) days as stated in Article (8) regarding opening an account without making a deposit from Rule (100) of the same rules. Therefore, the relevant rules for account opening rules should be amended as follows:
First: Amending Rule (5) related to Inoperative Accounts, to state as follows:"..... Accounts of government entities shall be excluded from the provisions of this Rule in respect of the phase of abandoned accounts only as set forth in paragraph (5.2.4), and the bank accounts for enforcement courts that are established for the purpose of collecting enforcement amounts are excluded from all three stages of classification outlined in Article (5.2). Accounts of statutory reserve deposited by financial institutions supervised by SAMA, whose balances are not allowed to be disposed of without prior written permission from SAMA, shall also be excluded from the provisions of this Rule".
Second: Amending Article (8) concerning the Opening an Account without Making a Deposit from Rule (100), to state as follows: " The bank must agree to open an account for any customer if the required documents and conditions are submitted and satisfied. The bank must not require the customer to deposit any amounts as a condition for opening the account. If no amount is deposited in the customer account within a period of 90 days, then the bank must close such account. The exception is being made to government entities’ accounts that the Ministry of Finance (MOF) approves opening without the need to deposit any amounts for a period specified by the MOF, As well as the bank accounts for enforcement courts that are established for the purpose of collecting enforcement amounts".
For your information and action accordingly as of this date, SAMA confirms that this does not absolve the bank from its responsibility to monitor these bank accounts. It is important to continue official correspondence and communication with the Ministry of Justice or its authorized representative regarding the status of keeping or closing the account, in case no deposits are made within a period of (90) days from the account opening, or if (24) calendar months have passed from the last financial transaction, in accordance with the Account Opening Rules and related instructions.
Amendment of the Two Rules Related to Private Associations and Foundations
In reference to Rule (300-1-5-2) related to Private Associations, and Rule (300-1-5-3) related to Private Foundations, as outlined in the Account Opening Rules communicated through SAMA Circular No. (65681/67) dated 01/11/1440H, as well as to the National Center for Non-Profit Sector Development Regulation issued by the Minister Council Decision No. (618) dated 20/10/1442H, and the Implementing Regulation for the Law of Civil Society Associations and Organizations issued by the Minister Council Decision No. (Q/2022/1/2) dated 22/03/1444H, and further to SAMA Circular concerning the Introduction of a New Paragraph within the Rule (300-1-5-3) related to Private Foundations , issued under circular No. (45065133) dated 14/10/1445H.
I would like to inform you of the amendment to the two rules mentioned above, according to the attached format. Please note that the main amendments are as follows:
- Replacing the definition of the National Center for Non-Profit Sector Development "the Center" in place of the Ministry of Human Resources and Social Development 'the Ministry' wherever it appears.
- Excluding the requirement of obtaining the approval of the manager of compliance department at the bank for opening accounts for Private Associations and Foundations.
- Excluding the requirement of obtaining the approval of "the Center" for opening the sub-account for expenses, and establishing unified requirements for sub-accounts, facilitating the management of these accounts so that disbursements and deposits are not restricted to the main account.
- Excluding the specification of the positions of those authorized to manage and operate the account, and limiting the requirement to joint signatures, with the approval of the Center when the authorized persons are from outside the board.
- Excluding the approval of the supervisory authority for remittances outside the Kingdom or receiving remittances, and limiting it to the approval of the Center.
- Acceptance of gifts, bequests, donations, endowments, grants, or Zakat is not allowed into the accounts of private foundations from parties other than the founders specified in its bylaws, unless the approval of the Center is obtained.
- Replacing the definition of the National Center for Non-Profit Sector Development "the Center" in place of the Ministry of Human Resources and Social Development 'the Ministry' wherever it appears.
Encouragement for Technical Integration with the General Organization for Social Insurance
In reference to SAMA's receipt of a request from the General Organization for Social Insurance (GOSI) urging banks to establish technical integration with the organization in order to automate its services related to the request for a clearance letter in case the client wishes to transfer their pension to another bank account or requests the issuance of a bank commitment certificate to be submitted to the banks, which is part of the organization's efforts to improve the client experience.
Therefore, SAMA urges banks operating in the Kingdom to establish technical integration with GOSI in order to enable the automation of the aforementioned services. SAMA also emphasizes the importance of adhering to all relevant instructions and regulations in this regard, and conducting evaluations and risk assessments related to technological, cybersecurity, and data privacy aspects resulting from the technical integration process.
Extending the Opening Hours of Bank Branches and Transfer Centers
Based on Article 16 of the Banking Control Law, and further to SAMA Circular No. (35487/BCS/586) dated 09/10/1427H regarding the working hours of bank branches for the public.We inform you that it has been decided to extend the working hours of bank branches and their affiliated transfer centers located in the central area of the Two Holy Mosques for 24 hours, seven days a week, according to the following regulations:
- Obtaining the necessary approvals from the competent security authorities and other competent governmental authorities, and complying with the statutory, regulatory and technical requirements of those authorities.
- Ensure compliance with the physical security requirements, electronic security requirements related to physical security, and procedural operational requirements referred to in the Security and Safety Manual in the Financial Sector issued by SAMA in 2019G and any updates thereof, and that the bank branch/transfer center and its facilities are monitored around the clock by the bank's security control room in preparation for any security event that may occur - God forbid - and ensure that private civilian security guards are provided at all bank's locations around the clock (24/7).
- Providing banking products and services that suit the needs of visitors to the Two Holy Mosques, as well as individuals and companies providing Hajj and Umrah services and other related parties.
- Without prejudice to the provisions of the Labor Law and its Implementing Regulations.
- Announcing the extension of the working hours of the branches or transfer centers through its approved channels.
- Notify SAMA of the list of branches whose working hours will be extended, including a list of the products and services that will be offered and the target group of customers.
For your information and to be implemented as of today. while emphasizing on SAMA's Circular No. (45052183) dated 11/08/1445H regarding extending the working hours of branches operating in the cities of Makkah and Al-Madinah by four hours from the beginning of Ramadan until the end of Dhu al-Hijjah each year, for those branches that are not located in the central area of the Two Holy Mosques.
- Obtaining the necessary approvals from the competent security authorities and other competent governmental authorities, and complying with the statutory, regulatory and technical requirements of those authorities.
Update of Rule No. (300-1-5-1) of the Account Opening Rules
Refer to Rule (300-1-5-1) included in the Banking Accounts Rules communicated via SAMA Circular No. (65681/67) dated 01/11/1440 H, which outlines the requirements for opening and managing bank accounts for Hajj, Umrah, and visiting the Prophet's Mosque.
Accordingly, please be informed that it has been decided to amend the aforementioned rule to align with the attached format. The update includes the following:
- Specific requirements for opening and managing accounts for Pilgrim Affairs Offices.
- Specific requirements for opening and managing accounts for Tourism companies and travel agencies organizing pilgrim arrival from outside Saudi Arabia.
For your information and action accordingly as of this date.Update to Rule No. (300-1-5-1) on the Requirements for Opening and Managing Bank Accounts for Hajj, Umrah, and Visiting the Prophet’s Mosque
(300-1-5-1) Hajj, Umrah, and Visiting the Prophet’s Mosque:
Pilgrims Affairs Offices A. Requirements for Account Opening: 1. Bank accounts shall be opened in Saudi riyal only. 2. The Hajj organizer shall present to the bank a letter from the Saudi Ministry of Hajj and Umrah approving opening a bank account for the pilgrim affairs office and including the office’s information as follows: • The official name of the Pilgrims Affairs Office.
• Names of the persons authorized to sign for the account (joint signature), provided that they shall be members of the pilgrim affairs office or shall be officials in the embassy of the country of such office.
• The position of each account signatory and his/her information as per his/her passport.
• The bank account shall be limited to Hajj purposes only.
• The office’s bank account number in its home country or in the country designated by the Saudi Ministry of Hajj and Umrah ,and the name of the bank transferring the money, which the office deals with in its home country or in the country designated by the Saudi Ministry of Hajj and Umrah, shall also be stated.3. The bank shall conclude an account opening agreement with the authorized signatories specified in the letter of the Ministry of Hajj and Umrah, addressed to the bank. 4. The account signatories shall determine, in Saudi riyal, the approximate total amount that their respective office will transfer for Hajj purposes. 5. Upon meeting the above requirements by the bank, the bank’s compliance department shall submit an application to SAMA along with all necessary documents to obtain SAMA approval for opening the bank account. 6. The bank shall ensure that such accounts are subject to dual control. 7. The bank shall provide the pilgrim affairs office and the Saudi Ministry of Hajj and Umrah with the IBAN number of the office’s bank account. 8. If the requirements for opening a bank account are not met, the bank branch manager must inform the applicant of the necessary requirements for opening a bank account. Such process shall be documented in a special file designed for this purpose in the bank branch. In addition, measures taken in this regard shall be reported to the compliance department at the head office of the bank on the same day. 9. If the requirements for opening a bank account are met, the documents shall be submitted on the same day to the compliance department at the bank’s head office. Consequently, the compliance department, in turn, shall submit such documents to SAMA on the same day or at the beginning of the following working day, at the most. 10. The pilgrim affairs office may open multiple accounts, provided that these accounts are opened in the same bank only - with an explanation of the account's purpose -, The office may not open other accounts in other banks. If the office requests to transfer its accounts from one bank to another, it shall provide compelling justifications that are not related to meeting the requirements. Approval of the Ministry Hajj and Umrah and SAMA for that matter shall be secured. B. Requirements for account operation and management: 1. The account shall be operated under a new approval letter from the Saudi Ministry of Hajj and Umrah to the bank on the account operation. The letter should specify the operation period, which should be from the beginning of Rabi II up till the end of Muharram of the following year. The letter shall be accompanied by a list provided by the pilgrim affairs office. This list shall include the names of Saudi natural persons, companies and establishments that the office will be dealing with for petty expenses, and it shall be attested by the Saudi Ministry of Hajj and Umrah. 2. Deposits shall be made in the accounts of the pilgrim affairs office via remittances from a bank in the office’s home country or countries designated by the Saudi Ministry of Hajj and Umrah, the purpose of such remittance shall be specified as “office’s expenses related to Hajj only”. 3. Deposits may be made in the account via checks under collection, drawn by the office itself on a bank in the office’s home country only. 4. Remittances, checks or cash deposits from entities inside Saudi Arabia shall not be accepted, except in the following cases: • By persons whose names are included in the list, submitted in advance to the Saudi Ministry of Hajj and Umrah by the pilgrim affairs office and attached to the ministry's letter to the bank. Such list should include the names of service providers dealing with the pilgrim affairs office. The amounts of such remittances, shall be less than or equal to the amounts stated in contracts concluded with each beneficiary (at the Saudi Ministry of Hajj and Umrah’s discretion).
