Archive 2
Minimum Regulatory Requirements
Finalized Guidance Document Concerning the Implementation of Basel III
No: 341000015689 Date(g): 19/12/2012 | Date(h): 6/2/1434 Status: In-Force 1. Overview
SAMA will implement Basel II.5 and Basel III framework commencing as of 1 January 2013 for both i) Standardized Approach and ii) IRB Approaches. Specifically, the Regulatory Capital under Basel III will be an entirely new framework incorporating a more pure and loss absorbent capital structure. However, RWAs under Basel III will be an aggregate of RWA under Basel II and enhancements and modifications to these RWA under Basel II.5 and Basel III frameworks. Refer to attached Basel III Prudential Returns package.
The finalized Guidance Document and Prudential Returns concerning Basel II.5 for both Standardized and IRB Approach have already been circulated through SAMA Circular # BCS 25478 dated 21 October 2012. These Guidance Notes are related exclusively to Basel III concerning both Standardized and IRB Approaches.
As both the Basel II.5 and Basel III Framework are to be implemented concurrently, the following are their major elements with regard to Regulatory Capital and Enhanced Risk Coverage.
For SAMA’s National Discretion items, please refer to Annex # 9.
A.1.1 Refining and Enhancing Regulatory Capital for Basel III
Basel III
The main reasons for the economic and financial crisis, which began in 2007 was that the banks of many countries had 1) insufficient quality of capital 2) limited risk coverage 3) had built up excessive on and off-balance sheet leverage. This was accompanied by a gradual erosion of the level and quality of the capital base and at the same time, many banks were holding insufficient liquidity buffers. The banking system therefore was not able to absorb the resulting systemic trading and credit losses nor could it cope with the re-intermediation of large off-balance sheet exposures that had built up.
Consequently, the Basel III framework is composed of the following major enhancements (1 to 5) which are to be implemented on a staggered approach up to 2019 in accordance with the phase in arrangement describe in Annex #1. In this respect, items 3 (Leverage) and 5 [Liquidity (LCR & NSFR)] are currently being monitored for Saudi banks in accordance with the Phase in arrangements from January 2011 and 2012 respectively.
1. Strengthening the quality of Regulatory Capital
2. Enhanced Risk Coverage
3. Leverage Ratio – refer to SAMA Circular # BCS 5610 dated 13 February 2011
4. Introduction of Capital buffers
5. Introduction of Global Liquidity Standards [Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)] – refer to SAMA Circular # BCS 28266 dated 19 November 2011
Consequently, these specific guidance and prudential returns are being provided for 1, 2 and 4 through this document which will initiate the monitoring of Basel III capital ratios by 1 January 2013 as per Annex # 1.
Strengthening the Quality of Regulatory Capital
Basel III framework makes critical that banks’ Enhanced risk exposures are backed by a high quality capital base. To this end, the predominant form of Tier 1 capital must be common shares and retained earnings. BCBS principles adopted by SAMA ensure that banks hold a high quality Tier 1 capital that represent "Pure Capital" which is highly "Loss Absorbent" through the following measures:
• Deductions from capital and prudential filters to be generally applied at the level of common equity or its equivalent.
• Subordinated debt of high quality
• Fully discretionary noncumulative dividends or coupons
• Neither a maturity date nor an incentive to redeem.
• Innovative hybrid capital instruments with an incentive to redeem through features such as step-up clauses, currently limited to 15% of the Tier 1 capital base, will be phased out.
• Tier 3 capital instruments to cover market risks are eliminated.
• To improve market discipline, the transparency of the capital base will be improved, with all elements of capital required to be disclosed along with a detailed reconciliation to the reported accounts.
SAMA plans to ensure that its definition of Basel III Regulatory Capital is in compliance with BCBS requirements. This will be accomplished through compliance with requirements as described in Annexes # 2 to 4. Further, SAMA will ensure the Basel III enhancements to Definition of Capital are implemented in a manner that minimizes the disruption to capital instruments that are currently outstanding by Saudi banks.
B.1.2 Enhancing Risk Coverage (Pillar 1) for Basel II.5 and Basel III
1.2.1 Basel II.5 – Enhancing Risk Coverage (Pillar 1)
SAMA implemented Basel II.5 through its Guidance Document and Prudential Return. These introduced further refinements to its Basel II reforms related to capital requirements relating to securitized and resecuritized assets or Risk Weighted Assets for Pillar 1 risks i.e. for Credit and Market risks. Basel II.5 components of Pillar 1, Pillar 2 and Pillar 3 enhancements have been implemented on the basis of the following BCBS documents.
• Enhancement to the Basel II Framework – July 2009
• Revisions to the Basel II Market Risk Framework – December 2010
In specific, these refinements are concerning Securitization and Resecuritization activities in the Banking book and Trading book. These reforms will raise capital requirements for the trading book and complex securitization exposures, which were a major source of losses for many internationally active banks. The enhanced treatment also introduced a stressed value-at- risk (VaR) capital requirement based on a continuous 12-month period of significant financial stress. In addition, the Committee set higher capital requirements for so-called resecuritizations in both the banking and the trading book. Basel III also raised the standard of the Pillar 2 supervisory review process and strengthened Pillar 3 disclosures.
The Committee is also conducting a fundamental review of the trading book. The work on the fundamental review of the trading book currently is incomplete (BCBS document of May 2012).
Consequently, with regard to Market Risk, SAMA will not implement the option to use models for both Basel II.5 or Basel III for the Trading book.
1.2.2 Basel III Framework – Enhanced Risk Coverage
Basel III also introduced measures to strengthen the capital requirements through Enhanced Risk Coverage as given below, which included counterparty credit exposures arising from banks’ derivatives, repo and Securities Financing Activities (SFA). These reforms also included the raising of capital buffers backing these additional exposures, in order to reduce procyclicality and provide additional incentives to move to OTC derivative contracts to central counterparties, thus helping reduce systemic risk across the financial system.
Further, Basel III also provides incentives to strengthen the risk management of counterparty credit exposures. The enhancement to counterparty credit exposures as given below was the main change amongst others to Enhanced Risk Coverage in the Basel III framework:
A. Counterparty Credit Risk
1. Revised metric to better address counterparty credit risk, credit valuation adjustments and wrong-way risks
2. Introduction of Asset Value correlation (AVC) for Financial Institutions
3. Collateralized counterparties and increased margin period of risk
4. Central Counterparties (CCPs)
5. Enhanced counterparty credit risk management requirements
B. Addressing Reliance on external credit ratings and minimizing cliff effects
1. Standardized Inferred rating treatment for long-term exposure
2. Incentive to avoid getting exposures rated
3. Incorporation of IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies
4. ‘‘Cliff effects’’ arising from guarantees and credit derivatives- ‘‘CRM’’
5. Unsolicited ratings and recognition of ECAI’s
The more specific, Basel III enhancements include the following:
1. Banks will be subject to an additional capital charge for potential mark-to-market losses (i.e. credit valuation adjustment – CVA – risk) associated with a deterioration in the credit worthiness of a counterparty. This charge is applicable both i) under Standardized Approach and ii) IRB Approaches. While the Basel II standard covers the risk of a counterparty default, it does not address such CVA risk, which during the financial crisis was a greater source of losses than those arising from outright defaults. Consequently, an additional Counterparty Credit risk.
2. Under IRB, banks must determine their capital requirement for counterparty credit risk using stressed inputs. This will address concerns about capital charges becoming too low during periods of compressed market volatility and help address procyclicality. The approach, which is similar to what has been introduced for market risk, will also promote more integrated management of market and counterparty credit risk.
3. Basel III Framework has strengthened standards for collateral management and initial margining. Banks with large and illiquid derivative exposures to a counterparty will have to apply longer margining periods as a basis for determining the regulatory capital requirement. Additional standards have been adopted to strengthen collateral risk management practices.
4. Basel III Framework also includes the additional systemic risk arising from the interconnectedness of banks and other financial institutions through the derivatives markets. In this regard, the Basel III Framework supports the efforts of the Committee on Payments and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) to establish strong standards for financial market infrastructures, including central counterparties. These standards have now been finalized through the BCBS Finalized Document entitled "Capital Requirements for Banks Exposures to Central Counterparties" of July 2012.The capitalization of bank exposures to central counterparties (CCPs) is based in part on the compliance of the CCP with such standards. A bank’s collateral and mark-to-market exposures to CCPs meeting these enhanced principles will be subject to a low risk weight, proposed at 2%; and default fund exposures to CCPs will be subject to risk-sensitive capital requirements. These criteria, together with strengthened capital requirements for bilateral OTC derivative exposures, will create strong incentives for banks to move exposures to such CCPs. Moreover, to address systemic risk within the financial sector, the Committee also is raising the risk weights through IRB Approaches only on exposures to financial institutions relative to the non-financial corporate sector, as financial exposures are more highly correlated than non-financial ones.
5. The Committee is raising counterparty credit risk management standards in a number of areas, including for the treatment of wrong-way risk, i.e. cases where the exposure increases when the credit quality of the counterparty deteriorates. It also issued final additional guidance for the sound backtesting of counterparty credit exposures. Finally, the Committee assessed a number of measures to mitigate the reliance on external ratings of the Basel II framework. The measures include requirements for banks to perform their own internal assessments of externally rated securitization exposures, the elimination of certain “cliff effects” associated with credit risk mitigation practices, and the incorporation of key elements of the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies into the Committee’s eligibility criteria for the use of external ratings in the capital framework. The Committee also is conducting a more fundamental review of the securitization framework, including its reliance on external ratings.
A. Regulatory Capital Under Basel III
2. Definition of Regulatory Capital for Basel III
2.1 A Summary of Components of Capital
Total regulatory capital will consist of the sum of the following elements:
• Tier 1 Capital (going-concern capital)
a. Common Equity Tier 1Capital
b. Additional Tier 1Capital
• Tier 2 Capital
For each of the three categories above (Tier-1-a, Tier-1-b and Tier-2 capital) there are sets of criteria that instruments are required to meet before inclusion in the relevant category. (Refer to attachment # 2 to 4).
Limits and minima
All elements above are net of the associated regulatory adjustments and are subject to the following restrictions (see also Annex 1):
• Common Equity Tier 1 must be at least 4.5% of risk-weighted assets at all times.
• Tier 1 Capital must be at least 6.0% of risk-weighted assets at all times.
• Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 8.0% of risk weighted assets at all times.
2.2 Details on Components of Regulatory Capital
2.2.1 Common Equity Tier 1
Common Equity Tier 1 capital consists of the sum of the following elements:
• Common shares issued by the bank that meet the criteria for classification as common shares for regulatory purposes (or the equivalent for non-joint stock companies);
• Stock surplus (share premium) resulting from the issue of instruments included Common Equity Tier 1;
• Retained earnings;
• Accumulated other comprehensive income and other disclosed reserves;
(There is no adjustment applied to remove from Common Equity Tier 1 unrealized gains or losses recognized on the balance sheet. Unrealized losses are subject to the transitional arrangements set out in paragraph 94 (c) and (d) Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, 2011.)
• Common shares issued by consolidated subsidiaries of the bank and held by third parties (i.e. minority interest) that meet the criteria for inclusion in Common Equity Tier 1 capital.
• Retained earnings and other comprehensive income include interim profit or loss.
• Dividends are removed from Common Equity Tier 1 in accordance with applicable accounting standards. The treatment of minority interest and the regulatory adjustments applied in the calculation of Common Equity Tier 1 are addressed in separate sections.
Common shares issued by the bank
For an instrument to be included in Common Equity Tier 1 capital it must meet all of the criteria that an outlined in Annex-2. The vast majority of internationally active banks are structured as joint stock companies. (Joint stock companies are defined as companies that have issued common shares, irrespective of whether these shares are held privately or publically. These will represent the vast majority of internally active banks)1 and for these banks the criteria must be met solely with common shares.
In the rare cases where banks need to issue non-voting common shares as part of Common Equity Tier 1, they must be identical to voting common shares of the issuing bank in all respects except the absence of voting rights.
• Common shares issued by consolidated subsidiaries are described in section 3 of this document.
Regulatory adjustments applied in the calculation of Common Equity Tier 1 are described in section 4 of this document.
• Common shares issued by consolidated subsidiaries are described in section 3 of this document.
2.2.2. Additional Tier 1 capital
• A minimum set of criteria for an instrument issued by the bank to meet or to exceed in order for its to be included in additional Tier-1 Capital and described in Annex # 3.
Additional Tier 1 capital consists of the sum of the following elements:
• Instruments issued by the bank that meet the criteria for inclusion in Additional Tier 1 capital (and are not included in Common Equity Tier 1); Refer to paragraph 87-89, A global regulatory framework for more resilient banks and banking systems – revised version (rev June 2011)
• Stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 capital;
• Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Additional Tier 1 capital and are not included in Common Equity Tier 1. Refer to section 3 for the relevant criteria; and
• Regulatory adjustments applied in the calculation of Additional Tier 1 Capital are addressed in section 4 of this document.
• Tier-1 Capital instruments issued by consolidated subsidiaries are described in section 3 of this document.
2.2.3. Tier 2 Capital
The objective of Tier 2 is to provide loss absorption on a gone-concern basis. Based on this objective, the following out the minimum set of criteria for an instrument to meet or exceed in order for it to be included in Tier 2 capital. (Annex 4)
• For details on the qualifying criteria for Tier 2 capital, please refer to annex # 4.
Tier 2 capital consists of the sum of the following elements:
• Instruments issued by the bank that meet the criteria for inclusion in Tier 2 capital (and are not included in Tier 1 capital);
• Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital;
• Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Tier 2 capital and are not included in Tier 1 capital are described in section 3.
• Certain loan loss provisions
• Regulatory adjustments applied in the calculation of Tier 2 Capital.
The treatment of regulatory adjustments applied in the calculation of Tier 2 Capital are addressed in section 4.
Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital;
Stock surplus (i.e. share premium) that is not eligible for inclusion in Tier 1, will only be permitted to be included in Tier 2 capital if the shares giving rise to the stock surplus are permitted to be included in Tier 2 capital.
General provisions/general loan-loss reserves (for banks using the Standardized Approach for credit risk)
Provisions or loan-loss reserves held against future, presently unidentified losses are freely available to meet losses which subsequently materialize and therefore qualify for inclusion within Tier 2. Provisions ascribed to identified deterioration of particular assets or known liabilities, whether individual or grouped, should be excluded. Furthermore, general provisions/general loan-loss reserves eligible for inclusion in Tier 2 will be limited to a maximum of 1.25 percentage points of credit risk-weighted risk assets calculated under the Standardized approach.
Excess of total eligible provisions under the Internal Ratings-based Approach
Where the total expected loss amount is less than total eligible provisions, as explained in paragraphs 380 to 383 of the June 2006 Comprehensive version of Basel II, banks may recognize the difference in Tier 2 capital up to a maximum of 0.6% of credit risk weighted assets calculated under the IRB approach. SAMA may apply a lower limit than 0.6% which will be communicated to banks.
3. Minority Interest (i.e. Non-Controlling Interest) and Other Capital Issued Out of Consolidated Subsidiaries that is Held by Third Parties
Note: Minority Interests arise on the full consolidation of majority held subsidiaries.
3.1 Common Shares Issued by Consolidated Subsidiaries
Minority interest arising from the issue of common shares by a fully consolidated subsidiary of the bank may receive recognition in Common Equity Tier 1 only if (1) the instrument giving rise to the minority interest would, if issued by the bank, meet all of the criteria for classification as common shares for regulatory capital purposes; and (2) the subsidiary that issued the instrument is itself a bank (for the purposes of this paragraph, any institution that is subject to the same minimum prudential standards and level of supervision as a bank may be considered to be a bank.) & (Minority interest in a subsidiary that is a bank is strictly excluded from the parent bank’s common equity if the parent bank or affiliate has entered into any arrangements to fund directly or indirectly minority investment in the subsidiary whether through an SPV or through another vehicle or arrangement. The treatment outlined above, thus, is strictly available where all minority investments in the bank subsidiary solely represent genuine third party common equity contributions to the subsidiary).
The amount of minority interest meeting the criteria above that will be recognized in consolidated Common Equity Tier 1 will be calculated as follows:
• Total minority interest meeting the two criteria above minus the amount of the surplus Common Equity Tier 1 of the subsidiary attributable to the minority shareholders.
• Surplus Common Equity Tier 1 of the subsidiary is calculated as the Common Equity Tier 1 of the subsidiary minus the lower of: (1) the minimum Common Equity Tier 1 requirement of the subsidiary plus the capital conservation buffer (i.e. 7.0% of risk weighted assets) and (2) the portion of the consolidated minimum Common Equity Tier 1 requirement plus the capital conservation buffer (i.e. 7.0% of consolidated risk weighted assets) that relates to the subsidiary.
• The amount of the surplus Common Equity Tier 1 that is attributable to the minority shareholders is calculated by multiplying the surplus Common Equity Tier 1 by the percentage of Common Equity Tier 1 that is held by minority shareholders.
Refer to para 62 A global regulatory framework for more resilient bank.
3.2 Tier 1 Qualifying Capital Issued by Consolidated Subsidiaries
Tier 1 capital instruments issued by a fully consolidated subsidiary of the bank to third party investors including amounts under paragraph 62 of the BCBS document of June 2011 may receive recognition in Tier 1 capital only if the instruments would, if issued by the bank, meet all of the criteria for classification as Tier 1 capital. The amount of this capital that will be recognized in Tier 1 will be calculated as follows:
• Total Tier 1 of the subsidiary issued to third parties minus the amount of the surplus Tier 1 of the subsidiary attributable to the third party investors.
• Surplus Tier 1 of the subsidiary is calculated as the Tier 1 of the subsidiary minus the lower of: (1) the minimum Tier 1 requirement of the subsidiary plus the capital conservation buffer (ie 8.5% of risk weighted assets) and (2) the portion of the consolidated minimum Tier 1 requirement plus the capital conservation buffer (ie 8.5% of consolidated risk weighted assets) that relates to the subsidiary.
• The amount of the surplus Tier 1 that is attributable to the third party investors is calculated by multiplying the surplus Tier 1 by the percentage of Tier 1 that is held by third party investors.
The amount of this Tier 1 capital that will be recognized in Additional Tier 1 will exclude amounts recognized in Common Equity Tier 1 Capital under paragraph 62 of BCBS document of June 2011.
3.3 Tier 1 and Tier 2 Qualifying Capital Issued by Consolidated Subsidiaries
Total capital instruments (ie Tier 1 and Tier 2 capital instruments) issued by a fully consolidated subsidiary of the bank to third party investors (including amounts under paragraph 3.1 and 3.2) may receive recognition in Total Capital only if the instruments would, if issued by the bank, meet all of the criteria for classification as Tier 1 or Tier 2 capital. The amount of this capital that will be recognized in consolidated Total Capital will be calculated as follows:
• Total capital instruments of the subsidiary issued to third parties minus the amount of the surplus Total Capital of the subsidiary attributable to the third party investors.
• Surplus Total Capital of the subsidiary is calculated as the Total Capital of the subsidiary minus the lower of: (1) the minimum Total Capital requirement of the subsidiary plus the capital conservation buffer (i.e. 10.5% of risk weighted assets) and (2) the portion of the consolidated minimum Total Capital requirement plus the capital conservation buffer (i.e. 10.5% of consolidated risk weighted assets) that relates to the subsidiary.
• The amount of the surplus Total Capital that is attributable to the third party investors is calculated by multiplying the surplus Total Capital by the percentage of Total Capital that is held by third party investors.
The amount of this Total Capital that will be recognized in Tier 2 will exclude amounts recognized in Common Equity Tier 1 under paragraph 3.1 and amounts recognized in Additional Tier 1 under paragraph 3.2.
Paragraphs 64-65: A global regulatory framework for more resilient banks and banking systems – revised version (rev June 2011).
Where capital has been issued to third parties out of a special purpose vehicle (SPV), none of this capital can be included in Common Equity Tier 1. However, such capital can be included in consolidated Additional Tier 1 or Tier 2 and treated as if the bank itself had issued the capital directly to the third parties only if it meets all the relevant entry criteria and the only asset of the SPV is its investment in the capital of the bank in a form that meets or exceeds all the relevant entry criteria (as required by criterion 14 for Additional Tier 1 and criterion 9 for Tier 2). In cases where the capital has been issued to third parties through an SPV via a fully consolidated subsidiary of the bank, such capital may, subject to the requirements of this paragraph, be treated as if the subsidiary itself had issued it directly to the third parties and may be included in the bank’s consolidated Additional Tier 1 or Tier 2 in accordance with the treatment outlined in paragraphs 63 and 64 of the BCBS document of June 2011.
4. Regulatory Adjustments or "Filter"
4.1
This section sets out the regulatory adjustments to be applied to regulatory capital. In most cases these adjustments are applied in the calculation of Common Equity Tier 1.
4.1.1 Goodwill and Other Intangibles (Except Mortgage Servicing Rights)
Goodwill and all other intangibles must be deducted in the calculation of Common Equity Tier 1, 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. With the exception of mortgage servicing rights, the full amount is to be deducted net of any associated deferred tax liability which would be extinguished if the intangible assets become impaired or derecognized under the relevant accounting standards. The amount to be deducted in respect of mortgage servicing rights is set out in the threshold deductions section below.
Subject to prior supervisory approval, banks that report under local GAAP may use the IFRS definition of intangible assets to determine which assets are classified as intangible and are thus required to be deducted.
4.1.2 Deferred Tax Assets
Deferred tax assets (DTAs) that rely on future profitability of the bank to be realized are to be deducted in the calculation of Common Equity Tier 1. Deferred tax assets may be netted with associated deferred tax liabilities (DTLs) only if the DTAs and DTLs relate to taxes levied by the same taxation authority and offsetting is permitted by the relevant taxation authority. Where these DTAs relate to temporary differences (e.g. allowance for credit losses) the amount to be deducted is set out in the “threshold deductions” section below. All other such assets, e.g. those relating to operating losses, such as the carry forward of unused tax losses, or unused tax credits, are to be deducted in full net of deferred tax liabilities as described above. The DTLs permitted to be netted against DTAs must exclude amounts that have been netted against the deduction of goodwill, intangibles and defined benefit pension assets, and must be allocated on a pro rata basis between DTAs subject to the threshold deduction treatment and DTAs that are to be deducted in full.
An over installment of tax or, in some jurisdictions, current year tax losses carried back to prior years may give rise to a claim or receivable from the government or local tax authority. Such amounts are typically classified as current tax assets for accounting purposes. The recovery of such a claim or receivable would not rely on the future profitability of the bank and would be assigned the relevant sovereign risk weighting.
4.1.3 Cash Flow Hedge Reserves
The amount of the cash flow hedge reserves that relates to the hedging of items that are not fair valued on the balance sheet (including projected cash flows) should be derecognized in the calculation of Common Equity Tier 1. This means that positive amounts should be deducted and negative amounts should be added back.
This treatment specifically identifies the element of the cash flow hedge reserve that is to be derecognized for prudential purposes. It removes the element that gives rise to artificial volatility in common equity, as in this case the reserve only reflects one half of the picture (the fair value of the derivative, but not the changes in fair value of the hedged future cash flow).
4.1.4 Shortfall of the Stock of Provisions to Expected Losses
The deduction from capital in respect of a shortfall of the stock of provisions to expected losses under the IRB approach should be made in the calculation of Common Equity Tier 1. The full amount is to be deducted and should not be reduced by any tax effects that could be expected to occur if provisions were to rise to the level of expected losses.
Gain on sale related to securitization transactions
Derecognize in the calculation of Common Equity Tier 1 any increase in equity capital resulting from a securitization transaction, such as that associated with expected future margin income (FMI) resulting in a gain-on- sale.
Cumulative gains and losses due to changes in own credit risk on fair valued financial liabilities
Derecognize in the calculation of Common Equity Tier 1, all unrealized gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank’s own credit risk.
In addition, with regard to derivative liabilities, derecognize all accounting valuation adjustments arising from the bank's own credit risk. The offsetting between valuation adjustments arising from the bank's own credit risk and those arising from its counterparties' credit risk is not allowed.
(BIS has issued its final guidelines (July 2012) titled “Regulatory treatment of valuation adjustments to derivative liabilities - final rule issued by the Basel Committee”. Banks are advised to refer to the aforementioned, these would be regarded as binding by SAMA with respect to capital computation / capital adequacy under Basel III guidelines.
4.1.5 Defined Benefit Pension Fund Assets and Liabilities
Defined benefit pension fund liabilities, as included on the balance sheet, must be fully recognized in the calculation of Common Equity Tier 1 (ie Common Equity Tier 1 cannot be increased through derecognizing these liabilities). For each defined benefit pension fund that is an asset on the balance sheet, the asset should be deducted in the calculation of Common Equity Tier 1 net of any associated deferred tax liability which would be extinguished if the asset should become impaired or derecognized under the relevant accounting standards. Assets in the fund to which the bank has unrestricted and unfettered access can, with supervisory approval, offset the deduction. Such offsetting assets should be given the risk weight they would receive if they were owned directly by the bank.
This treatment addresses the concern that assets arising from pension funds may not be capable of being withdrawn and used for the protection of depositors and other creditors of a bank. The concern is that their only value stems from a reduction in future payments into the fund. The treatment allows for banks to reduce the deduction of the asset if they can address these concerns and show that the assets can be easily and promptly withdrawn from the fund.
4.1.6 Investments in Own Shares (Treasury Stock)
All of a bank’s investments in its own common shares, whether held directly or indirectly, will be deducted in the calculation of Common Equity Tier 1 (unless already derecognized under the relevant accounting standards). In addition, any own stock which the bank could be contractually obliged to purchase should be deducted in the calculation of Common Equity Tier 1. The treatment described will apply irrespective of the location of the exposure in the banking book or the trading book. In addition:
• Gross long positions may be deducted net of short positions in the same underlying exposure only if the short positions involve no counterparty risk.
• Banks should look through holdings of index securities to deduct exposures to own shares. However, gross long positions in own shares resulting from holdings of index securities may be netted against short position in own shares resulting from short positions in the same underlying index. In such cases the short positions may involve counterparty risk (which will be subject to the relevant counterparty credit risk charge).
This deduction is necessary to avoid the double counting of a bank’s own capital. Certain accounting regimes do not permit the recognition of treasury stock and so this deduction is only relevant where recognition on the balance sheet is permitted. The treatment seeks to remove the double counting that arises from direct holdings, indirect holdings via index funds and potential future holdings as a result of contractual obligations to purchase own shares.
Following the same approach outlined above, banks must deduct investments in their own Additional Tier 1 in the calculation of their Additional Tier 1 capital and must deduct investments in their own Tier 2 in the calculation of their Tier 2 capital.
4.1.7 Reciprocal Cross Holdings in the Capital of Banking, Financial and Insurance Entities
Reciprocal cross holdings of capital that are designed to artificially inflate the capital position of banks will be deducted in full. Banks must apply a “corresponding deduction approach” to such investments in the capital of other banks, other financial institutions and insurance entities. This means the deduction should be applied to the same component of capital for which the capital would qualify if it was issued by the bank itself.
4.2
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.
The regulatory adjustment described in this section applies to 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. In addition:
• Investments include direct, indirect1 and synthetic holdings of capital instruments. For example, banks should look through holdings of index securities to determine their underlying holdings of capital.2
• Holdings in both the banking book and trading book are to be included. Capital includes common stock and all other types of cash and synthetic capital instruments (e.g. subordinated debt). It is the net long position that is to be included (i.e. the gross long position net of short positions in the same underlying exposure where the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least one year).
• Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included.
• If the capital instrument of the entity in which the bank has invested does not meet the criteria for Common Equity Tier 1, Additional Tier 1, or Tier 2 capital of the bank, the capital is to be considered common shares for the purposes of this regulatory adjustment.3
Amounts below the threshold, which are not deducted, will continue to be risk weighted. Thus, instruments in the trading book will be treated as per the market risk rules and instruments in the banking book should be treated as per the internal ratings-based approach or the standardized approach (as applicable). For the application of risk weighting the amount of the holdings must be allocated on a pro rata basis between those below and those above the threshold.
1 Indirect holdings are exposures or parts of exposures that, if a direct holding loses its value, will result in a loss to the bank substantially equivalent to the loss in value of the direct holding.
2 If banks find it operationally burdensome to look through and monitor their exact exposure to the capital of other financial institutions as a result of their holdings of index securities, SAMA may permit banks, subject to prior supervisory approval, to use a conservative estimate.
3 If the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant sector of the financial entity, it is not required to be deducted.4.2.1
If the total of all holdings listed above in aggregate exceed 10% of the bank’s common equity (after applying all other regulatory adjustments in full listed prior to this one) then the amount above 10% is required to be deducted, applying a corresponding deduction approach. This means the deduction should be applied to the same component of capital for which the capital would qualify if it was issued by the bank itself. Accordingly, the amount to be deducted from common equity should be calculated as the total of all holdings which in aggregate exceed 10% of the bank’s common equity (as per above) multiplied by the common equity holdings as a percentage of the total capital holdings. This would result in a common equity deduction which corresponds to the proportion of total capital holdings held in common equity. Similarly, the amount to be deducted from Additional Tier 1 capital should be calculated as the total of all holdings which in aggregate exceed 10% of the bank’s common equity (as per above) multiplied by the Additional Tier 1 capital holdings as a percentage of the total capital holdings. The amount to be deducted from Tier 2 capital should be calculated as the total of all holdings which in aggregate exceed 10% of the bank’s common equity (as per above) multiplied by the Tier 2 capital holdings as a percentage of the total capital holdings.
If, under the corresponding deduction approach, a bank is required to make a deduction from a particular tier of capital and it does not have enough of that tier of capital to satisfy that deduction, the shortfall will be deducted from the next higher tier of capital (eg if a bank does not have enough Additional Tier 1 capital to satisfy the deduction, the shortfall will be deducted from Common Equity Tier 1).
4.3 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation 1
The regulatory adjustment described in this section applies to investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation where the bank owns more than 10% of the issued common share capital of the issuing entity or where the entity is an affiliate2 of the bank. In addition:
• Investments include direct, indirect and synthetic holdings of capital instruments. For example, banks should look through holdings of index securities to determine their underlying holdings of capital.3
• Holdings in both the banking book and trading book are to be included. Capital includes common stock and all other types of cash and synthetic capital instruments (e.g. subordinated debt). It is the net long position that is to be included (i.e. the gross long position net of short positions in the same underlying exposure where the maturity of the short position either matches the maturity of the long position or has a residual maturity of at least one year).
• Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included.
• If the capital instrument of the entity in which the bank has invested does not meet the criteria for Common Equity Tier 1, Additional Tier 1, or Tier 2 capital of the bank, the capital is to be considered common shares for the purposes of this regulatory adjustment.4
• National discretion applies to allow banks, with prior supervisory approval, to exclude temporarily certain investments where these have been made in the context of resolving or providing financial assistance to reorganize a distressed institution. (If necessary and relevant, please refer to SAMA for further guidance.)
All investments included above that are not common shares must be fully deducted following a corresponding deduction approach. This means the deduction should be applied to the same tier of capital for which the capital would qualify if it was issued by the bank itself. If the bank is required to make a deduction from a particular tier of capital and it does not have enough of that tier of capital to satisfy that deduction, the shortfall will be deducted from the next higher tier of capital (e.g. if a bank does not have enough Additional Tier 1 capital to satisfy the deduction, the shortfall will be deducted from Common Equity Tier 1).
Investments included above that are common shares will be subject to the threshold treatment described in the next section.
1 Investments in entities that are outside of the scope of regulatory consolidation refers to investments in entities that have not been consolidated at all or have not been consolidated in such a way as to result in their assets being included in the calculation of consolidated risk-weighted assets of the group.
2 An affiliate of a bank is defined as a company that controls, or is controlled by, or is under common control with, the bank. Control of a company is defined as (1) ownership, control, or holding with power to vote 20% or more of a class of voting securities of the company; or (2) consolidation of the company for financial reporting purposes.
3 If banks find it operationally burdensome to look through and monitor their exact exposure to the capital of other financial institutions as a result of their holdings of index securities, SAMA may permit banks to use a conservative estimate.
4 If the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant sector of the financial entity, it is not required to be deducted.4.4 Threshold Deductions
Instead of a full deduction, the following items may each receive limited recognition when calculating Common Equity Tier 1, with recognition capped at 10% of the bank’s common equity (after the application of all regulatory adjustments set out in paragraphs 4.1.1 to 4.3):
• Significant investments in the common shares of unconsolidated financial institutions (banks, insurance and other financial entities) as referred to in paragraph 4.3 of this document; (Refer to paragraph 87,89, A global regulatory framework for more resilient bank and banking systems – revised version (rev June 2011)
• Mortgage servicing rights (MSRs); and
• DTAs that arise from temporary differences.
On 1 January 2013, a bank must deduct the amount by which the aggregate of the three items above exceeds 15% of its common equity component of Tier 1 (calculated prior to the deduction of these items but after application of all other regulatory adjustments applied in the calculation of Common Equity Tier 1). The items included in the 15% aggregate limit are subject to full disclosure. As of 1 January 2018, the calculation of the 15% limit will be subject to the following treatment: the amount of the three items that remains recognized after the application of all regulatory adjustments must not exceed 15% of the Common Equity Tier 1 capital, calculated after all regulatory adjustments. See Annex 2 for an example.
The amount of the three items that are not deducted in the calculation of Common Equity Tier 1 will be risk weighted at 250%. (Refer to Prudential Return)
4.10 Former Deductions from Capital
90. The following items, which under Basel II were deducted 50% from Tier 1 and 50% from Tier 2 (or had the option of being deducted or risk weighted), will receive a 1250% risk weight: (Refer to Prudential Return)
• Certain Securitization and Resecuritization exposures;
• Certain equity exposures under the PD/LGD approach;
• Non-payment/delivery on non-DvP and non-PvP transactions; and
• Significant investments in commercial entities.
5. Transitional Arrangements
The transitional arrangements for implementing the new standards will help to ensure that there is minimal disruption in banking sector, and that it can meet the higher capital standards through reasonable earnings retention and capital raising, while still supporting lending to the economy. The transitional arrangements include:
5.1 Minimum Capital Adequacy Ratio – Please Also Refer to Annex-1
National implementation by member countries will begin on 1 January 2013. Member countries must translate the rules into national laws and regulations before this date. As of 1 January 2013, banks will be required to meet the following new minimum requirements in relation to risk-weighted assets (RWAs):
– 3.5% Common Equity Tier 1/RWAs;
– 4.5% Tier 1 capital/RWAs, and
– 8.0% total capital/RWAs.
5.2 Phasing in of the Minimum Common Equity Tier 1 and Tier 1 Requirements
The minimum Common Equity Tier 1 and Tier 1 requirements will be phased in between 1 January 2013 and 1 January 2015. On 1 January 2013, the minimum Common Equity Tier 1 requirement will rise from the current 2% level to 3.5%. The Tier 1 capital requirement will rise from 4% to 4.5%. On 1 January 2014, banks will have to meet a 4% minimum Common Equity Tier 1 requirement and a Tier 1 requirement of 5.5%. On 1 January 2015, banks will have to meet the 4.5% Common Equity Tier 1 and the 6% Tier 1 requirements. The total capital requirement remains at the existing level of 8.0% and so does not need to be phased in. The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 and higher forms of capital.
5.3 15% Limit for Significant Investment
The regulatory adjustments (ie deductions and prudential filters), including amounts above the aggregate 15% limit for significant investments in financial institutions, mortgage servicing rights, and deferred tax assets from temporary differences, would be fully deducted from Common Equity Tier 1 by 1 January 2018.
5.4 Phasing in Regulatory Adjustment
In particular, the regulatory adjustments will begin at 20% of the required adjustments to Common Equity Tier 1 on 1 January 2014, 40% on 1 January 2015, 60% on 1 January 2016, 80% on 1 January 2017, and reach 100% on 1 January 2018. During this transition period, the remainder not deducted from Common Equity Tier 1 will continue to be subject to existing national treatments (Follow up). The same transition approach will apply to deductions from Additional Tier 1 and Tier 2 capital. Specifically, the regulatory adjustments to Additional Tier 1 and Tier 2 capital will begin at 20% of the required deductions on 1 January 2014, 40% on 1 January 2015, 60% on 1 January 2016, 80% on 1 January 2017, and reach 100% on 1 January 2018. During this transition period, the remainder not deducted from capital will continue to be subject to existing national treatments. (Follow up)
5.5 The Treatment of Capital Issued Out of Subsidiaries and Held by Third Parties
The treatment of capital issued out of subsidiaries and held by third parties (eg minority interest) will also be phased in. Where such capital is eligible for inclusion in one of the three components of capital according to paragraphs 63 to 65 of the BCBS document of June 2011, it can be included from 1 January 2013. Where such capital is not eligible for inclusion in one of the three components of capital but is included under the existing national treatment, 20% of this amount should be excluded from the relevant component of capital on 1 January 2014, 40% on 1 January 2015, 60% on 1 January 2016, 80% on 1 January 2017, and reach 100% on 1 January 2018.
5.6 Grand Fathering
Existing public sector capital injections will be grandfathered until 1 January 2018.
5.7 Capital Instruments that No Longer Qualify as Non-Common Equity Tier 1 Capital
Capital instruments that no longer qualify as non-common equity Tier 1 capital or Tier 2 capital will be phased out beginning 1 January 2013. Fixing the base at the nominal amount of such instruments outstanding on 1 January 2013, their recognition will be capped at 90% from 1 January 2013, with the cap reducing by 10 percentage points in each subsequent year. This cap will be applied to Additional Tier 1 and Tier 2 separately and refers to the total amount of instruments outstanding that no longer meet the relevant entry criteria. To the extent an instrument is redeemed, or its recognition in capital is amortized, after 1 January 2013, the nominal amount serving as the base is not reduced. In addition, instruments with an incentive to be redeemed will be treated as follows:
– For an instrument that has a call and a step-up prior to 1 January 2013 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward-looking basis will meet the new criteria for inclusion in Tier 1 or Tier 2, it will continue to be recognized in that tier of capital.
– For an instrument that has a call and a step-up on or after 1 January 2013 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward looking basis will meet the new criteria for inclusion in Tier 1 or Tier 2, it will continue to be recognized in that tier of capital. Prior to the effective maturity date, the instrument would be considered an “instrument that no longer qualifies as Additional Tier 1 or Tier 2” and will therefore be phased out from 1 January 2013.
– For an instrument that has a call and a step-up between 12 September 2010 and 1 January 2013 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward looking basis does not meet the new criteria for inclusion in Tier 1 or Tier 2, it will be fully derecognized in that tier of regulatory capital from 1 January 2013.
– For an instrument that has a call and a step-up on or after 1 January 2013 (or another incentive to be redeemed), if the instrument is not called at its effective maturity date and on a forward looking basis does not meet the new criteria for inclusion in Tier 1 or Tier 2, it will be derecognized in that tier of regulatory capital from the effective maturity date. Prior to the effective maturity date, the instrument would be considered an “instrument that no longer qualifies as Additional Tier 1 or Tier 2” and will therefore be phased out from 1 January 2013.
– For an instrument that had a call and a step-up on or prior to 12 September 2010 (or another incentive to be redeemed), if the instrument was not called at its effective maturity date and on a forward looking basis does not meet the new criteria for inclusion in Tier 1 or Tier 2, it will be considered an “instrument that no longer qualifies as Additional Tier 1 or Tier 2” and will therefore be phased out from 1 January 2013.
Capital instruments that do not meet the criteria for inclusion in Common Equity Tier 1 will be excluded from Common Equity Tier 1 as of 1 January 2013. However, instruments meeting the following three conditions will be phased out over the same horizon described in paragraph 94(g): (1) they are issued by a non-joint stock company1; (2) they are treated as equity under the prevailing accounting standards; and (3) they receive unlimited recognition as part of Tier 1 capital under current national banking law.
Only those instruments issued before 12 September 2010 qualify for the above transition arrangements.
NOTE: Banks should also refer to SAMA Circular entitled "Elements of the Reforms to Raise the Quality of Regulatory Capital – Loss Absorbency at the Point of Non- Viability issued through SAMA Circular # BCS 5611 dated 13 February 2011.
1 Non-joint stock companies were not addressed in the Basel Committee’s 1998 agreement on instruments eligible for inclusion in Tier 1 capital as they do not issue voting common shares.
B. Pillar 1 Requirements
Enhancement Risk Under Basel III Framework
6. Enhanced Risk Coverage
In addition to raising the quality and level of the capital base, the Basel III framework recognized the need to ensure that all material risks are captured in the capital framework. Failure to capture major on- and off-balance sheet risks, as well as derivative related exposures, was a key factor that amplified the crisis. This section outlines enhancement to Risk Coverage under the Basel III framework as given below.
A. Counterparty Credit Risk
• Revised metric to better address counterparty credit risk, credit valuation adjustments and wrong-way risks
• Introduction of Asset Value correlation (AVC) for Financial Institutions
• Collateralized counterparties and increased margin period of risk
• Central Counterparties (CCPs)
• Enhanced counterparty credit risk management requirements
B. Addressing Reliance on external credit ratings and minimizing cliff effects
• Standardized Inferred rating treatment for long-term exposure
• Incentive to avoid getting exposures rated
• Incorporation of IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies
• ‘’Cliff effects’’ arising from guarantees and credit derivatives- ‘’CRM’’
• Unsolicited ratings and recognition of ECAI’s
6.1 Counterparty Credit Risk
As mentioned, Counterparty Credit Risk under Basel II only measured Default Risk which could be calculated by using the following 3 methods, where SAMA adopted the # 3 Current Exposure Method.
1. Internal Model Method
2. Standardized Approach
3. Current Exposure Method (CEM)
In this regard, SAMA had permitted only the Current Exposures Method under Basel II. For Basel III purposes as in Basel II banks are to use the more simple CEM.
Further, Basel III introduced the concept of Current Value Adjustment (CVA) as an additional Counterparty Risk, which again can be determined by using the Internal Model Method (IMM) or the Standardized Method.
It should also be emphasized that Basel III introduced incremental risk or additional risk through the concept of the Credit Value Adjustment which measure the counterparty risk prior to default. Consequently, total risk is an aggregate of these two.
The main revision to Internal Models Method to measure default risk exposure is to using the Effective EPE with stressed parameters.
In this regard, the Default risk capital charge is the greater of:
• Portfolio level capital charge based on effective EPE (not including CVA charge using current market data) and the portfolio level capital charge based on effective EPE under stress calibration.
B. Credit Value Adjustment
Capitalization of the risk of CVA losses
The major element of CVA include the following:
• Applies to IMM and non IMM banks
• Huge mark-to-market losses incurred during financial crisis
• BCBS introduced a ‘’bond equivalent of the counterparty exposure’’ approach which aims to better capture CVA losses
• In addition to default risk, additional capital charge introduced for CCR for OTC derivatives
• Transactions with SFTs and CCPs excluded from CVA capital charge unless these are material, where the materiality threshold for SFT’s will be defined by SAMA and if warranted, bank will be advised accordingly.
• Banks with IMM approval and Specific Interest Rate Risk VaR model approval for bonds will use ‘’Advanced CVA risk capital charge’’
• All other banks will calculate CVA capital charge based on ‘’Standardized CVA risk capital charge’’ methodology
• Under Basel II, Banks in KSA are mandated by SAMA to use ‘’CEM’’ methodology for both Standardized & IRB Approach. However, for Basel III they can utilize IMM as well.
• Under the Standardized Approach, Banks would be required to develop enhanced system’s capability to apply this formula
• Maturity: Mi is the notional weighted average maturity (FAQ- For CVA purposes, the 5-year cap of the effective maturity will not be applied). This applies to all transactions with the counterparty, not only to index CDS- Maturity will be capped at the longest contractual remaining maturity in the netting set.
A. Counterparty credit risk using Internal Models
This section is only applicable for those banks that have been given regulatory approval by SAMA to use the IMM Approach to calculate counterparty credit risk. Alternatively, Banks should use Standardized Approach 6.1.B on page 30. Also, for further clarifications, please refer to SAMA Circular # BCS 24331 dated 4 September 2012 entitled "Basel III Definition of Capital FAQs (p.7).
6.1.A Internal Model Method (IMM)
Default Risk Exposures Calculation
Internal Model (EPE)
25(i). To determine the default risk capital charge for counterparty credit risk as defined in paragraph 105, banks must use the greater of the portfolio-level capital charge (not including the CVA charge in paragraphs 97-104) based on Effective EPE using current market data and the portfolio-level capital charge based on Effective EPE using a stress calibration. 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.
61. 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:
• The bank must demonstrate, at least quarterly, that the stress period coincides with a period of increased 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.
• 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.
• 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. Supervisors may adjust the stress calibration if the exposures of these benchmark portfolios deviate substantially.
Calculation of Credit Value Adjustment (CVA)
The Concept
Credit Value Adjustments (CVA) under Basel III is an incremental credit risk capital charge prior to default. Under Basel II and Basel II.5 counterparty credit risk methodology only calculated capital requirements for default risk. However, Basel III brings in the capital charge with regard to the deterioration of a counterparty risk prior to default. Consequently, the CVA is in addition or as an incremental risk to default risk. SAMA's methodology uses the Current Exposure Method (CEM) for Default Risk which is one of the four methods prescribed under Basel II Annex # 41. Consequently, capital requirements for counterparty risk is the aggregate of CEM and CVA calculations.
Specific Aspects of CVA under IMM Approach
Capitalization of the risk of CVA losses
99. To implement the bond equivalent approach, the following new section VIII will be added to Annex 4 of the Basel II framework.1 The new paragraphs (97 to 105) are to be inserted after paragraph 96 in Annex 4.1
VIII. Treatment of mark-to-market counterparty risk losses (CVA capital charge)
- CVA Risk Capital Charge
97. In addition to the default risk capital requirements for counterparty credit risk determined based on the standardized or internal ratings- based (IRB) approaches for credit risk, a bank must add a capital charge to cover the risk of mark-to-market losses on the expected counterparty risk (such losses being known as credit value adjustments, CVA) to OTC derivatives. The CVA capital charge will be calculated in the manner set forth below depending on the bank’s approved method of calculating capital charges for counterparty credit risk and specific interest rate risk. A bank is not required to include in this capital charge (i) transactions with a central counterparty (CCP); and (ii) securities financing transactions (SFT), unless their supervisor determines that the bank’s CVA loss exposures arising from SFT transactions are material.
A. Banks with IMM approval and Specific Interest Rate Risk VaR model2 approval for bonds: Advanced CVA risk capital charge
98. Banks with IMM approval for counterparty credit risk and approval to use the market risk internal models approach for the specific interest-rate risk of bonds must calculate this additional capital charge by modeling the impact of changes in the counterparties’ credit spreads on the CVAs of all OTC derivative counterparties, together with eligible CVA hedges according to new paragraphs 102 and 103, using the bank’s VaR model for bonds. This VaR model is restricted to changes in the counterparties’ credit spreads and does not model the sensitivity of CVA to changes in other market factors, such as changes in the value of the reference asset, commodity, currency or interest rate of a derivative. Regardless of the accounting valuation method a bank uses for determining CVA, the CVA capital charge calculation must be based on the following formula for the CVA of each counterparty:
Where:
• ti is the time of the i-th revaluation time bucket, starting from t0=0.
• tT is the longest contractual maturity across the netting sets with the counterparty.
• si is the credit spread of the counterparty at tenor ti, used to calculate the CVA of the counterparty. Whenever the CDS spread of the counterparty is available, this must be used. Whenever such a CDS spread is not available, the bank must use a proxy spread that is appropriate based on the rating, industry and region of the counterparty.
• LGDMKT is the loss given default of the counterparty and should be based on the spread of a market instrument of the counterparty (or where a counterparty instrument is not available, based on the proxy spread that is appropriate based on the rating, industry and region of the counterparty). It should be noted that this LGDMKT, which inputs into the calculation of the CVA risk capital charge, is different from the LGD that is determined for the IRB and CCR default risk charge, as this LGDMKT is a market assessment rather than an internal estimate.
• The first factor within the sum represents an approximation of the market implied marginal probability of a default occurring between times ti-1 and ti. Market implied default probability (also known as risk neutral probability) represents the market price of buying protection against a default and is in general different from the real-world likelihood of a default.
• EEi is the expected exposure to the counterparty at revaluation time ti, as defined in paragraph 30 (regulatory expected exposure), where exposures of different netting sets for such counterparty are added, and where the longest maturity of each netting set is given by the longest contractual maturity inside the netting set. For banks using the short cut method (paragraph 41 of Annex 4)1 for margined trades, the paragraph 99 should be applied.
• Di is the default risk-free discount factor at time ti, where D0 = 1.
99. The formula in paragraph 98 must be the basis for all inputs into the bank’s approved VaR model for bonds when calculating the CVA risk capital charge for a counterparty. For example, if this approved VaR model is based on full repricing, then the formula must be used directly. If the bank’s approved VaR model is based on credit spread sensitivities for specific tenors, the bank must base each credit spread sensitivity on the following formula:3
If the bank’s approved VaR model uses credit spread sensitivities to parallel shifts in credit spreads (Regulatory CS01), then the bank must use the following formula:4
If the bank’s approved VaR model uses second-order sensitivities to shifts in credit spreads (spread gamma), the gammas must be calculated based on the formula in paragraph 98.
Banks using the short cut method for collateralized OTC derivatives (paragraph 41 in Appendix 4), must compute the CVA risk capital charge according to paragraph 98, by assuming a constant EE (expected exposure) profile, where EE is set equal to the effective expected positive exposure of the shortcut method for a maturity equal to the maximum of (i) half of the longest maturity occurring in the netting set and (ii) the notional weighted average maturity of all transactions inside the netting set.
Banks with IMM approval for the majority of their businesses, but which use CEM (Current Exposure Method) or SM (Standardized Method) for certain smaller portfolios, and which have approval to use the market risk internal models approach for the specific interest rate risk of bonds, will include these non-IMM netting sets into the CVA risk capital charge, according to paragraph 98, unless the national supervisor decides that paragraph 104 should apply for these portfolios. Non-IMM netting sets are included into the advanced CVA risk capital charge by assuming a constant EE profile, where EE is set equal to the EAD as computed under CEM or SM for a maturity equal to the maximum of (i) half of the longest maturity occurring in the netting set and (ii) the notional weighted average maturity of all transactions inside the netting set. The same approach applies where the IMM model does not produce an expected exposure profile.
For exposures to certain counterparties, the bank's approved market risk VaR model may not reflect the risk of credit spread changes appropriately, because the bank's market risk VaR model does not appropriately reflect the specific risk of debt instruments issued by the counterparty. For such exposures, the bank is not allowed to use the advanced CVA risk charge. Instead, for these exposures the bank must determine the CVA risk charge by application of the standardized method in paragraph 104. Only exposures to counterparties for which the bank has supervisory approval for modeling the specific risk of debt instruments are to be included into the advanced CVA risk charge.
100. The CVA risk capital charge consists of both general and specific credit spread risks, including Stressed VaR but excluding IRC (incremental risk charge). The VaR figure should be determined in accordance with the quantitative standards described in paragraph 718(Lxxvi). It is thus determined as the sum of (i) the non-stressed VaR component and (ii) the stressed VaR component.
i. When calculating the non-stressed VaR, current parameter calibrations for expected exposure must be used.
ii. When calculating the stressed VaR future counterparty EE profiles (according to the stressed exposure parameter calibrations as defined in paragraph 61 of Annex 4)1 must be used. The period of stress for the credit spread parameters should be the most severe one-year stress period contained within the three year stress period used for the exposure parameters.5
101. This additional CVA risk capital charge is the standalone market risk charge, calculated on the set of CVAs (as specified in paragraph 98) for all OTC derivatives counterparties, collateralized and uncollateralized, together with eligible CVA hedges. Within this standalone CVA risk capital charge, no offset against other instruments on the bank’s balance sheet will be permitted (except as otherwise expressly provided herein).
102. Only hedges used for the purpose of mitigating CVA risk, and managed as such, are eligible to be included in the VaR model used to calculate the above CVA capital charge or in the standardized CVA risk capital charge set forth in paragraph 104. For example, if a credit default swap (CDS) referencing an issuer is in the bank’s inventory and that issuer also happens to be an OTC counterparty but the CDS is not managed as a hedge of CVA, then such a CDS is not eligible to offset the CVA within the standalone VaR calculation of the CVA risk capital charge.
103. The only eligible hedges that can be included in the calculation of the CVA risk capital charge under paragraphs 98 or 104 are single-name CDSs, single-name contingent CDSs, other equivalent hedging instruments referencing the counterparty directly, and index CDSs. In case of index CDSs, the following restrictions apply:
• The basis between any individual counterparty spread and the spreads of index CDS hedges must be reflected in the VaR. This requirement also applies to cases where a proxy is used for the spread of a counterparty, since idiosyncratic basis still needs to be reflected in such situations. For all counterparties with no available spread, the bank must use reasonable basis time series out of a representative bucket of similar names for which a spread is available.
• If the basis is not reflected to the satisfaction of the supervisor, then the bank must reflect only 50% of the notional amount of index hedges in the VaR. Other types of counterparty risk hedges must not be reflected within the calculation of the CVA capital charge, and these other hedges must be treated as any other instrument in the bank’s inventory for regulatory capital purposes. Tranched or nthto-default CDSs are not eligible CVA hedges. Eligible hedges that are included in the CVA capital charge must be removed from the bank’s market risk capital charge calculation.
1 Annex 5 of this document.
2 “VaR model” refers to the internal model approach to market risk.
3 This derivation assumes positive marginal default probabilities before and after time bucket ti and is valid for i<T. For the final time bucket i=T, the corresponding formula is:
4 This derivation assumes positive marginal default probabilities.
5 Note that the three-times multiplier inherent in the calculation of a bond VaR and a stressed VaR will apply to these calculations.6.1.B Counterparty Credit Risk (Under the Standardized Approach)
The total capital requirements for counterparty credit risk under the Standardized Approach is also an aggregate of the 1) Default risk under SAMA Basel III calculated using the Current Exposure Method and the Incremental Risk under Basel III called the Credit Value Adjustment.
For further clarifications, please refer to SAMA Circular # BCS 24331 dated 4 September 2012 entitled "Basel III Definition of Capital FAQs (p.7).
Consequently, Bank using the Standardized Approach will calculate the Default Risk using the CEM as prescribed also under Basel II, and the CVA under the Standardized Approach as given below under Basel III.
Standardized CVA risk capital charge
104. When a bank does not have the required approvals to use paragraph 98 to calculate a CVA capital charge for its counterparties, the bank must calculate a portfolio capital charge using the following formula:
Where:
• h is the one-year risk horizon (in units of a year), h = 1.
• wi is the weight applicable to counterparty ‘i’. Counterparty ‘i’ must be mapped to one of the seven weights wi based on its external rating, as shown in the table of this paragraph below. When a counterparty does not have an external rating, the bank must, subject to supervisory approval, map the internal rating of the counterparty to one of the external ratings.
• EADtotali EAD is the exposure at default of counterparty ‘i’ (summed across its netting sets), including the effect of collateral as per the existing IMM, SM or CEM rules as applicable to the calculation of counterparty risk capital charges for such counterparty by the bank. For non-IMM banks the exposure should be discounted by applying the factor (1-exp(-0.05*Mi))/(0.05*Mi). For IMM banks, no such discount should be applied as the discount factor is already included in Mi.
• Bi is the notional of purchased single name CDS hedges (summed if more than one position) referencing counterparty ‘i’, and used to hedge CVA risk. This notional amount should be discounted by applying the factor (1-exp(-0.05*Mihedge))/(0.05* Mihedge).
• Bind is the full notional of one or more index CDS of purchased protection, used to hedge CVA risk. This notional amount should be discounted by applying the factor (1-exp(-0.05*Mind))/(0.05* Mind).
• wind is the weight applicable to index hedges. The bank must map indices to one of the seven weights wi based on the average spread of index ‘ind’.
• Mi is the effective maturity of the transactions with counterparty ‘i’. For IMM banks, Mi is to be calculated as per Annex 4,1 paragraph 38 of the Basel Accord. For non-IMM banks, Mi is the notional weighted average maturity as referred to in the third bullet point of para 320. However, for this purpose, Mi should not be capped at 5 years.
• Mihedge is the maturity of the hedge instrument with notional Bi (the quantities Mihedge Bi are to be summed if these are several positions).
• Mind is the maturity of the index hedge ‘ind’. In case of more than one index hedge position, it is the notional weighted average maturity.
For any counterparty that is also a constituent of an index on which a CDS is used for hedging counterparty credit risk, the notional amount attributable to that single name (as per its reference entity weight) may, with supervisory approval, be subtracted from the index CDS notional amount and treated as a single name hedge (Bi) of the individual counterparty with maturity based on the maturity of the index.
The weights are given in this table, and are based on the external rating of the counterparty:2
Rating Weight Wi AAA 0.7% AA 0.7% A 0.8% BBB 1.0% BB 2.0% B 3.0% CCC 10.0% 1 Annex 5 of this document.
2 The notations follow the methodology used by one institution, Standard & Poor’s. The use of Standard & Poor’s credit ratings is an example only; those of some other approved external credit assessment institutions could be used on an equivalent basis. The ratings used throughout this document, therefore, do not express any preferences or determinations on external assessment institutions by the Committee.6.1.C Further Details on CCR and CVA Aggregation
105. Calculation of the aggregate CCR and CVA risk capital charges for 6.1.A IMM and 6.1.b (Standardized Approach)
As a summary, total counterparty exposure is an aggregate of 1) Default Rate calculated either through IMM, CEM or Standardized Approach and 2) Credit Value Adjustment which again can be calculated as per the IMM or Standardized Approach or CEM.
This paragraph deals with the aggregation of the default risk capital charge and the CVA risk capital charge for potential mark-to-market losses. Note that outstanding EAD referred to in the default risk capital charges below is net of incurred CVA losses according to [new paragraph after Para 9 in Annex 4],1 which affects all items “i” below. In this paragraph, “IMM capital charge” refers to the default risk capital charge for CCR based on the RWAs obtained when multiplying the outstanding EAD of each counterparty under the IMM approach by the applicable credit risk weight (under the Standardized or IRB approach), and summing across counterparties. Equally, Current Exposures Method “(CEM) capital charge” or “SM capital charge” refer to the default risk capital charges where outstanding EADs for all counterparties in the portfolio are determined based on CEM or SM, respectively.
A. Banks with IMM approval and market-risk internal-models approval for the specific interest-rate risk of bonds The total CCR capital charge for such a bank is determined as the sum of the following components:
i. The higher of (a) its IMM capital charge based on current parameter calibrations for EAD and (b) its IMM capital charge based on stressed parameter calibrations for EAD. For IRB banks, the risk weights applied to OTC derivative exposures should be calculated with the full maturity adjustment as a function of PD and M set equal to 1 in the Basel Accord (paragraph 272), provided the bank can demonstrate to SAMA its specific VaR model applied in paragraph 98 contains effects of rating migrations. If the bank cannot demonstrate this to the satisfaction of SAMA, the full maturity adjustment function, given by the formula (1 – 1.5 x b)^-1 × (1 + (M – 2.5) × b)2 should apply.
ii. The advanced CVA risk capital charge determined pursuant to paragraphs 98 to 103.
B. Banks with IMM approval and without Specific Risk VaR approval for bonds The total CCR capital charge for such a bank is determined as the sum of the following components: i. The higher of (a) the IMM capital charge based on current parameter calibrations for EAD and (b) the IMM capital charge based on stressed parameter calibrations for EAD.
ii. The standardized CVA risk capital charge determined by paragraph 104.
C. All other banks The total CCR capital charge for such banks is determined as the sum of the following two components:
i. The sum over all counterparties of the CEM or SM based capital charge (depending on the bank’s CCR approach) with EADs determined by paragraphs 91or 69 respectively.
ii. The standardized CVA risk capital charge determined by paragraph 104.
In addition, the following paragraph will be inserted after paragraph 9 in Annex 4.1
“Outstanding 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 paragraph 75.3 RWAs for a given OTC derivative counterparty may be calculated as the applicable risk weight under the Standardized or IRB approach multiplied by the outstanding EAD of the counterparty. This reduction of EAD by incurred CVA losses does not apply to the determination of the CVA risk capital charge.
1 Annex 5 of this document.
2 Where “M” is the effective maturity and “b” is the maturity adjustment as a function of the PD, as defined in paragraph 272 of the Basel Accord.
3 The incurred CVA loss deduced from exposures to determine outstanding EAD is the CVA loss gross of all debit value adjustments (DVA) which have been separately deducted from capital. To the extent DVA has not been separately deducted from a bank’s capital, the incurred CVA loss used to determine outstanding EAD will be net of such DVA.6.2 Wrong-Way Risk
As a summary, ‘’Wrong-way risk substantially applies only to IMM banks and is typically defined as an exposure to a counterparty that is adversely correlated with the credit quality of that counterparty’’ (Transactions with counterparties such as financial guarantors). However, there are implications for the Standardized and IRB Approaches as described in p.36.
As a summary:
• 2 types of wrong way risk
• General wrong-way risk (GWWR)
• Specific wrong-way risk (SWWR)
• GWWR arises when the PD of the counterparties are positively corrected with general market risk factors
• Arises from purchase of credit protection via CDS from mono-line insurers
• Banks must identify exposures that give rise to general WWR:
■ Stress testing and scenario analysis to be conducted
■ Monitor general wrong way risk by product, by region, by industry etc.
■ Reports to be provided to Senior Management and Board on a regular basis
Implement an explicit Pillar 1 capital charge and revise Annex 41 where specific wrong-way risk (SWWR) has been identified
• Banks exposed to SWWR if future exposure to a counterparty is highly correlated with the counterparty’s PD
• Banks need to have explicit procedure for identifying, monitoring and controlling specific WWR
• Specific WWR charges applies for where there exists a legal connection between the counterparty and the underlying issuer e.g.
■ Single name credit default swaps
■ Equity derivatives referencing single counterparty
■ CDS (Credit Default Swaps): use expected loss assuming underlying in liquidation (LGD for swap = 100%)
■ Equity, bond, securities financing EAD= value of transaction under JtD (jump-to-default)
100. In specific, Paragraph 57 of Annex 41 in Basel II will be revised as follows to explain the following aforementioned summary on wrong way exposures:
57. 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 and the appropriate committee of the Board on a regular basis that communicate wrong way risks and the steps that are being taken to manage that risk.
Implement an explicit Pillar 1 capital charge and revise Annex 41 where specific wrong-way risk has been identified
101. In order to implement the requirement that the EAD calculation reflect a higher EAD value for counterparties where specific wrong way risk has been identified, paragraph 423 of the Basel II text and paragraphs 29 and 58 of Annex 4 will be revised as follows:
423. 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 58, Annex 4).1
29. 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 paragraph 58):
58. 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 charge, 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.
Application to IRB and Standardized Approach
Accordingly LGD for Advanced or Foundation IRB banks must be set to 100% for such swap transactions.2 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. In as much this makes re-use of possibly existing (market risk) calculations (for IRC) that already contain an LGD assumption, the LGD must be set to 100%.
1 Annex 5 of this document.
2 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 under the Accord 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 (ie assuming such underlying exposure is an unsecured credit exposure).6.3. Asset Value Correlation (AVC) Multiplier for Large Financial Institutions
As summary, the following elements are relevant.
■ AVC is applicable under credit risk for IRB Approaches only; For banks remaining on Standardized Approach for bank asset class this will not apply
■ Financial institution’s (FIs) credit quality deteriorated in a highly corrected manner during the severe financial crisis
■ To address this Basel III introduced AVC for large financial institutions
■ A multiplier of 1.25 is applied to the correlation parameter of all exposures to large financial institutions meeting the following criteria:
• Regulated financial institutions are whose total assets are greater than or equal to US$100 billion (SR 375 billion)
• Most recent audited financial statements of the parent and consolidated Subsidiaries to be used
Unregulated financial institutions are regardless of size and includes lending, factoring, leasing, securitization etc. (FAQs unregulated financial institution can include a financial institution or leveraged fund that is not subject to prudential solvency regulation)
102. In order to implement the AVC multiplier, paragraph 272 of the Basel framework would be revised as follows: (This relates to the determination of Capital requirements under IRB Approaches.)
272. Throughout this section, PD and LGD are measured as decimals, and EAD is measured as currency (e.g. euros), except where explicitly noted otherwise. For exposures not in default, the formula for calculating risk-weighted assets is:1
Correlation (R) = 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 requirement2 (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
The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph 468) and the bank’s best estimate of expected loss (described in paragraph 471). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.
A multiplier of 1.25 is applied to the correlation parameter described on page 37 para 102of all exposures to financial institutions meeting the following criteria.
Accordingly, the correlation R as determined by the formats in paragraph 101 will be multiplied by 1.25. This in turn would produce a higher "R" correlation and capital requirements necessary for exposure to large FI.
- Regulated financial institutions whose total assets are greater than or equal to US $100 billion (SR 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 institution is 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;
- 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.
1 Ln denotes the natural logarithm. 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 (ie 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.
2 If this calculation results in a negative capital charge for any individual sovereign exposure, banks should apply a zero capital charge for that exposure.6.4. Collateralized Counterparties and Margin Period of Risk
Increase the margin period of risk
As a summary the following are relevant.
• Applicable to IMM banks
• Financial crisis showed that the mandated margin period of risks for regulatory capital calculations underestimated the realized risk
• Margin period of risk increased to 20 business days for netting sets where the number of trade exceeds 5000 or that contain illiquid collateral
103. To further explain the aforementioned Summary, and in order to implement the increased margin periods of risk, the following new paragraphs 41(i) and 41 (ii) will be inserted into Annex 41 of the Basel II framework:
41(i). 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 modeling EAD with margin agreements. In the following cases a higher supervisory floor is imposed:
• For all netting sets where the number of trades exceeds 5,000 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.
• 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 (eg OTC derivatives or repostyle transactions referencing securities whose fair value is determined by models with inputs that are not observed in the market).
• 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.
41 (ii). 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 least double the supervisory floor for that netting set for the subsequent two quarters.
41 (iii). For re-margining with a periodicity of N-days, irrespective of the shortcut method or full IMM model, 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.
Paragraph 167 of Basel II (Adjustment for different holding periods and non daily mark-to-market or re-margining) will be replaced with the following:
167. The minimum holding period for various products is summarized in the following table.
Transaction Type Minimum holding period Condition Repo-style transaction 5 business days Daily re-margining Other capital market transactions Ten business days Daily re-margining Secured lending Twenty business days Daily revaluation
Where a bank has such a transaction or netting set which meets the criteria outlined in paragraphs 41(i) or 41 (ii) of Annex 4, the minimum holding period should be the margin period of risk that would apply under those paragraphs.
Paragraph 179 of Basel II (Use of models) will be replaced with the following:
179. The quantitative and qualitative criteria for recognition of internal market risk models for repo-style transactions and other similar transactions are in principle the same as in paragraphs 718 (LXXIV) to 718 (LXXVI). With regard to the holding period, the minimum will be 5- business days for repo-style transactions, rather than the 10-business days in paragraph 718 (LXXVI) (c). 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. At a minimum, where a bank has a repo-style or similar transaction or netting set which meets the criteria outlined in paragraphs 41(i) or 41 (ii) of Annex 4, the minimum holding period should be the margin period of risk that would apply under those paragraphs, in combination with paragraph 41(iii).
6.4.1 Revise the Shortcut Method for Estimating Effective EPE
The following is a summary of the components.
• Applicable to IMM banks
• Amended ‘’short-cut‘’ method to take more realistic simplifying assumptions to estimate Effective EPE when a bank is unable to model margin requirements along with exposures
104. In order to elaborate on the aforementioned, Paragraph 41 of Annex 41 in Basel II will be revised as follows:
41. Shortcut method: a bank that can model EPE without margin agreements but cannot achieve the higher level of modeling sophistication to model EPE with margin agreements can use the following method for margined counterparties subject to re-margining and daily mark-to-market as described in paragraph 41 (i)2. The method is a simple approximation to Effective EPE and sets Effective EPE for a margined counterparty equal to the lesser of:
a) Effective EPE without any held or posted margining collateral, plus any collateral that has been posted to the counterparty independent of the daily valuation and margining process or current exposure (ie initial margin or independent amount); or
b) An add-on that reflects the potential increase in exposure over the margin period of risk plus the larger of
i. the current exposure net of and including all collateral currently held or posted, excluding any collateral called or in dispute; or
ii. the largest net exposure including all collateral held or posted under the margin agreement that would not trigger a collateral call. This amount should reflect all applicable thresholds, minimum transfer amounts, independent amounts and initial margins under the margin agreement.
The add-on is calculated as E[max(ΔMtM, 0)], where E[…] is the expectation (ie the average over scenarios) and ΔMtM is the possible change of the mark-to-market value of the transactions during the margin period of risk. Changes in the value of collateral need to be reflected using the supervisory haircut method or the internal estimates method, but no collateral payments are assumed during the margin period of risk. The margin period of risk is subject to the supervisory floor specified in paragraphs 41(i) to 41(iii). Backtesting should test whether realized (current) exposures are consistent with the shortcut method prediction over all margin periods within one year. If some of the trades in the netting set have a maturity of less than one year, and the netting set has higher risk factor sensitivities without these trades, this fact should be taken into account. If backtesting indicates that effective EPE is underestimated, the bank should take actions to make the method more conservative, eg by scaling up risk factor moves.
1 Annex 5 of this document.
2 Where a bank generally uses this shortcut method to measure Effective EPE, this shortcut method may be used by a bank that is a clearing member in a CCP for its transactions with the CCP and with clients, including those client transactions that result in back-to-back trades with a CCP.6.4.2 Preclude Downgrade Triggers from Being Reflected in EAD
As a summary:
• Applicable to IMM banks
• Downgrade triggers in margin agreements resulted in liquidity strains for market participants during the crisis
• Prevent the reflection in EAD of any clause in a collateral agreement that requires receipt of collateral when a counterparty’s credit quality deteriorates (downgrade triggers)
105. In order to explicitly disallow downgrade triggers in EAD, a new paragraph 41(iv) will be inserted into Annex 41 to read as follows:
41(iv). 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.
6.4.3 Add Requirements to Improve Operational Performance of the Collateral Department
• Only applicable to IMM Banks.
To implement the requirements designed to improve the collateral department operations, two new paragraphs, 51(i) and 51(ii), will be incorporated into Annex 4 and paragraph 777(x), Part 3: The Second Pillar – Supervisory Review Process, will be revised as follows:
51(i). Banks applying the internal model 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.
51(ii). 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.
777(x). The bank must conduct an independent review of the CCR management system regularly through its own internal auditing process. This review must include both the activities of the business credit and trading units and of the independent CCR control unit. A review of the overall CCR management process must take place at regular intervals (ideally not less than once a year) and must specifically address, at a minimum:
• the adequacy of the documentation of the CCR management system and process;
• the organization of the collateral management unit;
• the organization of the CCR control unit;
• the integration of CCR measures into daily risk management;
• the approval process for risk pricing models and valuation systems used by front and back-office personnel;
• the validation of any significant change in the CCR measurement process;
• the scope of counterparty credit risks captured by the risk measurement model;
• the integrity of the management information system;
• the accuracy and completeness of CCR data;
• the accurate reflection of legal terms in collateral and netting agreements into exposure measurements;
• the verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;
• the accuracy and appropriateness of volatility and correlation assumptions;
• the accuracy of valuation and risk transformation calculations; and
• the verification of the model’s accuracy through frequent backtesting.
Refer to Pillar 2 section of this document with regard to BCBS Basel III requirements to improve the operational performance of the collateral definition.
6.4.4 Requirements on the Controls Around the Reuse of Collateral by IMM Banks
As a summary, please note the following:
• Applicable to IMM banks
• Relates to variation margin, initial or independent margin and calls resulting from potential downgrade.
• Cash management policies for IMM banks to account liquidity risks of potential incoming margin calls
To further elaborate on the aforementioned,
107. To implement the requirements on controls regarding the reuse of collateral, a new paragraph 51(iii) will be included in Annex 41 as follows:
51(iii). 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.
6.4.5 Require Banks to Use Supervisory Haircuts when Transforming Non-Cash OTC Collateral into Cash-Equivalent
• Applicable to IMM banks
• Implementation of supervisory haircuts for non-cash OTC collateral
• Recognition in EAD calculation the effect of collateral other than cash
• Must use either haircuts that meets the standards of the financial collateral comprehensive method or standard supervisory haircuts
108. To implement the supervisory haircuts for non-cash OTC collateral, a new paragraph 61(i) would be incorporated in Annex 41 as follows:
61(i). 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 either haircuts that meet the standards of the financial collateral comprehensive method with own haircut estimates or the standard supervisory haircuts.
6.4.6 Requirement for Banks to Model Non-Cash Collateral Jointly with Underlying Securities for OTC Derivatives and SFTs
The following summary is appropriate.
• Applicable to IMM banks
• Regulation ensures robustness of non-cash collateral
• Ensure the effect of collateral on changes in the market for SFTs for EAD calculation
In order to further explain this component:
109. To ensure the robustness of non-cash collateral, a new paragraph 61(ii) will be inserted in Annex 41 as follows:
61(ii). 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.
6.4.7 Revise Credit Risk Mitigation Section to Add a Qualitative Collateral Management Requirement
The following summary is appropriate.
• Applicable to IMM and non IMM banks
• Sufficient resources are devoted to the orderly operation of margin agreements for OTC and SFTs
• Appropriate collateral management policies to be in place
110. To ensure that sufficient resources are devoted to the orderly operation of margin agreements for OTC derivative and SFT counterparties, and that appropriate collateral management policies are in place, a new paragraph 115(i) will be inserted into the main text and will read as follows:
115(i). 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 calls and response time to incoming calls. Banks must have collateral management policies in place to control, monitor and report:
• the risk to which margin agreements exposes them (such as the volatility and liquidity of the securities exchanged as collateral),
• the concentration risk to particular types of collateral,
• the reuse of collateral (both cash and non-cash) including the potential liquidity shortfalls resulting from the reuse of collateral received from counterparties, and
• the surrender of rights on collateral posted to counterparties.
6.4.8 Revise Text to Establish Standard Supervisory Haircuts for Securitization Collateral
The following summary is appropriate.
• Applicable to IMM and non IMM banks
• Re-securitization no more an eligible collateral
• Under Basel II framework, the standardized haircuts currently treat corporate debt and securitizations collateral in the same manner
• Collateral haircuts for securitization exposures are doubled due to stressed volatilities
111. To implement the supervisory haircuts for securitization collateral, a new paragraph 145(i) will be inserted into the Basel text and paragraph 151 will be revised as follows:
145(i). Re-securitizations (as defined in the securitization framework), irrespective of any credit ratings, are not eligible financial collateral. This prohibition applies whether the bank is using the supervisory haircuts method, the own estimates of haircuts method, the repo VaR method or the internal model method.
151. These are the standardized supervisory haircuts (assuming daily mark-to-market, daily re-margining and a 10-business day holding period), expressed as percentages:
Issue rating for debt
securitiesResidual
MaturitySovereigns Other
IssuersSecuritization
ExposuresAAA to AA-/A-1 <1 year 0.5 1 2 >1 year <5 years 2 4 8 > 5 years 4 8 16 A+ to BBB-/ <1 year 1 2 4 A-2/A-3/P-3 and >1 year <5 years 3 6 12 unrated bank securities > 5 years 6 12 24 BB+ to BB- All 15 Not eligible Not eligible main index equities 15 other equities 25 UCITS/mutual funds Highest haircut applicable to any security in
Fund
Cash in the same currency 0 (The footnotes associated with the table are not included. However, securitization exposures would be defined as those exposures that meet the definition set forth in the securitization framework.) 6.5 Treatment of Highly Leveraged Counterparties (HLC)
The following summary is appropriate.
• Applicable to IMM and non IMM banks (IRB Approach)
• New rule stipulates that PD for a highly leveraged counterparty (hedge funds) should be based on a period of stressed volatilities
• While, the definition of highly-leveraged counterparties is aimed at hedge funds or any other equivalently highly-leveraged counterparties that are financial entities, SAMA will in due course provide a clear definition of HLC's for IRB purposes.
112. The Committee believes it is appropriate to add a qualitative requirement indicating that the PD estimates for highly leveraged counterparties should reflect the performance of their assets based on a stressed period and, thus, is introducing a new paragraph after 415 of the framework to read as follows:
415(i). 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.
6.6 Central Counterparties to be Implemented
The following represents a summary of the additional capital requirements to central counterparties.
• International regulators intention to move to CCPs to clear OTC trades
• No local CCP’s is in KSA- banks will be at disadvantage
For further clarifications also refer to SAMA Circular # BCS 25092 dated 21/11/1433 (Hijri) entitled "BCBS Finalized Document Entitled "Capital Requirements for Bank Exposures to Central Counterparties".
Definition of CCP
‘’is a clearing house that interposes itself between counterparties to contracts traded on 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’’
• In 2009, the G20’s ambition of moving standardized over-the-counter (OTC) derivatives from a bilaterally cleared to a centrally cleared model by the end of 2012 reducing systemic risks in global banking
• Capitalizing exposures to CCPs builds on the new CPSS-IOSCO Principles for Financial Market Infrastructures (PFMIs)
Key features of Interim rules published by BCBS July, 2012
As part of the reform process BCBS released interim rules for the risk weighting of exposures to CCP’s (Document entitled: Capital requirements for bank exposures to central counterparties July, 2012)
The decision to publish the rules on an interim basis suggests that Basel Committee will monitor and make further changes if necessary
Exposures to Qualifying CCPs
Trade exposures:
Where a bank acts as a clearing member of a CCP, 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 and SFT’s.
Where a clearing member offers clearing services to clients 2% risk weight also applies when the clearing member is obligated to reimburse the clients for any losses suffered due to changes in the value of transactions in the event CCP defaults.
(‘’A qualifying CCP is a CCP that meets the new ‘’Principles for Financial Market Infrastructures’’ published by Payment and Settlement Systems and International Organization of Securities Commission’’)
Clearing member exposures to clients
‘’A clearing member is a member of or a direct participant in a CCP that is entitled to enter into transactions with the CCP’’
• Clearing member will always calculate its exposure (including potential CVA risk exposure) to clients as bilateral trades
• To recognize shorter close-out period for cleared transactions clearing members can capitalize the exposure to their clients applying a margin of period of risk of at least 5 days in case if they adopt the IMM or multiply the EAD by a scalar of no less than 0.71 if they adopt either the CEM or the Standardized Method
Client exposure
‘’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’’
• Where a bank is a client of a clearing member and enters into a transaction with the clearing member acting as financial intermediary the client’s exposures to the clearing member may receive the same treatment as defined for clearing member exposures to CCPs subject to meeting two conditions as defined in Para 114 (a) and (b) of Basel Document for central counterparties
Basel III imposed a capital charge on a bank’s exposures to a CCPs default funds
‘’CCP default funds consist of contributions made by clearing members which are designed to protect the relevant CCP from losses caused by the default of a clearing member’’
• Whenever a bank is required to capitalize for exposures arising from default fund contributions to a ‘’Qualifying CCP’’
• Clearing member banks may apply one of the following approaches:
Method 1: Risk sensitive approach
Risk sensitive formula considers size and quality of a qualifying CCP’s financial resources
Method 2: Simplified method
Clearing member banks: Default fund exposures will be subject to a 1250% risk weight subject to an overall cap of 20% of the total trade exposures to the relevant CCP
Exposures to Non-Qualifying CCPs
• Banks must apply the Standardized Approach for credit risk in the main framework according to the category of the counterparty to their trade exposures
• Banks must also apply a risk weight of 1250% to their default fund contributions to a non-qualifying CCP
7. Internal Models
This section deals with the IMM Approach to calculating default risks. – see section 6.1.A.
Enhanced counterparty credit risk management requirements
Stress testing
• Applicable to IMM banks
• New requirement enhancing counterparty credit risk management
• Explicit requirements defined for stress testing, revised model validation standards and new supervisory guidance for sound backtesting practices of CCR
• Engagement of senior management
114. Paragraph 36 of Annex 41 will be revised as follows to increase the robustness of banks’ own estimates of alpha.
36. To this end, banks must ensure that the numerator and denominator of alpha are computed in a consistent fashion with respect to the modeling 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 supervisors should be alert to the 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.
115. The qualitative requirements set forth in Annex 41 for stress testing that banks must perform when using the internal model method have been expanded and made more explicit. More specifically, the existing paragraph 56, Annex 41, of the Basel II text will be replaced with the following:
56. Banks must have a comprehensive stress testing program for counterparty credit risk. The stress testing program must include the following elements:
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• Banks should consider reverse stress tests to identify extreme, but plausible, scenarios that could result in significant adverse outcomes.
• 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.
Model validation and backtesting
116. On model validation, the following paragraph (currently in paragraph 42) will be moved after paragraph 40 of Annex 41:
40bis. 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.
117. The current Basel II requirements for backtesting will be replaced with the following:
42. It is important that supervisory authorities are able to assure themselves that banks using models have counterparty credit risk management systems that are conceptually sound and implemented with integrity. Accordingly the supervisory authority will specify a number of qualitative criteria that banks would have to meet before they are permitted to use a models-based approach. The extent to which banks meet the qualitative criteria may influence the level at which supervisory authorities will set the multiplication factor referred to in paragraph 32 (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:
• The bank must conduct a regular programme of backtesting, ie an ex-post comparison of the risk measures2 generated by the model against realized risk measures, as well as comparing hypothetical changes based on static positions with realized measures.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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:
• The adequacy of the documentation of the risk management system and process;
• The organization of the risk control unit;
• The integration of counterparty credit risk measures into daily risk management;
• The approval process for counterparty credit risk models used in the calculation of counterparty credit risk used by front office and back office personnel;
• The validation of any significant change in the risk measurement process;
• The scope of counterparty credit risks captured by the risk measurement model;
• The integrity of the management information system;
• The accuracy and completeness of position data;
• The verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;
• The accuracy and appropriateness of volatility and correlation assumptions;
• The accuracy of valuation and risk transformation calculations; and
• The verification of the model’s accuracy as described below in paragraphs 43-46.
• 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.
43. 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 re-create 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 data flows and portfolios and the analyses that are used.
44. 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.
45. Banks must define how representative counterparty portfolios are constructed for the purposes of validating an EPE model and its risk measures.
46. When validating EPE models and its risk measures that produce forecast distributions, validation must assess more than a single statistic of the model distribution.
46(i) As part of the initial and on-going validation of an IMM model and its risk measures, the following requirements must be met:
• A bank must carry out backtesting using historical data on movements in market risk factors prior to supervisory approval. Backtesting must consider a number of distinct prediction time horizons out to at least one year, over a range of various start (initialisation) dates and covering a wide range of market conditions.
• Banks must back-test 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.
• 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.
• 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.
• Static, historical backtesting on representative counterparty portfolios must be a part of the validation process. At regular intervals as directed by its supervisor, 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, eg the modeled relationship between tenors of the same risk factor, and the modeled relationships between risk factors.
• Significant differences between realized exposures and the forecast distribution could indicate a problem with the model or the underlying data that the supervisor would require the bank to correct. Under such circumstances, supervisors may require additional capital to be held while the problem is being solved.
• The performance of EPE models and its risk measures must be subject to good backtesting practice. The backtesting programme must be capable of identifying poor performance in an EPE model’s risk measures.
• 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 modeling method.
• 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.
• The on-going validation of a bank’s EPE model and the relevant risk measures include an assessment of recent performance.
• The frequency with which the parameters of an EPE model are updated needs to be assessed as part of the validation process.
• 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 the supervisor. The degree of relative conservatism will be assessed upon initial supervisory approval and at the regular supervisory reviews of the EPE models. The bank must validate the conservatism regularly.
• The on-going assessment of model performance needs to cover all counterparties for which the models are used.
• The validation of IMM models must assess whether or not the bank level and netting set exposure calculations of EPE are appropriate.
49(i). The bank must have an independent risk control unit that is responsible for the design and implementation of the bank’s counterparty credit risk management system. The unit should produce and analyze daily reports on the output of the bank’s risk measurement model, including an evaluation of the relationship between measures of counterparty credit exposure and trading limits. The unit must be independent from the business trading units and should report directly to senior management of the bank.
1 Annex 5 of this document.
2 “Risk measures” 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.8. Other Major Enhancement to Basel III Regarding Enhanced Risk Coverage
8.1 Addressing Reliance on External Credit Ratings and Minimizing Cliff Effects
The following is a summary of this component.
• A major consequence under Basel II was to rely excessively on external ratings for regulatory capital requirements
• This resulted in the neglect of bank’s own independent internal assessment of risks to a certain degree
• Rating agencies have an incentive to produce ‘’good ratings’’
• Given the Basel II rules banks have an incentive to seek ratings just above the ‘’cliff’’
• For e.g. the Standardized Approach prescribes a higher risk weight to corporate exposures that are rated below BB- (150%) than for unrated exposures (100%)- This provides incentives to banks not to get ratings for companies that are likely to be rated below BB-
• Applicable under Standardized Approach
Further elaboration on the above are given below.
8.1.1 Standardised Inferred Rating Treatment for Long-Term Exposures
• Relates to determining of an inferred rating under Standardized Approach Para 99 of Basel II framework
‘’Issuer vs issues assessment para 99 ‘’if either the issuer or a single issue has a low quality assessment (mapping into a risk weight equal or higher than that which applies to unrated claims), an unassessed claim on the same counterparty will be assigned the same risk weight as is applicable to the low quality assessment.
For e.g. if a Corporate issuer has subordinated debt rated single -B and a bank holds an unrated senior exposure to that issuer, the unrated senior exposure must be assigned to the risk weight category corresponding to the single –B rating (eg the 150% risk weight), even if there are other rated senior exposures of the issuer (eg AA)
In specific,
118. Para. 99 of the Basel II text would be modified as follows:
99. Where a bank invests in a particular issue that has an issue-specific assessment, the risk weight of the claim will be based on this assessment. Where the bank’s claim is not an investment in a specific assessed issue, the following general principles apply.
• In circumstances where the borrower has a specific assessment for an issued debt – but the bank’s claim is not an investment in this particular debt – a high quality credit assessment (one which maps into a risk weight lower than that which applies to an unrated claim) on that specific debt may only be applied to the bank’s unassessed claim if this claim ranks pari passu or senior to the claim with an assessment in all respects. If not, the credit assessment cannot be used and the unassessed claim will receive the risk weight for unrated claims.