• By authorized persons, provided that such an amount is within normal limits, i.e. is less than or equal to the withdrawn amount as petty expenses (at the Saudi Ministry of Hajj and Umrah’s discretion).
• The amounts (in SAR/foreign currencies) disclosed at ports of entry (land ports, seaports, or airports) shall be delivered to the bank branch at the port or the bank representative in the seasonal office at the port as per a document from the Saudi Zakat, Tax, and Customs Authority. Such document shall include the name of the pilgrim affairs office and its account number (IBAN) in Saudi Arabia, as well as the name of the cash carrier and a copy of his/her passport. The bank employee shall give the depositor a deposit or transfer receipt attested by the bank.
5. Transfers from the office’s account to the electronic pathway of the Ministry of Hajj and Umrah are made for services contracted through the electronic pathway. Direct transfers from the office’s account in its country—or in countries specified by the Saudi Ministry of Hajj and Umrah—to the electronic pathway account of the Saudi Ministry of Hajj and Umrah for external pilgrims are allowed for contracting purposes related to Hajj arrangements and any other purposes specified by the Saudi Ministry of Hajj and Umrah, in compliance with all requirements stated in this rule. 6. The organizer may pay authorized signatories by checks for petty expenses (within the estimated amounts approved by the Saudi Ministry of Hajj and Umrah). 7. The approval of the bank’s compliance department is required for the operation of the office’s account. 8. The office shall not use its account balances for investments. C. Operating the pilgrim affairs office’s account after Hajj season: 1. Surplus funds in the Hajj Affairs Office account at the end of the Hajj season (end of Muharram) must be returned to a bank in the office's country or to a bank in one of the countries specified by the Saudi Ministry of Hajj and Umrah in case they were the source of these funds, based on a request from the authorized persons in the office, provided that this requirement is specified in the office's account opening agreement. 2. If the office wants to keep the balance in the same account to be used in the subsequent Hajj year, the account will be frozen at the end of Muharram until the beginning of the subsequent Hajj season (which is to be specified by the Ministry of Hajj and Umrah). 3. In exceptional cases, operating the account of the pilgrim affairs office may be allowed during the period in which using the account is originally prohibited, provided that the bank obtains SAMA written approval therefor. D. Reactivating and operating the pilgrim affairs office’s account in the following Hajj year: To reactivate the pilgrim affairs office’s bank account in the following Hajj year, the bank shall obtain a letter from the Ministry of Hajj and Umrah, including the same information specified in the form filled out by the ministry when it first approved the account opening. In particular, the information should include the names of authorized persons and their information. The approval letter should be obtained along with the list provided by the pilgrim affairs office for the Ministry of Hajj and Umrah, stating the parties that the office has contracted with in the Hajj year and that the office will write checks and make payments for. This list shall be attested by the Ministry of Hajj and Umrah.
Tourism companies and travel agencies organizing pilgrim arrival from outside Saudi Arabia: A. Requirements for opening a bank account: 1. Bank accounts shall be opened in Saudi riyal only. 2. The Hajj organizer shall present to the bank a letter from the Ministry of Hajj and Umrah approving opening a bank account for the pilgrim affairs office and including the office’s information as follows: • Official name of the organizer (tourism company, agency or association approved to organize pilgrims’ arrival) in Arabic and English.
• The computer number given to the organizer by the Ministry of Hajj and Umrah.
• Name(s) of person(s) authorized to manage the bank account, provided that they are officials in the tourism company, agency or association approved to organize for pilgrim arrival. Full names shall be written in English and Arabic as shown in their passports, along with their passport number.
• The authorized person’s title shall be a “Hajj organizer".
• The bank account shall be limited to Hajj purposes only.
• The organizer’s bank account number in its home country or or in the country designated by the Saudi Ministry of Hajj and Umrah, shall be specified, as well as the name of the bank transferring funds, which the organizer deals with in its home country or in the country designated by the Saudi Ministry of Hajj and Umrah.
3. A copy of the organizer’s commercial register and/or license issued for the organizer in its home country shall be submitted. Such commercial register and/or license shall be attested by the concerned Saudi embassy and/or the Ministry of Foreign Affairs. 4. The bank must obtain copies of the passports of person(s) authorized to operate the bank account for dual control. 5. The bank shall conclude an account opening agreement with the authorized signatories. 6. The organizer shall determine, in Saudi riyal, the approximate total amount that it will transfer for Hajj purposes. 7. Upon meeting all the above requirements by the bank, the bank’s compliance department shall submit an application to SAMA along with all necessary documents to obtain SAMA approval for opening the bank account. 8. The bank shall ensure that such accounts are subject to dual control. 9. The bank shall provide the organizer and the Ministry of Hajj and Umrah with the IBAN number of the organizer's account on a form designed for this purpose. 10. If the requirements for opening a bank account are not met, the bank branch manager must inform the applicant of the necessary requirements for opening a bank account. Such process shall be documented in a special file designed for this purpose in the bank branch. In addition, measures taken in this regard shall be reported to the compliance department at the head office of the bank on the same day. 11. If the requirements for opening a bank account are met, the documents shall be submitted on the same day to the compliance department at the bank’s head office. Consequently, the compliance department, in turn, shall submit such documents to SAMA on the same day or at the beginning of the following working day, at the most. 12. Where all requirements are met, the period for opening a bank account shall not exceed two working days. 13. The Hajj organizer may open multiple accounts, provided that these accounts are opened in the same bank only - with an explanation of the account's purpose - The organizer may not open other accounts in other banks. If the organizer requests to transfer its accounts from one bank to another, it shall provide compelling justifications that are not related to meeting the requirements. Approval of the Ministry Hajj and Umrah and SAMA for that matter shall be secured. B. Requirements for account operation and management:: 1. The account shall be operated under a new approval letter from the Ministry of Hajj and Umrah to the bank on the account operation. The letter should specify the operation period, which should be from the first day of Rabi I up till the last day of Muharram of the following year. The letter shall be accompanied by a list provided by the Hajj organizer. This list shall include the names of Saudi natural persons, companies and establishments that the organizer will be dealing with for petty expenses, and it shall be attested by the Ministry of Hajj and Umrah. 2. Deposits shall be made in the account of the Hajj organizer via remittances from a bank in the organizer’s home country or countries designated by the Saudi Ministry of Hajj and Umrah, the purpose of such remittance shall be specified as “organizer’s expenses related to Hajj only”. 3. Deposits may be made in the account via checks under collection, drawn by the organizer itself on a bank in the organizer’s home country only. 4. Remittances, checks or cash deposits from entities inside Saudi Arabia shall not be accepted, except in the following cases: • By persons whose names are included in the list, submitted in advance to the Ministry of Hajj and Umrah by the organizer and attached to the ministry's letter to the bank. Such list should include the names of service providers dealing with the organizer. The amounts of such remittances, checks or cash deposits shall be less than or equal to the amounts stated in contracts concluded with each beneficiary (at the Saudi Ministry of Hajj and Umrah’s discretion).
• By authorized persons, provided that such an amount is within normal limits, i.e. is less than or equal to the withdrawn amount as petty expenses (at the Saudi Ministry of Hajj and Umrah’s discretion).
• The amounts (in SAR/foreign currencies) disclosed at ports of entry (land ports, seaports, or airports) shall be delivered to the bank branch at the port or the bank representative in the seasonal office at the port as per a document from the Saudi Zakat, Tax, and Customs Authority. Such document shall include the name of the organizer and its account number (IBAN) in Saudi Arabia, as well as the name of the cash carrier and a copy of his/her passport. The bank employee shall give the depositor a deposit or transfer receipt attested by the bank.
5. Transfers from the office’s account to the electronic pathway of the Ministry of Hajj and Umrah are made for services contracted through the electronic pathway. Direct transfers from the office’s account in its country—or in countries designated by the Saudi Ministry of Hajj and Umrah—to the electronic pathway account of the Saudi Ministry of Hajj and Umrah for external pilgrims are allowed for contracting purposes related to Hajj arrangements and any other purposes specified by the Saudi Ministry of Hajj and Umrah, in compliance with all requirements stated in this rule. 6. The organizer may pay authorized signatories by checks for petty expenses (within the estimated amounts approved by the Saudi Ministry of Hajj and Umrah). 7. The approval of the bank’s compliance department is required for the operation of the organizer’s account. 8. The organizer shall not use its account balances for investments. C. Operating the organizer’s account after Hajj season: 1. At the end of the Hajj season (end of Muharram), amounts left in the account of the organizer shall be returned to a bank in the organizer’s home country or to a bank in one of the countries designated by the Saudi Ministry of Hajj and Umrah in case they were the source of these funds at the request of the authorized persons. Such a request shall be indicated in the bank account opening agreement signed by the organizer. 2. If the organizer wants to keep the balance in the same account to be used in the subsequent Hajj year, the account will be frozen at the end of Muharram until the beginning of the subsequent Hajj season (which is to be specified by the Ministry of Hajj and Umrah). 3. In exceptional cases, operating the account of the organizer may be allowed during the period in which using the account is originally prohibited, provided that the bank shall obtain SAMA written approval therefor. D. Reactivating and operating the organizer’s account in the following Hajj year: To reactivate the organizer’s bank account in the following Hajj year, the bank shall obtain a letter from the Ministry of Hajj and Umrah, including the same information specified in the form filled out by the ministry when it first approved the account opening. In particular, the information should include the names of authorized persons and their information. The approval letter should be obtained along with the list provided by the organizer for the Ministry of Hajj and Umrah, stating the parties that the organizer has contracted with in the Hajj year and that the organizer will write checks and make payments for. This list shall be attested by the Ministry of Hajj and Umrah. Saudi establishments and companies organizing the arrival of Umrah performers and visitors of the Prophet's Mosque: - Documents required from those Saudi establishments are as specified in Rule (300.1.1) above. - Documents required from those Saudi companies are as specified in Rule (300.1.3) above. - All bank accounts of Saudi establishments and companies licensed to offer Umrah and holy site visit services shall be separated from one another, in that bank accounts designated for Umrah and holy site visit services shall be separate from other bank accounts designated for other activities and services. In addition, all bank transactions related to Umrah services shall be separate from those related to other services and activities that such establishments and companies may carry out. Non-Requirement for Customers from Companies to Provide the Official Stamp on the Memorandum of Association and their Amendments Submitted to Account Opening or Banking Transactions
Further to the instructions issued by SAMA under Circular No. (381000053456) dated 17/05/1438 H, Circular No. (391000031596) dated 18/03/1439 H and other relevant instructions, which stipulate that customers from companies and institutions are not required to have the official stamp of the Ministry on the documents submitted for account opening or banking transactions, it has been observed that some banks have not accepted the Memorandum of Association and their amendments submitted by customers due to the absence of the Ministry's stamp on them.