• In circumstances where the borrower has an issuer assessment, this assessment typically applies to senior unsecured claims on that issuer. Consequently, only senior claims on that issuer will benefit from a high quality issuer assessment. Other unassessed claims of a highly assessed issuer will be treated as unrated. If either the issuer or a single issue has a low quality assessment (mapping into a risk weight equal to or higher than that which applies to unrated claims), an unassessed claim on the same counterparty that ranks pari passu or is subordinated to either the senior unsecured issuer assessment or the exposure assessment will be assigned the same risk weight as is applicable to the low quality assessment.
8.2. Incentive to Avoid Getting Exposures Rated
As a summary:
• Revised Para 733 of the Basel II framework (Supervisory Review Process Pillar 2)
• Banks should internally assess if the risk weights applied under the Standardized Approach are appropriate for their inherent risk.
• If it turns out that that the inherent risk is higher, then the bank should consider the higher degree of risk
119. Para. 733 of the Basel II text will read as follows:
733. Credit risk: Banks should have methodologies that enable them to assess the credit risk involved in exposures to individual borrowers or counterparties as well as at the portfolio level. Banks should assess exposures, regardless of whether they are rated or unrated, and determine whether the risk weights applied to such exposures, under the Standardized Approach, are appropriate for their inherent risk. In those instances where a bank determines that the inherent risk of such an exposure, particularly if it is unrated, is significantly higher than that implied by the risk weight to which it is assigned, the bank should consider the higher degree of credit risk in the evaluation of its overall capital adequacy. For more sophisticated banks, the credit review assessment of capital adequacy, at a minimum, should cover four areas: risk rating systems, portfolio analysis/aggregation, securitization/complex credit derivatives, and large exposures and risk concentrations.
8.3. Incorporation of IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies
As a summary:
• SAMA to refer to IOSCO Code of Conduct Fundamentals for Credit Rating Agencies when determining ECAI eligibility
120. Paragraph 91 and 565(b) of the Basel II text will read as follows (paragraph 90 does not need additional changes):
1. The recognition process
90. SAMA is responsible for determining on a continuous basis whether an external credit assessment institution (ECAI) meets the criteria listed in the paragraph below. SAMA will accordingly refer to the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies when determining ECAI eligibility. The assessments of ECAIs may be recognized on a limited basis, e.g. by type of claims or by jurisdiction. The supervisory process for recognizing ECAIs should be made public to avoid unnecessary barriers to entry.
2. Eligibility criteria
91. An ECAI must satisfy each of the following six criteria.
• objectivity: no change suggested
• Independence: no change suggested
• International access/Transparency: The individual assessments, the key elements underlining the assessments and whether the issuer participated in the assessment process should be publicly available on a non-selective basis, unless they are private assessments. In addition, the general procedures, methodologies and assumptions for arriving at assessments used by the ECAI should be publicly available.
• Disclosure: An ECAI should disclose the following information: its code of conduct; the general nature of its compensation arrangements with assessed entities; its 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 assessments, e.g. the likelihood of AA ratings becoming A over time.
• Resources: no change suggested
• Credibility: no change suggested
3. Operational requirements for use of external credit assessments
565. The following operational criteria concerning the use of external credit assessments apply in the standardized and IRB approaches of the securitization framework:
(a) no change
(b) The external credit assessments must be from an eligible ECAI as recognized by SAMA in accordance with paragraphs 90 to 108 with the following exception. In contrast with bullet three of paragraph 91, an eligible credit assessment, procedures, methodologies, assumptions, and the key elements underlining the assessments must be publicly available, on a non-selective basis and free of charge.1 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 ratings assumptions should be publicly available. Consequently, ratings that are made available only to the parties to a transaction do not satisfy this requirement.
(c) to (f) no change
1. Where the eligible credit assessment is not provided free of charge the ECAI should provide an adequate justification, within their own publicly available Code of Conduct, in accordance with the 'comply or explain' nature of the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies.
8.4. “Cliff Effects” Arising from Guarantees and Credit Derivatives - Credit Risk Mitigation (CRM)
As a summary:
• Current CRM rules requires under Standardized Approach requires ‘’eligible guarantors’’ to be externally rated ‘’A-’’ or better or ‘’internally rated’’ and associated with a PD equivalent to A- or better
• In order to mitigate the ‘’cliff effects’’ that arises when the credit worthiness of a guarantor falls below the A-level of credit quality BCBS revised Para 195 (Standardized Approach) and Para 302 (FIRB Approach)
• BCBS proposed the elimination of the A-minimum requirement for guarantors in the Standardized Approach and the FIRB
Standardized Approach - Range of eligible guarantors (counter- guarantors)/protection providers
195. Credit protection given by the following entities will be recognized:
• sovereign entities, PSEs, banks, and securities firms with a lower risk weight than the counterparty.
• other entities that are externally rated except when credit protection is provided to a securitization exposure. This would include credit protection provided by parent, subsidiary and affiliate companies when they have a lower risk weight than the obligor.
• 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.
Recognition under the Foundation IRB approach
302. 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 189 to 201. 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 189 to 194 must be met.
8.5. Unsolicited Ratings and Recognition of ECAIs
As a summary:
• To address the risk that the credit assessments of unsolicited ratings may be inferior in quality to the general quality of solicited ratings and the potential risk that ECAIs used unsolicited ratings to put pressure on the entities to obtain solicited ratings
• Banks must use chosen ECAIs and their ratings consistently and will not be allowed to ‘’cherry pick’’ the assessments and to arbitrarily change the use of ECAIs
• As a general rule, banks should use solicited ratings from eligible ECAIs
121. Accordingly, paragraph 94 and 108 of the Basel II text will be modified as follows:
94. Banks must use the chosen ECAIs and their ratings consistently for each type of claim, for both risk weighting and risk management purposes. Banks will not be allowed to “cherry-pick” the assessments provided by different ECAIs and to arbitrarily change the use of ECAIs.
108. As a general rule, banks should use solicited ratings from eligible ECAIs. SAMA may, however, allow banks to use unsolicited ratings in the same way as solicited ratings if it is satisfied that the credit assessments of unsolicited ratings are not inferior in quality to the general quality of solicited ratings. SAMA will advise should it permit banks to use consolidated rating. However, there may be the potential for ECAIs to use unsolicited ratings to put pressure on entities to obtain solicited ratings. Such behavior, when identified, will cause SAMA to consider whether to continue recognizing such ECAIs as eligible for capital adequacy purposes.
9. Capital Buffer
Basel III Framework proposes two type of Capital buffers.
1. Capital conservation buffer
2. Countercyclical buffer
This section outlines the operation of the capital conservation buffer, which is designed to ensure that banks build up capital buffers outside periods of stress which can be drawn down as losses are incurred. The requirement is based on simple capital conservation rules designed to avoid breaches of minimum capital requirements.
9.1 Capital Conservation Buffer
A. Best practice
• Outside of periods of stress, banks should hold buffers of capital above the regulatory minimum.
• When buffers have been drawn down, one way banks should look to rebuild them is through reducing discretionary distributions of earnings. This could include reducing dividend payments, share-backs and staff bonus payments. Banks may also choose to raise new capital from the private sector as an alternative to conserving internally generated capital.
The balance between these options should be discussed with supervisors as part of the capital planning process.
• It is clear that greater efforts should be made to rebuild buffers the more they have been depleted. Therefore, in the absence of raising capital in the private sector, the share of earnings retained by banks for the purpose of rebuilding their capital buffers should increase the nearer their actual capital levels are to the minimum capital requirement.
• It is not acceptable for banks which have depleted their capital buffers to use future predictions of recovery as justification for maintaining generous distributions to shareholders, other capital providers and employees. These stakeholders, rather than depositors, must bear the risk that recovery will not be forthcoming.
• It is also not acceptable for banks which have depleted their capital buffers to try and use the distribution of capital as a way to signal their financial strength. Not only is this irresponsible from the perspective of an individual bank, putting shareholders interests above depositors, it may also encourage other banks to follow suit. As a consequence, banks in aggregate can end up increasing distributions at the exact point in time when they should be conserving earnings.
• The framework reduces the discretion of banks which have depleted their capital buffers to further reduce them through generous distributions of earnings. In doing so, the framework will strengthen their ability to withstand adverse environments. Implementation of the framework through internationally agreed capital conservation rules will help increase sector resilience both going into a downturn, and provide the mechanism for rebuilding capital during the early stages of economic recovery. Retaining a greater proportion of earnings during a downturn will help ensure that capital remains available to support the ongoing business operations of banks through the period of stress. In this way the framework should help reduce procyclicality.
B. The framework
A capital conservation buffer of 2.5%, comprised of Common Equity Tier 1, is established above the regulatory minimum capital requirement.1 Capital distribution constraints will be imposed on a bank when capital levels fall within this range. Banks will be able to conduct business as normal when their capital levels fall into the conservation range as they experience losses. The constraints imposed only relate to distributions, not the operation of the bank.
The distribution constraints imposed on banks when their capital levels fall into the range increase as the banks’ capital levels approach the minimum requirements. By design, the constraints imposed on banks with capital levels at the top of the range would be minimal. This reflects an expectation that banks’ capital levels will from time to time fall into this range. The Basel Committee does not wish to impose constraints for entering the range that would be so restrictive as to result in the range being viewed as establishing a new minimum capital requirement.
The table below shows the minimum capital conservation ratios a bank must meet at various levels of the Common Equity Tier 1 (CET1) capital ratios. For example, a bank with a CET1 capital ratio in the range of 5.125% to 5.75% is required to conserve 80% of its earnings in the subsequent financial year (ie payout no more than 20% in terms of dividends, share buybacks and discretionary bonus payments). If the bank wants to make payments in excess of the constraints imposed by this regime, it would have the option of raising capital in the private sector equal to the amount above the constraint which it wishes to distribute. This would be discussed with the bank’s supervisor as part of the capital planning process. The Common Equity Tier 1 ratio includes amounts used to meet the 4.5% minimum Common Equity Tier 1 requirement, but excludes any additional Common Equity Tier 1 needed to meet the 6% Tier 1 and 8% Total Capital requirements. For example, a bank with 8% CET1 and no Additional Tier 1 or Tier 2 capital would meet all minimum capital requirements, but would have a zero conservation buffer and therefore by subject to the 100% constraint on capital distributions.
Individual bank minimum capital conservation standards Common Equity Tier 1 Ratio Minimum Capital Conservation Ratios (express as a percentage of earnings) 4.5% - 5.125% 100% >5.125% - 5.75% 80% >5.75% - 6.375 60% >6.375% - 7.0% 40% >7.0% 0% Set out below are a number of other key aspects of the requirements:
(a) Elements subject to the restriction on distributions: Items considered to be distributions include dividends and share buybacks, discretionary payments on other Tier 1 capital instruments and discretionary bonus payments to staff. Payments that do not result in a depletion of Common Equity Tier 1, which may for example include certain scrip dividends, are not considered distributions.
(b) Definition of earnings: Earnings are defined as distributable profits calculated prior to the deduction of elements subject to the restriction on distributions. Earnings are calculated after the tax which would have been reported had none of the distributable items been paid. As such, any tax impact of making such distributions are reversed out. Where a bank does not have positive earnings and has a Common Equity Tier 1 ratio less than 7%, it would be restricted from making positive net distributions.
(c) Solo or consolidated application: The framework should be applied at the consolidated level, ie restrictions would be imposed on distributions out of the consolidated group. SAMA would have the option of applying the regime at the solo level to conserve resources in specific parts of the group.
(d) Additional supervisory discretion: Although the buffer must be capable of being drawn down, banks should not choose in normal times to operate in the buffer range simply to compete with other banks and win market share. To ensure that this does not happen, supervisors have the additional discretion to impose time limits on banks operating within the buffer range on a case-by- case basis. In any case, supervisors should ensure that the capital plans of banks seek to rebuild buffers over an appropriate timeframe.
C. Transitional arrangements
The capital conservation buffer will be phased in between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019. It will begin at 0.625% of RWAs on 1 January 2016 and increase each subsequent year by an additional 0.625 percentage points, to reach its final level of 2.5% of RWAs on 1 January 2019. Countries that experience excessive credit growth should consider accelerating the build up of the capital conservation buffer and the countercyclical buffer. SAMA has the discretion to impose shorter transition periods and will do so where appropriate.
Banks that already meet the minimum ratio requirement during the transition period but remain below the 7% Common Equity Tier 1 target (minimum plus conservation buffer) should maintain prudent earnings retention policies with a view to meeting the conservation buffer as soon as reasonably possible.
The division of the buffer into quartiles that determine the minimum capital conservation ratios will begin on 1 January 2016. These quartiles will expand as the capital conservation buffer is phased in and will take into account any countercyclical buffer in effect during this period.
1 Common Equity Tier 1 must first be used to meet the minimum capital requirements (including the 6% Tier 1and 8% Total capital requirements if necessary), before the remainder can contribute to the capital conservation buffer.
9.2. Countercyclical Buffer
A. Introduction
Losses incurred in the banking sector can be extremely large when a downturn is preceded by a period of excess credit growth. These losses can destabilize the banking sector and spark a vicious circle, whereby problems in the financial system can contribute to a downturn in the real economy that then feeds back on to the banking sector. These interactions highlight the particular importance of the banking sector building up additional capital defences in periods where the risks of system-wide stress are growing markedly.
The countercyclical buffer aims to ensure that banking sector capital requirements take account of the macro-financial environment in which banks operate. It will be deployed by national jurisdictions when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses. This focus on excess aggregate credit growth means that jurisdictions are likely to only need to deploy the buffer on an infrequent basis. The buffer for internationally-active banks will be a weighted average of the buffers deployed across all the jurisdictions to which it has credit exposures. This means that they will likely find themselves subject to a small buffer on a more frequent basis, since credit cycles are not always highly correlated across jurisdictions.
The countercyclical buffer regime consists of the following elements:
(a) SAMA will monitor credit growth and other indicators that may signal a build up of system-wide risk and make assessments of whether credit growth is excessive and is leading to the build up of system-wide risk. Based on this assessment they will put in place a countercyclical buffer requirement when circumstances warrant. This requirement will be released when system-wide risk crystallizes or dissipates.
(b) Internationally active banks will look at the geographic location of their private sector credit exposures and calculate their bank specific countercyclical capital buffer requirement as a weighted average of the requirements that are being applied in jurisdictions to which they have credit exposures.
(c) The countercyclical buffer requirement to which a bank is subject will extend the size of the capital conservation buffer. Banks will be subject to restrictions on distributions if they do not meet the requirement.
B. National countercyclical buffer requirements
Each Basel Committee member jurisdiction will identify an authority with the responsibility to make decisions on the size of the countercyclical capital buffer. Consequently, if SAMA judges a period of excess credit growth leading to the build up of system-wide risk, it will consider, together with any other macroprudential tools at its disposal by putting in place a countercyclical buffer requirement. This will vary between zero and 2.5% of risk weighted assets, depending on its judgment as to the extent of the build up of systemwide risk.1
The document entitled Guidance for national authorities operating the countercyclical capital buffer, sets out the principles that national authorities have agreed to follow in making buffer decisions. This document provides information that should help banks to understand and anticipate the buffer decisions made by national authorities in the jurisdictions to which they have credit exposures.
To give banks time to adjust to a buffer level, a jurisdiction will pre-announce its decision to raise the level of the countercyclical buffer by up to 12 months.2 Decisions by a jurisdiction to decrease the level of the countercyclical buffer will take effect immediately. The pre-announced buffer decisions and the actual buffers in place for all Committee member jurisdictions will be published on the BIS website.
C. Bank specific countercyclical buffer
Banks will be subject to a countercyclical buffer that varies between zero and 2.5% to total risk weighted assets.3 The buffer that will apply to each bank will reflect the geographic composition of its portfolio of credit exposures. Banks must meet this buffer with Common Equity Tier 1 or other fully loss absorbing capital4 or be subject to the restrictions on distributions set out in the next Section.
Internationally active banks will look at the geographic location of their private sector credit exposures (including non-bank financial sector exposures) and calculate their countercyclical capital buffer requirement as a weighted average of the buffers that are being applied in jurisdictions to which they have an exposure. Credit exposures in this case include all private sector credit exposures that attract a credit risk capital charge or the risk weighted equivalent trading book capital charges for specific risk, IRC and securitization.
The weighting applied to the buffer in place in each jurisdiction will be the bank’s total credit risk charge that relates to private sector credit exposures in that jurisdiction5, divided by the bank’s total credit risk charge that relates to private sector credit exposures across all jurisdictions.
For the VaR for specific risk, the incremental risk charge and the comprehensive risk measurement charge, banks should work with their supervisors to develop an approach that would translate these charges into individual instrument risk weights that would then be allocated to the geographic location of the specific counterparties that make up the charge. However, it may not always be possible to break down the charges in this way due to the charges being calculated on a portfolio by portfolio basis. In such cases, the charge for the relevant portfolio should be allocated to the geographic regions of the constituents of the portfolio by calculating the proportion of the portfolio’s total exposure at default (EAD) that is due to the EAD resulting from counterparties in each geographic region.
D. Extension of the capital conservation buffer
The countercyclical buffer requirement to which a bank is subject is implemented through an extension of the capital conservation buffer described in section III.
The table below shows the minimum capital conservation ratios a bank must meet at various levels of the Common Equity Tier 1 capital ratio.6 When the countercyclical capital buffer is zero in all of the regions to which a bank has private sector credit exposures, the capital levels and restrictions set out in the table are the same as those set out in section III.
Individual bank minimum capital conservation standards Common Equity Tier 1 (including other fully loss absorbing capital) Minimum Capital Conservation Ratios (express as a percentage of earnings) Within first quartile of buffer 100% Within second quartile of buffer 80% Within third quartile of buffer 60% Within fourth quartile of buffer 40% Above top of buffer 40% 148. For illustrative purposes, the following table sets out the conservation ratios a bank must meet at various levels of Common Equity Tier 1 capital if the bank is subject to a 2.5% countercyclical buffer requirement.
Individual bank minimum capital conservation standards, when a bank is subject to a 2.5% countercyclical requirement Common Equity Tier 1 (including other fully loss absorbing capital) Minimum Capital Conservation Ratios (express as a percentage of earnings) 4.5% - 5.75% 100% >5.75% - 7.0% 80% >7.0% - 8.25 60% >8.25% - 9.5% 40% >9.5% 0% E. Frequency of calculation and disclosure
Banks must ensure that their countercyclical buffer requirements are calculated and publically disclosed with at least the same frequency as their minimum capital requirements. The buffer should be based on the latest relevant jurisdictional countercyclical buffers that are available at the date that they calculate their minimum capital requirement. In addition, when disclosing their buffer requirement, banks must also disclose the geographic breakdown of their private sector credit exposures used in the calculation of the buffer requirement.
F. Transitional arrangements
The countercyclical buffer regime will be phased-in in parallel with the capital conservation buffer between 1 January 2016 and year end 2018 becoming fully effective on 1 January 2019. This means that the maximum countercyclical buffer requirement will begin at 0.625% of RWAs on 1 January 2016 and increase each subsequent year by an additional 0.625 percentage points, to reach its final maximum of 2.5% of RWAs on 1 January 2019. Countries that experience excessive credit growth during this transition period will consider accelerating the build up of the capital conservation buffer and the countercyclical buffer. In addition, jurisdictions may choose to implement larger countercyclical buffer requirements. In such cases the reciprocity provisions of the regime will not apply to the additional amounts or earlier time-frames.
Ratio Calculation – Standardized Approach Basel III
Quarterly Capital Adequacy Ratios Standardized Approach
NOTE: This section is only for information purposes as the end result of implementing Basel III. Banks will have to complete the Basel III Prudential Returns package sent separately in order to obtain the actual ratios. Further, the minimum BCBS Basel III CAR requirements are given in attachment # 1. 1. Basel III Actual Ratios Ratios % 1.1 Actual Common Equity Tier 1 (as a percentage of risk weighted assets), to be calculated as row 2912 divided by row 6012 (expressed as a percentage) refer to page 16 % 1.2 Actual Tier 1 (as a percentage of risk weighted assets), to be calculated as row 4512 divided by row 6012 (expressed as a percentage) refer to page 16 % 1.3 Actual Total capital (as a percentage of risk weighted assets), to be calculated as row 597 divided by row 607 (expressed as a percentage) refer to page 17 % 2. Basel III Minimum Capital Ratio Requirements7 and excess/(deficit) of Actual Ratio for the following ratios %: Ratios 2.1 Minimum Common Equity Tier 1 Capital Ratio7 % Excess/(Deficit) of Actual 1.1 over above 2.1 % 2.2 Capital Conservation Buffer7 % 2.3 Minimum Common Equity Tier 1 ratio plus Capital Conservation buffer (2.1+2.2)7 % Excess/(Deficit) of actual (1.1) over above 2.3 % 2.4 Minimum Tier 1 Capital Ratio7 % Excess of Actual/(Deficit) of 1.2 over 2.4 % 2.5 Minimum Total Capital Ratio 8% Excess of Actual/(Deficit) of 1.3 over 2.5 (8%) % 2.6 Minimum Total Capital ratio plus Conservation buffer (2.5+2.2)7 % Excess of Actual/(Deficit) of 1.3 over 2.6 % 2.7 Minimum Total Capital ratio plus all buffers concerning conservation7, countercyclical and DSIBs % Excess/(Deficit) of actual Total Capital Ratio (1.3) over Minimum Total Capital Ratio + Conservation Buffer (2.6) plus countercyclical buffer (3.2) plus DSIBs (3.3) % 3. Basel III Buffers including capital buffer concerning Conservation, Countercyclical and Domestic SIB (DSIBs) Buffers % 3.1 Capital Conservation ratio7,11 Nil% 3.2 Countercyclical ratio10 Nil% 3.3 Domestic SIBSs ratio8,9 Nil% 1 SAMA can implement a range of additional macroprudential tools, including a buffer in excess of 2.5% for banks in Saudi Arabia, if this is deemed appropriate in Saudi Arabia. However, the international reciprocity provisions set out in this regime treat the maximum countercyclical buffer as 2.5%.
2 Banks outside of Saudi Arabia with credit exposures to counterparties in Saudi Arabia will also be subject to the increased buffer level after the pre-announcement period in respect of these exposures. However, in cases where the pre-announcement period of a jurisdiction is shorter than 12 months, the home authority of such banks should seek to match the preannouncement period where practical, or as soon as possible (subject to a maximum preannouncement period of 12 months), before the new buffer level comes into effect.
3 As with the capital conservation buffer, the framework will be applied at the consolidated level. In addition, SAMA may apply the regime at the solo level to conserve resources in specific parts of the group.
4 The Committee is still reviewing the question of permitting other fully loss absorbing capital beyond Common Equity Tier 1 and what form it would take. Until the Committee has issued further guidance, the countercyclical buffer is to be met with Common Equity Tier 1 only.
5 When considering the jurisdiction to which a private sector credit exposure relates, banks should use, where possible, an ultimate risk basis; i.e. it should use the country where the guarantor of the exposure resides, not where the exposure has been booked.
6 Consistent with the conservation buffer, the Common Equity Tier 1 ratio in this context includes amounts used to meet the 4.5% minimum Common Equity Tier 1 requirement, but excludes any additional Common Equity Tier 1 needed to meet the 6% Tier 1 and 8% Total Capital requirements.
7 Refer to minimum required ratios contingent on the phase-in requirements (Annex 1)
8 SAMA to provide Nil for now.
9 D-SIB not relevant to Saudi banks at the present.
10 For DSIBs and countercyclical buffer, SAMA has nil for each.
11 Capital Conservation buffers are nil until 2016.
12 All reference to Rows are to the attached Prudential Returns (P15-P17).C. Pillar 2 Requirements
Pillar 2: Add Requirements to Improve the Operational Performance of the Collateral Department
A summary is as follows:
• Applicable to IMM banks
• BCBS strengthened the standards for collateral management (Pillar 2)
• Requirement added to improve the operational performance of the collateral department for IMM banks
• BCBS supports the creation of a ‘’Collateral Management Unit’’ (CMU)
Enhancements
106. To implement the requirements designed to improve the collateral department operations, two new paragraphs, 51(i) and 51(ii), will be incorporated into Annex 41 and paragraph 777(x), Part 3: The Second Pillar – Supervisory Review Process, will be revised as follows:
51(i). Banks applying the internal model 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.
51(ii). 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.
SAMA's circular concerning the implementation of Pillar 2 under Basel II.5 will continue to apply and represent SAMA's Pillar 2 capital requirement under Basel III.
The additional requirement under Basel III are not applicable to SAMA as currently they refer to IMM approach only. Consequently, SAMA will inform the banks where relevant.
777(x). The bank must conduct an independent review of the CCR management system regularly through its own internal auditing process. This review must include both the activities of the business credit and trading units and of the independent CCR control unit. A review of the overall CCR management process must take place at regular intervals (ideally not less than once a year) and must specifically address, at a minimum:
• the adequacy of the documentation of the CCR management system and process;
• the organization of the collateral management unit;
• the organization of the CCR control unit;
• the integration of CCR measures into daily risk management;
• the approval process for risk pricing models and valuation systems used by front and back-office personnel;
• the validation of any significant change in the CCR measurement process;
• the scope of counterparty credit risks captured by the risk measurement model;
• the integrity of the management information system;
• the accuracy and completeness of CCR data;
• the accurate reflection of legal terms in collateral and netting agreements into exposure measurements;
• the verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;
• the accuracy and appropriateness of volatility and correlation assumptions;
• the accuracy of valuation and risk transformation calculations; and
• the verification of the model’s accuracy through frequent backtesting.
D. Pillar 3 Requirements
SAMA implemented Basel III Pillar 3 requirements will be implemented shortly.
Disclosure requirements
91. To help improve transparency of regulatory capital and improve market discipline, banks are required to disclose the following:
• a full reconciliation of all regulatory capital elements back to the balance sheet in the audited financial statements;
• separate disclosure of all regulatory adjustments and the items not deducted from Common Equity Tier 1 according to section 4.4 of this SAMA guideline
• a description of all limits and minima, identifying the positive and negative elements of capital to which the limits and minima apply;
• a description of the main features of capital instruments issued; banks which disclose ratios involving components of regulatory capital (e.g. “Equity Tier 1”, “Core Tier 1” or “Tangible Common Equity” ratios) must accompany such disclosures with a comprehensive explanation of how these ratios are calculated.
92. Banks are also required to make available on their websites the full terms and conditions of all instruments included in regulatory capital. The Basel Committee will issue more detailed Pillar 3 disclosure requirements in 2011.
93. During the transition phase banks are required to disclose the specific components of capital, including capital instruments and regulatory adjustments that are benefiting from the transitional provisions.
Annexes
Annex # 1: Calibration of the Capital Framework Phase-In-Arrangement
2011 2012 2013 2014 2015 2016 2017 2018 1 January 2019 Leverage Ratio Supervisory monitoring Parallel run 1 Jan 2013 – 1 Jan 2017 Disclosures start 1 Jan 2015 Migration to Pillar 1 Minimum Common Equity Capital (CEC) Ratio 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% Capital Conservation Buffer 0.625% 1.25% 1.875% 2.50% Minimum Common Equity plus capital conservation buffer 3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0% Phase-in of deductions from CET1 (including amounts exceeding the limit for DTAs, MSRs and financials) 20% 40% 60% 80% 100% 100% Minimum Tier 1 Capital 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0% Minimum Total Capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Minimum Total Capital plus conservation buffer 8.0% 8.0% 8.0% 8.625% 9.25% 9.875% 10.5% Capital instruments that no longer qualify as non-core Tier 1 capital or Tier 2 capital Phased out over 10 years horizon beginning 2013 Liquidity coverage ratio1 Observation period begins Introduce minimum standard Net stable funding ratio Observation period begins Introduce minimum standard 1 Reporting to regulatory authorities from January 2012.
Note: All dates as of 1 January.Annex-1A: Calibration of the Capital Framework Capital Requirements and Buffers (All Numbers in Percent)
Common Equity Tier 1 Tier 1 Capital Total Capital Minimum 4.5 6.0 8.0 Conservation buffer 2.5 Minimum plus conservation buffer 7.0 8.5 10.5 Countercyclical buffer range* 0 – 2.5 Annex # 2: Criteria for Classification as Common Shares for Regulatory Capital Purposes
1. Represents the most subordinated claim in liquidation of the bank.
2. Entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been repaid in liquidation (ie has an unlimited and variable claim, not a fixed or capped claim).
3. Principal is perpetual and never repaid outside of liquidation (setting aside discretionary repurchases or other means of effectively reducing capital in a discretionary manner that is allowable under relevant law).
4. The bank does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled nor do the statutory or contractual terms provide any feature which might give rise to such an expectation.
5. Distributions are paid out of distributable items (retained earnings included). The level of distributions is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items).
6. There are no circumstances under which the distributions are obligatory. Non-payment is therefore not an event of default.
7. Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including in respect of other elements classified as the highest quality issued capital.
Footnote a: The criteria also apply to non-joint stock companies, such as mutuals, cooperatives or savings institutions, taking into account their specific constitution and legal structure. The application of the criteria should preserve the quality of the instruments by requiring that they are deemed fully equivalent to common shares in terms of their capital quality as regards loss absorption and do not possess features which could cause the condition of the bank to be weakened as a going concern during periods of market stress. Supervisors will exchange information on how they apply the criteria to non-joint stock companies in order to ensure consistent implementation.
(Refer to Paragraphs 52: Basel III: A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
8. It is the issued capital that takes the first and proportionately greatest share of any losses as they occur. (In cases where capital instruments have a permanent write-down feature, this criterion is still deemed to be met by common shares.) Within the highest quality capital, each instrument absorbs losses on a going concern basis proportionately and pari passu with all the others.
9. The paid in amount is recognized as equity capital (ie not recognized as a liability) for determining balance sheet insolvency.
10. The paid in amount is classified as equity under the relevant accounting standards.
11. It is directly issued and paid-in and the bank can not directly or indirectly have funded the purchase of the instrument.
12. The paid in amount is neither secured nor covered by a guarantee of the issuer or related entity (a related entity can include a parent company, a sister company, a subsidiary or any other affiliate. A holding company is a related entity irrespective of whether it forms part of the consolidated banking group)1 or subject to any other arrangement that legally or economically enhances the seniority of the claim.
13. It is only issued with the approval of the owners of the issuing bank, either given directly by the owners or, if permitted by applicable law, given by the Board of Directors or by other persons duly authorized by the owners.
14. It is clearly and separately disclosed on the bank’s balance sheet.
Annex # 3: Instruments Issued by the Bank that Meet the Additional Tier 1 Criteria
The following box sets out the minimum set of criteria for an instrument issued by the bank to meet or exceed in order for it to be included in Additional Tier 1 capital.
Criteria for inclusion in Additional Tier 1 capital
1. Issued and paid-in
2. Subordinated to depositors, general creditors and subordinated debt of the bank
3. Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors
4. Is perpetual, ie there is no maturity date and there are no step-ups or other incentives to redeem
5. May be callable at the initiative of the issuer only after a minimum of five years:
a. To exercise a call option a bank must receive prior supervisory approval; and
b. A bank must not do anything which creates an expectation that the call will be exercised; and
c. Banks must not exercise a call unless:
i. They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; (replacement issues can be concurrent with but not after the instrument is called); or
ii. The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised. (minimum refers to the regulator’s prescribed minimum requirement, which may be higher than the Basel III Pillar 1 minimum requirement)
6. Any repayment of principal (eg through repurchase or redemption) must be with prior supervisory approval and banks should not assume or create market expectations that supervisory approval will be given
7. Dividend/coupon discretion:
a. the bank must have full discretion at all times to cancel distributions/payments (a consequence of full discretion at all times to cancel distributions/payments is that “dividend pushers” are prohibited. An instrument with a dividend pusher obliges the issuing bank to make a dividend/coupon payment on the instrument if it has made a payment on another (typically more junior) capital instrument or share. This obligation is inconsistent with the requirement for full discretion at all times. Furthermore, the term “cancel distributions/payments” means extinguish these payments. It does not permit features that require the bank to make distributions/payments in kind.)
b. cancellation of discretionary payments must not be an event of default
c. banks must have full access to cancelled payments to meet obligations as they fall due
d. cancellation of distributions/payments must not impose restrictions on the bank except in relation to distributions to common stockholders.
8. Dividends/coupons must be paid out of distributable items
9. The instrument cannot have a credit sensitive dividend feature, that is a dividend/coupon that is reset periodically based in whole or in part on the banking organization’s credit standing.
10. The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms part of national insolvency law.
11. Instruments classified as liabilities for accounting purposes must have principal loss absorption through either (i) conversion to common shares at an objective pre-specified trigger point or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger point. The write-down will have the following effects:
a. Reduce the claim of the instrument in liquidation;
b. Reduce the amount re-paid when a call is exercised; and
c. Partially or fully reduce coupon/dividend payments on the instrument.
12. Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument.
13. The instrument cannot have any features that hinder recapitalization, such as provisions that require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame
14. If the instrument is not issued out of an operating entity (An operating entity is an entity set up to conduct business with clients with the intention of earning a profit in its own right.) or the holding company in the consolidated group (e.g. a special purpose vehicle – “SPV”), proceeds must be immediately available without limitation to an operating entity or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Additional Tier 1 capital.
Stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 capital;
Stock surplus (i.e. share premium) that is not eligible for inclusion in Common Equity Tier 1, will only be permitted to be included in Additional Tier 1 capital if the shares giving rise to the stock surplus are permitted to be included in Additional Tier 1 capital.
Annex # 4: Instruments Issued by the Bank that Meet the Tier 2 Criteria
Criteria for inclusion in Tier 2 Capital
1. Issued and paid-in
2. Subordinated to depositors and general creditors of the bank
3. Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis depositors and general bank creditors
4. Maturity:
a. minimum original maturity of at least five years
b. recognition in regulatory capital in the remaining five years before maturity will be amortized on a straight-line basis
c. there are no step-ups or other incentives to redeem
5. May be callable at the initiative of the issuer only after a minimum of five years:
a. To exercise a call option a bank must receive prior supervisory approval;
b. A bank must not do anything that creates an expectation that the call will be exercised; (An option to call the instrument after five years but prior to the start of the amortization period will not be viewed as an incentive to redeem as long as the bank does not do anything that creates an expectation that the call will be exercised at this point.) and
c. Banks must not exercise a call unless:
i. They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; or
ii. The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised (minimum refers to the regulator’s prescribed minimum requirement, which may be higher than the Basel III Pillar 1 minimum requirement.)
6. The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal), except in bankruptcy and liquidation.
7. The instrument cannot have a credit sensitive dividend feature, that is a dividend/coupon that is reset periodically based in whole or in part on the banking organization’s credit standing.
8. Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument.
9. If the instrument is not issued out of an operating entity or the holding company in the consolidated group (e.g. a special purpose vehicle – “SPV”), proceeds must be immediately available without limitation to an operating entity (An operating entity is an entity set up to conduct business with clients with the intention of earning a profit in its own right) or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Tier 2 Capital.
Annex # 5*: Treatment of Counterparty Credit Risk and Cross-Product Netting
1. This rule identifies permissible methods for estimating the Exposure at Default (EAD) or the exposure amount for instruments with counterparty credit risk (CCR) under this Framework.237 Banks may seek supervisory approval to make use of an internal modeling method meeting the requirements and specifications identified herein. As alternatives banks may also use the standardized method or the current exposure method.
I. Definitions and general terminology
2. This section defines terms that will be used throughout this text.
A. General terms
• Counterparty Credit Risk (CCR) is 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.
B. Transaction types
• Long Settlement Transactions are 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) are 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 are 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.
C. Netting sets, hedging sets, and related terms
• Netting Set is 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 paragraphs 96 (i) to 96 (v) of this Annex, this Framework text on credit risk mitigation techniques, or the Cross-Product Netting Rules set forth in this Annex. 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.
• Risk Position is a risk number that is assigned to a transaction under the CCR standardized method (set out in this Anne) using a regulatory algorithm.
• Hedging Set is a group of risk positions from the transactions within a single netting set for which only their balance is relevant for determining the exposure amount or EAD under the CCR standardized method.
• Margin Agreement is a contractual agreement or provisions to an agreement under which one counterparty must supply collateral to a second counterparty when an exposure of that second counterparty to the first counterparty exceeds a specified level.
• Margin Threshold is the largest amount of an exposure that remains outstanding until one party has the right to call for collateral.
• Margin Period of Risk is the time period from the last exchange of collateral covering a netting set of transactions with a defaulting counterpart until that counterpart is closed out and the resulting market risk is re-hedged.
• Effective Maturity under the Internal Model 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 paragraph 38.
• 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 this Annex.
• Current Market Value (CMV) refers to the net market value of the portfolio of transactions within the netting set with the counterparty. Both positive and negative market values are used in computing CMV.
D. Distributions
• Distribution of Market Values is 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 is 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 is 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 is 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.
E. Exposure measures and adjustments
• Current Exposure is the larger of zero, or the market value of a transaction or portfolio of transactions within a netting set with a counterparty that would be lost upon the 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 is 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 is 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) is the weighted average over time of expected exposures 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) is 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 is 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 is 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.
F. CCR-related risks
• Rollover Risk is the amount by which expected positive exposure is understated when future transactions with a counterpart 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 counterpart is positively correlated with the probability of default of the counterparty due to the nature of the transactions with the counterparty.
II. Scope of application
3. The methods for computing the exposure amount under the standardized approach for credit risk or EAD under the internal ratings-based (IRB) approach to credit risk described in this Annex are applicable to SFTs and OTC derivatives.
4. Such instruments generally exhibit the following abstract characteristics:
• The transactions generate a current exposure or market value.
• The transactions have an associated random future market value based on market variables.
• The transactions generate an exchange of payments or an exchange of a financial instrument (including commodities) against payment.
• The transactions are undertaken with an identified counterparty against which a unique probability of default can be determined238.
5. Other common characteristics of the transactions to be covered may include the following:
• Collateral may be used to mitigate risk exposure and is inherent in the nature of some transactions.
• 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.
• Netting may be used to mitigate the risk.
• Positions are frequently valued (most commonly on a daily basis), according to market variables.
• Remargining may be employed.
6. An exposure value of zero for counterparty credit risk can be attributed to derivative contracts or SFTs that are outstanding with a central counterparty (e.g. a clearing house). This does not apply to counterparty credit risk exposures from derivative transactions and SFTs that have been rejected by the central counterparty. Furthermore, an exposure value of zero can be attributed to banks’ credit risk exposures to central counterparties that result from the derivative transactions, SFTs or spot transactions that the bank has outstanding with the central counterparty. This exemption extends in particular to credit exposures from clearing deposits and from collateral posted with the central counterparty. A central counterparty is an entity that interposes itself between counterparties to contracts traded within one or more financial markets, becoming the legal counterparty such that it is the buyer to every seller and the seller to every buyer. In order to qualify for the above exemptions, the central counterparty CCR exposures with all participants in its arrangements must be fully collateralized on a daily basis, thereby providing protection for the central counterparty’s CCR exposures. Assets held by a central counterparty as a custodian on the bank’s behalf would not be subject to a capital requirement for counterparty credit risk exposure.
7. Under all of the three methods identified in this Annex, when a bank purchases credit derivative protection against a banking book exposure, or against a counterparty credit risk exposure, it will determine its capital requirement for the hedged exposure subject to the criteria and general rules for the recognition of credit derivatives, i.e. substitution or double default rules as appropriate. Where these rules apply, the exposure amount or EAD for counterparty credit risk from such instruments is zero.
8. The exposure amount or EAD for counterparty credit risk is zero for 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.
9. Under all three methods identified in this Annex, 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.
III. Cross-product netting rules239
10. Banks that receive approval to estimate their exposures to CCR using the internal model 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
11. 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) closeout 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.
12. 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 firm’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.
• 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.
• A legal opinion must be generally recognized as such by the legal community in the firm’s home country or a memorandum of law that addresses all relevant issues in a reasoned manner.
13. 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.
14. 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.
15. The Cross-Product Netting Arrangement does not include a walk away clause. A walk away 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.
16. Each included bilateral master agreement and transaction included in the Cross- Product Netting Arrangement satisfies applicable legal requirements for recognition of (i) bilateral netting of derivatives contracts in paragraphs 96(i) to 96(v) of this Annex, or (ii) credit risk mitigation techniques in Part 2, Section II.D of this Framework.
17. The bank maintains all required documentation in its files.
Operational Criteria
18. The supervisory authority is satisfied that the effects of a Cross-Product Netting Arrangement are factored into the firm’s measurement of a counterparty’s aggregate credit risk exposure and that the bank manages its counterparty credit risk on such basis.
19. 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.
IV. Approval to adopt an internal modeling method to estimate EAD
20. A bank (meaning the individual legal entity or a group) that wishes to adopt an internal modeling method to measure exposure or EAD for regulatory capital purposes must seek approval from its supervisor. The internal modeling 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 Section V of this Annex and must apply the method to all of its exposures that are subject to counterparty credit risk, except for long settlement transactions.
21. A bank may also choose to adopt an internal modeling method to measure CCR for regulatory capital purposes for its exposures or EAD to only OTC derivatives, to only SFTs, or to both, subject to the appropriate recognition of netting specified above. 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 method or the current exposure method for a portion of its business. The bank must submit a plan to its supervisor to bring all material exposures for that category of transactions under the internal model method.
22. For all OTC derivative transactions and for all long settlement transactions for which a bank has not received approval from its supervisor to use the internal models method, the bank must use either the standardized method or the current exposure method. Combined use of the current exposure method and the standardized method is permitted on a permanent basis within a group. Combined use of the current exposure method and the standardized method within a legal entity is only permissible for the cases indicated in paragraph 90 of this Annex.
23. Exposures or EAD arising from long settlement transactions can be determined using any of the three methods identified in this document 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.
24. After adoption of the internal model 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 either the current exposure or standardized methods 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.
V. Internal Model Method: measuring exposure and minimum requirements
A. Exposure amount or EAD under the internal model method
25. CCR exposure or EAD is measured at the level of the netting set as defined in Sections I and III of this Annex. 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 firm’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 paragraphs 146 and 703 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 model method are met for the collateral.
26. To the extent that a bank recognizes collateral in exposure amount or EAD via current exposure, a bank would not be permitted to recognize the benefits in its estimates of 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.
27. Under the Internal Model 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 charge 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.
28. Expected exposure or peak exposure measures should be calculated based on a distribution of exposures that accounts for the possible nonnormality of the distribution of exposures, including the existence of leptokurtosis (“fat tails”), where appropriate.
29. When using an internal model, exposure amount or EAD is calculated as the product of alpha times Effective EPE, as specified below:
EAD = α x Effective EPE (1)
30. Effective EPE (“Expected Positive Exposure”) is computed by estimating expected exposure (EEt) as the average 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…240 Specifically, “Effective EE” is computed recursively as:
Effective EEtk = max(Effective EEtk-1, EEtk) (2)
where the current date is denoted as t0 and Effective EEt0 equals current exposure.
31. 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:
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.
32. Alpha (＜) is set equal to 1.4.
33. Supervisors have the discretion to require a higher alpha based on a firm’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.
B. Own estimates for alpha
34. Banks may seek approval from their supervisors 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).
35. In the denominator, EPE must be used as if it were a fixed outstanding loan amount.
36. To this end, banks must ensure that the numerator and denominator of alpha are computed in a consistent fashion with respect to the modeling methodology, parameter specifications and portfolio composition. The approach used must be based on the firm’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.
37. 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.
C. Maturity
38. 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 paragraph 320 of this Framework is replaced with the following:
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.241
39. For netting sets in which all contracts have an original maturity of less than one year, the formula for effective maturity (M) in paragraph 320 of this Framework is unchanged and a floor of one year applies, with the exception of short-term exposures as described in paragraphs 321 to 323 of this Framework.
D. Margin agreements
40. 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). Such models are noticeably more complicated than models of EPE for unmargined counterparties. As such, they are subject to a higher degree of supervisory scrutiny before they are approved, as discussed below.
41. A bank that can model EPE without margin agreements but cannot achieve the higher level of modeling sophistication to model EPE with margin agreements can use the following method for margined counterparties. The method is a simple and conservative approximation to Effective EPE and sets Effective EPE for a margined counterparty equal to the lesser of:
• The threshold, if positive, under the margin agreement plus an add-on that reflects the potential increase in exposure over the margin period of risk. The add-on is computed as the expected increase in the netting set’s exposure beginning from current exposure of zero over the margin period of risk.242 A supervisory floor of five business days for netting sets consisting only of repo style transactions subject to daily remargining and daily mark-to-market, and 10 business days for all other netting sets is imposed on the margin period of risk used for this purpose;
• Effective EPE without a margin agreement.
E. Model validation
42. Because counterparty exposures are driven by movements in market variables, the validation of an EPE model is similar to the validation of a Value-at-Risk (VaR) model that is used to measure market risk. Therefore, in principle, the qualitative standards in paragraph 718 (LXXIV) for the use of VaR models should be carried over to EPE models. However, an EPE model has additional elements that require validation:
• Interest rates, foreign exchange rates, equity prices, commodities, and other market risk factors must be forecast over long time horizons for measuring counterparty exposure. The performance of the forecasting model for market risk factors must be validated over a long time horizon. In contrast, VaR for market risk is measured over a short time horizon (typically, one to ten days).
• The pricing models used to calculate counterparty exposure for a given scenario of future shocks to market risk factors must be tested as part of the model validation process. These pricing models may be different from those used to calculate VaR over a short horizon. Pricing models for options must account for the nonlinearity of option value with respect to market risk factors.
• 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.
• 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 threshold 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.
43. Static, historical backtesting on representative counterparty portfolios must be part of the model validation process. At regular intervals as directed by its supervisor, a bank must conduct such backtesting on a number of representative counterparty portfolios (actual or hypothetical). These representative portfolios must be chosen based on their sensitivity to the material risk factors and correlations to which the bank is exposed.
44. Starting at a particular historical date, backtesting of an EPE model would use the internal model to forecast each portfolio’s probability distribution of exposure at various time horizons. Using historical data on movements in market risk factors, backtesting then computes the actual exposures that would have occurred on each portfolio at each time horizon assuming no change in the portfolio’s composition. These realized exposures would then be compared with the model’s forecast distribution at various time horizons. The above must be repeated for several historical dates covering a wide range of market conditions (e.g. rising rates, falling rates, quiet markets, volatile markets). Significant differences between the realized exposures and the model’s forecast distribution could indicate a problem with the model or the underlying data that the supervisor would require the bank to correct. Under such circumstances, supervisors may require additional capital. Unlike the backtesting requirement for VaR models prescribed in paragraph 718(Lxxiv) (b) and 718(xcviii), no particular statistical test is specified for backtesting of EPE models.
45. Under the internal model method, a measure that is more conservative than Effective EPE (e.g. a measure based on peak rather than average exposure) for every counterparty may be used in place of alpha times Effective EPE in equation (1) with the prior approval of the supervisor. The degree of relative conservatism will be assessed upon initial supervisory approval and subject to periodic validation.
46. Banks using an EPE model or a VaR model (as described in paragraphs 178 to 181of this Framework) must meet the above validation requirements.
F. Operational requirements for EPE models
47. 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
48. The bank must satisfy its supervisor that, in addition to meeting the operational requirements identified in paragraphs 49 to 69 below, it adheres to sound practices for CCR management, including those specified in paragraphs 777 (i) to 777 (xiv) of this Framework.
Use test
49. 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 are not acceptable.
50. 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 supervisory approval.
51. Banks employing the internal model method must have an independent control unit that is responsible for the design and implementation of the firm’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 analyse reports on the output of the firm’s risk measurement model, including an evaluation of the relationship between measures of 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 firm.
The work of this unit should be closely integrated into the day-to-day credit risk management process of the firm. Its output should accordingly be an integral part of the process of planning, monitoring and controlling the firm’s credit and overall risk profile.
52. 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.243 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.
53. 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 its supervisor 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.
54. 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 firm’s internal economic capital model.
Stress testing
55. 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 firm’s credit exposures and assessment of the firm’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.
56. The bank must stress test its counterparty exposures including jointly stressing market and credit risk factors. Stress tests of counterparty risk must consider concentration risk (to a single counterparty or groups of counterparties), correlation risk across market and credit risk (for example, a counterparty for which a large market move would result in a large exposure, a material deterioration in credit quality, or both), and the risk that liquidating the counterparty’s positions could move the market. Such stress tests must also consider the impact on the firm’s own positions of such market moves and integrate that impact in its assessment of counterparty risk.
Wrong-way risk
57. Banks must be aware of exposures that give rise to a greater degree of general wrong-way risk.
58. A bank is said to be exposed to “specific wrong-way risk” if future exposure to a specific counterparty is expected to be high when the counterparty’s probability of default is also high. 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.
Integrity of Modeling Process
59. 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.
60. 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.
61. The internal model must employ current market data to compute current exposures. When using historical data to estimate volatility and correlations, at least three years of historical data must be used and must be updated quarterly or more frequently if market conditions warrant. The data should cover a full range of economic conditions, such as a full business cycle. A unit independent from the business unit must validate the price supplied by the business unit. The data must be acquired independently of the lines of business, must be fed into the internal model in a timely and complete fashion, and maintained in a secure database subject to formal and periodic audit. Banks must also have a well-developed data integrity process to scrub the data of erroneous and/or anomalous observations. To the extent that the internal model relies on proxy market data, for example for new products where three years of historical data may not be available, internal policies must identify suitable proxies and the bank must demonstrate empirically that the proxy provides a conservative representation of the underlying risk under adverse market conditions. If the internal model includes the effect of collateral on changes in the market value of the netting set, the bank must have adequate historical data to model the volatility of the collateral
62. The EPE model (and modifications made to it) must be subject to an internal model validation process. The process must be clearly articulated in firms’ 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.
63. The use of an internal model to estimate EPE, and hence the exposure amount or EAD, of positions subject to a CCR capital charge will be conditional upon the explicit approval of the firm’s supervisory authority. Home and host country supervisory authorities of banks that carry out material trading activities in multiple jurisdictions will work co-operatively to ensure an efficient approval process.
64. In this Framework and in prior documents, the Committee has issued guidance regarding the use of internal models to estimate certain parameters of risk and determine minimum capital charges against those risks. Supervisors will require that banks seeking to make use of internal models to estimate EPE meet similar 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 rigor 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 Committee’s 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.244
65. Pillar 2 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.
66. 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 supervisory approval and review. Banks that seek recognition for the use of an internal model that is not based on simulations must demonstrate to their supervisors that the model meets all operational requirements.
67. For a bank that qualifies to net transactions, the bank must have internal procedures to verify that, prior to including a transaction in a netting set, the transaction is covered by a legally enforceable netting contract that meets the applicable requirements of paragraphs 96(I) to 96(v) of this Annex, this Framework text on credit risk mitigation techniques, or the Cross-Product Netting Rules set forth in this Annex.
68. 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 Part 2, Section II.D of this Framework.
VI. Standardized Method
69. Banks that do not have approval to apply the internal models method for the relevant OTC transactions may use the standardized method. The standardized method can be used only for OTC derivatives; SFTs are subject to the treatments set out under the Internal Model Method of this Annex or under the Part 2, Section II.D, of this Framework. The exposure amount (under the standardized approach for credit risk) or EAD is to be calculated separately for each netting set. It is determined as follows:
CMV = current market value of the portfolio of transactions within the netting set with a counterparty gross of collateral, i.e.CMV =∑CMV , where CMVi is the current market value of transaction i.
CMC = current market value of the collateral assigned to the netting set, i.e.
CMC =∑CMC, where CMCl is the current market value of `collateral l.
i = index designating transaction.
l = index designating collateral.
j = index designating supervisory hedging sets. These hedging sets correspond to risk factors for which risk positions of opposite sign can be offset to yield a net risk position on which the exposure measure is then based.
RPTij = Risk position from transaction i with respect to hedging set j245.
RPClj = Risk position from collateral l with respect to hedging set j.
CCFj = Supervisory credit conversion factor with respect to the hedging set j246.
ß = Supervisory scaling parameter.
Collateral received from a counterparty has a positive sign; collateral posted to a counterparty has a negative sign.
Collateral that is recognized for the standardized approach is confined to the collateral that is eligible under paragraphs 146 and 703 of this Framework for credit risk mitigation.
70. When an OTC derivative transaction with linear risk profile (e.g. a forward, a future or a swap agreement) stipulates the exchange of a financial instrument (e.g. a bond, an equity, or a commodity) for a payment, the payment part is referred to as the payment leg. Transactions that stipulate the exchange of payment against payment (e.g. an interest rate swap or a foreign exchange forward) consist of two payment legs. The payment legs consist of the contractually agreed gross payments, including the notional amount of the transaction. Banks may disregard the interest rate risk from payment legs with a remaining maturity of less than one year from the following calculations. Banks may treat transactions that consist of two payment legs that are denominated in the same currency (e.g. interest rate swaps) as a single aggregate transaction. The treatment for payment legs applies to the aggregate transaction.
71. Transactions with linear risk profiles that have equity (including equity indices), gold, other precious metals or other commodities as the underlying financial instruments are mapped to a risk position in the respective equity (or equity index) or commodity (including gold and the other precious metals) hedging set. The payment leg of these transactions is mapped to an interest rate risk position within the appropriate interest rate hedging set. If the payment leg is denominated in a foreign currency, the transaction is also mapped to a foreign exchange risk position in the respective currency.
72. Transactions with linear risk profiles that have a debt instrument (e.g. a bond or a loan) as the underlying instrument are mapped to an interest rate risk positions with one risk position for the debt instrument and another risk position for the payment leg. Transactions with linear risk profiles that stipulate the exchange of payment against payment (including foreign exchange forwards) are mapped to an interest rate risk position for each of the payment legs. If the underlying debt instrument is denominated in a foreign currency, the debt instrument is mapped to a foreign exchange risk position in the respective currency. If a payment leg is denominated in a foreign currency, the payment leg is also mapped to a foreign exchange risk position in this currency.247 The exposure amount or EAD assigned to a foreign exchange basis swap transactions is zero.
73. For all but debt instruments, the size of a risk position from a transaction with linear risk profile is the effective notional value (market price multiplied by quantity) of the underlying financial instruments (including commodities) converted to the firm’s domestic currency.
74. For debt instruments and the payment legs of all transactions, the size of the risk position is the effective notional value of the outstanding gross payments (including the notional amount) converted to the firm’s domestic currency, multiplied by the modified duration of the debt instrument or payment leg, respectively.
75. The size of a risk position from a credit default swap is the notional value of the reference debt instrument multiplied by the remaining maturity of the credit default swap.
76. The size of a risk position from an OTC derivative with non-linear risk profile (including options and swaptions) is equal to the delta equivalent effective notional value of the financial instrument that underlies the transaction, except in the case of an underlying debt instrument.
77. For OTC derivative with non-linear risk profiles (including options and swaptions), for which the underlying is a debt instrument or a payment leg, the size of the risk position is equal to the delta equivalent effective notional value of the financial instrument or payment leg multiplied by the modified duration of the debt instrument or payment leg.
78. Banks may use the following formulas to determine the size and sign of a risk position:
a. for all but debt instruments:
effective notional value, or delta equivalent notional value =
where
ρref price of the underlying instrument, expressed in the reference currency
v value of the financial instrument (in the case of an option: option price; in the case of a transaction with a linear risk profile: value of the underlying instrument itself)
p price of the underlying instrument, expressed in the same currency as v b. for debt instruments and the payment legs of all transactions:
effective notional value multiplied by the modified duration, or delta equivalent in notional value multiplied by the modified duration
where
v value of the financial instrument (in the case of an option: option price; in the case of a transaction with a linear risk profile: value of the underlying instrument itself or of the payment leg, respectively)
r interest level
If v is denominated in a currency other than the reference currency, the derivative must be converted into the reference currency by multiplication with the relevant exchange rate.
79. The risk positions are to be grouped into hedging sets. For each hedging set, the absolute value amount of the sum of the resulting risk positions is computed. This sum is termed the “net risk position” and is represented as in the formulas in paragraph 70 of this Annex.
80. Interest rate positions arising from debt instruments of low specific risk are to be mapped into one of six hedging sets for each represented currency. A debt instrument is classified as being of low specific risk when it is subject to a 1.6 percent or lower capital charge according to paragraphs 710 to 711(ii). Interest rate positions arising from the payment legs are to be assigned to the same hedging sets as interest rate risk positions from debt instruments of low specific risk. Interest rate positions arising from money deposits received from the counterparty as collateral are also to be assigned to the same hedging sets as interest rate risk positions from debt instruments of low specific risk. The six hedging sets per currency are defined by a combination of two criteria:
(i) The nature of the referenced interest rate — either a sovereign (government) rate or some other rate.
(ii) The remaining maturity or rate-adjustment frequency — less than one year, between one and five years, or longer than five years.
Table 1
Hedging Sets for Interest Rate Risk Positions Per Currency
Remaining maturity or rate-adjustment frequency Sovereign-referenced interest rates Non-sovereign referenced interest rates One year or less X X Over one year to five years X X Over five years X X 81. For underlying debt instruments (e.g. floating rate notes) or payment legs (e.g. floating rate legs of interest swaps) for which the interest rate is linked to a reference interest rate that represents a general market interest level (e.g. government bond yield, money market rate, swap rate), the rate-adjustment frequency is the length of the time interval up to the next re-adjustment of the reference interest rate. Otherwise, the remaining maturity is the remaining life of the underlying debt instrument, or, in the case of a payment leg, the remaining life of the transaction.
82. There is one hedging set for each issuer of a reference debt instrument that underlies a credit default swap.
83. There is one hedging set for each issuer of a debt instrument of high specific risk, i.e. debt instruments to which a capital charge of more than 1.60 percent applies under the standardized measurement method for interest rate risk in paragraph 710. The same applies to money deposits that are posted with a counterparty as collateral when that counterparty does not have debt obligations of low specific risk outstanding. When a payment leg emulates a debt instrument of high specific risk (e.g. in the case of a total return swap with one leg that emulates a bond), there is also one hedging set for each issuer of the reference debt instrument. Banks may assign risk positions that arise from debt instruments of a certain issuer or from reference debt instruments of the same issuer that are emulated by payment legs or that underlie a credit default swap to the same hedging set.
84. Underlying financial instruments other than debt instruments (equities, precious metals, commodities, other instruments), are assigned to the same respective hedging sets only if they are identical or similar instruments. The similarity of instruments is established as follows:
• For equities, similar instruments are those of the same issuer. An equity index is treated as a separate issuer.
• For precious metals, similar instruments are those of the same metal. A precious metal index is treated as a separate precious metal.
• For commodities, similar instruments are those of the same commodity. A commodity index is treated as a separate commodity.
• For electric power, delivery rights and obligations that refer to the same peak or off-peak load time interval within any 24-hour interval are similar instruments.
85. The credit conversion factor that is applied to a net risk position from a hedging set depends on the supervisory hedging set category as given in paragraphs 86 to 88 of this Annex.
86. The credit conversion factors for underlying financial instruments other than debt instruments and for foreign exchange rates are given in Table 2.
Table 2
Exchange Rates Gold Equity Precious Metals (except gold) Electric Power Other Commodities (excluding precious metals 2.5% 5.0% 7.0% 8.5% 4% 10.0% 87. The credit conversion factor for risk positions from debt instruments are as follows:
• 0.6 percent for risk positions from a debt instrument or reference debt instrument of high specific risk.
• 0.3 percent for risk position from a reference debt instrument that underlies a credit default swap and that is of low specific risk.
• 0.2 percent otherwise.
88. Underlying instruments of OTC derivatives that are not in any of the categories above are assigned to separate individual hedging sets for each category of underlying instrument. A credit conversion factor of 10 percent is applied to the notional equivalent amount.
89. There may be transactions with a non-linear risk profile for which the bank cannot determine the delta with a model that the supervisor has approved for the purposes for determining the minimum capital requirements for market risk (instrument models approved for the purposes of the standardized approach for market risk, or instrument models approved as part of the firm's admission to the internal modeling approach for market risk). In the case of payment legs and transactions with debt instruments as underlying, there may be transactions for which the bank cannot determine the modified duration with such a model. For these transactions, the supervisor will determine the size of the risk positions and the applicable credit conversion factors conservatively. Alternatively, supervisors may require the use of the current exposure method. Netting will not be recognized: in other words, the exposure amount or EAD is to be determined as if there were a netting set that comprises just the individual transaction.
90. The supervisory scaling parameter β (beta) is set at 1.4.
VII. Current Exposure Method
91. Banks that do not have approval to apply the internal models method may use the current exposure method as identified in paragraphs 186, 187 and 317 of this Framework. The current exposure method is to be applied to OTC derivatives only; SFTs are subject to the treatments set out under the Internal Model Method of this Annex or under the Part 2, Section II.D, of this Framework.
92. (Deleted)
92(i) Under the Current Exposure Method, banks must calculate the current replacement cost by marking contracts to market, thus capturing the current exposure without any need for estimation, and then adding a factor (the "addon") to reflect the potential future exposure over the remaining life of the contract. It has been agreed that, in order to calculate the credit equivalent amount of these instruments under this current exposure method, a bank would sum:
• The total replacement cost (obtained by "marking to market") of all its contracts with positive value; and
• An amount for potential future credit exposure calculated on the basis of the total notional principal amount of its book, split by residual maturity as follows:
Interest Rates FX and Gold Equities Precious Metals except Gold Other Commodities One year or less 0.0% 1.0% 6.0% 7.0% 10.0% Over one year to five years 0.5% 5.0% 8.0% 7.0% 12.0% Over five years 1.5% 7.5% 10.0% 8.0% 15.0% Notes:
1. For contracts with multiple exchanges of principal, the factors are to be multiplied by the number of remaining payments in the contract.
2. For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be set equal to the time until the next reset date. In the case of interest rate contracts with remaining maturities of more than one year that meet the above criteria, the add-on factor is subject to a floor of 0.5%.
3. Forwards, swaps, purchased options and similar derivative contracts not covered by any of the columns of this matrix are to be treated as "other commodities".
4. No potential future credit exposure would be calculated for single currency floating/floating interest rate swaps; the credit exposure on these contracts would be evaluated solely on the basis of their mark-to-market value.
92(ii). Supervisors will take care to ensure that the add-ons are based on effective rather than apparent notional amounts. In the event that the stated notional amount is leveraged or enhanced by the structure of the transaction, banks must use the effective notional amount when determining potential future exposure.
93. Banks can obtain capital relief for collateral as defined in paragraphs 146 and 703 of this Framework. The methodology for the recognition of eligible collateral follows that of the applicable approach for credit risk.
94. The counterparty credit risk exposure amount or EAD for single name credit derivative transactions in the trading book will be calculated using the potential future exposure add-on factors set out in paragraph 707 of this Framework.
95. To determine capital requirements for hedged banking book exposures, the treatment for credit derivatives in this Framework applies to qualifying credit derivative instruments.
96. Where a credit derivative is an nth-to-default transaction (such as a first- to-default transaction), the treatment specified in paragraph 708 of this Framework applies.
Bilateral netting
96(i). Careful consideration has been given to the issue of bilateral netting, i.e. weighting the net rather than the gross claims with the same counterparties arising out of the full range of forwards, swaps, options and similar derivative contracts.248 The Committee is concerned that if a liquidator of a failed counterparty has (or may have) the right to unbundle netted contracts, demanding performance on those contracts favorable to the failed counterparty and defaulting on unfavorable contracts, there is no reduction in counterparty risk. 96(ii). Accordingly, it has been agreed for capital adequacy purposes that:
(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 (a), including other forms of novation.
(c) In both cases (a) and (b), a bank will need to satisfy SAMA that it has:249
(i) A netting contract or agreement with the counterparty 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;
(ii) Written and reasoned legal opinions 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:
• 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;
• The law that governs the individual transactions; and
• The law that governs any contract or agreement necessary to effect the netting.
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;250
(iii) 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.
96(iii). Contracts containing walkaway clauses will not be eligible for netting for the purpose of calculating capital requirements pursuant to this Framework. 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 a defaulter, even if the defaulter is a net creditor.
96(iv). Credit exposure on bilaterally netted forward transactions will be calculated as the sum of the net mark-to-market replacement cost, if positive, plus an add-on based on the notional underlying principal. The add-on for netted transactions (ANet) will equal the weighted average of the gross addon (AGross)251 and the gross add-on adjusted by the ratio of net current replacement cost to gross current replacement cost (NGR). This is expressed through the following formula:
ANet=0.4*AGross+0.6*NGR*AGross
where:
NGR=level of net replacement cost/level of gross replacement cost for transactions subject to legally enforceable netting agreements252
96(v). The scale of the gross add-ons to apply in this formula will be the same as those for non-netted transactions as set out in paragraphs 91 to 96 of this Annex. The Committee will continue to review the scale of add-ons to make sure they are appropriate. For purposes of calculating potential future credit exposure to a netting counterparty for forward foreign exchange contracts and other similar contracts in which notional principal is equivalent to cash flows, notional principal is defined as the net receipts falling due on each value date in each currency. The reason for this is that offsetting contracts in the same currency maturing on the same date will have lower potential future exposure as well as lower current exposure.
Risk weighting
96(vi). Once the bank has calculated the credit equivalent amounts they are to be weighted according to the category of counterparty in the same way as in the main framework, including concessionary weighting in respect of exposures backed by eligible guarantees and collateral. The Committee will keep a close eye on the credit quality of participants in these markets and reserves the right to raise the weights if average credit quality deteriorates or if loss experience increases.
* This Annex # 5 is the same of Basel II of June 2006.
237 In the present document, the terms “exposure at default” and “exposure amount” are used together in order to identify measures of exposure under both an IRB and a standardized approach for credit risk.
238 Transactions for which the probability of default is defined on a pooled basis are not included in this treatment of CCR.
239 These 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. They do not revise or replace the rules that apply to recognition of netting within the OTC derivatives, repo-style transaction, and margin lending transaction product categories under the 1988 Accord, as amended, or in this Framework. The rules in the 1988 Accord and this Framework continue to apply for purposes of regulatory capital recognition of netting within product categories under IMM or other relevant methodology.
240 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.
241 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 its supervisor.
242 In other words, the add-on equals EE at the end of the margin period of risk assuming current exposure of zero. Since no roll-off of transactions would be occurring as part of this EE calculation, there would be no difference between EE and Effective EE.
243 This section draws heavily on the Counterparty Risk Management Policy Group’s paper, Improving Counterparty Risk Management Practices (June 1999); a copy can be found online at mfainfo.org/Washington/derivatives/Improving%20Counterparty%20risk.pdf.
244 See Part 2, Section VI D 1 (paragraphs 718 (LXX) to 718 (LXXIII).
245 E.g. a short-term FX forward with one leg denominated in the firm’s domestic currency will be mapped into three risk positions: 1. an FX risk position, 2. a foreign currency interest rate risk position, 3. a domestic currency risk position.
246 Calibration has been made assuming at the money forwards or swaps and given a forecasting horizon of one year.
247 E.g. a short-term FX forward with one leg denominated in the firm’s domestic currency will be mapped into three risk positions: 1. an FX risk position, 2. a foreign currency interest rate risk position, 3. a domestic currency risk position.
248 Payments netting, which is designed to reduce the operational costs of daily settlements, will not be recognized in the capital framework since the counterparty's gross obligations are not in any way affected.
249 In cases where an agreement as described in 96(ii) (a) has been recognized prior to July 1994, the supervisor will determine whether any additional steps are necessary to satisfy itself that the agreement meets the requirements set out below.
250 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.
251 AGross equals the sum of individual add-on amounts (calculated by multiplying the notional principal amount by the appropriate add-on factors set out in paragraph 92(i) of this Annex) of all transactions subject to legally enforceable netting agreements with one counterparty.
252 SAMA may permit a choice of calculating the NGR on a counterparty by counterparty or on an aggregate basis for all transactions subject to legally enforceable netting agreements. If supervisors permit a choice of methods, the method chosen by an institution is to be used consistently. Under the aggregate approach, net negative current exposures to individual counterparties cannot be used to offset net positive current exposures to others, i.e. for each counterparty the net current exposure used in calculating the NGR is the maximum of the net replacement cost or zero. Note that under the aggregate approach, the NGR is to be applied individually to each legally enforceable netting agreement so that the credit equivalent amount will be assigned to the appropriate counterparty risk weight category.Annex # 6: The 15% of Common Equity Limit on Specified Items
1. This Annex is meant to clarify the calculation of the 15% limit on significant investments in the common shares of unconsolidated financial institutions (banks, insurance and other financial entities); mortgage servicing rights, and deferred tax assets arising from temporary differences (collectively referred to as specified items).
2. The recognition of these specified items will be limited to 15% of Common Equity Tier 1 (CET1) capital, after the application of all deductions. To determine the maximum amount of the specified items that can be recognized*, banks and supervisors should multiply the amount of CET1** (after all deductions, including after the deduction of the specified items in full) by 17.65%. This number is derived from the proportion of 15% to 85% (ie 15%/85% = 17.65%).
3. As an example, take a bank with €85 of common equity (calculated net of all deductions, including after the deduction of the specified items in full).
4. The maximum amount of specified items that can be recognized by this bank in its calculation of CET1 capital is €85 x 17.65% = €15. Any excess above €15 must be deducted from CET1. If the bank has specified items (excluding amounts deducted after applying the individual 10% limits) that in aggregate sum up to the 15% limit, CET1 after inclusion of the specified items, will amount to €85 + €15 = €100. The percentage of specified items to total CET1 would equal 15%.
* The actual amount that will be recognized may be lower than this maximum, either because the sum of the three specified items are below the 15% limit set out in this annex, or due to the application of the 10% limit applied to each item.
** At this point this is a "hypothetical" amount of CET1 in that it is used only for the purposes of determining the deduction of the specified items.Annex # 7: Minority Interest Illustrative Example
This Annex illustrates the treatment of minority interest and other capital issued out of subsidiaries to third parties, which is set out in paragraphs 62 to 64.
Illustrative example
A banking group consists of two legal entities that are both banks. Bank P is the parent and Bank S is the subsidiary and their unconsolidated balance sheets are set out below.
Bank P balance sheet Bank S balance sheet Assets Assets Loans to customers 100 Loans to customers 150 Investment in CET1 of Bank S 7 Investment in the AT1 of Bank S 4 Investment in the T2 of Bank S 2 Liabilities and equity Liabilities and equity Depositors 70 Depositors 127 Tier 2 10 Tier 2 8 Additional Tier 1 7 Additional Tier 1 5 Common equity 26 Common equity 10 The balance sheet of Bank P shows that in addition to its loans to customers, it owns 70% of the common shares of Bank S, 80% of the Additional Tier 1 of Bank S and 25% of the Tier 2 capital of Bank S. The ownership of the capital of Bank S is therefore as follows:
Capital issued by Bank S Amount issued to parent (Bank P) Amount issued to third parties Total Common Equity Tier 1 (CET1) 7 3 10 Additional Tier 1 (AT1) 4 1 5 Tier 1 (T1) 11 4 15 Tier 2 (T2) 2 6 8 Total capital (TC) 13 10 23 The consolidated balance sheet of the banking group is set out below:
Consolidated balance sheet Assets Loans to customers 250 Liabilities and equity Depositors 197 Tier 2 issued by subsidiary to third parties 6 Tier 2 issued by parent 10 Additional Tier 1 issued by subsidiary to third parties 1 Additional Tier 1 issued by parent 7 Common equity issued by subsidiary to third parties (ie minority interest) 3 Common equity issued by parent 26 For illustrative purposes Bank S is assumed to have risk weighted assets of 100. In this example, the minimum capital requirements of Bank S and the subsidiary’s contribution to the consolidated requirements are the same since Bank S does not have any loans to Bank P. This means that it is subject to the following minimum plus capital conservation buffer requirements and has the following surplus capital:
Minimum and surplus capital of Bank S Minimum plus capital conservation buffer Surplus CET1 7.0
(= 7.0% of 100)3.0
(=10 – 7.0)T1 8.5
(= 8.5% of 100)6.5
(=10 + 5 – 8.5)TC 10.5
(= 10.5% of 100)12.5
(=10 + 5 + 8 – 10.5)The following table illustrates how to calculate the amount of capital issued by Bank S to include in consolidated capital, following the calculation procedure set out in paragraphs 62 to 65:
Bank S: amount of capital issued to third parties included in consolidated capital Total amount issued Amount issued t third parties Surplus Surplus attributable to third parties (ie amount excluded from Consolidated capital) Amount included in consolidated capital (a) (b) (c) (d) =(c) * (b)/(a) (e) = (b) – (d) CET1 10 3 3.0 0.90 2.10 T1 15 4 6.5 1.73 2.27 TC 23 10 12.5 5.43 4.57 The following table summarizes the components of capital for the consolidated group based on the amounts calculated in the table above. Additional Tier 1 is calculated as the difference between Common Equity Tier 1 and Tier 1 and Tier 2 is the difference between Total Capital and Tier 1.
Total amount issued by parent (all of which is to be included in consolidated capital) Amount issued by subsidiaries to third parties to be included in consolidated capital Total amount issued by parent and subsidiary to be included in consolidated capital CET1 26 2.10 28.10 AT1 7 0.17 7.17 T1 33 2.27 35.27 T2 10 2.30 12.30 TC 43 4.57 45.57 Annex # 8: List of BCBS Documents for References in the Implementation of Basel III
Implementation of Basel III requires the aggregation of RWA under Basel II, Basel II.5 and Basel III.
A. Basel III
1. Basel III: A Global Regulatory Framework for More Resilient Banks and Banking System – December 2010 (revised June 2011) issued through SAMA Circular # BCS 27885 dated 12 November 2011.
2. Leverage Ratio (Basel III) issued through SAMA Circular # BCS 5610 dated 13 February 2011
3. Liquidity Ratios (Basel III) issued through SAMA Circular # BCS 28266 dated 19 November 2011
4. Pillar 3 for Basel III: SAMA Circular covering disclosure requirements and Guidance notes to be issued shortly.
5. Capital requirements for Bank's exposures to Central Counterparties of July 2012 issued through SAMA Circular # BCS 25092 dated 21/11/1433 (Hijri)
6. Final Elements of the Reforms to Raise the Quality of Regulatory Capital – Loss Absorbency at the Point of Non- Viability issued through SAMA Circular # BCS 5611 dated 13 February 2011.
B. Basel II.5
7. Basel II.5: SAMA Circular # BCS 25478 dated 21 October covering Pillar 1, Pillar 2 and Pillar 3 components.
C. Basel II
8. International Convergence of Capital Measurement and Capital Standards of June 20041 issued through the following SAMA Circulars.
Standardized Approach
• Pillar 1 Draft Guidelines issued through SAMA Circular dated 6 June 2006
• Basel II Prudential Returns Consultative Draft # 2 issued through SAMA Circular # BCS 180 dated 22 March 2007
• Capital Adequacy Requirements for Market Risk issued through SAMA Circular # BCS 355 dated 29 December 2004.
• Pillar 2 Document issued through SAMA Circular # BCS 581 dated 22 September 2008
• Pillar 3 Document issued through SAMA Circular # BCS 378 dated 24 May 2007
1 Update to BCBS Document of June 2006 through Basel II.5 SAMA Circular # BCS 25478 dated 21 October covering Pillar 1, Pillar 2 and Pillar 3 components.
Annex # 9: National Discretions Basel III – Basel Committee Members Excluding EU
Para's Description of items 52 Consider appropriate audit, verification or review procedures Yes 61 Apply a limit lower than 0.6% to excess provisions No 78-89 FAQ14 consolidation alternative to deduction No 80 FN 27 Permit banks to use a conservative estimate instead of look- through Yes 80 Permit banks to exclude investments made in the context of resolution Yes 84 FN 31 Permit banks to use a conservative estimate instead of look- through Yes 84 Permit banks to exclude investments made in the context of resolution Yes 99 Apply para 104 instead of 98 non-IMM CVA charge No* 121 Allow banks to use unsolicited ratings No 132 (c) Apply at solo level Yes 132 (d) Impose time limits on draw down of buffers Yes 133 Impose shorter transitional periods No 142 FN 50 Apply at solo level Yes PON Press release 1 (a) Apply Statutory approach No *Amended to Yes as per SAMA circular No. (361000021954), dated 11/2/1436 H.
Risk Weight for Asian Infrastructure Investment Bank (AIIB)
This section is currently available only in Arabic, please click here to read the Arabic version.Implications of Fintech Developments for Banks and Bank Supervisors- BCBS
This section is currently available only in Arabic, please click here to read the Arabic version.Requests for SAMA's NOC to offering banking products
This section is currently available only in Arabic, please click here to read the Arabic version.Step-in Risk- BCBS
This section is currently available only in Arabic, please click here to read the Arabic version.Schedule of Charges for SPAN Payment
This circular is currently available only in Arabic, please click here to read the Arabic version.FAQs
Frequently Asked Questions on SAMA's Pillar 3 Disclosure Requirements Framework
For Frequently Asked Questions on SAMA's Pillar 3 Disclosure Requirements Framework, click here.
Basel III Definition of Capital, Frequently Asked Questions
The Basel Committee on Banking Supervision has published responses to the fourth set of frequently asked questions regarding the definition of Basel III capital in September 2017, which updates what was previously published in July 2011, October 2011, and December 2011.
The Committee aims to enhance consistency among countries in applying Basel III guidelines by providing clarifications and interpretive guidance. Therefore, we emphasize the importance of reviewing these materials through the website of the Bank for International Settlements.
Frequently Asked Questions on Benchmark Reform- BCBS
This circular is currently available only in Arabic, please click here to read the Arabic version.SAMA's Comments Concerning Amended LCR - FAQs
IRRBB Frequently Asked Questions and Answers Including National Discretions
Basel III - The Net Stable Funding Ratio (NSFR) Frequently Asked Questions
The Basel Committee has received a number of interpretation questions related to the October 2014 publication of the NSFR standard. In order to promote consistent global implementation of these requirements, the Basel Committee periodically reviews frequently asked questions and publishes answers along with any necessary technical elaboration of the rules text and interpretative guidance, if needed. The recently issued document deals with these Frequently Asked Questions (FAQs) and answers on Basel Ill's Net Stable Funding Ratio (NSFR).
Basel III Counterparty Credit Risk - Frequently Asked Questions- BCBS
FAQs related to Basel III definition of capital have been consolidated in the Basel III definition of capital- Frequently asked questions.As you are aware, Saudi Central Bank has issued the following main documents relating to Basel III Reforms.
- Basel III: A Global Regulatory Framework for More Resilient Banks and Banking System under Circular# BCS 1278 of 21 December 2010.
- Basel III: A Global Regulatory Framework for More Resilient Banks and Banking System December 2010 (Revised June 2011) issued under Saudi Central Bank Circular# BCS 27885 of 12 November 2011.
The attached is a recent BCBS document (July 2012)* entitled "Basel III Counterparty Credit Risk - Frequently Asked Questions", and represents an update to "Frequently Asked Questions" relating to Basel III counterparty credit risk of November 2011 which was circulated by Saudi Central Bank on 24 of November 2011. The above referred documents relate to Counterparty Credit risk rules under the Definition of Capital component of Basel III reforms. Consequently, these Frequently Asked Questions should be read in conjunction with Saudi Central Bank Circulars# BCS 1278 and BCS 27885.
* This document has been superseded and replaced by Basel III counterparty credit risk - Frequently asked questions (21 November 2012)
Frequently Asked Questions (FAQs) on Market Risk Capital Requirements
This document is superseded by the BCBS.In January 2016, the Basel Committee on Banking Supervision published the standard "Minimum Capital Requirements for Market Risk". The new standard sets out revised minimum capital requirements for Market Risk and replaces the existing minimum capital requirements for market risk in the global regulatory framework applicable in Saudi Arabia from 1 January 2019.
Since publication, the Committee has received a number of questions on the published standards text and has agreed to periodically review Frequently Asked Questions (FAQs) and publish answers along with any technical elaboration of the standards text and interpretative guidance that may be necessary to promote consistent global implementation of the standard. This document sets out the first set of responses to questions that have been received.
The Banks should access the BCBS document from BIS website www.bis.org. Frequently Asked Questions on Basel III Leverage Ratio- BCBS
In January 2014, the Basel Committee on Banking Supervision published the Basel III leverage ratio framework* and disclosure requirements together with the public disclosure requirements applicable as of 1 January 2015. To promote consistent global implementation of those requirements, the Committee has agreed to periodically review frequently asked questions (FAQs) and publish answers along with any technical elaboration of the standards text and interpretative guidance that may be necessary.
This document sets out the third set of FAQs that relate to the Basel III leverage ratio framework. The questions and answers, combined with those published earlier in the first and second sets of FAQs, are grouped according to the following themes:
(i) on-balance sheet exposures;
(ii) derivative exposures;
(iii) specific treatment for written credit derivatives;
(iv) securities financing transaction (SFT) exposures;
(v) cross-product netting agreements for derivative exposures and SFTs;
(vi) treatment of long settlement transactions and failed trades;
(vii) off-balance sheet items; and
(viii) scope of consolidation and disclosure.
*The Leverage Ratio Framework, issued by SAMA circular No. (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G, supersedes the Basel III Leverage Ratio Framework issued via SAMA circular No. (351000133367), dated 25 August 2014.
Frequently Asked Questions Concerning SAMA's Various Guidance Document Regarding Basel III
1. Basel Committee on Banking Supervision (BCBS) Document regarding Liquidity Coverage Ratio Disclosure Standards
We refer to SAMA's circular # 351000133366 dated 25 August 2014 with regard to the Prudential Return Guidance document concerning the captioned BCBS document of 25 August 2014.
The Agency response to the issues banks have raised is described in the attached. (Annex 1)
2. SAMA detailed guidance document relating to Pillar 1, June 2006 - A Haircut to Collateral issued through circular #290 dated 12 June 2006
We refer to paragraph 6.6 "Other Items Related to CRM Techniques" of the captioned SAMA's guidance document with regard to haircut on collaterals where "KSA government bonds and bonds of public sector entities (PSE's) eligible for sovereign treatment in local currency had been set by SAMA at 0% haircut".
SAMA wishes to amend the above in order to bring supervisory haircut into line with BCBS requirement of para 151 as given in the Annex 2.
3. SAMA Circular # 361000005773 dated 4 November 2014 regarding National Discretions concerning SAMA's Implementation of Capital Reforms under Basel III Framework
We refer to the captioned circular where SAMA has provided its National Discretion concerning the implementation of Basel III. In this regard with reference to para 99 of BCBS document as given below should read as "Yes" and not as originally submitted as "No". (Refer to Annex# 3)
Para Areas of national discretion KSA 99 Apply para 104 instead of 98 non-IMM CVA charge Yes 4. SAMA’s Final document concerning Basel III IRB Approaches for Credit Risk issued through circular# 351000121270 dated 17 July 2014
The Agency with regard to its captioned guidance document wishes to amend para 106 to read .... "that Netting is permitted in KSA for capital purposes" and not as previously documented as "Netting is not permitted in KSA". (Annex 4)
5. What is meant by PON "Press release 1 (a) Apply Statutory approach" in the last row of the Annexes (refer to Annex 5)
Response
The captioned "PON" is an abbreviation of "Point of Non-viability" in the context of the BCBS press release of 13 January 2011 entitled "Basel Committee issue final elements of the reforms to raise the quality of regulatory capital".
This Press Release covers minimum requirements to ensure loss absorbency at the point of non-viability as described in Annex 4 where 1a refer to applying the statutory approach.
Frequently Asked Questions on Market Risk Capital Requirements- BCBS (2018)
Referring to SAMA Circular No. 381000055026 dated 22/5/1438 H regarding the Basel Committee on Banking Supervision's responses to the first set of frequently asked questions concerning market risk capital requirements in January 2017.
SAMA would like to inform you that the Basel Committee on Banking Supervision has issued responses to the second set of frequently asked questions regarding market risk capital requirements in March 2018. The committee aims to enhance consistency among countries in implementing these requirements by providing clarifications and interpretive guidance. SAMA emphasizes the importance of reviewing these materials on the Bank for International Settlements' website.
The Liquidity Coverage Ratio Framework, Frequently Asked Questions
The Basel Committee on Banking Supervision has issued responses to the second set of frequently asked questions regarding the Liquidity Coverage Ratio (LCR) within Basel III guidelines, published in June 2017, updating what was previously presented in April 2014.
The aim is to enhance consistency among countries in applying Basel III guidelines by providing clarifications and interpretive guidance. SAMA emphasizes the importance of reviewing these materials on the Bank for International Settlements website.
FAQs on the Net Stable Funding Ratio (NSFR)
Referring to the Net Stable Funding Ratio (NSFR) standard issued by the Basel Committee on Banking Supervision in October 2014, which has been implemented in the Kingdom of Saudi Arabia since January 2016. The aim of its implementation is to enhance liquidity risk management in banks by maintaining more stable funding sources to align asset maturity both on and off the balance sheet.
Due to many inquiries regarding this standard, the Basel Committee on Banking Supervision has decided to conduct periodic reviews of frequently asked questions (FAQs) and publish them along with their answers, as well as any technical details or clarifications to enhance consistency at the international level in the application of this standard. The Basel Committee published FAQs on the Net Stable Funding Ratio (NSFR) on February 24, 2017. Therefore, SAMA emphasizes the importance of reviewing them on the Bank for International Settlements website.
Rules for Remote Opening of Bank Accounts for Foreign Companies
Referring to Rule No. (100) containing General Instructions for Opening Bank Accounts as stipulated in the Account Opening Rules, issued by SAMA Circular No. (65681/67) dated 01/11/1440 H and based on SAMA's commitment to facilitate banking transactions for various customers and contributing to supporting the commencement of business activities for foreign investors.
We inform you that it has been decided to introduce a new clause within the aforementioned rule, which allows for Remote Opening of Bank Accounts for Foreign Companies According to Foreign Investment Law, based on specific regulations according to the attached wording.
Rules for Remote Opening of Bank Accounts for Foreign Companies According to Foreign Investment Law Paragraph number (6) of chapter (three) of the Account Opening Rules.
6. Rules for Remote Opening of Bank Accounts for Foreign Companies According to Foreign Investment Law:
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.
Urging Adherence to the Preventive and Precautionary Measures
Remuneration for Chairs of Boards of Directors of Local Banks
Referring to SAMA Circular No. 381000063670 dated 14/6/1438 H regarding the remuneration of the chairs and members of boards of directors of local banks.
We would like to inform you that the remuneration of the chairs of the bank, as referenced in Article 81 of the Companies Law issued by Royal Decree No. (M/3) dated 28/1/1437 H*, is not covered by the provisions of the aforementioned circular.
* The Companies Law issued by Royal Decree No. (M/132) dated 01/12/1443 H replaced the Companies Law issued by Royal Decree No. (M/3) dated 28/01/1437 H.
Unified Instructions for Funds Exempt from Seizure Under Court Orders
Refer to circular No.(43043372), dated 15/05/1443H, Corresponding 19/12/2021G to read the consolidated requirements.Removal of the Visual Identity of the Kingdom's G20 Presidency
Ensure Adherence to Preventive Protocols in all Workplaces
National Discretions Concerning SAMA’s Implementation of Capital Reforms Under Basel III Framework
No: 361000005773 Date(g): 3/11/2014 | Date(h): 11/1/1436 Status: In-Force The Saudi Central Bank refer to its circular # 341000015689 dated 19 December 2012 concerning its Final Guidance Document regarding Implementation of Capital reforms under Basel III Framework.
In this respect, the Basel III capital framework permits national discretions to be exercised in a number of areas for the standards to be implemented in a manner that takes into consideration local market considerations within certain parameters that ensure adherence to overall BCBS objectives.
Accordingly, the Saudi Central Bank has exercised National Discretions in many areas (see attached) which Saudi banks must take into consideration in their implementation of Basel III.
Basel III National Discretions
Para Areas of national discretion KSA 52 Consider appropriate audit, verification or review procedures Yes 61 Apply a limit lower than 0.6% to excess provisions No 78-79 FAQ 14 consolidation alternative to deduction No 80 FN 27 Permit banks to use a conservative estimate instead of look-through Yes 80 Permit banks to exclude investments made in the context of resolution Yes 84 FN 31 Permit banks to use a conservative estimate instead of look-through Yes 84 Permit banks to exclude investments made in the context of resolution Yes 99 Apply para 104 instead of 98 non-IMM CVA charge No* 121 Allow banks to use unsolicited ratings No 132 (c) Apply at solo level Yes 132 (d) Impose time limits on draw down of buffers Yes 133 Impose shorter transitional periods No 142 FN 50 Apply at solo level Yes PON Press release 1 (a) Apply Statutory approach No *Amended to Yes as per SAMA circular No. (361000021954), dated 11/2/1436 H.
Emphasis on Adherence to SAMA’s Instructions Related to Advertising and Marketing
Referring to SAMA's instructions regarding advertising and marketing, which stipulate that promotional advertisements for services and products must be clear and free from phrases that could directly or indirectly mislead customers.
Due to SAMA's observation of promotional advertisements from some financial institutions under its supervision that do not align with its advertising and marketing guidelines, SAMA emphasizes all financial institutions' necessity to adhere to these guidelines. All promotional advertisements should be reviewed to ensure their compliance. It should be noted that SAMA will take regulatory measures against those who violate these guidelines.
Extending the Working Hours of Remittance Centers Affiliated with Banks
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 22/2/1386H, and further to the instructions of SAMA communicated pursuant to Circular No. 2304/41 dated 09/09/1439H regarding the operating hours for bank-related remittance centers and Circular No. 49029/67 dated 5/8/5 H regarding extending the exemption for bank-related remittance centers to operate on Fridays, allowing 10% of the branches to be open.
I inform you that, as an exception to the instructions mentioned above, it has been decided to extend the operating hours of remittance centers to reduce customer crowding under the current circumstances. All remittance centers are allowed to operate throughout the week, including Friday and Saturday, starting from 7:00 AM until 5:30 PM, according to the discretion of each bank, provided that the branches' operating hours do not fall below the times specified in SAMA's instructions mentioned above, while ensuring compliance with the following regulations:
- Adhering to the necessary precautionary measures set by the Ministry of Health regarding employees who attend workplaces, in accordance with the preventive guideline specific to the Coronavirus (COVID-19) within workplaces issued by the Ministry of Health.
- Setting a maximum number of customers being served at one time, while ensuring adequate space for social distancing between branch employees at remittance centers and customers.
- The regular sanitization of branch centers, ATMs, and self-service machines while adhering to the highest safety standards to ensure the safety of remittance centers and all related devices.
- Providing sorting points at the entrances of branch remittance centers to measure the temperature of employees and customers, and supplying the necessary sanitizers and masks, along with equipping these branches with all necessary preventive measures.
- Continuing the work on developing electronic channels, particularly applications for smart devices, to enable customers to access all services related to electronic transfers, including adding beneficiaries.
- Continuing to intensify awareness campaigns aimed at urging customers to use electronic channels when conducting remittance through various methods and in different languages.
- The emphasis on providing display screens in front of remittance branch centers and sharing video clips on social media to educate customers and explain how to conduct remittance through electronic channels in various languages.
- Ensuring the continued intensification of security measures at branch remittance centers to organize waiting lines both inside and outside the branches, and maintaining social distancing between customers in accordance with the preventive and precautionary instructions issued in this regard.
- Continuing the expansion of activating mobile branches of remittance centers to serve companies at their locations with a minimum of 50 employees, while taking all security, preventive, and precautionary measures implemented at the center branches to provide all remittance services, except for the delivery of incoming remittances and cash payments.
Additionally, in order to reduce the use of traditional transfer channels and to take advantage of electronic channels for conducting transfers such as self-service kiosks, ATMs, and smartphone applications, SAMA emphasizes that banks should continue to implement the following measures:
- Exemption from electronic banking service fees, which includes exemption from remittance fees through electronic channels such as self-service kiosks, ATMs, and mobile applications.
- Applying a remittance fee for transactions outside the Kingdom through traditional channels (bank branches or remittancecenters) of 25 riyals as a minimum, while adhering to not exceeding the maximum fees specified in the banking tariff communicated in accordance with Circular No. 381000095093 dated 10/9/1438 H.
- Allowing the opening of accounts at remittance centers remotely, provided that the customer's identity is verified using documents, data, or information from a reliable and independent source.
For your information and action accordingly from its date until further notice, knowing that SAMA will monitor through its inspection tours the compliance of remittance centers with the aforementioned regulations, and will take all legal measures in case of non-compliance.
Extension of Business Days to Include Saturdays to Provide Subsidized Real Estate Finance Products-2019
Prohibiting Seizure of Agricultural Subsidies
Please refer to circular No. (43043372), dated 15/05/1443H, Corresponding To 19/12/2021G for the list of Amounts Excluded from Seizure.BCBS Consultative Document Entitled "Margin Requirements for Non-Centrally Cleared Derivatives"
Amendment of Rule No. (200-1-3) Under the Rules for Bank Accounts
This section is currently available only in Arabic, please click here to read the Arabic version.Extending Working Hours of Bank Branches Located in Pilgrims Gathering Areas Near the Two Holy Mosques
Extending the Exemption for Bank-Related Remittance Centers to Operate on Fridays
Referring to SAMA's instructions communicated through Circular No. 41/2304 dated 09/09/1439 H regarding the Operating Hours of Bank-Related Remittance Centers, which includes an extension of the exemption for some branches of remittance centers to operate on Fridays.
I would like to inform you that it has been decided to extend the exemption for some branches of remittance centers to operate on Fridays for an additional year, provided that it is in accordance with the approved working hours regulations. Requests for non-objection may be submitted to SAMA, including the names of the branches, their locations, and the required working hours, and that the request does not exceed 10% of the total number of branches of the bank’s remittance centers.
For your information and action accordingly as of 17/10/1440 H corresponding 20/06/2019 G.
Trade Respository Reporting & Risk Mitigation Requirements for OTC Derivatives Contracts-2019
These requirements have been updated in accordance with SAMA's circular No. (42056371), dated 10/08/1442, corresponding to 23/03/2023. To read the updated requirements, click here.Net Stable Funding Ratio Minimum Requirements and Disclosure Standards
We refer to SAMA's Circular # 361000036260 dated 29/12/2014 and Circular # 361000130698 dated 28 July 2015 regarding the Finalized Guidance Document, Prudential Returns concerning Net -Stable Funding Ratio (NSFR) and NSFR Disclosure template.
As per these circulars, the NSFR will move, to a minimum standard of 100% by 1 January 2018. Saudi banks have already been providing their quarterly NSFR ratios since January 2012 for monitoring purposes and quarterly prudential returns since 1 January 2015.
Based on the review of NSFR reported in the quarterly prudential returns, we have decided to change the date of minimum standard of 100% from 1 January 2018 to January 2016. Therefore, this ratio should be equal to at least 100% on an ongoing basis from 1 January 2016 using the quarterly prudential returns and disclosure template as specified in our circulars as mentioned above.
SAMA - Basel II Prudential Returns - 2007
Guidance Document Concerning Basel III: The Net Stable Funding Ratio (NSFR) - Based on BCBS Document of October 2014
Amendments in LCR Rules
In view of a recent review of SAMA LCR rules by the Basel Regulatory Consistency Assessment Program (RCAP) Team, there are few corrections, clarifications and amendments to SAMA LCR rules.
a. SAMA's General and Specific Guidance concerning amended LCR dated November 2014.
b. SAMA's circular # 351000133366 dated 25 August 2014 concerning BCBS Document regarding Liquidity Coverage Ratio Disclosure Standards
Amendment of Bank Account Requirements fo The Muslim World League and its Affiliated Councils and Organizations
SAMA's Finalized Guidance Document and Prudential Returns Concerning Net Stable Funding Ratio (NSFR) Based on BCBS Document of October 2014
Enhancement of SAMA Circulars Concerning Basel II, II.5 and III Capital Adequacy Framework
No: 351000123076 Date(g): 21/7/2014 | Date(h): 24/9/1435 Status: Modified Over the years SAMA has issued guidance to Saudi Banks arising from the Standards issued by the Basel Committee on Banking Supervision on the capital adequacy framework including those related to Basel II, II.5 and III. In this process SAMA has sometimes prepared its own documents and guidance notes extracted from the original Basel documents and also provided specific guidance in areas where national discretion was to be exercised. On other occasions SAMA issued its relevant Basel document without any change. As SAMA documents were issued at different stages in the development of the Basel Framework and also took into account the peculiar requirements of the Saudi Banking sector at the point in time, they may have sometimes varied slightly from the underlying Basel requirements.
In this respect, SAMA has now carried out a comprehensive self-review of its regulations against the relevant BCBS documentation and identified some areas where there are gaps and omissions, or further clarifications are required. The purpose of this circular is to identify the specific revisions and ensure that SAMA's documentation concerning Basel II, II.5 and III is fully in sync with the relevant BCBS requirements.
Many of the gaps identified relate to IRB Approaches for Credit risk, VAR models for Market risk, CRM for Advanced IRB approaches etc. These areas at the time of issuance of SAMA regulations and documentation were largely not relevant to Saudi Banks which were still implementing the Standardized approaches. However, going forward and given increasing sophistication of our banks to implement advanced IRB and market risk approaches, these will become relevant. Therefore, where appropriate, SAMA expects banks to implement these regulations effective 1st October 2014.
Over the years SAMA has issued the following circulars and related documents, and in this respect any gaps noted as a result of the aforementioned review are described in the attached Annexes. These identify both the description of the gaps and the documentation that is required to address these gaps. The Sections and Page numbers with regard to SAMA documents have been indicated and referenced.
SAMA Regulatory Documents Annexure No specific SAMA Document General Annexure - 1 SAMA Detailed Guidance Document Relating to Pillar 1, June 2006 Annexure 2 Prudential Returns Basel II, March 2007 Annexure 3 SAMA's Basel II IRB Prudential Returns, Guidance Notes Package and Frequently Asked Questions (FAQs) Annexure 4 Guidance On Application Procedures, For Adoption of the IRB Approach by Banks Licensed in Saudi Arabia Annexure 5 SAMA's Finalized Guidance Document for the Implementation of Basel II.5, 2012 Annexure 6 Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004 Annexure 7 Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007 Annexure 8 SAMA’s Guidelines Document on the Internal Capital Adequacy Assessment Plan, 2008 Annexure 9 Pillar 3 – Package of Disclosure Requirements and Guidance Notes, 2007 Annexure 10 Basel III Pillar 3 – Package of Disclosure Requirements and Guidance Notes Annexure 11 Section A Finalized Guidance Document Concerning the Implementation of Basel III Annexure 12
SAMA is issuing this Circular to ensure Banks can be ready to fully implement the relevant changes by the effective date. SAMA also plans to issue the revised documents incorporating these changes in the next quarter. Given the nature of these changes and the tight timeline SAMA does not intend to have a consultative process. However, any Question raised by the banks will be addressed through an FAQ process.
ANNEXURE 1: Document Enhanced: General Section
As a result of certain queries by Saudi banks on the enforceability of the following SAMA circulars related to Basel II, II.5 and III, SAMA wishes to provide the following clarifications:
Banks are required to take note of the following:
(1) SAMA on June 6, 2006, had issued regulations titled "Detailed Guidance Document Consultative Draft No 2, 2006", covering matters pertaining to Basel II. Since that date, for the purpose of Basel II implementation, this document should be considered as final and binding. The title of the aforementioned document was subsequently amended to "SAMA Detailed Guidance Document Relating to Pillar 1, June 2006".
(2) SAMA on March 22, 2007, had issued regulations titled "SAMA- Basle II Prudential Returns Consultative Draft No 2", covering matter pertaining to Basel II, Prudential returns. The title of the aforementioned document was amended to "Prudential Returns Basel II, March 2007", this document should be considered as final and binding since the date of issuance.
(3) SAMA has issued circular No BCS 769 titled "Enhancements and Revisions to the Basel II Framework, Market Risk and Trading Book", dated July 29, 2009 requiring banks to establish necessary policies, systems and processes to enable them to meet the Basel requirements pertaining to:
■ Enhancement to the Basel II Framework, July 2009
■ Revisions to the Market Risk Framework (subsequently updated as of 31st December, 2010) and intimated by BCBS in February, 2011
■ Guidelines for Computing Capital for Incremental Risk in the Trading Book
SAMA confirms that all the regulations identified above were to be implemented and were binding on banks from the date of the original issuance.
4) SAMA has issued circular No. BCS 28548, titled "Treatment of Trade Finance under Basel Capital Framework" dated 21 November, 2011 requiring banks to be fully aware of this document.
SAMA wishes to clarify that the guidelines mentioned in its circular, should be implemented and considered binding on banks from the date of the issue.
ANNEXURE 2: Document Enhanced: SAMA Detailed Guidance Document Relating to Pillar 1, June 2006
Section 2.1 “Owned or Controlled Financial Entities”, Page 8 of the SAMA detailed guidance document relating to Pillar 1, June 2006
Original Paragraph to be deleted:
SAMA Requires that owned or controlled entities and securities entities should be fully consolidated for Basel II purposes
The revised paragraph would be as follows:
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)
“Scope of Application and other issues”, Page 12 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
Original Paragraph to be deleted
Reference to paragraph 24, 26 & 27 (SAMA Document) - Choice of rule between consolidation and deduction. All relevant financial activities will be consolidated, but, if not consolidated, deducted.
The revised paragraph would be as follows:
Reference to paragraph 24, 26 & 27 (SAMA Document) - Choice of rule between consolidation and deduction. All relevant financial activities will be consolidated, but, if not consolidated, deducted.
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)
Section 2.2.1 Subsidiaries and Significant Minority Interests in Insurance Entities, Page 8 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
Original Paragraph to be deleted
[30 to 34] 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.
The revised paragraph would be as follows:
[30 to 34] (SAMA Document) Saudi Central Bank 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)
2.2.1-A Subsidiaries and Significant Minority Interests in Insurance Entities, Page 8 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
The new paragraph (would be inserted in addition to the other amendment identified above for Section 2.2.1) which would read as follows:
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)
Section 2.3. “Significant investment in commercial entities”, Page 8 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
Original Paragraph to be deleted:
[35] (SAMA Document) "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".
SAMA requires that the threshold and majority investments in commercial entities is 10% of shareholders 'equity and that the deduction would be 50 percent from Tier 1 capital and 50 percent from Tier 2 capital.
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.
The revised paragraph would be as follows:
[35] "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".
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)
The following guidelines will be read as part of Section 4.1.11 [82 to 89] Off balance sheet items: Page 20 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
The following guidelines will be read as part of Section 4.1.11 [82 to 89] Off balance sheet items: Page 20 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
With regard to unsettled securities, commodities, and foreign exchange 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)
The following would be a new subsection 6.4 titled “legal and operational certainty” on page 147, of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
To be read as part of the comprehensive scope section (Section 6.1 (ii) laid out on page 145 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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. However, SAMA ‘s overriding requirement that netting would not be allowed for capital adequacy purposes.
(Refer para 112, International Convergence of Capital Measurement and Capital Standards – June 2006)
To be read as part Section 6 of Credit Risk Mitigation, Collateral Management laid out on page 145 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
To be read as part Section 6 of Credit Risk Mitigation, Collateral Management laid out on page 145 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
To be read as part Section 6 of Credit Risk Mitigation, Collateral Management laid out on page 145 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
To be read as part Section 6 of Credit Risk Mitigation Collateral Management laid out on page 145 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
As a new subsection 6.4.1, titled “Repo-style transaction” on page 147, of the SAMA detailed guidance document relating to Pillar 1, June 2006
(This is in addition to existing text)
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)
Page 147, Section 6.2, On balance sheet netting, SAMA detailed guidance document relating to Pillar 1, June 2006:
Original Paragraph was as follows:
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.
The revised paragraph would be as follows:
SAMA does not recognize netting for capital adequacy purposes
As part of subsection 6.3 titled “guarantees and credit derivatives” on page 147, of the SAMA detailed guidance document relating to Pillar 1, June 2006
(This is in addition to existing text)
In addition to the legal certainty requirements 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)
As a new subsection Chapter 6.3.1 “additional operational requirements for credit derivatives”, SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
To be read as part of 6.3 “Credit and Guarantee Derivatives” - Page 147 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
To be read as part of 6.3 “Credit and Guarantee Derivatives” - Page 147 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
Tranched cover
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)
To be read as part of 6.3 “Credit and Guarantee Derivatives” - Page 147 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
Chapter 6, Credit Risk Mitigation, Basel II SAMA guideline as a separate section 6.5 “Maturity Mismatch”, Page 147 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
Chapter 6, Credit Risk Mitigation, Basel II SAMA guideline as a separate section 6.6 “Other items related to the treatment of CRM techniques”, Page 147 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
Page 33, Specialized lending (“SL”) exposures, 2.2.4, SAMA detailed guidance document relating to Pillar 1, June 2006:
The original paragraph was as follows:
The four sub-classes of SL are project finance, object finance, commodities finance and income-producing real estate, each of these sub-classes are considered below.
The new paragraph would read as follows:
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)
To be read as part of Specialized lending (“SL”) exposures, Page 34, SAMA detailed guidance document relating to Pillar 1, June 2006, through insertion of a heading titled “High Volatility Commercial Real Estate” subsequent to Para 2.2.10
(This is in addition to existing text)
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)
To be read as part of Specialized lending (“SL”) exposures, Page 34, SAMA detailed guidance document relating to Pillar 1, June 2006, through insertion of a heading titled “High Volatility Commercial Real Estate” subsequent to Para 2.2.10:
(This is in addition to existing text)
Where SAMA would categories 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)
Page 30, Section 1.3.6, SAMA detailed guidance document relating to Pillar 1, June 2006:
The original paragraph was as follows:
A bank must produce an implementation plan, specifying to what extent and when it intends to roll out IRB approaches across significant asset classes (or sub-classes in the case of retail) and business units over time.
The revised paragraph would be as follows:
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)
To be read as part of Section 1.2, Application, page 29 SAMA detailed guidance document relating to Pillar 1, June 2006 SAMA detailed guidance document relating to Pillar 1, June 2006
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)
To be read as part of Section for Criteria for transition to the IRB Approach – Page 54, SAMA detailed guidance document relating to Pillar 1, June 2006
(This is in addition to existing text)
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 other sub-classes within the corporate asset class
(Refer para 262, International Convergence of Capital Measurement and Capital Standards – June 2006)
To be read as part of Section for Criteria for transition to the IRB Approach – Page 54, SAMA detailed guidance document relating to Pillar 1, June 2006
(This is in addition to existing text)
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)
To be read as part of Section for Criteria for transition to the IRB Approach – Page 54,SAMA detailed guidance document relating to Pillar 1, June 2006
(This is in addition to existing text)
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)
To be read as part of Page 40, Section 4.1.10, 4.2 Risk components, Probability of default (PD), SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
Banks (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)
To be read as part of Section, 5.2.1, Probability of default (PD) and loss given default (LGD), Basel II Page 45, - SAMA detailed guidance document relating to Pillar 1, June 2006
(This is in addition to existing text)
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)
To be read as part of Section, 5.2.1, Probability of default (PD) and loss given default (LGD), Basel II Page 45, - SAMA detailed guidance document relating to Pillar 1, June 2006
(This is in addition to existing text)
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)
Page 42, of 168, Section 4.2.6, Exposure at default (EAD), SAMA detailed guidance document relating to Pillar 1, June 2006-
The original paragraph was
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.
The revised paragraph would be as follows:
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)
Page 149, Section 7.2.1, MBA based Approach, SAMA detailed guidance document relating to Pillar 1, June 2006:
The original paragraph read as follows
Under the MBA, a bank would 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 revised paragraph would be as follows:
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)
To be read as part of 6.3 “Credit and Guarantee Derivatives” - Page 147 of the SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
To be read as part of Section 8.2, Rules for purchased receivables, page 151 of SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
Foundation IRB treatment
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)
To be read as part of Section 8.2, Rules for purchased receivables, page 151 of SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
Advanced IRB treatment
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)
To be read as part of Section 8.2, Rules for purchased receivables, page 151 of SAMA detailed guidance document relating to Pillar 1, June 2006:
(This is in addition to existing text)
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)
Page 46, Section 6, Calculation of expected losses.,SAMA detailed guidance document relating to Pillar 1, June 2006:
The original paragraph was as follows:
Banks should sum the EL amount (defined as EL multiplied by EAD) associated with their exposures.
The revised paragraph would be as follows:
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)
The following would be read as part of, Page 46, Section 6.2, Expected loss for SL exposures subject to the supervisory slotting criteria, SAMA detailed guidance document relating to Pillar 1, June 2006:
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)
Page 47, Section 6.4, Treatment of expected losses and provisions, SAMA detailed guidance document relating to Pillar 1, June 2006:
Original paragraph was as follows:
Where the total EL amount is less than total eligible provisions, the SAMA would generally allow banks to recognize the difference in supplementary capital up to a maximum of 0.6% of credit risk-weighted assets.
The revised paragraph would be as follows:
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)
Page 47, Section 6.4, Treatment of expected losses and provisions, SAMA detailed guidance document relating to Pillar 1, June 2006:
Original paragraph was as follows:
The EL amount for equity exposures under the PD/LGD approach is deducted from the capital base. Provisions or write-offs for equity exposure under the PD/LGD approach will not be used in the calculation of EL and provision calculation.
The revised paragraph would be as follows:
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)
Page 81, Section 5.2.2, Integrity of rating process, Corporate, sovereign and bank exposures - SAMA detailed guidance document relating to Pillar 1, June 2006:
Original paragraph was as follows
Borrower and facility ratings should be reviewed and updated at least annually. Higher risk borrowers or problem exposures should be subject to more frequent review.
The revised paragraph would be as follows:
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)
Page 104, Section 4.2.8, Re-ageing, SAMA detailed guidance document relating to Pillar 1, June 2006:
The original paragraph was as follows:
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 following is added to the original paragraph:
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)
Page 104, Section 4.4.1, Data observation period - SAMA detailed guidance document relating to Pillar 1, June 2006:
Original paragraph was as follows:
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 should be at least 2 years for at least one source. If the available observation period spans a longer period for any source, and the data are relevant and material, this longer period should be used. Bank need not give equal importance to historical data if it can convince SAMA that more recent data are a better predictor of default rates.
The revised paragraph would be as follows:
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.
(Refer para 463, International Convergence of Capital Measurement and Capital Standards – June 2006)
Page 104, Section 4.4.1, Data observation period, SAMA detailed guidance document relating to Pillar 1, June 2006:
Original paragraph was as follows:
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 should be at least 2 years for at least one source. If the available observation period spans a longer period for any source, and the data are relevant and material, this longer period should be used. Bank need not give equal importance to historical data if it can convince SAMA that more recent data are a better predictor of default rates.
The revised paragraph would be as follows:
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)
Page 109, Section 4.6.7, Requirements specific to own-EAD estimates - SAMA detailed guidance document relating to Pillar 1, June 2006:
Original paragraph was as follows:
Due consideration should be paid by banks to their specific policies and strategies adopted in respect of account monitoring and payment processing. Banks should also consider their ability and willingness to prevent further drawings in circumstances short of payment default, such as covenant violations or other technical default events. Banks should 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. Banks should be able to monitor outstanding balances on a daily basis.
The revised paragraph would be as follows:
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 fulfil the requirements set forth in Annex 4 of this Framework.
(Refer para 477, International Convergence of Capital Measurement and Capital Standards – June 2006)
To be read as part of Section 4.5, Requirements specific to own-LGD estimates, page 106 of SAMA detailed guidance document relating to Pillar 1, June 2006:
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)
Chapter 6 - Credit Risk Mitigation - Collateral Management, Page 145 of SAMA detailed guidance document relating to Pillar 1, June 2006:
Original Paragraph was as following
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 following is added to the above:
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)
Page 157, 10.4.7, 10.4.8, Recognition of internally determined correlations, SAMA detailed guidance document relating to Pillar 1, June 2006:
Original Paragraphs were the following:
10.4.7 Recognition of internally determined correlations
The new Basel framework allows a national supervisory authority to decide whether to permit a bank to recognize diversification benefits (less than perfect correlation) across individual operational risk estimates within a bank group. The Bank must be able to prove to the supervisor that its systems for determining correlations are sound, implemented with integrity, and take into account the uncertainty surrounding any such correlation estimate (particularly in periods of stress). The bank should also validate its assumptions using appropriate quantitative and qualitative techniques. SAMA proposes to allow a Bank to use internally determined correlations across individual operational risk estimates provided that i) such co-relations meet back testing, stress testing and other validation requirements ii) and the bank ‘s internal estimates taken as a whole provide predictability for determining regulatory capital requirements.
10.4.8 Calculation of operational risk capital to UL only
The new Basel framework requires a bank to calculate its regulatory capital requirement as the sum of expected loss (EL) and unexpected loss (UL), unless the bank can demonstrate to the satisfaction of its national supervisory authority that it has measured and accounted for its EL exposure.
SAMA proposes to permit a bank to hold capital against UL only provided that the Bank can demonstrate to SAMA that it has accounted for its EL exposure.
The revised paragraph would be as follows:
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)
Page 155, 10.4, Partial Use, SAMA detailed guidance document relating to Pillar 1, June 2006: Original Paragraph was the following:
[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:
• 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.
The revised paragraph would be as follows:
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)
ANNEXURE 3: Document Enhanced: Prudential Returns Basel II, March 2007
The following is to be read as part of "Core Capital– Tier-I” and “Tier II Capital” guidelines (in addition to existing guidelines), Page 25, Prudential Returns Basel II, March 2007:
(This is in addition to existing text)
The limits on Tier 2 and on innovative Tier 1 instruments will be based on the amount of Tier 1 capital after deduction of goodwill but before the deductions of investments pursuant (see Annex 1, International Convergence of Capital Measurement and Capital Standards – June 2006, for an example how to calculate the 15% limit for innovative Tier 1 instruments).
(Please refer to Paragraph 39 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following is to be read as part of “Additional Guidance Notes I” (in addition to existing guidelines), Page 12, Paragraph No 15, Bullet point No 2, Prudential Returns Basel II, March 2007:
(This is in addition to existing text)
The comprehensive approach
Maturity Mismatch
Where the residual maturity of the CRM is less than that of the underlying credit exposure a maturity mismatch occurs. Where there is a maturity mismatch and the CRM has an original maturity of less than one year, the CRM is not recognized for capital purposes.
In other cases where there is a maturity mismatch, partial recognition is given to the CRM for regulatory capital purposes as detailed in para 202 – 205, International Convergence of Capital Measurement and Capital Standards – June 2006. Under the simple approach for collateral maturity mismatches will not be allowed.
(Please refer to Paragraph 143 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following is to be read as part of “Additional Guidance Notes I” (in addition to existing guidelines), Page 13, Paragraph No 15, Bullet point No 4, Prudential Returns Basel II, March 2007:
(This is in addition to existing text)
The comprehensive approach
Calculation of capital requirement
Where the collateral is a basket of assets, the haircut on the basket will be
H =Σa H, where a1 is the weight of the asset (as measured by units of currency) in the basket and H1 the haircut applicable to that asset.
(Please refer to Paragraph 150 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following is to be read as part of “Additional Guidance Notes I” 17.2, Counterparty Credit Risk On Derivative Contracts, Current Exposure Method, (in addition to existing guidelines), Page 16,, Prudential Returns Basel II, March 2007:
(This is in addition to existing text)
Under the Current Exposure Method, the calculation of the counterparty credit risk charge for an individual contract will be as follows:
counterparty charge = [(RC + add-on) – CA] x r x 8%
where:
RC = the replacement cost, add-on = the amount for potential future exposure calculated according to paragraph 92(i) and 92(ii) of Annex 4, International Convergence of Capital Measurement and Capital Standards – June 2006.
CA = the volatility adjusted collateral amount under the comprehensive approach prescribed in paragraphs 147 to 172, International Convergence of Capital Measurement and Capital Standards – June 2006, or zero if no eligible collateral is applied to the transaction, and
r = the risk weight of the counterparty.
(Please refer to Paragraph 186 of International Convergence of Capital Measurement and Capital Standards – June 2006)
ANNEXURE 4: Document Enhanced: SAMA's Basel II IRB Prudential Returns, Guidance Notes Package and Frequently Asked Questions (FAQs)
Page 31 of the GN 4 – IRB Approach – Section C Prudential Returns General Guidance on IRB Approaches - January 2012:
Original paragraph (130) to be deleted:
130. A Bank relying on its own estimates of LGD has the option to adopt the treatment for Bank using the foundation IRB approach (see paragraphs 126 to 128, International Convergence of Capital Measurement and Capital Standards – June 2006), or to make an adjustment to its LGD estimate of the exposure to reflect the presence of the recognized guarantee/credit derivative contract under the advanced IRB approach.
Revised paragraph would read as follows:
A bank relying on own-estimates of LGD has the option to adopt the treatment outlined above for banks under the foundation IRB approach (paragraphs 302 to 305, International Convergence of Capital Measurement and Capital Standards – June 2006), 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 483 and 484, International Convergence of Capital Measurement and Capital Standards – June 2006, concerning the type of guarantee must be satisfied. For credit derivatives, the requirements of paragraphs 488 and 489, International Convergence of Capital Measurement and Capital Standards – June 2006, must be satisfied. (When credit derivatives do not cover the restructuring of the underlying obligation, the partial recognition set out in paragraph 192, International Convergence of Capital Measurement and Capital Standards – June 2006, applies.)
Operational requirements for recognition of double default
130(i). A bank using an IRB approach has the option of using the substitution approach in determining the appropriate capital requirement for an exposure. However, for exposures hedged by one of the following instruments the double default framework according to paragraphs 284 (i) to 284 (iii), International Convergence of Capital Measurement and Capital Standards – June 2006, may be applied subject to the additional operational requirements set out in paragraph 307 (ii), International Convergence of Capital Measurement and Capital Standards – June 2006. A bank may decide separately for each eligible exposure to apply either the double default framework or the substitution approach.
(a) Single-name, unfunded credit derivatives (e.g. credit default swaps) or single- name guarantees.
(b) First-to-default basket products — the double default treatment will be applied to the asset within the basket with the lowest risk-weighted amount.
(c) nth-to-default basket products — the protection obtained is only eligible for consideration under the double default framework if eligible (n-1)th default protection has also been obtained or where (n-1) of the assets within the basket have already defaulted.
130(ii). The double default framework is only applicable where the following conditions are met.
(a) The risk weight that is associated with the exposure prior to the application of the framework does not already factor in any aspect of the credit protection.
(b) The entity selling credit protection is a bank, (This does not include PSEs and MDBs, even though claims on these may be treated as claims on banks according to paragraph 230, International Convergence of Capital Measurement and Capital Standards – June 2006) investment firm or insurance company (but only those that are in the business of providing credit protection, including mono-lines, re-insurers, and non-sovereign credit export agencies - By nonsovereign it is meant that credit protection in question does not benefit from any explicit sovereign counter-guarantee.), referred to as a financial firm, that:
■ is regulated in a manner broadly equivalent to that in this Framework (where there is appropriate supervisory oversight and transparency/ market discipline), or externally rated as at least investment grade by a credit rating agency deemed suitable for this purpose by supervisors;
■ had an internal rating with a PD equivalent to or lower than that associated with an external A- rating at the time the credit protection for an exposure was first provided or for any period of time thereafter; and •has an internal rating with a PD equivalent to or lower than that associated with an external investment-grade rating.
(c) The underlying obligation is:
■ a corporate exposure as defined in paragraphs 218 to 228, International Convergence of Capital Measurement and Capital Standards – June 2006, (excluding specialised lending exposures for which the supervisory slotting criteria approach described in paragraphs 275 to 282, International Convergence of Capital Measurement and Capital Standards – June 2006, is being used); or
■ A claim on a PSE that is not a sovereign exposure as defined in paragraph 229, International Convergence of Capital Measurement and Capital Standards – June 2006; or
■ A loan extended to a small business and classified as a retail exposure as defined in paragraph 231, International Convergence of Capital Measurement and Capital Standards – June 2006.
(d) The underlying obligor is not:
■ A financial firm as defined in (b); or
■ A member of the same group as the protection provider.
(e) The credit protection meets the minimum operational requirements for such instruments as outlined in paragraphs 189 to 193, International Convergence of Capital Measurement and Capital Standards – June 2006.
(f) In keeping with paragraph 190, International Convergence of Capital Measurement and Capital Standards – June 2006, for guarantees, for any recognition of double default effects for both guarantees and credit derivatives a bank must have the right and expectation to receive payment from the credit protection provider without having to take legal action in order to pursue the counterparty for payment. To the extent possible, a bank should take steps to satisfy itself that the protection provider is willing to pay promptly if a credit event should occur.
(g) The purchased credit protection absorbs all credit losses incurred on the hedged portion of an exposure that arise due to the credit events outlined in the contract.
(h) If the payout structure provides for physical settlement, then there must be legal certainty with respect to the deliverability of a loan, bond, or contingent liability. If a bank intends to deliver an obligation other than the underlying exposure, it must ensure that the deliverable obligation is sufficiently liquid so that the bank would have the ability to purchase it for delivery in accordance with the contract.
(i) The terms and conditions of credit protection arrangements must be legally confirmed in writing by both the credit protection provider and the bank.
(j) In the case of protection against dilution risk, the seller of purchased receivables must not be a member of the same group as the protection provider.
(k) There is no excessive correlation between the creditworthiness of a protection provider and the obligor of the underlying exposure due to their performance being dependent on common factors beyond the systematic risk factor. The bank has a process to detect such excessive correlation. An example of a situation in which such excessive correlation would arise is when a protection provider guarantees the debt of a supplier of goods or services and the supplier derives a high proportion of its income or revenue from the protection provider.
(Please refer to Paragraph 307 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The advanced approaches have been laid out on page 13 of the GN 4 – IRB Approach – Section C Prudential Returns General Guidance on IRB Approaches - January 2012:
The original paragraph (60) was follows
(a) Market-based approach
60. Under this approach, a Bank is permitted to calculate the risk-weighted amount of its equity exposures held in the banking book using one or both of the following two separate and distinct methods:
(i) Simple risk-weight method
A 300% risk-weight is to be applied to equity exposure in a publicly traded company (being an equity security traded on a recognized exchange)1 and a 400% risk-weight is to be applied to all other equity exposures.
1 For the definition of recognized exchange refer to SAMA's guidance document concerning the market risk issued in January 2004.
Short positions in an equity exposure (including derivative instruments) held in the banking book are permitted to offset long positions in the same equity exposure, provided that these short positions have been explicitly designated as a hedge of the long positions in that equity exposure and that they have a remaining maturity of at least one year. Other short positions (including the net short position remains after the set-off) are to be treated as if they were long positions with the relevant risk-weight applied to the absolute value of each position.
The following content would be deemed added to the original paragraph as a continuation:
In the context of maturity mismatched positions, the methodology is that for corporate exposures
(Please refer to Paragraph 345 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The advanced approaches have been laid out on page 31 of the GN 4 – IRB Approach – Section C Prudential Returns General Guidance on IRB Approaches - January 2012
The following is added to para 133 of the GN 4 – IRB Approach – Section C Prudential Returns General Guidance on IRB Approaches - January 2012
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.
(Please refer to Paragraph 480 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following text should be considered as added to Paragraph 129, page 31 of the GN 4 “Advanced IRB Approach” – IRB Approach – Section C Prudential Returns General Guidance on IRB Approaches - January 2012
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 recognise for regulatory capital purposes.
(Please refer to Paragraph 483 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following text is a new Paragraph 129-A “adjustment criteria for advanced approach”, page 31 of the GN 4 “Advanced IRB Approach” – IRB Approach – Section C Prudential Returns General Guidance on IRB Approaches - January 2012
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 410 and 411, International Convergence of Capital Measurement and Capital Standards – June 2006 and must follow all minimum requirements for assigning borrower or facility ratings set out in this document. 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.
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.
(Please refer to Paragraph 485-487 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following text is a new Paragraph 129 B “Credit derivatives - Advanced IRB Approach”, page 31 of the GN 4 “Advanced IRB Approach” – IRB Approach – Section C Prudential Returns General Guidance on IRB Approaches - January 2012
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.
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.
(Please refer to Paragraph 488 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following text is a new Paragraph 129 C “For banks using foundation LGD estimates”, page 31 of the GN 4 “Advanced IRB Approach” – IRB Approach – Section C Prudential Returns General Guidance on IRB Approaches - January 2012
The minimum requirements outlined in paragraphs 480 to 489, International Convergence of Capital Measurement and Capital Standards – June 2006, 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 BIS guidelines outlined in paragraph 302, International Convergence of Capital Measurement and Capital Standards – June 2006.
(Please refer to Paragraph 490 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following text is a new subheading (c) “Requirements specific to estimating PD and LGD (or EL) for qualifying purchased receivables ” main heading “Purchased Receivables”, New Para 75 A, page 17 of the GN 4 “Advanced IRB Approach” – IRB Approach – Section C Prudential Returns General Guidance on IRB Approaches - January 2012
Requirements specific to estimating PD and LGD (or EL) for qualifying purchased receivables
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.
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.
Minimum operational requirements
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:
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.
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:
■ 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.
■ 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.
■ 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.
■ The bank must have effective policies and procedures for monitoring on an aggregate basis single-obligor concentrations both within and across receivables pools.
■ 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.
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,
■ 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 amortisation 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.
■ To limit inappropriate draws, the bank should have effective policies and procedures for detecting, approving, monitoring, and correcting over-advances.
■ 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.
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,
■ 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.
■ Internal systems must ensure that funds are advanced only against specified supporting collateral and documentation (such as servicer attestations, invoices, shipping documents, etc.).
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
■ Regular internal and/or external audits of all critical phases of the bank ‘s receivables purchase programme.
■ Verification of the separation of duties (i) between the assessment of the seller/servicer and the assessment of the obligor and (ii) between the assessment of the seller/servicer and the field audit of the seller/servicer.
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
(Please refer to Paragraph 491-499 of International Convergence of Capital Measurement and Capital Standards – June 2006)
Page 14 of the GN 4 “(ii) Internal models method” – IRB Approach – Section F “Equity Exposure” Prudential Returns General Guidance on IRB Approaches - January 2012
The original paragraphs were as follows:
(ii) Internal models method
A Bank may use its internal models to calculate the risk-weighted amount of its equity exposures, subject to fulfilling the relevant requirements set out in the Rules described in SAMA's documents relating to the market risk amendment of 2004.
Under this method, the Bank should calculate the risk-weighted amount of its equity exposures by multiplying the potential loss of its equity exposures as derived by using its internal models (e.g. VaR models) subject to the one-tailed 99% confidence interval of the difference between quarterly returns of the exposures and an appropriate risk-free rate computed over a long-term observation period (i.e. not less than three years) by 12.5. The risk-weighted amount calculated under the internal models method should be no less than the risk-weighted amount calculated under the simple risk weight method using a 200% risk-weight for equity exposure in a publicly traded company and a 300% risk weight for all other equity exposures. Such minimum risk-weighted amount should be calculated separately using the simple risk-weight method at individual exposure level rather than at portfolio level.
The revised paragraph would read as follows
Internal Models Market Basic Approach
To be eligible for the internal models market-based approach a bank must demonstrate to its supervisor that it meets certain quantitative and qualitative minimum requirements at the outset and on an ongoing basis. A bank that fails to demonstrate continued compliance with the minimum requirements must develop a plan for rapid return to compliance, obtain its supervisor ‘s approval of the plan, and implement that plan in a timely fashion. In the interim, banks would be expected to compute capital charges using a simple risk weight approach.
Capital charge risk and quantification
The following minimum quantitative standards apply for the purpose of calculating minimum capital charges under the internal models approach.
■ The capital charge is equivalent to the potential loss on the institution ‘s equity portfolio arising from an assumed instantaneous shock equivalent to the 99th percentile, one-tailed confidence interval of the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period.
■ The estimated losses should be robust to adverse market movements relevant to the long-term risk profile of the institution ‘s specific holdings. The data used to represent return distributions should reflect the longest sample period for which data are available and meaningful in representing the risk profile of the bank ‘s specific equity holdings. The data used should be sufficient to provide conservative, statistically reliable and robust loss estimates that are not based purely on subjective or judgmental considerations. Institutions must demonstrate to supervisors that the shock employed provides a conservative estimate of potential losses over a relevant long-term market or business cycle. Models estimated using data not reflecting realistic ranges of long-run experience, including a period of reasonably severe declines in equity market values relevant to a bank ‘s holdings, are presumed to produce optimistic results unless there is credible evidence of appropriate adjustments built into the model. In the absence of built-in adjustments, the bank must combine empirical analysis of available data with adjustments based on a variety of factors in order to attain model outputs that achieve appropriate realism and conservatism. In constructing Value at Risk (VaR) models estimating potential quarterly losses, institutions may use quarterly data or convert shorter horizon period data to a quarterly equivalent using an analytically appropriate method supported by empirical evidence. Such adjustments must be applied through a well-developed and well-documented thought process and analysis. In general, adjustments must be applied conservatively and consistently over time. Furthermore, where only limited data are available, or where technical limitations are such that estimates from any single method will be of uncertain quality, banks must add appropriate margins of conservatism in order to avoid over-optimism.
■ No particular type of VaR model (e.g. variance-covariance, historical simulation, or Monte Carlo) is prescribed. However, the model used must be able to capture adequately all of the material risks embodied in equity returns including both the general market risk and specific risk exposure of the institution ‘s equity portfolio. Internal models must adequately explain historical price variation, capture both the magnitude and changes in the composition of potential concentrations, and be robust to adverse market environments. The population of risk exposures represented in the data used for estimation must be closely matched to or at least comparable with those of the bank ‘s equity exposures.
■ Banks may also use modelling techniques such as historical scenario analysis to determine minimum capital requirements for banking book equity holdings. The use of such models is conditioned upon the institution demonstrating to its supervisor that the methodology and its output can be quantified in the form of the loss percentile specified under (a).
■ Institutions must use an internal model that is appropriate for the risk profile and complexity of their equity portfolio. Institutions with material holdings with values that are highly non-linear in nature (e.g. equity derivatives, convertibles) must employ an internal model designed to capture appropriately the risks associated with such instruments.
■ Subject to supervisory review, equity portfolio correlations can be integrated into a bank ‘s internal risk measures. The use of explicit correlations (e.g. utilisation of a variance/covariance VaR model) must be fully documented and supported using empirical analysis. The appropriateness of implicit correlation assumptions will be evaluated by supervisors in their review of model documentation and estimation techniques.
■ Mapping of individual positions to proxies, market indices, and risk factors should be plausible, intuitive, and conceptually sound. Mapping techniques and processes should be fully documented and demonstrated with both theoretical and empirical evidence to be appropriate for the specific holdings. Where professional judgement is combined with quantitative techniques in estimating a holding ‘s return volatility, the judgement must take into account the relevant and material information not considered by the other techniques utilised.
■ Where factor models are used, either single or multi-factor models are acceptable depending upon the nature of an institution ‘s holdings. Banks are expected to ensure that the factors are sufficient to capture the risks inherent in the equity portfolio. Risk factors should correspond to the appropriate equity market characteristics (for example, public, private, market capitalisation industry sectors and sub-sectors, operational characteristics) in which the bank holds significant positions. While banks will have discretion in choosing the factors, they must demonstrate through empirical analyses the appropriateness of those factors, including their ability to cover both general and specific risk.
■ Estimates of the return volatility of equity investments must incorporate relevant and material available data, information, and methods. A bank may utilise independently reviewed internal data or data from external sources (including pooled data). The number of risk 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. Institutions should take appropriate measures to limit the potential of both sampling bias and survivorship bias in estimating return volatilities.
■ Risk Management processes and controls
A rigorous and comprehensive stress-testing programme must be in place. Banks are expected to subject their internal model and estimation procedures, including volatility computations, to either hypothetical or historical scenarios that reflect worst-case losses given underlying positions in both public and private equities. At a minimum, stress tests should be employed to provide information about the effect of tail events beyond the level of confidence assumed in the internal models approach.
Banks‘ overall risk management practices used to manage their banking book equity investments are expected to be consistent with the evolving sound practice guidelines issued by the Committee and national supervisors. With regard to the development and use of internal models for capital purposes, institutions must have established policies, procedures, and controls to ensure the integrity of the model and modelling process used to derive regulatory capital standards.
These policies, procedures, and controls should include the following:
■ Full integration of the internal model into the overall management information systems of the institution and in the management of the banking book equity portfolio. Internal models should be fully integrated into the institution ‘s risk management infrastructure including use in: (i) establishing investment hurdle rates and evaluating alternative investments; (ii) measuring and assessing equity portfolio performance (including the risk-adjusted performance); and (iii) allocating economic capital to equity holdings and evaluating overall capital adequacy as required under Pillar 2. The institution should be able to demonstrate, through for example, investment committee minutes, that internal model output plays an essential role in the investment management process.
■ Established management systems, procedures, and control functions for ensuring the periodic and independent review of all elements of the internal modelling process, including approval of model revisions, vetting of model inputs, and review of model results, such as direct verification of risk computations. Proxy and mapping techniques and other critical model components should receive special attention. These reviews should assess the accuracy, completeness, and appropriateness of model inputs and results and focus on both finding and limiting potential errors associated with known weaknesses and identifying unknown model weaknesses. Such reviews may be conducted as part of internal or external audit programmes, by an independent risk control unit, or by an external third party.
■ Adequate systems and procedures for monitoring investment limits and the risk exposures of equity investments.
■ The units responsible for the design and application of the model must be functionally independent from the units responsible for managing individual investments.
■ Parties responsible for any aspect of the modelling process must be adequately qualified. Management must allocate sufficient skilled and competent resources to the modelling function.
Under this method, the Bank should calculate the risk-weighted amount of its equity exposures by multiplying the potential loss of its equity exposures as derived by using its internal models (e.g. VaR models) subject to the one-tailed 99% confidence interval of the difference between quarterly returns of the exposures and an appropriate risk-free rate computed over a long-term observation period (i.e. not less than three years) by 12.5.
The risk-weighted amount calculated under the internal models method should be no less than the risk-weighted amount calculated under the simple risk weight method using a 200% risk-weight for equity exposure in a publicly traded company and a 300% risk-weight for all other equity exposures. Such minimum risk-weighted amount should be calculated separately using the simple risk-weight method at individual exposure level rather than at portfolio level.
(Please refer to Paragraph 525, 527 and 528 of International Convergence of Capital Measurement and Capital Standards – June 2006)
ANNEXURE 5: Document Enhanced: SAMA’s Implementation Document Titled “Guidance on Application Procedures, for Adoption of the IRB Approach by Banks Licensed in Saudi Arabia”
Page 51 Guidance On Application Procedures “PD/LGD/EAD estimation”, For Adoption Of The IRB Approach By Banks Licensed In Saudi Arabia
The original paragraph was as follows
4.1.9 Banks may utilise 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.
The revised paragraph would read as follows
Banks should make use of other quantitative validation tools and comparisons with 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 model must be based on long data histories, covering a range of economic conditions, and ideally one or more complete business cycles.
(Refer Paragraph 532 of International Convergence of Capital Measurement and Capital Standards – June 2006)
Page 19, 4.6.3, (last bullet point) Guidance On Application Procedures, For Adoption Of The IRB Approach By Banks Licensed In Saudi Arabia
The original bullet point read as follows:
Requirements for using models:
Banks should have procedures for management 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.
The revised bullet would read as follows:
Since the evaluation of actual performance to expected performance over time provides a basis for banks to refine and adjust internal models on an ongoing basis, it is expected that banks using internal models will have established well- articulated model review standards. These standards are especially important for situations where actual results significantly deviate from expectations and where the validity of the internal model is called into question. These standards must take account of business cycles and similar systematic variability in equity returns. All adjustments made to internal models in response to model reviews must be well documented and consistent with the bank‘s model review standards.
(Refer Paragraph 534 of International Convergence of Capital Measurement and Capital Standards – June 2006)
ANNEXURE 6: Document Enhanced: SAMA's Finalized Guidance Document for the Implementation of Basel II.5 , 2012
The following guideline to read as part of Section 3.8 “Securitization liquidity facilities – IRB Approach”, Page 14 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
If a bank ‘s internal assessment process is no longer considered adequate, SAMA may preclude the bank from applying the internal assessment approach to its ABCP (Asset Backed Commercial Paper) 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 Supervisory Formula or, if not available, to the method described in paragraph 639, International Convergence of Capital Measurement and Capital Standards
(Refer to Paragraph 622 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guideline to be included in Section G “IRB Approaches”, Page 23 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
Liquidity Facility
Liquidity facilities are treated as any other securitisation exposure and receive a CCF of 100% unless specified differently in paragraphs 638 to 641 of International Convergence of Capital Measurement and Capital Standards – June 2006. If the facility is externally rated, the bank may rely on the external rating under the RBA. If the facility is not rated and an inferred rating is not available, the bank must apply the SF, unless the IAA can be applied.
An eligible liquidity facility that can only be drawn in the event of a general market disruption as defined in paragraph 580 of International Convergence of Capital Measurement and Capital Standards – June 2006, is assigned a 20% CCF under the SF. That is, an IRB bank is to recognise 20% of the capital charge generated under the SF for the facility. If the eligible facility is externally rated, the bank may rely on the external rating under the RBA provided it assigns a 100% CCF rather than a 20% CCF to the facility.
When it is not practical for the bank to use either the bottom-up approach or the top-down approach for calculating KIRB, the bank may, on an exceptional basis and subject to SAMA‘s consent, temporarily be allowed to apply the following method. If the liquidity facility meets the definition in paragraph 578 or 580 of International Convergence of Capital Measurement and Capital Standards – June 2006, the highest risk weight assigned under the standardised approach to any of the underlying individual exposures covered by the liquidity facility can be applied to the liquidity facility. If the liquidity facility meets the definition in paragraph 578 of International Convergence of Capital Measurement and Capital Standards – June 2006, the CCF must be 50% for a facility with an original maturity of one year or less, or 100% if the facility has an original maturity of more than one year. If the liquidity facility meets the definition in paragraph 580 of International Convergence of Capital Measurement and Capital Standards – June 2006, the CCF must be 20%. In all other cases, the notional amount of the liquidity facility must deducted.
(Refer to Paragraph 637- 639 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guideline to be included in Section G “IRB Approaches”, Page 23 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
Treatment of credit risk mitigation for securitization exposures
As with the RBA, banks are required to apply the CRM techniques as specified in the foundation IRB approach of Section III when applying the SF. The bank may reduce the capital charge proportionally when the credit risk mitigant covers first losses or losses on a proportional basis. For all other cases, the bank must assume that the credit risk mitigant covers the most senior portion of the securitisation exposure (i.e. that the most junior portion of the securitisation exposure is uncovered). Examples for recognising collateral and guarantees under the SF are provided in Annex 7 of International Convergence of Capital Measurement and Capital Standards – June 2006.
(Refer to Paragraph 642 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guideline to be included in Section G “IRB Approaches”, Page 23 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
Capital requirement for early amortization provision
An originating bank must use the methodology and treatment described in paragraphs 590 to 605 of International Convergence of Capital Measurement and Capital Standards – June 2006, for determining if any capital must be held against the investors' interest. For banks using the IRB approach to securitisation, investors 'interest is defined as investors 'drawn balances related to securitisation exposures and EAD associated with investors ‘undrawn lines related to securitisation exposures.
(Refer to Paragraph 643 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guideline to be included in B “Specific Changes with regard to Market Risk Under Basel II.5” - Page 20 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
709(iii). The capital charge 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.
(Refer to Paragraph 709(iii) of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guideline to be included in Section 2 “Prudent valuation guidance ”, Page 70 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
The original paragraph was as follows:
Prudent valuation guidance
690. This section provides banks with guidance on prudent valuation for positions in the trading book. This guidance is especially important for less liquid positions which, although they will not be excluded from the trading book solely on grounds of lesser liquidity, raise supervisory concerns about prudent valuation.
The revised paragraph would read as follows:
Prudent valuation guidance
690). This section provides banks with guidance on prudent valuation for positions that are accounted for at fair value, whether they are in the trading book or in the banking book. This guidance is especially important for positions without actual market prices or observable inputs to valuation, as well as less liquid positions which, raise supervisory concerns about prudent valuation. The valuation guidance set forth below is not intended to require banks to change valuation procedures for financial reporting purposes. SAMA would assess a bank ‘s valuation procedures for consistency with this guidance. One factor in a supervisor ‘s assessment of whether a bank must take a valuation adjustment for regulatory purposes under paragraphs 718(cx) to 718(cxii) of International Convergence of Capital Measurement and Capital Standards – June 2006, should be the degree of consistency between the bank ‘s valuation procedures and these guidelines.
(Refer to revisions to the Basel II Market Risk Framework 2010 (718 c))
The following guideline to be included in Section 2 “Prudent valuation guidance” (i). Systems and controls, Page 70 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
The original paragraph was as follows:
Systems and controls
692. Banks must establish and maintain adequate systems and controls sufficient to give management and supervisors the confidence that their valuation estimates are prudent and reliable. These systems must be integrated with other risk management systems within the organisation (such as credit analysis). Such systems must include:
■ Documented policies and procedures for the process of valuation. This includes clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, end of the month and ad-hoc verification procedures; and
■ Clear and independent (i.e. independent of front office) reporting lines for the department accountable for the valuation process. The reporting line should ultimately be to a main board executive director.
The revised paragraph would read as follows:
692. Banks must establish and maintain adequate systems and controls sufficient to give management and SAMA the confidence that their valuation estimates are prudent and reliable. These systems must be integrated with other risk management systems within the organisation (such as credit analysis). Such systems must include:
■ Documented policies and procedures for the process of valuation. This includes clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, guidelines for the use of unobservable inputs reflecting the bank ‘s assumptions of what market participants would use in pricing the position, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, end of the month and ad-hoc verification procedures; and
■ Clear and independent (ie independent of front office) reporting lines for the department accountable for the valuation process. The reporting line should ultimately be to a main board executive director.
(Refer to revisions to the Basel II Market Risk Framework 2010 (718 cii))
The following guideline to be included in Section 2 “Prudent valuation guidance” (ii) Valuation Methodologies, Marking to Market, Page 70 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
Original paragraph was as follows:
694. Banks must mark-to-market as much as possible. The more prudent side of bid/offer must be used unless the institution is a significant market maker in a particular position type and it can close out at mid-market.
The revised paragraph would read as follows:
Banks must mark-to-market as much as possible. The more prudent side of bid/offer should be used unless the institution is a significant market maker in a particular position type and it can close out at mid-market. Banks should maximise the use of relevant observable inputs and minimise the use of unobservable inputs when estimating fair value using a valuation technique. However, observable inputs or transactions may not be relevant, such as in a forced liquidation or distressed sale, or transactions may not be observable, such as when markets are inactive. In such cases, the observable data should be considered, but may not be determinative.
(Refer to revisions to the Basel II Market Risk Framework 2010 (718 civ))
The following guideline to be included in Section 2 “Prudent valuation guidance” (ii) Valuation Methodologies, Marking to Model, Page 70 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 212
(In addition to the original text)
The original paragraph was as follows
Marking to model
695. Where marking-to-market is not possible, banks may mark-to-model, where this can be demonstrated to be prudent. Marking-to-model is defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input. When marking to model, an extra degree of conservatism is appropriate. Supervisory authorities will consider the following in assessing whether a mark-to-model valuation is prudent:
■ Senior management should be aware of the elements of the trading book which are subject to mark to model and should understand the materiality of the uncertainty this creates in the reporting of the risk/performance of the business.
■ Market inputs should be sourced, to the extent possible, in line with market prices (as discussed above). The appropriateness of the market inputs for the particular position being valued should be reviewed regularly.
■ Where available, generally accepted valuation methodologies for particular products should be used as far as possible.
■ Where the model is developed by the institution itself, it should be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process. The model should be developed or approved independently of the front office. It should be independently tested. This includes validating the mathematics, the assumptions and the software implementation.
■ There should be formal change control procedures in place and a secure copy of the model should be held and periodically used to check valuations.
■ Risk management should be aware of the weaknesses of the models used and how best to reflect those in the valuation output.
■ The model should be subject to periodic review to determine the accuracy of its performance (e.g. assessing continued appropriateness of the assumptions, analysis of P&L versus risk factors, comparison of actual close out values to model outputs).
■ Valuation adjustments should be made as appropriate, for example, to cover the uncertainty of the model valuation (see also valuation adjustments in 698 to 701).
The revised paragraph would read as follow
Only where marking-to-market is not possible, should banks mark-to-model, but this must be demonstrated to be prudent. Marking-to-model is defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input. When marking to model, an extra degree of conservatism is appropriate. Supervisory authorities will consider the following in assessing whether a mark-to-model valuation is prudent:
■ Senior management should be aware of the elements of the trading book or of other fair-valued positions which are subject to mark to model and should understand the materiality of the uncertainty this creates in the reporting of the risk/performance of the business.
■ Market inputs should be sourced, to the extent possible, in line with market prices (as discussed above). The appropriateness of the market inputs for the particular position being valued should be reviewed regularly.
■ Where available, generally accepted valuation methodologies for particular products should be used as far as possible.
■ Where the model is developed by the institution itself, it should be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process. The model should be developed or approved independently of the front office. It should be independently tested. This includes validating the mathematics, the assumptions and the software implementation.
■ There should be formal change control procedures in place and a secure copy of the model should be held and periodically used to check valuations.
■ Risk management should be aware of the weaknesses of the models used and how best to reflect those in the valuation output.
■ The model should be subject to periodic review to determine the accuracy of its performance (eg assessing continued appropriateness of the assumptions, analysis of P&L versus risk factors, comparison of actual close out values to model outputs).
■ Valuation adjustments should be made as appropriate, for example, to cover the uncertainty of the model valuation (see also valuation adjustments in 698 to 701).
(Refer to revisions to the Basel II Market Risk Framework 2010 (718 cv))
The following guideline to be included in Section 2 “Prudent valuation guidance” (iii) Valuation adjustments or reserves, Page 71/72 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
The original paragraph was as follows:
698. Banks must establish and maintain procedures for considering valuation adjustments/reserves. Supervisory authorities expect banks using third-party valuations to consider whether valuation adjustments are necessary. Such considerations are also necessary when marking to model.
The revised paragraph would read as follow
698. As part of their procedures for marking to market, banks must establish and maintain procedures for considering valuation adjustments/reserves. Supervisory authorities expect banks using third-party valuations to consider whether valuation adjustments are necessary. Such considerations are also necessary when marking to model.
(Refer to revisions to the Basel II Market Risk Framework 2010 (718 cviii))
The following guideline would be a new subsection to be included in Section 2 “Prudent valuation guidance” (iv) Adjustment to the current valuation of less liquid positions for regulatory capital purposes, Page 71/72 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
Adjustment to the current valuation of less liquid positions for regulatory capital purposes
701 A. Banks must establish and maintain procedures for judging the necessity of and calculating an adjustment to the current valuation of less liquid positions for regulatory capital purposes. This adjustment may be in addition to any changes to the value of the position required for financial reporting purposes and should be designed to reflect the illiquidity of the position.SAMA expect banks to consider the need for an adjustment to a position ‘s valuation to reflect current illiquidity whether the position is marked to market using market prices or observable inputs, third-party valuations or marked to model.
Bearing in mind that assumptions made about liquidity in the market risk capital charge may not be consistent with the bank ‘s ability to sell or hedge out less liquid positions where appropriate, banks must take an adjustment to the current valuation of these positions and review their continued appropriateness on an on-going basis. Reduced liquidity may have arisen from market events. Additionally, close-out prices for concentrated positions and/or stale positions should be considered in establishing the adjustment. Banks must consider all relevant factors when determining the appropriateness of the adjustment for less liquid positions. These factors may include, but are not limited to, the amount of time it would take to hedge out the position/risks within the position, the average volatility of bid/offer spreads, the availability of independent market quotes (number and identity of market makers), the average and volatility of trading volumes (including trading volumes during periods of market stress), market concentrations, the aging of positions, the extent to which valuation relies on marking-to-model, and the impact of other model risks not included in paragraph 718 (cx), the Basel II Market Risk Framework 2010.
For complex products including, but not limited to, securitisation exposures and n-th-to-default credit derivatives, banks must explicitly assess the need for valuation adjustments to reflect two forms of model risk: the model risk associated with using a possibly incorrect valuation methodology; and the risk associated with using unobservable (and possibly incorrect) calibration parameters in the valuation model.
The adjustment to the current valuation of less liquid positions made under paragraph 718 (cxi), the Basel II Market Risk Framework 2010, must impact Tier 1 regulatory capital and may exceed those valuation adjustments made under financial reporting standards and paragraphs 718 (cviii) and 718 (cix), the Basel II Market Risk Framework 2010 (Refer to revisions to the Basel II Market Risk Framework 2010 (718 cx))
The following guideline to be included in B “Specific Changes with regard to Market Risk Under Basel II.5”, Page 20 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
Original Paragraph to be deleted:
• Para 709 (ii)1 relating to co-relation Trading portfolio – refer to para 709.
• Para 709 (ii-1)1: Transitional period to 31/12/2013 for securitized exposure which are not included in the correlation trading portfolio according to para 709ii.
• Para 712 (ii)1 of the Basel II Framework relating to specific risk for unrated securitized securities will be amended.
• Changes as per para 712iii.
The amended paragraph would read as follows:
709(ii). The minimum capital requirement is expressed in terms of two separately calculated charges, 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. The bank must, however, determine the specific risk capital charge for the correlation trading portfolio as follows: The bank computes (i) the total specific risk capital charges that would apply just to the net long positions from the net long correlation trading exposures combined, and (ii) the total specific risk capital charges that would apply just to the net short positions from the net short correlation trading exposures combined. The larger of these total amounts is then the specific risk capital charge for the correlation trading portfolio.
709(ii-1-). During a transitional period until 31 December 2013, the bank may exclude positions in securitisation instruments which are not included in the correlation trading portfolio from the calculation according to paragraph 709(ii) and determine the specific risk capital charge as follows: The bank computes (i) the total specific risk capital charge that would apply just to the net long positions in securitisation instruments in the trading book, and (ii) the total specific risk capital charge that would apply just to the net short positions in securitisation instruments in the trading book. The larger of these total amounts is then the specific risk capital charge for the securitisation positions in the trading book. This calculation must be undertaken separately from the calculation for the correlation trading portfolio.
709(iii). The capital charge 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. (This clause is also referred to in a row above, in this annexure)
712(ii). 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:
• To apply a higher specific risk charge to such instruments; and/or
• To disallow offsetting for the purposes of defining the extent of general market risk between such instruments and any other debt instruments.
(Refer to Paragraph 709(ii), 709(ii-1-), and 712(ii) of Revisions to the Basel II Market Risk Framework – Dec 2010.)
(Refer to Paragraph 709(iii) International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guideline to be included in 718(xxi) “Specific and general Market Risk”, Page 87 of the SAMA’s Finalized Guidance Document for the Implementation of Basel II.5, 2012
(In addition to the original text)
Original Paragraph to be deleted:
718 (xxi) The capital charge for specific risk will be 8%, unless the portfolio is both liquid and well-diversified, in which case the charge will be 4%. Given the different characteristics of national markets in terms of marketability and concentration, national authorities will have discretion to determine the criteria for liquid and diversified portfolios. The general market risk charge will be 8%.
The amended paragraph would read as follows:
The capital charge for specific risk and for general market risk will each be 8%.
(Refer to Paragraph 718(xxi) of Revisions to the Basel II Market Risk Framework – Dec 2010.)
ANNEXURE 7: Document Enhanced: Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004
The following guideline to be included in Section 4.3 “Qualitative Standards” (b), Page 46 of the SAMA’s Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004 Qualitative Standards
The unit should also conduct the initial and on-going validation of the internal model.
The following footnotes to be included in Section 4.3 Qualitative Standards of theSAMA’s Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004
Page 46 Section 4.3 (b) - Further guidance regarding the standards that SAMA will expect can be found in paragraph 718(xcix) of Revisions to the Basel II market risk framework – Dec 2010
Page 46 Section 4.3 (c) - The report, Risk management guidelines for derivatives, issued by the Basel Committee in July 1994 further discusses the responsibilities of the board of directors and senior management.
Page 47 Section 4.3 (f) - Though banks will have some discretion as to how they conduct stress tests, their SAMA will wish to see that they follow the general lines set out in paragraphs 718(Lxxvii) to 718(Lxxxiiii) of Revisions to the Basel II market risk framework – Dec 2010f
(Refer to Paragraph 718(Lxxiv) of Revisions to the Basel II market risk framework – Dec 2010)
The following guideline is added to Section 4.4 “Specification of Market Risk Factors” (a), Page 48 of the SAMA’s Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004
Specification of market risk factors
(a) Factors that are deemed relevant for pricing should be included as risk factors in the value-at-risk model. Where a risk factor is incorporated in a pricing model but not in the value-at-risk model, the bank must justify this omission to the satisfaction of SAMA. In addition, the value-at-risk model must capture nonlinearities for options and other relevant products (e.g. mortgage-backed securities, tranched exposures or n-th-to-default credit derivatives), as well as correlation risk and basis risk (e.g. between credit default swaps and bonds). Moreover, SAMA has to be satisfied that proxies are used which show a good track record for the actual position held (i.e. an equity index for a position in an individual stock).
(Refer to Paragraph 718(Lxxv)(a) of Revisions to the Basel II Market Risk Frameworks – Dec 2010)
The following guideline to be included in Section 4.5 “Quantitative Standards”, Page 50 of the SAMA’s Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004
Quantitative standards
Original Paragraph to be deleted:
(c) In calculating value-at-risk, an instantaneous price shock equivalent to a 10 days movement in prices is to be used, i.e. the minimum "holding period" will be ten trading days. Banks may use value-at-risk numbers calculated according to shorter holding periods scaled up to ten days by the square root of time (for the treatment of options, also see (h) below).
The amended paragraph would reads as follows:
(c) In calculating value-at-risk, an instantaneous price shock equivalent to a 10 days movement in prices is to be used, i.e. the minimum "holding period" will be ten trading days. Banks may use value-at-risk numbers calculated according to shorter holding periods scaled up to ten days by the square root of time (for the treatment of options, also see (h) below). A bank using this approach must periodically justify the reasonableness of its approach to the satisfaction of SAMA.
Original Paragraph to be deleted:
(e) Banks should update their data sets no less frequently than once every three months and should also reassess them whenever market prices are subject to material changes. SAMA may also require a bank to calculate its value-at-risk using a shorter observation period if, in SAMA ‘s judgment, this is justified by a significant upsurge in price volatility.
The amended paragraph would reads as follows:
(e) Banks should update their data sets no less frequently than once every three months and should also reassess them whenever market prices are subject to material changes. This updating process must be flexible enough to allow for more frequent updates SAMA may also require a bank to calculate its value-at-risk using a shorter observation period if, in the SAMA ‘s judgment, this is justified by a significant upsurge in price volatility.
Original Paragraph to be deleted:
(i) Each bank must meet, on a daily basis, a capital requirement expressed as the higher of (I) its previous day‘s value- at-risk number measure according to the parameters specified in this section and (ii) an average of the daily value-at-risk measures on each of the preceding sixty business days, multiplied by a multiplication factor.
The amended paragraph would reads as follows:
(i) Each bank must meet, on a daily basis, a capital requirement expressed as the higher of (I) its previous day‘s value- at-risk number measure according to the parameters specified in this section and (ii) an average of the daily value-at-risk measures on each of the preceding sixty business days, multiplied by a multiplication factor.
In addition, a bank must calculate a ‗stressed value-at-risk‘ measure. This measure is intended to replicate a value-at-risk calculation that would be generated on the bank‘s current portfolio if the relevant market factors were experiencing a period of stress; and should therefore be based on the 10-day, 99th percentile, one-tailed confidence interval value-at- risk measure of the current portfolio, with model inputs calibrated to historical data from a continuous 12-month period of significant financial stress relevant to the bank‘s portfolio. The period used must be approved by SAMA and regularly reviewed. As an example, for many portfolios, a 12-month period relating to significant losses in 2007/2008 would adequately reflect a period of such stress; although other periods relevant to the current portfolio must be considered by the bank.
As no particular model is prescribed under paragraph (f) above, different techniques might need to be used to translate the model used for value-at-risk into one that delivers a stressed value-at-risk. For example, banks should consider applying anti-thetic14 data, or applying absolute rather than relative volatilities to deliver an appropriate stressed value- at-risk. The stressed value-at-risk should be calculated at least weekly.
Each bank must meet, on a daily basis, a capital requirement expressed as the sum of:
■ The higher of (1i) its previous day‘s value-at-risk number measured according to the parameters specified in this section (VaRt-1); and (2ii) an average of the daily value-at-risk measures on each of the preceding sixty business days (VaRavg), multiplied by a multiplication factor (mc);
plus.
■ The higher of (1) its latest available stressed-value-at-risk number calculated according to (i) above (sVaRt-1); and (2) an average of the stressed value-at-risk numbers calculated according to (i) above over the preceding sixty business days (sVaRavg), multiplied by a multiplication factor (ms).
Therefore, the capital requirement (c) is calculated according to the following formula: 
Original Paragraph to be deleted:
(j) The multiplication factor will be set by SAMA on the basis of their assessment of the quality of the bank‘s risk management system, subject to an absolute minimum of 3. Banks will be required to add to this factor a "plus" directly related to the ex-post performance of the model, thereby introducing a built-in positive incentive to keep high the predictive quality of the model. The plus will range from 0 to 1 based on the outcome of so-called "backtesting". If the backtesting results are satisfactory and the bank meets all of the qualitative and quantative standards the plus factor could be zero.
In specific the following methods is to be appropriated:
Multiplication Factor
The multiplication factor is the summation of the following three elements.
(a) The minimum multiplication factor of 3;
(b) The "plus" factor ranging from 0 to 1 based on the number of back testing exceptions in the past 250 trading days as set out in Table below, or the backtesting "plus" factor agreed with SAMA; and
(c) Any additional "plus" factor as agreed with SAMA
"Plus" Factor Based on the Number of Backtesting
Exceptions for the Past 250 Trading Days
Number of Exceptions "Plus" factor
0 0.00 1 0.00 Green zone 2 0.00 3 0.00 4 0.00 5 0.40 6 0.50 Yellow zone 7 0.65 8 0.75 9 0.85 Red zone 10 or more 1.00
The amended paragraph would reads as follows:
The multiplication factors mc and ms will be set by SAMA on the basis of their assessment of the quality of the bank‘s risk management system, subject to an absolute minimum of 3 for mc and an absolute minimum of 3 for ms. Banks will be required to add to these factors 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. The plus will range from 0 to 1 based on the outcome of so-called "backtesting. " The backtesting results applicable for calculating the plus are based on value-at-risk only and not stressed value-at-risk. If the backtesting results are satisfactory and the bank meets all of the qualitative standards set out in paragraph 718(Lxxiv), Revisions to the Basel II Market Risk Frameworks – Dec 2010, the plus factor could be zero. The Annex 10a of this Framework (International Convergence of Capital Measurement and Capital Standards – June 2006) presents in detail the approach to be applied for backtesting and the plus factor. SAMA will have national discretion to require banks to perform backtesting on either hypothetical (i.e. using changes in portfolio value that would occur were end-of-day positions to remain unchanged), or actual trading (i.e. excluding fees, commissions, and net interest income) outcomes, or both.
Original Paragraph to be deleted:
(k) As stated earlier in Section 4.1 banks using models will be subject to a separate capital charge to cover the specific risk of interest rate related instruments and equity securities as defined in the standardized approach to the extent that this risk is not incorporated into their models. However, for banks using models, the total specific risk charge applied to interest rate related instruments or to equities should in no case be less than half the specific risk charges calculated according to the standardized methodology.
The amended paragraph would reads as follows:
Banks using models will also be subject to a capital charge to cover specific risk (as defined under the standardised approach for market risk) of interest rate related instruments and equity securities. The manner in which the specific risk capital charge is to be calculated is set out in paragraphs 718(Lxxxvii) to 718(xcviii), Revisions to the Basel II Market Risk Frameworks – Dec 2010
The following footnotes to be included in Section 4.5 of the SAMA‘s Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004
Page 50 Section 4.5 (d) - A bank may calculate the value-at-risk estimate using a weighting scheme that is not fully consistent with (d) as long as that method results in a capital charge at least as conservative as that calculated according to (d)
Page 52 Section 4.5 (j) - Firms should consider modelling valuation changes that are based on the magnitude of historic price movements, applied in both directions – irrespective of the direction of the historic movement.
(Refer to Paragraph 718(Lxxvi) of Revisions to the Basel II Market Risk Frameworks – Dec 2010)
The following guidelines to be included in Section 4.9 “Combination of Internal Models and the Standardized Methodology” point (a) Pg 58 of theSAMA’s Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004
(The following is added to the original content)
However, banks may incur risks in positions which are not captured by their models, for example, in remote locations, in minor currencies or in negligible business areas. Such risks should be measured according to the standardised methodology
(Refer to Paragraph 718(Lxxxvi) of Revisions to the Basel II market risk framework – Dec 2010)
The following guidelines to be included in Section 4.7" Stress Testing" (a)Scenarios requiring no simulations by the bank, Pg 56 of the SAMA‘s Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004
The original paragraph was as follows
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, for example the 1987 equity crash, the ERM crisis of 1993 or the fall in bond markets in the first quarter of 1994, incorporating both the large 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 correlation. Applying this test would require an evaluation of the historical range of variation for volatilities and correlation‘s 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. The 1987 equity crash, the suspension of the ERM, or the fall in bond markets in the first quarter of 1994, for example, all involved correlation within risk factors approaching the extreme values of 1 or -1 for several days at the height of the disturbance.
The revised paragraph would read as follows:
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, for example, the 1987 equity crash, the Exchange Rate Mechanism crises of 1992 and 1993 or, the fall in bond markets in the first quarter of 1994, the 1998 Russian financial crisis, the 2000 bursting of the technology stock bubble or the 2007/2008 sub-prime crisis, incorporating both the large 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 above-mentioned situations involved correlations within risk factors approaching the extreme values of 1 or -1 for several days at the height of the disturbance.
(Refer to Paragraph 718 (Lxxxii of Revisions to the Basel II Market Risk Frameworks – Dec 2010
The following guidelines to be included as a separate section “Treatment of specific risk” on Pg 53 of the SAMA’s Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004 as a replacement of the original section 4.6, Specific Risk Calculation, Pg 53 of theSAMA’s Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004.
Where a bank has a VaR measure that incorporates specific risk from equity risk positions and where the supervisor has determined that the bank meets all the qualitative and quantitative requirements for general market risk models, as well as the additional criteria and requirements set out in paragraphs 718(Lxxxviii) to 718(xci-2-) Revisions to the Basel II market risk framework – Dec 2010, the bank is not required to subject its equity positions to the capital charge according to the standardised measurement method as specified in paragraphs 718(xix) to 718(xxviii) Revisions to the Basel II market risk framework – Dec 2010.
For interest rate risk positions other than securitisation exposures and n-th-to-default credit derivatives, the bank will not be required to subject these positions to the standardised capital charge for specific risk, as specified in paragraphs 709(ii) to 718, Revisions to the Basel II market risk framework – Dec 2010, when all of the following conditions hold:
■ The bank has a value-at-risk measure that incorporates specific risk and SAMA has determined that the bank meets all the qualitative and quantitative requirements for general market risk models, as well as the additional criteria and requirements set out in paragraphs 718(Lxxxviii) to 718(xci-2-), Revisions to the Basel II market risk framework – Dec 2010; and
■ SAMA is satisfied that the bank ‘s internally developed approach adequately captures incremental default and migration risks for positions subject to specific interest rate risk according to the standards laid out in paragraphs 718(xcii) and 718(xciii), Revisions to the Basel II market risk framework – Dec 2010.
The bank is allowed to include its securitisation exposures and n-th-to-default credit derivatives in its value-at-risk measure. Notwithstanding, it is still required to hold additional capital for these products according to the standardised measurement methodology, with the exceptions noted in paragraphs 718(xcv) to 718(xcviii), Revisions to the Basel II market risk framework – Dec 2010.
Treatment of specific risk
The criteria for supervisory recognition of banks 'modelling of specific risk require that a bank ‘s model must capture all material components of price risk Banks need not capture default and migration risks for positions subject to the incremental risk capital charge referred to in paragraphs 718(xcii) and 718(xciii) Revisions to the Basel II market risk framework – Dec 2010) and be responsive to changes in market conditions and compositions of portfolios. In particular, the model must:
• Explain the historical price variation in the portfolio; (The key ex ante measures of model quality are "goodness-of-fit" measures which address the question of how much of the historical variation in price value is explained by the risk factors included within the model. One measure of this type which can often be used is an R-squared measure from regression methodology. If this measure is to be used, the risk factors included in the bank ‘s model would be expected to be able to explain a high percentage, such as 90% of the historical price variation or the model should explicitly include estimates of the residual variability not captured in the factors included in this regression. For some types of models, it may not be feasible to calculate a goodness-of-fit measure. In such instance, a bank is expected to work with SAMA to define an acceptable alternative measure which would meet this regulatory objective.)
• Capture concentrations (magnitude and changes in composition); (The bank would be expected to demonstrate that the model is sensitive to changes in portfolio construction and that higher capital charges are attracted for portfolios that have increasing concentrations in particular names or sectors.)
• Be robust to an adverse environment; (The bank should be able to demonstrate that the model will signal rising risk in an adverse environment. This could be achieved by incorporating in the historical estimation period of the model at least one full credit cycle and ensuring that the model would not have been inaccurate in the downward portion of the cycle. Another approach for demonstrating this is through simulation of historical or plausible worst-case environments.)
• Capture name-related basis risk; (Banks should be able to demonstrate that the model is sensitive to material idiosyncratic differences between similar but not identical positions, for example debt positions with different levels of subordination, maturity mismatches, or credit derivatives with different default events.)
• Capture event risk; (For equity positions, events that are reflected in large changes or jumps in prices must be captured, e.g. merger break-ups/takeovers. In particular, firms must consider issues related to survivorship bias.)
• Be validated through backtesting (Aimed at assessing whether specific risk, as well as general market risk, is being captured adequately.)
The bank's model must conservatively assess the risk arising from less liquid positions and/or positions with limited price transparency under realistic market scenarios. In addition, the model must meet minimum data standards. Proxies may be used only where available data is insufficient or is not reflective of the true volatility of a position or portfolio, and only where they are appropriately conservative.
Further, as techniques and best practices evolve, banks should avail themselves of these advances.
1- Banks which apply modelled estimates of specific risk are required to conduct backtesting aimed at assessing whether specific risk is being accurately captured. The methodology a bank should use for validating its specific risk estimates is to perform separate backtests on sub-portfolios using daily data on sub-portfolios subject to specific risk. The key sub- portfolios for this purpose are traded debt and equity positions. However, if a bank itself decomposes its trading portfolio into finer categories (e.g. emerging markets, traded corporate debt, etc.), it is appropriate to keep these distinctions for sub-portfolio backtesting purposes. Banks are required to commit to a sub-portfolio structure and stick to it unless it can be demonstrated to SAMA that it would make sense to change the structure.
2- Banks are required to have in place a process to analyse exceptions identified through the backtesting of specific risk. This process is intended to serve as the fundamental way in which banks correct their models of specific risk in the event, they become inaccurate. There will be a presumption that models that incorporate specific risk are "unacceptable" if the results at the sub-portfolio level produce a number of exceptions commensurate with the Red Zone as defined in Annex 10a of this Framework (International Convergence of Capital Measurement and Capital Standards – June 2006). Banks with "unacceptable" specific risk models are expected to take immediate action to correct the problem in the model and to ensure that there is a sufficient capital buffer to absorb the risk that the backtest showed had not been adequately captured.
In addition,
The bank must have an approach in place to capture in its regulatory capital default risk and migration risk in positions subject to a capital charge for specific interest rate risk, with the exception of securitisation exposures and n-th-to-default credit derivatives, that are incremental to the risks captured by the VaR-based calculation as specified in paragraph 718(Lxxxviii) of Revisions to the Basel II market risk framework – Dec 2010 ("incremental risks"). No specific approach for capturing the incremental default risks is prescribed; The Committee provides guidelines to specify the positions and risks to be covered by this incremental risk capital charge. meets its aim.
The bank must demonstrate that it the approach used to capture incremental risks meets a soundness standard comparable to that of the internal-ratings based approach for credit risk as set forth in this Framework, under the assumption of a constant level of risk, and adjusted where appropriate to reflect the impact of liquidity, concentrations, hedging, and optionality. A bank that does not capture the incremental default risks through an internally developed approach must use the specific risk capital charges under the standardised measurement method as set out in paragraphs 710 to 718 and 718(xxi) of Revisions to the Basel II market risk framework – Dec 2010 / International Convergence of Capital Measurement and Capital Standards – June 2006 (for paragraph not superseded by Revisions to the Basel II market risk framework, 2010.
Subject toSAMA‘s approval, a bank may incorporate its correlation trading portfolio in an internally developed approach that adequately captures not only incremental default and migration risks, but all price risks ("comprehensive risk measure"). The value of such products is subject in particular to the following risks which must be adequately captured:
• the cumulative risk arising from multiple defaults, including the ordering of defaults, in tranched products;
• credit spread risk, including the gamma and cross-gamma effects;
• volatility of implied correlations, including the cross effect between spreads and correlations;
• basis risk, including both:
• the basis between the spread of an index and those of its constituent single names; and
• the basis between the implied correlation of an index and that of bespoke portfolios;
• recovery rate volatility, as it relates to the propensity for recovery rates to affect tranche prices; and
• to the extent the comprehensive risk measure incorporates benefits from dynamic hedging, the risk of hedge slippage and the potential costs of rebalancing such hedges.
The approach must meet all of the requirements specified in paragraphs 718(XCiii), 718(XCvi) and 718(xcvii) of Revisions to the Basel II market risk framework – Dec 2010. This exception only applies to banks that are active in buying and selling these products. For the exposures that the bank does incorporate in this internally developed approach, the bank will be required to subject them to a capital charge equal to the higher of the capital charge according to this internally developed approach and 8% of the capital charge for specific risk according to the standardised measurement method. It will not be required to subject these exposures to the treatment according to paragraph 718(XCiii) of Revisions to the Basel II market risk framework – Dec 2010. It must, however, incorporate them in both the value-at-risk and stressed value-at-risk measures
For a bank to apply this exception, it must
• Have sufficient market data to ensure that it fully captures the salient risks of these exposures in its comprehensive risk measure in accordance with the standards set forth above;
• Demonstrate (for example, through backtesting) that its risk measures can appropriately explain the historical price variation of these products; and
• Ensure that it can separate the positions for which it holds approval to incorporate them in its comprehensive risk measure from those positions for which it does not hold this approval.
In addition to these data and modelling criteria, for a bank to apply this exception it must regularly apply a set of specific, predetermined stress scenarios to the portfolio that receives internal model regulatory capital treatment (i.e., the ‗correlation trading portfolio‘). These stress scenarios will examine the implications of stresses to (i) default rates, (ii) recovery rates, (iii) credit spreads, and (iv) correlations on the correlation trading desk‘s P&L. The bank must apply these stress scenarios at least weekly and report the results, including comparisons with the capital charges implied by the banks‘ internal model for estimating comprehensive risks, at least quarterly to SAMA. Any instances where the stress tests indicate a material shortfall of the comprehensive risk measure must be reported to SAMA in a timely manner. Based on these stress testing results, SAMA may impose a supplemental capital charge against the correlation trading portfolio, to be added to the bank‘s internally modelled capital requirement. For guidance on conducting stress tests for correlation trading portfolio, refer Annex of Revisions to the Basel II market risk framework – Dec 2010.
A bank must calculate the incremental risk measure according to paragraph 718(xcii) of Revisions to the Basel II market risk framework – Dec 2010, and the comprehensive risk measure according to paragraph 718(xcv) of Revisions to the Basel II market risk framework – Dec 2010, at least weekly, or more frequently as directed by SAMA. The capital charge for incremental risk is given by a scaling factor of 1.0 times the maximum of (i) the average of the incremental risk measures over 12 weeks; and (ii) the most recent incremental risk measure. Likewise, the capital charge for comprehensive risk is given by a scaling factor of 1.0 times the maximum of (i) the average of the comprehensive risk measures over 12 weeks; and (ii) the most recent comprehensive risk measure. Both capital charges are added up. There will be no adjustment for double counting between the comprehensive risk measure and any other risk measures.