Accordingly, SAMA emphasizes to all banks that they should not require customers from companies to provide the official stamp from the Ministry on the memorandums of association and their amendments submitted for account opening or banking transactions, and only verify their validity through the (Aamaly) magazine via the following link: (aamaly.sa).
Extending the Working Hours of Branches Operating in the Cities of Makkah and Madinah
Based on the powers of SAMA to issue instructions related to financial institutions and their business in accordance with the provisions of its law issued by Royal Decree No. (M/36) dated 11/04/1442H; and to SAMA's supplementary circular No. (44087394) dated 17/11/1444 H, regarding extending the working hours of branches in places where pilgrims gather near the Two Holy Mosques, and to enhance the efforts exerted to improve the experience of the pilgrims, and to facilitate their access to financial services to obtain currency exchange and exchange service for Umrah performers and pilgrims.
Accordingly, SAMA stresses the importance of extending the working hours of branches operating in the cities of Makkah and Madinah during the Hajj and Umrah season, from the beginning of Ramadan until the end of Dhu al-Hijjah of each year, in accordance with the following controls:
- The branch should be located in the places where pilgrims gather near the Two Holy Mosques.
- The overtime working hours shall not exceed four extended hours of official working hours, without prejudice to the provisions of the Labor Law and its Implementing Regulations contained in this regard.
- Availability of sufficient number of Bank employees during overtime hours.
- The Bank announces the extension of branch working hours through the available channels.
- Provide SAMA with a list of branches whose working hours have been extended.
- The bank notifies the security authorities to extend the working hours of branches within the scope of the Two Holy Mosques.
Amendment of Rule (500-1-2) of the Account Opening Rules
In reference to Rule No. (500-1-2) included in the Account Opening Rules notified under SAMA Circular No. (65681/67) dated 01/11/1440 H, which includes the requirements for Opening Bank Accounts for Government Entities to Receive Donations for their Own Account.
I would like to inform you that the above-mentioned rule has been amended in accordance with the following:
- Amend paragraph No. (1) to be as follows: "The request to open a bank account shall be submitted after obtaining the approval of the Ministry of Finance notified through SAMA. Such request shall indicate that the purpose of opening the account is to receive donations for the government entity.
- Amend paragraph No. (2) to be as follows: "Two signatories shall be determined by the concerned minister or the head of the entity, in addition to the financial controller in the government entity. The bank shall obtain IDs copies and specimen signatures of such authorized persons. Those copies shall be attested as true copies of the original by both the government entity and the bank. Changing the signatories or financial controller requires sending a letter from the concerned minister or the head of the entity or his authorized representative to the bank where the account is opened.
SAMA also emphasizes the importance of monitoring updates and amendments to the rules, and always relying on the version of the rules published on its official website.
- Amend paragraph No. (1) to be as follows: "The request to open a bank account shall be submitted after obtaining the approval of the Ministry of Finance notified through SAMA. Such request shall indicate that the purpose of opening the account is to receive donations for the government entity.
Provision of Small Denominations and Coins
Based on the powers of SAMA to issue instructions related to financial institutions and their business in accordance with the provisions of its law issued by Royal Decree No. (M/36) dated 11/04/1442 H, and to SAMA's supplementary Circular No. (42015321) dated 11/03/1442 H regarding the instructions notified by Circular No. (341000111354) dated 15/09/1434 H regarding the necessity for banks operating in the Kingdom to secure the public's requirements for small monetary denominations and coins.
Accordingly, SAMA stresses to all banks the need to have sufficient quantities of small denominations and coins to meet the public's requests for obtaining or replacing them, and to be available to everyone and in all branches.
Note that SAMA will conduct field tours to cash centers and bank branches to ensure the availability of various small denominations of cash and coins for individual and corporate customers.
Urging Technical Connectivity with Musanid Platform
Referring to the decision of the Ministry of Human Resources and Social Development No. (149944) dated 04/11/1445 H, which stipulates the implementation of the wage protection program for domestic workers by paying monthly wages through the payment channels approved on the Musanid platform starting from 25/12/1445 H, and to SAMA's receipt of a request from the Ministry to urge banks to link with the Musanid platform.
Accordingly, SAMA urges banks operating in the Kingdom to link technically with the Musanid platform to enable them to provide the necessary services to all employers. SAMA confirms compliance with all relevant instructions and regulations in this regard, including conducting assessments of technical and cyber risks resulting from the technical linking process and ensuring the implementation of effective controls to limit and prevent potential fraudulent risks.
Urgent Measures to Combat Financial Fraud in Banks Operating in the Kingdom
Pursuant to the powers vested in SAMA under the relevant regulations, and with reference to the Guidelines for Combating Financial Fraud in Banks Operating in Saudi Arabia, issued under Circular No. (41071315) dated 27/12/1441H, the Information Technology Governance Framework, issued under Circular No. (43028139) dated 29/03/1443H, and the Cyber Security Framework and other related SAMA instructions, and in line with the aim of enhancing the quality of financial and cyber fraud prevention procedures in the banking sector through assessment and analysis of fraud incidents.
Given the recent increase in financial and cyber fraud cases, especially with regard to social engineering and the increase in fake websites and social media accounts, SAMA emphasizes the need for banks to adhere to the instructions contained in the above-mentioned guides and to carry out continuous assessments. SAMA also emphasizes that banks must adhere to urgent measures to combat financial fraud in a manner that does not conflict with other relevant regulatory requirements. These controls apply to the accounts of individuals as well as the accounts of individual institutions, as follows:
First / Quick and urgent measures to be implemented by banks within one working day from today's date:
1. Electronic banking services:
1.1 Stop opening bank accounts remotely.
1.2 Setting a total daily limit for all financial transfers made through digital channels between internal bank customers and through all local payment systems (IPS and RTGS) and international payments, including Remittance transfers, with a maximum limit of (60,000) Riyals.
Second: Quick and urgent measures that banks must implement within (10) working days from the date of this announcement:
1. Electronic banking services:
1.1 Applying more than one criterion for identity verification when requesting (establishing e-services, changing the password, issuing and activating cards (term or credit, etc.), and confirming the request through another channel (e.g. phone call).
1.2 Apply the beneficiary addition and activation requirements to e-wallet transfers by any method whatsoever.
1.3 Apply the mechanism of adding and activating the beneficiary using another channel to all types of money transfers.
1.4 Send a verification code (OTP) for each remittance transaction to previously added customers, including transactions made through membership (Remittance Accounts).
1.5 Customers must manually enter the OP- PIN and disable the auto fill feature.
2. Controls for Domestic and International Remittances
2.1 Amending the daily limit for accounts previously opened remotely and not authenticated by branch or fingerprint through self-service machines so that the total amount of daily transfers between the Bank's internal customers and across all local payment systems (IPS and RTGS) is limited to a maximum of SAR (20,000) Riyals.
2.2 Depending on the risks accepted by the Bank, the Bank can establish reliable and secure procedures that enable customers to raise daily limits, provided that they are limited to accounts opened through branches/authenticated through branches or self-service devices, with the adherence to the following:
- The total amount of daily transfers through the IPS system shall be a maximum of (60,000) Riyals, and what is more than that shall be through the RTGS system.
- Putting precautionary measures on transfers and suspending transfers for at least two hours before executing them from the issuing bank through the RTGS system.
2.3 Adding an international beneficiary from accounts owned by a resident, the activation shall be through the branch or self-service devices (with fingerprint).
2.4 Suspending international transfers executed through electronic channels for accounts opened through branches or authenticated through branches or self-service devices for (24) hours if it is for the first time. And at least two hours for subsequent transfers to the same beneficiary for high-risk countries, including operations carried out through memberships (Remittance Accounts).
2.5 The total amount of monthly remittance amounts through membership (Remittance Accounts Application) shall be as follows:
- Not exceeding a maximum of (20,000) Riyals for accounts opened through branches/ or authenticated through branches or self-service machines.
- Not exceeding a maximum of (5000) SAR for accounts previously opened remotely.
2.6 Bank accounts previously opened remotely and not documented are not allowed to make any international transfers.
3. Procedures for Accounts Previously Opened Remotely
3.1 With regard to accounts opened remotely previously and through which banking products such as (salary linking, financing, etc.) were utilized, the bank must establish a mechanism to authenticate the account either through the branch or self-service, and bear the risks resulting from the failure to authenticate the account.
3.2 Reduce the amount of purchase transactions for previously opened unauthenticated accounts (20,000) Riyals per day. In case of special circumstances, such as the customer's presence outside the Kingdom, the bank can establish a mechanism to authenticate the account and raise the limit, provided that the bank bears the resulting risks.