(Refer to Paragraph 718(xc) of Revisions to the Basel II market risk framework – Dec 2010)
The following guidelines to be included as a separate section "Model Validation Standards" on Pg 55 of the SAMA‘s Detailed Guidelines Notes on the Maintenance of Adequate Capital Against Market Risk by Saudi Banks, 2004 Model Validation Standards
It is important that banks have processes in place to ensure that their internal models have been adequately validated by suitably qualified parties independent of the development process to ensure that they are conceptually sound and adequately capture all material risks. This validation should be conducted when the model is initially developed and when any significant changes are made to the model. The validation should also be conducted on a periodic basis but especially where there have been any significant structural changes in the market or changes to the composition of the portfolio which might lead to the model no longer being adequate. More extensive model validation is particularly important where specific risk is also modelled and is required to meet the further specific risk criteria. As techniques and best practices evolve, banks should avail themselves of these advances. Model validation should not be limited to backtesting, but should, at a minimum, also include the following:
(a) Tests to demonstrate that any assumptions made within the internal model are appropriate and do not underestimate risk. This may include the assumption of the normal distribution, the use of the square root of time to scale from a one day holding period to a 10-day holding period or where extrapolation or interpolation techniques are used, or pricing models;
(b) Further to the regulatory backtesting programmes, testing for model validation should be carried out using additional tests, which may include, for instance:
• Testing carried out using hypothetical changes in portfolio value that would occur were end-of-day positions to remain unchanged. It therefore excludes fees, commissions, bid-ask spreads, net interest income and intra-day trading;
• Testing carried out for longer periods than required for the regular backtesting programme (e.g. 3 years). The longer time period generally improves the power of the backtesting. A longer time period may not be desirable if the VaR model or market conditions have changed to the extent that historical data is no longer relevant;
• Testing carried out using confidence intervals other than the 99 percent interval required under the quantitative standards;
• Testing of portfolios below the overall bank level;
(c) The use of hypothetical portfolios to ensure that the model is able to account for particular structural features that may arise, for example:
Where data histories for a particular instrument do not meet the quantitative standards in paragraph 718(Lxxvi) and where the bank has to map these positions to proxies, then the bank must ensure that the proxies produce conservative results under relevant market scenarios;
• Ensuring that material basis risks are adequately captured. This may include mismatches between long and short positions by maturity or by issuer;
• Ensuring that the model captures concentration risk that may arise in an undiversified portfolio.
(Refer to Paragraph 718(xcix) of Revisions to the Basel II market risk framework – Dec 2010)
ANNEXURE 8: Document Enhanced: Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
The following guidelines to be included in Pg 5 Section 1.2 “Background and Scope” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
SAMA requires formal interaction intended to foster an active dialogue between banks and SAMA such that when deficiencies are identified, prompt and decisive action can be taken to reduce risk or restore capital.
Accordingly, SAMA may adopt an approach to focus more intensely on those banks with risk profiles or operational experience that warrants such attention.
(Refer to Paragraph 722 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 6 Section 2.3 “Determination of the minimum CAR and or other supervisory measures” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Other means for addressing risk, such as strengthening risk management, applying internal limits, strengthening the level of provisions and reserves, and improving internal controls, would also be considered by SAMA
(Refer to Paragraph 723 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 8 Section 5.3 “Preliminary Assessment of Inherent additional Risks” of theSAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
A further important aspect of Pillar 2 is the assessment of compliance with the minimum standards and disclosure requirements of the more advanced methods in Pillar 1, in particular the IRB framework for credit risk and the Advanced Measurement Approaches for operational risk. SAMA must ensure that these requirements are being met, both as qualifying criteria and on a continuing basis.
(Refer to Paragraph 724 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 16 Section 6.2.8 “SAMA's Standards #8: Documentation of CAAP” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
The bank ‘s board of directors has responsibility for setting the bank ‘s tolerance for risks.
(Refer to Paragraph 730 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 8 Section 5.3 “Preliminary Assessment of Inherent additional Risks” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Credit risk: Banks should have methodologies that enable them to assess the credit risk involved in exposures to individual borrowers or counterparties as well as at the portfolio level. For more sophisticated banks, the credit review assessment of capital adequacy, at a minimum, should cover four areas: risk rating systems, portfolio analysis/aggregation, securitization/complex credit derivatives, and large exposures and risk concentrations.
Internal risk ratings should be adequate to support the identification and measurement of risk from all credit exposures, and should be integrated into an institution ‘s overall analysis of credit risk and capital adequacy. The ratings system should provide detailed ratings for all assets, not only for criticized or problem assets. Loan loss reserves should be included in the credit risk assessment for capital adequacy.
The analysis of credit risk should adequately identify any weaknesses at the portfolio level, including any concentrations of risk. It should also adequately take into consideration the risks involved in managing credit concentrations and other portfolio issues through such mechanisms as securitization programmes and complex credit derivatives.
Further, the analysis of counterparty credit risk should include consideration of public evaluation of the supervisor ‘s compliance with the Core Principles for Effective Banking Supervision.
(Refer to Paragraph 733-735 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 8 Section 5.3 “Preliminary Assessment of Inherent additional Risks” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Operational Risk
A bank should develop a framework for managing operational risk and evaluate the adequacy of capital given this framework. The framework should cover the bank ‘s appetite and tolerance for operational risk, as specified through the policies for managing this risk, including the extent and manner in which operational risk is transferred outside the bank. It should also include policies outlining the bank ‘s approach to identifying, assessing, monitoring and controlling/mitigating the risk.
(Refer to Paragraph 737 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 8 Section 5.3 “Preliminary Assessment of Inherent additional Risks” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Market Risk
For more sophisticated banks, their assessment of internal capital adequacy for market risk, at a minimum, should be based on both VaR modelling and stress testing, including an assessment of concentration risk and the assessment of illiquidity under stressful market scenarios, although all firms 'assessments should include stress testing appropriate to their trading activity.
(i). VaR is an important tool in monitoring aggregate market risk exposures and provides a common metric for comparing the risk being run by different desks and business lines. A bank ‘s VaR model should be adequate to identify and measure risks arising from all its trading activities and should be integrated into the bank ‘s overall internal capital assessment as well as subject to rigorous on-going validation. A VaR model estimates should be sensitive to changes in the trading book risk profile.
(ii). Banks must supplement their VaR model with stress tests (factor shocks or integrated scenarios whether historic or hypothetical) and other appropriate risk management techniques. In the bank‘s internal capital assessment it must demonstrate that it has enough capital to not only meet the minimum capital requirements but also to withstand a range of severe but plausible market shocks. In particular, it must factor in, where appropriate:
• Illiquidity/gapping of prices;
• Concentrated positions (in relation to market turnover);
• One-way markets;
• Non-linear products/deep out-of-the money positions;
• Events and jumps-to-defaults;
• Significant shifts in correlations;
• Other risks that may not be captured appropriately in VaR (e.g. recovery rate uncertainty, implied correlations, or skew risk).
The stress tests applied by a bank and, in particular, the calibration of those tests (e.g. the parameters of the shocks or types of events considered) should be reconciled back to a clear statement setting out the premise upon which the bank‘s internal capital assessment is based (e.g. ensuring there is adequate capital to manage the traded portfolios within stated limits through what may be a prolonged period of market stress and illiquidity, or that there is adequate capital to ensure that, over a given time horizon to a specified confidence level, all positions can be liquidated or the risk hedged in an orderly fashion). The market shocks applied in the tests must reflect the nature of portfolios and the time it could take to hedge out or manage risks under severe market conditions.
(iii). Concentration risk should be pro-actively managed and assessed by firms and concentrated positions should be routinely reported to senior management.
(iv). Banks should design their risk management systems, including the VaR methodology and stress tests, to properly measure the material risks in instruments they trade as well as the trading strategies they pursue. As their instruments and trading strategies change, the VaR methodologies and stress tests should also evolve to accommodate the changes.
(v). Banks must demonstrate how they combine their risk measurement approaches to arrive at the overall internal capital for market risk.
(Refer to Paragraph 738 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 13 Section 6.2.2 “SAMA's Standards #2” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Monitoring and reporting
The bank ‘s senior management or board of directors should, on a regular basis, receive reports on the bank ‘s risk profile and capital needs. These reports should allow senior management to:
• Evaluate the level and trend of material risks and their effect on capital levels;
• Evaluate the sensitivity and reasonableness of key assumptions used in the capital assessment measurement system;
• Determine that the bank holds sufficient capital against the various risks and is in compliance with established capital adequacy goals; and
• Assess its future capital requirements based on the bank ‘s reported risk profile and make necessary adjustments to the bank‘s strategic plan accordingly.
(Refer to Paragraph 743 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 11 Section 5.6 “On-going monitoring of Capital Adequacy” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
As part of the supervisory review process, SAMA would ensure that these conditions are being met on an ongoing basis.
(Refer to Paragraph 753 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 8 Section 5.3 “Preliminary Assessment of Inherent additional Risks” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Supervisory review of compliance with minimum standards
There is also an important role for SAMA ‘s to review of compliance with certain conditions and requirements set for standardized approaches. In this context, there will be a particular need to ensure that use of various instruments that can reduce Pillar 1 capital requirements are utilized and understood as part of a sound, tested, and properly documented risk management process.
(Refer to Paragraph 755 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 12 Paragraph 6.1.3 (part of Section 6.1 General) of theSAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Supervisory response
SAMA typically requires (or encourages) banks to operate with a buffer, over and above the Pillar 1 standard. Banks should maintain this buffer for a combination of the following:
a) Pillar 1 minimums are anticipated to be set to achieve a level of bank creditworthiness in markets that is below the level of creditworthiness sought by many banks for their own reasons. For example, most international banks appear to prefer to be highly rated by internationally recognized rating agencies. Thus, banks are likely to choose to operate above Pillar 1 minimums for competitive reasons.
b) In the normal course of business, the type and volume of activities will change, as will the different risk exposures, causing fluctuations in the overall capital ratio.
c) It may be costly for banks to raise additional capital, especially if this needs to be done quickly or at a time when market conditions are unfavourable.
d) For banks to fall below minimum regulatory capital requirements is a serious matter. It may place banks in breach of the relevant law and/or prompt non-discretionary corrective action on the part of supervisors.
e) There may be risks, either specific to individual banks, or more generally to an economy at large, that are not taken into account in Pillar 1
(Refer to Paragraph 757 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 12 Paragraph 6.1.3 (Part of Section 6.1 General) of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Supervisory response
There are several means available to SAMA for ensuring that individual banks are operating with adequate levels of capital. Among other methods, SAMA may set trigger and target capital ratios or define categories above minimum ratios (e.g. well capitalized and adequately capitalized) for identifying the capitalization level of the bank.
(Refer to Paragraph 758 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 6 Section 2.3 “Determination of the minimum CAR and or other supervisory measures” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Supervisory response
The permanent solution to banks‘ difficulties is not always increased capital. However, some of the required measures (such as improving systems and controls) may take a period of time to implement. Therefore, increased capital might be used as an interim measure while permanent measures to improve the bank ‘s position are being put in place.
Once these permanent measures have been put in place and have been seen by SAMA to be effective, the interim increase in capital requirements can be removed.
(Refer to Paragraph 760 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 14 Section 6.2.6 “SAMA's Standards #6: Setting of capital adequacy goals” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Interest rate risk in the banking book
If SAMA determine that banks are not holding capital commensurate with the level of interest rate risk, they must require the bank to reduce its risk, to hold a specific additional amount of capital or some combination of the two. SAMA should be particularly attentive to the sufficiency of capital of ‗outlier banks 'where economic value declines by more than 20% of the sum of Tier 1 and Tier 2 capital as a result of a standardized interest rate shock (200 basis points) or its equivalent, as described in the supporting document Principles for the Management and Supervision of Interest Rate Risk
(Refer to Paragraph 764 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 14 Section 6.2.6 “SAMA's Standards #6: Setting of capital adequacy goals” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Credit Risk – Stress testing under IRB approaches
SAMA may wish to review how the stress test has been carried out. The results of the stress test will thus contribute directly to the expectation that a bank will operate above the Pillar 1 minimum regulatory capital ratios. SAMA will consider whether a bank has sufficient capital for these purposes. To the extent that there is a shortfall, SAMA will react appropriately. This will usually involve requiring the bank to reduce its risks and/or to hold additional capital/provisions, so that existing capital resources could cover the Pillar 1 requirements plus the result of a recalculated stress test.
(Refer to Paragraph 765 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 14 section 6.2.6 “SAMA's Standards #6: Setting of capital adequacy goals” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
2. Definition of default
SAMA will assess individual banks application of the reference definition of default and its impact on capital requirements. In particular, SAMA will focus on the impact of deviations from the reference definition according to paragraph 456 (use of external data or historic internal data not fully consistent with the reference definition of default).
(Refer to Paragraph 766 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 18 Section “Compliance with Pillar 2” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
3. Residual risk
The Framework allows banks to offset credit or counterparty risk with collateral, guarantees or credit derivatives, leading to reduced capital charges. While banks use credit risk mitigation (CRM) techniques to reduce their credit risk, these techniques give rise to risks that may render the overall risk reduction less effective. Accordingly, these risks (e.g. legal risk, documentation risk, or liquidity risk) to which banks are exposed are of SAMA ‘s concern. Where such risks arise, and irrespective of fulfilling the minimum requirements set out in Pillar 1, a bank could find itself with greater credit risk exposure to the underlying counterparty than it had expected. Examples of these risks include:
• Inability to seize, or realize in a timely manner, collateral pledged (on default of the counterparty);
• Refusal or delay by a guarantor to pay; and
• Ineffectiveness of untested documentation
(Refer to Paragraph 767 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 14 Section 6.2.4 “SAMA's Standards #4: Risk management policies and procedures” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Residual risk
Therefore, SAMA will require banks to have in place appropriate written CRM policies and procedures in order to control these residual risks. A bank may be required to submit these policies and procedures to SAMA and must regularly review their appropriateness, effectiveness and operation.
(Refer to Paragraph 768 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 14 Section 6.2.6 “SAMA's Standards #6: Setting of capital adequacy goals” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Residual risk
In its CRM policies and procedures, a bank must consider whether, when calculating capital requirements, it is appropriate to give the full recognition of the value of the credit risk mitigant as permitted in Pillar 1 and must demonstrate that its CRM management policies and procedures are appropriate to the level of capital benefit that it is recognizing. Where SAMA is not satisfied as to the robustness, suitability or application of these policies and procedures they may direct the bank to take immediate remedial action or hold additional capital against residual risk until such time as the deficiencies in the CRM procedures are rectified to the satisfaction of SAMA. For example, SAMA may direct a bank to:
• Make adjustments to the assumptions on holding periods, supervisory haircuts, or volatility (in the own haircuts approach);
• Give less than full recognition of credit risk mitigants (on the whole credit portfolio or by specific product line); and/or
• Hold a specific additional amount of capital
(Refer to Paragraph 769 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in as a separate sub-section “Credit Concentration Risk” in Section 6 “Supervisory Standards on CAAP” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Credit Concentration Risk
Concentration risk arises in both direct exposures to obligors and may also occur through exposures to protection providers. Such concentrations are not addressed in the Pillar 1 capital charge for credit risk.
Banks should have in place effective internal policies, systems and controls to identify, measure, monitor, and control their credit risk concentrations. Banks should explicitly consider the extent of their credit risk concentrations in their assessment of capital adequacy under Pillar 2. These policies should cover the different forms of credit risk concentrations to which a bank may be exposed. Such concentrations include:
• Credit exposures to counterparties whose financial performance is dependent on the same activity or commodity; and
• Indirect credit exposures arising from a bank ‘s CRM activities (e.g. exposure to a single collateral type or to credit protection provided by a single counterparty).
A bank ‘s framework for managing credit risk concentrations should be clearly documented and should include a definition of the credit risk concentrations relevant to the bank and how these concentrations and their corresponding limits are calculated. Limits should be defined in relation to a bank ‘s capital, total assets or, where adequate measures exist, its overall risk level.
A bank should ensure that, in respect of credit risk concentrations, it complies with the Committee document Principles for the Management of Credit Risk (September 2000) and the more detailed guidance in the Appendix to that paper.
(Refer to Paragraph 772-776 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included as a separate sub-section “Counterparty Credit Risk” in Section 6 of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Counterparty Credit Risk
(i) As counterparty credit risk (CCR) represents a form of credit risk, this would include meeting this Framework ‘s standards regarding their approaches to stress testing, "residual risks" associated with credit risk mitigation techniques, and credit concentrations.
(ii). The bank must have counterparty credit risk management policies, processes and systems that are conceptually sound and implemented with integrity relative to the sophistication and complexity of a firm ‘s holdings of exposures that give rise to CCR. A sound counterparty credit risk management framework shall include the identification, measurement, management, approval and internal reporting of CCR.
(iii). The bank ‘s risk management policies must take account of the market, liquidity, legal and operational risks that can be associated with CCR and, to the extent practicable, interrelationships among those risks. The bank must not undertake business with a counterparty without assessing its creditworthiness and must take due account of both settlement and pre-settlement credit risk. These risks must be managed as comprehensively as practicable at the counterparty level (aggregating counterparty exposures with other credit exposures) and at the firm-wide level.
(iv). The board of directors and senior management must be actively involved in the CCR control process and must regard this as an essential aspect of the business to which significant resources need to be devoted. Where the bank is using an internal model for CCR, senior management must be aware of the limitations and assumptions of the model used and the impact these can have on the reliability of the output. They should also consider the uncertainties of the market environment (e.g. timing of realization of collateral) and operational issues (e.g. pricing feed irregularities) and be aware of how these are reflected in the model.
(v). In this regard, the daily reports prepared on a firm ‘s exposures to CCR must be reviewed by a level of management with sufficient seniority and authority to enforce both reductions of positions taken by individual credit managers or traders and reductions in the firm ‘s overall CCR exposure.
(vi) The bank ‘s CCR management system must be used in conjunction with internal credit and trading limits. In this regard, credit and trading limits must be related to the firm ‘s risk measurement model in a manner that is consistent over time and that is well understood by credit managers, traders and senior management.
(vii). The measurement of CCR must include monitoring daily and intra-day usage of credit lines. The bank must measure current exposure gross, and net of collateral held where such measures are appropriate and meaningful (e.g. OTC derivatives, margin lending, etc.).
Measuring and monitoring peak exposure or potential future exposure (PFE) at a confidence level chosen by the bank at both the portfolio and counterparty levels is one element of a robust limit monitoring system. Banks must take account of large or concentrated positions, including concentrations by groups of related counterparties, by industry, by market, customer investment strategies, etc.
(viii). The bank must have a routine and rigorous program of stress testing in place as a supplement to the CCR analysis based on the day-to-day output of the firm ‘s risk measurement model. The results of this stress testing must be reviewed periodically by senior management and must be reflected in the CCR policies and limits set by management and the board of directors. Where stress tests reveal particular vulnerability to a given set of circumstances, management should explicitly consider appropriate risk management strategies (e.g. by hedging against that outcome or reducing the size of the firm ‘s exposures).
(ix). The bank must have a routine in place for ensuring compliance with a documented set of internal policies, controls and procedures concerning the operation of the CCR management system. The firm ‘s CCR management 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 CCR.
(x). The bank must conduct an independent review of the CCR management system regularly through its own internal auditing process. This review must include both the activities of the business credit and trading units and of the independent CCR control unit. A review of the overall CCR management process must take place at regular intervals (ideally not less than once a year) and must specifically address, at a minimum:
• the adequacy of the documentation of the CCR management system and process;
• the organization of the CCR control unit;
• the integration of CCR measures into daily risk management;
• the approval process for risk pricing models and valuation systems used by front
• and back-office personnel;
• the validation of any significant change in the CCR measurement process;
• the scope of counterparty credit risks captured by the risk measurement model;
• the integrity of the management information system;
• the accuracy and completeness of CCR data;
• the verification of the consistency, timeliness and reliability of data sources used to run internal models, including the independence of such data sources;
• the accuracy and appropriateness of volatility and correlation assumptions;
• the accuracy of valuation and risk transformation calculations;
• the verification of the model‘s accuracy through frequent back testing.
(xi). A bank that receives approval to use an internal model to estimate its exposure amount or EAD for CCR exposures must monitor the appropriate risks and have processes to adjust its estimation of EPE when those risks become significant. This includes the following:
• Banks must identify and manage their exposures to specific wrong-way risk.
• For exposures with a rising risk profile after one year, banks must compare on a
• regular basis the estimate of EPE over one year with the EPE over the life of the exposure.
• For exposures with a short-term maturity (below one year), banks must compare on a regular basis the replacement cost (current exposure) and the realised exposure profile, and/or store data that allow such a comparisons.
(xii). When assessing an internal model used to estimate EPE, and especially for banks that receive approval to estimate the value of the alpha factor, SAMA would review the characteristics of the firm ‘s portfolio of exposures that give rise to CCR. In particular, SAMA would consider the following characteristics, namely:
• the diversification of the portfolio (number of risk factors the portfolio is exposed to);
• the correlation of default across counterparties; and
• the number and granularity of counterparty exposures.
(xiii). Supervisors will take appropriate action where the firm ‘s estimates of exposure or EAD under the Internal Model Method or alpha do not adequately reflect its exposure to CCR. Such action might include directing the bank to revise its estimates; directing the bank to apply a higher estimate of exposure or EAD under the IMM or alpha; or disallowing a bank from recognizing internal estimates of EAD for regulatory capital purposes.
(xiv). For banks that make use of the standardized method, supervisors should review the bank ‘s evaluation of the risks contained in the transactions that give rise to CCR and the bank ‘s assessment of whether the standardized method captures those risks appropriately and satisfactorily. If the standardized method does not capture the risk inherent in the bank‘s relevant transactions (as could be the case with structured, more complex OTC derivatives), supervisors may require the bank to apply the CEM or the SM on a transaction-by transaction basis (i.e. no netting will be recognized).
(Refer to Paragraph 777 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Section 6 “Supervisory Standards on CAAP” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Market risk
1. Policies and procedures for trading book eligibility
(i). Clear policies and procedures used to determine the exposures that may be included in, and those that should be excluded from, the trading book for purposes of calculating regulatory capital are critical to ensure the consistency and integrity of firms 'trading book. Such policies must conform to paragraph 687(i) of this Framework. SAMA has been satisfied that the policies and procedures clearly delineate the boundaries of the firm ‘s trading book, in compliance with the general principles set forth in paragraphs 684 to 689(iii) of this Framework, and consistent with the bank ‘s risk management capabilities and practices. SAMA also needs to be satisfied that transfers of positions between banking and trading books can only occur in a very limited set of circumstances. SAMA will require a firm to modify its policies and procedures when they prove insufficient for preventing the booking in the trading book of positions that are not compliant with the general principles set forth in paragraphs 684 to 689(iii) of this Framework, or not consistent with the bank‘s risk management capabilities and practices.
2. Valuation
(ii). Prudent valuation policies and procedures form the foundation on which any robust assessment of market risk capital adequacy should be built. For a well-diversified portfolio consisting of highly liquid cash instruments, and without market concentration, the valuation of the portfolio, combined with the minimum quantitative standards set out in paragraph 718(Lxxvi), as revised in this section, may deliver sufficient capital to enable a bank, in adverse market conditions, to close out or hedge its positions within 10 days in an orderly fashion. However, for less well diversified portfolios, for portfolios containing less liquid instruments, for portfolios with concentrations in relation to market turnover, and/or for portfolios which contain large numbers of positions that are marked-to-model this is less likely to be the case. In such circumstances, SAMA will consider whether a bank has sufficient capital. To the extent there is a shortfall SAMA will react appropriately. This will usually require the bank to reduce its risks and/or hold an additional amount of capital.
3. Stress testing under the internal models approach
(iii). A bank must ensure that it has sufficient capital to meet the minimum capital requirements set out in paragraphs 718(Lxx) to 718(xciv) and to cover the results of its stress testing required by paragraph 718(Lxxiv) (g), taking into account the principles set forth in paragraphs 738(ii) and 738(iv). SAMA will consider whether a bank has sufficient capital for these purposes, taking into account the nature and scale of the bank ‘s trading activities and any other relevant factors such as valuation adjustments made by the bank. To the extent that there is a shortfall, or if SAMA are not satisfied with the premise upon which the bank ‘s assessment of internal market risk capital adequacy is based, SAMA will take the appropriate measures. This will usually involve requiring the bank to reduce its risk exposures and/or to hold an additional amount of capital, so that its overall capital resources at least cover the Pillar 1 requirements plus the result of a stress test acceptable to SAMA.
4. Specific risk modelling under the internal models approach
(iv). For banks wishing to model the specific risk arising from their trading activities, additional criteria have been set out in paragraph 718(Lxxxix), including conservatively assessing the risk arising from less liquid positions and/or positions with limited price transparency under realistic market scenarios. Where SAMA consider that limited liquidity or price transparency undermines the effectiveness of a bank ‘s model to capture the specific risk, they will take appropriate measures, including requiring the exclusion of positions from the bank ‘s specific risk model. SAMAshould review the adequacy of the bank ‘s measure of the default risk surcharge; where the bank ‘s approach is inadequate; the use of the standardized specific risk charges will be required.
(Refer to Paragraph 778 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 2 Section 2 “Key components of Supervisory Review Process” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Supervisory transparency and accountability
SAMA would set target and trigger ratos and the Categories of capital in excess of the regulatory minimum, factors that may be considered in doing so, would be made publicly available.
(Refer to Paragraph 779 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 8 Section 4.1 “Application to Banks Licensed in Saudi Arabia” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
In order to reduce the compliance burden and avoid regulatory arbitrage, the methods and approval processes used by a bank at the group level may be accepted by SAMA at the local level, provided that they adequately meet the SAMA ‘s requirements. Wherever possible, SAMA will avoid performing redundant and uncoordinated approval and validation work in order to reduce the implementation burden on banks, and conserve supervisory resources
(Refer to Paragraph 781 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 8 Section 6 “Supervisory Standards on CAAP” of the SAMA’s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
(In addition to the original text)
Amongst other things, SAMA may review where relevant a bank ‘s own assessment of its capital needs and how that has been reflected in the capital calculation as well as the documentation of certain transactions to determine whether the capital requirements accord with the risk profile (e.g. substitution clauses). SAMA will also review the manner in which banks have addressed the issue of maturity mismatch in relation to retained positions in their economic capital calculations. In particular, they will be vigilant in monitoring for the structuring of maturity mismatches in transactions to artificially reduce capital requirements. Additionally, SAMA may review the bank ‘s economic capital assessment of actual correlation between assets in the pool and how they have reflected that in the calculation. Where SAMA consider that a bank ‘s approach is not adequate, they will take appropriate action. Such action might include denying or reducing capital relief in the case of originated assets, or increasing the capital required against securitization exposures acquired.
Significance of risk transfer Securitization transactions may be carried out for purposes other than credit risk transfer (e.g. funding). Where this is the case, there might still be a limited transfer of credit risk. However, for an originating bank to achieve reductions in capital requirements, the risk transfer arising from a securitization has to be deemed significant by SAMA. If the risk transfer is considered to be insufficient or non-existent, SAMA can require the application of a higher capital requirement than prescribed under Pillar 1 or, alternatively, may deny a bank from obtaining any capital relief from the securitizations. Therefore, the capital relief that can be achieved will correspond to the amount of credit risk that is effectively transferred. The following includes a set of examples where SAMA may have concerns about the degree of risk transfer, such as retaining or repurchasing significant amounts of risk or "cherry picking" the exposures to be transferred via a securitization
Retaining or repurchasing significant securitization exposures, depending on the proportion of risk held by the originator, might undermine the intent of a securitization to transfer credit risk. Specifically, SAMA might expect that a significant portion of the credit risk and of the nominal value of the pool be transferred to at least one independent third party at inception and on an ongoing basis. Where banks repurchase risk for market making purposes, SAMA could find it appropriate for an originator to buy part of a transaction but not, for example, to repurchase a whole tranche. SAMAwould expect that where positions have been bought for market making purposes, these positions should be resold within an appropriate period, thereby remaining true to the initial intention to transfer risk.
Another implication of realising only a non-significant risk transfer, especially if related to good quality unrated exposures, is that both the poorer quality unrated assets and most of the credit risk embedded in the exposures underlying the securitised transaction are likely to remain with the originator. Accordingly, and depending on the outcome of the supervisory review process, SAMA may increase the capital requirement for particular exposures or even increase the overall level of capital the bank is required to hold.
Market innovations
As the minimum capital requirements for securitization may not be able to address all potential issues, SAMA would consider new features of securitization transactions as they arise. Such assessments would include reviewing the impact new features may have on credit risk transfer and, where appropriate, SAMA will take appropriate action under Pillar 2. A Pillar 1 response may be formulated to take account of market innovations. Such a response may take the form of a set of operational requirements and/or a specific capital treatment.
Provision of implicit support
Support to a transaction, whether contractual (i.e. credit enhancements provided at the inception of a securitized transaction) or non-contractual (implicit support) can take numerous forms. For instance, contractual support can include over collateralization, credit derivatives, spread accounts, contractual recourse obligations, subordinated notes, credit risk mitigants provided to a specific tranche, the subordination of fee or interest income or the deferral of margin income, and clean-up calls that exceed 10 percent of the initial issuance.
Examples of implicit support include the purchase of deteriorating credit risk exposures from the underlying pool, the sale of discounted credit risk exposures into the pool of securitized credit risk exposures, the purchase of underlying exposures at above market price or an increase in the first loss position according to the deterioration of the underlying exposures.
The provision of implicit (or non-contractual) support, as opposed to contractual credit support (i.e. credit enhancements), raises significant supervisory concerns. For traditional securitization structures the provision of implicit support undermines the clean break criteria, which when satisfied would allow banks to exclude the securitized assets from regulatory capital calculations. For synthetic securitization structures, it negates the significance of risk transference. By providing implicit support, banks signal to the market that the risk is still with the bank and has not in effect been transferred. The institution ‘s capital calculation therefore understates the true risk. Accordingly,SAMA would take appropriate action when a banking organization provides implicit support.
When a bank has been found to provide implicit support to a securitization, it will be required to hold capital against all of the underlying exposures associated with the structure as if they had not been securitized. It will also be required to disclose publicly that it was found to have provided non-contractual support, as well as the resulting increase in the capital charge (as noted above). The aim is to require banks to hold capital against exposures for which they assume the credit risk, and to discourage them from providing non-contractual support.
The following guidelines to be included in Pg 8 Section 6 of the SAMA ‘s Basel II Guidance Document Pillar 2 Supervisory Review Process, 2007
If a bank is found to have provided implicit support on more than one occasion, the bank is required to disclose its transgression publicly and SAMA will take appropriate action that may include, but is not limited to, one or more of the following:
• The bank may be prevented from gaining favourable capital treatment on securitized assets for a period of time to be determined by SAMA;
• The bank may be required to hold capital against all securitized assets as though the bank had created a commitment to them, by applying a conversion factor to the risk weight of the underlying assets;
• For purposes of capital calculations, the bank may be required to treat all securitized assets as if they remained on the balance sheet
• The bank may be required bySAMA to hold regulatory capital in excess of the minimum risk-based capital ratios.
SAMA will be vigilant in determining implicit support and will take appropriate supervisory action to mitigate the effects. Pending any investigation, the bank may be prohibited from any capital relief for planned securitization transactions (moratorium). SAMA ‘s response will be aimed at changing the bank ‘s behaviour with regard to the provision of implicit support, and to correct market perception as to the willingness of the bank to provide future recourse beyond contractual obligations
Residual risks
As with credit risk mitigation techniques more generally, SAMA will review the appropriateness of banks 'approaches to the recognition of credit protection. In particular, with regard to securitizations, SAMA will review the appropriateness of protection recognized against first loss credit enhancements. On these positions, expected loss is less likely to be a significant element of the risk and is likely to be retained by the protection buyer through the pricing. Therefore, SAMA will expect banks 'policies to take account of this in determining their economic capital. Where SAMA do not consider the approach to protection recognized is adequate, they will take appropriate action. Such action may include increasing the capital requirement against a particular transaction or class of transactions.
Call provisions
SAMA expect a bank not to make use of clauses that entitles it to call the securitization transaction or the coverage of credit protection prematurely if this would increase the bank ‘s exposure to losses or deterioration in the credit quality of the underlying exposures.
Besides the general principle stated above, SAMA expect banks to only execute clean-up calls for economic business purposes, such as when the cost of servicing the outstanding credit exposures exceeds the benefits of servicing the underlying credit exposures
Subject to national discretion, SAMA may require a review prior to the bank exercising a call which can be expected to include consideration of:
• The rationale for the bank ‘s decision to exercise the call; and
• The impact of the exercise of the call on the bank ‘s regulatory capital ratio.
SAMA may also require the bank to enter into a follow-up transaction, if necessary, depending on the bank ‘s overall risk profile, and existing market conditions
Date related calls should be set at a date no earlier than the duration or the weighted average life of the underlying securitization exposures. Accordingly, SAMA may require a minimum period to elapse before the first possible call date can be set, given, for instance, the existence of up-front sunk costs of a capital market securitization transaction.
Early amortization
SAMA would review how banks internally measure, monitor, and manage risks associated with securitizations of revolving credit facilities, including an assessment of the risk and likelihood of early amortization of such transactions. At a minimum, SAMA would ensure that banks have implemented reasonable methods for allocating economic capital against the economic substance of the credit risk arising from revolving securitizations and should expect banks to have adequate capital and liquidity contingency plans that evaluate the probability of an early amortization occurring and address the implications of both scheduled and early amortization. In addition, the capital contingency plan should address the possibility that the bank will face higher levels of required capital under the early amortization Pillar 1 capital requirement.
Because most early amortization triggers are tied to excess spread levels, the factors affecting these levels should be well understood, monitored, and managed, to the extent possible (see paragraphs 790 to 794 on implicit support), by the originating bank. For example, the following factors affecting excess spread should generally be considered:
• Interest payments made by borrowers on the underlying receivable balances;
• Other fees and charges to be paid by the underlying obligors (e.g. late-payment fees, cash advance fees, over-limit fees);
• Gross charge-offs;
• Principal payments;
• Recoveries on charged-off loans;
• Interchange income;
• Interest paid on investors‘ certificates;
• Macroeconomic factors such as bankruptcy rates, interest rate movements, unemployment rates; etc.
Banks should consider the effects that changes in portfolio management or business strategies may have on the levels of excess spread and on the likelihood of an early amortization event. For example, marketing strategies or underwriting changes that result in lower finance charges or higher charge-offs, might also lower excess spread levels and increase the likelihood of an early amortization event.
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. SAMA 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 amortization credit conversion factor, thus, increasing the bank ‘s capital requirements.
While the early amortization capital charge described in Pillar 1 is meant to address potential supervisory concerns associated with an early amortization event, such as the inability of excess spread to cover potential losses, the policies and monitoring described in this section recognize that a given level of excess spread is not, by itself, a perfect proxy for credit performance of the underlying pool of exposures. In some circumstances, for example, excess spread levels may decline so rapidly as to not provide a timely indicator of underlying credit deterioration. Further, excess spread levels may reside far above trigger levels, but still exhibit a high degree of volatility which could warrant supervisory attention. In addition, excess spread levels can fluctuate for reasons unrelated to underlying credit risk, such as a mismatch in the rate at which finance charges re-price relative to investor certificate rates.
Routine fluctuations of excess spread might not generate supervisory concerns, even when they result in different capital requirements. This is particularly the case as a bank moves in or out of the first step of the early amortization credit conversion factors. On the other hand, existing excess spread levels may be maintained by adding (or designating) an increasing number of new accounts to the master trust, an action that would tend to mask potential deterioration in a portfolio. For all of these reasons, SAMA will place particular emphasis on internal management, controls, and risk monitoring activities with respect to securitizations with early amortization features.
SAMA expect that the sophistication of a bank ‘s system in monitoring the likelihood and risks of an early amortization event will be commensurate with the size and complexity of the bank ‘s securitization activities that involve early amortization provisions.
For controlled amortizations specifically, SAMA may also review the process by which a bank determines the minimum amortization period required to pay down 90% of the outstanding balance at the point of early amortization. Where SAMA does not consider this adequate it will take appropriate action, such as increasing the conversion factor associated with a particular transaction or class of transactions.
(Refer to Paragraphs 785-807 of International Convergence of Capital Measurement and Capital Standards – June 2006)
ANNEXURE 9: Document Enhanced: SAMA ’s Guidelines Document on the Internal Capital Adequacy Assessment Plan, 2008
The following guidelines to be included in Pg 6 Section 3.3 “ICAAP as a part of Pillar 2” of the SAMA’s Guidelines Document on the Internal Capital Adequacy Assessment Plan, 2008
(In addition to the original text)
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.
(Refer to Paragraph 739-740 of of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 6 Section 3.3 “ICAAP as a part of Pillar 2” of the SAMA’s Guidelines Document on the Internal Capital Adequacy Assessment Plan, 2008
(In addition to the original text)
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 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 19 Section 11 “Challenge and Adoption of the ICAAP” of the SAMA’s Guidelines Document on the Internal Capital Adequacy Assessment Plan, 2008
(In addition to the original text)
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 of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 16 Section “Risk Covered in the ICAAP” of the SAMA’s Guidelines Document on the Internal Capital Adequacy Assessment Plan, 2008
(In addition to the original text)
Risk Covered in the ICAAP
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.
(Refer to Paragraph 763 of International Convergence of Capital Measurement and Capital Standards – June 2006)
ANNEXURE 10: Document Enhanced: Pillar 3 – Package of Disclosure Requirements and Guidance Notes, 2007
The following guidelines to be included in Pg 11 Section 4 “Materiality” of the SAMA’s Pillar 3 – Package of Disclosure Requirements and Guidance Notes, 2007
(In addition to the original guidance)
Materiality
This Framework also anticipates a role for specific measures. Where disclosure is a qualifying criterion under Pillar 1 to obtain lower risk weightings and/or to apply specific methodologies, there would be a direct sanction (not being allowed to apply the lower weighting or the specific methodology).
(Refer to Paragraph 812 of of International Convergence of Capital Measurement and Capital Standards – June 2006)
The following guidelines to be included in Pg 12 Section 5.2 “Location of Disclosures” of the SAMA’s Pillar 3 – Package of Disclosure Requirements and Guidance Notes, 2007
(In addition to the original guidance)
Location of Disclosures
In situations where the disclosures are made under accounting requirements or are made to satisfy listing requirements promulgated by securities regulators, banks may rely on them to fulfil the applicable Pillar 3 expectations. In these situations, banks should explain material differences between the accounting or other disclosure and the supervisory basis of disclosure. This explanation does not have to take the form of a line by line reconciliation.
(Refer to Paragraph 814 of of International Convergence of Capital Measurement and Capital Standards – June 2006)
ANNEXURE 11: Document Addressed: Basel III Pillar 3 – Package of Disclosure Requirements and Guidance Notes
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.Basel III Pillar 3 - Package of Disclosure Requirements and Guidance Notes Page No. 14, Frequency and Location of Disclosure
Original paragraph was as follows:
7. Frequency and Location of Disclosure
Frequency
Banks are expected to comply with the Basel III enhanced requirements from 1 Jan 2013.
All disclosures will be made semi-annually with the exception of the following:
• Table and 2b, 2c and 2d 3f will be disclosed quarterly.
• All Qualitative Disclosure Requirements will be reported annually.
Location of Disclosures
• All quarterly disclosures will be in the regular quarterly financial statements.
• All semi-annual disclosures will be made on a bank's websites.
• All annual disclosures will be in the annual reports of banks and web sites.
• A reporting bank shall provide in its Annual Report and Periodic Financial Statements the location of all disclosures required under Pillar
• A reporting bank may exercise its discretion in determining the form of the disclosure required and may choose to use graphical and other representations where appropriate.
• The frequency and location of reporting has been specified in each Disclosure Template. The following are the abbreviations on the top right hand side of each template:
Location Frequency Annual Financial Statement Report (AR) Annual: A Quarterly Financial Statement Report (QR) Quarterly: Q Website (W) Semi-Annually: SA
The following is considered added to the above paragraph:
Under Pillar 3, large banks are required to make certain minimum disclosures with respect to certain defined key capital ratios and elements on a quarterly basis, regardless of the frequency of financial statement publication. 2 The disclosure of key capital ratios/elements for these banks will continue to be required under Basel III.
Banks must also make available on their websites, or through publicly available regulatory reports, an archive (for a suitable retention period determined by the relevant national authority) of all templates relating to prior reporting periods.
Irrespective of the location of the disclosure (published financial reports, bank websites or publicly available regulatory reports), all disclosures must be in the format required by this document
For the relevant Pillar 3 disclosure requirements see paragraph 818 of the Basel II Framework: International Convergence of Capital Measurement and Capital Standards – A Revised Framework – Comprehensive Version (June 2006).
(Refer to Paragraphs 5-7: Implementation date and frequency of reporting, Composition of capital disclosure requirements - Rules text (June 2012)
Basel III Pillar 3 - Package of Disclosure Requirements and Guidance Notes Page 16, 3.1 Reconciliation requirements
Original paragraphs were as follows:
3.1 Reconciliation requirements
There is a three step approach to be undertaken in preparing the enhanced P3 disclosures to show the link between the bank's published financial statements and the numbers that are used in the composition of capital disclosures set out in Section 1 (post 2018) and Section 5 (transition).
3.1.1 Step 1: Disclose the reported balance sheet under the regulatory scope of consolidation Table (2b).
In this step, banks are required to take their published balance sheet and report the numbers when the regulatory scope of consolidation is applied.
Banks must list which legal entities (along with disclosure of such entities balance sheet assets, balance sheet equity and principal activities) are included within one scope of consolidation that do not appear in the other scope.
If some entities are included in both the regulatory scope of consolidation and accounting scope of consolidation, but the method of consolidation differs between these two scopes, banks are required to list these legal entities separately and explain the differences in consolidation.
If the scopes of consolidation are identical, then banks can skip this step by noting that there is no difference and move onto step 2.
Table 2b will be used for this step with the balance sheet under the accounting scope of consolidation and regulatory scope of consolidation updated in columns C and E respectively.
An example of where the basis of consolidation for regulatory purposes differs from that used for the financial consolidation is where holdings in insurance and financial entities are excluded from regulatory capital if they qualify as significant minority investments. Column D in table 2b will be used for such a purpose.
On this note, where the two scopes of consolidation differ, the totals of the balance sheet (i.e: total assets, total shareholders equity) in the published financial statements will not be the same as the totals of the balance sheet under the regulatory scope of consolidation.
With respect to the above paragraphs, the content highlighted in “bold font” has been added:
3.1 Reconciliation requirements
There is a three step approach to be undertaken in preparing the enhanced P3 disclosures to show the link between the bank's published financial statements and the numbers that are used in the composition of capital disclosures set out in Section 1 (post 2018) and Section 5 (transition).
3.1.1 Step 1: Disclose the reported balance sheet under the regulatory scope of consolidation Table (2b).
In this step, banks are required to take their published balance sheet and report the numbers when the regulatory scope of consolidation is applied.
Banks must list which legal entities (along with disclosure of such entities balance sheet assets, balance sheet equity and principal activities) are included within one scope of consolidation that do not appear in the other scope. Regarding each legal entity that is required to be disclosed by this paragraph, banks must also disclose its total balance sheet assets and total balance sheet equity (as stated on the accounting balance sheet of the legal entity)] and a description of the principle activities of the entity.
(Refer to, Paragraphs 10-13: section 2: Reconciliation requirements, Composition of capital disclosure requirements - Rules text (June 2012))
Basel III – Pillar 3 Package of Disclosure Requirements and Guidance Notes, Page 22, Table 2 – Capital Structure "All B", Table 2 (e) – Main features template
The original paragraph was as follows:
Table 2 (e) – Main features template
• Disclose the key features of all regulatory capital instruments. In this template, banks are required to complete all of the shaded cells for each outstanding regulatory capital instrument (banks should insert "NA" if the question is not applicable).
The revised paragraph would read as follows:
Table 2 (e) – Main features template
• Disclose the key features of all regulatory capital instruments. In this template, banks are required to complete all of the shaded cells for each outstanding regulatory capital instrument (banks should insert "NA" if the question is not applicable).
Banks are required to keep the completed main features report up-to-date, such that the report is updated and made publicly available whenever a bank issues or repays a capital instrument and whenever there is a redemption, conversion/write-down or other material change in the nature of an existing capital instrument.
Given that the template includes information on the amount recognised in regulatory capital at the latest reporting date, the main features report should either be included in the bank‘s published financial reports or, at a minimum, these financial reports must provide a direct link to where the report can be found on the bank‘s website or publicly available regulatory reporting.
(Refer to Paragraphs 27-31: Section 3; Main features template, Composition of capital disclosure requirements - Rules text (June 2012))
The following is inserted as Annexure A, Pillar 3 Package of Disclosure Requirements and Guidance Notes
Other disclosure requirements
In addition to the disclosure requirements set out in this document, and aside from the transitional disclosure requirements set out in Section 5 of Composition of Capital Disclosure Requirement, Rules Text, June 2012, the Basel III rules text makes the following requirements in respect of the composition of capital:
Non-regulatory ratios: banks which disclose ratios involving components of regulatory capital (eg "Equity Tier 1", "Core Tier 1" or "Tangible Common Equity" ratios) must accompany such disclosures with a comprehensive explanation of how these ratios are calculated.
Full terms and conditions: banks are required to make available on their websites the full terms and conditions of all instruments included in regulatory capital.
The requirement for banks to make available the full terms and conditions of regulatory capital instruments on their websites will allow market participants and supervisors to investigate the specific features of individual capital instruments. An additional related requirement is that all banks must maintain a Regulatory Disclosures section of their websites, where all of the information relating to disclosure of regulatory capital is made available to market participants. In cases where disclosure requirements set out in this document are met via publication through publicly available regulatory reports, the regulatory disclosures section of the bank‘s website should provide specific links to the relevant regulatory reports that relate to the bank. This requirement stems from the supervisory experience that, in many cases, the benefit of Pillar 3 disclosures is severely diminished by the challenge of finding the disclosure in the first place.
Ideally much of the information that would be reported in the Regulatory Disclosures section of the website would also included in the published financial reports of the bank. The Basel Committee has agreed that, at minimum, the published financial reports must direct users to the relevant section of their websites where the full set of required regulatory disclosure is provided.
Refer to Paragraphs 31-33: Section 4: Other disclosure requirements, Composition of capital disclosure requirements - Rules text (June 2012)
ANNEXURE 12: Document Enhanced: Section A Finalized Guidance Document Concerning the Implementation of Basel III
Refer Page 7 & 8 of Section A – Finalized guidance document concerning the implementation of Basel III, 2.2 Details on Components of Regulatory Capital, 2.2.1 Common Equity Tier 1
The original paragraphs were as follows
2.2.1 Common Equity Tier 1
Common Equity Tier 1 capital consists of the sum of the following elements:
• Common shares issued by the bank that meet the criteria for classification as common shares for regulatory purposes (or the equivalent for non-joint stock companies);
• Stock surplus (share premium) resulting from the issue of instruments included Common Equity Tier 1;
• Retained earnings;
• Accumulated other comprehensive income and other disclosed reserves;
• Common shares issued by consolidated subsidiaries of the bank and held by third parties (i.e. minority interest) that meet the criteria for inclusion in Common Equity Tier 1 capital.
• Retained earnings and other comprehensive income include interim profit or loss.
• Dividends are removed from Common Equity Tier 1 in accordance with applicable accounting standards. The treatment of minority interest and the regulatory adjustments applied in the calculation of Common Equity Tier 1 are addressed in separate sections.
Common shares issued by the bank
For an instrument to be included in Common Equity Tier 1 capital it must meet all of the criteria that an outlined in Annex- 2. The vast majority of internationally active banks are structured as joint stock companies and for these banks the criteria must be met solely with common shares.
In the rare cases where banks need to issue non-voting common shares as part of Common Equity Tier 1, they must be identical to voting common shares of the issuing bank in all respects except the absence of voting rights.
• Common shares issued by consolidated subsidiaries are described in section 3 of this document.
Regulatory adjustments applied in the calculation of Common Equity Tier 1 are described in section 4 of this document.
• Common shares issued by consolidated subsidiaries are described in section 3 of this document.
The following content has been added against certain assertions in the original paragraph above, these are highlighted in bold font – the rest of the original content remains “as is”:
2.2.1 Common Equity Tier 1
• Accumulated other comprehensive income and other disclosed reserves; (There is no adjustment applied to remove from Common Equity Tier 1 unrealised gains or losses recognized on the balance sheet. Unrealised losses are subject to the transitional arrangements set out in paragraph 94 (c) and (d) Basel III: A global regulatory framework for more resilient banks and banking systems, 2011).
Common shares issued by the bank
For an instrument to be included in Common Equity Tier 1 capital it must meet all of the criteria that an outlined in Annex- 2. The vast majority of internationally active banks are structured as joint stock companies (Joint stock companies are defined as companies that have issued common shares, irrespective of whether these shares are held privately or publically. These will represent the vast majority of internationally active banks)and for these banks the criteria must be met solely with common shares.
(Refer to Paragraphs 53: Basel III: A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
Refer Page 77 Section A – Finalized guidance document concerning the implementation of Basel III, Annex 2, Criteria for Classification as Common Shares for Regulatory Capital purposes The original heading was as follows
Annex-2 Criteria for Classification as Common Shares for Regulatory Capital purposes
The revised heading would be accompanied by a foot note
Annex-2 Criteria for Classification as Common Shares for Regulatory Capital purposesa
Footnote a: The criteria also apply to non joint stock companies, such as mutuals, cooperatives or savings institutions, taking into account their specific constitution and legal structure. The application of the criteria should preserve the quality of the instruments by requiring that they are deemed fully equivalent to common shares in terms of their capital quality as regards loss absorption and do not possess features which could cause the condition of the bank to be weakened as a going concern during periods of market stress. Supervisors will exchange information on how they apply the criteria to non joint stock companies in order to ensure consistent implementation.
(Refer to Paragraphs 52: Basel III: A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
Refer Page 77 Section A – Finalized guidance document concerning the implementation of Basel III, Annex 2, Criteria for Classification as Common Shares for Regulatory Capital purposes
The original paragraph was as follows:
1. Represents the most subordinated claim in liquidation of the bank.
2. Entitled to a claim on the residual assets that is proportional with its share of issued capital, after all senior claims have been repaid in liquidation (ie has an unlimited and variable claim, not a fixed or capped claim).
3. Principal is perpetual and never repaid outside of liquidation (setting aside discretionary repurchases or other means of effectively reducing capital in a discretionary manner that is allowable under relevant law).
4. The bank does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled nor do the statutory or contractual terms provide any feature which might give rise to such an expectation.
5. Distributions are paid out of distributable items (retained earnings included). The level of distributions is not in any way tied or linked to the amount paid in at issuance and is not subject to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items).
6. There are no circumstances under which the distributions are obligatory. Non payment is therefore not an event of default.
7. Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including in respect of other elements classified as the highest quality issued capital.
8. It is the issued capital that takes the first and proportionately greatest share of any losses as they occur. Within the highest quality capital, each instrument absorbs losses on a going concern basis proportionately and pari passu with all the others.
9. The paid in amount is recognised as equity capital (ie not recognised as a liability) for determining balance sheet insolvency.
10. The paid in amount is classified as equity under the relevant accounting standards.
11. It is directly issued and paid-in and the bank can not directly or indirectly have funded the purchase of the instrument.
12. The paid in amount is neither secured nor covered by a guarantee of the issuer or related entity or subject to any other arrangement that legally or economically enhances the seniority of the claim.
13. It is only issued with the approval of the owners of the issuing bank, either given directly by the owners or, if permitted by applicable law, given by the Board of Directors or by other persons duly authorised by the owners.
14. It is clearly and separately disclosed on the bank‘s balance sheet.
The following content has been added against certain assertions in the original paragraph above, these are highlighted in bold font – the rest of the original content remains “as is”:
8. It is the issued capital that takes the first and proportionately greatest share of any losses as they occur (In cases where capital instruments have a permanent write-down feature, this criterion is still deemed to be met by common shares.). Within the highest quality capital, each instrument absorbs losses on a going concern basis proportionately and pari passu with all the others.
12. The paid in amount is neither secured nor covered by a guarantee of the issuer or related entity (A related entity can include a parent company, a sister company, a subsidiary or any other affiliate. A holding company is a related entity irrespective of whether it forms part of the consolidated banking group.) or subject to any other arrangement that legally or economically enhances the seniority of the claim.
(Refer to 54-56, Tier 2 capital, Basel III: A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
Refer Page 7 & 8 of Section A – Finalized guidance document concerning the implementation of Basel III, 2.2 Details on Components of Regulatory Capital, Common shares issued by the bank
Original paragraph was as follows:
2.2.2. Additional Tier 1 capital
• A minimum set of criteria for an instrument issued by the bank to meet or to exceed in order for its to be included in additional Tier-1 Capital and described in Annex # 3.
Additional Tier 1 capital consists of the sum of the following elements:
• Instruments issued by the bank that meet the criteria for inclusion in Additional Tier 1 capital (and are not included in Common Equity Tier 1);
• Stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 capital;
• Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Additional Tier 1 capital and are not included in Common Equity Tier 1. Refer to Annex # 3 for the relevant criteria; and
• Regulatory adjustments applied in the calculation of Additional Tier 1 Capital are addressed in section 4 of this document.
• Tier-1 Capital instruments issued by consolidated subsidiaries are described in section 3 of this document.
The following content has been added against certain assertions in the original paragraph above, these are highlighted in bold font – the rest of the original content remains “as is”:
• Instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Additional Tier 1 capital and are not included in Common Equity Tier 1. Refer to Section 3 for the relevant criteria; and
Refer to Paragraph 54, Additional Tier 1 capital, A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
Refer Page 78 Section A – Finalized guidance document concerning the implementation of Basel III, Annex 3, Instruments issued by the bank that meet the Additional Tier 1 criteria
The original content was as follows:
Criteria for inclusion in Additional Tier 1 capital
1. Issued and paid-in
2. Subordinated to depositors, general creditors and subordinated debt of the bank
3. Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors
4. Is perpetual, ie there is no maturity date and there are no step-ups or other incentives to redeem
5. May be callable at the initiative of the issuer only after a minimum of five years
a. To exercise a call option a bank must receive prior supervisory approval; and
b. A bank must not do anything which creates an expectation that the call will be exercised; and
c. Banks must not exercise a call unless:
i. They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank15; or
ii. The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised.16
6. Any repayment of principal (eg through repurchase or redemption) must be with prior supervisory approval and banks should not assume or create market expectations that supervisory approval will be given
7. Dividend/coupon discretion:
a. the bank must have full discretion at all times to cancel distributions/payments17
b. cancellation of discretionary payments must not be an event of default
c. banks must have full access to cancelled payments to meet obligations as they fall due
d. cancellation of distributions/payments must not impose restrictions on the bank except in relation to distributions to common stockholders.
8. Dividends/coupons must be paid out of distributable items
9. The instrument cannot have a credit sensitive dividend feature, that is a dividend/coupon that is reset periodically based in whole or in part on the banking organisation‘s credit standing.
10. The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms part of national insolvency law.
11. Instruments classified as liabilities for accounting purposes must have principal loss absorption through either (i) conversion to common shares at an objective pre-specified trigger point or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger point. The write-down will have the following effects:
a. Reduce the claim of the instrument in liquidation;
b. Reduce the amount re-paid when a call is exercised; and
c. Partially or fully reduce coupon/dividend payments on the instrument.
12. Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument
13. The instrument cannot have any features that hinder recapitalisation, such as provisions that require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame
14. If the instrument is not issued out of an operating entity or the holding company in the consolidated group (eg a special purpose vehicle – "SPV"), proceeds must be immediately available without limitation to an operating entity18 or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Additional Tier 1 capital
Stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 capital;
Stock surplus (ie share premium) that is not eligible for inclusion in Common Equity Tier 1, will only be permitted to be included in Additional Tier 1 capital if the shares giving rise to the stock surplus are permitted to be included in Additional Tier 1 capital.
The following content has been added against certain assertions in the original paragraph above, these are highlighted in bold font – the rest of the original content remains “as is”:
5. May be callable at the initiative of the issuer only after a minimum of five years:
a. To exercise a call option a bank must receive prior supervisory approval; and
b. A bank must not do anything which creates an expectation that the call will be exercised; and
c. Banks must not exercise a call unless:
i. They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank (Replacement issues can be concurrent with but not after the instrument is called); or
ii. The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised. (Minimum refers to the regulator’s prescribed minimum requirement, which may be higher than the Basel III Pillar 1 minimum requirement.)16
7. Dividend/coupon discretion:
a. the bank must have full discretion at all times to cancel distributions/payments (A consequence of full discretion at all times to cancel distributions/payments is that “dividend pushers” are prohibited. An instrument with a dividend pusher obliges the issuing bank to make a dividend/coupon payment on the instrument if it has made a payment on another (typically more junior) capital instrument or share. This obligation is inconsistent with the requirement for full discretion at all times. Furthermore, the term “cancel distributions/payments” means extinguish these payments. It does not permit features that require the bank to make distributions/payments in kind.)17
14. If the instrument is not issued out of an operating entity or the holding company in the consolidated group (eg a special purpose vehicle – "SPV"), proceeds must be immediately available without limitation to an operating entity (An operating entity is an entity set up to conduct business with clients with the intention of earning a profit in its own right.) or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Additional Tier 1 capital
Refer to Paragraph 54-56, A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
Refer Page 80 Section A – Finalized guidance document concerning the implementation of Basel III, Annex 4, Instruments issued by the bank that meet the Tier 2 criteria
The original content was as follows
Annex-4
Criteria for inclusion in Tier 2 Capital
1. Issued and paid-in
2. Subordinated to depositors and general creditors of the bank
3. Is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis depositors and general bank creditors
4. Maturity:
a. minimum original maturity of at least five years
b. recognition in regulatory capital in the remaining five years before maturity will be amortized on a straight line basis
c. there are no step-ups or other incentives to redeem
5. May be callable at the initiative of the issuer only after a minimum of five years:
a. To exercise a call option a bank must receive prior supervisory approval;
b. A bank must not do anything that creates an expectation that the call will be exercised; and
c. Banks must not exercise a call unless:
i. They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; or
ii. The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised
6. The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal), except in bankruptcy and liquidation.
7. The instrument cannot have a credit sensitive dividend feature, that is a dividend/coupon that is reset periodically based in whole or in part on the banking organisation‗s credit standing.
8. Neither the bank nor a related party over which the bank exercises control or significant influence can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase of the instrument.
9. If the instrument is not issued out of an operating entity or the holding company in the consolidated group (eg a special purpose vehicle – "SPV"), proceeds must be immediately available without limitation to an operating entity or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Tier 2 Capital.
Stock surplus (ie share premium) that is not eligible for inclusion in Tier 1, will only be permitted to be included in Tier 2 capital if the shares giving rise to the stock surplus are permitted to be included in Tier 2 capital.
General provisions/general loan-loss reserves (for banks using the Standardised Approach for credit risk)
The following content has been added against certain assertions in the original paragraph above, these are highlighted in bold font – the rest of the original content remains “as is”:
Annex-4
Criteria for inclusion in Tier 2 Capital
5. May be callable at the initiative of the issuer only after a minimum of five years:
a. To exercise a call option a bank must receive prior supervisory approval;
b. A bank must not do anything that creates an expectation that the call will be exercised; (An option to call the instrument after five years but prior to the start of the amortisation period will not be viewed as an incentive to redeem as long as the bank does not do anything that creates an expectation that the call will be exercised at this point.) and
c. Banks must not exercise a call unless:
i. They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; (Replacement issues can be concurrent with but not after the instrument is called.) or
ii. The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised (Minimum refers to the regulator’s prescribed minimum requirement, which may be higher than the Basel III Pillar 1 minimum requirement.)
9. If the instrument is not issued out of an operating entity or the holding company in the consolidated group (eg a special purpose vehicle – "SPV"), proceeds must be immediately available without limitation to an operating entity (An operating entity is an entity set up to conduct business with clients with the intention of earning a profit in its own right) or the holding company in the consolidated group in a form which meets or exceeds all of the other criteria for inclusion in Tier 2 Capital.
(Refer paragraph 57-59, A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
Refer Page 80 Section A – Finalized guidance document concerning the implementation of Basel III, Minority interest (i.e. non-controlling interest) and other capital issued out of consolidated subsidiaries that is held by third parties
The original content was as follows:
3.1 Common shares issued by consolidated subsidiaries
Minority interest arising from the issue of common shares by a fully consolidated subsidiary of the bank may receive recognition in Common Equity Tier 1 only if:
(1) the instrument giving rise to the minority interest would, if issued by the bank, meet all of the criteria for classification as common shares for regulatory capital purposes; and
(2) the subsidiary that issued the instrument is itself a bank. The amount of minority interest meeting the criteria above that will be recognized in consolidated Common Equity Tier 1 will be calculated as follows:
• Total minority interest meeting the two criteria above minus the amount of the surplus Common Equity Tier 1 of the subsidiary attributable to the minority shareholders.
• Surplus Common Equity Tier 1 of the subsidiary is calculated as the Common Equity Tier 1 of the subsidiary minus the lower of: (1) the minimum Common Equity Tier 1 requirement of the subsidiary plus the capital conservation buffer (ie 7.0% of risk weighted assets) and (2) the portion of the consolidated minimum Common Equity Tier 1 requirement plus the capital conservation buffer (ie 7.0% of consolidated risk weighted assets) that relates to the subsidiary.
• The amount of the surplus Common Equity Tier 1 that is attributable to the minority shareholders is calculated by multiplying the surplus Common Equity Tier 1 by the percentage of Common Equity Tier 1 that is held by minority shareholders.
The following content has been added against certain assertions in the original paragraph above, these are highlighted in bold font – the rest of the original content remains “as is”:
3.1 Common shares issued by consolidated subsidiaries
(2) the subsidiary that issued the instrument is itself a bank (For the purposes of this paragraph, any institution that is subject to the same minimum prudential standards and level of supervision as a bank may be considered to be a bank.) & (Minority interest in a subsidiary that is a bank is strictly excluded from the parent bank’s common equity if the parent bank or affiliate has entered into any arrangements to fund directly or indirectly minority investment in the subsidiary whether through an SPV or through another vehicle or arrangement. The treatment outlined above, thus, is strictly available where all minority investments in the bank subsidiary solely represent genuine third party common equity contributions to the subsidiary). The amount of minority interest meeting the criteria above that will be recognized in consolidated Common Equity Tier 1 will be calculated as follows:
• Total minority interest meeting the two criteria above minus the amount of the surplus Common Equity Tier 1 of the subsidiary attributable to the minority shareholders.
• Surplus Common Equity Tier 1 of the subsidiary is calculated as the Common Equity Tier 1 of the subsidiary minus the lower of: (1) the minimum Common Equity Tier 1 requirement of the subsidiary plus the capital conservation buffer (ie 7.0% of risk weighted assets) and (2) the portion of the consolidated minimum Common Equity Tier 1 requirement plus the capital conservation buffer (ie 7.0% of consolidated risk weighted assets) that relates to the subsidiary.
• The amount of the surplus Common Equity Tier 1 that is attributable to the minority shareholders is calculated by multiplying the surplus Common Equity Tier 1 by the percentage of Common Equity Tier 1 that is held by minority shareholders.
(Refer paragraph 62, A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
Refer Page 11 Section A – Finalized guidance document concerning the implementation of Basel III, 3.3 Tier 1 and Tier 2 qualifying capital issued by consolidated subsidiaries
The original paragraph was as follows:
3.3 Tier 1 and Tier 2 qualifying capital issued by consolidated subsidiaries
Total capital instruments (ie Tier 1 and Tier 2 capital instruments) issued by a fully consolidated subsidiary of the bank to third party investors (including amounts under paragraph 3.1 and 3.2) may receive recognition in Total Capital only if the instruments would, if issued by the bank, meet all of the criteria for classification as Tier 1 or Tier 2 capital. The amount of this capital that will be recognized in consolidated Total Capital will be calculated as follows:
• Total capital instruments of the subsidiary issued to third parties minus the amount of the surplus Total Capital of the subsidiary attributable to the third party investors.
• Surplus Total Capital of the subsidiary is calculated as the Total Capital of the subsidiary minus the lower of: (1) the minimum Total Capital requirement of the subsidiary plus the capital conservation buffer (ie 10.5% of risk weighted assets) and (2) the portion of the consolidated minimum Total Capital requirement plus the capital conservation buffer (ie 10.5% of consolidated risk weighted assets) that relates to the subsidiary.
• The amount of the surplus Total Capital that is attributable to the third party investors is calculated by multiplying the surplus Total Capital by the percentage of Total Capital that is held by third party investors.
The amount of this Total Capital that will be recognized in Tier 2 will exclude amounts recognized in Common Equity Tier 1 under paragraph 3.1 and amounts recognized in Additional Tier 1 under paragraph 3.3.
Where capital has been issued to third parties out of a special purpose vehicle (SPV), none of this capital can be included in Common Equity Tier 1. However, such capital can be included in consolidated Additional Tier 1 or Tier 2 and treated as if the bank itself had issued the capital directly to the third parties only if it meets all the relevant entry criteria and the only asset of the SPV is its investment in the capital of the bank in a form that meets or exceeds all the relevant entry criteria (as required by criterion 14 for Additional Tier 1 and criterion 9 for Tier 2). In cases where the capital has been issued to third parties through an SPV via a fully consolidated subsidiary of the bank, such capital may, subject to the requirements of this paragraph, be treated as if the subsidiary itself had issued it directly to the third parties and may be included in the banks consolidated Additional Tier 1 or Tier 2 in accordance with the treatment outlined in paragraphs 63 and 64 of the BCBS document of June 2011.
The following content has been amended in the original paragraph above, these are highlighted in bold font – the rest of the original content remains “as is”:
• The amount of the surplus Total Capital that is attributable to the third party investors is calculated by multiplying the surplus Total Capital by the percentage of Total Capital that is held by third party investors.
The amount of this Total Capital that will be recognized in Tier 2 will exclude amounts recognized in Common Equity Tier 1 under paragraph 3.1 and amounts recognized in Additional Tier 1 under paragraph 3.2.
Paragraphs 64-65: A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
Refer, Page 13 of Section A – Finalized guidance document concerning the implementation of Basel III, Cumulative gains and losses due to changes in own credit risk on fair valued financial liabilities
The original paragraph was as follows:
Cumulative gains and losses due to changes in own credit risk on fair valued financial liabilities
Derecognize in the calculation of Common Equity Tier 1, all unrealized gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank's own credit risk.
The revised paragraph would read as follows
Derecognize in the calculation of Common Equity Tier 1, all unrealized gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank's own credit risk.
In addition, with regard to derivative liabilities, derecognise all accounting valuation adjustments arising from the bank's own credit risk. The offsetting between valuation adjustments arising from the bank's own credit risk and those arising from its counterparties' credit risk is not allowed. "
(BIS has issued its final guidelines (July 2012) titled "Regulatory treatment of valuation adjustments to derivative liabilities - final rule issued by the Basel Committee". Banks are advised to refer to the aforementioned, these would be regarded as binding by SAMA with respect to capital computation / capital adequacy under Basel III guidelines and consider these as binding.)
Refer to Paragraph 75, Cumulative gains and losses due to changes in own credit risk on fair valued financial liabilities (Updated in July 2012)
Page 18 of Section A – Finalized guidance document concerning the implementation of Basel III, 4.4 Threshold Deduction
The original paragraph was as follows:
4.4 Threshold deductions
Instead of a full deduction, the following items may each receive limited recognition when calculating Common Equity Tier 1, with recognition capped at 10% of the bank's common equity (after the application of all regulatory adjustments set out in paragraphs 4.1.1 to 4.3):
• Significant investments in the common shares of unconsolidated financial institutions (banks, insurance and other financial entities) as referred to in paragraph 84;
• Mortgage servicing rights (MSRs); and
• DTAs that arise from temporary differences.
On 1 January 2013, a bank must deduct the amount by which the aggregate of the three items above exceeds 15% of its common equity component of Tier 1 (calculated prior to the deduction of these items but after application of all other regulatory adjustments applied in the calculation of Common Equity Tier 1). The items included in the 15% aggregate limit are subject to full disclosure. As of 1 January 2018, the calculation of the 15% limit will be subject to the following treatment: the amount of the three items that remains recognized after the application of all regulatory adjustments must not exceed 15% of the Common Equity Tier 1 capital, calculated after all regulatory adjustments. See Annex 2 for an example.
The amount of the three items that are not deducted in the calculation of Common Equity Tier 1 will be risk weighted at 250%. (Refer to Prudential Return)
The following content has been amended in the original paragraph above, these are highlighted in bold font – the rest of the original content remains “as is”:
Instead of a full deduction, the following items may each receive limited recognition when calculating Common Equity Tier 1, with recognition capped at 10% of the bank's common equity (after the application of all regulatory adjustments set out in paragraphs 4.1.1 to 4.3):
• Significant investments in the common shares of unconsolidated financial institutions (banks, insurance and other financial entities) as referred to in section 4.3 of this document;
Refer to Paragraph 87-89, A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
Page 73 of Section A – Finalized guidance document concerning the implementation of Basel III, Disclosure requirements
Disclosure requirements
The original paragraph was as follows:
91. To help improve transparency of regulatory capital and improve market discipline, banks are required to disclose the following:
• a full reconciliation of all regulatory capital elements back to the balance sheet in the audited financial statements;
• separate disclosure of all regulatory adjustments and the items not deducted from Common Equity Tier 1 according to paragraphs 87 and 88;
• a description of all limits and minima, identifying the positive and negative elements of capital to which the limits and minima apply;
• a description of the main features of capital instruments issued;
banks which disclose ratios involving components of regulatory capital (eg "Equity Tier 1, "Core Tier 1 or "Tangible Common Equity ratios) must accompany such disclosures with a comprehensive explanation of how these ratios are calculated.
92. Banks are also required to make available on their websites the full terms and conditions of all instruments included in regulatory capital. The Basel Committee will issue more detailed Pillar 3 disclosure requirements in 2011.
93. During the transition phase banks are required to disclose the specific components of capital, including capital instruments and regulatory adjustments that are benefiting from the transitional provisions
The following content has been amended in the original paragraph above, these are highlighted in bold font – the rest of the original content remains “as is”:
91. To help improve transparency of regulatory capital and improve market discipline, banks are required to disclose the following:
• a full reconciliation of all regulatory capital elements back to the balance sheet in the audited financial statements;
• separate disclosure of all regulatory adjustments and the items not deducted from Common Equity Tier 1 according to section 4.4. of this SAMA guideline;
• a description of all limits and minima, identifying the positive and negative elements of capital to which the limits and minima apply;
• a description of the main features of capital instruments issued;
• banks which disclose ratios involving components of regulatory capital (eg "Equity Tier 1, "Core Tier 1 or "Tangible Common Equity ratios) must accompany such disclosures with a comprehensive explanation of how these ratios are calculated.
(Refer to Paragraphs 91-93: A global regulatory framework for more resilient banks and banking systems - revised version (rev June 2011)
Amending the Requirements of Rule No. (300-1-4) for Resident Investors According to the Foreign Investment System
Identification and Management of Step-in Risk- BCBS
This section is currently available only in Arabic, please click here to read the Arabic version.Capital Adequacy Requirements for Market Risk-2014
This Circular has been superseded by SAMA circular No , (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 AD. Refer to SAMA Minimum Capital Requirements for Market Risk framework.Introducing a Paragraph Within Rule No. (100) of the Account Opening Rules
This section is currently available only in Arabic, please click here to read the Arabic version.Amendment of Rule (300.1.3) of the Rules for Bank Accounts
This circular is currently available only in Arabic, please click here to read the Arabic version.Range of Methodologies for Risk and Performance Alignment of Remuneration; and Pillar 3 Disclosure Requirements for Remuneration - BCBS
The Basel Committee on Banking Supervision (BCBS) has issued the final versions of its following documents relating to compensation practices:
i. The document titled “Range of Methodologies for Risk and Performance Alignment of Remuneration” issued on 12 May 2011. The document provides guidance on the design of risk-adjusted remuneration schemes and highlights issues that may affect the effectiveness of the risk adjustment methodologies;
ii. The document titled “Pillar 3 disclosure requirements for remuneration” issued on 1 July 2011. The disclosure requirements specified under this document cover the main components of sound remuneration practices and are aimed to support effective market discipline by allowing market participants to assess the quality of a bank’s compensation practices;
Both the above documents can be accessed from the Bank for International Settlements website (bis.org).
SAMA has already issued its Rules on Compensation Practices to banks vide Circular No. BCS/12580 dated 3 May 2010, which sets out the requirements, inter alia, on alignment of compensation with risk taking and compensation related disclosures. All banks are required to take into account the guidance provided in the above documents while complying with the SAMA Rules on Compensation Practices.
Amendments of Rule No. 300-1-1-3 for E-Commerce Institutions Without Official Headquarters
This section is currently available only in Arabic, please click here to read the Arabic version.Introducing a Paragraph Within Rule No. (100) of the Account Opening Rules
This circular is currently available only in Arabic, please click here to read the Arabic version.Main Principles of Governance for Banks Operating in Saudi Arabia - Definition of Independent Member
Banks’ Preparedness to Receive Applications for Prepaid Salary Cards of Domestic Workers
Enhancements and Revisions to the Basel II Framework , Market Risk and Trading Book
basel III: Treatment of Extraordinary Monetary Policy Operations in the Net Stable Funding Ratio (NSFR)
This section is currently available only in Arabic, please click here to read the Arabic version.Frequently Asked Questions on the Basel III Leverage Ratio Framework- BCBS 2014
This circular has been updated by SAMA circular No. 371000086852 dated 04/08/1437 H.SAMA refers to its circular # 351000133367 dated 25 August, 2014 regarding its guidance on the implementation of the BCBS document of January 2014 entitled “Basel III Leverage Ratio Framework” for implementation in January 2015. Recently, the BCBS has issued a document entitled “Frequently Asked Questions on Basel III Leverage Framework” that addresses various issues raised by the banks.
To promote consistent global implementation of the Basel requirements, the Committee has agreed to periodically review frequently asked questions (FAQs) and publish answers along with any technical elaboration of the standards text and interpretative guidance that may be necessary.
This document sets out the first set of FAQs that relate to the Basel III leverage ratio framework. The questions and answers are grouped according to different areas, which are in the order (i) criteria for the recognition of cash variation margin associated with derivative exposures (section 1); (ii) centrally cleared client derivative exposures (section 2); (iii) netting of securities financing transactions (SFTs) (section 3); (iv) the treatment of netting of SFTs and derivatives under a cross-product netting agreement (section 4); and (v) the exposure measure under the additional treatment for credit derivatives (section 5).
This document can be obtained from the BCBS Website (www.bis.org) which banks must review in the context of SAMA’s implementation framework.
Bank Customers Awareness Regarding VAT
Prudential Report Template for Commissions for Deposits, Loans, bonds and other Instruments
No: 391000029727 Date(g): 3/12/2017 | Date(h): 15/3/1439 Status: Superseded 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.SAMA in consultations with the Banking Working Groups will be issuing its guidance in the near future.
ATTACHMENT -1
Definitions and Guidance Notes "PRUDENTIAL RETURN ON LENDING AND DEPOSITS"
General
This general guidance is provided to facilitate the preparation of this quarterly return. This return should be completed at a solo level only.
Banks should use the following definitions and guidance notes for completing these returns relating to lending, deposit and borrowing's special commissions:
- Special commission received and paid should be disclosed in percentage terms(%) for new loans in first column split into Local Currency, Foreign Currency and Total and outstanding loans for the second column.
- Only weighted average is to be provided. Weighted average should be the weighted average of all changes of contractual rates within a quarter. Weighted average should be based on the amount outstanding at the end of the quarter and corresponding rates prevailing at that date.
- Current column means loans, interbank loans. investments, deposits, margin deposits, bonds and interbank deposits booked in that quarter. However, outstanding means cumulative including the current quarter.
- Calculation of weighted average(WA) is described in item 4.
- All classifications of Loans, Deposits and Bonds issued are mutually exclusive.
- All data for calculating weighted average rate should be related to M1 domestic (Resident by Local Currency & Foreign Currency).
- Special commission rate for Loans(B/S item 9.2 and 9.3), interbank deposits(B/S item 16) & lending(BIS item 4), Investment(B/S item 10) and Bond & Sukuk(B/S item 28).
- Special commission rate for deposits(B/S 17, 18, 21 and 22).
- Margin deposits(B/S 23)
- Weighted average rate for each row and each column, (if data is available) including total loans, and total deposits and subtotals should be calculated.
- This quarterly return to SAMA is due within 30 calendar days following the quarter end.
- Banks are requested to follow the note below to fill out the return.
- The list in annexure 3 should be used as a guide to fill out the return. We will update the list as needed. If any government institution or public nonfinancial corporation is not included in the list, banks are requested to draw this to our attention.
Quarterly Return
Types of Loans (please note that accrued special commission receivable should be added in the loan while computing weighted average)
2.1 Loans to Governments
Includes loans to all sovereign governments including Saudi Arabia and are classified as follows:
Budgetary central government - (more details in annexure 3) Social security funds - (more details in annexure 3) Development funds (specialised credit institutions)- (more details in annexure 3) 2.2 Loans to Financial Institutions (include insurance companies, leasing companies etc.)
2.3 Loans to Corporates
Public Non- Financial Corporates
Includes loans to all major public corporates such as ARAMCO, SABIC, SAUDIA, SEC, STC, SAPTCO etc. The detailed table as below provide examples:
Muslim World League National Water Company PETROMIN-General Organization for Petroleum and Minerals SABIC- Saudi Arabian Basic Industries SADARA SAPTCO- Saudi Arabian Public Transport Co. Saudi Arabian Airlines Saudi Arabian Minings (Ma'aden) SAUDI ARAMCO TOTAL Refining and Petrochemical Company (SATORP) Saudi Council of Engineers Saudi EDI (Saudi Electronic Data Interchange) Saudi Electricity Corporations Saudi Post Corporation Saudi Press Agency Saudi Telecom Company SAUDIA- Saudi Arabian Airlines Vela International Marine Ltd. World Assembly of Muslim Youth Large Corporates
Includes loans to all major commercial corporates with annual revenues above SR200 million. If annual revenue data is not available, in that case number of full time, employees should be considered for the definition of Large Private Corporates. Full time employees should be above 249.
Medium Enterprises
Includes loans to all medium sized commercial corporates with annual revenues between SR40 million to SR200 million. If annual revenue data is not available, in that case number of full time, employees should be considered for the definition of Medium Private Corporates. Full time employees should be from 50 to 249.
Small Enterprises
Includes loans to all small sized corporates with annual revenue between SR 3million to SR40 million. If annual revenue data is not available, in that case number of full time, employees should be considered for the definition of Small Private Corporates. Full time employees should be from 6 to 49.
Micro Enterprises
Includes loans to all small sized corporates with annual revenue upto SR3 million. If annual revenue data is not available, in that case number of full time, employees should be consider for the definition of Micro Company. Full time employees should be from 1 to five 5.
Kafalah Fund
These loans are defined to be for a maximum amount of SR. 1 O MM made to an enterprise with a maximum turnover of SR. 200 MM and are guaranteed by the Kafalah fund.
Commercial real estate
A commercial mortgage or commercial real estate loan normally involves a financing a commercial real estate asset. It generally represents a long term debt normally for up to 25 years but can be for shorter periods. The loan is secured by commercial property being financed.
Other Businesses
These include all types of business exclusive of above i.e. partnerships, proprietorships, etc.
2.4 Retail Loans
Consumer Loans
Consumer loan includes loans to individuals, household and family members, granted
on the following basis:
- Granted by the creditor to a borrower as a secondary activity for the borrower, i.e. outside the sphere 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 enjoyment, consumption and other such requirements of individuals as identified above e.g. to purchase furniture, household items, vacations, education, etc.
- These may cover Shariah compliant consumer loans under Murabaha, lstisna and other Islamic contracts.
- While mortgage loans are to be excluded, home improvement financing is included.
Credit Card Loans
These include all credit balances or amount owing by payment cardholders.
Mortgages or Housing Loans
A mortgage or housing loan normally involves a financing a real estate asset. It generally represents a long term debt normally for up to 25 years but can be for shorter periods. The loan is secured by residential property being financed where this lien is recorded in the title document. These may also include Shariah complaint residential property loans that are supported by an ljarah contract.
Other loans
Any other loan not already classified in above categories.
Interbank Loans
Refers to loan placements, made by one bank to another bank.
Investments
Represents investments in TBills, Bonds, fixed and floating rate securities issued by Government and quasi government, corporate, banks and other financial institutions and other counterparties.
2.7 Placements with SAMA - Represents reverse repo placements with SAMA. This should reconcile to line 2.6 of M1 return
All types of Deposits (please note that accrued special commission payable should be added in the deposits while computing weighted average)
3.1 Split of total deposits
- If a deposit is new, original maturity should be reported in the column WA rates - current quarter. However, in case of old deposits, residual maturity should be used to populate the column stating outstanding WA rates.
- Demand deposits (including Shariah Compliant 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, it should report it as zero.
- Saving deposits (including Shariah Compliant deposits) represent non-checking special commission bearing customer deposits with no defined maturity.
- Time deposits (including Shariah Compliant deposits) represent special commissions bearing customer deposits with a defined maturity.
- Split of deposit by counterparties (Government, Financial Institutions, Corporate, SME and Retail) is required to be populated as a memo line and should not affect totals or sub totals.
Repo deposits from SAMA should reconcile to line 15.2, 15.3, 15.4 and 15.5 of M1 return.
3.2 Margin deposits
Represents all deposits received in relation to transaction in exchanges.
3.3 Bonds and SUKUK
Issued by banks should be reported according to their maturities. i.e. if the issuance is during the quarter, it should reflect original maturity date in the calculation of weighted average. However if there is an existing issuance, the weighted average %age reported in outstanding column should reflect residual maturity.
3.4 Interbank deposits
Refer to deposit received by one bank from another bank.
4. Example of Calculating Weighted Average Special Commissions
The weighted average rate is calculated as at the end of a given period, i.e, quarter.
Example of Calculating Weighted Average Special Commissions
Example-I
Example of computation of weighted average special commissions for a given period end balance in the amount of SR360 million is given below:
Special Commissions Rates Related Amounts In 000's Rates multiplied by I Amounts 1 2 3=1X2 0% 30,000 - 1% 50,000 500 2% 60 000 1,200I 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 WASCRs= (14000/360000)*100 Weighted Average Special
Commission Rates (WASCRs)
3.89% ATTACHMENT - 2
QUARTERLY RETURN (as attached herewith in excel format)
ATTACHMENT-3
4.1.1 Budgetary central government
1
Royal Court
2
Private Affairs of the Custodian of the Two Holy Mosques
3
Crown Prince Court
4
Private Affairs of Crown Prince
5
Royal Protocols
6
Crown Prince Royal Protocols
7
National Security Council
8
Royal Guard Regiment
9
Shura Council
10
Presidency of the Council of Ministers
11
General Secretariat of the Council of Ministers
12
Bureau of Experts at the Council of Ministers
13
King Fahd National Library
14
Ministry of National Guard
15
King Khalid Military Academy
16
The Board of Grievances
17
General Auditing Bureau
18
Ministry of Civil Service - the General Bureau
19
General Intelligence Presidency
20
Control and Investigation Board
21
General Authority of Sports
22
Chairmanship of the Commission
23
Royal Commission for Jubail and Yanbu
24
Ministry of Foreign Affairs - the General Bureau
25
Prince Saud Al-Faisal Institute of Diplomatic Studies
26
Ministry of Economy and Planning - the General Bureau
27
General Authority for Statistics
28
Ministry of Defense - the General Bureau
29
Office of the General Staff Headquarters
30
Royal Saudi Land Forces
31
Royal Saudi Air Force
32
Royal Saudi Naval Forces
33
Royal Saudi Air Defense Forces
34
King Abdulaziz Military Academy
35
King Faisal Air Academy
36
General Directorate of the Armed Forces Medical Services
37
King Fahad Naval Academy
38
King Abdullah Air Defense Academy
39
Ministry of Interior - the General Bureau
40
Directorate of Public Security
41
General Directorate of Civil Defense
42
General Directorate of Investigation
43
General Directorate of Border Guard
44
King Fahd Security College
45
Special Security Forces
46
General Directorate of Passports
47
General Administration of Mujahideen
48
Emirate of Riyadh Province
49
Emirate of Makkah Province
50
Emirate of Eastern Province
51
Emirate of Madinah Province
52
Emirate of Najran Province
53
Emirate of Aseer Province
54
Emirate of Hael Province
55
Emirate of Jazan Province
56
Emirate of Tabouk Province
57
Emirate of AI-Qasim Province
58
Emirate of Northern Border Province
59
Emirate of AI-Jouf Province
60
Emirate of AI-Baha Province
61
The Bureau of Investigation and Public Prosecution
62
General Directorate of Prisons
63
Ministerial Agency of Civil Affairs
64
Facilities Security Forces
65
The General Directorate of Narcotics Control
66
Ministry of Municipal and Rural Affairs
67
Najran Municipality
68
Aseer Municipality
69
Ha'il Municipality
70
Jazan Municipality
71
Tabuk Municipality
72
AI-Madinah Municipality
73
AI-Qasim Municipality
74
Al-Riyadh Municipality
75
Northern Borders Municipality
76
AI-Jouf Municipality
77
AI-Baha Municipality
78
Jeddah Municipality
79
Ta'if Municipality
80
Eastern Region Municipality
81
Holy Makkah Region
82
AI-Ahsa Municipality
83
Ministry of Education
84
Higher Council of Education
85
Transport Ministry
86
Saudi Railways Organization
87
Minister of Communications and Information Technology - the General Bureau
88
Ministry of Energy, Industry and Mineral Resources
89
Ministry of Commerce and Investment
90
Saudi Standards, Metrology and Quality Orgainzation
91
Saudi Export Development Authority
92
Ministry of Environment, Water and Agriculture
93
Alahsa Irrigation & Drainage Authority
94
Saudi Grains Organization
95
Ministry of Justice -the General Bureau
96
The General Presidency of Scholarly Resarch and lfta
97
The General Presidency for the Affairs of the Two Holy Mosques
98
The Saudi Projects Bureau in Yemen
99
Ministry of Finance - the General Bureau
100
Saudi Customs
101
General Authority of Zakat & Tax
102
Saudi Wildlife Authority
103
The Ministry of Islamic Affairs, Da'wah, and Guidance
104
Ministry of Haj and Umra
105
Government programs and facilities
106
Regular allowances and subvention
107
Installment payment/returns of development bonds
108
The General Authority of Meteorology & Environmental Protection
109
Saline Water Conversion Corporation
110
Ministry of Labour & Social Development
111
Ministry of Housing
112
Supreme Judiciary Council
113
King Abdul Aziz Foundation
114
National Anti-Corruption Commission
115
Saudi Red Crescent Authority
116
General Commission for the Guardianship of Trust Funds for Minors and Their Counterparts
117
Education Evaluation Commission
118
Saudi Port Authority
119
Rayal Commission for AI-Jubyal and Yanbu
120
Saudi Standards, Metrology and Quality Orgainzation
121
Saudi Arabian General Investment Authority
122
Technical and Vocational Training Corporation
123
King Abdul Aziz City for Science & Technology (KACST)
124
Institute of Public Administration
125
King Faisal Specialized Hospital & Research Centre
126
Saudi Red Cresent Authority
127
Military Industries Organization
128
Saudi Geological Survey Authority
129
General Commission for Tourism & Antique
130
Communication and Information Technology Commission (C.I.T.C)
131
Saudi Food and Drug Authority (SFDA)
132
Saudi Post Organization
133
General Authority of Civil Aviation (GACA)
134
Human Rights Commission
135
General Survey Authority
136
Kind Abdullah City for Nuclear Energy
137
King Saud University
138
King Abdul Aziz University
139
King Fahd University of Petroleum and Minerals
140
Imam Muhammad lbn Saud University
141
Islamic University
142
King Faisal University
143
Umm AI-Qura University
144
King Khalid University
145
Taibah University
146
Qassim University
147
Taif University
148
Jazan University
149
Al Jouf University
150
University of Ha'il
151
University of Tabuk
152
Al-Baha University
153
Najran University
154
Prince Nora Bint Abdulrahman University
155
Northern Borders University
156
University of Dammam
157
Prince Salman Bin Abdulaziz University
158
AI-Majma'ah University
159
Shagra University
160
Saudi Electronic University
161
University of Jeddah
162
University of Hafr Albatin
163
University of Bisha
4.1.2 Social security fund (GOSI and PPA)
4.1.3 Development funds
A Specialized Credit Institutions 1 Agriculture Development Fund 2 Social Development Bank 3 Public Investment Fund 4 Saudi Industrial Development Fund 5 Real Estate Development Fund B Saudi Fund for Development IFRS 9 (International Financial Reporting Standard-9)
Background
IFRS 9 (International Financial Reporting Standard - 9) - "Financial instruments" issued on 24 July 2014 by the lASB's (International Accounting Standards Board) is a replacement of IAS 39 "Financial Instruments: Recognition and Measurement". This standard includes requirements for recognition and measurement of assets, impairment, de-recognition and general hedge accounting. The version of IFRS 9 issued in 2014 supersedes all the previous versions and is effective globally for accounting periods beginning on or after 1 January 2018 with an early adoption permitted. In Saudi Arabia, this standard is applicable from 1 January 2018.