4. Process Control
4.1 Establishing precautionary measures to stop or recover international electronic money transfers after they are executed by the customer (Remittance), taking into account the customer's behavior in international transfers and the countries to which these amounts are sent.
4.2 Customers are not allowed to execute financial transactions when customers access their accounts through biometrics or (M-PIN), and that these services are for viewing only without conducting financial transactions according to SAMA's requirements. In the event that the customer wishes to carry out financial transactions, more than one of the identity verification criteria (OTP) must be applied for each financial transaction, and regular procedures must be applied regarding the process of adding and activating beneficiaries.
4.3 Conduct a comprehensive review to ensure that there are no technical or procedural gaps that lead to the disclosure of any sensitive information about the customer (e.g. bank card number, list of cards).
4.4 To verify all versions of the bank's application, and the absence of any cyber, technical or procedural vulnerabilities. Do not allow access to electronic services from modified devices (e.g. Jailbreak).
4.5 When customers access the phone banking service, more than one identity verification criteria should be applied, taking into account the bank's ability to recognize the call number whether it is from a real number or from a spoofed customer number (Spoofing Caller IDs).
5. Reports of Fraud
5.1 Establishing effective internal procedures that ensure quick response to fraud cases after their discovery or after the customer's complaint, including all relevant departments on a 24/7 basis.
5.2 Conduct due diligence on mobile numbers registered in bank accounts used in the process of collecting funds resulting from fraudulent operations and review other bank accounts associated with those numbers.
5.3 Establish effective and fast 24/7 procedures to respond to fraud cases received from other banks, and include precautionary measures to freeze disputed amounts until their origin is verified. And the governance of those procedures. It should also be within the scope of internal auditing to conduct assessments on the application of the procedures approved by the bank on a periodic basis.
5.4 Studying all customer complaints and suspected cases of fraud and analyzing the methods used in fraud operations and adding them to the anti-fraud systems.
5.5 Listing and analyzing all types, methods, sizes and numbers of financial fraud cases, including the data of victims and beneficiaries of the funds resulting from the fraud operations, and keeping them in the databases of the Anti-Fraud Unit.
5.6 When a customer informs the bank of a fraud case, the bank must immediately stop all services associated with the account and all channels, and the bank must exercise due diligence to verify the customer's identity before reactivating the services, and reverse the status of Mada cards and credit cards and synchronize them (validity date, status, etc.) with the cards added on e-wallets (e.g. Apple Pay).
5.7 Providing other banks as well as the relevant authorities with fictitious websites and advertisements that impersonate the names and identities of government and private entities or known personalities, including accounts in social networks and modern methods through the Interbank Financial Fraud Control Committee.
5.8 Sharing the numbers of mobile phones registered in bank accounts used in the process of collecting funds resulting from fraud operations, the Device ID and IP Address with other banks through the Interbank Financial Fraud Control Committee.
6. General Controls
6.1 Inform clients if the account is upgraded to a higher tier, and take consent to raise the financial limits for operations. Customers should be clearly given the option to reduce the daily limit if they wish to reduce the daily limit. If the customer wishes to raise the daily limit, banks should use more than one identity verification standard. In addition to putting in place secure verification measures that include the use of a channel other than the one used in the limit change request process (e.g. phone call, ATM, branch, etc.). The daily limit shall not exceed the daily limit for the customer category specified by the bank, with immediate notification messages sent to customers and a time limit set by the bank to activate the request.
6.2 Daily limits are applied to accounts including sub-accounts for example: If the account limit is (60,000) SAR, it includes all main and sub-accounts, i.e. the total does not exceed (60,000) SAR.
6.3 Ensure that the purpose of all types of verification messages (OTP) is clearly and explicitly specified, including e-commerce transactions, and that they include the purpose, amount, and store name according to the approved notification templates.
6.4 Notify customers of account logins if they are logged in from a new device.
SAMA emphasizes the application of the above-mentioned controls in accordance with the specified periods. Note that SAMA will take regular measures against non-compliance, including the suspension of the bank's quick transfer service.
Third: Emphasizing banks to comply with the previously issued regulatory requirements within a maximum of two months from today and providing us with the action plan on 04/14/2022.
1- Based on Paragraph No. (3-5) in Chapter 3 of Guidelines for Combating Financial Fraud in Banks Operating in Saudi Arabia, banks must invest in advanced infrastructure and systems for combating financial fraud, and there must be sufficient and effective precautionary measures to ensure the identity of the customer to enable him to conduct financial operations, taking into account the study of the customer's behavior whether in financial transactions or with regard to the customer's behavior in accessing electronic services, and developing comprehensive and effective patterns and scenarios (Use Cases) to detect suspicious operations and develop precautionary measures to reduce fraud, provided that these patterns and scenarios are updated periodically taking into account the renewed fraud patterns and scenarios. This includes, but is not limited to, the following:
A- When logging in from different geographical areas in a short period of time.
B. When logging in from a device other than the one used by the customer.
C- When changing the PIN or mobile number followed by attempts to make financial transactions.
D- Different customer behavior in the way the PIN is typed.
E- Analyzing the customer's behavior in terms of financial transactions if a number of financial transfers are made in a short time as a result of incoming financial transfers for the same account.
F- Analyzing customer behavior in terms of financial operations carried out on the customer's account according to the daily operations limit, including internal, local and external transfers, linking financial operations to all customer accounts and banking channels used by them, and according to the customer's financial behavior in financial operations (Consumer Behavior), provided that the measures include added and predefined customers.
G. Developing comprehensive and detailed patterns and scenarios to detect fraud, take the necessary measures, measure their effectiveness and update them periodically.
2- Based on what is stated in the fourth chapter of the Guidelines for Combating Financial Fraud in Banks Operating in Saudi Arabia, banks must develop a plan to attract capable and experienced human competencies in anti-financial and cyber fraud systems, capable of drawing the strategic direction of these systems, and enhancing the capabilities of human competencies responsible for conducting investigations and studies related to fraud cases, and the Human Resources Unit is responsible for following up the implementation of this plan.
3- Based on what is stated in the fifth chapter of the Guidelines for Combating Financial Fraud in Banks Operating in Saudi Arabia, the bank must carry out effective and continuous awareness programs for the purpose of educating customers about the renewed methods of financial and cyber fraud, in innovative and modern ways away from traditional methods, and these programs have performance indicators that measure their effectiveness. Banks may organize joint awareness campaigns among themselves to achieve awareness of financial fraud.
4- Based on paragraph (3.7) in Chapter 3 of the Guidelines for Combating Financial Fraud in Banks Operating in Saudi Arabia, banks are required to conduct a comprehensive review of all banking products and services available to customers through existing and new electronic channels, evaluate them thoroughly and comprehensively, and put in place effective measures to minimize the risk of fraud.
5- Based on paragraph (2.1.4) on the responsibilities of “senior management” in the second chapter of the Guidelines for Combating Financial Fraud in Banks Operating in Saudi Arabia. Banks are required to establish a supervisory committee to follow up on the application of anti-fraud systems. It is linked to all banking services and internal control systems, and its members consist of the following departments - as a minimum: (Director of Compliance Department, Director of Fraud Control, Director of Cyber Security Department, Director of Information Technology, Director of Alternative or Electronic Channels, Director of Card Management), and may add other members that the bank deems appropriate to be included in the committee.
6- Based on paragraph (3.13) in Chapter 3 of the Guidelines for Combating Financial Fraud in Banks Operating in Saudi Arabia, the anti-fraud units in banks are required to conduct the necessary investigations and ensure that the investigation reports of fraudulent operations include customer complaints received by the bank from the customer, SAMA or the competent courts related to fraud cases.
7- Based on the seventh article of the Anti-Money Laundering Law and its Implementing Regulations regarding due diligence measures, banks must monitor the accounts receiving remittance funds and verify their compatibility with the customer's financial situation and monthly income, taking into account the channel used to open the account, and verifying the mobile phone owner's identity number with the account owner's identity and the date of the beginning of the relationship.
8- Developing corrective plans for all previously opened remote accounts and documenting them through branches or self-banking devices (with fingerprints) within a period not exceeding one month.
9- Emphasizing the application of the verification service for all bank accounts according to the previously issued instructions.
Reduced Processing Time for Local ATM Claims
Based on the powers of SAMA to issue instructions related to financial institutions and their business in accordance with the provisions of its law issued by Royal Decree No. (M/(36) dated 11/04/1442 H, and to the instructions of SAMA issued regarding the procedures for settling claims and complaints of the operations of the Saudi network and the Gulf network, and the instructions for exceptional cases notified pursuant to circular No. (57143/BCT/27221) dated 03/12/1432 H, which requires host banks (Acquiring banks) to respond objectively to ATM claims for customers Banks issuing the card within a maximum of seven working days from the date of receipt of the claim, in the special procedures in the exchange of claims between banks related to the operations of the Saudi network.
Therefore, I would like to inform you that it has been decided to reduce the maximum period for substantive response to ATM claims for bank customers mentioned in the above-mentioned instructions to a maximum of four working days from the date of receipt of the claim instead of seven working days, taking into account all the procedures mentioned in the other relevant instructions.
For your information and action accordingly as of 1/8/2024.
Urging the Acceptance of Payment of Gulf Employees' Insurance Contributions through Electronic Means, and Providing the Required Information and Data
Referring to the framework for the application of the unified law for the extension of insurance protection to the Arab Gulf States, and to the receipt by SAMA of the letter of the General Secretariat of the Cooperation Council for the Arab States of the Gulf which includes the existence of a number of challenges related to the payment of insurance contributions of Gulf employees working in the GCC States and the creation of contributions amounts in the accounts of civil retirement and social insurance agencies of the GCC States in the accounts of commercial banks, including the lack of information and data required from the civil retirement and social insurance accounts of the Gulf countries.
Accordingly, it urges SAMA to accept the payment of Gulf employees' insurance contributions through electronic means, and stresses the importance of providing the required information and data from the retirement and social insurance agencies in the GCC countries (establishment name - registration number / establishment register with the retirement and social insurance authority for all operations on the accounts of pension agencies, and cooperation with representatives of retirement and social insurance accounts in the GCC countries).
Supporting the Programs of the Martyrs, Wounded, Prisoners of War and Missing Persons Fund
Further to SAMA Circular No. 43105952 dated 29/12/1443 H referring to Council of Ministers Resolution No. (366) dated 14/08/1436 H approving the organization of the Martyrs, Wounded, Prisoners and Missing Persons Fund, under which a fund was established with legal personality and financial and administrative independence.
Based on the efforts of our brave soldiers stationed on the borders of the Kingdom of Saudi Arabia for the sake of its security and protection, and in order to support this category that dear to all of us, SAMA hopes to support the Fund's programs through social responsibility programs at banks, and coordination can be made in this regard with the Fund.
Urge Connectivity with Takamul Platform
Referring to the instructions of SAMA issued pursuant to Circular No. (42017708) dated 18/03/1442 H regarding the Instructions to replace the unified number starting with (7) issued by the national information center with the commercial register number for non-governmental establishments, and with reference to paragraph (17) contained within these instructions related to the source of obtaining unified numbers for establishments that do not have/do not require obtaining a commercial register, and to the availability of the Ministry of Human Resources and Social Development to verify the validity of the unified number through the website provided Service (Takamul Holding Company).
Accordingly, SAMA urges to connect technically with a reliable source (Takamul Company) to benefit from the unified number validation service that does not have / does not require obtaining a commercial register, and SAMA also emphasizes to carry out technical and cyber tests and take all necessary precautionary measures for this connectivity while adhering to the instructions of SAMA issued in this regard.
Amendment of Rule No. (300-1-3-8) of the Account Opening Rules
In reference to Rule No. (300-1-3-8) concerning the Collection Accounts for Managing the Finance Value of Debt-Based Crowdfunding Companies, included in the Account Opening Rules and notified in accordance with SAMA Circular No. (65681/67) dated 01/11/1440 H, and to SAMA Circular No. (46023501) dated 14/04/1446H, through which the issuance of His Excellency the Governor’s Decision No. (162/M SH T) dated 27/03/1446H was communicated, approving the amendment of the Rules for Engaging in Debt-Based Crowdfunding.
Whereas, the amendment to the Rules for Engaging in Debt-Based Crowdfunding included the amendment to some of the terms used therein, including what is used in the name of Collection Accounts for Managing the Finance Value of Debt-Based Crowdfunding Companies.
Accordingly, I inform you that the following has been decided:
First/ Amending the above-mentioned rule to be in accordance with the accompanying formula by replacing the term "debt-based crowdfunding establishment" with the word "debt-based crowdfunding company", as well as replacing the word "finance value" with "finance amount" wherever it appears in the rule.
Second/ Amending the term and definition of the finance value and the debt-based crowdfunding establishment contained in Chapter (1) on definitions to be as follows:
- "Finance Amount: funds raised from Participants via a Debt-Based Crowdfunding Platform to be provided for an Institutional Beneficiary".
- "Debt-Based Crowdfunding Company: a joint-stock company licensed to engage in Debt-Based Crowdfunding activity".
Amendment of Rule (300-1-3-8) of the Account Opening Rules , as amended, to align with the modification of the Rules for Engaging in Debt-Based Crowdfunding as communicated to crowdfunding companies by SAMA Circular No. (46023501) dated (14/04/1446H)
300.1.3.8 Collection Accounts for Managing the Finance Value of Debt-Based Crowdfunding Companies:
The collection accounts for collecting funds from participants in order to extend credit to beneficiaries shall be opened and managed in accordance with the following requirements:
1. A letter from the Chairperson of the Board of Directors of the company or their authorized representative to the bank, stating the purpose of opening the account under the name “Management of the Finance Amount of (name of debt-based crowdfunding company)”, and identifying the persons authorized to manage the account.
2. Copies of all the company’s incorporation documents, including the memorandum of association, articles of association and Board formation decision.
3. Copies of the IDs of persons authorized to manage the account.
4. The name of the account shall be “Management of the Finance Amount of (name of debt-based crowdfunding company).”
5. The account shall be separate and independent from the accounts opened for managing the company’s business, including the fees and commissions collected by the company. The account shall not be used for any financial obligations or rights of the company.
6. Transfer of money to other accounts without the approval of the participants shall only be made after submitting SAMA’s non-objection for such transaction.
7. Cash deposits to or withdrawals from the account shall not be allowed.
Update of Rule No. (300-1-3-6) of the Account Opening Rules
No: 000046028059 Date(g): 9/11/2024 | Date(h): 8/5/1446 Status: In-Force Translated Document
In Reference to Rule No. (300-1-3-6) on Escrow Account for Real Estate Development–off-Plan Unit Sale and Rental Project, included in the Account Opening Rules, notified pursuant to SAMA Circular No. (67/65681) dated 01/11/1440 H, and a reference to the Law of Sale and Leasing of Real Estate Projects on Plan issued by Royal Decree No. (M/44) dated 1/03/1445 H and its Implementing Regulations, and to the Law of Collective Real Estate Investment Schemes issued by Royal Decree No. (M/203) dated 28/12/1444 H and its Implementing Regulations, and the instructions issued with the same Relationship, and in line with the alignment of organizational developments.
We inform you that the following has been decided:
First/ Amending the above-mentioned rule to be in accordance with the accompanying formula as follows:
- Amending the requirements for opening and managing escrow accounts for off-plan real estate projects.
- Adding a new paragraph regulating the opening and managing the bank accounts for escrow accounts for real estate contribution projects.
Second/ Amending the term and definition of "Escrow Account for Real Estate Development - Off-Plan Real Estate Units Sale Project Project" and adding the definition of the Escrow Account of the Real Estate Contribution Project within Chapter (1) on definitions, as follows:
- "Escrow accounts for off-plan sale or rental real estate projects": A bank account for depositing the amounts paid by financiers, buyers or tenants for the project.
- "Escrow Accounts for Real Estate Contributions Project": A bank account for depositing real estate contribution funds.
- Amending the requirements for opening and managing escrow accounts for off-plan real estate projects.
The New Rule under Rule No. (300-1-3-6) regarding the Requirements for Opening and Managing Bank Accounts for Escrow Accounts for Real Estate Development Projects
- 300-1-3-6 / Rules for Opening Escrow Accounts for Real Estate Development Projects:
The bank may open escrow accounts for real estate projects (sale or rental of off-plan real estate projects or real estate contributions) after fulfilling the following documents and procedures:
1. Verifying and identifying of the real estate developer, consulting office/engineering consultant, and certified public accountant in the legal form for each of them.
2. A written undertaking shall be made by the real estate developer stating that no disbursement shall be made from the account for purposes other than those concerning the project determined or its returns in the escrow account.
3. A written undertaking shall be made by the real estate developer stating its consent to amend the escrow account agreement to comply with any relevant laws, regulations, or instructions.
- Controls related to Opening and Managing Escrow Accounts for Off-Plan Sale or Rental Real Estate Projects:
1. Only one account shall be opened for each individual project and shall be named as follows: "name of project" Project- Escrow Account for "name of real estate developer”. Sub-accounts linked to the main account of the project may be opened, such as administrative and marketing expenses account, savings account, construction cost account, incentives account and finance account.
2. Payment shall be made from the project's escrow account based on the payment document submitted by the real estate developer to the bank. Such documents shall be certified by the consulting office and the certified public accountant and shall include the required amounts and justifications for their expenditure. Payment documents may be processed through secure technological means.
3. By exception to the provision in paragraph (2) above, payment may be made from the escrow account upon request from the Real Estate General Authority. The bank shall be notified through the Saudi Central Bank.
4. Payment from the account shall be made by check or transfers only and shall be within the limits stated in Paragraphs (2) and (3) above.
5. Deposits in the account shall be made by buyers, tenants, or financiers via any means of payment accepted by the bank other than cash.
Controls for Opening and Managing Escrow Accounts for Real Estate Contribution Projects
1. Only one account shall be opened for each individual project and shall be named as follows: "name of project" Project- Escrow Account for "Real Estate Contribution”. Sub-accounts linked to the main account of the contribution may be opened, such as: reserve account, revenue account, and any other sub-accounts for the purpose of the contribution project, such as a finance account.
2. Payment shall be made from the project's escrow account based on the payment document submitted by the real estate developer to the bank. Such documents shall be certified by the engineering consultant and the certified public accountant and shall include the required amounts and justifications for their expenditure. Payment documents may be processed through secure technological means.
3. Payment from the account shall be made by check or transfers only and shall be within the limits stated in Paragraph (2) above.
4. Payment shall be made from the reserve account based on the payment document submitted by the real estate developer to the bank. Such documents shall be certified by the engineering consultant and the certified public accountant and shall include the required amounts and justifications for their expenditure, along with the approval from the shareholders' association.
5. Payment shall be made from the revenue account based on the disbursement document submitted by the real estate developer, which must be recorded on the shareholders' register and certified by the certified public accountant. The document must include the required amounts and be accompanied by the completion certificate from the consultant or proof of the liquidation of the real estate contribution.
6. Deposits into the main and sub-accounts shall be made by the relevant financial market institution for issuing contribution certificates, financiers, or buyers, or from proceeds of the liquidation of the real estate contribution, by any accepted method, and cash deposits are not permitted.
General Provisions
1. The bank shall not activate the escrow account for the real estate project unless the license issued by the “Authority” to engage in the off-plan sale or rental of real estate projects or to offer the real estate contribution is submitted.
2. Project’s sub-accounts shall be used only for receiving/making deposits and transfers from and (in)to the main account.
3. No funds may be transferred from the escrow account to any other accounts other than that of its sub-accounts whose purposes are specified.
4. Checkbooks may be issued for this account at the request of the real estate developer. However, ATM cards and/or credit cards shall not be issued for this account.
5. The bank shall not attach the account for its own interest or that of the creditors of the real estate developer.
6. The bank shall not close the escrow account for the project except after obtaining approval from the relevant authority, without prejudice to the provisions of SAMA's instructions and the agreements in place.