In 2016 and 2017, SAMA has undertaken various quantitative impact studies along with detailed consultation process with the Saudi Banks for the implementation of this accounting standard. This has resulted in issuance of a detailed guidance document in 2016 around the following topics:
- IFRS 9 governance and risk frameworks highlighting the role and ownership of finance, risk, treasury and various other business functions
- Classification and measurement of assets
- Definition of past dues
- Clarification around impairment of assets
- Quantitative and qualitative disclosures applicable from December 2016 onwards
- Impact on Capital Adequacy Ratio (CAR), Leverage Ratio (LR) and Balance sheet and Income Statement
Transitional arrangements
Based on various discussions and results of the quantitative impact studies, SAMA has decided to adopt Basel standard on "Regulatory treatment of accounting provisions - interim approach and transitional arrangements" available on Basel website. In addition, SAMA has exercised various national discretions as clarified in the following table:
Page reference of
Basel document
Summary of Basel paragraph SAMA's national discretion 3
Distinction between General Provisions and Specific Provisions for regulatory capital purposes Total stage 1 provisions and only those stage 2 provisions, which are past dues for more than 30 days but less than 90 days, should be included in Tier 2 regulatory capital. In order to allow Stage 2 provisions, the bank should have reasonable and supportable information demonstrating that even if contractual payments are more than 30 days past due, this does not represent a significant increase in credit risk. However, as per Basel rules, the use of general provisions should be limited to 1.25% of total credit risk weighted assets under the Standardized Approach. 4
Transitional Approach Day 1 impact of IFRS 9 (applicable from 1 January 2018) on regulatory capital should be transitioned over five years. 5
Choice of static vs. dynamic transitional approach The Banks should use a dynamic approach for reflecting the impact of this transition. 6
Pillar 3 disclosure* The Banks should publish details of the impact of the transitional arrangements on their Capital and Leverage ratios in their Pillar 3 disclosures Template KM1. This should clearly show position for both transitional vs fully loaded ratios (if transition not applied). * Please refer to the Pillar 3 Disclosure Requirements Framework issued by SAMA circular No. (44047144), dated 04/06/1444H, Corresponding To 27/12/2022G.
Longevity Risk Transfer Markets: Market Structure, Growth Drivers and Impediments, and Potential Risks- BCBS
The aim of this Joint Forum report is to give a first and preliminary analysis of the size and structure of the LRT markets, and the factors affecting their growth and development. It will also seek to raise awareness of the associated potential risks and cross sectoral issues for market participants, policymakers and supervisors.
Banks are expected to refer to this BCBS document as a guidance in managing their own banking employee pension funds.
The Banks can access this BCBS document from BIS website: www.bis.org where they are expected to review it and incorporate it where relevant in their own internal capital planning framework.
The Principles for Effective Risk Data Aggregation and Risk Reporting - BCBS
The Principles for effective risk data aggregation and risk reporting (the Principles) were issued by the Basel Committee on Banking Supervision (the Basel Committee) in January 2013. The Principles aim to strengthen risk data aggregation and risk reporting practices at banks to improve risk management practices. In addition, improving banks' ability to rapidly provide comprehensive risk data by legal entity and business line will enhance banks' decision-making processes and improve their resolvability.
The Principles are initially addressed to systemically important banks (SIBs) and apply not only at the group level but also to all material business units or entities within the group. National supervisors may nevertheless choose to apply the Principles to a wider range of banks. The Basel Committee and the Financial Stability Board (FSB) expect banks identified as global systemically important banks (G-SIBs) to comply with the Principles by 1 January 2016.2 In addition, the Basel Committee strongly suggests that national supervisors also apply the Principles to banks identified as domestic systemically important banks (D-SIBs) three years after their designation as such by their national supervisors.
The Banks can access this BCBS document from BIS website: www.bis.org where they are expected to review it and incorporate it where relevant in their own internal capital planning framework.
Sound Capital Planning Process: Fundamental Elements- BCBS
An important lesson from the financial crisis concerns the need for banks to strengthen their capital planning processes by making it more comprehensive, forward-looking and adequately formalized.
Consequently, some banks continued to pay dividends and repurchase common shares when capital could have been retained to insulate them against potential future losses. Additionally, banks also issued capital instruments - such as hybrid debt - that ultimately proved ill-equipped to absorb realized losses.
While, this paper does not set forth new capital planning guidance, it presents sound international practices to foster improvement in the capital planning processes of banks. It is not intended to describe an ideal state, as banks' practices and processes are expected to continue to improve and evolve. This paper is not meant to outline a one-size-fit to capital planning, as it is understood that banks would need to adopt solutions that are tailored to their individual circumstances. In this respect, banks will be expected in due course to refer to this document in preparation their annual bank documents.
The Banks can access this BCBS document from BIS website: www.bis.org where they are expected to review it and incorporate it where relevant in their own internal capital planning framework.
Quarterly Monitoring of Capital Leverage Ratio in 2011 and 2012
SAMA New Banking Products and Services Guideline- 2017
This Guideline has been updated by SAMA circular No. (45032226), dated 16/05/1445 H, Corresponding To 30/11/2023 G. To read the updated guidelines, click here.1. INTRODUCTION
Purpose and Scope
Banks occasionally introduce new products or services in the course of their business. These same innovations, however, could cause unforeseen and undesirable results. Licensed banks must therefore make sure any risks posed by new products/services to the individual bank or the financial system as a whole is well controlled. Banks must also ensure that new products and/or services deliver the required level of fair treatment, honesty and financial inclusiveness and meet SAMA's strategic objective for financial consumer protection.
In light of the above, an operational risk management framework/guideline is necessary for the introduction of new products and services. The objectives of this framework/guideline is to promote sound risk management practices in managing and controlling new product/service risk by ensuring the appropriate assessment and mitigation of risk during new product/service development.
Purpose of the Guideline
This Guideline seeks to enhance the transparency, efficiency and risk management processes of the regulated banks' new products/services approval process by-
- Providing banks with guidance on what constitutes a new product or service.
- Providing high level policy requirements for new product/service development.
- Highlighting the special case of new derivatives and Fintech products.
- Detailing the information required to be submitted for new products/service when notifying SAMA.
Scope
This Guideline sets out the applicable regulatory procedures and SAMA's expectations regarding the management and control of risk associated with the development of new financial products and services by the regulated banks. It is applicable to all licensed banks. This guideline does not apply to products/services where licensed banks are explicitly required through other regulations or the Banking Control Laws to seek SAMA's approval for certain type of banking products and/or services.
Interpretation/guidance
For the purposes of this Guideline, a new product or service is one which has not previously been marketed or sold by the bank. This is a product/service that is being offered by the bank in the Kingdom of Saudi Arabia (KSA) for the first time and includes a product/service which has never been offered by the bank before in KSA, notwithstanding the fact that the product or service may have already been offered by the bank or its parent outside of KSA (in case of a foreign bank).
OR
An existing product or service that has undergone material/significant modifications to the product structure, characteristics and risk profile.
The Chief Risk Officer (CRO) (or other designated senior risk officer identified by the bank) and the Head of Compliance shall be responsible for determining whether a variation to an existing product or service constitutes a material/significant change for the purpose of the definition of new product or service. Changes to key terms related to payment and other significant rights and obligations of the counterparties/customers, the intended uses and target markets of the product, and the nature of assets underlying the product should be taken into consideration when determining whether a change/modification is deemed significant/material change.
For Shariah-compliant products and services, the CRO or identified officer shall consult the Shariah Committee in assessing whether the proposed variation which would result in a material/significant change would give rise to any Shariah issues.
2. POLICY REQUIREMENTS & PRODUCT RISK MANAGEMENT
Banks are required to have a Board (or its delegated authority) approved New Products/Services Policy to guide the development and approval process for new banking products and services. The New Product and Services Policy should detail the process to be followed regarding the review and approval of new products and services. Such a policy should at least cover the following areas;
a. The policy shall give due regard to the interests of consumers in the development, marketing and sale of new products and services. The bank's new products policy should describe the appropriate parameters and guidance for the fair treatment of consumers which shall serve to avoid the potential for mis-selling, terms and conditions that are inherently unfair to consumers, and business practices that restrict the freedom of choice to consumers.
b. For retail products, the new products/services policy must comply with relevant regulations for retail products and services on standards of business conduct issued by SAMA as may be applicable.
c. For retail products, the policy must require that all applicants complete the 'New Products - Consumer Protection Checklist' (SAMA will provide this checklist in due course). This checklist must be signed by the Business owner and the Head of Compliance. In the event that the application for the new product does not comply with consumer protection requirements, the product cannot be introduced to the marketplace, even if other approval requirements are in place. After the introduction of the product, SAMA can, at any time, request suspension or withdrawal of the product if there is a negative impact on consumers.
d. The policy should require that senior management and/or the board as appropriate approve all new products and services.
e. A full risk assessment of a new product and service should form the basis on whether or not to introduce it to the market.
f. The policy should define the requirement to have a pilot or testing phase for the new product/service before its commercial launch.
g. The policy should define parameters for the authority which approves new products and services including the circumstances under which such authority may be delegated.
h. The policy should establish restrictions and/or prudent concentration limits for exposures to geographic regions, product lines, economic sectors or any other relevant risk dimension where applicable.
i. The policy should establish lines of responsibility for managing related new product/service risks and;
j. Establish internal communication flows to ensure that the new product or service offerings are fully integrated throughout the bank's line functions.
- The board of directors (The Board) and senior management of the bank are responsible to ensure that the new product/service risks are well managed. Banks must have in place appropriate policies and procedures to prudently manage risks associated with the new products/services it offers
- The new product/services must fall within the ambit of banking business.
- The bank should correctly classify the new product as per the accounting and SAMA trading and banking book prudential rules.
- The bank should have the organizational and operational capacity to adequately manage and control the risks associated with the new product/service.
- In offering its new product/services, the bank must comply with all applicable regulatory requirements and its internal policies as well as regulatory requirements issued by other domestic and international regulators (for overseas subsidiaries and branches). The compliance department of the bank is required to review the new product (s) or service (s) request from compliance, regulatory and financial crimes perspective and ensure that the new product (s) and service (s) conform to all rules and regulations applicable in the Kingdom. The Internal Audit function of the bank is required to audit any new product or service within six months of the launch of the product. Bank Audit departments must also ensure that Shariah compliant products remain complaint throughout the life of the product/service.
- A bank that offers new Shariah-compliant product/service shall ensure a sound and robust Shariah technical and governance framework is in place that includes a comprehensive end-to-end Shariah-compliant product/service development and implementation process. The product/service (including its accompanying documentations) must be approved by the bank's Shariah Committee
- Banks offering Shariah-compliant products/services must also have a robust bridging methodology for conversion from Shariah to conventional products status for the purposes of complying with Basel rules for capital and risk determination.
- For Shariah-compliant products, banks must ensure that the new product development process is comprehensive and robust to minimise the possibilities of the new product to be later nullified on Shariah grounds
3. Derivative Products
Derivatives play an important role in the economy. However, they are also complex in nature and are associated with certain risks that are unique to them. Banks that seek to introduce new derivatives products for their customers shall develop and implement internal customer suitability procedures aimed at ensuring that these products are only sold to suitable customers. Customer suitability procedures should be designed to seek sufficient knowledge about the customer to establish that;
(a) The customer has a practical understanding of the features of the product and the risks assumed. For the more complex 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 structure product. Banks should illustrate the potential profit and loss scenarios over the structured product's time horizon. Banks must also ensure that the senior management and the board (where a board exists) of the customers are made aware in cases where the bank is offering the more complex derivatives such as structured products..
(b) The product would meet the customer's business objectives and;
(c) The product is consistent with the customer's appetite for risk.
A bank should not recommend a 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 should be made based on information sought and obtained from the customer.
Given their complex nature, greater due diligence is expected for new derivatives products. As such, banks must ensure that a new derivatives product, at a minimum, meets the following three (3) key tests:
(1) An Economic Purpose Test
Banks seeking to introduce new derivative products should demonstrate that the proposed derivative instrument has a bona fide economic purpose and does not merely provide a means of financial speculation, leverage, or regulatory arbitrage. To meet this test, the bank would have to;
(1) Identify the intended customers for the proposed new derivative product and describe (with sufficient specificity) potential uses;
(2) Show that the new derivative product will fulfill a specific business need of potential customers, which existing financial products fail to fulfill; and
(3) Demonstrate that this legitimate business need significantly outweighs any potential uses of the new derivative product for speculative purposes, leverage or regulatory arbitrage as the core motivation for the customer or the bank to enter into the proposed transaction.
(2) An Institutional Capacity Test
A bank that intends to introduce a new derivatives product must demonstrate that it has the internal organizational and operational capacity to monitor and manage potential risks the proposed new product poses to the bank's own financial health, as well as to the financial well-being of the customers and overall market stability.
The bank must demonstrate that effective control, monitoring and reporting systems and procedures are in place to ensure on-going operational compliance with the bank's, the customer's and the counterparty's risk appetite. The bank should also have a strong governance process around the valuation of derivatives, which includes robust control processes and documented procedures.
(3) A Systemic Risk Test
A bank intending to introduce a new derivatives product will have to demonstrate that the proposed product does not pose potentially unacceptable systemic risk. It is the responsibility of the bank to ensure that suitability of customers for the new derivatives product are assessed not only based on the bank's exposure to an individual customer but also based on the industry's exposure to the customer. The bank would therefore need to obtain full disclosure from the customers about their derivative exposures with other banks and nonbanking entities prior to selling a new derivative product. Future access by banks to aggregate position information in Saudi Arabian Trade Repository (SATR) will help banks meet this objective but until then, banks must get their customers to disclose this as part of their facility application process. The bank must also ensure that the new derivative it seeks to market is not likely to have a negative impact on broader socio-economic policy goals of the country (Impact on SAIBOR, SAR etc). In this regard, structured products like multi-legged non-linear derivatives involving SAR against a foreign currency warrant close monitoring for their impact on the financial markets. SAMA also expects that banks report any reportable new derivatives product transactions to the Saudi Arabian Trade Repository (SATR) as per SATR reporting guidelines.
4. Fintech Products
Fintech refers to the application of information and communication technology ("ICT") in the field of financial services, including such areas as digital payment and remittance, financial product investment and distribution platforms, peer-to-peer financing platforms, cybersecurity and data security technology, big data and data analytics, and distributed ledger application to new asset classes and processes.
Banks are keen to develop innovative Financial Technology (Fintech) products and services but may not be able to do as they either require additional regulation or the current regulation does not allow for the products and services.
SAMA has adopted the SANDBOX concept to help create an environment to provide fintech regulation clarity and provides regulation check for Fintechs and financial institutions that want to check new products and services.
SANDBOX is a monitored light touch regulatory environment that enables financial institutions and startups to experiment and test financial technology solutions that may not be allowed under current regulations. A sandbox provides a period of time for the promoter and SAMA to understand the impact of the technology.
All banks wanting to introduce on their own or partner with others to introduce new Fintech products or services are required to apply to SAMA to ensure such technology is first tested and evaluated comprehensively in SAMA's SANDBOX before being released to the public.
Below is a brief description of the processes that the Fintech product/service could go through under the SAMA SANDBOX concept.
Sandbox Application Process
5. SAMA NOTIFICATION PROCESS
- Banks intending to introduce new product/service are required to notify SAMA.
- SAMA will not grant approval or a 'no objection' for new products/services but in line with its primary supervisory objectives, SAMA can object to the introduction of a new product/service by a bank if it believes that such an introduction will go against this objective.
- SAMA will base any decision (2 above) on documents submitted by the bank as well as representations as to the process that has been followed by the bank in the development of the new product or service.
A bank notifying SAMA of its intention to introduce a new product/service should complete the checklist in Appendix A, which at minimum, requires the submission of the following supporting documents/information;
a) A detailed new product/service program/description document outlining the product/service's features, structure, and target customers. Banks should provide product illustrations and flow charts where appropriate.
b) Description of the product/service's key inherent risks from both the bank's perspective and the perspective of the customer, together with the systems and processes that are in place to mitigate these risks.
c) A signed statement by the Chief Risk Officer (CRO) and the Head of Compliance of the bank that the new product/service is developed in accordance with the bank's approved New Products/Service Policy, this guideline, all other regulations and the Banking Control Laws.
d) A Copy of the New Product/Service Development Policy as approved by the Board or its delegated authority.
e) Copies of supporting documents such as Term Sheets and other constituent documents where applicable.
f) Necessary Shariah approvals for Islamic products/services.
- SAMA will acknowledge receipt of such a notification within seven (7) business days of receiving the notification. In case the bank does not receive a notification within (7) days from SAMA, it is the responsibility of the bank to follow up this and confirm whether SAMA has received its new products/service notification application. SAMA will notify the bank if it needs further information and discussions about the new product/service or if it objects to the introduction of the new product within fourteen (14) business days of receiving the notification. If the bank does not receive any objection or request for further information/discussions from SAMA after fourteen (14) business days, the bank can go ahead and launch the new product as long as it meets the requirements of this guideline, Banking Control Laws, all other SAMA regulations and the bank's own internal policies.
6. Post Launch And Ongoing Monitoring Of New Product/Service Risks
- SAMA has the right, at a future date, to object to the continued offering of a product or service if it believes that the continued offering of that product or service poses risks to the bank or the system as a whole
- Banks are required to regularly review identified risk exposures of the products and services in the light of changing market conditions not previously factored in to ensure that all material risks of the new product or service are identified and monitored
- Banks are required to keep an updated register of all their products for future inspections by SAMA
Appendix A: New Products/Services Checklist
ID
Requirements
Yes
No
A
A detailed new product/service program/description document outlining the product/service's features, structure, and target customers. Banks should provide product illustrations where appropriate
B
Description of the product/service's key inherent risks from both the bank's perspective and the perspective of the customer, together with the systems and processes that are in place to mitigate these risks
C
A signed certificate (Appendix B) by the Chief Risk Officer (CRO) and the Head of Compliance of the bank that the new product/service is developed in accordance with this guideline and the bank's approved New Products/Service Policy
D
A Copy of the New Product/Service Development Policy as approved by the Board or its delegated authority
E
Copies of the Term sheet and other constituent documents where applicable
F
Necessary Shariah Approvals
Appendix B: Statement Of Concurrence
...........Bank (Name of bank) hereby concurs that the.................. product/service (Name of product) has been developed in accordance with SAMA's new products/services guideline, the banks' approved new products policy, Banking Control Law and all other relevant laws and regulations
----------------------------------- --------------------------------
Chief Risk Officer (CRO) Head of Compliance/Chief Compliance Officer
Revised Good Practice Principles for Supervisory Colleges- BCBS
This Document has been replaced by the BCBS document titled "Principles for effective supervisory colleges", dated 26 June 2014.In the aftermath of the recent financial crisis, a series of key initiatives have been undertaken with regard to the reform of international financial regulation and supervision. In particular, supervisors have taken steps to enhance the supervision of global systemically important banks (G-SIBs). Effective supervisory colleges play a key role in such enhanced supervision. Supervisory colleges can enhance information-sharing between supervisors, help the development of a common understanding of risk in financial groups, promote a shared agenda for addressing risks and vulnerabilities, and provide a platform for communicating key supervisory messages among college members.
In general, colleges of supervisors are permanent, but flexible, structures for collaboration, cooperation, coordination and information-sharing among the authorities responsible for and involved in the supervision of the different components of cross-border banking groups. While bilateral and multilateral arrangements among supervisors of global banking groups have existed for decades, many of these arrangements were formalized as supervisory colleges only in the years leading up to the financial crisis, with this trend accelerating thereafter. Colleges are now an important component of effective supervisory oversight of an international banking group. The G20 has re-emphasised the significance of colleges in the wake of the financial crisis.
The Banks can access this BCBS document from BIS website: www.bis.org Closure of the State Bank of India Branch
Include U.S. Dollar-Denominated Government Bonds and Sukuk for Liquidity Ratio Calculation
Referring to SAMA Circular No. 10348/M A/371 dated 15/08/1409 H regarding Inclusion of Banks' Investments in Local Development Bonds as a Component of Liquid Assets for calculating the liquidity ratio for banks as stipulated in paragraph two of Article Seven of the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386 H concerning liquidity reserves and their components.
Recently, the Government of the Kingdom has issued dollar-denominated Sukuk bonds as part of its fiscal policy, which provides this type of investment option as high-quality liquid assets for banks. SAMA has decided to include this financial instrument in the calculation of the liquidity ratio as specified in the aforementioned paragraph of the Banking Control Law. Please note that these bonds and Sukuk do not qualify as financial instruments eligible for repurchase operations (Repo-Eligible).
Corporate Governance Principles for Banks
Capital Requirements for Bank Exposures to Central Counterparties- BCBS (2012)
This Circular has been updated by Capital Requirements for Bank Exposures to Central Counterparties, dated 10 April 2014. Requirements are incorporated in SAMA's Basel 3 reforms, issued by Saudi Central Bank circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G.Review of the Credit Valuation Adjustment (CVA) Risk Framework
Report Timing for Bank Financial Statement (Annualy & Quarterly)
The report timing for bank quarterly and annual financial statement submissions were extended by the circular No.(11204/67), dated 22/02/1440 H, Corresponding To 01/11/2018G.TLAC Holdings Standard
In November 2015, the Financial Stability Board (FSB) published an international standard for Global Systemically Important Banks (G-SIBs) on loss-absorption and recapitalisation capacity in a bank's resolution. This standard was developed in consultation with the Basel Committee on Banking Supervision in response to a call from the G20 Leaders. The standard comprises a set of principles and a Term Sheet that implements these principles by setting a minimum requirement for Total Loss-Absorbing Capacity (TLAC) instruments.
The TLAC Holdings Standard deals with the regulatory capital treatment of banks' investments in instruments that comprise Total Loss-Absorbing Capacity (TLAC) for Global Systemically Important Banks (G-SIBs). The standard aims to reduce the risk of contagion within the financial system should a G-SIB enters into resolution. It applies to both G-SIBs and non-G-SIBs along with specifying how G-SIBs must take account of the TLAC requirement when calculating their regulatory capital buffers. The main elements of the prudential treatment are as follows:
• Tier 2 deduction: banks (both G-SIBs and non-G-SIBs) must deduct their holdings of TLAC instruments issued by other G-SIBs that do not otherwise qualify as regulatory capital from their own Tier 2 capital. • Threshold below which no deduction is required: TLAC holdings should be included within the existing 10% threshold that applies to holdings of regulatory capital instruments. There is an additional 5% threshold that may be used for non-regulatory capital TLAC holdings being measured on a gross long basis. • Instruments ranking pari passu with subordinated forms of TLAC must also be deducted subject to proportionate deduction approach.
The Banks should access the BCBS document from BIS website www.bis.org. These rules are applicable from 1 January 2019 as specified in the Basel document.
Prepaid Card - Payroll
In reference to Central Bank Circular No. (361000085193) dated 16/6/1436 H and circular number (BCT/15631) dated 11/6/1433 H Regarding the rules for prepaid services in the Kingdom of Saudi Arabia and the necessity of applying them to all prepaid payment services and products, and in light of the difficulties observed by the central bank that banks have faced in implementing paragraph number (12), from Rule number (2,4,2) related to the delivery of prepaid cards and their PINs to the concerned employees/beneficiaries, and Rule No. (3.2) Regarding the requirements of the Know Your Customer (KYC) principle for prepaid cards (salary card product) and based on discussions with banks on this matter, the central bank has studied these difficulties and classified them (especially in light of the implementation of several important national initiatives such as the Wage Protection Program) and has established appropriate mechanisms to address them.
Accordingly, you will find attached options to address those difficulties. The central bank also emphasizes that all banks must adhere to what is stated in the Regulatory Rules for Prepaid Payment Services in the Kingdom of Saudi Arabia, and the implementation of the requirements of the Know Your Customer (KYC) principle, and the necessity of clearly defining the responsibilities and commitments of the contracting entity (legal person) in the agreement related to the issuance of prepaid cards (payroll card product) concluded in this regard, especially with regard to the distribution of cards and secret numbers to the workers under the sponsorship of the legal person. The agreement must be reviewed and approved by the Compliance Manager in the bank before its application and enforcement. Additionally, these agreements must be reviewed by the internal auditor and/or the legal advisor of the contracting entity (legal person).
The Central Bank affirms that the bank bears full responsibility for implementing the procedures and instructions of the Central Bank regarding the verification of the requirements of the "Know Your Customer" principle and ensuring that the objectives of those requirements are met. The Central Bank also emphasizes the need to comply with what is stated in this circular and the Regulatory Rules for Prepaid Payment Services in the Kingdom of Saudi Arabia and emphasizing that this should be limited to a prepaid card account (salary card product) and starting to implement this from this date.
Updating the Rules for Prepaid Payment Services in the Kingdom of Saudi Arabia (Payroll Card Product)
First:
According to the prepaid services rules stated in paragraph number (12) of Rule Number (2,4,2) The text states: "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". Banks face challenges in delivering the PINs to primary cardholders for several reasons, which may cause delays in opening some accounts. To address these difficulties, banks may apply one of the following options for distributing the PINs of prepaid cards (wage card product), while ensuring that the chosen option is documented by the bank in the agreements made in this regard. The central bank also emphasizes that the bank bears full responsibility for implementing the procedures and instructions concerning the verification of Know Your Customer (KYC) requirements, ensuring the necessary diligence is applied by the bank to achieve the goals of these requirements.
Options for addressing these difficulties:
1- (First Option): Activating payroll cards by having the cardholder visit the bank branches, as follows:
- Salary cards (in an inactive state) and PIN numbers are sent together to the contracting party (the legal entity - institutions or companies).
-The cards and PINs are to be handed over to two different responsible individuals from the staff of the contracting entity (the legal entity).
- The two officials from the contracting entity (legal personality) are responsible for distributing cards and secret numbers to their customers. This process should be documented, and the customer (primary cardholder) must sign to acknowledge receipt of the card and the secret number.
- The customer (primary cardholder) visits one of the bank branches to complete the card activation process and fulfill the requirements of the Know Your Customer (KYC) principle.
2- (Option Two): Activating payroll cards through a visit by the bank's employees to the headquarters of the contracting entity (legal entity), as follows:
- Salary cards (in an inactive state) and PINs are sent together to the contracting entity (legal entity - institutions or companies).
- The cards and PINs are to be handed over to two different responsible individuals from the personnel of the contracting party (the legal entity).
- The two officials from the contracting entity (legal entity) are responsible for distributing the cards and PINs to their respective customers, documenting the process, and obtaining the customer's (primary cardholder's) signature upon receipt of the card and PIN.
- The bank coordinates with the officials of the contracting entity (legal entity) to visit its site through two branch employees who have different responsibilities and authorities, with the aim of implementing the Know Your Customer (KYC) requirements.
- After the bank verifies the matching of the client's information (the primary cardholder) and applies the Know Your Customer (KYC) requirements, and the client receives the card and the associated PIN, the card is activated.
3- (The third option): Activating bank cards through mobile messages (One Time Password – OTP):
- Payroll cards (in inactive status) are sent to the contracting party (the legal entity - institutions or companies).
- The contracting entity (legal personality) - through one of its responsible employees - undertakes the distribution of the cards to its employees through a documented mechanism and obtains the customer's (primary cardholder's) signature upon receiving the card.
- The bank coordinates with the contracting party (the legal entity) to arrange a visit for the bank's personnel (two branch employees with different levels of responsibilities) to the worksite in order to fulfill the requirements of the Know Your Customer (KYC) principle and to obtain the customer's (primary cardholder's) signature on a declaration confirming receipt of their card and the accuracy of their mobile number.
- The bank sends a One Time Password (OTP) to the mobile phone of the customer (primary cardholder) that was registered in the account opening form and signed by the customer.
- The primary cardholder is enabled to activate their card using a one-time password (OTP) through one of the bank's electronic channels (such as an ATM). These channels will be programmed to prompt the customer to enter a new permanent PIN for the card. The bank is committed to setting a specific validity period (48 hours for example) for the OTP sent to the customer's mobile phone number.
Second:
According to what was reported in Regulatory Rules for Prepaid Payment Services in the Kingdom of Saudi Arabia, and due to the difficulties associated with the requirement to reapply the Know Your Customer (KYC) principle at every renewal of the legal residency - which is often valid for twelve months - for resident customers working for governmental or non-governmental entities, or individuals classified as domestic workers, despite the basic information (such as the customer’s name and the sponsor’s name) not changing. Banks may address these difficulties for prepaid cards (salary card products) by adhering to the following:
- After the bank implements the requirements of the Know Your Customer (KYC) principle and meets the customer (the primary cardholder) face-to-face when opening a prepaid card account (such as a salary card product), it's not necessary for the customer- only resident individuals - to come to the bank again to update their information and re-apply the KYC requirements as long as the core information of the client (such as: the client's name, sponsor's name, nationality) has not changed. It suffices to update and match the client’s information electronically using the data available from the (NIC-National Information Center), provided that the bank retains a printed copy of the electronic update of the customer's information.
- The bank must reapply the Know Your Customer (KYC) principle after a maximum period of five years from the last application of the principle and meet the customer face-to-face, provided that there have been no changes to the customer's basic information during this period.
- The bank must freeze the prepaid card account (salary card product) of the customer if any of their basic information changes, which the bank may discover. This should be done during the electronic update phase, and the customer must be notified and requested to visit the bank to apply the Know Your Customer (KYC) principle.
This procedure is limited to residents of the Kingdom.
Third:
According to what was reported in the Regulatory Rules for Prepaid Payment Services in the Kingdom of Saudi Arabia and the accompanying difficulties in reapplying the Know Your Customer (KYC) principle for individual expatriate customers who are coming to work for government or non-government entities. These clients have been allowed to open prepaid card accounts (Payroll Card product) under a temporary residency based on a work visa in their passport, limited to a ninety-day period. And further to the Circular no. (341000029727) issued from the Central Bank dated 7/3/1434 H. Regarding the amendment of the title and requirements of the third paragraph of Rule No. (3-1-200): "Regarding the accounts of "individual expatriates and residents in the Kingdom / work visa residence for three months in the passport", banks may address these challenges by adhering to the following (after the issuance of the official residence permit for the customer):
- Sufficient to update the data of the expatriate customer (primary cardholder) in this case electronically by utilizing the services of the (NIC- National Information Center), provided that the bank retains a hard copy of the electronic update of the customer's information.
-In case the bank discovers—during the electronic update phase—any discrepancies in the fundamental data of the expatriate worker (such as the sponsor's name) from that provided during the account opening of a prepaid card (salary card product), the bank must immediately freeze the account and inform the account holder. The bank would then request the account holder to visit the bank to fulfill the requirements of the Know Your Customer principle, as per the procedures mentioned in the Regulatory Rules for Prepaid Payment Services in the Kingdom of Saudi Arabia.
- This mechanism is limited to individual expatriates working for government or non-government entities, or domestic workers classified as residents, who have fulfilled all the requirements of the Know Your Customer (KYC) principle and have been met face-to-face by the bank during the prepaid account opening phase (salary card product).
Revisions to the Securitisation Framework- BCBS
In July 2016, the Basel Committee on Banking Supervision (BCBS) published an updated standard for the regulatory capital treatment of securitisation exposures that includes the regulatory capital treatment for "Simple, Transparent and Comparable" (STC) securitisations. This standard amends the BCBS's 2014 capital standards for securitisations.
The capital treatment for STC securitisations builds on the 2015 STC criteria published by the BCBS and the International Organization of Securities Commissions. The new standard sets out additional criteria for differentiating capital treatment of STC securitisations from other securitisation transactions. The additional criteria, for example, exclude transactions in which the standardised risk weights for the underlying assets exceed certain levels. This ensures that securitisations with higher- risk underlying exposures do not qualify for the same capital treatment as STC-compliant transactions.
Compliance with the expanded set of STC criteria should provide additional confidence in the performance of the transactions, and thereby warrants a modest reduction in minimum capital requirements for STC securitisations. Compared to the consultative version in November 2015, the final standard has scaled down the risk weights for STC securitisation exposures, and has reduced the risk weight floor for senior exposures from 15% to 10%.
Banks are expected to review the BCBS document available at the BIS website www.bis.org and undertake the necessary changes to comply with it from the date of issuance of this circular.
Supervision Guidelines for Identifying and Dealing with Weak Banks
General Guidelines for Working of the Banking Committee
Basel - Standards Review of the Pillar 3 Disclosure Requirements
This Circular has been superseded by SAMA circular No.(440471440000), dated 04/06/1444 H, Corresponding To 27/12/2022 G.LCR - Liquidity Coverage Ratio
Please refer to 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.The Standardised Approach for Measuring Counterparty Credit Risk
"The Minimum Capital Requirements for Counterparty Credit Risk" in The Basel III Reforms, issued via SAMA circular No. (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G supersede any conflicting requirements in this circular.Background
The Basel document on the Standardised Approach for measuring Counterparty Credit Risk includes a comprehensive, non-modelled approach for measuring counterparty credit risk associated with OTC derivatives, exchange-traded derivatives, and long settlement transactions. The new standardised approach (SA-CCR) replaces both the Current Exposure Method (CEM) and the Standardised Method (SM) in the capital adequacy framework. In addition, the Internal Models Method (IMM) shortcut method will be eliminated from the framework once the SA-CCR takes effect. The new Standardised Approach includes:
• increased specificity regarding the application of the approach to complex instruments; • the introduction of a supervisory measure of duration for interest rate and credit derivative exposures; • removal of the one-year trade maturity floor for unmargined trades and the addition of a formula to scale down the maturity factor for any such trades with remaining maturities of less than one year; • the inclusion of a supervisory option pricing formula to estimate the supervisory delta for options; • a cap on the measured exposure for margined transactions to mitigate distortions arising from high threshold values in some margining agreements; and • adjustments to the calibration of the approach with respect to foreign exchange, credit and some commodity derivatives.
SAMA has conducted a consultation process with the Saudi Banks in the development of this regulation, which is attached in the annexures containing: *
• Annexure 1: The Standardised Approach for measuring Counterparty Credit Risk exposures (available on BIS website http://www.bis.org/publ/bcbs279.pdf)* • Annexure 2: SAMA's position on National Discretion and Frequently Asked Questions (FAQs) and answers. • Annexure 3: Changes in the template 17.6.3 A. Please ensure that this template is cross-validated and reconciled to other Q17 templates. *
Implementation date
These rules are applicable from 1 January 2017 as specified in the Basel document.
* No longer relevant
Standardized Approach for Measuring Counterparty Credit Risk Exposure - BCBS March 2014
Capital Requirements for Bank Exposures to Central Counterparties of April 2014 - BCBS
Net Stable Funding Ratio Disclosure Standards
Update on Correspondent Banking Annex of Guidelines for Sound Management of Risks Related to Money Laundering and Terrorist Financing
The Basel Committee on Banking Supervision has issued an update to the Annex for Correspondent Banks against the Guidelines for Sound Management of Risks Related to Money Laundering and Financing of Terrorism, which was initially published in January 2014 and updated in February 2016, aligning with what the Financial Action Task Force (FATF) released for combating money laundering and financing of terrorism in October 2016.
This update aims to guide banks on the risk assessment mechanism in activities and transactions related to correspondent banks, due to different levels of risk involved. The principles include an updated list of risk indicators that must be taken into account when evaluating these risks.
SAMA emphasizes the importance of the commitment of banks operating in the Kingdom with the updated annex for correspondent banks issued by the Basel Committee on Banking Supervision.
Announcement of the Basel III Accord and SAMA Plans for Its Implementation of Basel II and III in 2011
No: 321000005944 Date(g): 15/2/2011 | Date(h): 12/3/1432 Status: In-Force The Basel Committee for Banking Supervision (BCBS) issued its finalized comprehensive reforms package in December 2010 to strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector. The objective of these reforms is to improve the banking sector's ability to absorb shocks arising from financial and economic stresses, and in this regard, this comprehensive package addresses the lessons learnt from the financial crisis.
In December 2009, the BCBS issued its initial comprehensive consultative document entitled "The Strengthening the Resilience of the Banking System". This document proposed major enhancements and amendments to the Basel II framework for strengthening the global capital framework through raising the quality, consistency and transparency of capital, institution of capital buffers, enhancing risk coverage, and the introduction of leverage and liquidity ratios. Following an elaborate consultation process, the major features of Basel III have now been agreed by the Basel Committee, and the final Basel III text was issued on 16 December 2010.
As a member of the Basel Committee, SAMA has been actively involved in developing these standards and it fully supports the package of reforms announced by the BCBS. SAMA believes that the Basel III framework will strengthen the supervisory framework by enhancing the quality and quantity of capital, introduction of liquidity and leverage ratios and by supporting greater sophistication in identification and management of risks in the banking industry. Therefore, SAMA is planning to fully implement Basel III as provided by the BCBS Reforms Package on the basis of the phase-in arrangements described in attachment - 1.
As was the case for Basel II, the implementation of Basel III in the Saudi banking system will require close coordination and collaboration between SAMA and the banks. The process will require continuous communication and feedback to ensure that the implementation of Basel III proceeds smoothly. SAMA intends to actively involve all Banks through bilateral and multilateral meetings, and SAMA sponsored seminars and presentations in the implementation of Basel III reforms. This circular is the first in a series of communiqués that SAMA plans to issue over the next few years.
During 2011, SAMA will continue to discuss with the Banks the implementation of Basel II projects and some new initiatives under Basel III. The main areas of work are as follows:
1. Further refinements of the ICAAP process in light of Basel III. 2. Follow up on Banks previously submitted plans for transition to the IRB approaches for credit risk. 3. Finalization of Prudential Returns and Guidance notes for IRB Approaches 4. Finalization of the Prudential Return on Capital Leverage Ratio and start of the monitoring process. 5. Finalization of the Prudential Returns for Liquidity Coverage Ratio and monitoring will start in 2012.
SAMA envisages forming a number of working groups to advance the implementation of different aspects of Basel III. These are listed in Attachment . 2. All Banks are required to designate at least 2 senior persons to each Committee by 28 February 2011. Their names and contact telephone numbers should be forwarded to Mr. Fahd Al-Mufarrij, Director of Banking Supervision. We expect these Committees to commence work once further details on Basel III proposals are issued by the BCBS, and SAMA has assessed their relevance and implications for the Saudi Banking system. We expect the working groups to commence their work in the 2nd quarter of 2011.
In order to ensure a good understanding of Basel III in the Banking sector, SAMA representatives have made presentations to Managing Director of the Banks in the MD's Committee and to relevant senior managers and Basle II Team members in December 2010. SAMA may organize additional seminars during 2011 to deal with specific areas. Banks will be notified about the specific dates and details of such seminars in due course.
Banks are advised to maintain strong Basel II/III teams with a designated project leader (coordinator) to plan and execute the implementation of Basel III. The Project Leader should have overall responsibility, with the work delegated to the team members. The Project Leader should also act as the liaison person with SAMA.
Attachment - 1 Basel III Reforms Package Phase-In-Arrangement
2011 2012 2013 2014 2015 2016 2017 2018 1 January 2019 Leverage Ratio Supervisory monitoring Parallel run 1 Jan 2013 - 1 Jan 2017 Disclosures start 1 Jan 2015 Migration to Pillar 1 Minimum Common Equity Capital (CEC) Ratio 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% Capital Conservation Buffer 0.625% 1.25% 1.875% 2.50% Minimum Common Equity plus capital conservation buffer 3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0% Phase-in of deductions from CETI (including amounts exceeding the limit for DTAs, MSRs and financials) 20% 40% 60% 80% 100% 100% Minimum Tier 1 Capital 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0% Minimum Total Capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Minimum Total Capital plus conservation buffer 8.0% 8.0% 8.0% 8.625% 9.25% 9.875% 10.5% Capital instruments that no longer qualify as non-core Tier 1 capital or Tier 2 capital Phased out over 10 years horizon beginning 2013 Liquidity coverage ratio1 Observation period begins Introduce minimum standard Net stable funding ratio Observation period begins Introduce minimum standard Note: All dates as of 1 January.
1 Reporting to regulatory authorities from January 2012.
Attachment - 2 Working Group (WG) to Implement Basel III
1.
Working Group on Capital Reforms
Banks should be represented by a senior officer (Chief Financial Officer, Chief Risk Officer, Strategic Planning, etc). This WG would study Capital Reforms and examine the current position of Banks and assess what remains to be done for its full implementation.
2.
Working Group on Global Liquidity Standards
This WG will examine the under-mentioned new Global liquidity Standards for monitoring, observing and implementation in Saudi Arabia.
• Liquidity Coverage Ratio (LCR) • Net Stable Funding Ratio (NSFR)
The WG will particularly focus on Basel ill proposals. Banks should be represented by senior staff members from Risk Management, Treasury or Finance Department.
3.
Working Group on Enhanced Risk Coverage
The WG will examine the proposals for enhanced risk coverage for implementation in Saudi Arabia including the following:
• Securitization • Trading Book • Counterparty Credit Risk
The WG will particularly focus on Basel III proposals in relation to the above items. Banks should be represented by a senior staff members from Risk Management, Treasury or Finance Department.
4.
Working Group on Enhanced Pillar 2 Reforms
This Working Group will focus on Basel III proposals on Pillar 2 related reform, and their impact on ICAAP, Supervisory Review process.
5.
Pillar 3 Reforms
As in the past, Saudi Central Bank will continue to develop any refinements in Prudential Templates and Guidance notes through the Chief Financial Officers' Committee
Attachment - 3 Major Refinements and References
Components of Basel III: Major Regulatory Overhaul of Regulatory and Prudential Framework
Summary of Basel Committee Reforms:
1) Capital
• Quality and level of capital • Capital conservation buffer • Countercyclical buffer • Capital Ratios Phased in • Regulatory deduction phased in • Non compliant instrument phased out
2) Risk Coverage
• Securitizations / Re-securitizations • Trading book • Counterparty Credit Risk
3) Containing Leverage
• Leverage ratio
4) Pillar 2
• Risk concentration • Off balance-sheet items • Reputational risk • Sound compensation practices • Valuation and liquidity risk • Sound stress testing practices
5) Pillar 3
• Enhanced exposure on securitized assets, CDO's MBS, Leverage Finance • Thematic Review in progress
6) Global Liquidity Standard and Supervisory Monitoring
• Liquidity Coverage Ratio • Net Stable Funding Ratio • Supervisory Monitoring • Principles for Sound Liquidity Risk • Management and Supervision
7) Systemic Risk and Interconnectedness
• "Gone Concern" Contingent capital • Risk coverage • Cross-border bank resolution • Significant Financial Institutions (SIFI's)
Core Principles for effective banking supervision- BCBS (2012)
This document has been updated by the BCBS document entitled "Core Principles for effective banking supervision", dated 25 April 2024.The Basel Committee on Banking Supervision revised October 2006 Core principles for effective bonking supervision and the associated Core principles methodology. These revisions in the Core Principles were then endorsed by banking supervisors at the 17th International Conference of Banking Supervisors held in Istanbul, Turkey, on 13-14 September 2012. Since then, there has been no change but Basel Committee will continue to look into these principles to suggest any additions in future.
Both the existing Core Principles and the associated assessment methodology have served their purpose well in terms of helping countries to assess their supervisory systems and identify areas for improvement. While conscious efforts were made to maintain continuity and comparability to the extent possible, the revised document (issued in September 2012) combined the Core Principles and the assessment methodology into a single comprehensive document. The revised set of twenty-nine Core Principles has also been reorganized to foster their implementation through a more logical structure, highlighting the difference between what supervisors do and what they expect banks to do.
These principles are useful for both regulators and the banks. Principles 1 to 13 address supervisory powers, responsibilities and functions, focusing on effective risk-based supervision, and the need for early intervention and timely supervisory actions. Principles 14 to 29 cover supervisory expectations of banks, emphasizing the importance of good corporate governance and risk management, as well as compliance with supervisory standards.
Banks should access the BCBS document from BIS website www.bis.org and continue to follow these standards to enhance their risk management processes and procedures and corporate governance.
Basel Committee Documents Published on 16 December 2010
(1) Basel Ill - Global Framework for More Resilient Banks and Banking System.
(2) Basel Ill - International Framework for Liquidity Risk Measurement Standards and Monitoring.
(3) Results of the Quantitative Impact Study.
On 16 December 2010, the Basel Committee on Banking Supervision has issued the rules text, which presents the details on Global Regulatory Standards on Bank Capital Adequacy and Liquidity agreed by the Governors and Heads of Supervision, and endorsed by the G-20 Heads of State at their November 2010 Summit in Seoul, Korea. The Committee has also published the results of its comprehensive Quantitative Impact Study (QIS).
These documents are of interest to all banks in Saudi Arabia that have currently implemented the Basel II framework and are now preparing to move on to Basel III. Banks are expected to review these documents and start developing their plans for implementation of Basel III. Banks should study these carefully and become familiar with the rules text. Over the next few months, SAMA will be issuing specific guidance documents to banks on these subjects including SAMA's position in areas where national discretion is to be applied. SAMA will also issue revised or new prudential returns related to these topics.
The Basel Committee has also released the results of the Quantitative Impact Study (QIS) that was carried out in 2009 and 2010. The QIS covered the impact on banks due to proposed rules relating to new Regulatory Capital and Liquidity. The results of the QIS should be of interest to all banks, particularly to the three (3) Saudi Banks that participated in this study.
Working Hours of the Remittance Centers Affiliated with Banks
Referring to paragraph (4) of the first edition of the "Guide to Rules Governing Banks’ Remittance Centers" which included the approval of Friday as an official weekly holiday for all remittance centers, as communicated in SAMA Circular No. 381000063572 dated 14/06/1438 H.
Taking into account the study conducted by SAMA regarding the percentage of operations that were carried out on Fridays in previous years, and with the desire to gradually apply the instructions. As the public interest requires not to stimulate shadow markets, if any bank wishes to exclude some branches of remittance centers to operate on Fridays for a year, a no-objection request can be submitted to SAMA, including the names of the branches, their locations, and the required working hours, provided that they are in accordance with the Guide to Rules Governing Banks’ Remittance Centers, and the request does not exceed 20% of the total number of branches of the bank's remittance centers.*
* According to SAMA Circulars No. 2304/41 dated 09/09/1439 H and No. 49029/67 dated 05/08/1440 H, extending the exception for bank remittance centers to operate on Fridays has been extended for two years, provided that it aligns with the approved working hours regulations mentioned above. A request for non-objection can be submitted to SAMA, including the names of the branches, their locations, and the required working hours, and the request should not exceed 10% of the total number of branches of the bank's remittance centers.
Pillar3
Amendments in Saudi Central Bank Capital Rules
Following the recent Regulatory Consistency Assessment Programme (RCAP) of Saudi Central Bank Capital rules by the Basel RCAP Assessment Team, Saudi Central Bank has considered suggestions to add, clarify and correct some rules to make them consistent with the Basel Text.
These amendments have been made in the attached documents and the changes have been highlighted for ease of reference.
1. Pillar 1-Basel 11.5 - Saudi Central Bank’s Guidance Document concerning implementation 2. Basel II Guidance Document - Pillar 2 Supervisory Review Process 3. Basel II - Saudi Central Bank’s detailed Guidance Document relating to Pillar 1 4. Finalized Guidance Document concerning the implementation of Basel III 5. Basel III - Pillar 3 - Package of disclosure requirements and guidance notes 6. Saudi Central Bank’s Detailed Guidance Notes on the maintenance of adequate capital against market risk by Saudi Banks 7. Basel III IRB Approaches - Prudential Returns and Guidance Notes 8. Prudential Returns, General Guidance Notes on Internal Rating Based (IRB) Approaches 9. Table 2 - Capital structure 10. Table 8 - General disclosures for exposures related to counterparty 11. Table 9 (STA) - Securitisations - Standardised disclosures 12. Templates for qualitative disclosures
Banks are advised to follow the amended rules with effect from the date of this circular.
Basel III Monitoring Report
The Document outlined in this circular is superseded by the BCBS.To assess the impact of the Basel III framework on banks, the Basel Committee on Banking Supervision monitors the effects and dynamics of the reforms. For this purpose, a semiannual monitoring framework has been set up on the risk-based capital ratio, the leverage ratio, and the liquidity metrics using data collected by national supervisors on a representative sample of institutions in each country. This report is the seventh publication of results from the Basel III monitoring exercise and summarizes the aggregate results using data as of 30 June 2014. The Committee believes that the information contained in the report will provide relevant stakeholders with a useful benchmark for analysis.
Banks are advised to access the BCBS document from BIS website www.bis.org for information purposes only.
SAMA's Amended IRB Prudential Returns and Guidance Notes Package and Frequently Asked Questions (FAQs)
Adjusting the Loss Given Default (LGD) Rate for the Corporate Sector from 60% to 50%
Progress in Adopting the Principles for Effective Risk Data Aggregation and Risk Reporting - BCBS (2015)
A Subsequent Report on the Progress in adopting the Principles for effective risk data aggregation and risk reporting has been published in April 2020.The Principles for effective risk data aggregation and risk reporting (the “Principles”) were issued by the Basel Committee on Banking Supervision in January 2013. The Principles aim to strengthen risk data aggregation and risk reporting practices at banks to improve risk management practices. In addition, improving banks' ability to rapidly provide comprehensive risk data by legal entity and business line is expected to enhance both their decision-making processes and their resolvability.
The Principles are initially applicable to systemically important banks (SIBs) and apply not only at the group level but also to all material business units or entities within the group. National supervisors may nevertheless choose to apply the Principles to a wider range of banks. In this respect, the BCBS and the Financial Stability Board (FSB) expect banks identified as global systemically important banks (G-SIBs) to comply with the Principles by 1 January 2016. In addition, the BCBS strongly suggests that national supervisors also apply the Principles to banks identified as domestic systemically important banks (D-SIBs) three years after their designation. To facilitate consistent and effective implementation of the Principles among G-SIBs, it was decided to use a coordinated approach for national supervisors to monitor and assess banks' progress until 2016.
In this respect, this report compares the response of the 30 G-SIBs that participated in the initial 2013 stock taking with the response of the the 2014 questionnaire.
Banks are expected to study the text of this report and be fully aware with regard to its content and be prepared for its implementation in 2016. This circular is relevant to D-SIBs in Saudi Arabia, which according to Saudi Central Bank circular # 351000138356 dated 5 November 2014 will be identified prior to 2016.
Fundamental Review of the Trading Book - BCBS Consultative Document
The Securitization Framework-BCBS
Requirements outlined in this document has been integrated into the Basel Framework, issued by Saudi Central Bank circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G.The Basel Committee is publishing the revised securitisation framework, which aims to address a number of shortcomings in the Basel II securitisation framework and to strengthen the capital standards for securitisation exposures held in the banking book. This framework, which will come into effect in January 2018, forms part of the Committee’s broader Basel ill agenda to reform regulatory standards for banks in response to the global financial crisis and thus contributes to a more resilient banking sector.
In developing the final standards for capitalising securitisation exposures, the Committee has carefully taken into account the comments received on the two consultative documents, as well as the results of the quantitative impact studies (QIS) undertaken during the consultations. Furthermore, revisions have also been guided by the Committee’s determination to strike an appropriate balance between risk sensitivity, simplicity and comparability. Further work is being conducted jointly by the Basel Committee and the International Organization of Securities Commissions (IOSCO) to review securitisation markets and to identify factors that may be hindering the development of sustainable securitisation markets.
This document should be of interest to all banks in Saudi Arabia as they have implemented the Basel III framework. Banks are expected to review this document and become familiar with the rules text and start developing their plans for its implementation. Over the next few months, Saudi Central Bank will be holding meeting with all banks through the Working Group Forum concerning other risks. At the conclusion of the Working Group meeting, Saudi Central Bank will be issuing specific guidance documents including prudential returns to banks, and will also notify banks with respect to its position in areas where national discretion is to be applied.
Guidelines on Application Procedures for the Adoption of IRB Approaches
FSB Documents: Principles for an Effective Risk Appetite Framework (Finalized Document) & Guidance on Supervisory Interaction with Financial Institutions on Risk Culture (Consultative Document)
The Financial Stability Board (FSB) has published the above Documents on 18 November 2013. The two documents aim to assist supervisors in assessing the risk culture at financial institutions. Both Documents can be obtained from FSB Website: www.financialstabilityboard.org.
Banks are required to implement "Principles for an Effective Risk Appetite Framework” Document effective 1 st January 2014, and review the public consultative Document "Guidance on Supervisory Interaction with Financial Institutions on Risk Culture" and provide their comments to the Agency by 26 January 2014 for onward submission to the FSB.
Amendment of Rule 300.1.15.4 of the Rules for Bank Accounts
This circular is currently available only in Arabic, please click here to read the Arabic version.Supervisory Guidance for Managing Risks Associated with the Settlement of Foreign Exchange Transactions- BCBS
This Guidance published on 15 February 2013 updates the Basel Committee's Supervisory guidance for managing settlement risk in foreign exchange transactions. Since the publication of that guidance in 2000, the foreign exchange market has made significant strides in reducing the risk associated with settlement of FX transactions. Substantial FX settlement- related risks remain, however, not least because of the rapid growth in FX trading.
While the original 2000 guidance focused mainly on the principal risk element of FX settlement-related risks, the new guidance is intended to address a broader spectrum of FX settlement-related risks. It provides more comprehensive and detailed direction on governance arrangements and the management of principal risk as well as all other FX settlement-related risks. In addition, the guidance promotes the use of payment-versus-payment arrangements, where practicable, to reduce principal risk. It should be noted that this guidance was drawn up in close consultation with the Committee on Payment and Settlement Systems. This paper can be obtained from BIS website: www.bis.org.
The guidance is organized into seven "guidelines" that addresses governance, principal risk, replacement cost risk, liquidity risk, operational risk, legal risk and capital for FX transactions. Bank should accordingly include where applicable the guidance offered by this finalized BCBS Press Release and Document in their respective internal governance and risk management policies and procedures.
A Framework for Dealing with Domestic Systemically Important Banks- BCBS (2012)
SAMA issued through its Circular # BCS 28411 dated 20 November 2011 the BCBS document entitled "Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement" for information purposes only, regarding reforms to improve the resilience of Global Systemically Important Banks (G-SIBs).
In this regard, the BCBS has now issued the attached finalized document entitled "A Framework for Dealing with Domestic Systemically Important Banks (DSIBs)". SAMA is circulating it to the banks with the purpose that the framework for G-SIBs is also applicable to DSIBs. In specific, it is based on an assessment by local authorities on the impact of the failure of bank on the local financial system and local economy. In due course, SAMA will make an assessment and determine the D-SIBs in Saudi Arabia to which these principles will be applied. As the G-SIBs framework is to be phased in by January 2016, the same timeframe will applied to the D-SIBs. *
We suggest that all Banks should access these papers from Bank for International Settlements website: (bis.org) and distribute these to their relevant managers.
*In that regard, SAMA issued an updated circular No. (351000138356) dated 12/11/1435 H corresponding to 7/9/2014 AD, entitled "A Framework for Dealing with Domestic Systemically Important Banks in Saudi Arabia".
Periodic Reports on Customers Complaints
This section is currently available only in Arabic, please click here to read the Arabic version.Basel Committee Papers of Relevance to Saudi Banks
During 2011, the Basel Committee on Banking Supervision has published two documents related to operational risk management. In this regard, Bank Management can specifically benefit from these papers by incorporating the relevant principles and guidance information in their operational risk management and control policies and procedures.
SAMA would like Banks to be fully aware of the following Basel Committee Papers issued during 2011.
1. June 2011 - Operational Risk Supervisory Guidelines for Advanced Risk Measurement Approach*
2. June 2011 - Principle for Sound Management of Operational Risk**
We suggest that Banks should access these papers from Bank for International Settlements website: (http://www.bis.org). The Banks should distribute these papers to relevant managers in Risk Management, Compliance and Internal Audit functions to keep them abreast of the current developments and practices.
* SAMA Circular No. 44047144 (Basel 3 Reforms), Issued on 27/12/2022 supersedes any conflicting requirements in that document.
** This Document is superseded by the "Revisions to the principles for the sound management of operational risk", dated 31 March 2021.
Capital Requirements for Bank Exposures to Central Counterparties
Capital Requirements for Banks' Equity Investments in Funds
This Circular has been superseded by SAMA circular No , (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022G. Refer to Minimum Capital Requirements for Credit Risk Framework.Preservation of Documents Related to Bank Customers
In light of SAMA's desire to regulate the periods during which banks retain documents related to their customers, and based on paragraph (d) of Article (3) of the Saudi Arabian Monetary Authority Law issued by Royal Decree No. (23) dated 23/05/1377H, which empowered SAMA to issue specific instructions to banks operating in the Kingdom.
Banks must establish an internal policy that regulates the mechanisms, procedures, and periods for retaining documents related to their customers. This policy should include, at a minimum, the following:
1. Retention of all original paper documents related to customer transactions for a minimum of ten years from the date of either the completion of the transaction or the termination of the contractual relationship, in addition to maintaining a clear electronic copy of these documents.
2. Retention of all original paper documents related to legal claims or investigations of any nature, along with maintaining a clear copy, for a minimum of ten years from the date of the end of the case.
3. Banks must adequately inform their customers about the document retention period through contracts made with customers and by highlighting this information on the bank's website.
4. There should be an annual periodic review conducted by the Internal Audit Department as part of the auditing programs to verify the integrity and completeness of the retention process, ensuring compliance with the provisions of this circular, any other related instructions, and the internal policy of the bank mentioned above.For your information and implementation effective from this date, noting that this circular does not affect the requirements of any other related circulars or instructions.
Final Elements of the Reform to Raise the Quality of Regulatory Capital - Loss Absorbency at the Point of Non-viability- BCBS
The Basel Committee on 13 January 2011 has issued a Press Release accompanied by the minimum requirements to ensure that all classes of capital instruments fully absorb losses at the point of non-viability before tax payers are exposed to losses. The Committee is proposing that in order for an instrument issued by a bank to be included in additional (i.e. non-common) tier-1 or tier-2 capital, it must meet or exceed minimum requirements set out in Annex 1 to the Basel Press Release dated 13 January 2011. These requirements are in addition to the criteria detailed in the Basel Ill capital rules that were published in December 2010.
All Banks in Saudi Arabia are required to be familiar with these minimum requirements and should take these into consideration when planning to issue any additional tier-1 or tier-2 capital instruments. These rules go into immediate effect from the date of this Circular. You may access the minimum requirements and the Press Release dated 13 January 2011 from Bank for International Settlements (BIS) website address: (http://www.bis.orq).
Report and Recommendations of the Cross-border Bank Resolution Group- BCBS
The Basel Committee on Banking Supervision has issued a Report on 18 March 2010 entitled "Report and Recommendations of the Cross-border Bank Resolution Group". The Report addresses the complex and multidimensional process that is required for an orderly resolution of Banking institution problems during a financial turmoil or crises. While the Report is largely aimed at the national authorities and makes recommendations on strengthening the national resolution power and their cross-border implementation; it also suggests that Banks, as well as key home authorities should develop practical and credible contingency plans to ensure access to relevant information in a crisis.
This document is more relevant to Saudi Banks with cross-border operations. Nevertheless, Saudi Central Bank would like all Saudi Banks to study this report and in particular focus on Recommendation #6 which proposes that there should be a contingency plan, proportionate to the size and complexity of your institutions/group’s structure and business, to preserve the firm as a going concern, promote resilience of key functions and facilitate rapid resolution if that becomes necessary. You may access the full document on the BIS website: (http://www.bis.org).
In due course, Saudi Central Bank would provide guidance to banks for the implementation of this recommendation as well as on other bank specific matters in other recommendations of this Report.
For foreign banks’ branches in Saudi Arabia, Saudi Central Bank will at a point in time arrange to receive from their Parent Banks, the relevant contingency plans for their operations in Saudi Arabia. Also, SAMA will cover this subject in the home/host meetings with relevant supervisory authorities for matters such as supervisory cooperation and exchange of supervisory information relating to the bank resolution regimes.
Minimum Capital Requirement for Market Risk - New Standard
This Circular has been superseded by SAMA circular No , (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022G. Refer to Minimum Capital Requirements for Market Risk Framework.FSB Implementation Standards
Please refer to SAMA Circular No. B.C.S 842 dated 26 August 2009 through which banks were encouraged to take into account the guidance provided in the FSB Principles for Sound Compensation Practices in establishing their compensation policies and practices.
In order to achieve effective global implementation of its Principles, FSB has issued Implementation Standards on 25 September 2009. These Standards may be obtained from the FSB’s website.
Banks are advised to also take into account the requirements of the FSB’s Implementation Standards in establishing their compensation policies and practices. Furthermore, the Agency will issue a circular in due course providing additional guidance to banks in this regard.
In that regard SAMA issued (Banks Remuneration Rules) Via circular No. (44049096), dated 12/06/1444H, Corresponding to 4/1/2023G.
Revision to Standardised Approach for Credit Risk - Second Consultative Document
Basel Committee Papers on Basel II Framework
The Basel Committee on Banking Supervision has issued a number of Papers related to the Basel II Framework in July 2009 in their final form. SAMA had earlier issued the first two papers to Saudi Banks in January 2009 at the Consultative Draft stage and sought the Banks' comments. These papers are aimed at enhancing the Basel II framework in light of the experience gained by the Banks and Regulatory authorities during the recent global financial crisis. These include the following;
▪ July 2009 - Basel II Market Risk Framework ▪ July 2009 - Guidelines for Computing Capital for Incremental Risk in Trading Books ▪ October 2009 - Analysis of Trading Book Quantitative Impact Study
We recommend that all Banks currently engaged in implementing Basel II in Saudi Arabia should ensure that their staff involved in the implementation of Basel II project are fully aware of these papers and should take appropriate actions to benefit from these standards and guidance. Bank staff in other areas such as Risk Management, Financial Controls, Compliance Function and Internal Audits should also be familiar with these. In light of these papers, SAMA over the next few months, will also update its guidance documents to Saudi Banks on the Basel II framework. These documents should be accessed from the Bank for International Settlements website address: (www.bis.org).
Report on Special Purpose Entities - BCBS
The Basel Committee on Banking Supervision has published a Report on Special Purpose Entities in September 2009. This came out of a study by The Joint Forum, which includes the Basel Committee on Banking Supervision, International Organization of Securities Commissions, and the International Association of Insurance Supervisors.
The Report provides background on a variety of special purpose entities (SPE's) found across the financial sectors, the motivation of market participants to use these structures and risk management issues that arise. The recommendations of the Report are addressed to both the market participants and to supervisory community. Your Bank should access this paper on the website of the Bank for International Settlements (bis.org), IOSCO (iosco.org) and the I AIS (iaisweb.org).
The purpose of SAMA in forwarding this Report to your Bank is to ensure that the relevant managers in your institution and your subsidiaries are fully apprised of these recommendations and are able to adopt these in appropriate policies and procedures in your institution. The Agency will also be taking into consideration the recommendation of this Report in its on-going work on the regulation of subsidiaries and Special Purpose Vehicles.
Frequently Asked Questions (FAQs) on the Basel III Leverage Ratio Framework
Interest Rate Risk on Bank Books (IRRBB)
Basel Committee on Banking Supervision (BCBS) Consultative Document Entitled " Fundamental Review of The Trading Book: Outstanding Issues”
SAMA’s Revised Amended LCR Ratio Regulations-Operational Deposits
Referring to SAMA's circular No. 361000009335 dated 10/11/2014, we would like to provide further guidance on the implementation of para 93 concerning Operational Deposits. Para 93 requirements include that banks wishing to use a preferential 25% cash flows rate with regard to operational deposits must obtain SAMA's approval. SAMA's approval will be based on the banks compliance with the BCBS requirements outlined in para 94 to104 of the aforementioned SAMA's Revised Guidance document concerning Operational Deposits.
Therefore, as of 01/01/2015 G, banks are required to obtain SAMA's approval with regard to the aforementioned aspect of Operational Deposits.
Accordingly, these instructions must be implemented as of 31/01/2015 G, and the data must be submitted by 28/02/ 2015 G.
Importance of Implementing the Ministry of Social Affairs Decision to Form a Board of Directors for Charity Organizations
Basel Committee On Banking Supervision Document Regarding Capital Requirements For Banks' Equity Investment In Funds
Hafiz Program for Supporting Unemployed
Real Estate Transfer Service at the Ministry of Justice
Confirming Documents to Validate IDs and Amending Some of the Requirements in Rules and Section Related to the 4th Amendment to the Rules for Opening Bank Account
Banking Tariff
These instructions have been replaced by The Banking Tariff, accordance to SAMA circular No. (381000095093), dated 10/12/1438H, corresponding to 04/06/2017G.Implement Principals for Financial Market Infrastructures (PFMIs)
Referring to the principles for financial markets and payment systems issued in April 2012 by the Bank for International Settlements (Principles for Financial Market Infrastructures). It is required that all departments of SAMA and the banks operating in the Kingdom apply the principles relevant to their activities, for more information on this topic, please contact the following e-mail address.
Obtaining a License to Conduct Mortgage Financing and Leasing Activities
Based on the Real Estate Finance Law issued by Royal Decree No. 50/M dated 13/8/1434 H, and its Implementing Regulation issued by Minister of Finance Decision No. 1229 dated 10/4/1434 H, and The Finance Lease Law issued by Royal Decree No. M/48 dated 13/8/1434 H, and its Implementing Regulation issued by the SAMA Governor’s Decision No. 1/M dated 14/4/1434 H, and The Finance Companies Control Law issued by Royal Decree No. M/51dated 13/8/1433 H, and Implementing Regulation issued by SAMA Governor’s Decision No. 2/M dated 14/4/1434 H, and since Article 99 of the Implementing Regulation of the Finance Companies Control Law states that "Companies and establishments engaging in finance activities in the Kingdom of Saudi Arabia prior to the Law’s entry into force must provide SAMA, within the first nine months of the period prescribed in Article (36) of the Law, with their plan to correct their situation according to the Law or a plan to exit the market."
Therefore, all banks operating in the Kingdom that wish to continue engaging in real estate financing and/or leasing activities must apply to SAMA for a license to stop practicing these activities entirely starting from 14/10/1434 H. Copies of the finance Laws, their Implementing regulations, and licensing application forms and guidelines can be obtained through the following links:
- Finance Laws and Their Implementing Regulations
- Licensing Provisions and Requirements
According to Circular No. 22129/67 dated 9/4/1440 H, and Circular No. 58934/67 dated 24/9/1440 H, and in reference to Circular No. 39100070455 dated 19/6/1439 H concerning the procedural requirements for mortgage registration, SAMA advises as follows:
First: Licensed banks may continue to engage in real estate financing without the need to renew their existing real estate financing license or obtain a separate license. However, they must obtain no-objection letters from SAMA for launching related financing products in accordance with the provisions of the relevant Laws, regulations, and instructions.
Second: Licensed banks may continue to engage in leasing financing until new instructions are issued by SAMA in this regard, provided they obtain no-objection letters from SAMA for launching related financing products in accordance with the provisions of the relevant Laws, regulations, and instructions.
Enhancements and Update to SAMA's Accounting Standards for Commercial Banks
No: 9068/B.C.I/392 Date(g): 26/9/1999 | Date(h): 16/6/1420 Status: No longer applicable As you are aware, the Saudi Central Bank issued its Accounting Standard for Commercial Banks in 1995 and is now in the process of updating and enhancing these Accounting Standards. This is being done to accommodate the advent of new banking products and services in the Kingdom as well as to respond the current developments in Accounting and Disclosure Standards emanating from various Accounting Standard setting bodies such as the Saudi Organization of Certified Public Accountants (SOCPA), International Accounting Standards Committee (IASC), the Financial Accounting Standard Board (FASB) the American Institute of Certified Public Accountants (AICPA), etc.
The scope of the proposed enhancement and updates, as described in the attachment, fundamentally includes the areas already covered by SAMA's current Accounting Standards as well as three additional areas as given below:
1. Off Balance sheet Financial Instruments including Derivatives 2. Related Party Transactions. 3. Case Flow Statements
Attachment : 1 Accounting Standards Already Covered in SAMA's Accounting Standard for Commercial Bank Where Enhancements or Updates May be Required
1. Standard of Investment and Trading in Securities.
2. Standard of Loans.
3. Standard of Deposits.
4. Standard of Accounting Changes and Correction of Errors.
5. Standard of Foreign Currency Translation.
6. Standard of Fixed Assets and Other Real Estate.
7. Standard of Consolidated Financial Statements and Investments in Subsidiaries.
8. Standard of Presentation and General Disclosure.
Additional Areas in Accounting Standards to be covered vis-à-vis Enhancements and Updates
9. Off Balance Sheet Financial Instruments and Derivatives
10. Related Party Transaction.
11. Cash Flow Statement.
In order to ensure that the proposed update to SAMA's Accounting Standard for Commercial Banks and enhancements is carried out comprehensively and professionally, the Agency would like to receive detailed comments from the banks with respect to the following items vis-à-vis the individual topics covered in the attachment.
1. The scope of the proposed update and enhancement, i.e. are there any other major areas which are not covered in the Attachment 2. Current and relevant accounting and disclosure developments with reject to the topics described in the attachment from various standard setting bodies such as SOCPA, IASC, AICPA, FASB, etc. 3. An analysis of the alternative Accounting, Valuation and Disclosure treatment available in the light of the current Accounting and Disclosure developments from SOCPA, IASC, AICPA, FASB, etc. 4. Recommended Accounting and Disclosure treatment for each of the major topics covered in Attachment for licensed Saudi banks.
Conclusion
It would be appreciated on the basis of the guidance provided in items 1 to 4 above, if detailed and comprehensive comments, observations, critiques, and recommendation vis-à-vis the major areas described in the attachment only on individual basis are composed by the banks. Given the complexity and scope of work required, the banks have approx. three months to frame their responses Consequently, all submissions are due in SAMA's by 31.12.99, and for further clarification please contact Mr. Abdula Ibrahim Suwayan Tel. 466-2281.
Stop Dealing with the Increasing Instalment Financing Option "Step Up"
SAMA has recently noticed that several banks have offered the option of increasing instalment financing without obtaining SAMA's approval to introduce the aforementioned option. Accordingly, all banks must adhere to SAMA's instructions and stop dealing with the increasing instalment financing option within two weeks from the date of this notice.
For your information and action accordingly and inform all your branches.
Principles for Effective Risk Data Aggregation and Risk Reporting- BCBS
We refer to Saudi Central bank's Circular # BCS 22099 dated 4 July 2012 with regard to the BCBS consultative document sent to all banks for comments entitled "Principles for Effective Risk Data Aggregation and Risk Reporting". Subsequently, the BCBS finalized this document in January 2013 which can be obtained by your bank from BIS website.
One of the significant lessons learnt from the global financial crisis was that banks', including Global Systemically Important Banks (GSIB's), Information Technology (IT) and data architectures were inadequate to support the broad management of financial risks. Many banks lacked the ability to aggregate risk exposures and concentrations effectively at the bank group level, across business lines and between legal entities. Consequently, banks were unable to manage their risks because of their weak risk data aggregation capabilities and risk reporting practices.
Many in the banking industry recognize the benefits of improving their risk data aggregation capabilities and are working towards this goal. They see the improvements in terms of strengthening the capability and the status of the risk function to make judgments. This leads to gains in efficiency, reduced probability of losses and enhanced strategic decision-making, and ultimately increased profitability.
Further, improving banks’ ability to aggregate risk data will also improve their resolvability, and for G-SIBs in particular, it is essential that resolution authorities have access to aggregate risk data that complies with the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions as well as the principles set out in this document. For recovery, a robust data framework will help banks and supervisors anticipate problems ahead. It will also improve the prospects of finding alternative options to restore financial strength and viability when the firm comes under severe stress.
Saudi Central bank expects all banks to benefit from these Principles with regard to risk data aggregation and risk reporting and accordingly implement all of these by 2016 and in this respect, banks must develop an implementation strategy. Further, Saudi Central bank from time to time through its regular On-Site Examinations, Supervisory Review Visits, and through bilateral and multilateral meetings will discuss and track the implementation of these Principles.
Guidance Document Concerning Implementation Of Capital Reforms Under Basel III Framework Based on Relevant BCBS Documents
Finalized Guidance Document for the Implementation of Basel II.5 Standardized and IRB Approaches (Document)
Requirements outlined in this circular have been updated. refer to Basel Framework, issued by SAMA circular No (44047144), dated 04/06/1444 H, Corresponding To 27/12/2022 G.Saudi Central Bank issued a draft Guidance Document concerning the implementation of Basel II.5 Standardized and IRB Approaches on 29 September 2012 to all banks to solicit comments by 10 October 2012. These comments have now been received and we have now attached finalized the Guidance Document for the implementation of Basel II.5 in Saudi Arabia.
The Basel II.5 framework was issued through the following documents.
• "Enhancement to the Basel II Framework" - July 2009 • "Revisions to the Basel II Market Risk Framework" - December 2010
The aforementioned documents were issued in response to the financial crisis that began in 2007 and negatively affected many international banks and banking systems with significant losses on their investments in complex securitization products. Consequently, the BCBS issued the aforementioned documents to strengthen Credit and Market risks in international banks.
Saudi Central Bank's Finalized Guidance Document comprises of all Pillar 1, Pillar 2, and Pillar 3 requirements and contains Guidance Notes and Prudential Returns which have been compiled on the basis of the two aforementioned BCBS documents which represent enhancements and amendments to the BCBS Basel II Framework with regard to securitization and re-securitization activities. Consequently, the implementation of Saudi Central Bank's Basel II.5 will be carried out through the adjustments and enhancements to the Basel II Framework.
A. Pillar 1
With regard to implementing Pillar-1 risk, we refer to the following Saudi Central Bank Circulars concerning the implementation of Basel II.5 Standardized and IRB Approaches.
• Saudi Central Bank - Basel II Prudential Returns Circular # BCS 180 of 22 March 2007. • Saudi Central Bank Basel II Guidance Document to banks in Saudi Arabia of 6 June 2006. • Saudi Central Bank Amended IRB Prudential Return and Guidance Notes of 18 January 2012 Circular# BCS 5318.
While Saudi Central Bank's implementation framework incorporates i) Credit Risk and ii) Market Risk for both the Standardized and IRB Approaches, the latter would only be applicable where Saudi Central Bank granted an approval to use IRB approaches.
With regard to implementing models in the context of Basel II.5 Market risk, Saudi Central Bank has decided to wait until substantial Trading Book issues under review in the BCBS are resolved. These were documented in the BCBS document of May 2012 entitled "Fundamental Review of the Trading Book".
With regard to Operational Risk, there were no refinements under Basel II.5.
It should be noted that these Prudential Returns are not applicable to branches of foreign banks as the Agency will discuss the Basel II.5 implementation with their Head Offices and Home Supervisory Authorities, and ensure that they include the branches in Saudi Arabia in their Capital Adequacy plans.
B. Pillar 2
• Basel II.5 Pillar 2 ICAAP Requirements
- Please refer to page 40.
C. Pillar 3
• Basel II.5 Pillar 3 Disclosure Requirements
- Please refer to page 42.
Saudi Central Bank Basel II.5 Framework will be effective 1 January 2013 and Banks will submit their first quarterly prudential returns for data as of 31 March 2013 to be sent to SAMA by 30 April 2013. SAMAs Consultative Draft Concerning the Implementation of Basel II.5 (Standardized and IRB Approaches)
BCBS Consultative Document Entitled "Monitoring Indicators for Intraday Liquidity Management"
Basel Committee -Final Rules on Bank Disclosures of the Composition of the Capital
BCBS Releases Consultation Document on Measures to Address Domestic Systemically Important Banks (D-SIB)
Basel Committee for Banking Supervision (BCBS) Consultative Document Entitled "Principles for Effective Risk Data Aggregation and Risk Reporting"
Joint Forum Report on Intra-Group Support Measures- BCBS
BCBS has issued a report prepared by the Joint Forum for the benefit of national supervisors in gaining a better understanding of the use of intragroup support measures in times of stress or unexpected loss by financial groups across the banking, insurance and securities sectors.
The report provides an important overview of the use of intra-group support at a time when authorities are increasingly focused on ways to ensure banks and other financial entities can be wound down in an orderly manner during periods of distress. Furthermore the report provides an overview and analysis of the types and frequency of intra-group support measures derived from the results of a survey of 31 financial institutions headquartered in 10 jurisdictions on three continents.
In our view this report provides insights into and an overview of the various intra-group support measures used by financial groups and their potential impact on the groups operations in times of stress. The above document can be accessed from the BIS website (bis.org). Banks are advised to review this document and benefit from the guidance provided therein.
Interpretive Issues with Respect to the Revisions to the Market Risk Framework
The Basel Committee on Banking Supervision (BCBS) has issued a paper entitled "Interpretive Issues with Respect to the Revisions to the Market Risk Framework" in November 2011. This document has provided responses to important interpretive issues concerning past BCBS papers circulated by the Agency to all Banks. These papers include the Revisions to the Basel II Market Risk Framework ('the Revisions) and the Guidelines for Computing Capital for Incremental Risk in the Trading Book ("the IRC Guidelines").
The important interpretive issues raised and clarifications provided in the above document pertains to the following areas:
1. Stressed Value at Risk 2. Incremental Risk Capital 3. Risk Models 4. Standardized Measurement methods 5. Others
The above document can be accessed from the BIS website (bis.org). Banks are advised to review this document and benefit from the interpretations provided therein in implementation of the Basel II Market Risk Framework.
Treatment of Trade Finance Under Basel Capital Framework- BCBS
The Basel Committee on Banking Supervision (BCBS) has issued a paper in October 2011 entitled "Treatment of Trade Finance Under Basel Capital Framework".
This paper has been issued by BCBS in consultation with the World Bank, the World Trade Organization and International Chamber of Commerce and covers changes in Basel Capital framework with regard to Trade Finance transactions.
SAMA recommends that all Banks currently engaged in implementing Basel Capital framework in Saudi Arabia should ensure that their relevant staff is fully aware of this document. Further, Bank staff in other areas such as Risk Management, Financial Controls, Compliance Function and Internal Audits should also be familiar with this document. In light of this paper, SAMA over the next few months will also update its relevant guidance document on its Basel framework following which banks will be expected to implement the change. This document can be accessed from the Bank for International Settlement website address: (bis.org)
SAMAs Prudential Returns Concerning the Monitoring of Basel III Liquidity Risk Through the Minimum Regulatory Liquidity Standard Ratios
Refer to 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 to read the updated requirements.Consultative Paper on Revised Core Principles for Effective Banking Supervision - Dated 20 December 2011
Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement
The Joint Forum Report on Asset Securitization
Revision to Basel 2 Market Risk Framework - Updated as of 31 December 2010
Monitoring of Liquidity Risk Through Basel III Framework Concerning Minimum Regulatory Liquidity Standard Ratios
Basel 3: Global Framework for More Resilient Banks and Banking Systems- BCBS
As you are aware, in December 2010G, the Basel Committee on Banking Supervision issued its initial rules entitled "Basel III: Global Framework for More Resilient Banks and Banking System". This text presented the details of global regulatory standards on Banks' Capital Adequacy and Liquidity.
The Committee has now published its Revised Document of June 2011G, which can be accessed from BIS website www.bis.org. The major changes in the Revised Document are covered in the attached BCBS Press Release and generally relate to further refinements to Credit Value Adjustments (CVA).
This document is of interest to all banks in Saudi Arabia that have currently implemented the Basel II Framework and are now preparing to move on to Basel III. Banks are expected to review these documents and start developing their plans for implementation of Basel III. Banks should study these carefully and become familiar with the rules text. Over the next few months, Saudi Central Bank will be issuing specific guidance documents to banks on these subjects including Saudi Central Bank's position in areas where national discretion is to be applied. Saudi Central Bank will also issue revised or new prudential returns related to these topics.
Opening Accounts for Customers Needing to Benefit from Unemployment Program Named 'Hafiz'
FSB Releases Consultation Documents on Measures to Address Systemically Important Financial Institutions
Domestic Systemically Important Bank (D-SIBs) 2022
To read the last updated list of Domestic Systemically Important Bank (D-SIBs), click here .List of Domestic Systemically Important Banks (D-SIBs) 2021
To read the last updated list of Domestic Systemically Important Bank (D-SIBs), click here .Basel Committee Papers: (1) Sound Practices for Back Testing Counterparty Credit Risk Models; and (2) Capitalization of Bank Exposures to Central Counterparties
List of Domestic Systemically Important Banks (D-SIBs) 2020
To read the last updated list of Domestic Systemically Important Bank (D-SIBs), click here .List of Domestic Systemically Important Banks (D-SIBs) 2019
To read the last updated list of Domestic Systemically Important Bank (D-SIBs), click here .List of Domestic Systemically Important Banks (D-SIBs) 2018
To read the last updated list of Domestic Systemically Important Bank (D-SIBs), click here .BCBS Consultative Document: Countercyclical Capital Buffer Proposal
List of Domestic Systemically Important Banks (D-SIBs) 2017
To read the last updated list of Domestic Systemically Important Bank (D-SIBs), click here .APR - Annual Percentage Rate
SAMA has noticed that banks do not clarify the actual commission imposed by banks on various financing products for their customers, and rely only on the nominal commission rate (Flat Rate) without mentioning the actual commission rate (APR), which led to confusion among borrowers. This issue was also observed in banks' marketing campaigns and various advertisements for financing products aimed at attracting new borrowers to benefit from personal loan products, real estate financing products, and others.
I inform you that the method of advertisement mentioned above is in violation of the instructions communicated to the banks pursuant to SAMA Circular regarding the regulations for consumer credit No. 33232/M A Sh/516 dated 23 /9/1426 H corresponding to 26/10/2005 G, especially (paragraph 2-1) concerning the announcement of consumer loans, which states the following:"
1-2 Announcement of Consumer Loans*
The advertisement must generally be displayed prominently at bank premises or any other location, while adhering to the principles of good faith, and it should be presented in a simple, clear, and comprehensive manner. It must include information about the Annual Percentage Rate (APR).
Therefore, it is necessary to adhere to the aforementioned regulations, specifically mentioning the actual APR and explaining it to customers within bank branches or when advertising any financial products, or conducting marketing campaigns for all financing products, including real estate products. The bank is required to provide SAMA with evidence of its compliance and the measures it will take in this regard.
*Since the regulations for consumer financing issued under Circular No. (351000116619), dated 10/09/1435 H, corresponding to 07/07/2014 G It has replaced the regulations for consumer credit issued under Circular No. 33232/M.A.S/516 dated 23/9/1426 H corresponding to 26 /10/2005 G , You must comply with Article 17 of the regulations issued pursuant to Circular No. (351000116619).
Governance of Compensation Practices
In that regard SAMA issued (Banks Remuneration Rules) Via circular No. (44049096), dated 12/06/1444H, Corresponding to 4/1/2023G.
Risk Management for Electronic Banking and Electronic Money Activities- BCBS
No: BCL/78/1439 Date(g): 24/5/1998 | Date(h): 28/1/1419 Status: Guidance A subsequent document issued by the BCBS entitled "The Risk Management Principles for Electronic Banking" substitutes this paper.We are enclosing herewith a recent Report issued by the Basel Committee on Banking Supervision on the above subject. This paper defines "Electronic Banking" and "Electronic Money" and identifies the various Risk that Banks are exposed to when providing such services. The paper also lists various risk management practices that are followed by the Banks and provides examples of possible risks arising from such activities and risk management measures that can be followed.
The Saudi Central Bank's Objectives in circulating this Report is to ensure that Saudi Banks can benefit from this document which summarizes the best practices of international Banks that are engaged in Electronic Banking activities. We would like all Saudi Banks to review and compare their Risk Management Practices in relation to points outlined in Chapter 3 of the Report. All banks are required to carry out a self-assessment done by their internal auditors in relation to the points raised in Chapter 3. Amendment to the Prudential Report Template for Commissions for Deposits, Loans, Bonds and Other Instruments
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.1. Introduction
Electronic payment media are likely to figure importantly in the development of electronic commerce, and retail electronic hanking services and products, including electronic money, could provide significant new opportunities for banks. Electronic banking may allow banks to expand their markets for traditional deposit-taking and credit extension activities, and to offer new products and services or strengthen their competitive position in offering existing payment services. In addition, electronic banking could reduce operating costs for hanks.
More broadly, the continued development of electronic banking and electronic money may contribute to improving the efficiency of the banking and payment system and to reducing the cost of retail transactions nationally and internationally. This could potentially result in gains in productivity and economic welfare. Consumers and merchants may be able to increase the efficiency, with which they make and receive payments, and enjoy greater convenience. Electronic banking may also increase access to the financial system for consumers who have previously found access limited.
The scope of this report is nescessarily restricted in two respects. First, it deals with the risk management of electronic banking and electronic money activities from a banking supervisory perspective only and docs not, for example, address the monetary consequences. Second, while many of the risks described in the report apply both to bank and non-bank issuers and providers, this report addresses banks only.
1.1. Purpose and Organisation
The development and use of electronic money and some forms of electronic banking are still in their early stages. Given the degree of uncertainty about future technological and market developments in electronic banking and electronic money, it is important that supervisory authorities avoid policies that hamper sueful innovation and experimentation. At (he same time, the Basle Committee recognises that along with the benefits, electronic banking and electronic money activates carry risks for banking organisations, and these risks must be balanced against the benefits.
The purpose of this document is to provide considerations for supervisory authorities and banking organisations as they develop methods for identifying, assessing, managing and controlling the risks associated with electronic banking and electronic money. The Basle Committee regards the document as an initial step in an ongoing review and discussion of supervisory issues and responses related to technological advances in electronic retail products and services.
the Basle Committee is distributing this document to supervisors worldwide with the expectation that it will facilitate development of appropriate supervisory approaches to the management of risks in electronic banking and electronic money activities. Supervisors may wish to circulate the document to the institutions under their jurisdiction.
The discussion is general in nature because the technology for electronic banking and electronic money is changing rapidly, and products and services in the future may be very different from those available today. At this relatively early stage in the development of some electronic banking and electronic money activities, many aspects of risks are neither fully discernible nor readily measurable. A premature regulatory approach would run the risk of stifling innovation and creativity in these areas. Therefore, supervisors should encourage banks to develop a risk management process rigorous and comprehensive enough to deal with known material risks, and flexible enough to accommodate changes in the type and intencity of material risks associated with their electronic banking and electronic money activities. The risk management process can be effective only if it is constantly evolving.
The remainder of this document is organised as follows. The next section of the Introduction presents definitions of electronic banking and electronic money, and refers to key roles banks can play as participants in electronic money activities. Section II identifies risks that banks may face in electronic banking and electronic money. The identification and analysis of risks does not aim to he exhaustive, rather, the discussion is intended to be illustrative of the types of problems banks may face. Among these, analysis suggests that operational, reputational, and legal risk may be more likely to arise.1
As the development of electronic banking and electronic money progresses, interaction between banks and their customers across national boundaries is likely to increase. Such relationships may raise different issues and risks for banks and for supervisors. In light of this, Section II includes a discussion of cross border risks.
Based on the identification and analysis of risks, Section III outlines the major steps in a risk management process for banks engaging in electronic banking and electronic money activities. The process has three main steps: assessing risks, implementing measures to control risk exposures, and monitoring risks.
1 Banks are also likely to face risks that can affect the value of their shareholders’ interest. For example, faced with a choice between competing new technologies, bank management risks choosing one which does not become widespread and hence may not be successful, or it may choose one which does not fit well with other products and services. As with any business decision management takes, risks to financial success posed by electronic bunking and electronic money are of central concern to it and to owners. However, because supervisory authorities arc charged with protecting the safety and soundness of the banking system, but not with ensuring bank profitability, such "shareholder value" issues arc not of direct concern to supervisors, unless the viability of an institution is threatened. Therefore, in general, the document does not discuss this perspective on electronic money and electronic banking risks.
1.2. Definitions of Electronic Banking and Electronic Money
1.2.1 Electronic banking refers to the provision of retail and small value banking products and services through electronic channels.2 Such products and services can include deposit-taking, lending, account management, the provision of financial advice, electronic bill payment, and the provision of other electronic payment products and services such as electronic money (defined separately, below).
Two fundamental aspects of electronic banking are the nature of the delivery channels through which activities are prrsued, and the means for customers to gain access to those channels. Common delivery channels include "closed” and "open” networks. "Closed networks" restrict access to participants (financial institutions, consumers, merchants, and third party service providers) bound by agreements on the terms of membership. "Open networks" have no such membership requirements. Currently, widely used access devices through which electronic banking products and services can be provided to customers include point of sale terminals, automatic teller machines, telephones, personal computers, smart cards and other devices.
1.2.2 Electronic money refers to "stored value" or prepaid payment mechanisms for executing payments via point of sale terminals, direct transfers between two devices, or over open computer networks such as the Internet.3 Stored value products include "hardware” or "card-based" mechanisms (also called "electronic purses"), and "software" or "networkbased" mechanisms (also called "digital cash"). Stored value cards can be "single-purpose" or "multi-purpose".4 Single- purpose cards (e.g., telephone cards) are used to purchase one type of good or service, or products from one vendor, multi-purpose cards can be used for a variety of pruchases from several vendors.5
Banks may participate in electronic money schemes as issuers, but they may also perform other functions. Those include distributing electronic money issued by other entities; redeeming the proceeds of electronic money transactions for merchants; handling the processing, clearing, and settlement of electronic money transactions; and maintaining records of transactions.
2 This document focuses on retail electronic banking and electronic payment services. Large-value electronic payments and other wholesale banking services delivered electronically arc outside the scope of the present discussion.
3 Several official bodies have each issued their own definition of electronic money. As pointed out in a recent Group of Ten report on electronic money, a precise definition of electronic money is difficult to provide, in part because technological innovations continue to blur distinctions between forms of prepaid electronic mechanisms. (See electronic Money: Consumer protection, law enforcenent, supervisory and cross-border issues, Group of Ten, April 1997. for a list of such studies.) The current document draws from both the Group of Ten report and Security of Electronic Money, Hank for International Settlements, August 1996, in establishing a definition of electronic money. The hitler report explains distinctions in the technical representation of money on stored-value products. In particular, "balanced-based" products are devices which manipulate a numeric ledger, such that transactions arc performed as debits or credits to a balance; and "note-based" products which perform transactions by transferring the appropriate amount of electronic notes" (also called "coins" or "tokens"), which are of a fixed denomination, from one device to another. Debit cards and credit cards are retail electronic payment mechanisms, but are not considered to be electronic money because they arc not prepaid mechanisms.
4 Stored value cards may be characterised by the use of a magnetic stripe or a computer chip embedded in the card. A plastic card with an embedded computer chip (known as a "smart card") may perform stored value applications, in addition to other functions such as debit and credit applications.
5 Increasingly, the terms multi-purpose or multi-function arc also used to convey the idea that the card or device can function as several types of payment istrument (e.g. credit card, debit card, stored value card), and/or that the card can be used for purposes besides financial transactions (e.g. identification card, repository of personal medical information). The lack of standardisation of terminology is perhaps a reflection of rapid technological innovations.2. Identification and Analysis of Risks
Because of rapid changes in information technology, no list of risks can be exhaustive. The intention in this document is to describe a broad, representative set of risks as a basis for designing general guidance for risk management. Specific risks facing banks engaged in electronic banking and electronic money activities can be grouped according to risk categories discussed in other Basle Committee risk management documents and, in this sense, the risks are not new.6 Categorising risks in this manner can be helpful in systematically identifying risks in a banking organisation. The Annex presents examples of specific risks and problems banks may face in electronic banking and elecronic money activities grouped into risk categories.
While the basic types of risks generated by electronic banking and electronic money are not new, the specific ways in which some of the risks arise, as well as the magnitude of their impact on banks, may be new for banks and supervisors. Some of the risks and problems banks may face apply both to electronic money and electronic banking activtites. However, there are likely to be differences in the degree to which a particular risk is applicable across different electronic money and electronic banking activities.
At this stage, it would appear that operational risk, reputational risk, and legal risk may be the most important risk categories for most electronic banking and electronic money activities, especially for diversified international banks, and the next three subsections discuss specific manifestations of these types of risks. Some of the specific problems cut across risk categories. For example, a breach of security allowing unauthorised access to customer information can be classified as an operational risk, but such an event also exposes the bank to legal risk and reputational risk. Even though these different types of risks may result from a single problem, appropriate risk management may require several remedies to address each of these different risks. Other risks may also be important for some forms of electronic banking and electronic money activities, and these are discussed thereafter. Possible cross border risks are also discussed.
6 See, e.g., Risk Management Guidelines far Derivatives. Basle Committee on Banking Supervision, July 1994, and Core Principles for Effective Banking Supervision, Basle Committee on Banking Supervision. September 1997. The hitter document includes a basic discussion of eight risk categories: credit risk, country and transfer risk, market risk, interest rate risk, liquidity risk, operational risk, legal risk and reputational risk. Payment Systems in the Group of Ten Countries, Bank for International Settlements. December 1993, includes definitions of risks in blinking and payment systems.
2.1. Operational Risk
Operational risk arises from the potential for loss due to significant deficiencies in system reliability or integrity. Security considerations are paramount, as banks may be subject to external or internal attacks on their systems or products. Operational risk can also arise from customer misuse, and from inadequately designed or implemented electronic banking and electronic money systems. Many of the specific possible manifestations of these risks apply to both electronic banking and electronic money.
2.1.1 Security Risks
Operational risk arises with respect to the controls over access to bank's critical accounting and risk management systems, information that it communicates with other parties and, in the case of electronic money, measures the bank uses to deter and detect counterfeiting. Controlling access to bank systems has become increasingly complex due to expanded computer capabilities, geographical dispersal of access points, and the use of various communications paths, including public networks such as the Internet. It is important to note that with electronic money, a breach of security could result in fraudulently created liabilities of the bank. For other forms of electronic banking, unauthorised access could lead to direct losses, added liabilities to customers or other problems.
A variety of specific access and authentication problems could occur. For example, inadequate controls could result in a successfrl attack by hackers operating via the Internet, who could access, retrieve, and use confidential customer information. In the absence of adequate controls, an outside third party could access a bank’s computer system and inject a virus into it.
In addition to external attacks on electronic money and electronic banking systems, banks are exposed to operational risk with respect to employee fraud: employess could surreptitiously acquire authentication data in order to access customer accounts, or steal stored value cards. Inadvertent errors by employees may also compromise a bank's systems.
Of direct concern to supervisory authorities is the risk of criminals counterfeiting electronic money, which is heightened if banks fail to incorporate adequate measures to detect and deter counterfeiting. A bank faces operational risk from counterfeiting, as it may be liable for the amount of the falsified electronic money balance. In addition, there may be costs associated with repairing a compromised system.
2.1.2 Systems Design, Implementaion, And Maintenance
A bank faces the risk that the systems it chooses are not well designed or implemented. For example, a bank is exposed to the risk of an interruption or slow-down of its existing systems if the electronic banking or eletronic money system it chooses is not compatible with user requirements.
Many banks are likely to rely on outside service providers and external experts to implement, operate, and support portions of their electronic money and electronic banking activities. Such reliance may be desirable because it allows a bank to outsource aspects of the provision of electronic banking and electronic money activities that it cannot provide economically itself. However, reliance on outsourcing exposes a bank to operational risks. Service providers may not have the requisite expertise to deliver services expected by the bank, or may fail to update their technology in a timely manner. A service provider's operations could be interrupted due to system breakdowns or financial difficulties, jeopardising a bank’s ability to deliver products or services.
The rapid pace of change that characterises information technology presents banks with the risk of systems obsolescence. For example, computer software that facilitates the use of electronic banking and electronic money products by customes will require updating, but channels for distributing software updates pose risks for banks in that criminal or malicious individuals could intercept and modity the software. In addition, rapid technological change can mean that staff may fail to understand fully the nature of new technology employed by the bank. This could result in operational problems with new or updated systems.
2.1.3 Customer Misuse of Products And Services
As with traditional banking services, customer misuse, both intentional and inadvertent, is another source of operational risk. Risk may be heightened where a bank does not adequately educate its customers about security precautions. In addition, in the absence of adequate measures to verify transactions, customers may be able to repudiate transactions they previously authorised, inflictitng financial losses on the bank. Customers using personal information (e.g., authentication information, credit card numbers or bank account numbers) in a non-secure electronic transmission could allow criminals to gain access to customer accounts. Subsequently, the bank may incur financial losses because of transactions customers did not authorise. Money laundering may be another source of concern, as pointed out in the Group of Ten, April 1997, report: Electronic Money: Consumer Protection, Law Enforcement, Supervisory and Cross- Border Issues.
2.2. Reputational Risk
Reputational risk is the risk of significant negative public opinion that results in a critical loss of funding or customers. Reputational risk may involve actions that create a lasting negative public image of overall bank operations, such that the bank's ability to establish and maintain customer relationships is significantly impaired. Reputational risk may also arise if actions by the bank cause a major loss of public confidence in the bank’s ability to perform functions critical to its continued operation. Reputational risk can arise in response to actions a bank itself takes, or in response to actions of third parties. Increased reputational risk can be a direct corollary of heightened risk exposure, or problems, in other risk categories, particularly operational risk.
Reputational risk may arise when systems or products do not work as expected and cause widespread negative public reaction. A significant breach of security, whether as a result of external or internal attacks on a bank’s system, can undermine public confidence in a bank. Reputational risk may also arise in cases where customers experience problems with a service but have not been given adequate information about product use and problem resolution procedures.
Mistakes, malfeasance, and fraud by third parties may also expose a bank to reputational risk. Reputational risk can arise from significant problems with communications networks that impair customers' access to their funds or account information, particularly if there are no alternative means of account access. Substantial losses caused by mistakes of another institution offering the same, or similar, electronic banking or electronic money products or service may cause a bank’s customers to view its products or service with suspicion, even if the bank itself did not face the same problems. Reputational risk may also arise rom targeted attacks on a bank. For example, a haker penetrating a bank's web site may alter it to intentionally spread inaccurate information about the bank or its products.
Reputational risk may not only be significant for a single bank but also for the banking system as a whole. If, for isntance, a globally active bank experienced important reputational damage concerning its electronic banking or electronic money business, the security of other banks’ systems may also be called into question. Under extreme circumstances, such a situation might lead to systemic disruptions in the banking system as a whole.
2.3. Legal Risk
Legal risk arises from violations of, or non-conformance with laws, rules, regulations, or prescribed practices, or when the legal rights and obligations of parties to a transaction are not well established. Given the relatively new nature of many retail electronic banking and electronic money activities, rights and obligations of parties to such transactions are, in some cases, uncertain. For example, application of some consumer protection rules to electronic banking and electronic money activities in some countries may not be clear. In addition, legal risk may arise from uncertainty about the validity of some agreements formed via electronic media.
Electronic money schemes may be attractive to money launderers if the systems offer liberal balance and transaction limits, and provide for limited auditability of transactions. Application of money laundering rules may be inappropriate for some forms of electronic payments. Because electronic banking can be conducted remotely, bank may face increased difficulties in applying traditional methods to prevent and detect criminal activity.
Banks engaging in electronic banking and electronic money activities can face legal risks with respect to customer disclosures and privacy protection. Customers who have not been adequately informed about their rights and obligations may bring suit against a bank, failure to provide adequate privacy protection may also subject a bank to regulatory sanctions in some countries.
Banks choosing to enhance customer service by linking their Internet sites to other sites also can face legal risks. A hacker may use the linked site to defraud a bank customer, and the bank could face litigation from the customer.
As electronic commerce expands, banks may seek to play a role in electronic authentication systems, such as those using digital certificates.7 The role of a certification authority may expose a bank to legal risk. For example, a bank acting as a certification authority may be liable for financial losses incurred by parties relying on the certificate. In addition, legal risk could arise if banks participate in new authentication systems and rights and obligations are not clearly specified in contractual agreements.
7 A digital certificate issued by a certification authority is intended to ensure that a given digital signature is in fact generated by a given signer. A bank that undertakes to act as a certification authority could be considered to be providing services to clients similar to those associated with providing an account access device or acting us a notary public. A digital signature is a string of data appended to an electronic message that is intended to identify uniquely the sender to the recipient. At present, most digital signatures are generated using a cryptographic algorithm in which the sender uses one mathematical function to create the signature and the receiver uses a different, but related mathematical function to verity the signature. Digital signatures also typically provide a mechanism for verifying the integrity of the message.
2.4. Other Risks
Traditional banking risks such as credit risk, liquidity risk, interest rate risk, and market risk may also arise from electronic banking and eletronic money activities, though their practical consequences may be of a different magnitude for banks and supervisors than operational, reputational, and legal risks. This may be particularly true for banks that engage in a variety of banking activities, as compared to banks or bank subsidiaries that specialise in electronic banking and electronic money activities.
2.4.1 Credit risk is the risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. Banks engaging in electronic banking activities may extend credit via non-traditional channels, and expand their market beyond traditional geographic boundaries. Inadequate procedures to determine the creditworthiness of borrowers applying for credit via remote banking procedures could heighten credit risk for banks. Banks engaged in electronic bill payment programs may face credit risk if a third party intermediary fails to carry out its obligations with respect to payment. Banks that purchase electronic money from an issuer in ordr to resell it to customers are also exposed to credit risk in the event the issuer defaults on its obligations to redeem the electronic money.
2.4.2 Liquidity risk is the risk arising from a bank’s inability to meet its obligations when they come due, without incurring unacceptable losses, although the bank may ultimately be able to meet its obligations. Liquidity risk may be significant for banks that specialise in electronic money activities if they are unable to ensure that funds are adequate to cover redemption and settlement demands at any particular time. In addition, failure to meet redemption demands in a timely manner could result in legal action against the institution, and lead to reputational damage.
2.4.3 Interest rate risk refers to the exposure of a bank's financial condition to adverse movements in interest rates. Banks specialising in the provision of electronic money may face significant interest rate risk to the extent adverse movements in interest rates decrease the value of assets relative to electronic money liabilities outstanding.
2.4.4 Market risk is the risk of losses in on-and off-balance sheet positions arising from movements in market prices, including foreign exchange rates. Banks accepting foreign currencies in payment for electronic money are subject to this type of risk.
2.5. Cross Border Issues
Electronic banking and electronic money activities are based on technology that by its very nature is designed to extend the geographic reach of banks and customers. Such market expansion can extend beyond national borders, highlighting certain risks. Although banks currently face similar types of risks in international banking, it is important to note that these risks are also relevant to the cross-border conduct of electronic banking and electronic money. Banks may face different legal and regulatory requirements when they deal with customers across national borders. For new forms of retail electronic banking, such as Internet banking, and for electronic money, there may be uncertainties about legal requirements in some countries. In addition, there may be jurisdictional ambiguities with respect to the responsibilities of different national authorities. Such considerations may expose banks to legal risk associated with non-compliance with different national laws and regulations, including consumer protection laws, record-keeping and reporting requirements, privacy rules, and money laundering laws.
Operational risk could arise for a bank dealing with a service provider lacated in another country, which for that reason may be more difficult to monitor. Banks may also face other risks as they engage in the provision of electronic banking and electronic money activities across borders. Banks dealing with foreign-based service providers, or with foreign participants in electronic banking or electronic money activities, are subject to county risk to the extent that foreign parties become unable to fulfil their obligations due to economic, social, or political factors. A bank offering services via open networks like the Internet may be exposed to credit risk, in that applications for credit from customers in other countries may be more difficult to evaluate with procedures based upon a more familiar customer base. Banks accepting foreign currencies in payment for electronic money may be subject to market risk because of movements in foreign exchange rates.
3. Risk Management
For an increasing number of banks there may be a strategic reason for engaging in electronic banking and electronic money activities. In addition, greater use of electronic banking and electronic money may increase the efficiency of the banking and payment system, benefiting consumers and merchants. At the same time, as the preceding discussion indicates, there are risks for banks engaging in electronic banking and electronic money activities. Risks must be balanced against benefits; banks must be able to manage and control risks and absorb any related losses if necessary. Risks from electronic banking and electronic money activities should also be evaluated in the context of other risks the bank faces. Even though electronic banking and electronic money activities may represent a relatively small portion of the overall activities of banks currently, supervisors may still require senior management’s assurance that critical systems are not threatened by the risk exposures banks take.
The rapid pace of technological innovation is likely to change the nature and scope of risks banks face in electronic money and electronic banking. Supervisors expect banks to have processes that enable bank management to respond to current risks, and to adjust to new risks. A risk management process that includes the three basic elements of assessing risks, controlling risk exposure, and monitoring risks will help banks and supervisors attain these goals. Banks may employ such a process when committing to new electronic banking and electronic money activities, and as they evaluate existing commitments to these activities.
It is essential that banks have a comprehensive risk management process in place that is subject to appropriate oversight by the board of directors and senior management. As new risks in electronic banking and electronics activitities are identified and assessed, the board and senior management must be kept informed of these changes. Prior to any new activity being commenced, a comprehensive review should be conducted so that senior management can ensure that the risk management process is adequate to assess, control and monmitor any risks arising from the proposed new activity.
3.1 Assessing Risks
Assessing risks is an ongoing process. It typically involves three steps. First a bank may engage in a rigorous analytic process to identify risks and, where possible, to quantify them. In the event risk cannot be quantified, management may still identify how potential risks can arise and the steps it has taken to deal with and limit those risks. Bank management should form a reasonable and defensible judgement of the magnitude of any risk with respect to both the impact it could have on the bank (including the maximum potential impact), and the probability that such an event will occur.
A second step in assessing risk is for the board of directors or senior management to determine the bank's risk tolerance, based on an assessment of the losses the bank can afford to sustain in the event a given problem materialises. Finally, management can compare its risk tolerance with its assessment of the magnitude of a risk to ascertain if the riks exposure fits within the tolerance limits.
3.2. Managing and Controlling Risks
Having made an assessment of risks and its risk tolerance, bank management should take steps to manage and control risks. This phase of a risk management process includes activities such as implementing security policies and measures, co-ordinating internal communication, evaluating and upgrading products and services, implementing measures to ensure that outsourcing risks are controlled and managed, providing disclosures and customer education, and developing contingency plans. Senior management should ensure that staff responsible for enforcing risk limits have authority independent from the busines unit undertaking the electronic banking or electronic money activity. Banks increase their ability to control and manage the various risks inherent in any activity when policies and procedures are set out in written documentation and made available to all relevant staff.
3.2.1 Security Policies And Measures
Security is the combination of systems, applications, and internal controls used to safeguard the integrity, authenticity, and confidentiality of data and operating processes. Proper security relies on the development and implementation of adequate security policies and security measures for processes within the bank, and for communication between the bank and external parties. Security policies and measures can limit the risk of external and internal attacks on electronic banking and eletronic money systems, as well as the reputational risk arising from security breaches.
A security policy states management's intentions to support information security and provides an explanation of the bank's security organisation. It also establishes guidelines that define the bank's security risk tolerance. The policy may define responsibilities for designing, implementing, and enforcing information security measures, and it may establish procedures to evaluate policy compliance, enforce disciplinary measures, and report security violations
Security measures are combinations of hardware and software tools, and personnel management, that contribute to building secure systems and operations. Senior management should regard security as a comprhensive process that is only as strong as the weakest link in the process. Banks can choose from a variety of security measures to prevent or mitigate external and internal attacks and misuse of electronic banking and electronic money. Such measures include, for example, encryption, passwords, firewalls, virus controls, and employee screening. Encryption is the use of cryptographic algorithms to encode clear text data into cipher text to prevent unauthorised observation.8 Passwords, pass phrases, personal identification numbers, hardware-based tokens, and biometrics are techniques for controlling acess and identifying users.
Firewalls are combinations of hardware and software that screen and limit external access to internal systems connected to open networks such as the Internet. Firewalls may also separate segments of internal networks using Internet technology (Intranets). Firewall technology, if properly designed and implemented, can be an effective means of controlling access and safeguarding data confidentiality and integrity. Because this technology is complex to design and can be csotly, its strength and capabilities should be proportionate with the sensitivity of the information being protected. A well-planned design should include enterprise-wide security requirements, clear procedures for operation, separation of duties, and selection of trusted personnel who are responsible for the configuration and operation of the firewall.
Although firewalls screen incoming messages they do not necessarily protect against virus-infected programs downloaded from the Internet. As a consequence, management should develop prevention and detection controls to reduce the chance of virus attack and data destruction, particularly for remote banking. Programmes to mitigate the risk of a virus infection may include network controls, end-user policies, user training, and virus detection software.
Not all security threats are external. Electronic banking and electronic money systems should also be safeguarded, to the extent possible, against unauthorised activities by current and former employees. As with existing banking activities, background checks for new employees, temporary employees, and consultants, as well as internal controls and separation of duties are important precautions to protect system security.
For electronic money, additional security measures may help deter attacks and misuse, including counterfeiting and money laundering.9 Such measures could include on-line interaction with the issuer or a central operator; monitoring and tracing individual transactions; maintenance of cumulative records in a central database; the use of tamper-resistant devices incorporated into stored-value cards and merchant hardware; and the use of value limits and expiration dates on stored-value cards.
3.2.2 Internal Communication
Aspects of operational, reputational, legal, and other risks can be managed and controlled if senior management communicates to key staff how the provision of electronic banking and electronic money is intended to support the overall goals of the bank. At the same time, technical staff should clearly communicate to senior management how systems are designed to work, as well as the strengths and weaknesses of systems. Such procedures can reduce operational risks of poor systems design, including incompatibilty of different systems within a banking organisation; data integrity problems; reputational risk associated with customer dissatisfaction that systems did not work as expected; and credit and liquidity risk.
To ensure adequate internal communication, all policies and procedures should be provided in writing. In addition, senior management should adopt a corporate policy of ongoing education and upgrading of skills and knowledge, consistent with the pace of technological innovation, in order to limit operational risks arising from lack of staff and management expertise. Training may include technical course work, as well as time for staff to keep abreast of important market developments.
3.2.3 Evaluating And Upgrading
Evaluating products and services before they are introduced on a widespread basis can also help limit operational and reputational risks. Testing validates that equipment and systems function properly and produce the desired results. Pilot programs or prototoypes can be helpful in developing new applications. The risk of system slowdowns or disruptions can also be reduced by policies to review the capabilities of existing hardware and software regularly.
3.2.4 Outsourcing
A growing trend in the industry is for banks to focus strategically on core competencies and rely on external parties specialising in activities outside the bank's expertise. While these arrangements may offer benefits such as cost-reduction and economies of scale, outsourcing does not relieve the bank of the ultimate responsibility for controlling risks that affect its operations. Consequently, banks should adopt policies to limit risks arising from reliance on outside service providers. For example, bank management should monitor the operational and financial performance of their service providers; ensure that contractual relations between parties, as well as the expectations and obligations of each party, are clearly understood and are defined in written, enforceable contracts; and maintain a contingency arrangement to change service providers in a prompt manner, if necessary.
Security of the bank's sensitive information is of critical importance. The outsourcing arrangement may require the bank to share sensitive data with service providers. Bank management should evaluate the ability of the service provider to maintain the same level of security as though the activities were conducted in-house, through the review of service providers’ policies and procedures aimed at protecting sensitive data. Additionally, supervisors may wish to have the right to independently assess, when necessary, the competence and the operational and financial performance of the service providers.
3.2.5 Disclosures And Customer Education
Disclosures and customer education may help a bank limit legal and reputational risk. Disclosures and programs to educate customers that address how to use new products and services, fees charged for services and products, and problem and error resolution procedures can help banks comply with customer protection and privacy laws and regulations. Disclosures and explanations about the nature of a bank's relationship to a linked web site may help reduce legal risk to a bank arising form problems with services or products on the linked sites.
3.2.6 Contingency Planning
A bank can limit the risk of disruptions in internal processes or in service or product delivery by developing contingency plans that establish its course of action in the event of a disruption in its provision of electronic banking and electronic money services. The plan may address data recovery, alternative data-processing capabilities, emergency staffing, and customer service support. Backup systems should be tested periodically to ensure their continuing effectiveness. Banks should ensure that their contingency operations are as secure as their normal production operations.
An important aspect of electronic banking and electronic money is the reliance on external entities including hardware vendors, sftware providers, Internet service providers, and telecommunications companies. Bank management may insist that such service providers have backup capabilities. In addition, management may consider compensating actions it can take in the event service providers become impaired. Such plans could include shourt-term contracting with other providers, and a policy decribing how the bank will address customer losses associated with the service disruption. Banks should also consider the advisability of reserving the right to change service providers in a prompt manner if necessary.
Contingency planning may also contribute to limit reputational risk arising from the bank's own actions, or from problems experienced by another institution offering the same or similar electronic banking or electronic money products or services. For example, banks may wish to establish procedures to address customer problems during system disruptions.
8 See Security of Electronic Money, Bank for International Settlements, August 1996, especially section 4.1.2 on cryptography, for a detailed discussion of encryption.
9 A detailed discussion of security measures for electronic money can be found in Security of Electronic Money, Bank for International Settlements, April 1996. That report concluded that a combination of security measures, rather than reliance on any one particular measure, is likely to be most effective in preventing and deterring security problems for electronic money.3.3. Monitoring Risks
Ongoing monitoring is an important aspect of any risk management process. For electronic banking and electronic money activities, monitoring is particularly important both because the nature of the activities are likely to change rapidly as innovations occur, and because of the reliance of some products on the use of open networks such as the Internet. Two important elements of monitoring are system testing and auditing.
3.3.1 System Testing And Surveillance
Testing of systems operations can help detect unusual activity patterns and avert major system problems, disruptions, and attacks. Penetration testing focuses upon the identification, isolation, and confirmation of flaws in the design and implementation of security mechanisms through controlled attempts to penetrate a system outside normal procedures. Surveillance is a form of monitoring in which software and audit applications are used to track activity. In contrast to penetration testing, surveillance focuses on monitoring routine operations, investigating anomalies, and making ongoing judgements regarding the effectiveness of security by testing aherence to security policies.
3.3.2 Auditing
Auditing (internal and external) provides an important independent control mechanism for detecting deficiencies and minimising risks in the provision of electronic banking and electronic money services. The role of an auditor is to ensure that appropriate standards, plocies, and procedures are developed, and that the bank consistently adheres to them. Audit personnel must have sufficient specialised expertise to perform an accurate review. An internal auditor should be separate and independent from employees making risk management decisions. To augment internal audit, management may seek qualified external auditors, such as computer security consultants or other professionals with relevant expertise, to provide an independent assessment of the electronic banking or electronic money activity.
3.4. Management of Cross Border Risks
Cross border risks may be more complex than risks banks face within their home country. Hence, banks and supervisors may need to devote added attention to assessing, controlling, and monitoring operational, reputational, legal and other risks arising from cross border electronic banking and electronic money activities.
Banks that choose to provide services to customers in different national markets will need to understand different national legal requirements, and develop an appreciation for national differences in customer expectations and knowledge of products and services. In addition, senior management should ensure that existing systems for credit extension and liquidity management take into account potential difficulties arising from cross border activities. A bank may need to assess country risk and develop contingency plans that take into account service disruptions due to problems in the economic or political climate abroad. A bank may also face difficulties in enforcing the fulfilment of a foreign service provider’s obligations. In the case of banks relying on service providers located abroad, national supervisors may want to assess the accessibility of information from, and consider the activities of, cross-border service providers on a case- by-case basis.
National supervisors can play an important role by identifying and discussing jurisdictional ambiguities. They can also continue efforts to develop measures to detect unsafe and illegal practices. Finally, national supervisors can continue, and strengthen, cooprative efforts to share information about product and service innovations and industry practices.
Annex
Examples of possible risks and risk management measures in retail electronic banking and electronic money
The matrix below provides examples of possible risks banks may face in engaging in electronic banking and electronic money activities, and notes possible measures banks may use to manage such risks. The list is representative rather than exhaustive. The possible risk management measures should not be construed as a reflection of national or international supervisory policy.
Examples of possble risks and risk management measures in retail electronic banking and electronic money
Examples of possible risks Possible manifestation Potential effect on the banking organisation Possible risk management measures Operational risk Unauthorized system access. Hacker gains entry to internal systems. Confidential customer information is intercepted by an unauthorized third party. Virus injected into bank's system.
Bank's systems and data deliberately corrupted and crashed.
Loss of data. Theft of, or tampering with, customer information. Disabling of a significant portion of bank's internal computer system. Costs associated with repairing system.
Perceived insecurity of bank's systems and potential adverse publicity.
Penetration testing for vulnerabilities. Surveillance to detect anomalies in usage, deployment of communication security measures such as firewalls, password management, encryption techniques, and proper authorization of end-users.
Deploy virus checking and on-going monitoring of security measures in internal systems.
Employee fraud. Employee alteration of data in order to draw funds from general bank accounts, and to obtain information from records. Employee theft of smart cards. Costs associated with reimbursing customer losses and with reconstructing accurate data on customers. Possible losses from redeeming electronic money for which no corresponding prepaid funds were received. Customers may perceive the bank as being unreliable. A bank may face legal or regulatory sanctions, and negative publicity. Develop policies for adequately screening new employees. Institute internal controls, including segregation of duties. External auditing of employee performance. Proper control over storage, manufacture, etc, of smart cards. Counterfeiting of electronic money. Criminals alter or duplicate electronic money products to obtain goods or funds without proper payment. A bank may be liable for the amount of the falsified electronic money. Possible costs associated with repairing a compromised system. On-line interaction with the issuer or central operator; monitor and trace individual transactions; maintain cumulative records in a central database; incorporate tamper-resistant devices into stored-value cards and merchant hardware; develop audit trails. Low load-limits may make counterfeiting less attractive for criminals. Service provider risk. Service provider may not deliver services expected by the bank; deficiencies in system or data integrity or reliability may result. Bank may be held accountable by customers for service provider-induced problems. Undertake due diligence before entering into a service provider contract. Construct service provider contracts that establish performance benchmarks, and address contingencies and auditing provisions. Establish backup plans with service provider, develop contingency plans for contracting with alternative service providers. Obsolescence of systems. Delays or disruptions in processing transactions. Deficiencies in system or data integrity or reliability. Adverse public reaction. Possible legal repercussions as law suits could result from erroneous transactions. Costs associated with resolving customer problems. Regular review of capabilities of existing hardware and software. Installation of an accountability system that assigns responsibility for updates to systems and equipment. Outdated staff and management expertise. Rapid technological change can mean that management and staff at a bank are not able to fully understand the nature of new technology employed by the bank, or technological upgradeprovided by service providers. Poor implementation of newer technology. Inability to provide ongoing support. Deficiencies in system or data integrity or reliability. Develop corporate view for training as an ongoing process. Design management and staff training at the planning stage. Inadequate customer security practices. Customer use of personal information (e.g., credit card numbers, bank account numbers) in non-secure electronic transmissions. Criminals could access customer accounts using what should be kept as confidential information. Financial loss through unauthorized transactions. Provide information to customers on the importance of safeguarding information in non-secure transactions. Incorporate security measures into products and services. Customer repudiation of a transaction. Customer completes a transaction, but denies transaction took place, and demands reimbursement of funds. Expenses incurred in proving that the customer authorized the transaction. Possible loss of funds if proof cannot be produced. Implement security measures that enhance customer authentication, such as personal identification numbers. Audit trail for transactions. Reputational risk Significant, widespread system deficiencies. Customers' access to their funds or account information is impaired. Customers may discontinue use of the product or the service. Directly affected customers leave the bank; others follow if problems are publicized. Test systems before implementing. Develop back-up facilities and contingency plans, including plans to address customer problems during system disruptions. A significant breach of security. A virus is introduced into a bank's system, causing significant system and data integrity problems.
Hackers gain entry to internal systems.
Customers may discontinue use of the product or the service. Directly affected customers leave the bank; others follow. Penetration testing, and other appropriate security measures. Develop contingency plans.
Deploy virus checking.
Problems with, or misuses of, same or similar systems or products by another isntitution. Customers view a given bank's electronic money with suspicion in the wake of problems by another bank. Customers may leave the bank. Develop contingency plans. Legal risk Uncertain or ambiguous applicability of laws and rules. A bank may inadvertently be in noncompliance with laws. Application of established consumer compliance rules, money-laundering rules, and signature rules may be uncertain. A bank may incur legal expenses, or be subject to regulatory sanctions. Ascertain areas of legal uncertainty prior to committing to electronic money or electronic banking activities. Make careful judgments about risk tolerance for legal uncertainties. Perform periodic compliance reviews. Request interpretations from regulatory authorities. Update compliance training. Develop contingency plans. Money laundering. A bank's electronic banking or electronic money system may be misused by customers who seek to engage in criminal activity, including money laundering. Legal sanctions for noncompliance with "know your customer" laws. Design customer identification and screening techniques. Develop audit trails. Design policies and procedures to spot and report suspicious activities. For electronic money, low load limits may make money laundering less attractive. Perform periodic compliance reviews. Update compliance training. Develop contingency plans. Inadequate disclosure of information to customers. Customers may not fully understand what their lefts and obligations are, including, for example, any dispute resolution procedure. They may therefore take inadequate precautions in using the product or service. Customer may bring legal suit against the bank as a result of losses or disputed transactions. A bank may be subject to regulatory or legal sanctions. Ascertain appropriate disclosures in advance of offering electronic money or electronic banking activities. Train employees to be aware of typical difficulties customers may have. Carefully weigh costs and benefits of disclosures beyond legal minimum in areas where customer risks may arise. Design and disseminate product information to the public. Develop a process to periodically review regulatory requirements. Failure to protect customer privacy. A bank releases information profiling the pattern of customer financial transactions without customer authorization. Litigation expenses incurred by bank if law suits are filed by customers. Bank may face legal or regulatory sanctions. Review privacy protection policies. Train employees in privacy protection procedures. Deploy security measures. Perform periodic compliance reviews. Update compliance training. Problems at a linked Internet site. A bank may link its web site to web sites of entities offering complementary products. The linked site may disappoint or defraud a bank customer. The bank could face litigation from the customer. Fully understand the legal repercussion, and security risks, of linking to other web sites. Make appropriate consumer disclosures to prevent consumer confusion over the role of the bank, or the insured status of products offered at linked sites. Do not make representations on bank's site regarding the quality of the goods or services available at the linked sites. Certificate authority risk. Forged certificates are issued in the bank's name, defrauding customers. Certificates are issued to persons posing as bank customers without adequate identity verification. Costs associated with revoking and reissuing compromised certificates. Parties relying on a forged or fraudulently obtained certificate may bring lawsuits against the bank. Negative reputational repercussions. Implement appropriate security measures and controls. Exposure to foreign jurisdictions. A Bank offering services over the Internet may attract customers from other countries, causing the bank to be subject to different legal or regulatory requirements. Ambiguities about jurisdictional responsibilities of different national authorities. Bank-issued or distributed dlectronic money may be used outside the country in which the bank is chartered. A Bank may be in noncompliance with laws or regulations outside its home country. A bank may incur unanticipated legal expenses. Ascertain the extent to which its electronic money and electronic banking activities are likely to be used across borders, and make careful judgments on the bank's ability to respond to legal and jurisdictional uncertainties. Train personnel about different nationsl, legal and regulatory environments. Credit risk Default of borrowers who applied for credit via remote banking. Bank may approve extension of credit to customers outside its normal market where data are not available, or are costly to obtain. Unanticipated provisioning for non-performing loans may be necessary. Ensure that evaluation of creditworthiness of remote banking customers is in line wiht traditional requirements. Audit lending decisions and procedures. Default of an electronic money issuer. Issuer may become insolvent while the bank holds electronic money for resale to customers or for redemption. A bank may have to use its own funds to redeem electronic money held by its customers in the event of issuer default. Perform due diligence on any issuing entity prior to participating in an electronic money system. Monitor the financial condition of the issuer. Develop contingency plans in case of default. Liquidity risk Illiquidity of electronic money issuer. A sudden increase in demand for redemption of electronic money. May be a problem for banks that specialise in electronic money schemes. Bank may incur losses as it seeks to generate more costly sources of funds. If public perceives liquidity problems there may be a more widespread withdrawal of deposits or redemption of electronic money. Failure to meet redemption demands in a timely manner could also lead to reputation damage. Invest funds in liquid assets. Develop a monitoring system on usage. Conduct regular and comprehensive audits. Interest rate risk Unanticipated interest rate changes for instruments in which an electronic money issuer invests. Unfavorable movement in interest rates could decrease value of assets relative to electronic money liabilities outstanding. May be a problem for banks that specialise in electronic money issuance. Unanticipated decline in value of assets could bring bank out of compliance with regulatory requirements. Liquidity problems could arise. Institute interest rate risk management measures commensurate with bank's exposure. Market risk Foreign Exchange risk arising from acceptance of foreign currencies in payment for electronic money. An unfavorable movement in FX rates could require bank to cover losses. Negative impact on earnings. Establish FX risk management or hedging program. Country risk Transfer risk arising from foreign-based service provider, foreign participants in an electronic money or electronic banking scheme. Foreign service providers or participants in an electronic money or electronic banking scheme may become unable to fulfill obligations due to economic, social, or political factors. Costs of resolving customer problems. The bank could face litigation from the customer. Conduct country risk assessment. Develop contingency plans for contracting with other possible participants. Principles for the Supervision of Financial Conglomerates-BCBS
The Joint Forum was established in 1996 under the aegis of the Basel Committee on Banking Supervision, the International Organization of Securities Commission (IOSCO) and the International Association of Insurance Supervisors (IAIS) to deal with issues common to banking, securities and insurance sectors. In 2009, Joint Forum recommended that the 1999 Principles should be updated and expanded. In this regard, the Joint Forum has now issued its finalized paper on Supervision of Financial Conglomerates which is relevant to banks in Saudi Arabia.
We require all banks to access the above document from the Bank for International Settlement website: (www.bis.org). Banks are expected to study and review the relevant component of this document with the objective to further strengthening their internal governance, risk management and control systems.
Amendment of the Name and Requirements of the Third Paragraph of Rule No. (200-1-3) Regarding the Accounts of Individual Expatriates and Residents in the Kingdom with a Three-Month Work Visa Residence in the Passport
Rules Governing the Opening of Bank Accounts & General Operational Guidelines
To read the most updated Rules for Bank Accounts, click here.The required information that is showed on banks statements for the consumers
This circular has been replaced by SAMA circular No. (42059442), dated 22/08/1442H, corresponding to 04/04/2021G.Attachment 1: Types of Transactions That Current Bank Accounts Should Include
SN Transaction Type
Remarks 1 - Cash Deposit:
- Bank's Counter
- ATM
2 Cash Withdraws) :
- Bank's Counter -Check
- Bank's Counter - Form
- ATM
3 Check Deposit:
- Clearing - Out (drawn on local bank)
- Collection - Outward (drawn on overseas)
- Internal (drawn on same bank)
4 Payment of Check (received from clearing / overseas)
- Clearing-in / Collection - inward
5 Outgoing Transfer:
- SARIE
- SWIFT
- Payroll
- Dividend
6 incoming Transfer :
- SARIE
- SWIFT
- Payroll
- Dividend
7 internal Transfer ( A/c to A/c - Same Bank) 8 Cashier Order issuance (Saudi Riyal) 9 Demand Draft issuance (Foreign Currency) 10 SADAD Payment 11 Direct Debit Payment 12 Buying Foreign Currency (Bank Notes) 13 Setting Foreign Currency (Bank Notes) 14 Credit Card Settlement 15 POS Transactions (ATM, VISA) 16 IPO Subscription 17 Standing Orders 18 Charges / Fees Transactions 19 Term Deposit 20 Term Loan (installment, Principal) 21 Murabha Deposit 22 Tawaroq Finance Attachment 2: Detailed Criteria That Must Be Listed in Current Bank accounts For Types of Transactions in Attachment 1
CASH DEPOSIT (BANK BRANCH ) - (1/1)
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks , A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank + Branch Name where cash is deposited) M √ √ 2 Delivery Channel Location (City where branch is located) o √ √ 3 Trans Ref # (generated by the system) M √ √ - * 4 Trans Type ( Cash Deposit - Bank) M √ √ * * 5 Date Trans Initiated M √ √ * 6 Time Trans Initiated (Mandatory for ATM / E-banking Trans for other normal trans it is Optional) o √ √ Stt to be sorted by date & by time 7 Value Date (Cr) M √ √ * C Credit information 1 Amount M √ √ * 2 Currency M √ √ * * 3 Exchange Rate Applied Must be applied in 2nd Phase 4 Purpose / Details of Payment / Sources of Funds 0 √ 5 Depositor Name M - - √ - - * 6 Depositor ID# - - - - √ * On cash deposit form 7 Depositor Tele / Celt # - - - - √ * On cash deposit form *M= Mandatory, O=Optional, A= Arabic, E= English, NR=Not Required, NA= Not Applicable
CASH DEPOSIT (ATM) - (1/2)
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank +
ATM Name where cash is deposited)
M √ √ 2 Delivery Channel Location (City where
ATM is located)
0 √ √ 3 Trans Ref # (generated by ATM ) M √ √ - - - - 4 Trans Type (Cash Deposit - ATM) M √ √ - - - - 5 Date Trans initiated M √ √ - - - - 6 Time Trans initiated (Mandatory for ATM / E-banking trans. Options) for other normal
trans.)
M √ Mandatory for ATM / E- banking
trans.
7 Value Date (Cr) M √ √ - - - C Credit information 1 Amount M √ √ - - - 2 Currency M √ √ - - - 3 Exchange Rate Applied s - Must be applied in 2nd Phase 4 Charges - - - - *M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
CASH WITHDRAWAL (CHQ) - (2/1)
SN Criteria for information *M / 0 *A ;*E Teller input Language *NR *NA Remarks ; A Initiating Delivery Channel. 1 Delivery Channel Name / Code (Bank + Branch Name where cash is withdrawn) M √ √ 2 Delivery Channel Location (Name of City where Branch is located) 0 √ √ 3 Trans Ref # (generated by system) M √ √ - - - 4 Trans Type (Cash Withdrawal at Bank) M √ √ - - - 5 Date Trans initiated M √ √ - - - 6 Time Trans initiated 0 √ √ - - - 7 Value Date (Dr) M √ √ - - - B Debit information 1 Amount M √ √ - - - 2 Currency M √ √ - - 3 Exchange Rate Applied √ √ h Must be applied in 2nd Phase 4 Charges M √ √ if foreign currency is withdrawn 5 Cheque Number M √ √ - - - 6 Beneficiary Name M - - 7 Beneficiary's ID # To be
recorded on the cheque by the teller
8 Beneficiary's Tele / Cell# To be
recorded on the cheque by the Teller
*M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
CASH WITHDRAWAL (FORM) - (2/2) SN Criteria for information s *M /
'o
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank + Branch Name where cash is withdrawn) M √ √ 2 Delivery Channel Location (Name of City where branch is located) 0 √ √ 3 Trans Ref # (generated by system) M √ √ - - 4 Trans Type ( Cash Withdrawal - Voucher) M √ √ - - - 5 Date Trans initiated M √ √ - - 6 Time Trans Initiated 0 √ √ - - 7 Value Date (Dr) M √ √ - - - B Debit information 1 Amount M √ √ - - 2 Currency M √ √ - - 3 Exchange Rate Applied M √ √ h Must be applied in 2nd Phase 4 Charges M √ √ if foreign currency is withdrawn 5 Beneficiary Name M - - √
* 6 Beneficiary's ID # - - - -
√ To be
recorded on form
7 Beneficiary's Tele / Cell # - - - -
√ To be
recorded on form
M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
CASH WITHDRAWAL (ATM) - (2/3)
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channelw 1 Delivery Channel Name / Code ( Bank + ATM Name where cash is withdrawn ) M √ √ 2 Delivery Channel Location (Name of City where ATM is located) 0 √ √ 3 Trans Ref # ( SARRAF / VISA Issuer Bank Name / Code + Trans reference # generated by system) M √ √ 4 Trans Type (Cash Withdrawal ATM) M √ √ - - 5 Date Trans initiated M √ √ - 6 Time Trans initiated (Mandatory for ATM / E-banking trans. Optional for other normal trans.) M √ √ Mandatory for ATM / E- banking
trans.
7 Value Date (Dr) M √ √ - B Debit information M √ √ - 1 Amount M √ √ - 2 Currency M √ √ - 3 Exchange Rate Applied Must be
applied in 2nd
Phase
4 Charges M √ √ if amount is withdrawn in foreign currency *M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
CHECK DEPOSIT (CLC- OUT)- (3/1)
SN Criteria for information *M/
0
*A *E. Teller input Language *NR *NA Remarks A initiating Delivery Channels 1 Delivery Channel Name / Code (Bank + Branch / Dept Name where transaction is processed) M √ √ 2 Delivery Channel Location (Name of City where branch / dept is located)√ 0 √ √ 3 Trans Ref # (generated by system) M √ √ - - 4 Trans Type ( Cheque - Clearing) M √ √ - - 5 Date Trans Initiated M √ √ - - 6 Time Trans initiated 0 √ √ - - 7 Value Date (Cr) M √ √ - - C Credit information 1 Amount M √ √ - 2 Currency M √ √ 3 Cheque Number M √ √ 3 Drawn on Bank Name M - - √ - 4 Depositor Name M - - √ - if other than a/c holder 5 Depositor ID # - - - - √ On chq deposit form 6 Depositor Tele / Cell # - - - - √ On chq deposit form *M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
CHECK DEPOSIT (COLL) - (3/2]
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank & Branch / Dept Name where check for collection is processed) M √ √ 2 Delivery Channel Location (Name of City where Branch / Dept is located) 0 √ √ 3 Trans Ref # (generated by system) M √ √ 4 Trans Type (Check for Collection ) M √ √ 5 Date Trans initiated M √ √ 6 Time Trans initiated 0 √ √ 7 Value Date (Dr) M √ √ 8 Value Date (Cr) M √ √ B Debit information ( CHARGES ) 1 Amount M √ √ - - - Charges on collection 2 Currency M √ √ - - - 3 Exchange Rate Applied Must be applied in 2nd Phase 4 Cheque Number M √ √ - - - - 5 Drawn on Bank Name + City M √- √ - - - 6 Charges (Collecting + Correspondent
Banks charges)
M C Credit information' M √ √ 1 Amount M √ √ - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied h Must be applied in 2nd
Phase
4 Check Number M √ √ - - - - 5 Drawn on Bank Name + City M - - √ - - - 6 Depositor Name M - - √ - - if other than a/c holder 7 Depositor ID # - - - - '√ - On chq deposit form 8 Depositor Tele / Cell # * - - √ - On chq deposit form *M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
CHECK DEPOSIT (Internal - Same Bank) - (3/3)
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks
---
A initiating Delivery Channel 1 Delivery Channel Name / Code ( Bank & Branch Name where transaction is processed) M √ √ 2 Delivery Channel Location (Name of City where Branch is located) 0 √ √ 3 Trans Ref # (generated by system) M √ √ 4 Trans Type ( Check Deposit - internal) M √ √ 5 Date Trans initiated M √ √ 6 Time Trans initiated 0 √ √ 7 Value Date (Dr) M √ √ 8 Value Date (Cr) M √ √ B Debit information 1 Amount M √ √ 2 Currency M √ √ 3 Exchange Rate Applied h Must be applied in 2nd Phase 4 Check Number M * * * 5 Beneficiary Name M - * c Credit information- 1 Amount M √ √ - - * * 2 Currency M √ √ - * * 3 Exchange Rate Applied s Must be applied in 2nd Phase 4 Check Number M √ √ - - - - 5 Drawn on Bank Name M - - √ - - - 6 Depositor Name M - - √ - - if other than a/c holder 7 Depositor ID# - - - - √ - On chq deposit form 8 Depositor Tele/Cell# - - - * √ - On chq deposit form *M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
PAYMENT OF CHECK (CLG-IN / COLL-IN) -(4)
SN Criteria for information *M/
0
*A - :.*E Teller inputs Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank + Branch Dept Name where transaction is processed) M √ √ 2 Delivery Channel Location (Name of City where branch / dept is located) M √ √ 3 Trans Ref # (generated by system) M √ √ 4 Trans Type (Clearing- In / Inward Coll) M √ √ 5 Date Trans initiated√ M √ √ 6 Time Trans initiated 0 √ √ 7 Value Date (Dr) - - - 8 Value Date (Cr) - - * B Debit information ' 1 Amount M √ √ 2 Currency M √ √ 3 Exchange Rate Applied Must be applied in 2nd Phase 4 Check Number M √ √ 5 Beneficiary's Name M - - √ 6 Presenting Bank / Collecting Bank Name 0 * √ - *M= Mandatory, 0=0ptionai, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
OUTGOING FUNDS TRANSFER (SARIE) - (5/1)
SN Criteria for information *M/
0
*A *E , Teller input Language *NR .d *NA Remarks .
A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank & Branch name where transaction is processed) M √ √ 2 Delivery Channel Location (Name of City of branch ) 0 √ √ 3 Trans Ref # (Outgoing Transfer # generated by system) + UTI # for SARIE transaction. M √ √ UTI # for SARIE trans. 4 Trans Type (Outgoing Transfer - SARIE) M √ √ * 5 Date Trans Initiated M √ √ * 6 Time Trans initiated (Mandatory for ATM / E-banking transaction. Optional for other normal trans.) 0 √ √ √ Mandatory for ATM / E- banking
trans.
7 Value Date (Dr) M √ √ - * * B Debit information 1 Amount M √ √ - - - * 2 Currency M √ √ - - - - 3 Exchange Rate Applied - * Must be applied in 2nd
Phase.
4 Charges M √ √ - - 5 Beneficiary Name M - - √ - - 6 Beneficiary Bank Name / Code M - - √ - - 7 Beneficiary Account Number - - - - - Mandatory on form 8
9
Beneficiary's Address - - - - √ Mandatory on form Purpose / Details of Trans - - - - √ - Mandatory on form *M= Mandatory, 0=0ptionai, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
OUTGOING FUNDS TRANSFER (SWIFT)- (5/2)
SN Criteria for information *M/O *A *E Teller input ; Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank & Branch Name where transaction is processed) M √ √ 2 Delivery Channel Location (Name of City of Branch where transaction is processed) 0 √ √ 3 Trans Ref # ( Outgoing Transfer # generated by system) M √ √ 4 Trans Type (Outgoing Transfer Overseas - SWIFT) M √ √ 5 Date Trans initiated M √ √ 6 Time Trans initiated (Mandatory for ATM / E-banking trans. Optional for other normal trans) 0 √ √ Mandatory for ATM / E- banking
trans.
7 Value Date (Dr) M √ √ B Debit information 1 Amount M √ √ 2 Currency M √ √ - $ Exchange Rate Applied h - Must be
applied in 2 nd
Phase
4 Charges M √ √ - - SWIFT
charges
5 Commission M √ √ - - Commission on transfer 6 Beneficiary Name M - - √ - - 7 Beneficiary Bank Name M - - √ - - 8 Beneficiary Account Number - - - - - Mandatory on form 9 Beneficiary's Address - - - - Mandatory on form 10 Purpose / Details of Trans * - - - Mandatory on form *M= Mandatory, 0=0ptionai, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
OUTGOING TRANSFER (PAYROLL) - (5/3)
SN Criteria for information *M/
O
*A *E Teller input Languages *NR *NA Remarks A Initiating Delivery Channel* 1 Delivery Channel Name / Code (Bank & Branch name where transaction is processed) M √ √ -
-
-
-
2 Delivery Channel Location (Name of City of branch ) 0 √ √ -
-
-
-
3 Trans Ref #(MT102 - Outgoing Transfer# generated by system) + UT7 # for SAR/E transaction. M √ √ -
-
-
UT! # for SARIE trans.
4 Trans Type (PAYROLL -Bulk Customer Payment) M √ √ -
-
-
-
5 Date Trans initiated M √ √ -
-
-
-
6 Time Trans initiated (Mandatory for ATM/ E-banking trans. Optional for other normal trans ) 0 √ √ -
-
-
Mandatory for ATM / E- banking
trans.
7 Value Date (Debit) M √ √ B Debit information 1 Amount M √ √ -
-
-
Aggregate
amount
2 Currency M √ √ *
-
-
-
3 Exchange Rate Applied Must be applied in 2nd Phase;
4 Charges M √ √ -
-
-
charges on Bulk payment
5 Details of Payment (Payroll) M √ √ -
-
-
-
*M= Mandatory, 0=0ptionai, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
OUTGOING TRANSFER (DIVIDEND) - (5/4)
SN Criteria for information *M/ O *A *E Teller input Languages *NR *NA Remarks A Initiating Delivery Channel* 1 Delivery Channel Name / Code (Bank & Branch name where transaction is processed) M √ √ -
-
-
-
2 Delivery Channel Location (Name of City of branch ) 0 √ √ -
-
-
-
3 Trans Ref #(MT102 - Outgoing Transfer# generated by system) + UT1 + for SARIE transaction. M √ √ -
-
-
UT! # for SARIE trans.
4 Trans Type (PAYROLL -Bulk Customer Payment) M √ √ -
-
-
-
5 Date Trans initiated M √ √ -
-
-
-
6 Time Trans initiated (Mandatory for ATM/ E-banking trans. Optional for other normal trans ) 0 √ √ -
-
-
Mandatory for ATM / E- banking
trans.
7 Value Date (Debit) M √ √ B Debit information 1 Amount M -
-
-
Aggregate
amount
2 Currency M √ √ -
-
-
-
3 Exchange Rate Applied Must be applied in 2nd Phase;
4 Charges M √ √ -
-
-
Bulk payment message
5 Field 70: Details of Payment (Dividend + Period)
e.g / Dividend / 1st Half 2010
M √ √ -
-
-
- *M= Mandatory, 0=0ptionai, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
INCOMING TRANSFER (SARIE)-(6/1)
SN Criteria for information
*M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank & Branch / Dept name where transaction is processed) M √ √ -
-
-
-
2 Delivery Channel Location (Name of the
City where branch / dept is located)
0 √ √ -
-
-
-
3 Trans Ref # (incoming Transfer Number) +
UTI# for SAR/E transaction.
M √ √ -
-
-
UT! # for SARIE trans. 4 Trans Type (incoming Transfer - SARIE) M √ √ -
-
-
-
5 Date Trans Initiated M √ √ -
-
-
-
6 Time Trans Initiated 0 √ √ -
-
-
-
7 Value Date (Cr) M √ √ -
-
-
-
C Credit information -
-
-
-
1 Amount M √ √ -
-
-
-
2 Currency M √ √ -
-
-
-
2 Remitter's Name M - √
-
-
-
1 Remitting Bank Name / Code M √ √ -
-
-
-
3 Purpose / Details of Payment M * * √
-
-
-
*M= Mandatory, 0=0ptionai, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
lNCOMlNG TRANSFER (SWlFT)- (6/2)
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channelr 1 Delivery Channel Name / Code (Bank & Branch / Dept where trans is processed) M √ √ -
-
-
-
2 Delivery Channel Location (Name of City where Branch / Dept is located) 0 √ √ -
-
-
-
3 Trans Ref#(Incoming Transfer #) M √ √ -
-
-
-
4 Trans Type (incoming Transfer-SWIFT) M √ √ -
-
-
-
5 Date Trans initiated M √ √ -
-
-
-
6 Time Trans initiated 0 √ √ -
-
-
-
7 Value Date (Cr) M √ √ -
-
-
-
C Credit information 1 Amount M √ √ -
-
-
-
2 Currency M √ √ -
-
-
-
3 Exchange Rate Applied Must be applied in 2nd Phase 4 Remitter's Name M -
-
-
-
-
-
5 Remitting Bank Name M -
-
√ -
-
-
6 Purpose / Details of Payment M -
-
√ -
-
-
*M- Mandatory, 0=0ptional, A= Arabic, E= English, NR= Not Required, NA- Not Applicable
INCOMING TRANSFER (PAYROLL) - (6/3]
SN Criteria for information *M/
0
*A *E : Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank & Branch / Dept name where transaction is processed) M √ √ -
-
-
-
2 Delivery Channel Location (Name of the
City where branch / dept is located)
0 √ √ -
-
-
-
3 Trans Ref # (MT102 - incoming Transfer Number) + UTI# for SARIE transaction. M √ √ -
-
-
UT! # for SARIE trans. 4 Trans Type (MT 102 - Incoming Transfer Local - Payroll) M √ √ -
-
-
-
5 Date Trans Initiated M √ √ -
-
-
-
6 Time Trans Initiated (Mandatory for ATM / E-banking trans. Optional for other normal trans) o √ √ -
-
-
Mandatory for ATM / E- banking
trans.
7 Value Date (Cr) M √ √ -
-
-
-
C Credit information -
-
-
-
1 Amount M √ √ -
-
-
-
2 Currency M √ √ -
-
-
-
3 Ordering Customer (Remitter's) Name M √ √ -
-
-
-
4 Remitting Bank Name / Code M √ √ -
-
-
-
5 Purpose / Details of Payment (Payroll) M -
-
-
-
*M= Mandatory, O=Optional A= Arabic, E= English, NR= Not Required, NA= Not Applicable
INCOMING TRANSFER (DIVIDEND) -(6/4)
SN Criteria for information *M/; 0 *A *E Teller input Language *NR *NA r Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank & Branch / Dept name where transaction is processed) M √ √ -
-
-
-
2 Delivery Channel Location (Name of the
City where branch / dept is located)
0 √ √ -
-
-
-
3 Trans Ref # (MT102 - incoming Transfer Number) + UT/ # for SARIE transaction. M √ √ -
-
-
UTI# for SARIE trans. 4 Trans Type ( Dividend ) M √ √ -
-
-
-
5 Date Trans initiated M √ √ -
-
-
-
6 Time Trans Initiated 0 √ √ -
-
-
-
7 Value Date (Cr) M √ √ -
-
-
-
C Credit information -
-
-
-
1 Amount M √ √ -
-
-
-
2 Currency M √ √ -
-
-
-
3 Field 50: Ordering Customer (Remitter's) Name
e g. STC, SABIC etc
M √ √ -
-
-
Company which has declared dividend 4 Remitting Bank Name / Code 0 - * √ -
-
-
5 Field 70: Purpose / Details of Payment
(Dividend + Period)
e.g. / Dividend/1st Half 2010
M - * √ -
-
-
*M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
INTERNAL TRANSFER (A/C TO A/C - Same Bank)- (7)
SN Criteria for information *M/
0
*A *E Teller input Languages *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank & Branch name where transaction is processed) M √ √ - 2 Delivery Channel Location (Name of City where branch is located) 0 √ √ - 3 Trans Ref # (generated by system) M √ √ - 4 Trans Type (A/c to A/c Transfer) M √ √ - 5 Date Trans initiated M √ √ - 6 Time Trans initiated 0 √ √ - 7 Value Date (Dr) M √ √ - - 8 Value Date (Cr) M √ √ - - B Debit information - - 1 Amount M √ √ - - 2 Currency M √ √ - - 3 Exchange Rate Applied Must be applied in 2nd
Phase
4 Beneficiary Name M - - √ - - - 5 Beneficiary Account Number M - - √ - C Credit information 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be applied in 2nd Phase 4 Remitter's Name M - - √ - - - 5 Purpose/Details of Payment M - - √ - - - *M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
CASHlER ORDER (SAR) - ISSUANCE - (8)
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank + Branch Name where transaction is processed) M √ √ -
-
-
-
2 Delivery Channel Location (Name of City where branch is located) 0 √ √ -
-
-
-
3 Trans Ref # (generated by system) M √ √ -
-
-
-
4 Trans Type (Cashier Order) M √ √ -
-
-
-
5 Date Trans Initiated M √ √ -
-
-
-
6 Time Trans initiated 0 √ √ -
-
-
-
7 Value Date (Dr) M √ √ -
-
-
-
B Debit information ; -
-
-
-
1 Amount M √ √ -
-
-
-
2 Currency M √ √ -
-
-
-
3 Exchange Rate Applied - Must be applied 2nd Phase 4 Commission M √ √ - -
-
-
5 Cashier Order Number M - - √ -
-
-
6 Beneficiary Name M - - √ -
-
-
*M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
DEMAND DRAFT (F/C)- ISSUANCE - (9)
SN
Criteria for information *M/
o
*A ,*E Teller input -'Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank + Branch Name where transaction is processed) M √ √ -
-
-
-
2 Delivery Channel Location (Name of City where branch is located) 0 √ √ -
-
-
-
3 Trans Ref # (generated by system) M √ √ -
-
-
-
4 Trans Type ( Demand Draft) M √ √ -
-
-
-
5 Date Trans initiated M √ √ -
-
-
-
6 Time Trans Initiated 0 √ √ -
-
-
-
7 Value Date (Dr) M √ √ -
-
-
-
B Debit information 1 Amount M √ √ -
-
-
-
2 Currency M √ √ -
-
-
-
3 Exchange Rate Applied Must be applied in 2nd
Phase.
4 Commission M √ √ -
-
-
-
5 Demand Draft Number M - - √ -
-
-
6 Beneficiary Name M * √ -
-
-
*M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
SADAD PAYMENT (10)
SN Criteria for information *M/
' 0
*A *E Teller input Language *NR *NA Remarks .. A initiating Delivery Channei 1 Delivery Channei Name (Bank & Branch / Dept name/E-banking channel where transaction is processed) M √ √ -
-
-
-
2 Delivery Channei Location (Name of City where Branch/Dept is located / E-banking channel name) 0 √ √ -
-
-
-
3 Trans Ref # (generated by SADAD system) Ie SADAD # 9 digits M √ √ -
-
-
-
4 Trans Type (Sadad Payment) M √ √ -
-
-
-
5 Date Trans initiated M √ √ -
-
-
-
6 Time Trans Initiated (Mandatory for ATM/ E-banking trans. Optional for other normal trans) O/M √ √ -
-
-
Mandatory for ATM / E- banking
trans.
Optional for other normal trans.
7 Value Date (Dr) M √ √ -
-
-
-
B Debit information -
-
-
-
1 Amount M √ √ -
-
-
-
2 Currency M √ √ -
-
-
-
3 Biller Name (Company Name) e.g. STC. SEC. Mobily, MOl-Traffic violation, MOI-Driving License, MOI-Motor Vehicle. MOI-Saudi Passport etc. M √ -
-
-
4 Bill # or Biller Subscription Number (in case of STC. SEC etc)
/ Beneficiary ID Number (in case of MOI)
M √ -
-
-
*M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
DIRECT DEBIT PAYMENT -(11)
SN Criteria for information *M/
0
*A *E Teller input Language^ *NR - *NA- Remarks A initiating Delivery Channei 1 Delivery Channei Name (Bank & Branch / Dept name where transaction is processed) M √ √ -
-
-
-
2 Delivery Channei Location (Name of City where branch / dept is located) 0 √ √ -
-
-
-
3 Trans Ref # (unique reference number generated by system) + U77 # for SAR/E trans. M √ √ -
-
-
UTI # for SARIE trans. 4 Trans Type (Direct Debit Payment) M √ √ - - - - 5 Date Trans initiated M √ √ - - - - 6 Time Trans initiated 0 √ √ - - - - 7 Value Date (Dr) M √ √ - - * * B Debit information - - - - 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be applied in 2 nd Phase 4 Beneficiary Name (Originator Name) M - - √ - - - 5 Beneficiary Bank (Sponsoring Bank Name) M - - √ - - - 6 Direct Debit Mandate Number M * - √ - - - *M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
BUYING FOREIGN CURRENCY (BANK NOTES)- (12)
SN Criteria for information *M /0 *A -*E Teller input Language *NR
*NA Remarks A initiating Delivery Channei 1 Delivery Channei Name (Bank & Branch Name where transaction is processed) M √ √ - - - - 2 Delivery Channei Location (Name of City where branch is located) 0 √ √ - - - - 3 Trans Ref # (Unique reference number generated by system) M √ √ - - - - 4 Trans Type (Selling Foreign Currency) M √ √ - - - - 5 Date Trans initiated M √ √ - - - - 6 Time Trans initiated 0 √ √ - - - - 8 Value Date (Cr) M √ √ - - - - C Credit information 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be applied in 2nd Phase 4 Currency Bought from customer M - - √ - - USD, EUR, AED + Amount *M= Mandatory, O=Optional A= Arabic, E= English, NR= Not Required, NA= Not Applicable
SELLING FOREIGN CURRENCY (BANK NOTES-(13)
Criteria tor information *M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name ( Bank & Branch Name where trans is processed) M √ √ - - - - 2 Delivery Channel Location (Name of City where branch is located) 0 √ √ - - - - 3 Trans Ref # (unique reference number generated by system) M √ √ - - - - 4 Trans Type (Buying Foreign Currency) M √ √ - - - - 5 Date Trans initiated M √ √ - - - - 6 Time Trans Initiated 0 √ √ - - - - 7 Value Date (Dr) M √ √ - - - - B: Debit information: .. - - - - 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - § Exchange Rate Applied Must be applied in 2nd Phase 4 Charges - - - - - - - 5 Commission M √ √ - - - - 6 Currency Soid M - - √ - - USD, EUR, AED + Amount CREDIT CARD SETTLEMENT - TRANS - (14)
SN Criteria for information *M /O. *A :*E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name (Bank &
Branch / Dept where transaction is settled)
M √ √ - - - - 2 Delivery Channel Location (Name of
City where branch / dept is located)
0 √ √ - - - - 3 Trans Ref # (unique reference number generated by system) M √ √ - - - - 4 Trans Type: (Credit Card Settlement) M √ √ - - - - 5 Date Trans Initiated M √ √ - - - - 6 Time Trans initiated (Mandatory for ATM / E-banking transactions. Optional for other normal trans.) 0 √ √ - - - Mandatory for ATM / E- banking trans. 7 Value Date (Dr) M √ √ - - - - 8 Value Date (Cr) - - * - - - - B Debit information (To debit customer's sight deposit a/c) Settlement of Credit Card balance outstanding in VCL (Visa Credit Limit) Account at the beginning or month end as per arrangements with the customer. 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be applied in 2nd Phase 4 Beneficiary (Credit Card ) Account Number credited M - - √ - - - *M- Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
POS TRANS-ATM/VISA-(15)
SN Criteria for information
*M/
0 ;
*A' *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name (POS Number +
POS Bank Name + Retailer Name where transaction is processed)
M √ √ - - - 2 Delivery Channel Location (Name of City where POS device is located) M √ √ - - - 3 Trans Ref # ( SARRAF / VISA # + Bank Name) M √ √ - - - 4 Trans Type (POS / VISA Purchase transaction) M √ √ - - - 5 Date Trans initiated M √ √ - - - 6 Time Trans initiated (Mandatory for ATM / E-banking trans. Optionalfor other normal trans) M √ √ - - - Mandatory for ATM / E- banking
trans.
7 Value Date (Dr) - - - - √ - - 8 Value Date (Cr) - - - - √ - - B Debit information 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied _Must be applied in 2nd
Phase
4 Charges M √ √ - - - VISA- Purchase / Cash
withdrawal
*M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
IPO - SUBSCRIPTION - (16)
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank + Branch Name where transaction is processed) M √ √ - - - - 2 Delivery Channel Location (Name of City where branch is located) 0 √ √ - - - - 3 Trans Ref # (generated by system) M √ √ - - - - 4 Trans Type (IPO - Subscription ) M √ √ - - - - 5 Date Trans initiated M √ √ - - - - 6 Time Trans initiated (Mandatory for ATM/ E-banking transaction. Optional for other normal trans.) 0 √ √ - - - Mandatory for ATM / E- banking
trans.
7 Value Date (Dr) M √ √ - - - - B Debit information 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be applied in 2nd Phase' 4 IPO Application Number M - - √ - - - 5 Company Name M * * √ - - - *M= Mandatory, O=Optional A= Arabic, E= English, NR= Not Required, NA= Not Applicable
STANDING ORDERS - (17)
SN Criteria for information *M/ *A
w
*E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank & Branch / Dept Name where transaction is processed) M √ √ - - - - 2 Delivery Channel Location (Name of City of Branch where transaction is processed) 0 √ √ - - - - 3 Trans Ref # (Trans Reference # generated by system) + UT) #for SARIE trans. M √ √ UTI# for SARIE trans. 4 Trans Type (Standing Order) M √ √ - - - - 5 Date Trans Initiated M √ √ - - - - 6 Time Trans Initiated 0 √ √ - - - - 7 Value Date (Dr) M √ √ - - - - B Debit information - - - - 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied M √ √ Must be applied in 2nd Phase.' 4 Charges M √ √ - - - - 5 Commission (standing order) M √ √ - - - - 6 Beneficiary Name M - - √ - - - 7 Beneficiary Bank Name M - - √ - - - 8 Details of Trans (Standing Order Type & Ref#) M - - √ - - - CHARGES / FEES - TRANSACTIONS - (18)
SN Criteria tor information ^*M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code (Bank & Branch / Dept Name where transaction is processed) M √ √ - - - - 2 Delivery Channel Location (Name of City of Branch where transaction is processed) 0 √ √ - - - - 3 Trans Ref # ( Trans Reference # generated by system) M √ √ - - - - 4 Trans Type (Charges / Fees ) M √ √ - - - - 5 Date Trans initiated M √ √ - - - - 6 Time Trans Initiated 0 √ √ - - - - 7 Value Date (Dr) M √ √ - - - - B Debit information 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be applied in 2nd Phase 4 Details of Trans (Details of Charges / Fees) M √ - - - *M= Mandatory, O=Optional A= Arabic, E= English, NR= Not Required, NA= Not Applicable
TERM DEPOSIT- (19)
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name (Bank & Branch / Dept Name where transaction is processed) M √ √ - - - - 2 Delivery Channel Location (Name of City of Branch / Dept) 0 √ √ - - - - 3 Trans Ref # ( Deal Number) M √ √ - - - - 4 Trans Type ( Term Deposit) M √ √ - - - - 5 Date Trans initiated M √ √ - - - - 6 Time Trans initiated 0 √ √ - - - - 7 Value Date (Dr) M √ √ - - - - 8 Value Date (Cr) M √ √ - - - - B Debit information Funds are placed in Term Deposit and TD Confirmation is issued to the customer 1 Amount M '√ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be applied in 2nd Phase C Credit information At maturity principal + interest are credited as per details mentioned in the Term Deposit Confirmation sent to customer 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate applied Must be applied in 2nd Phase *M= Mandatory, O=Optional A= Arabic, E= English, NR= Not Required, NA= Not Applicable
TERM LOAN TRANS. - (20)
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA , Remarks A initiating Delivery Channel - - - - 1 Delivery Channel Name / Code (Bank & Branch / Dept Name where transaction is processed) M √ √ - - - - 2 Delivery Channel Location (Name of City of Branch / Dept) 0 √ √ - - - - 3 Trans Ref # ( Deal Number) M √ √ - - - - 4 Trans Type (Term Loan) M √ √ - - - - 5 Date Trans Initiated M √ √ - - - - 6 Time Trans Initiated 0 √ √ - - - - 7 Value Date (Dr) M √ √ - - - - 8 Value Date (Cr) M √ √ - - - - B Debit information ( Payment of loan
Installment)
Schedule of payment - as per agreement signed with the customer
1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be applied in 2nd Phase C Credit : information (Loan
Reimbursement)
Loan confirmation mentioning details of loan is sent to the customer 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied * Must be applied in 2nd Phase *M= Mandatory, O=Optional A= Arabic, E= English, NR= Not Required, NA= Not Applicable
MURABHA DEPOSIT - (21)
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channels 1 Delivery Channel Name (Bank & Branch / Dept Name where Murabha deposit is processed) M √ √ - - - - 2 Delivery Channel Location (Name of City where the branch / dept is located) 0 √ √ - - - - 3 Trans Ref # ( Deal Number) M √ √ - - - - 4 Trans Type ( Murabha Deposit) M √ √ - - - - 5 Date Trans initiated M √ √ - - - - 6 Time Trans Initiated 0 √ √ - - - - 7 Value Date (Dr) M √ √ - - - - 8 Value Date (Cr) M √ √ - - - - B Debit information (Payment). Murabha investment Confirmation giving details of investment is sent to the customer
1 Amount M √ √ - - √ - 2 Currency M √ √ - - √ - 3 Exchange Rate Applied √ Must be applied in 2nd Phase; C Credit information (at payment date) Sale price includes purchase amount + profit as mentioned in the Murabha investment confirmation is credited. 1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be applied in 2nd Phase; TAWAROQ FINANCE (22)
SN Criteria for information *M/O *A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel - - - - 1 Delivery Channel Name (Bank & Branch / Dept name where transaction is processed) M √ √ - - - - 2 Delivery Channel Location (Name of City where the Branch / Dept is located) 0 √ √ - - - - 3 Trans Ref # ( Tawaroq Deal #) M √ √ - - - - 4 Trans Type (Tawaroq Finance) M √ √ - - - - 5 Date Trans initiated M √ √ - - - - 6 Time Trans initiated 0 √ √ - - - - 7 Value Date (Dr) M √ √ - - - - 8 Value Date (Cr) M √ √ - - - - B Debit information ( Payment of installment) Tawaroq Finance Confirmation sent to the customer contains deal #+commodity purchase and sale details.
1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be
applied in
2nd Phased
C Credit Information (Tawaroq ;. Reimbursement) Tawaroq Confirmation sent to the customer contains deal #+ commodity purchase and sale detail is.
1 Amount M √ √ - - - - 2 Currency M √ √ - - - - 3 Exchange Rate Applied Must be
applied in
2nd Phase.
Attachment 3: Generic Model Defining Mandatory and/or Optional Criteria and Fields Used in Types of Transactions That Need to Be Addressed in Customer Current Accounts
SN Criteria for information *M/
0
*A *E Teller input Language *NR *NA Remarks A initiating Delivery Channel 1 Delivery Channel Name / Code M √ √ Name of the Sank, Branch, ATM, POS etc with or without city name where transaction has been initiated 2 Delivery Channel Location (City) 0 √ √ Optional if city is already mentioned with Delivery Channel Name, otherwise it is mandatory 3 Trans Ref # + UT) # for SARIE Trans. M √ √ -
-
-
UTI # for SARIE Trans 4 Trans Type M √ √ -
-
-
-
5 Date Trans initiated M √ √ -
-
-
-
6 Time Trans initiated ( Mandatory for ATM / E-banking transactions. Optional for other normal trans) M/O √ √ -
-
-
Mandatory for ATM / E- banking
Trans
7 Value Date (Dr) M √ √ -
-
-
-
8 Value Date (Credit) M √ √ -
-
-
-
B Debit information -
-
-
-
1 Amount M √ √ -
-
-
-
2 Currency M √ √ -
-
-
-
3 Exchange Rate Applied * * * Must be applied in 2nd Phase 4 Charges Applied M √ √ -
-
-
-
5 Commission Applied M √ √ -
-
-
-
6 Cashier Order Number 0 √ √ -
-
-
-
7 Demand Draft Number 0 √ √ -
-
-
-
8 Check Number M √ √ -
-
-
-
9 Beneficiary Name M - √ -
-
-
10 Beneficiary Bank Name / Code 0 - √ -
-
-
11 Beneficiary Account Number NR - - -
-
-
12 Beneficiary's ID # NR - - NR 13 Beneficiary's Tele / Cell # NR - - NR 14 Biller Name M - √ -
-
-
15 Bitter Subscription Number / IPO Subscription Application Number/
Beneficiary ID # (MOI)
√ 16 Purpose / Details of Trans / Standing Order Type & Ref# 0 - - √ - - Mandatory for SO, Dividend / Payroll / Charges, Fees, 17 Direct Debit Mandate Number M - - √ - - - 18 Originator Name M - - - √ - - - 19 Deposit Duration NR - - - NR - - 20 Deposit Expiry NR - - - NR * * SN Criteria for information *M/
0
%*A *E Teller input Language *NR -*NA,. Remarks C Credit information 1 Amount M - * - 2 Currency M - * * 3 Exchange Rate Applied Must be Applied in2nd Phase 4 Remitting Bank Name / Code 0 - - * 5 Remitter's Name M - - √ 6 Purpose / Details of Payment / Sources of Funds Deposited. 0 - - √ Mandatory if pertains to Payroll, Dividend, incoming Transfer 7 Drawer Bank (Drawn on Bank) Name M - - √ - - - 8 Depositor Name M - - √ - - - 9 Depositor iD # NR - - - NR 10 Depositor Tele/Cell# NR - - - NR 11 Check Number M √ √ - - - - 12 incoming Transfer # M - √ - - - *M= Mandatory, O=Optional, A= Arabic, E= English, NR= Not Required, NA= Not Applicable
Attachment 4: Generic Model Defining Narratives of Account Statements and Classification of Transactions
DATA ITEMS BY PROVISION OF SERVICE, DEBIT INFORMATION AND CREDIT INFORMATION
A - initiating Delivery Channel Description 1 Delivery Channel Name / Code Name of the Bank, Branch, ATM, POS etc where the transaction is Initiated 2
Delivery Channel Location (City) Name of the city where the initiating Bank, Branch, ATM, POS etc is located 3 Trans Ref# Transaction Reference Number generated by the system 4 Trans Type Name of the Transaction Type / Event processed e g. Cash Deposit, Outgoing Transfer, incoming Transfer, Cash Withdrawal etc 5 Date Trans initiated Date of processing of transaction 6 Time Trans initiated Time of processing of transaction 7 Value Date (Dr) Debit Value date to update available balance 8 Value Date (Credit) Credit Value date to update available balance B Debit information
Description
1 Amount Amount debited to customer's account 2 Currency Currency of amount debited to customer's account 3 Exchange Rate Applied Exchange Rate applied if the currency of transfer is different than the account currency 4 Charges Applied Charges, if any, debited to customer's a/c 5 Commission Applied Commission, if any, debited to customer's a/c 6 Cashier Order Number Number of Cashier Order issued to the customer 7 Demand Draft Number Number of Demand Draft issued to the customer 8 Check Number Number of Check debited to customer's account 9 Beneficiary Bane Name of the beneficiary customer who will receive payment 10 Beneficiary Bank Name Name of the bank where beneficiary maintains account 11 Beneficiary Account Number Beneficiary's Account number where the funds will be credited 12 Beneficiary's ID # ID # of the Beneficiary in whose favour the funds have been remitted 13 Beneficiary's Tele / Cell # Tele / Mobile # of the beneficiary customer 14 Biller Name Billing Company's Name e.g. STC, SEC, MO) etc 15 Biller Subscription Number/ IPO Subscription Application
Number
User subscription number (STC, SEC) / Beneficiary ID # (MO)) / IPO Subscription Application number 16 Purpose / Details Mandate Number Payment Reference / Standing Order / Payroll / Dividend + Period 17 Direct Debit Mandate Number Direct Debit Mandate signed by the remitting customer 18
Originator Name Name of the originator (beneficiary) who wit) receive funds in his account 19 Deposit Duration Period for which the deposit is placed with the bank. 20 Deposit Expiry Date of expiry of deposit placed with the bank .
ATTACHMENT 4
GENRIC MODEL DEFINING NARRATIVES OF ACCOUNT STATEMENTS AND CLASSIFICATION OF TRANSACTUIONS DATA ITEMS BY PROVISION OF SERVICE, DEBIT INFORMATION AND CREDIT INFORMATION
C Credit Information Description 1 Amount Amount credited to customer's account 2 Currency Currency of amount credited to customer's account 3 Exchange Rate Applied Exchange rate applied, if the currency of transfer is different than the account currency 4 Remitting Bank Name Name of the Bank who has remitted the amount 5 Remitter's Name Name of the person who has remitted funds 6 Purpose / Details of Payment / Source of Funds Deposited Reference of payment / sources of funds deposited / Standing Order / Payroll / Dividend + Period 7 Drawer Bank (Drawn on
Bank) Name
Name of the Bank on which the check is issued for payment 8 Depositor Name Name of the person who has deposited cash / check 9 Depositor ID # ID number of the person who has deposited cash / check 10 Depositor Tele / Cell # Telephone / Cell) number of the person who has deposited cash / check 11 Check Number Check number credited to customer's account 12 incoming Transfer # incoming transfer reference number credited to beneficiary's customer's a/c Attachment 5: Confirmation Requirements that Must Be Listed in Attachments I, 2, 3 and 4 and Comply with Them
- Application of the same standards for publishing information in account statements by all banks.
- Taking into consideration corporate requirements in bank statements, which may vary from individuals' requirements.
- SARIE transactions must contain UTI (Unique Transaction Identifier)
- Maintaining two calendars (Hijri & Gregorian) in account statements.
- Time stamping for ATM and E-banking transactions is mandatory.
- Determining explicitly all charges applied for all transactions.
- Inclusion of a descriptive dictionary for abbreviations on the back of the account statement. Also, explaining the customer rights and any names for legal articles and regulations, including tariffs and how they or their interests are calculated, such as credit cards services.
- The electronic account statement must be identical to the official account statement sent by mail.
- Explaining to the customer any annual or periodical charges discounted from the customer's account.
- Meeting the customer's preference of language.
Emphasis on Local Branches to Provide Customers with their full Account Numbers and Names Upon Request
Follow-up Circular - Customer Data Update
Inclusion of Banks' Investments in Local Development Bonds as a Component of Liquid Assets
Reference our circular No. BC/120 dated 29-5-1404, regarding bank liquid reserves and components under article (7) of the Banking Control Law,
We wish to advise you that you can now list investments in local government bonds as a component of liquid assets for the purpose of calculating your liquid reserves, provided for in item (2) of article (7) which is presently fixed at 20% of deposits. Please take into consideration that the figure appearing in item 19-1 is the net government bonds kept by the bank for its own account, excluding bonds sold to bank clients or redeemed by SAMA. You are required to provide us with the attached analytical statement as one of the attachments of your financial position.
In view of the issuance by the Government of the Kingdom of Saudi Arabia of U.S. dollar-denominated Sukuk bonds as part of the fiscal policy and as this type provides the investment option as high-quality liquid assets for banks, the Central Bank has decided to include this financial instrument to calculate the liquidity ratio stipulated in the above-mentioned paragraph of the Banking Control Law. These bonds and sukuk are not included among the financial instruments supporting repurchase operations (Repo-Eligible) *.
Please be informed and act accordingly.
* This paragraph has been added in accordance with SAMA's Circular No. 391000002306, dated 8/1/1439.
Prohibiting Seizure of Funds Deposited by Charities Into Bank Accounts Seized Under Court Orders
Please refer to circular No. (43043372), dated 15/05/1443H, Corresponding To 19/12/2021G for the list of Amounts Excluded from Seizure.Domestic Systemically Important Banks (D-SIBs) 2024
To read the last updated list of Domestic Systemically Important Bank (D-SIBs), click here .Domestic Systemically Important Banks (D-SIBs) 2023
To read the last updated list of Domestic Systemically Important Bank (D-SIBs), click here .Information Security
Cyber Security Framework- Maturity Level 4 Requirements
Further to Sama's instructions issued by Circular No. 381000091275 dated 28/8/1438 H regarding the Cyber Security Framework and Maturity Level 3.