Principles on Trade Repositories
No: 000045049500 Date(g): 6/2/2024 | Date(h): 27/7/1445 Status: In-Force 1. Introduction
1.1. These Principles are issued by Saudi Central Bank (SAMA) in exercise of the powers vested upon it under its Law issued by the Royal Decree No. (M/36) on 11- 04-1442H, the Banking Control Law issued by the Royal Decree No. (M/5) on 22-02-1386H, and the rules for Enforcing its Provisions issued by Ministerial Decision No. 3/2149 on 14-10-1406AH.
2. Definitions
2.1. The following terms and phrases, where used in these Principles shall have the corresponding meanings, unless otherwise specified by SAMA:
SAMA: Saudi Central Bank.
Reporting Requirements: reporting requirements as prescribed in Trade Repository Reporting and Risk Mitigation Requirements for Over-the-Counter (OTC) Derivatives Contracts issued via SAMA circular No. 42056371 dated 110/08/1442 H.
Derivative Position Information: information about positions relating to Derivative Transactions reported in accordance with the Trade Repository Reporting Requirements.
Derivative Trade Data: includes Derivative Transaction Information and Derivative Position Information.
Financial Market Infrastructure (FMI): is defined as a multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling, or recording payments, securities, derivatives, or other financial transactions.
Linked Entities: any other derivative trade repositories, payment systems, central securities depositories, securities settlement systems, central counterparties and service providers (e.g. collateral management, portfolio reconciliation or portfolio compression service providers) with which the Trade Repository has operational and contractual arrangements in connection with the acceptance, retention, use, disclosure and provision of access to Derivative Trade Data.
Trade Reporting Services: all services provided by the Trade Repository for the acceptance, retention, use, disclosure and provision of access to Derivative Trade Data, including any services for the acceptance, retention, use, disclosure and provision of access to Derivative Trade Data.
Non-Trade Reporting Services: refers to services other than Trade Reporting Services, and includes Ancillary Services.
Trade Repository (TR): an entity that is authorised by SAMA to operate as a repository of transaction data for Over-The-Counter (OTC) derivatives.
Participant: an Entity that is a party to an OTC derivative transaction.
Reporting Entity: an entity that is required to report Derivative Transaction Information or Derivative Position Information in accordance with the Trade Repository Reporting Requirements.
3. Scope and level of application
3.1. These Principles shall be applicable to any Trade Repository already approved by SAMA and operating in the Kingdom of Saudi Arabia and other relevant jurisdictions, where applicable.
3.2. A Trade Repository must adhere with all the relevant CPMI-IOSCO Principles for Financial Market Infrastructures (PFMI) applicable to a Trade Repository 1. In addition, the adherence should cover all PFMI in their entirety, including the headline and all the applicable Key Considerations (KC) of the PFMI, and any specific or additional rules and requirements as may be imposed by SAMA.
3.3. SAMA shall conduct onsite and offsite oversight activities on the Trade Repositor(ies), under its jurisdiction, taking into consideration its risk assessment on trade repositories.
4. Principle 1: Legal basis
A Trade Repository should have a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.
4.1. A Trade Repository should have a legal basis which provides a high degree of certainty for each material aspect of activities in KSA and other relevant jurisdictions, where applicable.
4.2. A Trade Repository should have rules, procedures, and contracts that are clear, understandable, and consistent with relevant laws and regulations.
4.3. A Trade Repository should be able to articulate the legal basis for its activities to SAMA, other relevant authorities, participants, and, where relevant, participants’ customers, in a clear and understandable way.
4.4. A Trade Repository should have rules, procedures, and contracts that are enforceable in KSA and other relevant jurisdictions. There should be a high degree of certainty that actions taken by the Trade Repository under such rules and procedures will not be voided, reversed, or subject to stays.
4.5. Where a Trade Repository is conducting business in multiple jurisdictions, it should identify and mitigate the risks arising from any potential conflict of laws across jurisdictions.
5. Principle 2: Governance
A Trade Repository should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.
5.1. A Trade Repository should have objectives that place a high priority on the safety and efficiency of the Trade Repository and explicitly support financial stability and other relevant public interest considerations.
5.2. A Trade Repository should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, SAMA, other relevant authorities, participants, and, at a more general level, the public.
5.3. The roles and responsibilities of a Trade Repository’s Board of Directors should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address, and manage member conflicts of interest. The board should review both its overall performance and the performance of its individual board members regularly.
5.4. The board of a Trade Repository should contain suitable members with the appropriate skills and incentives to fulfil its multiple roles. This typically requires the inclusion of non-executive board member(s).
5.5. The roles and responsibilities of management should be clearly specified. A Trade Repository’s management should have the appropriate experience, a mix of skills, and the integrity necessary to discharge their responsibilities for the operations and risk management of the Trade Repository.
5.6. The board should establish a clear, documented risk-management framework that includes the Trade Repository’s risk-tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision making in crises and emergencies. Governance arrangements should ensure that the risk-management and internal control functions have sufficient authority, independence, resources, and access to the board.
5.7. The board should ensure that the Trade Repository’s design, rules, overall strategy, and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public.
5.8. A Trade Repository must appoint a chief compliance officer responsible for reviewing compliance with applicable legislation and regulatory requirements, identifying and resolving conflicts of interest and completing and certifying an annual compliance report.
5.9. The Trade Repository must establish, implement, maintain and enforce policies, procedures, systems and controls for monitoring and enforcing compliance by its employees and critical service providers with these Principles and any other applicable laws.
5.10. Without limiting paragraph 5.9 above, a Trade Repository must ensure that the arrangements, rules, procedures, policies, plans, systems and controls required by these Principles are reviewed, audited and tested periodically and after significant changes, to ensure compliance with these Principles.
5.11. A Trade Repository must establish and maintain sufficient and appropriate dedicated human, technological and financial resources to ensure that the Trade Repository operates at all times securely, efficiently and effectively.
5.12. A Trade Repository must at all times ensure its employees and managers are fit and proper, taking into account the experience, qualifications and skills necessary to perform their respective roles and responsibilities in the governance, management and operation of the Trade Repository.
6. Principle 3: Framework for the comprehensive management of risks
A Trade Repository should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.
6.1. A Trade Repository should have risk-management policies, procedures, and systems that enable it to identify, measure, monitor, and manage the range of risks that arise in or are borne by the Trade Repository. Risk-management frameworks should be subject to periodic review.
6.2. A Trade Repository should provide incentives to participants and. where relevant, their customers to manage and contain the risks they pose to the Trade Repository.
6.3. A Trade Repository should regularly review the material risks it bears from and poses to other entities (such as other FMIs, settlement banks, liquidity providers, and service providers) as a result of interdependencies and develop appropriate risk-management tools to address these risks.
6.4. A Trade Repository should identify scenarios that may potentially prevent the Trade Repository from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down. A Trade Repository should prepare appropriate plans for its recovery or orderly wind-down based on the results of that assessment. Where applicable, a Trade Repository should also provide SAMA and other relevant authorities with the information needed for the purposes of resolution planning.
7. Principle 4: General business risk
A Trade Repository should identify, monitor, and manage its general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.
7.1. A Trade Repository should have robust management and control systems to identify, monitor, and manage general business risks, including losses from poor execution of business strategy, negative cash flows, or unexpected and excessively large operating expenses.
7.2. A Trade Repository should hold liquid net assets funded by equity (such as common stock, disclosed reserves, or other retained earnings) so that it can continue operations and services as a going concern if it incurs general business losses. The amount of liquid net assets funded by equity that the Trade Repository hold should be determined by its general business risk profile and the length of time required to achieve a recovery or orderly wind-down, as appropriate, of its critical operations and services if such action is taken.
7.3. A Trade Repository should maintain a viable recovery or orderly wind-down plan and should hold sufficient liquid net assets funded by equity to implement this plan. At a minimum, the Trade Repository should hold liquid net assets funded by equity equal to at least six months of current operating expenses. These assets are in addition to the resources held to cover participant defaults or other risks covered under the financial resources principles. However, equity held under international risk-based capital standards can be included where relevant and appropriate to avoid duplicate capital requirements.
7.4. Assets held to cover general business risk should be of high quality and sufficiently liquid in order to allow the Trade Repository to meet its current and projected operating expenses under a range of scenarios, including in adverse market conditions.
7.5. A Trade Repository should maintain a viable plan for raising additional equity should its equity fall close to or below the amount needed. This plan should be approved by the board of directors and updated regularly.
8. Principle 5: Operational risk
A Trade Repository should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the Trade Repository’s obligations, including in the event of a wide-scale or major disruption.
8.1. A Trade Repository should establish a robust operational risk-management framework with appropriate systems, policies, procedures, and controls to identify, monitor, and manage operational risks.
8.2. A Trade Repository board of directors should clearly define the roles and responsibilities for addressing operational risk and should endorse the Trade Repository operational risk-management framework. Systems, operational policies, procedures, and controls should be reviewed, audited, and tested periodically and after significant changes.
8.3. A Trade Repository should have clearly defined operational reliability objectives and should have policies in place that are designed to achieve those objectives.
8.4. A Trade Repository should ensure that it has scalable capacity adequate to handle increasing stress volumes and to achieve its service-level objectives.
8.5. A Trade Repository should have comprehensive physical and information security policies that address all potential vulnerabilities and threats.
8.6. A Trade Repository should have a business continuity plan that addresses events posing a significant risk of disrupting operations, including events that could cause a wide-scale or major disruption. The plan should incorporate the use of a secondary site and should be designed to ensure that critical information technology (IT) systems can resume operations within two hours following disruptive events. The plan should be designed to enable the Trade Repository to complete settlement by the end of the day of the disruption, even in case of extreme circumstances. A Trade Repository should regularly test these arrangements.
8.7. A Trade Repository should identify, monitor, and manage the risks that key participants, other FMIs, and service and utility providers might pose to its operations. In addition, a Trade Repository should identify, monitor, and manage the risks its operations might pose to other Trade Repository or FMIs.