We inform you that based on Sama's powers to enhance cybersecurity in the financial sector and raise the level of maturity to face cyber challenges and manage them in a professional and advanced manner, it has been decided for banks the following:
1- Develop a Roadmap to achieve all the requirements of Maturity Level 4 by the end of the third quarter of 2020G, for all the requirements of the following subdomains in the Information Security Organizational Guide:
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- Providing the necessary support to the Information Security Management, supplying them with qualified national personnel, technical tools, and appropriate training to perform their role to the fullest extent. 3- Present the business plan (Roadmap) as mentioned in paragraphs (1) and (2) to the Board of Directors and obtain approval for the plan and the necessary support. 4- Provide SAMA (Financial Sector IT Risk Supervision Department) with the following:
a- Board-approved plan by the end of the first quarter of 2019G.
b- Quarterly reports starting from the end of the second quarter of 2019G, showing the stages of fulfillment of SAMA's requirements in this regard until they are completed. c- A detailed annual report by the bank's internal audit department indicating the extent of compliance with the requirements of the Regulatory Guide compared to the required maturity level, according to the tool to be determined by SAMA.
كما سيقوم البنك المركزي بزيارات ميدانية للتحقق من الالتزام بهذه التعليمات.
Follow Reformed Procedures Protection Systems & Information Security
Referring to SAMA Circular No. 53331/B C/25514 dated 9/12/1433 H regarding the directive for banks operating in the Kingdom to evaluate their security systems and information security, as well as business continuity plans by contracting with specialized international companies in the field of information security. Banks are required to prepare a detailed report on the observations and proposed recommendations for addressing them, and to provide SAMA with a copy of this report.
Given the importance of addressing all observations mentioned in the aforementioned report in accordance with the regulations and instructions issued by SAMA and best international practices, we hope to form an internal committee of specialists within the bank to monitor the implementation of the corrective actions outlined in the report. This committee should prepare a quarterly follow-up report on the progress of the corrective plan and provide copies of this report to the Board of Directors and SAMA (Banking Supervision Department) starting from the first quarter of the current year 2014.
Information Security Strategy for the Banking Sector
Foreword
We live in a digital society with high expectations of flawless customer experience, continuous availability of services and effective protection of sensitive data. Information and online services are now strategically important to all public and private organizations, as well as to the broader society.
Recent cyber incidents globally and regionally have indicated that the number, impact and sophistication of cyber-attacks have increased steadily. It is worth noting that the malicious use of technology could have cross border implications, thereby disrupting both the national and international financial stability.
The Saudi Central Bank* is proud to announce the Cyber Security Strategy to drive continuous improvement of cyber security and to ensure that the Saudi banking sector is well prepared in the five cyber security domains, namely: identification, protection, detection, response and recovery.
The strategy recognizes the rate at which the cyber threats are evolving, as well as the changing technology and business landscape. This places a premium on agility and flexibility in cyber security, underpinned by comprehensive intelligence on cyber threats and effective collaboration between SAMA and other member organization.
We strongly believe that the Cyber Security Strategy will set the sector on strong foundations to address present and future threats.
Ahmed Al Sheikh
Deputy Governor for Supervision
* 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.
1 The Importance of Cyber Security
1.1 The Rationale for Cyber Security
Public cyber incident disclosures over the past few years have indicated that the number, impact and sophistication of cyber-attacks have increased steadily. This trend is especially true within the global banking sector and the Kingdom of Saudi Arabia. At the same time, as mentioned in the foreword, banking customers have ever increasing expectations for service availability, privacy, usability — expectations that can only be met via information technology and its continual innovation. This innovation often results in new business models that increase reliance on third parties and external resources, complicating governance and supply chains. As a result of these trends, the Saudi Arabian banking sector ("the Sector") must improve cyber security throughout its ecosystem to counter malicious threats while also delivering on its promise to provide safe and efficient transaction services to its customers. The strategy contained in this document has been developed to achieve these objectives in a structured way, based on international best practices.
1.2 Challenges and Threat Landscape
Today's threat landscape is diverse and advanced. Threat actors, ranging from individual hackers and insiders to organised groups, exploit sophisticated attacks. Their goals are diverse from espionage, financial gain to online (h)activism. The most significant cyber security threats and challenges to the Saudi banking sector which have been considered when developing the strategy ("the Strategy") are summarised below:
2. The Cyber Security Strategy Highlights
Cyber security is defined as the collection of tools, policies, security concepts, security safeguards, guidelines, risk management approaches, actions, training, best practices, assurance, and technologies that can be used to protect the member organization's information assets against internal and external threats.
2.1 Mission, Vision, Objectives and Governing Rules
The table below illustrates the mission, vision, objectives and governing rules for cyber security within the Saudi banking sector.
2.2 Scope
In order to fulfil the mission, SAMA has collaborated with the Banking Committee for Information Security (BCIS) to develop this Strategy, which is applicable to the whole Saudi banking sector, including:
- the Saudi Central Bank* ;
- all organizations affiliated with SAMA ("the Member Organizations");
- all banks operating in Saudi Arabia;
- all banking subsidiaries of Saudi banks situated within Saudi Arabia or abroad;
- subsidiaries of foreign banks situated in Saudi Arabia.
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.
2.3 Governance
A robust governance structure will be put in place to direct, monitor and evaluate efforts related to the execution of Strategy. The governance structure will ensure that all parties involved are fully aware of their roles and responsibilities in the execution and the maintenance of the Strategy.
The parties involved and their role and responsibilities are summarized below:
2.4 Principles for Implementation
The implementation of the Strategy will be through a comprehensive set of strategic streams which together achieve the objectives of the Strategy.
A 5-year roadmap will set out how the strategic streams will be taken forward but will also recognize the need for the Strategy to be periodically evaluated under the governance of SAMA. Where necessary, the Strategy will be refined and new initiatives are to be defined if required.
The challenge of building a trustworthy, resilient and secure Saudi banking sector requires an integrated and collaborative approach in a number of domains:
- State of the art capabilities in identification, protection, detection, response and recovery.
- An organizational culture that promotes safe and appropriate use of information and online services among stakeholders.
- A deep understanding of dependencies on national critical infrastructure and online services, and seamless cooperation with national authorities to reduce the cyber security risks.
A successful cyber security strategy is founded on collaboration. All parties involved must join forces by contributing to effective community intelligence sharing and collectively coordinating responses to emerging cyber threats and attacks across the Saudi banking sector.
The implementation of the Strategy will be governed by the following rules when scoping, approving and taking forward the strategic streams and initiatives: GOVERNING
GOVERNING
RULES
- Defining leadership and responsibilities.
- Adopting a risk-based approach.
- Implementing a defense in depth approach.
- Investing in and utilizing national talents and skills.
- Aligning with national and international initiatives.
- Collaborating with partners.
2.4.1 Shared Responsibilities
The execution of the Strategy is a shared effort between SAMA and Member Organizations. The implementation will be overseen by a Program Board comprising SAMA and representative members of BCIS when delegated. Individual Project Teams will be constituted by the Program Board to take forward execution of strategic streams assigned by the Program Board. Each Project Team will include representatives of the Saudi banking sector and other relevant stakeholders, with SAMA coordinating liaison with relevant government agencies.
The Member Organizations, through BCIS, will act as an Advisory Board for the Program Board, and through the Program Board individual Project Teams.
The figure below illustrates the proposed program structure for implementing the Strategy:
2.4.2 Management Commitment and Funding
Shared responsibility implies that the boards of Member Organizations must commit to the strategic directions and timelines within this Strategy, while also being prepared to commit the required resources and funding.
2.4.3 Integrated Planning
Effective initiation, definition, approval and implementation of strategic streams depends on careful prioritization and planning to ensure availability of the required resources and achievement of realistic timescales. This process will ensure engagement with relevant stakeholders within and outside the Saudi banking sector, while also avoiding duplication and overlap between strategic streams. The Program Board will ensure that integrated planning is aligned with, and agreed by, relevant stakeholders.
2.4.4 Monitor Progress and Improvements
Effective monitoring of the execution of the Strategy, and associated strategic streams, is vital to successful achievement of the objectives and necessary improvements in cyber security. To achieve this, the Program Board will implement a performance management which will embrace:
- The execution of the strategic streams and the underlying initiatives (i.e. during the initiation, definition, approval and implementation phases).
- The adoption of the agreed directions or solutions by the Member Organizations.
Project initiation plans will be prepared for all strategic streams defining the scope, objectives, proposed approach, stakeholder engagement, dependency management, resourcing assumptions, risks and mitigation.
The progress of each strategic stream, and underlying initiatives, will be measured against key performance indicators (KPIs), such as:
- Progress against defined milestones and scope.
- Resources consumed (e.g. spend to date, level of effort).
- Quality of deliverables.
- Project management risks.
- Level of adoption by Member Organizations.
2.5 Maintaining and Evaluating the Cyber Security Strategy
The Strategy will be maintained and periodically evaluated by SAMA to ensure continuous improvement, including its continued relevance to emerging cyber security threats and risks. If applicable, SAMA will update the Strategy based on the outcome of the evaluation, this may include adjustments to existing strategic streams and initiatives, or the creation of new strategic streams and initiatives.
3 The Cyber Security Strategic Objectives, Streams and Initiatives
3.1 Objective 1: Proactively Protect Saudi Banking Sector Critical Information Assets
In order to achieve a stable and resilient Saudi banking sector, SAMA and the Member Organizations will identify and protect critical information assets. This should include but not be limited to:
- The identification of critical Saudi banking sector information assets supporting the delivery of essential services and capabilities.
- The analysis of key interdependencies with other sectors.
- The adoption of appropriate cyber security controls.
This will be supported by the creation of a strategic threat and capability analysis to collect and analyze the strategic and emerging cyber security threats and vulnerabilities, allowing the determination of potential attack scenarios and patterns, and forming the basis for identifying necessary enhancements in cyber security controls.
To build a sector-wide view of strategic cyber security risks to the Banking Sector, a periodic banking sector-wide strategic Cyber security risk assessment will be conducted. This will support the development of a banking sector-wide cyber action plans to address possible strategic and emerging cyber security risks.
The strategic streams for objective 1 are shown below:
3.1.1 Critical Information Assets
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
Identify the Saudi Banking sector critical information assets. Perform a cyber security risk assessment for the identified critical information assets to address the cyber security risks within the Saudi banking sector. Select appropriate cyber security controls and develop cyber security standards. Establish and implement a continuous monitoring capability to ensure compliance with the developed cyber security standards. For the identified critical information assets under the authority of SAMA: Perform a gap analysis to determine their compliance with cyber security standards; Implement the required cyber security controls in order to comply with cyber security standards. For identified systems at the Member Organizations which are connected to the identified critical information assets: Perform a gap analysis to determine their compliance with cyber security standards; Implement the required cyber security controls in order to comply with cyber security standards. Determine the interdependencies of the identified Saudi banking sector critical information assets with other sectors (national and international), as an input into objective 4 'Understand and Manage the Interdependencies (section 3.4). 3.1.2 Strategic Cyber Threat and Attack Scenarios
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Establish an effective approach to periodically determine the Saudi banking sector-wide strategic threats, vulnerabilities and interdependencies.
- Determine the Saudi banking sector-wide strategic threats, vulnerabilities and interdependencies and translate these into strategic threat and attack scenarios.
- Incorporate the strategic threat and attack scenarios into the threat and vulnerability management processes of the Member Organizations. These scenarios will also be used as an input into strategic stream 3.1.3 'Strategic Risk Assessment'.
3.1.3 Strategic Cyber security risk assessment
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Establish an effective strategic cyber security risk assessment approach and framework to periodically determine the Saudi banking sector-wide strategic cyber security risks.
- Perform a periodic strategic cyber security risk assessment to identify Saudi banking sector-wide strategic cyber security risks.
- Develop and execute a Banking Sector-wide treatment plan to address the strategic cyber security risks.
- Establish a cyber security risk and control repository capability.
3.2 Objective 2: Detect, Respond to and Recover from Cyber Security Incidents
Situational awareness is necessary to effectively detect, respond to and recover from cyber security incidents. The creation of a Banking Cyber Security Centre (BCSC) will provide a focus for the necessary monitoring and detection capabilities. The BCSC will also support mutual and immediate sharing of detected suspicious events between the BCSC and Member Organizations.
A Saudi Banking sector threat intelligence capability will also be established, providing a platform for intelligence sharing between Member Organizations. This platform will also be used to aggregate and share common threat intelligence from preferred threat intelligence providers. Threat intelligence sharing is essential to maintain a proactive posture to counter emerging cyber security threats.
To ensure an effective response to a major cyber security incident, it is vital that all relevant parties know what to do and have a clear understanding of their roles and responsibilities. This will be achieved through the creation of a Saudi banking sector-wide cyber security incident management process. These processes will be rehearsed periodically to ensure that all relevant stakeholders are familiar with the agreed incident management procedures, as well as contributing to the training of relevant staff. The lessons from exercises and incidents will be used to continuously improve the incident management process. In addition, a Saudi banking sector-wide cyber security crisis management process will be established. The cyber security crisis management process will ensure that response and communication procedures within and beyond the Saudi banking sector-wide are in place to deal with a serious incident. These processes will also be periodically exercised.
The strategic streams for objective 2 are shown below:
3.2.1 Cyber Security Monitoring and Detection
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Establish an effective Saudi banking sector-wide cyber security monitoring and detection capability (i.e. BCSC), including people, processes and technology.
- Establish an effective Saudi banking sector-wide capability for Member Organizations to connect to the BCSC, including people, processes and technology, for sharing analysis' of suspicious events, rulesets and use cases.
3.2.2 Cyber Threat intelligence Sharing
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Establish an effective Saudi banking sector-wide shared cyber threat intelligence capability, including people, processes and technology.
- Establish an effective Saudi banking sector-wide capability for Member Organizations to connect to the shared cyber threat intelligence capability, including people, processes and technology, for sharing cyber threat intelligence.
3.2.3 Cyber Security Incident Management
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Establish an effective Saudi banking sector-wide cyber security incident management process, including supporting incident response procedures and forensic process.
- Identify incident response capabilities that are required to support the defined cyber security incident management process.
- Implement required capabilities, either by arranging this internally (within the Saudi banking sector) or by formalizing joint service agreements with third parties to ensure on-demand availability of the required capabilities.
- Periodically rehearse the Saudi banking sector-wide incident response procedures.
- Establish a cyber security incident repository capability.
3.2.4 Cyber Security Crisis Management
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Establish an effective cyber security crisis management process, including supporting procedures.
- Conduct Saudi banking sector-wide cyber security crisis management exercises.
3.3 Objective 3: Foster a Cyber Security Culture
Cyber security is not only about technology. The effectiveness of technological measures largely depends on a security culture in which all stakeholders are sufficiently aware of cyber security risks. Awareness and the proper attitude in organizations are vital to foster a cyber security culture.
Raising awareness and investing in education are effective ways to improve the cyber security culture. Therefore, a Saudi banking sector-wide education program and awareness campaign will be developed and delivered.
SAMA has the ambition to be at the forefront of building and maintaining a skilled cyber security workforce. It is recognized that it will be difficult to create and maintain a sufficient national cadre of skilled cyber security professionals. Therefore, a Saudi banking sector-wide cyber security training and talent management program will be developed and implemented to ensure the development of such a national cadre.
In addition, a code of practice will be developed which ensures that contracting processes preserve and build cyber security knowledge within the Saudi banking sector by ensuring appropriate knowledge transfer from contractors or consultants.
The strategic streams for objective 3 are shown below:
3.3.1 Education and Awareness
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Establish an effective Saudi banking sector-wide education program and awareness campaign on cyber security.
- Contribute to broader cyber security awareness through education institutions and community action.
- Formalize joint service agreements with third parties to provide education programs and awareness campaign services.
3.3.2 National Training Capabilities and Talent Management
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Establish an effective Saudi banking sector-wide training program on cyber security skills for relevant cyber security professionals.
- Formalize joint service agreements with third parties to provide such training courses.
- Develop a Saudi banking sector-wide code of practice on the retention and talent development of cyber security professionals.
- Engage with colleges and universities to develop and implement cyber security curricula and educational programs at the graduate and post-graduate levels.
- Establish a periodic award for the best cyber security research or thesis relevant for the Saudi banking sector.
- Establish a periodic award for best cyber security professional within the Saudi banking sector.
3.3.3 Contracting Cyber Security Services
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Develop a Saudi banking sector-wide code of practice specifying requirements for knowledge transfer in cyber security service contracts.
3.4 Objective 4: Understand and Manage Interdependencies
The interconnected and distributed nature of the internet allows malicious actors to cross national and international boundaries. To counter cyber security threats, the Saudi banking sector must have an effective approach to national and international collaboration.
Engagement strategies and relationships will be developed and maintained with key national authorities and international organizations to promote cyber security information (e.g., threat intelligence) sharing, enable cyber security investigations and support cyber security operations.
The strategic streams for objective 4 are shown below:
3.4.1 National Interdependencies
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Develop and establish a national relationship management process to promote cyber security information sharing, enable cyber security investigations, and support cyber security operations.
- Engage periodically with national authorities to identify and address cyber security threats and coordinate actions to improve cyber security on a national level.
3.4.2 International Interdependencies
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Develop and establish an international relationship management process to promote cyber security information sharing, enable cyber security investigations, and support cyber security operations.
- Engage periodically with international organizations to identify and address cyber security threats and coordinate actions to improve cyber security on a national and international level.
3.5 Objective 5: Maintain an Adaptive Cyber Security Framework
Objectives 1-4 will be underpinned by the creation of a cyber security framework which will provide the basis for effectively protecting information assets throughout the Saudi banking sector.
The framework will be mandated by SAMA and will be applicable to all Member Organizations, it will be based on national and international good practice. It will be kept under continuous review in the light of emerging cyber threats and developments.
An implementation approach and process for periodic self-assessments will be established to direct, monitor progress and evaluate the adoption of the cyber security framework by the Member Organizations.
The strategic streams for objective 5 are shown below:
3.5.1 Cyber Security Framework
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Establish an effective Saudi banking sector-wide cyber security framework, detailing cyber security objectives, controls and compliance measures based on national and international good practices.
- Establish an effective and adaptive governance framework and implementation approach to direct, monitor and evaluate the adoption of, and compliance with the cyber security framework.
- Adopt the cyber security framework, governance structure and implementation approach, including performing periodic self-assessments and demonstrating the level of compliance.
- Maintain and continuously improve the cyber security framework based on changes in regulations, technologies, emerging cyber security threats and newly released national and international good practices.
3.5.2 Periodic Self-Assessments and Reviews
This strategic stream should include the following initiatives but should not be limited to these initiatives if required:
- Mandate the governance framework and implementation approach to direct, monitor the progress and evaluate the adoption of, and compliance with, the cyber security framework across the Saudi banking sector (including ambition and anticipated implementation timelines).
- SAMA, or (appointed) third party, undertakes periodic reviews at Member Organizations and challenges the self-assessments and level of compliance with the cyber security framework.
- SAMA, or (appointed) third party, undertakes thematic reviews and assessments periodically on cyber security controls at Member Organizations.
Appendices
Appendix A - Glossary
Term
Description Availability
Ensuring timely and reliable access to and use of information. (NIST IR 7298 Glossary of Key information Security Terms) Code of practice
Document that recommends practices or procedures for the design, implementation, maintenance or utilization of documents, structures or products. (NIST IR 89-4194) Confidentiality
Preserving authorized restrictions on information access and disclosure, including means for protecting personal privacy and proprietary information. (NIST IR 7298 Glossary of Key Information Security Terms) Cyber security
Cyber security is defined as the collection of tools, policies, security concepts, security safeguards, guidelines, risk management approaches, actions, training, best practice assurance, and technologies that can be used to protect the member organization's information assets against internal and external threats. Cyber security awareness
Activities which seek to focus an individual's attention on a cyber security issues. (NIST IR 7298 Glossary of Key Information Security Terms) Cyber security awareness program
A program that explains proper rules of behavior for the safe and secure use of IT System and information. The program communicates cyber security policies and procedures that need to be followed. Cyber security control
The management, operational, and technical controls (i.e., safeguards or countermeasures) prescribed for an information system to protect the Confidentiality, integrity, and availability of the system and its information.(NIST IR 7298 Glossary of Key Information Security Terms) Cyber security framework
Document detailing cyber security objectives, controls and compliance measures based on national and international good practices. Cyber security governance
A set of responsibilities and practices exercised by the board and executive management with the goal of providing strategic direction for cyber security, ensuring that cyber security objectives are achieved, ascertaining that information risks Are managed appropriately and verifying that the enterprise's resources are used responsibly. Cyber Security incident
An occurrence that actually or potentially jeopardizes the confidentiality, integrity, or availability of an information system or the information the system process, stores, or transmits or that constitutes a violation or imminent threat of violation of security policies, security procedures, or acceptable use policies. Cyber security incident management
The monitoring and detection of security events on an information systems and the execution of proper responses to those events. Cyber security program
Top-down management structure and mechanism for coordinating security activities throughout the organization. Cyber security review
Independent review and examination of security-related records and activities to provide limited assurance that system controls are adequate and that established policies and operational procedures are compliant. (NIST IR 7298 Glossary of Key Information Security Terms) Cyber security risk assessments
The process of identifying risks to organizational operations, organizational assets, individuals, other organizations, and the nation, arising through the operation of an information system. A part of risk management, it incorporates. threat and vulnerability analyses and considers mitigations provided by security controls planned or in place. (NIST IR 7298 Glossary of Key Information Security Terms) Cyber security strategy
A high-level plan, consisting of projects and initiatives, to mitigate cyber security risks while complying with legal, statutory, contractual, and internally prescribed requirements. Cyber security threat
Any circumstance or event with the potential to adversely impact organizational operations, organizational assets, individuals, other organizations, or the nation through an information system via unauthorized access, destruction, disclosure, modification of information, and/or denial of service. (NIST IR 7298 Glossary of Key Information Security Terms) Incident management
Refer to 'Cyber security incident management'. Incident management plan
The documentation of a predetermined set of instructions or procedures to detect, respond to, and limit consequences of a malicious cyber-attack against an organizations information system(s). Also Refer to 'Cyber security incident management'. (NIST IR 7298 Glossary of Key Information Security Terms) Integrity
Guarding against improper information modification or destruction, and includes ensuring information non-repudiation and authenticity. (NIST IR 7298 Glossary of Key Information Security Terms) Key performance indicator
A type of performance measurement that evaluate the success of an organization or of a particular activity in which it engages. Numerical threshold(s) are typically used to categorize performance. Member organization
Organizations affiliated with SAMA. Resilience
The ability to continue to: (i) operate under adverse conditions or stress, even if in a degraded or debilitated state, while maintaining essential operational capabilities; and (ii) recover to an effective operational posture in a time frame consistent with mission needs. Risk
A measure of the extent to which an organization is threatened by a potential. Circumstance or event, and typically a function of: (i) the adverse impacts that would arise if the circumstance or event occurs; and (ii) the likelihood of occurrence. (NIST IR 7298 Glossary of Key Information Security Terms) Threat
Refer to 'Cyber security threat' Threat intelligence
Threat intelligence is evidence-based knowledge, including context, mechanisms, indicators, implications and actionable advice, about an existing or emerging Menace or hazard to assets that can be used to inform decisions regarding the subject's response to that menace or hazard. (Gartner) Threat landscape
- An overview of threats, together with current and emerging trends.
- A collection of threats in a particular domain or context, with information on identified Vulnerable assets, threats, risks, threat actors and observed trends.(ENISA)
TOM
A target operating model (TOM) is a desired operating model that visualizes (i.e. using a model or collection of models, maps, tables and charts) how the organization operates so as to deliver value to its customers or beneficiaries. Vulnerability
Weakness in an information system, system security procedures, internal controls, or implementation that could be exploited or triggered by a threat source. (NIST IR 7298 Glossary of Key Information Security Terms) Vulnerability management
Vulnerability management is the cyclical practice of identifying, classifying, remediating mitigating vulnerabilities. Also refer to 'Vulnerability' Appendix B- Detailed Initiatives Objectives and Expected Outcome
Cyber Security Strategy of the Saudi Banking Sector - Draft
Information Security Committee
As you are aware, the Saudi Banking sector is highly dependant on Information Technology, which has helped banks to provide a wide range of products and services. However, information Technology carries benefits as well as security threats and challenges
Security issues that are of most concern to SAMA include the disclosure of confidential information, unauthorized access to systems, challenge introduced by the internet and open networks, viruses and threats to system operations, as well as direct loss of funds. Potential damages to the banking system from security breaches also include possible loss of customer confidence, hence affecting its overall reputation.
Therefore, SAMA wishes to create an Information Security Committee of the Banks on the following basis:
- Committee mandate would be to include all aspects of Information Security.
- Each bank should be represented by one senior manager who would be designated Information Security Officer.
- SAMA would act as an observer in this committee.
- The committee would meet on a 2 monthly basis.
The committee should elect, on a rotational basis, one of its members as the Chairman and another member as a secretary for a period of one year. The Chairman will be responsible for calling meetings, preparing agendas in consultation with another banks while the secretary will maintain record of discussions.
In this regard, SAMA would like to nominate Mr. Waleed Al Shubaili and Mr. Abdulrahman Al Shetwey as observers.
Please nominate your Bank’s representative at your earliest convenience to Mr. Ali Al Ghaith at Fax No. 466 2299.
The first meeting is schedule to be held at the Bankers Club at the Institute of Banking (IOB) on Saturday 1st June 2002 at 10 a.m.
SARIE System
Application of the Unified Template for Government Employees' Payroll Sheets
Further to SAMA Circular addressed to all banks No. (381000017647) dated 14/02/1438H regarding the RASD Service Project, which concerns the Application of the Unified Form for Government Employees' Salary Statements.
In light of the inability of most government entities to adhere to the unified model, and given the significant importance of the data contained in this model for assisting the Ministry of Finance in auditing, conducting monthly and yearly comparisons, and supporting several national projects based on this data.
Accordingly, we request that all deposits for all employees of government entities be fed into the RASD Service system starting from the current calendar year 2017G and for the coming months (for all government entities, whether the entity adheres to the unified model or not). Payroll files must follow the format of the unified model as specified in the document (RSD Banks File Specification: V2.7). The field for the ID number of citizens and residents is exempted and should be left blank if unavailable to the bank until a suitable mechanism for providing the ID number is established.
We also request your cooperation with Elm Company to implement the requirements. For any needed assistance, you may contact the following email designated for bank support: (RSD_OPS@elm.sa).
Application of the Unified Form for Government Employees' Salary Statements
This section is currently available only in Arabic, please click here to read the Arabic version.Working Hours for the Saudi Arabian Riyal Interbank Express (SARIE)
With reference to the working hours of the Saudi Arabian Riyal Interbank Express (SARIE), we would like to inform you that as of Sunday 23/3/1437 H corresponding to 3/1/2016 G, the working hours of the SARIE system will be modified according to the attached schedule.
Saudi Arabian Riyal Interbank Express (SARIE) System
SARIE Business Cycle
Starting from 3/1/2016
Event
Starting time
Ending time
Event No.
Cutover
09:00 16:30 1 Same Day value transfers
Clearing
09:00
15:00
2
All types of payments (Single & Bulk)
09:00
16:00
3
Squaring & Positions adjustment
16:00
16:15
4
Cutoff
16:30 5 Forward payments
Open 24 hours
6 Obligation not to Apply Fees or Commissions on the Salaries of State Employees and Student Reward Accounts
Referring to SAMA Circulars No. 018559/BCP/802 dated 29/11/1420H and No. 3430/BCP/63 dated 10/2/1424H regarding the confirmation that banks do not charge service expenses on the accounts of state employees in accordance with the unified agreement to transfer the salaries of their employees through the Saudi Rapid Financial Transfer System (SARIE), and the provisions of paragraphs (4,5,6) of (Article1) of the agreement related to the obligations of banks after charging any commissions or bank expenses on the services provided under this agreement, and benefiting from the services of the Saudi network, and providing an ATM card to customers free of charge, provided that it is renewed at the end of its term without fees.
Therefore, SAMA confirms not to impose fees or commissions (whatever their names) and whatever the balances of the state employees' salary accounts in accordance with the above-mentioned agreement, as well as to treat the students' accounts in which their bonuses are deposited as the accounts of the salaries of state employees in not imposing fees or commissions, regardless of the account balance, as well as confirming your branches to abide by this and report what has been taken within a week from its date.
Money Transfer through SARIE System
Referring to the circular issued by SAMA No. 45774/BCT/758 dated 24/12/1427 H regarding the determination of endowments for the implementation of financial transfers through the "Sarie" system, and where SAMA received complaints regarding the refusal of customers' requests to make financial transfers for the purpose of depositing them on the same day and challenging them with certain endowments determined by the bank.
We would like to emphasize the importance of banks receiving all customer payments in their branches and through their technical systems until (15:30) for transfers whose owners request that the transfer procedure be carried out through the "Sarie" system and deposited in the beneficiary's account on the same day.
To take note and approve and act accordingly, and to distribute a copy of this circular to your Bank's branches, and to report on what has been taken within a week from its date.
Employees' Salaries are Paid for the Month of Ramadan Every Year on the Twentieth of the Month Via the SARIE System
SAMA received the letter of His Excellency the Minister of Finance No. 8/2/7167 dated 6/9/1429 H, referring to Ministerial Circular No.12/28810 dated 15/7/1419 H regarding permitting the disbursement of employees' salaries and entitlements through the Saudi Rapid Financial Transfer System (SARIE) in accordance with the rules and procedures attached to it.
Based on what is stated in paragraph (7/h) of the first article of the unified agreement between government agencies and banks, which stipulates the payment of the salaries of the blessed month of Ramadan of each year on the twentieth of the aforementioned month by transferring them to their accounts through the Saudi system for rapid financial transfers (SARIE).
We hope to direct your specialists to transfer the salaries of the blessed month of Ramadan of the year 1429 H on 20/9/1429 H.
Transferring Dues of Construction Companies through the SARIE System Starting from the New Fiscal Year 1428/1429H
In reference to Council of Ministers Decision No. (23) dated 17/01/1428 H, communicated via the circular from His Highness the President of the Council of Ministers No. 4160 dated 23/01/1428 H regarding addressing the obstacles facing the contracting sector in the Kingdom, which stipulated in paragraph four that the Ministry of Finance should take the necessary measures to disburse contractors' entitlements through the SARIE system.
Accordingly, we inform you that SAMA received a letter from the Ministry of Finance No. 8/3/86833 dated 29/10/1428 H, which included a directive for each bank to open an intermediary account for each project assigned to it. The bank will be responsible for managing that account, and a copy of the agreement made with the contractor should be provided to government entities, specifying the name and account number so that government entities can include the account number on the payment order instead of the contractor's account. The project account must comply with what is required in SARIE system, adhering to the specified number of customer account numbers at each bank to avoid payment returns. Please note that the implementation of this circular will begin on 31/12/2007G.
Obliging Local Banks to Adhere with Agreement for Payroll Issuance for Government Employees through "SARIE" System
This section is currently available only in Arabic, please click here to read the Arabic version.Instructions and Standardised Tables for SARIE-Accredited Government Revenue for the Financial Year 1422H/1423H
This section is currently available only in Arabic, please click here to read the Arabic version.Using SARIE System for Student Stipends
SAMA received the letter of His Excellency the Minister of Finance and National Economy No. 8/2/10493 dated 16/8/1423 H referring to the study carried out by the Ministry with the participation of SAMA and the General Audit Bureau on the occasion of using the Saudi Fast Financial Transfer System (SARIE) to disburse students' bonuses by opening accounts with banks in accordance with the following controls:
- The opening of these accounts must be with the consent of the students and their knowledge of their receipt of their rewards using this method.
- Each student should be free to decide the bank she wishes to open an account with and transfer her bonus to her account with it.
- These accounts are dedicated to depositing and withdrawing bonuses during the study, and ATM cards are issued through the Saudi network for each student free of charge.
- It is sufficient for students to sign the marches with the data indicating that the supply of bonuses has been deposited into each student's account, and this shall be verified by the competent authority in the relevant educational authorities. We would also like to inform you that SAMA has received several complaints from citizens, including the requirement of banks for a certain amount when opening an account for the student, the requirement of a certain age to open the account, as well as the imposition of other conditions.
We hope to urge your specialists to comply with the above-mentioned speech of His Excellency the Minister of Finance and National Economy, as well as to abide by SAMA Circular No. 5082/MAT/55 dated 2/3/1423 H regarding the rules for opening accounts in commercial banks and the general rules for their operation.
Procedures for Cashing Ministerial Paychecks Through SARIE
This section is currently available only in Arabic, please click here to read the Arabic version.Executive Regulations for Disbursing State Employees' Salaries
No: 211000000091 Date(g): 28/8/2000 | Date(h): 28/5/1421 Translated Document
Further to SAMA Circular No. 17693/BCT/896 dated 7/12/1418H regarding the rules for salary transfers through the Saudi Instant Payments System (SARIE) and the implementation procedures.
We would like to inform you that there are some amendments to the rules regarding salary transfers via the (SARIE) system, as well as to the standard agreement with banks for salary transfers through the Saudi Instant Payments System (SARIE). The amendments are as follows:
Introduction:
Based on the Ministry of Finance and National Economy Circular No. 12/1936 dated 16/6/1405H, which outlines the implementing rules for disbursing government employees' salaries through national banks, most government agencies and public institutions have adopted the practice of paying employee salaries via cheques drawn on these banks.
Due to the steady increase in the number of government employees and the substantial burdens associated with issuing salary payments via cheques drawn on national banks such as the significant time and effort required, direct costs of cheque printing, and the congestion experienced by local banks during salary disbursement periods SAMA has developed and adopted the Saudi Instant Payments System (SARIE). This advanced automated system facilitates electronic transfers and payments between banks and customers, making it ideal for transferring employee salaries directly to their accounts at the banks they use. Additionally, the benefits provided by the Saudi Payments Network include easy access to cash, balance inquiries via ATMs, and the ability to obtain goods and services through widespread point-of-sale terminals across the Kingdom. Following consultations with the General Auditing Bureau and SAMA, it has been decided to utilize (SARIE) system for the automated transfer of employee salaries to their accounts at various local banks. This decision aims to streamline the salary disbursement process while maintaining adherence to general rules and documentation procedures to ensure proper salary transfer and verification of receipt by employees.
The following are the rules and executive procedures for transferring salaries via (SARIE) system that must be adhered to. SAMA hopes that the implementation of this method will facilitate the salary disbursement process for government employees, allow employees to benefit from the technical services provided by the Saudi Payments Network, support the banking sector, and enhance both banking awareness and savings habits among employees.
First: Rules for Transferring Employee Salaries via the Saudi Instant Payments System (SARIE).
1- Each government ministry or agency is required to open two current accounts with a local bank operating within the Kingdom as follows: The first account should be titled "Salaries of Employees of (Name of the Entity/City).
The second account should be titled "Other Entitlements of Employees of (Name of the Entity/City).
These accounts are to be used for disbursing salaries and entitlements of their employees, which will be processed by the corresponding bank through the transfer of net salaries and entitlements to the employees' accounts held with the same bank or other local banks.
2- The current bank will continue to be used for disbursing employee salaries via cheques during the implementation of these rules. For entities that are not currently dealing with banks, SAMA will coordinate with the Ministry of Finance and National Economy to either change or appoint a bank.
3- Each employee must specify the bank to which they wish their salary to be transferred and sign a declaration to this effect with the Human Resources Department of their respective entity, according to the attached proposed forms. This declaration serves as acknowledgment that their salary or any other entitlements will be automatically transferred to their account with the specified bank. Employees are free to choose the bank they wish to deal with for transferring their entitlements, and it is not necessary for this bank to be the same as the one used by the government entity.
4- Banks are required to accept the opening of current accounts for employees of government entities and public institutions for the purpose of transferring their salaries to these accounts without imposing a minimum balance requirement. Employees whose salaries are transferred to their current accounts at the bank will have access to all banking services available for current account holders, including the use of the Saudi Payments Network services such as ATMs and point of sale terminals. Banks may send representatives to government entities and public institutions to open current accounts for employees at the entities’ premises and branches, in coordination with the Human Resources Departments.
5- Banks are required to perform the salary transfer process without charging any banking service fees, either from government entities or from employees.
6- Human Resources Departments shall issue notifications to employees who have had deductions made from their salaries, detailing the amounts of the deductions and the reasons for them.
7- The application of this system is not limited to the transfer of employee salaries alone it also includes the transfer of their entitlements. The handling of these salaries and entitlements with the banks should be done by opening the two accounts as specified in paragraph (1).
8- Employees who do not wish to have their salaries and entitlements transferred to current accounts at banks, as well as employees of entities without branches of local banks, will have their salaries and entitlements disbursed in accordance with the Ministry of Finance and National Economy Circular No. 12/1936 dated 16/6/1405H, which outlines the implementing rules for salary disbursement through local banks. Separate payrolls will be issued for these cases. Second: Procedures for Transferring Employee Salaries via SARIE.
1- The government entity shall send the payment orders for its employees' salaries to the Ministry of Finance and National Economy on the 12th of each lunar month. The beneficiary's name on the payment order should be written as follows:
Pay to the order of: Salaries of Employees of [Name of the Entity/City], Account No. [Full Account Number for Salaries or Entitlements] at [Bank Name].
2- The Ministry of Finance and National Economy shall process the payment order in accordance with the current regulatory procedures. The issued cheque shall specify the full name, account number, and bank.
3- The cheque shall be delivered to SAMA for the transfer of its value to the bank where the government entity’s account is held. This process will continue until the automated systems are linked, technical tests are conducted, and procedures are revised at both the Ministry of Finance and National Economy and SAMA, to replace cheques with direct transfers to government entities' accounts at banks.
4- The bank shall credit the amount to the government entity's account and notify the entity accordingly to carry out the necessary accounting entries.
5- All government entities are required to send their employee data to the banks they work with on CDs by the middle of the lunar month. This data must include all employee details such as names, account numbers, bank names, and net salaries due. The data can be transmitted via an automated information exchange line between the government entity and the bank to expedite the process of data delivery and processing. For government entities that do not use computer systems for preparing employee salary data, coordination between these entities and the banks is necessary to determine the method of data transmission. Government entities are allowed to make any necessary changes to the data sent to the bank up to two days before the due date. The bank is responsible for implementing the required changes and notifying the government entity so that the necessary accounting entries can be made. It is preferable to agree on a standardized method for sending employee data to the bank in accordance with SAMA guidelines to minimize the need for data corrections during transmission.
6- Regarding the salaries of employees benefiting from installment services provided by banks, who currently receive their salaries via hand-delivered cheques from the bank, their salaries will be automatically transferred to current accounts opened in their names at the same banks. Banks will be notified of this change in salary disbursement method in accordance with the Circular of the Ministry of Finance and National Economy No.12 /162 dated 2/12/1413H.
7- Payroll transfer statements are prepared automatically by the Human Resources Department and are sent along with their attachments, to the Finance Department for review and recording in accordance with financial regulations. The recording should be based on the approval order for disbursement as follows: From Account No. To: Expenses (relevant items)
To the mentioned individuals
Account No. / Payment Orders (in the name of the Pension Fund or the General Organization for Social Insurance and the Credit Bank for settling their dues).
Account No. / Revenues (amounts that may be added to revenues, such as penalties).
Account No. / Deposits (amounts held in deposits for any reason).
Account No. / Payment Orders (for the net salaries specified in the disbursement approval order).
8- The dealing bank deposits the net salaries due into the employees' current accounts with it, as well as transfers the salaries of employees with accounts in various local banks to be credited to their accounts automatically. All salaries are deposited into employees' accounts at all banks on the 25th of the lunar month. Banks provide their customers with summary notifications by the 5th of each lunar month, confirming the addition of salaries to the employees' accounts with them and with other banks for the previous month. Government entities, after reviewing these notifications, attach them to the payroll statements for the relevant month and prepare them for submission along with their monthly documents to the General Auditing Bureau as per the standard procedure.
9- Employee entitlements that are not recorded in their accounts for any reason and reported by the bank are issued as cheques payable to the beneficiaries. These cheques are drawn on the entity's general account.
10- If the entity discovers an error or determines that an employee is not entitled to their salary or a part of it, which has been transferred to the bank, it must immediately notify the bank to make the necessary correction, and this must be done at least two days before the due date. If the error is discovered by the entity after this deadline, the entity should address it by making the following entry: From Account No. / Advances Under Collection (Employee's Account)
To Account No. / Expenses under exclusions (Relevant Item) The amount should be deducted from the employee's entitlements in the following month or collected in cash to settle the advance.
11- Government entities must ensure that all employees listed in the payroll files sent to the banks are still active. They should establish procedures and controls to prevent the transfer of salaries or other entitlements to employees who are no longer on duty. Monthly payroll statements should be accompanied by declarations from the heads of the main and subsidiary departments affirming the accuracy of the information provided and confirming that all employees listed are still active. These declarations must be approved by the Directors of Human Resources and Accounting, as well as the General Manager of Financial and Administrative Affairs. These individuals will be jointly responsible for any amounts incorrectly transferred or issued without entitlement.
12- The financial administration within government entities and public institutions should retain copies of monthly payroll statements and detailed reports of transactions issued by the banks, as requested. These documents should be kept in dedicated files for reference when needed. Unified Agreement for Transferring Employees' Salaries via the Saudi Arabian Riyal Interbank Express (SARIE) System
On the day of ..../.... / 14....H, corresponding to ..../.... / 199....G, an agreement has been made between:
The First Party:
The Government Entity (________________________) Address at (________________________).
Represented in the signing of this agreement by His Excellency / __________________.
Hereinafter referred to as the "Government Entity."
The Second Party:
The Bank (________________________) Address at (________________________).
Represented in the signing of this agreement by __________________.
Hereinafter referred to as the "Bank."
Introduction:
Based on the Government Entity’s desire to enlist the Bank to provide banking services, particularly the transfer of monthly salaries and other entitlements to its employees through direct deposit into their current accounts. This includes the transfer of monthly salaries and other entitlements to employees with accounts at other local banks through the Saudi Electronic Funds Transfer System (SARIE) instead of disbursing salaries through cheques, in accordance with the general rules and executive procedures for the payment of state employees' salaries via SARIE as issued under Circular No. ___________ from His Excellency the Minister of Finance dated ..../..../ 1419H. This agreement is supplementary to the implementing rules for paying state employees' salaries through local banks issued by the Minister of Finance and National Economy under Decision No. 11/H/1351 dated 16/5/1405H, circulated under No. 12/1936 dated 16/6/1405H and subsequent clarifications and additions. Furthermore, based on SAMA's approval to enter into an agreement with the Second Party to facilitate salary disbursement as outlined in Letter No. ___________ dated ..../.... /14....H, this agreement has been made between the two parties.
Article 1: Bank Obligations
1- The bank shall open two current accounts in the name of the Government Entity in accordance with the rules and regulations for opening current accounts for ministries, governmental entities, and public institutions as issued by SAMA. One account is for salary transfers, and the other is for other employee entitlements such as overtime and delegation allowances, which are paid collectively (by one check).
2- The bank shall provide the Government Entity with detailed automated reports regarding account activity via terminal screens, floppy disks, or another method that serves reconciliation purposes with their records. This should be done at least once a month or upon request.
3- The bank shall transfer the employees’ monthly salaries to their current accounts opened with the bank or with other local banks based on the data provided by the Government Entity.
4- The bank shall not charge any commissions or banking fees for the services provided under this agreement to the Government Entity or its employees. Employees are not required to maintain a minimum account balance (SAMA Circular No. M/A/142 dated 18/2/1417H).
5- Current accounts opened for employees under this agreement shall enjoy all the benefits available to other current accounts at the bank, including the use of Saudi ATM networks and point-of-sale services.
6- The bank shall issue an ATM card to every employee with a current account at the bank free of charge, and it shall be renewed upon expiration without charge. In the event of card loss or damage, the bank shall issue a replacement card.
7- The bank shall credit the employees’ salaries to their accounts on the 25th day of the Hijri month unless the following exceptions occur: A) If the 25th day falls on a Friday, the crediting will take place on the 26th day.
B) For the last month of the fiscal year, salaries will be paid in accordance with the instructions issued by the Ministry of Finance and National Economy for closing accounts at the end of the fiscal year.
C) The salary for the month of Ramadan will be paid on the 20th day of Ramadan.
8- The bank shall provide the Government Entity with the names and entitlements of employees whose salaries were not credited to their accounts for any reason, whether at the bank or other banks, no later than two days after the due date. The Government Entity shall then issue checks for the total salary amount to the beneficiaries.
9- The bank shall provide the following information to the Government Entity no later than five days after the salary transfer date: - Confirmation of the amounts credited to the opened accounts and any amounts not credited for any reason.
- Confirmation of the total amounts transferred for employees with other banks and any returned amounts.
10- The bank shall provide necessary support to rectify any errors in the data sent by the Government Entity upon notification. Article 2: Government Entity Obligations
1) The Government Entity shall provide the bank with detailed employee salary data, including the names of employees and their complete account numbers, through terminals, floppy disks, or other methods deemed suitable by both parties. The Government Entity is responsible for the accuracy of this data.
2) The Government Entity shall deposit the total amount of monthly salaries in its current account with the bank no later than the 20th of the month, ensuring sufficient funds to cover the monthly payroll. The Government Entity will also deposit any additional amounts required for other entitlements it wishes to transfer to its employees.
3) The Government Entity shall not approve the transfer of an employee's salary from one bank to another or cancel the transfer and replace it with a check if it had previously committed to another bank for the transfer.
4) The Government Entity shall transfer the salaries of employees benefiting from loan services provided by the bank to current accounts in their names at the same bank. Article 3: General Provisions
1) This agreement shall be valid for two years and will be automatically renewed for the same period unless either party notifies the other party at least four months before the end of the current term of its desire not to renew.
2) Upon signing this agreement, the bank shall coordinate with the Government Entity to complete all procedures necessary for implementing the agreement.
3) This agreement is governed by the laws and regulations currently in force in the Kingdom of Saudi Arabia.
4) In the event that either party breaches any of the obligations stated in this agreement, the other party has the right to terminate the agreement without compensation, provided that two written warnings are issued, and two months pass for each warning without corrective action.
5) In matters not covered by this agreement, reference shall be made to the general rules and executive procedures for salary transfers via SARIE issued under Circular No. 28810/12 dated 15/7/1419H by the Minister of Finance and National Economy.
6) In case of any dispute regarding the implementation of this agreement, SAMA shall have the authority to settle it.
7) This agreement is made in three original copies, one for SAMA, one for the Government Entity, and one for the bank, all to be executed accordingly.
The First Party The Second Party
On behalf of (The Government Entity) On behalf of (The Bank)
Signature: Signature:
- Confirmation of the amounts credited to the opened accounts and any amounts not credited for any reason.
Implementation Rules For Transferring Salaries for Government Employees SARIE
Referring to the circular of His Excellency the Minister of Finance and National Economy No. 28810/12/79 dated 15/7/1419H, which approved the application of the Saudi Payments Network (SARIE) system for the disbursement of salaries to government employees, and referring to SAMA’s Circular No. 17693/M AQ/896 dated 7/12/1418H, which communicated the implementing rules to be followed for the disbursement of government employees’ salaries through the SARIE system. The unified agreement, which must be used in contracts between the bank and the government entity, states that the agreement must be based on SAMA’s approval of the agreement between the two parties. The agreement must also include the reference number and date of SAMA’s approval letter for any government entity to deal with a bank. Based on the explanatory and supplementary circulars regarding the opening of accounts for government entities including Circular No. M A/183 dated 2/7/1405H, Circular No. M A/247 dated 29/6/1411H, and Circular No. M A/633 dated 21/10/1415H, SAMA has recently observed some banks entering into agreements to disburse salaries to government employees through the SARIE system directly without obtaining SAMA’s approval. SAMA has the authority to select the bank with which the government entity should deal to ensure fairness in distribution among banks. It has also been noted that some government entities may already be dealing with another bank for the same purpose, which constitutes a violation of the aforementioned circular from His Excellency the Minister of Finance and National Economy. Additionally, this situation may cause embarrassment for the Ministry and SAMA due to some banks entering into such agreements or the existence of various government accounts with different purposes opened with some banks without SAMA’s approval. In some cases, multiple accounts have been opened for the same entity despite only one account being approved.
Such actions violate the instructions that prohibit opening accounts for any government entity without obtaining SAMA’s approval, as SAMA holds the authority to approve such actions and limit approval to only one account. Violating these procedures exposes the bank to legal accountability and full responsibility for any consequences resulting from non-compliance with the instructions.
SAMA requests that all relevant personnel across your branches in different regions of the Kingdom be informed and instructed to strictly adhere to the guidelines issued by SAMA. Banks are reminded not to open accounts for any government entity unless SAMA has granted approval.
For accounts that were opened without obtaining SAMA's approval, the situation must be rectified by notifying the concerned government entities to contact their parent organization through the Ministry of Finance and National Economy, specifically addressing the Deputy Minister for Financial Affairs and Accounts, to obtain approval for these accounts. SAMA must then be notified to provide the bank with the necessary approval for the existence of these accounts.
The General Rules, Implementation Procedures and the Standard Agreement for Transferring Salaries of Employees by SARIE
No: 181000000896 Date(g): 3/4/1998 | Date(h): 7/12/1418 Status: Modified These rules have been updated in accordance with the rules for transferring salaries of government employees as per SAMA circular No. (211000000091), dated 28/05/1421H, to read the updated rules, click here.According to a letter received by SAMA from HE the Minister of Finance & National Economy No. 12/2502 dated 24/10/1418 H, the Ministry is developing the procedures of paying the salaries of government employees through SARIE. HE's letter included the implementation procedures which must be applied to this operation on a trial basis for 2 months starting 1-1-1419 H. Please be informed and notify your branches accordingly.
Attached please find a copy of the general rules and implementation procedures, along with the standard agreement proposed to be concluded with the bank with which the government agency deals. Please take note that the salary check shall be delivered C/o SAMA.
We take this opportunity to emphasize the role of banks in the success of this service and the need to extend support to all government agencies to enable them to transfer the salaries of their employees through SARIE.
The Standard Agreement for Transferring Salaries of Employees by SARIE
On____/___/14___H. (corresponding to ___/____/199__
A. D.) this Agreement was concluded by and between:
(Government Agency), address () represented in signing the Agreement by HE______________ (hereinafter referred to as “ Government Agency”) First Party and (Bank), address () represented in signing this Agreement by __________(hereinafter referred to as "Bank”) Second Party.
and
(Bank), address () represented in signing this Agreement by ______________(hereinafter referred to as "Bank") Second Party.
Introduction
In the desire of the Government Agency to have the Bank extend thereto a banking service in the form of transferring the monthly salaries and other benefits of its employees by direct deposit in their current accounts with the Bank, and to transfer the monthly salaries and other benefits of its employees who have a current account with some other banks by SARIE, instead of disbursement by checks, in accordance with general implementation rules and procedures to transfer civil servants salaries by SARIE, issued by the circular of HE the Minister of Finance No.________dated__/__/1419 H; and
Further to implementation rules for the payment of civil servants salaries through local banks, issued by the decision of HE the Minister of Finance and National Economy No. 11/H/1351 dated 16-5-1405 and circulated under No. 12/1936, dated 16-6-1405, along with explanatory and supplementary circulars; and
Pursuant to SAMA's consent to conclude an agreement with Second Party to pay salaries as per its letter No.______dated ___/___/14___H. (reference must be made to SAMA's letter of agreement to start dealing with a specified bank), the two parties agreed as follows:
Article (1): Obligations of Banks
The Bank must open 2 separate current accounts in the name of the Government Agency, in accordance with applicable rules and conditions for opening current accounts for ministries, government authorities and public institutions issued by SAMA.
One account shall be used for transferring the salaries of employees and the second for transferring their other collective benefits other than salaries, such as overtime compensation, outside assignments and others that are paid collectively (in one check).
- The Bank must provide the Government Agency, at least once a month or upon request, with statements on the account movements through terminals or floppy diskettes or any other method which serves the purpose of conformation with its own records.
- The Bank has to transfer the monthly salaries of employees to their current account with the Bank or with other local banks, in accordance with a statement submitted by the Government Agency.
- The Bank shall not charge the Government Agency or the employees any commissions or banking expenses for this service according to this Agreement and shall not commit the employees to a minimum balance in their accounts (SAMA circular No. BCL/142 dated 18-2-1417 H).
- Current accounts opened for employees under this Agreement should enjoy all the advantages of other Saudi banking services, such as ATM and Points of Sale.
- The Bank should provide each holder of an account with the Bank an ATM card free of charge, renewable free of charge and replaced if lost or damaged.
- Salaries shall be credited to the account of the employee on the 25th of the Hejira month, except:
a) If the 25th day falls on a Friday, salaries will then be credited on the 26th day..
b) In the last month of the fiscal year, salaries shall be paid in accordance with the closing of accounts instructions for that fiscal year issued by the Ministry of Finance and National Economy at the end of each fiscal year.
c) The salaries for Holy Ramadan of each year shall be paid on the start of the 20th day of that month.
- The Bank should provide the Government Agency with the names and benefits of employees, whose benefits were not credited for any reason to their account with the Bank or with other banks, within 2 days at the latest from maturity date. The Government agency shall issue checks drawn on the collective account for salaries in the amount of the benefits to the order of beneficiaries.
The Bank shall provide the Government Agency, within 5 days at the latest, from the date of transfer, with the following:
*Evidence of crediting the deposited amounts to the current accounts opened therewith and the non-credited amounts for any reason.
*Evidence of transferring the total amounts belonging to employees at other banks and amounts returned thereof.
- The Bank must, upon notification, provide necessary support for the correction of any error that may appear in statements sent by the Government Agency.
Article (2): Obligations of The Government Agency.
- The Government Agency must provide the Bank, through terminals, floppy diskettes or any other method seen suitable by the two parties, with detailed statements showing the monthly benefits of employees whose salaries have been transferred, and full account numbers, on which basis the transfer of amounts to current accounts with the Bank or with other banks shall take place, and the Government Agency shall be responsible for the accuracy of such statements.
- The Government Agency shall, on the 20th of the same month at the latest, deposit the value of the monthly salaries of its employees in the current account opened in its name with the Bank in sufficient amounts to cover the monthly salaries and shall also deposit any amount to cover other benefits which it desires to transfer to its employees.
- The Government Agency should not approve the changing by the employee of his salary transfer from one bank to the other or the replacing of the transfer with payment by a check delivered to the employee, if the Government Agency had already been committed to a certain bank to pay the salary of an employee by transfer or a check c/o that bank.
- The Government Agency must transfer the salaries of employees benefiting from the banks installment services to current accounts in their names with the same banks.
Article (3): General Provisions
- This Agreement is for 2 years, renewable for an equal period unless one Party notifies the other at least 4 months in advance of its desire not to renew it.
- Upon signing this Agreement, the Bank shall coordinate with the Government Agency to complete all necessary procedures to enforce it.
- This Agreement shall be governed by Saudi Laws and Regulations in effect.
- In the event of default by one Party on any of its obligations hereunder the other Party shall have the right to terminate this Agreement, after giving the defaulting party two written notices and the default is not remedied within 2 months from the date of each notice.
- Anything not mentioned herein shall be governed by general implementation rules and procedures connected with the transfer of employees salaries by SARIE issued by HE the Minister of Finance and National Economy No. ____dated___/___/_____. \
- Any dispute hereunder shall be settled by SAMA
- This Agreement was executed in 3 original copies, with SAMA. The Government Agency and the Bank each receiving one copy to act accordingly.
For First Party For Second Party
(Government Agency) (Bank)
Signature Signature
Implementation Rules And Procedures for Transferring Civil Servants Salaries by SARIE
Introduction
Pursuant to the Ministry of Finance and National Economy circular No. 12/1936 dated 16-6-1405 H, which included implementation rules for the payment of civil servants salaries through national banks, most Government Agencies and public institutions have followed this method of paying the salaries of their employees by checks drawn on these banks.
In view of the constant increase in the number of civil servants and the huge burdens carried by national banks, as a result, and the time and efforts involved in the direct cost of printing checks and the rush suffered by the banks during the salary payment period; and
In the light of SAMA's development and approval of the SARIE system, which is a developed procedure that facilitates the process of making financial transfers and payments between the banks and their clients electronically, and is considered ideal for transferring the salaries of employees to their accounts at the banks they deal with, in addition to other advantages provided by the Saudi Payment Network (SPAN), as regards the facility of obtaining cash and information about their balances through ATM and the buying of goods and services through Points of Sale spread throughout the Kingdom; and
After studying the subject by the Bureau of General Audit and SAMA, it was decided to use the SARIE system for transferring the salaries of employees to their accounts with various local banks, with no prejudice to general rules and the documentary payment cycle which aims at controlling the salary transfer process and verifying the receipt of the salaries by the employees.
Herebelow are the rules of transferring salaries by SARIE and the procedures to be followed. The Ministry hopes that the application of this system will facilitate the process of paying the salaries of employees, help the employee in making good use of the technological services rendered by the Saudi Payment Services Network, supporting the banking sector at the same time and promoting banking and saving awareness of the employees.
I.Rules for Transferring Employees Salaries by SARIE:
Each ministry or government authority must open two current accounts with one of the Saudi local banks as follows:
First account in the name of employees salaries of (name of government agency / city)
Second account in the name of other benefits of the employees of ___________(name of government agency / city), to be used for paying the salaries and other benefits of its employees, which are paid through the bank they deal with by transferring the net salaries and benefits of the employees to their accounts with the same bank or with other local banks.
- Dealing with bank through which the salaries of employees are presently paid by check shall continue when these rules are applied. The bank shall be changed or designated, in case of government agencies not presently dealing with any bank, by SAMA after coordinating with the Ministry of Finance and National Economy.
- Each employee shall name the bank through which he desires to have his salary transferred to his account therewith by signing a statement to this effect at the Personnel Department of the government agency he works for as per attached form. This statement amounts to an acknowledgement that his salary and other benefits shall be automatically transferred to his account with that bank (the employee has the full liberty to choose the bank he wishes to deal with and transfer his benefits thereto, and it does not have necessarily to be the same bank with which the government agency deals).
- Banks have to accept the opening of current accounts for the employees of government agencies for the transfer of their salaries thereto, without requiring a minimum balance in these accounts. The employee whose salary is transferred to his current account at a bank shall enjoy all the banking services available to the holders of other current accounts, such as ATM and Points of Sale offered by the Saudi Payment Network. Representatives of the various banks may be sent to the Government Agencies and public institutions at their head offices and branches for opening current accounts for their employees in coordination with the Personnel Department.
- Banks have to effect the transfer of salaries free of charge for government agencies and employees.
- The Personnel Department shall prepare notices to employees whose salaries have been subject to deductions, indicating the amounts of deduction and the reasons therefor.
- The system shall not be limited to the transfer of employees salaries but shall include the transfer of all benefits. The transfer process is done through separate current accounts opened with the banks as mentioned in paragraph (1).
- The salaries and benefits of employees who do not desire to have their salaries and benefits transferred to a bank current account, as well as the employees of government agencies that have no branch of the local banks, shall be paid in accordance with the circular of the Ministry of Finance and National Economy No. 1936/12 dated 16-6-1405, which included the implementation rules for paying the salaries of employees as per a separate payroll.
II.Procedures of Salary Transfer by SARIE
1.The government agency shall prepare payment orders of salaries and send them to the Ministry of Finance and National Economy on the 12th day of the Hajira month. The name of the beneficiary in the payment order shall be written as follows:
Pay to the order of: employees salaries (….. name of the government agency/city) account No. ….. (account number for salaries or benefits in full) with …… (name of the bank)
2. The Ministry of Finance and National Economy shall treat payment orders in accordance with presently practiced procedures and the issued check shall state the full name and number of the account and the bank.
3. The check shall be delivered to SAMA to transfer its value to the bank in which the account of the government agency is opened. This process shall continue until electronic systems are connected, the tests are made, and the procedures are amended by the Ministry of Finance and National Economy and SAMA and the transfers are made directly, instead of checks, to the benefit of the government agency with the bank.
4. The bank shall enter the amount in the account of the government agency, which shall be notified accordingly to effect its own entries.
5. All government agencies shall send their employees data to the banks on diskette in the middle of the Hejira month. The diskette must contain the details of all employees data, such as the name of the employee, his account No., the name of the bank, the net salary and benefits. Such data may be sent through an electronic transmission line between the government agency and the bank to expedite the arrival and processing of the data by the bank.
6. With regard to government agencies that do not use the computer in preparing the data and payrolls of their employees, they should coordinate with the banks about the method of sending such data. The government agency may amend the data sent to the bank 2 days before the maturity dale. The bank shall make the required amendments and notify the government agency accordingly to make the necessary accounting entries. It is preferable to have a standard method for transmitting the data of employees, as per SAMA instructions, to avoid amendments during the transmission process..
7. Regarding the salary of employees benefiting from the installment services of banks and whose salaries are now paid by checks c/o such banks, their salaries shall be transferred electronically to current accounts in their own name opened with the same banks, provided they notify the bank about the change in the method of paying their salaries, as per the Ministry of Finance and National Economy circular No. 12/162 dated 2-12-1413 H.
8. Payrolls of salary transfer shall be prepared electronically in the Personnel Department, and sent, with attachments, to the Financial Department to be reviewed and recorded, as per financial instructions on the basis of the payment order as follows: From expense account (relevant items)
To:
Payment orders account (in the name of the Retirement Salaries Authority or GOSI or Credit Bank to pay their benefits)
Revenues account (amounts that may be added to revenues such as penalties)
Imprest account (amounts that may involve imprests for any reason)
Payment orders account (net value of salaries as per payment order)
9. The bank shall deposit the net due salaries in the current accounts of employees therewith and transfer the salaries of employees who have their accounts with other banks to be electronically added to their accounts, so as to have all the salaries of employees transferred electronically and credited to the accounts of employees with all banks by the 25th day of the Hejira month. The banks shall, by the 5th day of the Hejira month, provide their client government agency with notices, indicating that the salaries of their employees for the previous month have been credited to their accounts therewith and with other banks. The government agencies shall, after reviewing the notices and attaching the payrolls of the relevant month, send same to the Bureau of General Audit within their monthly documentation.
10. The benefits of employees that are not credited for any reason and notified by the bank shall be paid to beneficiaries by check drawn on the gross account of the government agency.
11. If the government agency discovers any error in calculating the salary and benefits of the employee transmitted to the bank, it should notify the bank immediately 2 days before maturity date. If the error is discovered by the government agency after this deadline, it shall treat it as follows:
From :Imprest under collection from
employee account
To :Reimbursed expenses account.
Deduction from the employee benefits shall be made in the following month or the amount shall be collected from him in cash and reimbursed to the imprest account.
12. Government agencies shall make sure that all employees listed in the tables sent to the bank are still on the job, and adopt procedures and controls to cut down on the transfer of salaries and benefits of employees that are no longer on the job. The monthly payrolls must be accompanied by attestations from the officials of the main and branch departments certifying that the data in the payrolls is accurate and that all those listed therein are still on the job. Such attestations should be approved by the Director of Personnel and Accounts and the Director General of Financial and Administrative Affairs, who shall be jointly responsible for any funds transferred by error or without entitlement.
13. The Financial Department of government agencies and public institutions must keep a copy of monthly payrolls and detailed reports on executed operations issued by the banks, kept in special files for reference, if and when needed.
SAMA/Banking Technology
Form for Transferring Salary to Al-Rajhi Banking Investment Corporation
Dated: __/_/
HE The Director of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with Al-Rajhi Investment Corp.,__________branch in (city) as per account number set forth below.
A/c Number Currency and A/c Code Branch Code 6 0 8 0 1 (please fill out all blanks and contact the bank for any inquiry)
As of the salary and entitlements for the
(month) year
Regards,
Name File No. ID No Department/Section Phone No. Signature SAMA/ Banking Technology
Form For Transferring Salary To The Saudi Hollandi Bank
Date:___/___/___
HE The Manager of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with the Saudi Hollandi Bank as per details below (please fill out all blanks and contact the Bank for any inquiry).
Serial No. A/c No. Branch Code As of the salary and entitlements for the month of
() year
Regards,
Name ID No Department/Section Phone No. Signature SAMA/Banking Technology
Form For Transferring Salary To The Saudi British Bank
Date://
HE The Manager of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with the Saudi British Bank as per details below (please fill out all blanks and contact the Bank for any inquiry).
Type of A/c Control
Signal Code
Client A/c Code Branch Code As of the salary and entitlements for the month of
() year
Regards,
Name ID No Department/Section Phone No. Signature SAMA/Banking Technology
Form for Transferring Salary to The Saudi American Bank
Date:___/___ /
HE The Manager of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with the Saudi American Bank as per details below (please fill out all blanks and contact the Bank for any inquiry).
As of the salary and entitlements for the month of () year_______
Regards,
Name ID No Department/Section Phone No. Signature SAMA/Banking Technology
Form for Transferring Salary to The Riyad Bank
Date://
HE The Manager of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with the Riyad Bank as per details below (please fill out all blanks and contact the Bank for any inquiry).
Type of A/c Currency Code A/c No. Branch Code As of the salary and entitlements for the month of
() year
Regards,
Name ID No Department/Section Phone No. Signature SAMA/Banking Technology
Form For Transferring Salary To The Arab National Bank
Date: __/__/__
HE The Manager of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with the Arab National Bank as per details below (please fill out all blanks and contact the Bank for any inquiry).
Branch Client A/c No. Ledger Code. Currency Code. As of the salary and entitlements for the month of () year______
Regards,
Name ID No Department/Section Phone No. Signature SAMA/Banking Technology
Form for Transferring Salary to The Saudi French Bank
Date: __/__/
HE The Manager of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with the Saudi French Bank as per details below (please fill out all blanks and contact the Bank for any inquiry).
Control sign Serial No. of A/c Basic code for A/c No. As of the salary and entitlements for the month of () year______
Regards,
Name ID No Department/Section Phone No. Signature SAMA/Banking Technology
Form for Transferring Salary to The Saudi Investment Bank
Date:/__/___
HE The Manager of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with the Saudi Investment Bank as per details below (please fill out all blanks and contact the Bank for any inquiry).
As of the salary and entitlements for the month of () year______
Regards,
Name ID No Department/Section Phone No. Signature SAMA/Banking Technology
Form For Transferring Salary To The National Commercial Bank
Date: __/__/__
HE The Manager of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with the National Commercial Bank as per details below (please fill out all blanks and contact the Bank for any inquiry).
Supplement Code A/c No. Type of A/c Client A/c No. Branch Code As of the salary and entitlements for the month of () year_______
Regards,
Name ID No Department/Section Phone No. Signature SAMA/Banking Technology
Form for Transferring Salary to The United Saudi Commercial Bank
Date://
HE The Manager of Personnel
Greetings,
1 wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with the United Saudi Commercial Bank as per details below (please fill out all blanks and contact the Bank for any inquiry).
Signal Scale Serial No. A/c No. Type of A/c Currency Code Branch Code As of the salary and entitlements for the month of () year_______
Regards,
Name ID No Department/Section Phone No. Signature SAMA/Banking Technology
Form for Transferring Salary to The Al Jazira Bank
Date:___/__/___
HE The Manager of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to transfer my salary and other financial entitlements to my account with the Al Jazira Bank as per details below (please fill out all blanks and contact the Bank for any inquiry).
Supplement Code Client A/c No Branch Code As of the salary and entitlements for the month of () year______
Regards,
Name ID No Department/Section Phone No. Signature SAMA/Banking Technology
Form for Transfer of Salary to A Bank
Date: __/__/__
HE The Director of Personnel
Greetings,
I wish to inform you that this form was signed by me in the desire to have my salary and other entitlements transferred directly to my account with the Bank as per details set forth below.
Bank A/c No. As of the salary and entitlements for the month of () year______
Regards,
Name ID No Department/Section Job Title Phone No. Signature Using Checks to Disburse Government Employees' Salaries Through Local Banks
Reference to our circular No. BC/183 dated 3-7-1405H (23-3-1985 G) regarding the use of checks in paying the salaries of civil servants through local banks; and
In view of the difficulties faced by banks in safe keeping such checks after cashing them and the need for a large space for this purpose due to its large number; and
Whereas currently applicable instructions adequately guarantee the paying of government employees salaries to them in person and the refunding of unpaid amounts to the government agency, through SAMA; and
Since the return of cashed checks to the concerned government agency will move the problem that is now faced by banks to the government agency,
The matter was referred to HE the Minister of Finance & National Economy, who agreed in his letter No. 12-3411 dated 16-5-1411 H that banks may, after 2 years of cashing civil servants salaries, copy such checks on a microfilm to be easily accessible if and when needed, provided the signature of the civil servant appears in the inputs of the microfilm. Thereafter the checks may be destroyed to solve the problem of safekeeping.
Please be informed, taking into account the provision of article (13) of our above-mentioned circular (BC/183).
Supplementary Circular - Disbursement of Government Employees' Salaries Through Banks by Checks
Reference to our circular No. BC/183 dated 3-7-1405 H regarding payment of civil servants salaries by checks, SAMA has received a letter from HE the Minister of Finance and National Economy, noting that some government agencies have reached agreement with some Saudi banks, under which salary checks could be cashed by simply providing such banks with the payroll of such government agencies and having the payee sign on such payroll.
Since this procedure is in violation of the Implementation Rules stated in HE's circular No.11/H/1351 dated 16-6-1405 H, which was communicated to you in the above-mentioned circular, we hope you comply with such rules with no amendments. The Ministry will not approve payment orders to violating banks.
Using Checks to Disburse Government Employees' Salaries Through Local Banks
In the letter of HE the Minister of Finance and National Economy No. 206-405 dated 15-1-1405 H, regarding the use of checks for paying civil servants salaries through local banks, HE requested us to notify the banks as follows :
- Starting with the budget of the coming fiscal year 1405/1406 government agencies may open accounts with local banks for the payment of their employees' salaries by check. Such an account shall be used solely for this purpose.
- The opening of such an account shall be limited to Ministries and independent government agencies listed in the attached list and their affiliated branches in the Kingdom. Only one account may be opened by the agency or its branch.
- The account shall be opened in the name of the agency or branch, not in the name of a specific employee (s).
- The bank in which the account is to be opened shall be specified by SAMA at the request of the concerned agency.
- Banks undertake to cash salaries with no service charges.
- Checks are valid for one month from the date of issuance and are endorsable only to banks.
- The concerned agency shall feed its current account, when opened, with a net average of its monthly payroll, plus 50%, by a check issued by the Ministry of Finance and National Economy.
- The bank shall provide the concerned agency, at the end of the 10th day of each month, with a statement indicating the number and amounts of cashed checks. After reviewing such statements, the bank shall be reimbursed for cashed amounts. With regard to the statement of the payment of salaries for Jumada I of each year, the banks shall be reimbursed in the middle of Jumada II.
- The banks shall not be reimbursed for statements of account evidencing salary payments for the month of Jumada II of each year. Banks have to transfer any surplus balance in the current account to the current account of the Ministry of Finance and National Economy with SAMA before the end of Rajab each year. The bank shall send the statement of accounts evidencing the payment of salaries for the month of Jumada II, along with SAMA's notice evidencing the transfer of the agency balance therewith.
- The agency shall obtain check books through a letter addressed by the authorized person to the bank.
- The authorized person, who shall not hold a title less than director general, will provide the bank with signature samples of the persons authorized to sign the checks.
- With regard to government agency branches, the agency with which the branch is affiliated shall make the necessary arrangements for opening the branch account at the selected bank. This account shall be fed with a net average of employees salaries for 2 months. The branch director shall provide the bank with the name of persons authorized to sign the checks and their signature samples. The agency with which the branch is affiliated shall reimburse the bank gradually for paid salaries to maintain sufficient cash liquidity.
- The Ministry of Finance & National Economy, the General Audit Bureau or SAMA may send representatives to check on these statements of account or to ask for copies thereof.
We wish to emphasize that no direct accounts may be opened for this purpose except through SAMA.
Bc-Accounts
Precaution against Check Forgery
Security authorities have noted the increase in forgery schemes through which it was possible to withdraw from the accounts of some commercial firms and individuals at banks with forged signatures or endorsements. Complaints about such forging of checks have been lately on the increase. In the desire to adopt security controls and means to protect the checks and reduce forgery, Saudi Central Bank has decided to emphasize on banks to abide by the instructions in its previous circulars and by the procedures set forth below to detect forged checks before cashing them and to take all necessary precautions to protect checks against forgery:
(1) When a check is submitted for cashing the following must be observed: A- Verify the signature of the drawer by matching it with the signature(s) approved by the bank (circular No. BC/52 dated 19-3-1400H) B- Compare the amount in figures with that in letters. In case of variation or in case the check is quoted only in figures or letters, the check must be returned to drawer for amendment and signing with the signature approved by the bank (Circular No. BC/204 dated 16-4-1398H) C- Check must be free of any erasing or rubbing or amendment. Otherwise, it should be returned to drawer to be signed with signature approved by the bank before cashing (circular No. BC/204 dated 16-4-1398H.) D- Verify the identity of the beneficiary by checking his ID or passport and carefully record their number and place of issuance on the back of the check by the employee in charge (circular No. BC/204 dated 16-4-1398H) E- If the employee in charge notices something abnormal, such as the large amount of the check or the presentation of the check on regular paper, or the method of withdrawal or application, he has to notify the manager or assistant manager, as the manager should be aware of large or abnormal movements in the bank. F- The signature of the beneficiary on the back of the check must be coupled with his name in legible writing. Writing of the name and signing should be done in front of the employee in charge. If the beneficiary is illiterate, his left thumb stamp should be taken with his name written there below. (2) No name of any person should be printed on the check book delivered to him before checking his ID or passport (circular BC/94 dated 20-5-1400H) (3) Bank seals, documents and check books should be kept in safe cabinets. Employees in charge must not deliver documents or check books to clients in violation of adequate banking procedures (circular No. M/A/52 dated 19-3-1400). (4) Banks should use special paper for checks printed in a safe way that makes forgery difficult and, at the same time, makes it easy for the bank to detect any modification or amendment in the data written in the check by chemical erasing or otherwise (circular BC/ 204 dated 16-4-1398H) Please comply, notify all your branches to act accordingly and acknowledge receipt. Amending Item (3) of the Instructions for Payment of Amounts to Beneficiaries of the Citizen Account Program
This section is currently available only in Arabic, please click here to read the Arabic version.Not Opening Accounts for Depositing Revenues or Amounts for Governmental or Semi-Governmental Entities without Ministry of Finance Approval
SAMA has received a letter from the Acting Assistant Minister of Finance for Revenue Affairs No. 19962 dated 25/02/1439H regarding the opening of bank accounts for government entities. His Excellency requested confirmation that banks must not open accounts designated for depositing revenues or funds for government or semi-government entities without the approval of the Ministry of Finance.
Accordingly, SAMA emphasizes to all banks the prohibition of opening accounts designated for depositing revenues or funds for government or semi-government entities without the approval of the Ministry of Finance. Compliance with Rule No. (500-1-1) of the Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia, Fourth Amendment, is required.
For your information and action accordingly, and the Central Bank will take necessary regulatory actions in the event of non-compliance.
Providing Banking Services to Prison Inmates
SAMA has received a letter from His Royal Highness the Emir of Riyadh Region No. 107735 dated 15/10/1438H, referring to the letter from the Director of Prisons in Riyadh Region No. 583576 dated 09/09/1438H regarding the increasing number of prisoners wishing to visit banks, which has become a noticeable trend. When they are sent to banks, they face refusals from bank employees to assist them or disburse their salaries. This is despite the existence of Rule No. (200-1-1) from the Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia, Fourth Amendment related to Saudi citizens/inmates. SAMA had previously issued a circular on this matter under Circular No. 19027/M.A.T/200 dated 29/07/1423H, as well as Circular No. 47275/M.A.T/636 dated 21/10/1429H, emphasizing adherence to Rule No. (200-1-1) concerning Saudi citizens/inmates.
Accordingly, SAMA reiterates to all banks the necessity of adhering to the instructions and rules regarding procedures for dealing with prison inmates and providing banking services to them as stipulated in Rule No. (200-1-1) of the Rules Governing the Opening of Bank Accounts and General Operational Guidelines in Saudi Arabia, Fourth Amendment. SAMA also notes that necessary actions will be taken against banks found in violation of these rules.
For your information and action accordingly.
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-2014
Referring to SAMA’s Circulars No. 351000012318 dated 28/1/1435H, and No. 351000061537 dated 12/5/1435H regarding the "Wage Protection System (WPS)" program, and further to complaints received by SAMA regarding the lack of cooperation by some banks in opening accounts for establishments subject to the WPS program, particularly private schools, which exposes these establishments to penalties.
SAMA emphasizes the importance of the national program, the "Wage Protection System (WPS)," and the necessity for banks to fulfill their responsibilities under this program, especially the matters discussed during previous workshops and meetings with bank representatives. These responsibilities include opening accounts, processing payroll files in the approved format, issuing bank cards, ensuring the availability of cash in ATMs, and providing qualified human resources to serve establishments subject to this program—particularly private schools—regardless of their workforce size or salary amounts.
We kindly request compliance with these instructions and that they be communicated to all relevant departments and divisions within the bank. Additionally, please provide SAMA with the bank’s work plan for this program within two weeks from the date of this notice.
Providing SAMA with Procedures Taken by the Bank Regarding Accounts of Residents who Have Left the Country or Have Been Deported
In reference to the telegram of His Highness the Crown Prince, Deputy Prime Minister and Minister of Interior No. 289678 dated 20/11/1437 H regarding expatriates or residents who have left the country permanently or have been deported, or have left and return and their visas have expired and have not returned, while they are outside the country, they conduct banking operations on their accounts in Saudi banks, including transfer, and the transfer may be suspicious, and His Highness requested views about it.
We hope to provide us with the measures taken by the bank regarding the accounts of residents who have permanently left the country or have been deported or have left and returned and their visas have expired and have not returned and how their accounts are dealt with when they discover their residence outside the country and their inability to return, within a week from its date.
Seized Accounts
Referring to the field visit of SAMA team to the banks to study the supervisory status of the seized accounts, and the difficulties and results it highlighted regarding the correct and accurate data and the provision of some data, and the lack of databases for those accounts or their inventory, follow-up and evaluation. Therefore, we hope to take the following measures:
1- Providing SAMA with the name of the Bank's representative within a week from its date to participate in a working group of banks in which SAMA participates to work on finding mechanisms, tools and means of research based on the banks' procedures that enable the identification of accounts that some banks do not know the reasons for seizure and the party that imposed the seizure and benefit from the data available at some banks.
2- Work on creating databases for the seized accounts, including the legal document for the seizure, the actual date of the seizure, the party requesting the seizure, and the balance of the seized account, and provide SAMA with a quarterly detailed report on what has been achieved.
3- Provide SAMA on a semi-annual basis detailed report of the seized accounts according to the following table:
M Customer Name Account Number The legal document for the seizure The party requesting the seizure Date of seizure Account Balance Type of seizure Notes 1 2 Provide SAMA Accounts of Hajj Affairs Offices
Further to SAMA Circular No. 351000045818 dated 11/04/1435 H regarding the emphasis on the controls that banks must apply and abide by when opening and managing accounts for "Hajj, Umrah and visiting the Prophet's Mosque" and the documents required to open and manage a bank account. Among other things, these controls include allowing Hajj affairs offices to open more than one account, provided that they are in one bank only, and not allowing them to open other accounts in other banks.
Based on the above, we hope to provide SAMA (Bank Licensing Division) with all the accounts of the Hajj Affairs Offices that you have within a week from its date.
Freezing the Debit Side of Charitable Associations’ Accounts
Referring to paragraph (21) of Section (First) Definitions of the fourth update of the rules for opening bank accounts in commercial banks and the general rules for their operation, notified to banks operating in the Kingdom pursuant to Circular No. 18000/MAT/9200 dated 04/04/1434 H regarding “freezing accounts”, which stipulates that freezing “is a term specific only to the temporary suspension of withdrawal only from the bank account/banking relationship due to the expiration of the validity period of the customer’s identity proof or the customer or the authorized person on the account not updating the personal data and information, addresses, sources of income, signature and other data...etc.”
Given that some banks freeze the accounts of charitable associations - whose period of operation has expired - both creditor and debtor (withdrawal and deposit), which deprives these associations of receiving donations as the main source of income, in addition to that some bank regulations cancel all deductions that are deposited in these accounts if they are closed for a specific period, which makes it difficult to return them again or renew them.
Therefore, we hope to abide by paragraph (21) referred to above and limit the freeze to the debit side only (withdrawal) from the accounts of charitable associations at the end of the term of work of their boards of directors and until the bank is provided with the decision to form the new board of directors or extend the previous board of directors, with the opening of deposits in these accounts by various means.
Speeding Up the Procedures for Opening Accounts for Hajj Affairs Offices (Formerly Hajj Missions) and Companies and Tourism Agencies Organizing Pilgrim Arrivals from Abroad
This section is currently available only in Arabic, please click here to read the Arabic version.Opening Accounts for Broadcast Offices from Outside the Kingdom
Referring to the letter of His Excellency the Undersecretary of the Ministry of Culture and Information for Media Affairs No. 6115 dated 23/03/1434 H, which includes the Ministry's issuance of licenses to the representative offices of satellite channels that broadcast from outside the Kingdom under an approved implementing regulation authorizing them to practice work in the Kingdom in the media, administrative and legal aspects, and do not require the channels representative offices to obtain a commercial register. His Excellency the Undersecretary's letter included that some licensed channel offices applied to a number of banks operating in the Kingdom to open current accounts and apologized due to the lack of commercial records with those channels, and requests that those wishing to channel licensed representative offices issued by the Ministry be enabled to open an account with any of the banks operating in the Kingdom.
I inform you that accounts can be opened for the representative offices of satellite channels in the Kingdom that broadcast from outside the Kingdom and have obtained licenses issued by the Ministry of Culture and Information, provided that the accounts of the offices are managed by Saudi persons residing in the Kingdom under a contract clarifying the status of the relationship and responsibilities or from expatriates residing under the sponsorship of the channel's office. The account shall be used to spend on the purposes and activities of the office only, and that it meets other criteria of know your customer, including the address of the office, means of communication, addresses of authorized persons, sources of income, the purpose of the account and the beneficial owner, in accordance with Rule No. (300-1-1) for licensed shops from the rules for opening and operating accounts in commercial banks.
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.Ensure Cooperation in Account Opening for Customers Needing to Benefit from Unemployment Program Named 'Hafiz'
Referring to the two SAMA's circulars No. MT/3574 dated 08/02/1433 H and No. 52243/MT/24833 dated 04/11/1432 H regarding the support of the national program "Hafiz" for the disbursement of the subsidy for job seekers by opening bank accounts for citizens for male and female wishing to apply for the program and providing them with the IBAN number of their accounts, and fully adhering to the rules for opening bank accounts and the general rules for operating them in banks operating in the Kingdom, and taking the necessary measures to meet the demand for opening accounts for the purpose referred to above, in particular providing human cadres capable of carrying out the required procedures and not delaying in that, and excluding these accounts from the requirement of the third paragraph of the thirteenth rule of section IV of the third amendment of the rules for opening and operating bank accounts, that the period preceding the closure of the account in the event that it is without balance is one year instead of ninety days. And provide all banking services with open arms.
I inform you that SAMA received the telegram of His Royal Highness the Governor of Jazan Region No. 838 dated 16/02/1433 H regarding the complaining of a large number of beneficiaries of the "Hafiz" program due to the failure of some banks to issue ATM cards on their accounts and giving them long appointments to obtain cards, which caused crowding of citizens in front of bank branches, especially women's ones. His Highness' desire to facilitate citizens' procedures and find urgent practical solutions to avoid these scenes.
I would like to inform you that SAMA stresses the need to abide by the provisions of the two circulars referred to above, and to work to activate the necessary procedures for implementation, and to provide the necessary capabilities to meet requests for opening accounts and other services required of the beneficiaries of the program, such as ATM cards and other services necessary to deal with accounts, and to provide all banking services with open arms. While emphasizing the importance of classifying the accounts of the beneficiaries of the "Hafiz" program in a separate classification of its own so that it can be followed up and limited in the future if needed. We hope to act on it and inform it to all concerned departments and branches. And report on what is being taken in this regard within a week from its date.
Emphasising the Need to Cooperate and Open Bank Accounts for those Wishing to Benefit from the Hafiz Programme
Further to SAMA Circular No. 52243/MT/24833 dated 04/11/1432 H referring to the controls of the "Hafiz" program, which includes urging cooperation to support the national program "Hafiz" for disbursing the subsidy for job seekers by opening bank accounts for citizens for male and female citizens wishing to apply for the program and providing them with the IBAN number of their accounts, and fully adhering to the rules for opening bank accounts and the general rules for operating them in banks operating in the Kingdom, and taking the necessary measures to meet the demand for opening accounts. For the purpose referred to above, in particular the provision of human cadres capable of carrying out the required procedures and not delaying in doing so, and excluding these accounts from the requirement of the third paragraph of the thirteenth rule of section IV of the third amendment of the rules for opening and operating bank accounts for "closing the account" that the period preceding the closure of the account in the event that it is without balance is one year instead of ninety days.
In view of SAMA receiving comments from the Emirates of the regions, and complaints from a large number of citizens stating that banks do not respond to applicants for opening accounts, delay opening accounts for them, give them appointments in months, and complain about the treatment of some employees with reviewers. SAMA stresses its commitment to the above-mentioned circular, activating the necessary procedures for its implementation, providing the necessary capabilities to face requests for opening accounts, and providing all banking services with open arms. SAMA hopes that Hafiz accounts will be classified in their own separate classification so that they can be monitored and limited in the future if necessary. We hope to act on it and inform it to all concerned departments and branches. And report on what is being taken in this regard within a week from its date.
Opening and Operating Bank Accounts
This section is currently available only in Arabic, please click here to read the Arabic version.Authorizing Expatriates to Manage the Accounts of the Companies Invested in Economic Cities
Further to SAMA Circular No. 37954/MTA/17890 dated 27/07/1431 H amending the section 3 from rule No. 4 from the third amendment from rules for opening and operating bank accounts related to the controls of authorizing a non-Saudi to operate the accounts of companies, factories, joint ventures, international trademark agencies and other similar establishments, so that the text after the amendment becomes as follows:
- Companies: Companies are allowed to authorize an expatriate worker under their sponsorship who resides in the Kingdom to manage their bank accounts, and it is not permitted to accept the authorization of an expatriate worker to manage the accounts of another company, whether it is a subsidiary or sister company.
- Factories and trademark agencies: They are treated as authorizing an expatriate worker under their sponsorship according to their legal status stated in the license/commercial register issued to them by the competent authority, so that licensed persons are treated as sole proprietorships according to the text of the second paragraph of the same fourth rule regarding establishments and businesses owned by a single Saudi individual, and licensed persons are treated as companies according to the text of the third paragraph above regarding companies.