8.8. A Trade Repository must comply with SAMA Business Continuity Framework issued via SAMA circular 381000058504 dated 01/06/1438 H, and applicable national regulatory guidelines over Business Continuity, Outsourcing, Cybersecurity, IT Governance, and Data Privacy and must ensure that:
8.8.1. A Trade Repository’s services are provided at all times in a secure, efficient and effective manner.
8.8.2. A Trade Repository have in place processes for regular review of whether the Trade Repository’s operations are efficient and effective in meeting the requirements of participants, SAMA, and the markets it serves. These may include, for example, a review of its minimum service levels, operational reliability, cost-effectiveness pricing, and controls. Trade repository should also address IT operational risks as part of overall operational risk management through identifying and mitigating IT risks via mandating them to ensure control consideration from SAMA Information Technology Governance Framework issued via SAMA circular 43028139 dated 29/03/1443 H.
8.8.3. Cyber security risks are managed effectively and that the Trade Repository’s assets are protected. In this regard, a Trade Repository is also required to comply with SAMA Cyber Security Framework and applicable national Cybersecurity guidelines, and ensure effectiveness of its security controls through periodical evaluation.
8.8.4. A Trade Repository should define and develop data classification in organized categories based on the level of data sensitivity. A Trade Repository’s data classification should ensure its confidentiality, integrity, and availability; Where access to data should provide based on need to know principles
8.8.5. A Trade Repository should implement adequate mechanism to ensure the privacy of the data collected throughout its lifecycle in the Trade Repository and protection of personal data in compliance with national laws and regulations.
8.8.6. For the purposes of integrity and cyber security of the Trade Repository, a Trade Repository must establish, implement, maintain and enforce policies, procedures, physical and electronic controls over its systems for accepting, retaining, using, disclosing and providing access to Derivative Trade Data designed to:
8.8.6.1. Maintain the integrity and confidentiality of Derivative Trade Data at all times during transmission between the Trade Repository, SAMA and Participants, and while retained in the Trade Repository; and
8.8.6.2. Prevent unauthorized use or disclosure of, or access to, Derivative Trade Data in line with business requirements based on the need-to-have or need-to-know principle.
8.8.7. SAMA may make a direction relating to Derivative Trade Data if a Trade Repository ceases to be authorised, including a direction requiring the Trade Repository to destroy or transfer to another Trade Repository or SAMA all records of the Derivative Trade Data over which the Trade Repository has control.
8.8.8. A Trade Repository must report all incidents of disruption including IT and Cyber classified as “Medium" or “High” to SAMA immediately. A post-incident report should be communicated to SAMA after Trade Repository resumes to normal operations.
8.8.9. A Trade Repository must seek approval from SAMA when selecting a new site for its main or alternative data center, or when relocating the current main or alternative data center taking in consideration that Trade Repository’s information/data hosting and storage must be inside the KSA.
8.8.10. A Trade Repository must define the scope and coverage of backups to cover all critical technologies, information and data assets and implement backup and recovery processes with a periodic testing of their effectiveness.
8.9. The Trade Repository must establish, implement, maintain and enforce plans, including escalation plans, for its internal communications and its communications with Participants and SAMA in circumstances of an operational outage or other disruption to the Trade Repository’s services.
9. Principle 6: Access and participation requirements
A Trade Repository should have objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access.
9.1. A Trade Repository should allow for fair and open access to its services, including by direct and, where relevant, indirect participants and other FMIs, based on reasonable risk-related participation requirements.
9.2. A Trade Repository participation requirements should be justified in terms of the safety and efficiency of the Trade Repository and the markets it serves, be tailored to and commensurate with the Trade Repository’s specific risks and be publicly disclosed. Subject to maintaining acceptable risk control standards, The Trade Repository should endeavor to set requirements that have the least-restrictive impact on access that circumstances permit.
9.3. A Trade Repository should monitor compliance with its participation requirements on an ongoing basis and have clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements.
9.4. A Trade Repository must have and apply objective conditions for access to and participation in the Trade Repository’s services that permit open and non-discriminatory access to and participation in the Trade Repository by Participants.
9.5. The access and participation conditions referred to in (9.4.) above must include conditions reasonably designed to ensure Participants do not pose undue risks to the secure, efficient and effective operation of the Trade Repository.
9.6. The access and participation conditions referred to in (9.4.) above, other than the conditions in (9.5.), must not unreasonably prohibit or limit access to or participation in a Trade Repository. A Trade Repository must not impose unreasonable conditions on participation or access.
9.7. Trade Repository must provide each Participant with access to the records of the Derivative Trade Data that the Participant has reported to the Trade Repository, including access for the purposes of making necessary corrections or alterations to that Derivative Trade Data.
9.8. To the extent not provided under (9.7.) above, a Trade Repository must provide each Participant with access to the records of each Derivative for which the Participant is a counterparty.
9.9. A Trade Repository must ensure that its rules, procedures and contractual arrangements relating to the provision of access to Derivative Trade Data clearly define the categories of access available to Participants, if there is more than one category as well as the rights and obligations of Participants with respect to the provision of access to Derivative Trade Data.
9.10. A Trade Repository is not required to provide access under this condition to an entity that is suspended from being, or has ceased to be, a Participant in the Trade Repository by SAMA.
9.11. A Trade Repository must provide SAMA and other relevant authorities, if requested by SAMA and at no charge, continuous, direct and immediate electronic access2,3 to the following information retained in the Trade Repository:
9.11.1. All Derivative Trade Data reported by Participants in accordance with the Reporting Requirements; and
9.11.2. All information (including statistical data) that is created or derived from Derivative Trade Data referred to in (9.11.1.) above.
9.12. If a Trade Repository receives a request from SAMA for Derivative Trade Data retained in the Trade Repository, including a request for Derivative Trade Data referred to in (9.11.) above, it must comply with any such requirement specified in the request to provide the Derivative Trade Data:
9.12.1. On an ad hoc or periodic basis, or each time a particular circumstance or event occurs;
9.12.2. By a specified time; and/or
9.12.3. In a specified format.
2 Direct access may be provided through an electronic system, platform or framework that provides secure internet or web-based access to Derivative Trade Data, or by way of a direct real-time feed of Derivative Trade Data.
3 The Trade Repository will be required to provide access to aggregate-level data, position-level data and transaction-level data (including the identity of counterparties).10. Principle 7: Tiered participation arrangements
A Trade Repository should identify, monitor, and manage the material risks to the FMI arising from tiered participation arrangements.
10.1. A Trade Repository should ensure that its rules, procedures, and agreements allow it to gather basic information about indirect participation in order to identify, monitor, and manage any material risks to the Trade Repository arising from such tiered participation arrangements.
10.2. A Trade Repository should identify material dependencies between direct and indirect participants that might affect the Trade Repository.
10.3. A Trade Repository should identify indirect participants responsible for a significant proportion of transactions processed by the Trade Repository and indirect participants whose transaction volumes or values are large relative to the capacity of the direct participants through which they access the Trade Repository in order to manage the risks arising from these transactions.
10.4. A Trade Repository should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.
11. Principle 8: FMI links
A Trade Repository that establishes a link with one or more FMIs should identify, monitor, and manage link-related risks.
11.1. Before entering into a link arrangement and on an ongoing basis once the link is established, a Trade Repository should identify, monitor, and manage all potential sources of risk arising from the link arrangement. Link arrangements should be designed such that each FMI is able to observe the other principles in this report.
11.2. A link should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the FMIs involved in the link.
11.3. A Trade Repository should carefully assess the additional operational risks related to its links to ensure the scalability and reliability of IT and related resources.
12. Principle 9: Efficiency and effectiveness
A Trade Repository should be efficient and effective in meeting the requirements of its participants and the markets it serves.
12.1. A Trade Repository should be designed to meet the needs of its participants and the markets it serves, in particular, with regard to the choice of a clearing and settlement arrangement; operating structure; scope of products cleared, settled, or recorded; and use of technology and procedures.
12.2. A Trade Repository should have clearly defined goals and objectives that are measurable and achievable, such as in the areas of minimum service levels, risk-management expectations, and business priorities.
12.3. A Trade Repository should have established mechanisms for the regular review of its efficiency and effectiveness.
13. Principle 10: Communication procedures and standards
A Trade Repository should use, or at a minimum accommodate, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, settlement, and recording.
13.1. A Trade Repository should use, or at a minimum accommodate, internationally accepted communication procedures and standards.
13.2. Communication procedures and standards must support all operational and cyber risk management requirements specified under Principle 5 of this document.
14. Principle 11: Disclosure of rules, key procedures, and market data
A Trade Repository should have clear and comprehensive rules and procedures and should provide sufficient information to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the Trade Repository. All relevant rules and key procedures should be publicly disclosed.
14.1. A Trade Repository should adopt clear and comprehensive rules and procedures that are fully disclosed to participants. Relevant rules and key procedures should also be publicly disclosed.
14.2. A Trade Repository should disclose clear descriptions of the system’s design and operations, as well as the Trade Repository's and participants’ rights and obligations, so that participants can assess the risks they would incur by participating in the Trade Repository.
14.3. A Trade Repository should provide all necessary and appropriate documentation and training to facilitate participants’ understanding of the Trade Repository rules and procedures and the risks they face from participating in the Trade Repository.
14.4. A Trade Repository should publicly disclose its fees at the level of individual services it offers as well as its policies on any available discounts. The Trade Repository should provide clear descriptions of priced services for comparability purposes.
14.5. A Trade Repository should complete regularly and disclose publicly responses to the CPMI-IOSCO Disclosure framework for financial market infrastructures (Annex A). The Trade Repository also should, at a minimum, disclose basic data on transaction volumes and values.
14.6. If a Trade Repository proposes to make a change to the access and participation conditions, or the fees, rates and charges for the Trade Reporting Services, the Trade Repository first must obtain approval by SAMA and then notify participants in writing about the change within a reasonable time before the change is implemented.
14.7. A Trade Repository must disclose, on a publicly accessible section of its website and at no charge, a description of:
14.7.1. The Trade Reporting Services and any Ancillary Services;
14.7.2. The class or classes of Derivatives for which the Trade Repository can provide services, as specified in these Principles;
14.7.3. Key elements of the Trade Repository’s rules, procedures and contractual arrangements, including the dispute resolution procedures;
14.7.4. The Trade Repository’s access and participation conditions;
14.7.5. The organizational, legal and ownership structure of the Trade Repository and the arrangements for the governance and management of the Trade Repository; and
14.7.6. The Trade Repository’s policies and procedures in relation to the commercial use of Derivative Trade Data retained in the Trade Repository.
14.8. A Trade Repository must ensure the disclosures required under (14.5.) above are at all times complete, accurate and current.
14.9. SAMA may require the Trade Repository to submit a written Annual Observance Report on the extent to which it has discharged its obligations, complied with these Principles and other applicable laws, within three months after SAMA’s request for such report, if the Trade Repository’s compliance with disclosure requirements in paragraph 14.5 above is not deemed satisfactory by SAMA.
14.10. SAMA may require the Trade Repository to obtain an audit report on the Annual Observance Report, to be prepared by such specified person or body as SAMA nominates or accepts as suitably qualified to prepare the audit report.
14.11. A request by SAMA for an audit report under paragraph 14.10 above will be in writing and allow the Trade Repository a reasonable period to comply.
14.12. A Trade Repository must notify SAMA in writing as soon as practicable after the Trade Repository becomes aware that:
14.12.1. Any civil or criminal legal proceeding has been instituted against the Trade Repository or one of its employees, whether or not in the KSA;
14.12.2. Any disciplinary action has been taken against the Trade Repository or one of its employees by any regulatory authority other than SAMA, whether or not in KSA; and
14.12.3. Any significant changes are made to the regulatory requirements imposed on the Trade Repository or one of its employees by any regulatory authority other than SAMA, whether or not in KSA.
14.13. If A Trade Repository experiences:
14.13.1. A disruption of, delay in, or suspension or termination of any of the Trade Repository’s systems for the acceptance, retention, use, disclosure or provision of access to Derivative Trade Data, including as a result of any system failure; or
14.13.2. A breach of the integrity, security, or confidentiality of the Derivative Trade Data retained in the Trade Repository, a Trade Repository must:
14.13.2.1. As soon as practicable, notify SAMA of the occurrence of the circumstance; and
14.13.2.2. Submit a report to SAMA describing the cause and results of the occurrence of the circumstance, and any remedial actions already taken or planned by the Trade Repository in response to the occurrence of the circumstance. The Trade Repository should submit a detailed report after resuming operations.
15. Principle 12: Disclosure of market data by trade repositories
A Trade Repository should provide timely and accurate data to SAMA and the public in line with their respective needs.
15.1. A Trade Repository should provide data in line with regulatory and industry expectations to SAMA and the public, respectively, that is comprehensive and at a level of detail sufficient to enhance market transparency and support other public policy objectives.
15.2. A Trade Repository should have effective processes and procedures to provide data to SAMA in a timely and appropriate manner to enable them to meet their respective regulatory mandates and legal responsibilities.
15.3. A Trade Repository should have robust information systems that provide accurate current and historical data. Data should be provided in a timely manner and in a format that permits it to be easily analyzed.
15.4. If a Trade Repository receives a request from any party other than SAMA (Domestic or Foreign) for Derivative Trade Data retained in the Trade Repository, it must first obtain permission by SAMA before such request is processed.
15.5. A Trade Repository must produce data as specified in detail under Sections (15.5.1 and 15.5.2.) below.
15.5.1. Obligation to Create and Disclose Weekly Statistical Data
15.5.1.1. A Trade Repository must create and disclose statistical data on Derivative Trade Data that is retained in the Trade Repository and that was reported to the Trade Repository by Participants.
15.5.1.2. For the purposes of paragraph 15.1.1.1 above, a Trade Repository must, for each 7-calendar day period commencing from the day it first accepts a report of Relevant Derivative Trade Data, create the following statistical data from the Relevant Derivative Trade Data:
15.5.1.2.1. All aggregate open positions as at the end of the last day in the Relevant Period for which the statistical data is created; and
15.5.1.2.2. Volumes by number and by value of Derivative Transactions reported during the Relevant Period.
15.5.1.3. The statistical data created in accordance with paragraph 15.1.1.2. above must include breakdowns by the following categories.
15.5.1.3.1. The asset class, currency of the notional amount, type of participants, type and maturity of the Derivatives to which the statistical data relates;
15.5.1.3.2. The geographic location of the reference asset, rate, index, commodity or other thing underlying the Derivatives to which the statistical data relates; and
15.5.1.3.3. Whether the Derivatives to which the statistical data relates are cleared or uncleared.
15.5.1.4. A Trade Repository must disclose the statistical data required under paragraphs 15.1.1.1. to 15.1.1.3. above in relation to a relevant period, no longer than 5 business days after the day on which the relevant period ends.
15.5.1.5. A Trade Repository must disclose the statistical data required under paragraphs 15.1.1.1. to 15.1.1.3. by making the statistical data available at no charge and through a publicly accessible website.
15.5.1.6. The statistical data published under this condition must not include Derivative Trade Data capable of identifying a counterparty to a Derivative Transaction.
15.5.2. Create and Disclose Financial Year-to-Date Statistical Data
15.5.2.1. A Trade Repository must publish the weekly statistical data created and disclosed in accordance with the above paragraphs aggregated in financial-year-to-date form, by making the aggregated financial year-to-date statistical data available at no charge and through a publicly accessible website.
15.5.2.1. The statistical data published under this condition must not include Derivative Trade Data capable of identifying a counterparty to a Derivative Transaction.
Other Provisions
16. Asset Classes
16.1. SAMA determines the classes of over-the-counter (OTC) derivative for which reporting requirements could be made. The broad asset classes of derivatives subject to reporting requirements are:
16.1.1. Interest rates;
16.1.2. Credit;
16.1.3. Equities;
16.1.4. Foreign exchange; and
16.1.5. Commodity derivatives.
16.2. A Trade Repository must be in a position to accept OTC derivative trade reports for all asset classes specified above. SAMA may require the reporting requirements for these asset classes be implemented by the Trade Repository in different phases. The Trade Repository reporting service for any additional asset classes beyond those specified above would need SAMA’s approval.
17. Acceptance of Derivative Trade Data
17.1 A Trade Repository must accept from Participants Derivative Trade Data for all classes of OTC Derivatives specified in the Principles above.
17.2. A Trade Repository must establish, implement, maintain and enforce policies, procedures, systems and controls for the reporting of Derivative Trade Data to the Trade Repository.
17.3. Without limiting (17.2.) above, a Trade Repository must establish, implement, maintain and enforce policies, procedures, systems and controls that are:
17.3.1. Reasonably designed to maintain a continuous, reliable and secure connection between the Trade Repository and Participants for the purposes of accepting Derivative Trade Data; and
17.3.2. Reasonably designed to provide assurance that Derivative Trade Data reported to the Trade Repository by Participants is and remains at all times complete, accurate and current.
18. Retention of Derivative Trade Data
18.1. A Trade Repository must ensure that all Derivative Trade Data accepted by the Trade Repository, and each alteration and correction to that Derivative Trade Data, is recorded on a timely basis.
18.2. A Trade Repository must retain all records of Derivative Trade Data accepted by the Trade Repository, and records of each alteration or correction to that Derivative Trade Data.
18.3. A Trade Repository must ensure that each record referred to in paragraph 18.2. above is, for the period of time that the record must be retained, in a secure location and in an electronic format, and is immediately accessible by the Trade Repository and SAMA.
18.4. A Trade Repository must create at least one backup copy of each record referred to in (18.2.) above and must ensure that, for the period of time that the record must be retained, the backup copy is retained in a secure location and in an electronic format, separate from the location of the record, and is accessible by the Trade Repository and SAMA within 3 business days.
19. Separation of Functions
19.1. Where a Trade Repository, a related body corporate of the Trade Repository, or any other company with which it has a material agreement in connection with the Trade Reporting Services, provides Non-Trade Reporting Services, the Trade Repository must:
19.1.1. Disclose to SAMA a description of all of the Non-Trade Reporting Services, and update the disclosure as soon as practicable after any changes are made to the Non-Trade Reporting Services; and
19.1.2. Establish, implement, maintain and enforce policies, procedures, systems and controls designed to ensure operational separation between the Non-Trade Reporting Services and the Trade Reporting Services.
20. Outsourcing of Functions
20.1. If a Trade Repository outsources any of the Trade Reporting Services to a third party service provider, it must:
20.1.1. Ensure that the outsourcing arrangement meets SAMA’s outsourcing requirements and is covered by a contract with the Third-Party Service Provider that is in writing;
20.1.2. Establish, implement, maintain and enforce documented policies, procedures, systems and controls for ensuring that the Trade Repository continues to comply with all its obligations under these Principles, in relation to the outsourced Trade Reporting Services;
20.1.3. At all times be able to access books, records and other information of the Third-Party Service Provider relating to the outsourced Trade Reporting Services;
20.1.4. Ensure that SAMA has the same access to all Derivative Trade Data, books, records and other information relating to the outsourced Trade Reporting Services and maintained by the Service Provider, that SAMA would have if not for the outsourcing arrangements; and,
20.1.5. Obtain SAMA no-objection for material outsourcing.
21. Keeping of Records
21.1. A Trade Repository must keep records that enable it to demonstrate that it has complied with the requirements of these Principles.
21.2. A Trade Repository must keep records referred to in paragraph 21.1. above for a period of at least ten years from the date the record is made or amended. However, all historical OTC Derivatives Data must be maintained, in accordance to the requirements in paragraphs 18.1 to 18.4.
22. Effective date
22.1. A Trade Repository must, upon request by SAMA, provide SAMA with records or other information relating determining whether there has been compliance with the Principles and Provisions included in this document.
22.2. A request by SAMA under paragraph 22.1. will be in writing and will give the Trade Repository a reasonable time to comply.
22.2. A Trade Repository must comply with a request under paragraph 22.1. above within the time specified in the request or as soon as possible, if no time is specified.
23. Effective date
23.1. This Principles shall come into force with effect from 1st July 2024.