Referring to the letter of His Excellency the Minister of Labor No. 1/1/2584/p dated 17/08/1432 H in response to the letter of SAMA No. 1833 /M D/ M A T dated 23/07/1432 H regarding the request of some companies investing within the economic cities to authorize the expatriate worker to sponsor the General Authority for Investment or the Economic Cities Cadre Company to manage their bank accounts, and his letter included that Article (39/1) of the Labor Law stipulated in the first paragraph that "it is not permissible - without following the legal rules and procedures - to leave the employer by applying the concept of violation, the exception contained in the text of the article referred to above allows the exclusion of workers who work for non-sponsors from the application of the text of that article when following the legal rules and procedures. Whereas the prevailing character, the established rule and the legal procedure for all licensed investment projects in the economic cities is that all expatriate workers to work in these investment projects be sponsored by the General Authority for Investment or the Economic Cities Cadre Company, based on the agreement "Mechanism for issuing visas for economic cities" signed by the Ministry of Labor, the General Investment Authority, the Economic Cities Authority, and the Economic Cities Cadre Company on 16/02/1432 H. His Excellency requested to inform the banks operating in the Kingdom to accept the authorization of expatriates to sponsor the General Investment Authority or the Economic Cities Cadre Company to manage the bank accounts of investing companies within the Economic Cities in accordance with the following controls:
1- Submit an official identification letter issued by the General Investment Authority or the Economic Cities Staff Company (according to the sponsorship of the expatriate employee required to be authorized on the account), certified by the Chamber of Commerce.
2- A copy of the employee's contract.
We hope to take note and act accordingly and communicate it to all concerned departments and branches, stressing that the above is limited to the accounts of investing companies or licensed investment projects in the economic cities included in the visa issuance mechanism agreement for economic cities only.
And report what is being taken.
Accepting the Notification Issued by the Civil Status to Renew the Validity of Some Categories of Customers' Ids
Referring to SAMA Circular No. BCI/103 dated 19/02/1429 H based on the letter of His Excellency the Undersecretary of the Ministry of Interior for Rights Affairs No. 1/5/3/27694 dated 12/02/1429 H regarding the requirements for opening and managing the accounts of "mentally disabled retirees, interdicted persons, patients who do not hold appropriate or invalid identities, and prisoners in serious cases", which includes that in the event that any of the above-mentioned categories cannot attend the civil status departments, their guardians may personally refer to the Director of the Status Department in the region or governorate in which he resides to investigate and decide on the case. In reference to SAMA's receipt of inquiries from some banks about the submission of legal representatives for some of their customers (sick, disabled, prisoners or interdicted) a notice issued by some civil status departments to renew the customer's national identity card and not to issue it due to the circumstances of the customer's inability to personalize the department, and they request to update the data of their agents' accounts with the bank that were previously frozen due to the expiration of the identity validity and its continued operation under those notices.
We inform you that SAMA has received a telegram from His Excellency the Undersecretary of the Ministry of Interior for Civil Status No. 23095 dated 06/05/1432 H stating the occasion of accepting the notice submitted by the legal representative or guardian of the bank customer after ensuring his safety, in addition to those Saudi citizens residing outside the Kingdom who are proven unable to attend.
To take note and act accordingly, and to ensure the integrity of the notice issued by the Civil Status Department, and to fulfill the legal power of attorney for account management, and the guardianship deed in the event that the applicant is the guardian of an incapacitated customer.
Amendment to Section 3 From Rule # 4 From the Third Amendment from Rules for Opening and Operating Bank Accounts
This section is currently available only in Arabic, please click here to read the Arabic version.Differentiating Between the Type of Commercial Licenses for Expats in the Kingdom
SAMA has received inquiries from some banks on how to differentiate between the commercial register that is issued in accordance with the foreign investment law contained in the requirements of Rule No. (300-1-4) and the commercial register that is issued to institutions and companies owned by resident foreigners who are authorized to practice business and are not covered by the foreign investment law contained in the requirements of rule No. (400-3) stipulated in the third amendment to the rules for opening and operating bank accounts under the circular No. 55777/BCI/777 dated 16/12/1430 H.
We inform you that SAMA has addressed the Ministry of Commerce about the inquiry referred to above, and SAMA has received the letter of His Excellency the General Director of the Commercial Register No. 19260 dated 30/10/1430 H stating that the commercial register of the institution or company licensed by the General Investment Authority in accordance with the Foreign Investment Law is stipulated in the activity field the phrase (under the license of the General Investment Authority), and this phrase does not exist other than this type of records.
Changing of the Name of Village Complexes to Municipalities
SAMA received the letter of His Excellency the Undersecretary of the Ministry of Finance for Financial Affairs and Accounts No. 94804 dated 05/11/1430 H in response to the letter of SAMA No. 826 /N/MAT dated 24/10/1430 H based on the letter of His Excellency the Undersecretary of Riyadh Region for Municipalities Affairs No. 18068 dated 11/09/1430 H attached to the copy of the decision of His Royal Highness the Minister of Municipal and Rural Affairs No. 5477 dated 28/07/1430 H referring to the law of municipalities and rural areas issued by Royal Decree No. (M/5) dated 21/02/1397 H, and the decision of the Ministers No. 214 dated 29/06/1430 H transforming village complexes into municipalities. It includes the approval of amending the names of all accounts for village complexes opened at the branches of SAMA and banks operating in the Kingdom to the new name (Municipality ...) instead of the name of the village complex.
Therefore, we hope to amend all the names of the accounts of the village complexes opened with you from the name (village complex .....) to (municipality of .....) and inform the customers of the accounts (secretariats of the regions) of the amendment.
To take note and act accordingly, and to report on what is taken.
Failure of Banks to Comply with Paragraph (11-1-2) of the Account Opening Rules
This section is currently available only in Arabic, please click here to read the Arabic version.Using Names That are in Passports Instead of Iqamas in Case there is a Difference
SAMA received a telegram from His Excellency the Minister of State for Foreign Affairs at the Ministry of Foreign Affairs No. 93/41085/1 dated 1/4/1430 H regarding the freezing of banks accounts of some embassy employees and asking them to amend the name in the identity card granted by the Protocol Department at the Ministry of Foreign Affairs to match the name in the passport, which includes the statement that due to the limited space allocated for writing the name in the card and the length of some names of mission employees, the full name cannot be written on the card, and in order to avoid repeated requests from banks to write the full name, His Excellency wishes that banks be satisfied with filling in the full name written on the passport.
Therefore, we would like to inform you that in the event that the full name is not written in the residence card issued by the Protocol Department at the Ministry of Foreign Affairs in accordance with what is written in the passport of customers who maintain accounts with banks or wish to open bank accounts, banks are allowed to write down the full name according to what is written in the passport, and keep a copy of it and the residence card certified by the bank in the customer's file and complete the rest of the other data of the required residence card in accordance with the rules for opening accounts and customers are not required to amend the name in the residence card granted by the Protocol Department at the Ministry of Foreign Affairs only.
Printed IBAN Account Formats
In order to achieve and maximize the benefits and advantages of IBAN and increase its usage, banks should improve and ease the readability of the IBAN when presented to customers. Lately, SAMA has noticed that some banks don’t present a readable IBAN structure when it’s provided to their customers through all customer correspondents’ channels such as statements, brochures, etc.
The document entitled "IBAN Standards in Saudi Arabia” sections 4 states that “in a printed format the IBAN structure shall remain, but the IBAN should be printed in groups of four characters and each group should be separated by a blank space or dashes.”
EXAMPLE
Printed IBAN: SA39 1500 0999 1031 4343 0001 Electronic IBAN: SA3915000999103143430001 Please make sure to adopt this practice when presenting IBAN accounts for your customers.
For more information, please visit SARIE documentation website for all related IBAN documents.
Updating the Data of Licensed Money Exchangers Operating in the Kingdom
This section is currently available only in Arabic, please click here to read the Arabic version.Renaming of ‘Saudi Red Crescent Society’ to its New Name ‘Saudi Red Crescent Authority’
SAMA received the telegram of His Excellency the Minister of Finance No. 1/10087 dated 26/12/1429 H based on the telegram of His Highness the President of the Prime Minister's Office No. 50476/B dated 25/12/1429 H attached to the Council of Ministers Resolution No. (371) dated 24/12/1429 H to change the name of the Saudi Red Crescent Society to become "Saudi Red Crescent Authority".
Therefore, we hope to take note of replacing the name of the Saudi Red Crescent Society with the name of the Saudi Red Crescent Authority, and to adopt this new name in all of its accounts opened with you, current and future.
Amending Section 3 From the Circular # 107 (MAT) Dated 23-2-1429, Related to Rules for Donating Halalas to Charity Organizations
This section is currently available only in Arabic, please click here to read the Arabic version.Allowing the Secretary General of the World Islamic Youth Symposium to Sign the Symposium's Accounts Instead of the Symposium President
This section is currently available only in Arabic, please click here to read the Arabic version.Updated Account Statistics
Rreferring to Rule No. (4) of Section II (Supervisory Rules) of the Rules for Opening Bank Accounts in Commercial Banks and the General Rules for their Operation notified to banks operating in the Kingdom under Circular No. 5555/BCI/95 dated 8/2/1428 H on "Updating Account Data". As well as reference to circular No. MAT/285 dated 29/10/1424 H regarding the evaluation of the updated accounts of bank customers according to the table attached hereto.
We hope to provide SAMA with the following:
Statistics of the updated accounts as at the end of September 2008 on a floppy disk according to the table in force attached to the circular of SAMA referred to above, within two weeks from its date. Provide SAMA with a semi-annual report that includes statistics of updated accounts as at the end of June and the end of December of each year, starting from 2009.
Maintain the extension of the time limit for freezing some of the non-updated government accounts that were identified pursuant to Circular No. 39604/MAT/604 dated 12/11/1426 H until you are informed of what action should be taken regarding them from time to time.
Open Accounts and Banking Services for Prisoners
SAMA received the letter of the Director of the Asir Prisons Department No. 9/2814/25 dated 5/7/1429 H stating that the banks of the region refuse to provide banking services to prison inmates in various governorates, violating the requirements of the instructions issued by SAMA to banks operating in the Kingdom, which stipulated that the main teller in the branch, customer services officer or a higher official be assigned to go to the security vehicle outside the branches headquarters, meet prisoners and enable them to conduct operations and services provided by banks, as branch employees are still requesting the prisoners’ personal information to the branch headquarters, despite the difficulty of bringing the prisoners down while handcuffed and taking turns among the reviewers, and the risks and security warnings that this entails.
Therefore, SAMA hopes to fully comply with Rule No. (200-1-1) of the Rules for Opening Bank Accounts in Commercial Banks and the General Rules for their Operation notified to banks operating in the Kingdom under Circular No. 5555/BCI/ 95 dated 8/2/1428 H regarding "Saudi Citizens / Prison Inmates", which stipulated the opening of accounts for prison inmates when they apply to banks accompanied by security guards affiliated with the General Administration of Prisons, and to obtain from the guards a letter from the prison administration in the city where the prison is located addressed to the branch clarifies the prisoner's name, ID number and desire to open the account, so that the main teller in the branch, customer services officer or any higher official is assigned to the security vehicle outside the branch headquarters, meeting the prisoner and completing the account opening procedures, indicating the presence of the prisoner customer in prison on the date of the account opening request and enabling the customer to conduct operations and services provided by the bank, which also stipulated that the prisoner is allowed to manage and operate his account with the same mechanism and procedures, and if the prisoner is a woman, the prison administration's letter is accepted as her identification if she does not present her personal status card or passport as her identity and allows and signs consent to be photographed.
To inform and notify all branches of this and to confirm full compliance with the provisions of the controls referred to above.
Allowing Charity Organization to Collect Donations
This section is currently available only in Arabic, please click here to read the Arabic version.Rules for Donating Change Money by Shoppers to Charity Organizations
This section is currently available only in Arabic, please click here to read the Arabic version.Approving the Use of National ID which is Issued from the Central Issuing Agency for IDs
Further to SAMA Circular No. 11482/MAT/133 dated 21/04/1425 H based on the letter of His Excellency the Minister of Finance No. 1/5623 dated 12/04/1425 H based on the Ministry of Interior Circular No. 562/C H dated 05/04/1425 H, referring to the start of issuing national identity cards and approving their acceptance along with the civil status card.
We inform you that SAMA received the letter of His Excellency the Minister of Finance No. 1/403 dated 14/01/1429 H, to which a copy of the Ministry of Interior supplementary telegram circular No. 271/C H dated 05/01/1429 H includes that within the framework of raising the level of identification documents issued by the Ministry of Interior to citizens and benefiting from technological means in designing and printing these documents and adding more security protection to them, the issuance of the (national identity card) has been started through the central printing system for personal documents, which allows the application of High security, as the citizen's data and photo are printed in black and white using laser engraving, and this card also contains the same data as the (current) national identity card, including the light strip on the back of the card, which contains a picture, name and number of the cardholder in a visible manner that cannot be modified, deleted or added to, and the back side also includes the smart chip that will be activated later to accommodate many applications that can relieve the citizen in the future to carry a number of other cards. The Ministry of Interior hopes to adopt the acceptance of the national identity card in its aforementioned form, while continuing to work with the current civil status documents until the issuance of instructions to stop working with them.
Therefore, we hope to take note and approve the acceptance of the (National Identity Card) in its aforementioned form as an identification document for citizens in cases where it has been stipulated to accept (Civil Status Card and National ID) as an identification document, in accordance with what was stated in the second amendment for opening and operating bank accounts in the Kingdom under Circular No. 5555 /BCI/95 dated 08/02/1428 H, while continuing to work with the current civil status documents until the issuance of instructions to stop working with them.
Account Opening Procedures for Tribes in ِAl Robe' El Khali
Further to SAMA Circular No. 5555/BCI/95 dated 8/2/1428 H for the second update of the rules for opening bank accounts in commercial banks and the general rules for their operation.
In reference to the contents of Rule No. 200-1-1 of Clause III in those Rules on the Accounts of Rub' al-Khali tribes which stipulates that they are allowed to open bank accounts in Saudi Riyals and foreign currencies in accordance with the following conditions:
- A copy of the permit issued to the individual from the Najran Region passports, including the name of the permit holder, his passport number, date, source, and the personal photo of the owner stamped with the official stamp. This statement is the basis for dealing.
- A copy of the Saudi passport.
- Linking the validity of the permit to the date of the Saudi passport when establishing and updating the account.
- Complete other personal data stipulated by the requirements of the rules of this manual.
- Matching the copies with the originals and signing the copies with matching and their validity by the customer and by the employee with comparison and matching.
We would like to note that SAMA received the telegram of His Royal Highness the Minister of Interior No. 97687 dated 9/11/1428 H addressed to His Royal Highness the Governor of Najran Region, and a copy to it to SAMA, stating that it approved the exemption of members of Rub' al-Khali tribes from the instructions and the acceptance of their Saudi passports as proof of identity for movement and work and to review the banks until the study of their situation is completed.
Accordingly, we inform you that it has been decided to amend the requirements for opening bank accounts for this category of customers to become the requirements of their rule referred to above as follows:
They are allowed to open bank accounts in Saudi Riyals and foreign currencies according to the following conditions:
- Obtain a copy of the Saudi passport, to be photographed by the bank employee.
- Approving the expiry date of the Saudi passport upon account establishment and subsequent updates.
- Complete other personal data stipulated by the requirements of the rules of this manual.
- Matching the images with the originals and signing the images with matching and their validity by the customer and by the employee by matching and matching.
To inform and notify all your branches to act accordingly.
Account Opening Procedures for Military Scholarships
This section is currently available only in Arabic, please click here to read the Arabic version.Procedures for Disbursing Funds from Charity Organizations
Further to SAMA Circulars No. 18721 / MAT / 227 dated 29/8/1424 H, and No. 12299 / MAFT/201 dated 28/3/1426 H, which include a request to open special accounts for beneficiaries of charitable organizations subsidies inside the Kingdom, and to issue an ATM card for each beneficiary for whom an account is opened, and not to require financial limits or a specific balance for those accounts.
Referring to the receipt of a number of complaints to SAMA by some charitable organizations and some beneficiaries of the associations' subsidies, including the failure of banks to respond to the opening of accounts for the beneficiaries of the subsidies of those associations as soon as required, SAMA stresses the importance of opening accounts without conditions, in the service of this segment of society. In addition to the importance of expanding banking culture among all segments of society.
In the interest of SAMA to address the difficulties faced by charities regarding the disbursement of subsidies to beneficiaries within the Kingdom and to facilitate matters to beneficiaries, and in a manner that ensures the achievement of the regulatory requirements related to customer knowledge and documentation of operations, SAMA considers that in the event that the rules contained in SAMA Circular No. 18721/MAT/227 dated 29/8/1424 H referred to above cannot be applied, one of the following disbursement mechanisms can be applied to beneficiaries of charitable organizations subsidies within the Kingdom:
- Cheques issued by charitable organizations should be cashed directly to the first beneficiary of the subsidy without the requirement to deposit them in the beneficiary's account, taking into account the regulatory requirements of knowing the customer.
- The bank coordinates with charitable organizations to develop a specific mechanism whereby the bank issues a special ATM card for each beneficiary, and it is replenished through those associations to these beneficiaries at the date of entitlement to the subsidy.
We hope to adopt the work according to it, with SAMA stressing the need to quickly correct any violations at any of your branches operating in the Kingdom, and to report on the action taken in this regard.
Private Charity Endowments
This section is currently available only in Arabic, please click here to read the Arabic version.Validating ID for Saudi Women Customers
SAMA received the letter of His Excellency the Minister of Finance and National Economy No. 1/4602 dated 5/4/1423 AH based on the circular of His Royal Highness the Acting Minister of Interior No. 56 / T H dated 28/3/1423 AH containing that the identity of Saudi women is proven through the documents mentioned in the circular and shown below:
- The family book in which she is registered belongs to her father or husband.
- Her national ID.
- Status card for women who request it, which has been issued through the women's sections of some civil status departments.
His Highness' circular also included an emphasis on departments and authorities dealing with women to work as follows:
- Women are dealt with by women.
- The woman's card shall not be photographed in any case, and only her number and source shall be recorded.
- In cases where the woman does not have a card, her identity is verified as is the case and through the approved documents (family book or national ID) or a certified copy of her civil registry.
Rules for Opening Accounts for Companies in Import-Export Region
SAMA received the letter of His Excellency the Minister of Finance and National Economy No. 1/10818 dated 2/9/1422 H in response to SAMA's letter No. 1953 dated 26/8/1422 H regarding allowing foreign companies licensed to deposit and re-export to open accounts in local banks in accordance with the following controls:
- Obtaining a lease contract in the deposit area from the Saudi Development and Re-export Company (the concessionaire for leasing in the deposit area) certified by the Chamber of Commerce and Industry and the port management.
- A valid commercial registration from the country of origin with a clear address of the company.
- Identification from a bank in the country of origin of the leasing company.
- The persons authorized to manage the accounts of the rented company must be either Saudi nationals or have valid residency.
- The lessee shall specify the purpose of opening the account in a letter addressed by him to the bank.
- The account shall be closed immediately upon the expiry of the lease period and the lessor shall be provided with evidence thereof.
Accordingly, SAMA hopes to abide by the above-mentioned controls when applying for the opening of accounts for these companies.
Rules for Handling Deposits of Individuals' Having Prior Criminal Record of Drug Dealing
SAMA received the letter of His Excellency the Minister of Finance and National Economy No. 1/3206 dated 12/3/1421 H attached to it a copy of the Council of Ministers Resolution No. (47) dated 18/2/1421 H informing of a copy of the letter of His Highness the President of the Prime Minister's Office No. 3824 / R dated 28/2/1421 H stating the following:
First: Deposit the seized amounts with the defendants in drug cases with commercial banks in the name of the directors of the anti-narcotics departments until judicial rulings are issued in their regard, in accordance with the procedures and conditions agreed upon between the Minister of Interior and the Minister of Finance and National Economy.
Second: Transfer the amounts referred to in item (first) and the value of objects for which judicial rulings are issued for confiscation in drug cases that are not considered in accordance with the customs law, to SAMA, to be deposited in a separate account from which to be disbursed on the needs of the General Directorate for Drug Control in accordance with the procedures and conditions set by the Ministry of Interior in agreement with the Ministry of Finance and National Economy and the General Audit Office.
Third: The provisions mentioned in item (second) above shall apply to the amounts and value of objects for which judicial rulings have been issued for confiscation in drug cases, deposited with commercial banks in the name of drug control departments before the effective date of this decision.
We hope to take the necessary action and act accordingly.
Open Current Accounts Without Stipulating a Minimum Amount
SAMA has noticed from inspection visits and client complaints that some banks refuse to open current accounts for less than a specific minimum and that they close current accounts that fall below a certain minimum.
Since the banking sector is considered one of the most important service sectors for various clients and beneficiaries; and since opening current accounts is considered one of the factors that assist in banking and investment development and participate in increasing the savings and income of citizens and facilitate their activities, and, at the same time, allow the banks to market their services and broaden their client base,
SAMA, therefore, calls on all banks to open current accounts without stipulating a minimum amount, and to maintain such accounts as long as they are active and not closed at the request of the client, without any consideration to the balance therein. Banks can only charge the bank fee of SR 15 every 6 months to current accounts that have a balance less than SR 1000. As for non-active accounts, they should be treated as per the instructions of Banking Control in this respect.
We wish to inform you that Saudi Central Bank shall take necessary action against any bank that violates such instructions in the future and shall send examiners to verify such violations.
Consolidation of your SAMA Accounts
In preparation for the implementation of the Electronic Funds Transfer system, agreement has been reached at the Bank Operations Officers Committee to implement the following:
- Close all your current accounts at the SAMA branches on Thursday 14 September 1995G. at the end of the workday. Banks will transfer all their balances to one account at the SAMA Head Office.
- Instruct your Regional Offices to reconsolidate your account with our SAMA Branches. All claims must be settled within 15 days of receiving your account statement. If no claims are brought forward, the balances will be final.
- All correspondence and instruction relating to your account at SAMA Head Office should be addressed to Government Accounts Department (Bank Account Section) starting from Saturday, 16 September 1995G.
- Provide Government Account Department, Bank Account Section at SAMA Head Office a list of authorized names at signatures of each your Regional Office specifying maximum amount that each Regional Offices can transact at each of the SAMA branches.
- Cash withdrawal transactions from your SAMA account must be by cheques drawn on your account at SAMA Head Office and within the authorized limit of your Regional Offices.
- All government revenues collected by your Banks and deposited at SAMA branches should be via cheques drawn on your consolidated account at SAMA Head Office. These cheques should be accompanied by a letter stating the type and revenue collecting government agency and beneficiary.
- All cash deposits at SAMA Branches will be credited to your consolidated account after inspection and count.
- All government cheques presented to the SAMA Branches will be cleared through the clearing house.
Please follow the above.
Requesting Confirmation from the Branches to Authenticate the Account Statements Received from SAMA's Branches
It has been noticed that some bank branches delay the certification of their accounts opened with SAMA branches for 2 or 3 months. This delay leads to another delay in reviewing the accounts and discovering errors, if any,
SAMA calls on you to certify account statements received from SAMA branches within 15 days from the date you receive them.
Cheques
Checks Holding Full Names Consisting of Only Two or Three Parts
In reference to some banks' inquiries regarding the disbursement of government checks issued with dual or triple names by the Ministry of Finance and government agencies.
We inform you that it has been agreed between the Ministry of Finance and SAMA, as of the beginning of the fiscal year 1435/1436 H, not to issue checks to order beneficiaries with dual, triple or followed names with phrases that make it difficult to determine the name of the beneficiary and direct the beneficiary to review the drawer, and accordingly we hope to take into account the following:
- Returning government checks issued to the order of beneficiaries with dual, triple or triple names or followed by phrases that make it difficult to determine the name of the beneficiary and directing the beneficiary to review the drawer to amend them.
- Cashing expatriate cheques if the name of the beneficiary in the cheque is identical to his identity, provided that the bank keeps a copy of that signed by the beneficiary.
Adherence to Updated Check Clearing House Instructions and Specifications
This section is currently available only in Arabic, please click here to read the Arabic version.Commitment to Accepting and Cashing New Issuances of Traveler’s Checks in Saudi Riyals
In confirmation of the previous circulars of SAMA which included a request to commit to accepting the cashing of Saudi Riyals traveler's checks issued by the Saudi traveler's Checks Company, we inform you that in support of the Saudi Riyal Traveler's Cheque, SAMA calls on all banks operating in the Kingdom and all licensed money changers to abide by the following:
- Cashing traveler's checks in Saudi riyals (old and new) as soon as they are presented by their holders, including pilgrims, Umrah performers, visitors and citizens, without any obstacles or imposing any commissions.
- Compensating the owners of shops, hotels and other service companies with the value of checks accepted by the company's customers immediately in exchange for their sales or services.
SAMA stresses the importance of compensating entities that accept traveler's checks in Saudi riyals immediately to enhance their credibility and encourage their acceptance, and SAMA hopes to inform all your branches of this circular to act accordingly, and to report what has been taken within ten days from its date.
Requesting All Required Information from the Withdrawer When a Slip for Dishonored Check is Presented
Referring to SAMA Circular No. MAT/796 dated 23/12/1429 H which provides for the new objection paper form that the branches of SAMA and banks operating in the Kingdom should work with, and the supplementary Circular No. MAT/5824 dated 06/03/1431 H regarding the emphasize to all Banks operating in the Kingdom the necessity of using the new form for slip of dishonored cheque.
We would like to note that SAMA has noticed that some bank branches and clearing centers do not provide all the information and data of the drawer that is required to be recorded on the objection paper before delivering it to the beneficiary, which has caused obstruction of justice when dealing with such cases.
Based on the above, SAMA would like to emphasize the need to direct concerned employees, when any of the cases mentioned in the objection paper occur, which prevent the cheque for being cashed, to write an objection paper to be delivered to the check holder immediately, including all the drawer's information and data of the drawer, and not to procrastinate for any reason whatsoever. Assigning the Audit Department to prepare a report on all objection papers issued by the clearing departments and branches starting from 1/1/1432 H until the end of the year, including an inventory of the objection papers issued, the number of papers that do not meet the data, information, corrective actions, and the penalties taken regarding violating employees, and providing SAMA with it no later than the end of March 2012.
Cases Where Amounts Mentioned on Cheques in Words and Numeric are Different
This section is currently available only in Arabic, please click here to read the Arabic version.Checks for Service Fees and Fines Issued by Banks to the Order of SAMA
In reference to bank checks issued by banks to the order of SAMA at the request of a citizen or resident in return for fees for some services or fines incurred by any of the government agencies, and since banks request the (Order: who requested the bank to issue the check) when requesting the return of the value of those checks in the event of loss or reversal of the service request to review SAMA to bring proof that they were not submitted for cashing, SAMA has studied the treatment of these checks in a manner that does not conflict with the instructions regulating them, and accordingly, we inform you that banks must address the above-mentioned issue as follows:
1- Return the value of the cheques issued to the order to SAMA/to the (Orderer) upon the request and present the original cheque. 2- Returning the value of the checks issued to the order of SAMA in the event of their loss to the (orderer) or issuing a replacement for them according to his request, after the expiry of the deadline for submission specified in the Commercial Papers Law (7) months, and that the (orderer) submits an objection paper in the payment of a lost check that includes that the bank has the right to cash the value of the check to the first beneficiary in the event that it is submitted for disbursement on the date of submission without refererring to the applicant for issuing the check, and taking a pledge from him that in the event of otherwise, he will be subject to what is stated in the text of the article No. (118) of the Commercial Papers Law. To take note and act accordingly within a month from its date, and to report on what has been taken.
Rules for Handling Cases Where Amounts Mentioned on Cheques in Words and Numeric are Different
This section is currently available only in Arabic, please click here to read the Arabic version.Supplementary Circular - The Cheque Shall Include the Place of Issue and the Name of the City in Which the Drawer Resides in Addition to his Name
This section is currently available only in Arabic, please click here to read the Arabic version.Circular for All Banks Operating in the Kingdom Regarding the Slip of Dishonored Cheque Form
Reference to SAMA Circular No. BCI/9 dated 7/01/1424H, attached with the Slip of Dishonored Cheque form for the certified cheque to be used.
We would like to inform you that SAMA has re-examined the terms of the Slip of Dishonored Cheque form that was communicated to the banks through the aforementioned circular. This was done in collaboration with the Banking Operations Committee, the Commercial Papers Committee, and the Legal Department of the Ministry of Commerce and Industry. As a result, some amendments have been made.
So, we attach a copy of the new form for Slip of Dishonored Cheque, that should be applied and used by the branches of SAMA and the operating banks in the Kingdom, which should be attached when returning the cheque to the clearing house or to the customer submitting the cheque, for each cheque individually. We would also like to point out that the responsibility of verifying the legitimacy of the cheques submitted to the banks, including the verification of valid legal authorizations, inheritance papers, guardianship and custody documents, identity verification documents, account registration documents, and preservation of such documents, lies entirely with the banks before submitting the cheques to the clearinghouse. The banks also bear the responsibility for any violations that may arise thereafter.
Therefore, we hope to adopt and implement it on your official documents starting from 01/01/1430H. and notify SAMA (Banking Inspection Department) with a copy of the actions taken.
Excluding Government and Semi-Government Entities from Providing the Declaration Specified in the Form of Objection to the Payment of a Check Lost by the Drawer
This section is currently available only in Arabic, please click here to read the Arabic version.Prohibiting Check Issuance for Government Revenue or Fines with Names of Individual
SAMA received a copy of the letter of His Excellency the Acting Undersecretary of the Ministry of Finance for Revenue Affairs No. 68388 dated 23/8/1429 H regarding the observation that customers issue bank checks representing revenues or fines to the state in the names or jobs of officials of government sectors, and this is contrary to the requirements of paragraph No. (6) of Chapter Two of the instructions for collecting and depositing revenues, which stipulated that bank checks shall be ordered by the Ministry of Finance to handle the head of the entity or his deputy.
Therefore, SAMA hopes that bank checks representing revenues or fines for the state will not be issued in the names or positions of government sector officials, as they should be issued to the Ministry of Finance to handle the head of the entity or his deputy.
To inform and notify all your branches to act accordingly.
Cashing Lost Cheques when Presented
Given that SAMA has noticed the multiplicity of complaints related to the grievance of customers (beneficiaries) against the refusal of banks (drawee) to cash personal checks due to the presence of instructions from customers (drawers) to stop the payment of these checks on the pretext of loss (missing) of those checks in exploitation of the relevant articles of the Commercial Papers Law, including Article No. (105) of the Commercial Papers Law, which states that "The drawee shall pay the check, even after the expiry of the period prescribed for presentment thereof. The drawer may not object to payment of the check prior to the expiry of the period prescribed for presentment thereof except if it is lost or its holder becomes bankrupt or incompetent" and that there is a need to issue instructions to limit this phenomenon.
Therefore, SAMA addressed the Ministry of Commerce and Industry under letter No. 1727 /MZ/M A T dated 20/11/1426 H regarding this matter and SAMA received the letter of His Excellency the Minister of Commerce and Industry No. 2561/11 dated 4/7/1427 H to the effect that His Excellency shares SAMA's opinion regarding this phenomenon and the exploitation of the text of Article No. (105) of the Commercial Papers Law, and that His Excellency agrees with SAMA in issuing instructions that limit the violations mentioned in those complaints.
Based on SAMA's keenness to enhance confidence in dealing with cheques as a tool to fulfill financial obligations in commercial transactions, to prevent manipulation of regulations and exploitation by fraudsters and bad faith, and to avoid the regulatory liability and penalties that may fall under the penalty of both the drawer and the bank (drawee) stipulated in Articles No. (108, 118 and 119) of the Commercial Papers Law.
We inform you that the cases in which the cheque is considered lost referred to as lost in the text of Article (105) of the Commercial Papers Law are the following cases:
1) If the personal cheque is lost from the drawer before he delivers it to the beneficiary.
2) If the banker cheque is lost from the person issuing it before it is delivered to the beneficiary.
3) If the cheque, whether personal or banker, is lost from the beneficiary before cashing it from the bank.
In order to achieve the positive application of the above-mentioned article, the bank shall, in the event that the customer who draws the cheque submits to him to report the loss of a cheque that he had previously written to one of the beneficiaries, the bank shall ask him to issue an objection paper in payment of the lost cheque that includes the cheque number, date, amount, name of the beneficiary and the circumstances surrounding its loss, and an acknowledgment that once the bank finds that the cheque is in the possession of the first beneficiary and not an appearance of others, and presents it to the bank for disbursement on the date of its submission, and the bank ensures that it is complete. The formal conditions of the cheque, the validity of the drawer's signature, and the availability of the value of the cheque in the account of the customer (drawer), the value of the cheque will be paid to the beneficiary directly without reference to the drawer, and that the objection paper shall include a reminder of the drawer of what is stated in the text of Article No. 118 of the Commercial Papers Law, and a sample of an objection paper shall be attached in the payment of the check.
To review and act accordingly and apply the objection paper form in the payment of the lost cheque by the drawer, noting that SAMA will study and address similar complaints received and take the necessary corrective measures in this regard.
The Indication of the Place Where the Check Was Issued the City in Which the Drawer Resides
SAMA has noticed that the checks issued by banks to their clients do not include the place of issuance, nor do they reference the address next to the name of the drawer.
Since the place of issuance of a check is one of the mandatory details stipulated in Article 91 of the Commercial Papers Law, and since Article 92 of the same law states that a check devoid of the mandatory details mentioned in the previous article is not considered a check except in two cases, one of which is if the check lacks the place of issuance, it is deemed to have been issued at the location specified next to the drawer.
Therefore, in the absence of the place of issuance, a check may lose its value as a commercial instrument, leading to potential damages. SAMA hopes that this will be considered when issuing new checkbooks for your clients, ensuring that the name of the city where the bank client resides is added alongside their name on the check.
The New Model for Objection slip on cheque Form - 2003
Based on the proposal submitted by SAMA branch in Riyadh to change the current Objection slip on cheque form, which is outdated and no longer serves its purpose, a task force was formed from the SAMA and some local banks. This team concluded that a new unified form should be prepared for use by both the banks and SAMA branches, taking into account the technological and procedural developments in banking.
We have attached a copy of the new Objection slip on cheque form, which should now be used by SAMA branches and banks operating in the Kingdom. It must be included when returning a cheque to the clearinghouse or to the client who submitted the cheque, for each cheque individually. We hope that it will be approved for implementation in your documents one month from its date. We would also like to emphasize that the responsibility for verifying the legality of cheques presented to banks—including the validity of powers of attorney, inheritance certificates, guardianship documents, and identity verification documents for the relevant account—lies entirely with the banks prior to submitting the cheques to the clearinghouse. Additionally, the banks are responsible for any violations that may arise thereafter.
Cheques Containing "handling" Statement
Referring to the banks' inquiry on this subject, we inform you that the check drawn by one of the assigning bodies to the order of the contracting contractor and in which the phrase "handling such and such a bank" is mentioned after the contractor's name shall be subject to the provisions of a specially crossed check with a special underline and shall have the same effects, and such a check may be circulated by endorsement whenever it is a check to the order, and in accordance with the directives of the Ministry of Finance and National Economy in its letter No. 611/2/ H dated 3/4/1492 H, the mention of the word "handling" or "by" in the check means that the authorized person to receive the check's amount is the name that appears after one of the two words.
SAMA sees no justification for reversing the "handling" formula, which may appear in cheques that represent ceded receivables to banks, because that formula is sufficient to preserve the rights of banks, and because custom has been settled on it, and it is a custom that does not violate the law.
To take note, adopt and act accordingly.
Acceptance of E-signature on Payroll Cheques
SAMA received the letter of His Excellency the President of the General Audit Bureau No. 1/1 /O dated 1/1/1417 H attached to the letter of His Excellency the Minister of Finance and National Economy No. 12/12535 dated 27/10/1416 H regarding the approval of His Excellency to SAMA to baptize banks that pay the salaries of state employees by accepting E-signatures on payroll checks for entities that wish to apply this method, provided that they are stamped by the financial affairs in those government departments.
Whereas the NAO requested to be provided with a statement of the names of the entities for which SAMA has approved the automatic copies of payroll cheque signatures and future approvals.
Therefore, we hope that your specialists will provide us with the names of the entities that implement automatic printing of signatures on checks, and this is urgent for importance.
Non-Objection of the Central Bank to Accepting Electronic Copies of Signatures on Salary Checks from Authorized Signatories for Government Entities
SAMA has received the letter of HE the Minister of Finance & National Economy No. 12/12535 dated 27-10-1416, to the effect that HE has approved the acceptance of electronic signature on salary checks issued by government agencies that desire to use this method, provided checks are stamped by the competent Financial Affairs Department and under its own responsibility, until the committee which is studying the electronic deposit of salaries is through with its research on the subject and is out with a definite decision to be communicated to all concerned parties.
Please inform your people in charge that electronic signatures on salary checks by government agencies that wish to use this method are acceptable, once stamped by the competent financial department under its own responsibility.
Follow-up Circular - Non-Objection to the Printing of Magnetized Checks Specific to the Unified Account of Each Bank
Further to SAMA circular No. 6497/BCL/254, dated 21/5/1416 H., regarding its non-objection to the printing of magnetized checks related to the consolidated account of each bank, if the bank so desires, provided SAMA’s prior consent on the check sample must be obtained before printing, and provided further that the use of such checks must be limited to your withdrawals from and payments to Saudi Central Bank and other government departments and agencies.
We attach herewith a sample of the check to be used for the above-mentioned purposes. We wish to inform you that the approval of the sample by Saudi Central Bank must be obtained before printing.
For your info and acting accordingly.
Non-Compliance by Some Banks with the Saudi Central Bank's Instructions Requiring a Handwritten Signature for Cashing Checks
SAMA was informed that some local bank branches are cashing the salaries of some government employees through checks that carry the seal of the government agency but not signed by hand.
Since this action is in violation of our circular No. 12655/BC/633 dated 21-10-1415 H. which states in the 4th paragraph that 'commercial banks ought not to accept any check that carries a single signature or seal and is not signed by hand', Saudi Central Bank would like you to comply with this circular and notify all your branches to act accordingly.
Non-Objection to the Printing of Magnetized Checks Specific to your Unified Account
Re SAMA circular sent to you on 27/3/1416 H, regarding the consolidation of your current accounts with SAMA in one single account with the head office; and whereas paragraphs (5) and (6) of said circular provided that your cash withdrawals and deposits of collected government revenues should be handled through checks drawn on the consolidated account.
We wish to inform you that SAMA has no objection that you print magnetized checks for your consolidated account, if you so desire, provided prior approval by SAMA is obtained and the use of such checks is limited to your withdrawals from and payments to SAMA and government agencies.
Please be informed and act accordingly.
List of Banking Transaction Codes
Re statistical reports on clearing sent by SAMA branches to the head office, it was noted that a large number of banker checks are recorded and coded as personal checks, thus effecting the accuracy of such reports.
You are required to remind those in charge of such reports that banker checks must carry the figure (08) in the operation code space which represents:
- Checks drawn by local banks on Saudi Central bank branches
- Checks withdrawn by/at Saudi Central bank's Head Office by/on Saudi Central bank branches.
- Checks drawn by a Saudi Central bank branch on another Saudi Central bank branch
- Checks drawn by local banks on their branches.
We hereby attach a list of banking operating codes allowed to be coded in said space in accordance with the relevant method, hoping you comply therewith.
Type of Operation
Code
Ordinary Check
Ordinary Check
Ordinary Check
Back package method Returned check
Certified check
Bankers check
Travelers check
Front package method
Uncoded blank space
Zero
1
2
5
7
8
9
12
Approval for the Endorsement of Salary Checks for Women Employed by the General Presidency for Girls Education
Further to our circular No. BC/183 dated 20-7-1405H, regarding the use of checks in paying civil servants salaries through local banks and article (6) thereof which describes such checks as 'non-endorsable except to banks', and
Whereas the majority of beneficiaries of checks issued by the General Presidency of Girls Education are women and their cashing methods are different from those of men.
HE the Minister of Finance & National Economy has agreed, in his letter No. 13/1889 dated 11-3-1411 H to HE the President of the General Presidency (with a copy to Saudi Central Bank) that salary checks of women and Presidency Female Staff may be endorsable as an exception to the rule.
Hence a female beneficiary of such check may cash the check at the drawee bank by presenting her ID, such as passport, or deposit the check for account at the bank. She may also endorse the check on its back to another person who may either cash it at the drawee bank or deposit it thereat in his A/c. It is preferable that the endorsement be as follows: 'To the order of, name of beneficiary and signature, subject to article (6) above-mentioned circular to the effect that checks must be cashed within one month from the date of issuance.
Not Accepting Expatriates' Drafts or Issuing Checks to them Unless their Iqamas are Valied
SAMA wishes to confirm its previous circulars regarding not accepting expatriates' drafts or issuing checks to them unless their Iqamas are valid and sufficient information on them is taken. You are also required to notify the closest criminal investigation office or police department, via the most expedient means, about any request to transfer money abroad if it looks abnormal or suspicious, before the transfer is made, so that necessary action is taken in this regard.
Please stress on your branches in the Kingdom to comply with these instructions and acknowledge receipt.
The Objection Form that Should be Attached when Returning a Check to the Clearinghouse or to the Client who Submitted the Check
SAMA has received the letter of HE the Minister of Finance & National Economy No. 3/5153, dated 2/6/1406H, based on the letter of HE the Minister of Commerce No. 426/11, dated 26/2/1406H, requesting HE to instruct banks operating in the Kingdom of the following:
- Reasons for rejecting the cashing of a check should be stated clearly instead of just saying, "contact the drawer". The term in the rejection slip must be amended to read "contact the drawer as no balance is available" or "contact the drawer as no sufficient balance is available", as the case may be.
- Checks of individual establishments which have an account with the bank must include the name of the establishment owner together with the name of the establishment.
Enclosed is a copy of the rejection slip that should be attached to the rejected check when returned to the clearing house or to the client who presented the check, to act accordingly as of this date. Please acknowledge receipt and inform all your branches to comply with these instructions.
Use of Saudi Traveler Checks
In our desire to serve and develop Saudi economy and to encourage the Saudi Traveler Checks Co, being a national Company established with the approval of Saudi Central Bank and under its supervision for the purpose of issuing Saudi traveler checks, and in view of the fact that the checks issued thereby render large services and facilities to citizens, residents, travelers and pilgrims, Saudi Central bank, therefore, urges you to participate in encouraging the use of traveler checks in SR by observing the following:
1) Cashing the value of Saudi Travelers checks upon presentation to you or accepting them as deposits at the bank with value date upon presentation and not upon collection. 2) Reimbursing small shop owners, commercial firms and hotels immediately for the value of Saudi Traveler checks presented by them after having accepted these checks against certain sales or services, even if they did not have current accounts with you. 3) Facilitating the cashing of such checks by applying normal banking procedures followed in cashing traveler checks without asking the party presenting the check to fill out forms or applications. Please communicate same to all your branches to act accordingly.
Loss of Ministerial Checks
The Ministry of Finance & National Economy has requested in its letter No. 8850/190 dated 19/5/1405 H to be contacted in case of the loss of checks drawn by the Ministry.
Consequently, we call on you to send directly to the Ministry of Finance and National Economy your claims in connection with the circular related to the non-cashing of lost ministerial checks. The Ministry of Finance & National Economy shall in return, notify the Directorate General of Banking Control at Saudi Central Bank’s head office to circulate same, taking into consideration our clear instructions in our circular No. 9013/BC/114 dated 12/6/1402 H regarding lost checks.
Information that Must be Included in Letters Regarding the Loss of Checks
SAMA is receiving letters from some banks operating in the Kingdom and SAMA branches regarding the loss of checks. It is noticed that some of these letters do not contain all the data that may assist SAMA to circulate the loss of checks to all banks and SAMA branches.
We hope to receive your claims connected with the loss of checks containing the following data: check number, date and amount, the names of the drawer, drawee and beneficiary.
Warning Against the Use of Ball-point Pens
It has been noticed that ball-point pens produced by Papermit Company under the brand name 'Replay', along with possibly forged copies thereof, are available in the Kingdom. One of the features of such pens is that their ink can be easily erased with a simple rubber eraser.
Hence, we call on all banks to warn their clients against the use of such pens in writing checks so that the check may not be amended and forged after its issuance. The bank should post the warning at its premises. We further suggest that the word 'warning' be printed on the internal cover page of the check book.
Lost Checks
Saudi Central Bank has noticed the delay of some banks in answering its circulars regarding lost checks for several months. This delay causes several problems for beneficiaries and hurts their commercial dealings. For this reason, Saudi Central Bank started studying this subject to facilitate previous procedures and shift responsibility to the drawer and drawee of the lost check. To apply this approach, Saudi Central Bank hopes that you follow the following procedures:
I. Re Government Checks:
- Checks issued by the Ministry of Finance & National Economy in SR or foreign currencies
- Checks of the Retirement Salaries Authority in SR
- Checks of Government departments and agencies and public institutions in SR drawn on their accounts with Saudi Central Bank branches.
- Internal credit drafts drawn on Saudi Central Bank branches
- Checks drawn by Saudi Central Bank head office or Saudi Central Bank branches in SR and checks drawn by Saudi Central Bank branches on the head office or on other branches.
- Checks drawn by Saudi Central Bank head office and branches in SR on commercial banks.
Checks drawn by Saudi Central Bank head office and Riyadh branch in foreign currencies on their correspondents abroad.
With regard to all these checks drawer should notify drawee of the loss of the check requesting suspension of payment. Drawee has to suspend cashing the check immediately unless it had been already cashed. Meanwhile. Saudi Central Bank’s Banking Control will notify all branches and general managements of local banks to act accordingly.
To avoid the disruption of the interests of the lost check
owner, drawer has to issue another check, one month after the date of Saudi Central BankA’s circular regarding the lost check, after taking necessary commitments from the beneficiary or drawer or the party that lost the check or the party that requested the issuance of a new check, as the case may be, to return the lost check if and when found or to refund its value if it had been cashed in any manner.
Regarding checks drawn by Saudi Central Bank head office or Riyadh branch on foreign correspondents in foreign currencies, Saudi Central Bank's branch in Riyadh or the Draft Department at the head office shall order the foreign drawee correspondent by telex to suspend cashing the check, after making sure that, according to its records and the statements received from the correspondent up to the date of suspending cashing, the check has not yet been cashed. It should then inform Banking Control to notify all Saudi Central Bank branches and local banks general managements by circular of the lost check. The Draft Department and the Riyadh branch shall issue a new check after one month from the date of notifying the drawee.
II. Banker Checks:
- Checks drawn by local banks on Saudi Central Bank head office and branches.
- Checks drawn by local banks on their branches or on other local banks.
- Checks drawn by local banks in foreign currencies on their correspondents abroad.
- Checks drawn by foreign correspondents on local banks in foreign currencies
Checks drawn by foreign correspondents in different currencies on Saudi Central Bank's head office and Riyadh branch.
For all these checks drawer must notify drawee, inside or outside the Kingdom, to stop cashing the lost check, circulate same to all bank branches inside the Kingdom and notify Saudi Central Bank (Banking Control), with regard to item (1) II to notify its branches accordingly.
Drawee of the lost check, in connection with (4) and (5) II above, shall notify drawer of the lost check, upon receiving the news, that it has ordered the cashing of the check to be stopped after making sure that this has been actually done.
In order to avoid the disruption of the beneficiary
interests, drawer of the lost check must issue another check one month after the date of notifying drawee, and take necessary commitments from the beneficiary or any other party, as the case may be, to return the check if and when found or to refund its value if it had been cashed in any manner.
III . Individual and Corporate Checks Drawn on Local Banks:
Checks drawn by individuals or corporations in local or foreign currencies on local banks:
Beneficiary must contact drawer to notify drawee to order the holding up of cashing the lost check. After receiving a written confirmation from drawee, within one month at the latest from the date of being notified of the loss of the check, to the effect that the holding of the check has been notified to all its branches in the Kingdom, drawer must issue another check and take necessary commitments from beneficiary that the check will be returned if and when found or its value will be refunded if it had been cashed in any manner.
IV. Saudi Central Bank branches and all banks operating in the Kingdom shall keep a special register of lost checks, with a separate section for each type of checks, wherein the number, date and amount of the check and the name of the beneficiary shall be recorded for review before authorizing payment.
We urge compliance with the foregoing, noting that this circular applies to all Saudi Central Bank circulars previously issued in this respect. We further hope that banks will, in turn, circulate their instructions to all their branches by telex or cable. We also hope that Saudi Central Bank branches and banks will implement what is required from each one of them and acknowledge receipt.
Banks Withdrawing Checks Payable to their Individual and Corporate Clients from their Accounts with the Branches of the Saudi Central Bank
It was lately noticed that banks have started to draw on their accounts with SAMA branches by checks to the order of their individual and corporate clients. This is a violation to the concepts of dealing between banks and SAMA, in addition to wasting a good deal of SAMA's time on very minor operations outside its activities.
SAMA, therefore, requests the banks to observe the following rules:
1.The withdrawals of banks that have current accounts with SAMA branches should be limited to:
(a) Feeding their cash balances when necessary with amounts not less than SR 5,000,000.
(b) Settling their obligations toward their branches or other local banks provided such checks shall be drawn directly on SAMA's relevant branches to be settled outside the clearing house.
(c) Settling their obligations toward government agencies.
(d) Transferring funds in favor of the bank branches in other regions of the Kingdom.
(e) Payment of clearing balances as per article 23 of the Clearing House Law communicated to you via circular No. 667/32/96, dated 28/1/1387 H.
(f) If a bank cashes a check drawn at a SAMA branch in a city other than that of the bank, it has to send the check for collection to the bank branch where the SAMA branch on which the check is drawn, is located. Such check will not be accepted by the clearing house in any city other than that in which the SAMA branch, on which the check is drawn, is located.
2. No check may be drawn on SAMA by a bank branch that has no current account with SAMA branches.
3. Banks that have branches in the Kingdom must draw their checks on such branches, pursuant to article (96) of the Commercial Papers Law, subject to item (1) above.
4. Banks that have no branches in the Kingdom may exceptionally draw checks on SAMA branches only to pay their obligations.
5. Drawing of checks by the head office of the bank on accounts with SAMA's head office in Riyadh should be limited to covering foreign currency purchases, pursuant to previous SAMA instructions sent to you by cable.
Please be informed and instruct your branches in the Kingdom to act accordingly.
Not to Print any Person's Name Without Referring First to their National ID Document
Reference to SAMA Circulars No. BC/204 dated 16/4/1398 H, No. BC/35 dated 26/1/1399 H and No. BC/52 dated 19/3/1400 H, regarding the careful examination of checks before cashing and the need of taking all personal information about bank clients to be available to the authorities if and when needed, and the safe keeping of the bank stamps and documents.
SAMA has received the letter of HE the Minister of Finance & National Economy No. 306/S/400 dated 13/5/1400 H requesting that banks be instructed not to print the name of any person on the check before examining his ID to avoid any form of cheating and embezzlement.
Hence, SAMA requests you to comply with these instructions, to advice your branches accordingly and acknowledge receipt.
The Delay of Some Banks in Responding to Letters and Circulars Issued by the SAudi Central Bank Regarding Lost Checks and Freezes on Individual Accounts
SAMA has noticed that some banks delay their answer to SAMA letters and circulars regarding lost checks and attachment of individual balances. Since this delay is causing damage to the interest of the concerned parties, the public interest requires the banks to adopt the necessary measures that guarantee their commitment to send their answers, and that of their branches, to SAMA within 2 weeks from receiving such circulars.
All banks are requested to adopt speedy arrangements in this regard to serve the public interest.
FATF
Procedures for Dealing with the Weak Parties in the Field of Combating AML&CTF
This section is currently available only in Arabic, please click here to read the Arabic version.FATF Statement from the Meeting in Paris Dated 27-06-2014
FATF Public Statement - 27 June 2014
Paris, 27 June 2014 - The Financial Action Task Force (FATF) is the global standard setting body for anti-money laundering and combating the financing of terrorism (AML/CFT). In order to protect the international financial system from money laundering and financing of terrorism (ML/FT) risks and to encourage greater compliance with the AML/CFT standards, the FATF identified jurisdictions that have strategic deficiencies and works with them to address those deficiencies that pose a risk to the international financial system,
Jurisdictions subject to a FATF call on its members and other Jurisdictions to apply counter-measures to protect the International financial system from the on-going and substantial money laundering and terrorist financing (ML/FT) risks emanating from the Jurisdictions. Iran
Democratic People's Republic of Korea (DPRK)
Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies. The FATF calls on its members to consider the risks arising from the deficiencies associated with each Jurisdiction, as described below. Algeria
Ecuador
Indonesia
Myanmar
Ethiopia, Pakistan, Syria, Turkey and Yemen are now identified in the FATF document, "Improving Global AML/CFT Compliance: On-going Process" due to their progress in substantially addressing their action plan agreed upon with the FATF.
Iran
The FATF remains particularly and exceptionally concerned about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system, despite Iran’s previous engagement with the FATF and recent submission of information.
The FATF reaffirms its call on members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with Iran, including Iranian companies and financial institutions. In addition to enhanced scrutiny, the FATF reaffirms its 25 February 2009 call on its members and urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from Iran. The
FATF continues to urge jurisdictions to protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices and to take into account ML/FT risks when considering requests by Iranian financial institutions to open branches and subsidiaries in their jurisdiction. Due to the continuing terrorist financing threat emanating from Iran, jurisdictions should consider the steps already taken and possible additional safeguards or strengthen existing ones.
The FATF urges Iran to immediately and meaningfully address its AML/CFT deficiencies, in particular by criminalising terrorist financing and effectively implementing suspicious transaction reporting (STR) requirements. If Iran fails to take concrete steps to continue to improve its CFT regime, the FATF will consider calling on its members and urging all jurisdictions to strengthen counter-measures in October 2014.
Democratic People’s Republic of Korea (DPRK)
Since February 2014, the DPRK has engaged directly with the FATF to discuss its AML/CFT deficiencies. The FATF urges the DPRK to continue its cooperation with the FATF to come to an understanding on its AML/CFT deficiencies as a basis for an agreed action plan.
The FATF remains concerned by the DPRK’s failure to address the significant deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threat this poses to the integrity of the international financial system. The FATF urges the DPRK to immediately and meaningfully address its AML/CFT deficiencies.
The FATF reaffirms its 25 February 2011 call on its members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with the DPRK, including DPRK companies and financial institutions. In addition to enhanced scrutiny, the FATF further calls on its members and urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from the DPRK. Jurisdictions should also protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices, and take into account ML/FT risks when considering requests by DPRK financial institutions to open branches and subsidiaries in their jurisdiction.
Algeria
Algeria has taken steps towards improving its AML/CFT regime, including by bringing into force amendments to its Penal Code to expand the scope of terrorist acts criminalised. However, despite Algeria’s high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies, Algeria has not made sufficient progress in implementing its action plan within the established timelines, and certain strategic deficiencies remain. Algeria should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets and (3) adopting customer due diligence obligations in compliance with the FATF Standards. The FATF encourages Algeria to address its deficiencies and continue the process of implementing its action plan.
Ecuador
Ecuador has taken steps towards improving its AML/CFT regime, including by enacting a new criminal code, which includes provisions adequately criminalising money laundering and terrorist financing. However, despite Ecuador’s high-level political commitment to the FATF and GAFISUD to address its strategic AML/CFT deficiencies, Ecuador has not made sufficient progress in implementing its action plan, and certain strategic deficiencies remain. Ecuador should continue to work on implementing its action plan to address these deficiencies, including by (1) establishing and implementing adequate procedures to identify and freeze terrorist assets and (2) clarifying procedures for the confiscation of funds related to ML. Ecuador should also continue enhancing financial sector supervision. The FATF encourages Ecuador to address its remaining deficiencies and continue the process of implementing its action plan.
Indonesia
Indonesia has taken steps towards improving its AML/CFT regime including by developing Indonesia’s terrorist asset-freezing regime. However, despite Indonesia’s high-level political commitment to work with the FATF and APG to address its strategic CFT deficiencies, Indonesia has not made sufficient progress in implementing its action plan within the agreed timelines, and certain key CFT deficiencies remain regarding the development and implementation of an adequate legal framework and procedures for identifying and freezing of terrorist assets. The FATF encourages Indonesia to address its remaining deficiencies in compliance with FATF standards by fully implementing UNSCR 1267 and clarifying the legal framework and procedures for freezing terrorist assets.
Myanmar
Myanmar has taken steps towards improving its AML/CFT regime, including by enacting a new AML and CT Law. However, despite Myanmar’s high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Myanmar has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Myanmar should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) further strengthening the extradition framework in relation to terrorist financing; (4) ensuring a fully operational and effectively functioning financial intelligence unit; (5) enhancing financial transparency; and (6) strengthening customer due diligence measures. The FATF encourages Myanmar to address the remaining deficiencies and continue the process of implementing its action plan.
Improving Global AML/CFT Compliance: on-going process - 27 June 2014
Paris, 27 June 2014 - As part of its on-going review of compliance with the AML/CFT standards, the FATF has to date identified the following jurisdictions which have strategic AML/CFT deficiencies for which they have developed an action plan with the FATF. While the situations differ among each jurisdiction, each jurisdiction has provided a written high-level political commitment to address the identified deficiencies. The FATF welcomes these commitments.
A large number of jurisdictions have not yet been reviewed by the FATF. The FATF continues to identify additional jurisdictions, on an on-going basis, that pose a risk to the international financial system.
The FATF and the FATF-style regional bodies (FSRBs) will continue to work with the jurisdictions noted below and to report on the progress made in addressing the identified deficiencies. The FATF calls on these jurisdictions to complete the implementation of action plans expeditiously and within the proposed timeframes. The FATF will closely monitor the implementation of these action plans and encourages its members to consider the information presented below.
Afghanistan Kuwait Sudan Albania Lao PDR Syria Angola Namibia Tajikistan Argentina Nicaragua Turkey Cambodia Pakistan Uganda Cuba Panama Yemen Ethiopia Papua New Guinea Zimbabwe Iraq Jurisdictions no longer subject to the FATF’s on-going global AML/CFT compliance process
Kenya Mongolia Tanzania
Kyrgyzstan Nepal
Afghanistan
In June 2012, Afghanistan made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since then, Afghanistan has taken steps towards improving its AML/CFT regime, including by passing new AML and CFT laws in June 2014. While the AML law has been enacted, the FATF has not yet assessed it due to its very recent nature. In addition, it is not clear whether the CFT law is in force, and Afghanistan has not issued the necessary CFT regulations. If Afghanistan does not bring into force CFT legislation and issue the necessary regulations compliant with the international standards by the October 2014 FATF meetings, the FATF will call upon its members and other jurisdictions to consider the ML/TF risks arising from the deficiencies in Afghanistan. Afghanistan should continue to work on implementing its action plan to address its strategic AML/CFT deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (3) implementing an adequate AML/CFT supervisory and oversight programme for all financial sectors; (4) establishing and implementing adequate procedures for the confiscation of assets related to money laundering; (5) establishing a fully operational and effectively functioning Financial Intelligence Unit; and (6) establishing and implementing effective controls for cross-border cash transactions. The FATF urges Afghanistan to address its deficiencies and bring into force the necessary CFT legislation and regulations immediately.
Albania
In June 2012, Albania made a high-level political commitment to work with the FATF and MONEYVAL to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Albania should continue to work on implementing its action plan to address these deficiencies, including by: (1) addressing the remaining issues in its terrorist asset-freezing regime; and (2) enhancing the framework for international co-operation related to terrorist financing. The FATF encourages Albania to address its remaining deficiencies and continue the process of implementing its action plan.
Angola
In June 2010 and again in February 2013 in view of its revised action plan, Angola made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. Since February 2014, Angola has taken steps towards improving its AML/CFT regime, including by bringing into force legislation for the freezing and seizing of assets related to money laundering. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Angola should continue to work on implementing its action plan to address these deficiencies, including by: (1) addressing the remaining issues regarding criminalisation of money laundering; (2) ensuring it has an adequate legal framework for the confiscation of funds related to money laundering; (3) implementing an adequate supervisory framework; and (4) ensuring that appropriate laws and procedures are in place to provide mutual legal assistance. The FATF encourages Angola to address its remaining deficiencies and continue the process of implementing its action plan.
Argentina
Since June 2011, when Argentina made a high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies, Argentina has made significant progress to improve its AML/CFT regime. Argentina has substantially addressed its action plan, including by: adequately criminalising money laundering and terrorist financing; establishing procedures to identify and freeze terrorist assets, enhancing procedures for the confiscation of funds related to money laundering; ensuring a fully operational and effectively functioning financial intelligence unit and enhancing suspicious transaction reporting requirements; establishing customer due diligence requirements; and enhancing financial sector supervision. The FATF will conduct an onsite visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Cambodia
Since June 2011, when Cambodia made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Cambodia has made significant progress to improve its AML/CFT regime. Cambodia has substantially addressed its action plan, including by: adequately criminalising money laundering and terrorist financing; establishing procedures to identify and freeze terrorist assets; establishing procedures for the confiscation of funds related to money laundering; ensuring a fully operational and effectively functioning financial intelligence unit; and establishing effective controls for cross-border cash transactions. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Cuba
Since February 2013, when Cuba made a high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies, Cuba has made significant progress to improve its AML/CFT regime, Cuba has substantially addressed its action plan, including by: becoming a member of GAFISUD; adequately criminalising money laundering and terrorist financing; establishing procedures to identify and freeze terrorist assets; establishing adequate customer due diligence requirements; ensuring a fully operational and effectively functioning financial intelligence unit and enhancing suspicious transaction reporting requirements. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Ethiopia
Since June 2010, when Ethiopia made high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies, Ethiopia has made significant progress to improve its AML/CFT regime. Ethiopia has substantially addressed its action plan, including by: adequately criminalising money laundering and terrorist financing; establishing a legal framework and procedures to identify and freeze terrorist assets; ensuring a fully operational and effectively functioning financial intelligence unit; improving customer due diligence measures; raising awareness of AML/CFT issues within the law enforcement community; and establishing a AML/CFT supervisory framework. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Iraq
In October 2013, Iraq made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Iraq should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (3) establishing effective customer due diligence measures; (4) establishing a fully operational and effectively functioning financial intelligence unit; (5) establishing suspicious transaction reporting requirements; and (6) establishing and implementing an adequate AML/CFT supervisory and oversight programme for all financial sectors. The FATF encourages Iraq to address its AML/CFT deficiencies by implementing its action plan.
Kuwait
In June 2012, Kuwait made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since February, Kuwait has taken steps towards improving its AML/CFT regime, including by issuing a Ministerial Resolution on freezing terrorist assets. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Kuwait should continue to work on implementing its action plan to address these deficiencies, including by: (1) ensuring it has adequate procedures to identify and freeze terrorist assets; and (2) ensuring a fully operational and effectively functioning financial intelligence unit. The FATF encourages Kuwait to address its remaining deficiencies and continue the process of implementing its action plan.
Lao PDR
In June 2013, Lao PDR made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Lao PDR should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing adequate procedures for the confiscation of assets related to money laundering; (3) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (4) establishing a fully operational and effectively functioning financial intelligence unit; (5) establishing suspicious transaction reporting requirements; (6) implementing an adequate AML/CFT supervisory and oversight programme for all financial sectors; and (7) establishing and implementing effective controls for cross-border currency transactions. The FATF encourages Lao PDR to address its AML/CFT deficiencies and continue the process of implementing its action plan.
Namibia
In June 2011, Namibia made a high-level political commitment to work with the FATF and ESA AM LG to address its strategic AML/CFT deficiencies. Since February, Namibia has taken steps towards improving its AML/CFT regime, including by enacting new CFT legislation. The FATF welcomes this development, but has not assessed the new legislation due to its very recent nature, and therefore the FATF has not yet determined the extent to which it addresses any of the following issues; (1) adequately criminalising terrorist financing; and (2) establishing and implementing adequate procedures to identify and freeze terrorist assets. The FATF encourages Namibia to continue the process of implementing its action plan.
Nicaragua
In June 2011, Nicaragua made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. Since February, Nicaragua has taken steps towards improving its AML/CFT regime, including by establishing internal mechanisms for STR obligations and creating an AML/CFT supervisory programme for all financial sectors and issuing Decree 17-2014 aimed at establishing a framework for identifying and freezing terrorist assets. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Nicaragua should continue to work on implementing its action plan to address these deficiencies, including by ensuring adequate procedures for identifying and freezing terrorist assets. The FATF encourages Nicaragua to address its remaining deficiencies and continue the process of implementing its action plan.
Pakistan
Since June 2010, when Pakistan made a high-level political commitment to work with the FATF and A PG to address its strategic AML/CFT deficiencies, Pakistan has made significant progress to improve its AML/CFT regime. Pakistan has substantially addressed its action plan, including by: adequately criminalising money laundering and terrorist financing; establishing procedures to identify, freeze and confiscate terrorist assets; ensuring a fully operational and effectively functioning financial intelligence unit; establishing regulation of money service providers; and improving controls for cross-border cash transactions. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Panama
In June 2014, Panama made a high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies. Panama will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing an adequate legal framework for freezing terrorist assets; (3) establishing effective measures for customer due diligence in order to enhance transparency; (4)
establishing a fully operational and effectively functioning financial intelligence unit; (5) establishing suspicious transaction reporting requirements for all financial institutions and DNFBPs; and (6) ensuring effective mechanisms for international co-operation. The FATF encourages Panama to address its AML/CFT deficiencies by implementing its action plan.
Papua New Guinea
In February 2014, Papua New Guinea made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since then, Papua New Guinea has established the formal structure of its FIU. However, the FATF has determined that strategic AML/CFT deficiencies remain. Papua New Guinea should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing adequate procedures for the confiscation of assets related to money laundering; (3) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (4) establishing a fully operational and effectively functioning financial intelligence unit; (5) establishing suspicious transaction reporting requirements; (6) implementing an adequate AML/CFT supervisory and oversight programme for all financial sectors; and (7) establishing and implementing effective controls for cross-border currency transactions. The FATF encourages Papua New Guinea to address its AML/CFT deficiencies by implementing its action plan.
Sudan
In February 2010 and again in June 2013 in view of its revised action plan, Sudan made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since February, Sudan has taken steps towards improving its AML/CFT regime, including by enacting new AML/CFT legislation and undertaking AML/CFT supervisory visits for financial institutions. The FATF welcomes these developments but has not assessed the new legislation due to its very recent nature, and therefore the FATF has not yet determined the extent to which they address any of the following issues: (1) adequately criminalising money laundering and terrorist financing; (2) implementing adequate procedures for identifying and freezing terrorist assets; (3) ensuring a fully operational and effectively functioning financial intelligence unit; (4) improving customer due diligence measures; (5) ensuring that financial institutions are aware of and comply with their obligations to file suspicious transaction reports in relation to money laundering and terrorist financing; and (6) ensuring that appropriate laws and procedures are in place with regard to international co-operation and mutual legal assistance. The FATF encourages Sudan to address its remaining deficiencies and continue the process of implementing its action plan.
Syria
Since February 2010, when Syria made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies, Syria has made progress to improve its AML/CFT regime. Syria has substantially addressed its action plan at a technical level, including by criminalising terrorist financing and establishing procedures for freezing terrorist assets. While the FATF determined that Syria has completed its action plan agreed upon with the FATF, due to the security situation, the FATF is unable to conduct an on-site visit to assess whether the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF. The FATF will continue to monitor the situation.
Tajikistan
Since June 2011, when Tajikistan made a high-level political commitment to work with the FATF and EAG to address its strategic AML/CFT deficiencies, Tajikistan has made significant progress to improve its AML/CFT regime. Tajikistan has substantially addressed its action plan, including by: adequately criminalising money laundering and terrorist financing; establishing procedures for the confiscation of funds related to money laundering and identifying and freezing terrorist assets; enhancing financial transparency; ensuring a fully operational, and effectively functioning financial intelligence unit and improving suspicious transaction reporting requirements; and broadening CDD measures. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Turkey
Since February 2010, when Turkey made a high-level political commitment to work with the FATF to address its strategic CFT deficiencies, Turkey has made significant progress to improve its CFT regime. Turkey has largely addressed its action plan, including by adequately criminalising terrorist financing and establishing procedures to identify, freeze and confiscate terrorist assets. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Uganda
In February 2014, Uganda made a high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies. However, the FATF has determined that strategic AML/CFT deficiencies remain. Uganda should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (3) ensuring effective record-keeping requirements; (4) establishing a fully operational and effectively functioning financial intelligence unit (FIU); (5) ensuring there are adequate suspicious transaction reporting requirements; (6) ensuring an adequate and effective AML/CFT supervisory and oversight programme for all financial sectors; and (7) ensuring that appropriate laws and procedures are in place with regard to international cooperation for the FIU and supervisory authorities. The FATF encourages Uganda to address its AML/CFT deficiencies by implementing its action plan.
Yemen
Since February 2010, when Yemen made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies, Yemen has made progress to improve its AML/CFT regime. Yemen has substantially addressed its action plan at a technical level, including by adequately criminalising money laundering and terrorist financing; establishing procedures to identify and freeze terrorist assets; improving its customer due diligence and suspicious transaction reporting requirements; issuing guidance; developing the monitoring and supervisory capacity of the financial sector supervisory authorities and the FIU; and ensuring a fully operational and effectively functioning financial intelligence unit. While the FATF determined that Yemen has completed its action plan agreed upon with the FATF, due to the security situation, the FATF is unable to conduct an on-site visit to assess whether the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Zimbabwe
In June 2011, Zimbabwe made a high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies. Since February, Zimbabwe has taken steps towards improving its AML/CFT regime, including by enacting the Trafficking in Persons Act 2014 and issuing a Statutory Instrument to improve the framework to identify and freeze terrorist assets. The FATF welcomes these developments but has not assessed the new legislation due to its very recent nature, and therefore the FATF has not yet determined the extent to which they address any of the following issues: (1) adequately criminalising money laundering and terrorist financing; and (2) establishing and implementing adequate procedures to identify and freeze terrorist assets. The FATF encourages Zimbabwe to address its remaining deficiencies and continue the process of implementing its action plan.
Jurisdictions no longer subject to the FATF’s ongoing global AML/CFT compliance process
Kenya
The FATF welcomes Kenya’s significant progress in improving its AML/CFT regime and notes that Kenya has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in February 2010. Kenya is therefore no longer subject to FATF’s monitoring process under its on-going global AML/CFT compliance process. Kenya will work with ESAAMLG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report.
Kyrgyzstan
The FATF welcomes Kyrgyzstan’s significant progress in improving its AML/CFT regime and notes that Kyrgyzstan has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in October 2011. Kyrgyzstan is therefore no longer subject to FATF’s monitoring process under its on-going global AML/CFT compliance process. Kyrgyzstan will work with EAG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report.
Mongolia
The FATF welcomes Mongolia’s significant progress in improving its AML/CFT regime and notes that Mongolia has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in June 2011. Mongolia is therefore no longer subject to FATF’s monitoring process under its on-going global AML/CFT compliance process. Mongolia will work with APG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report.
Nepal
The FATF welcomes Nepal’s significant progress in improving its AML/CFT regime and । notes that Nepal has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in February 2010. Nepal is therefore no longer subject to FATF’s monitoring process under its on-going global AML/CFT compliance process. Nepal will work with APG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report.
Tanzania
The FATF welcomes Tanzania’s significant progress in improving its AML/CFT regime and notes that Tanzania has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in October 2010. Tanzania is therefore no longer subject to FATF’s monitoring process under its on-going global AML/CFT compliance process. Tanzania will work with ESAAMLG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report.
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Public Statement - 24 October 2014
Paris, 24 October 2014 - The Financial Action Task Force (FATF) is the global standard setting body for anti-money laundering and combating the financing of terrorism (AML/CFT). In order to protect the international financial system from money laundering and financing of terrorism (ML/FT) risks and to encourage greater compliance with the AML/CFT standards, the FATF Identified jurisdictions that have strategic deficiencies and works with them to address those deficiencies that pose a risk to the international financial system.
Jurisdictions subject to a FATF call on its members and other Jurisdictions to apply counter-measures to protect the International financial system from the on-going and substantial money laundering and terrorist financing (ML/FT) risks emanating from the Jurisdictions. Iran
Democratic People's Republic of Korea (DPRK)
Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies. The FATF calls on its members to consider the risks arising from the deficiencies associated with each Jurisdiction, as described below.
Algeria
Ecuador
Indonesia
Myanmar
Iran
The FATF remains particularly and exceptionally concerned about Iran's failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system, despite Iran's previous engagement with the FATF and recent submission of information.
The FATF reaffirms its call on members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with Iran, including Iranian companies and financial institutions. In addition to enhanced scrutiny, the FATF reaffirms its 25 February 2009 call on its members and urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from Iran. The FATF continues to urge jurisdictions to protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices and to take into account ML/FT risks when considering requests by Iranian financial institutions to open branches and subsidiaries in their jurisdiction. Due to the continuing terrorist financing threat emanating from Iran, jurisdictions should consider the steps already taken and possible additional safeguards or strengthen existing ones.
The FATF urges Iran to immediately and meaningfully address its AML/CFT deficiencies, in particular by criminalising terrorist financing and effectively implementing suspicious transaction reporting requirements. If Iran fails to take concrete steps to continue to improve its CFT regime, the FATF will consider calling on its members and urging all jurisdictions to strengthen counter-measures in February 2015.
Democratic People's Republic of Korea (DPRK)
Since June 2014, the DPRK has further engaged directly with the FATF and APG to discuss its AML/CFT deficiencies. The FATF urges the DPRK to continue its cooperation with the FATF and to provide a high-level political commitment to the action plan developed with the FATF.
The FATF remains concerned by the DPRK's failure to address the significant deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threat this poses to the integrity of the international financial system. The FATF urges the DPRK to immediately and meaningfully address its AML/CFT deficiencies.
The FATF reaffirms its 25 February 2011 call on its members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with the DPRK, Including DPRK companies and financial Institutions. In addition to enhanced scrutiny, the FATF further calls on its members and urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from the DPRK. Jurisdictions should also protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices, and take into account ML/FT risks when considering requests by DPRK financial institutions to open branches and subsidiaries in their jurisdiction.
Algeria
Algeria has taken steps towards improving its AML/CFT regime. However, despite Algeria's high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies, Algeria has not made sufficient progress in implementing its action plan within the established timelines, and certain strategic deficiencies remain. Algeria should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets and (3) adopting customer due diligence obligations in compliance with the FATF Standards. The FATF encourages Algeria to address its remaining deficiencies and continue the process of implementing its action plan.
Ecuador
Ecuador has taken steps towards improving its AML/CFT regime including by issuing AML/CFT regulations for companies supervised by Superintendence of Companies. However, despite Ecuador's high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies, Ecuador has not made sufficient progress in implementing its action plan, and certain strategic deficiencies remain. Ecuador should continue to work on implementing its action plan to address these deficiencies, including by (1) establishing and implementing adequate procedures to identify and freeze terrorist assets and (2) clarifying procedures for the confiscation of funds related to money laundering. Ecuador should also continue enhancing financial sector supervision. The FATF encourages Ecuador to address its remaining deficiencies and continue the process of implementing its action plan.
Indonesia
Indonesia has taken steps towards improving its AML/CFT regime including by further implementing its terrorist asset-freezing regime. However, despite Indonesia’s high-level political commitment to work with the FATF and APG to address its strategic CFT deficiencies, Indonesia has not made sufficient progress in implementing its action plan within the agreed timelines, and certain key CFT deficiencies remain regarding the development and implementation of an adequate legal framework and procedures for identifying and freezing of terrorist assets. The FATF encourages Indonesia to address its remaining deficiencies in compliance with FATF standards by fully implementing UNSCR 1267 and improving the legal framework and procedures for freezing terrorist assets.
Myanmar
Myanmar has taken steps towards improving its AML/CFT regime. However, despite Myanmar’s high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Myanmar has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Myanmar should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) further strengthening the extradition framework in relation to terrorist financing; (4) ensuring a fully operational and effectively functioning financial intelligence unit; (5) enhancing financial transparency; and (6) strengthening customer due diligence measures. The FATF encourages Myanmar to address the remaining deficiencies and continue the process of implementing its action plan.
Document type News Keywords lcrg Related documents Improving Global AML/CFT
Compliance: on-going process - 24 October 2014 Outcomes of the October 2014 Plenary meeting
High-risk and non-
cooperative Jurisdictions
- October 2014
Public Statement
Iran
Democratic Peoples’s
Republic of Korea (DPRK)Algeria
Ecuador
Indonesia
Myanmar
> full statement
Improving Global AML/CFT Compliance: on-going process Afghanistan
Albania
Angola
Cambodia
Guyana
Iraq
Kuwait
Lao PDR
Namibia
Nicaragua
Pakistan
Panama
Papua New Guinea
Sudan
Syria
Uganda
Yemen
Zimbabwe
Jurisdictions no longer subject to monitoring
Argentina
Cuba
Ethiopia
Tajikistan
Turkey
> full statement
More information
About the International Co-operation Review Group (ICRG)
Improving Global AML/CFT Compliance: on-going process - 24 October 2014Paris, 24 October 2014 - As part of its on-going review of compliance with the AML/CFT standards, the FATF has to date identified the following jurisdictions which have strategic AML/CFT deficiencies for which they have developed an action plan with the FATF. While the situations differ among each jurisdiction, each jurisdiction has provided a written high-level political commitment to address the identified deficiencies. The FATF welcomes these commitments.
A large number of jurisdictions have not yet been reviewed by the FATF. The FATF continues to identify additional Jurisdictions, on an on-going basis, that pose a risk to the international financial system. The FATF and the FATF-style regional bodies (FSRBs) will continue to work with the jurisdictions noted below and to report on the progress made in addressing the identified deficiencies. The FATF calls on these jurisdictions to complete the implementation of action plans expeditiously and within the proposed timeframes. The FATF will closely monitor the implementation of these action plans and encourages its members to consider the information presented below
Afghanistan Kuwait Papua New Guinea Albania Lao PDR Sudan Angola Namibia Syria Cambodia Nicaragua Uganda Guyana Pakistan Yemen Iraq Panama Zimbabwe Jurisdictions no longer subject to the FATF's on-going global AML/CFT compliance process
Argentina Ethiopia Turkey Cuba Tajikistan Afghanistan
In June 2012, Afghanistan made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since June 2014, Afghanistan has taken steps towards improving its AML/CFT regime, including by bringing CFT legislation into force and issuing CFT regulations. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Afghanistan should continue to work on implementing its action plan to address its strategic AML/CFT deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (3) implementing an adequate AML/CFT supervisory and oversight programme for all financial sectors; (4) establishing and implementing adequate procedures for the confiscation of assets related to money laundering; (5) establishing a fully operational and effectively functioning financial intelligence unit; and (6) establishing and implementing effective controls for cross-border cash transactions. The FATF encourages Afghanistan to address its remaining deficiencies and continue the process of implementing its action plan.
Albania
Since June 2012, when Albania made a high-level political commitment to work with the FATF and MONEYVAL to address its strategic AML/CFT deficiencies, Albania has made significant progress to improve its AML/CFT regime. Albania has substantially addressed its action plan at a technical level, including by: establishing adequate customer due diligence provisions; establishing an adequate legal framework for identifying, tracing and freezing terrorist assets; and enhancing the framework for international co-operation. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Angola
In June 2010 and again in February 2013 in view of its revised action plan, Angola made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. Since June 2014, Angola has taken steps towards improving its AML/CFT regime, including by commencing on-site inspections of AML/CFT compliance by banks. However, the FATF has determined that a strategic AML/CFT deficiency remains. Angola should continue to work on implementing its action plan to address this deficiency by ensuring that appropriate laws and procedures are in place to provide mutual legal assistance. The FATF encourages Angola to address its remaining deficiency and continue the process of implementing its action plan.
Cambodia
Since June 2011, when Cambodia made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Cambodia has made significant progress to improve its AML/CFT regime. Cambodia has substantially addressed its action plan at a technical level, including by: adequately criminalising money laundering and terrorist financing; establishing procedures to identify and freeze terrorist assets; establishing procedures for the confiscation of funds related to money laundering; establishing an effectively functioning financial intelligence unit; and establishing controls for cross-border cash transactions. The FATF conducted an on-site visit but cannot yet determine that implementation of the above reforms has begun. The FATF encourages Cambodia to make progress by February 2015, when the FATF will again assess the situation.
Guyana
In October 2014, Guyana made a high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies. Guyana will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing adequate procedures for the confiscation of assets related to money laundering; (3) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (4) establishing a fully operational and effectively functioning financial intelligence unit; (5) establishing effective measures for customer due diligence and enhancing financial transparency; (6) strengthening suspicious transaction reporting requirements; and (7) implementing an adequate supervisory framework. The FATF encourages Guyana to address its AML/CFT deficiencies by implementing its action plan.
Iraq
In October 2013, Iraq made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. The FATF has determined that certain strategic AML/CFT deficiencies remain. Iraq should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (3) establishing effective customer due diligence measures; (4) establishing a fully operational and effectively functioning financial intelligence unit; (5) establishing suspicious transaction reporting requirements; and (6) establishing and implementing an adequate AML/CFT supervisory and oversight programme for all financial sectors. The FATF encourages Iraq to address its AML/CFT deficiencies by implementing its action plan.
Kuwait
Since June 2012, when Kuwait made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies, Kuwait has made significant progress to improve its AML/CFT regime. Kuwait has substantially addressed its action plan at a technical level, including by: adequately criminalising terrorist financing; establishing procedures to identify and freeze terrorist assets; ensuring that appropriate laws and procedures are in place to provide mutual legal assistance with respect to terrorist financing; establishing customer due diligence measures; establishing a financial intelligence unit; ensuring that financial institutions are obligated to file suspicious transaction reports in relation to money laundering and terrorist financing; and ratifying the Terrorist Financing Convention. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Lao PDR
In June 2013, the Lao PDR made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. The Lao PDR should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing adequate procedures for the confiscation of assets related to money laundering; (3) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (4) establishing a fully operational and effectively functioning financial intelligence unit; (5) establishing suspicious transaction reporting requirements; (6) implementing an adequate AML/CFT supervisory and oversight programme for all financial sectors; and (7) establishing and implementing effective controls for cross-border currency transactions. The FATF encourages the Lao PDR to address its AML/CFT deficiencies and continue the process of implementing its action plan.
Namibia
Since June 2011, when Namibia made a high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies, Namibia has made significant progress to improve its AML/CFT regime. Namibia has substantially addressed its action plan at a technical level, including by: adequately criminalising terrorist financing; establishing adequate procedures to identify and freeze terrorist assets; ensuring that supervisory authorities have sufficient powers to supervise for AML/CFT compliance; developing an adequate AML/CFT supervisory programme; establishing a financial intelligence unit; implementing effective, proportionate and dissuasive sanctions in order to deal with non-compliance with the national AML/CFT requirements; and ratifying the Terrorist Financing Convention. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Nicaragua
Since June 2011, when Nicaragua made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies, Nicaragua has made significant progress to improve its AML/CFT regime. Nicaragua has substantially addressed its action plan at a technical level, including by: establishing effective customer due diligence measures and record-keeping requirements; establishing suspicious transaction reporting requirements for money laundering and terrorist financing; developing an AML/CFT supervisory programme for all financial sectors; establishing a financial intelligence unit, and establishing adequate procedures for Identifying and freezing terrorist assets. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Pakistan
Since June 2010, when Pakistan made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Pakistan has made significant progress to improve its AML/CFT regime. In June 2014, the FATF determined that Pakistan had substantially addressed its action plan at a technical level, including by: adequately criminalising money laundering and terrorist financing; establishing procedures to identify, freeze and confiscate terrorist assets; ensuring a fully operational and effectively functioning financial intelligence unit; establishing regulation of money service providers; and improving controls for cross-border cash transactions. Due to security reasons, the FATF has been unable to conduct an on-site visit to assess whether the process of implementing the required reforms and actions is underway. The visit is currently scheduled to take place prior to the February 2015 FATF meetings.
Panama
In June 2014, Panama made a high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies. However, the FATF has determined that strategic AML/CFT deficiencies remain. Panama should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing an adequate legal framework for freezing terrorist assets; (3) establishing effective measures for customer due diligence in order to enhance transparency; (4) establishing a fully operational and effectively functioning financial intelligence unit; (5) establishing suspicious transaction reporting requirements for all financial institutions and DNFBPs; and (6) ensuring effective mechanisms for international co-operation. The FATF encourages Panama to address its AML/CFT deficiencies and continue the process of implementing its action plan.
Papua New Guinea
In February 2014, Papua New Guinea made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since June, Papua New Guinea has taken steps towards improving its AML/CFT regime, including by issuing prudential standards on customer due diligence. However, the FATF has determined that strategic AML/CFT deficiencies remain. Papua New Guinea should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing adequate procedures for the confiscation of assets related to money laundering; (3) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (4) establishing a fully operational and effectively functioning financial intelligence unit; (5) establishing suspicious transaction reporting requirements; (6) implementing an adequate AML/CFT supervisory and oversight programme for all financial sectors; and (7) establishing and implementing effective controls for cross-border currency transactions. The FATF encourages Papua New Guinea to address its AML/CFT deficiencies and continue the process of implementing its action plan.
Sudan
In February 2010 and again in June 2013 in view of its revised action plan, Sudan made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since June 2014, Sudan has taken steps towards improving its AML/CFT regime, including by bringing into force three decrees related to UNSCR asset freezing obligations. However, the FATF has determined that strategic AML/CFT deficiencies remain. Sudan should continue to work on implementing its action plan to address these deficiencies, including by: (1) addressing the remaining issues regarding the predicate offences for money laundering; (2) implementing adequate procedures for identifying and freezing terrorist assets; (3) ensuring a fully operational and effectively functioning financial intelligence unit; (4) improving customer due diligence measures; and (5) ensuring that appropriate laws and procedures are in place with regard to mutual legal assistance. The FATF encourages Sudan to address its remaining deficiencies and continue the process of implementing its action plan.
Syria
Since February 2010, when Syria made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Syria has made progress to improve its AML/CFT regime. In June 2014, the FATF determined that Syria had substantially addressed its action plan at a technical level, including by criminalising terrorist financing and establishing procedures for freezing terrorist assets. While the FATF determined that Syria has completed its action plan agreed upon with the FATF, due to the security situation, the FATF has been unable to conduct an on-site visit to assess whether the process of implementing the required reforms and actions is underway. The FATF will continue to monitor the situation.
Uganda
In February 2014, Uganda made a high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies. Since June 2014, Uganda has taken steps towards improving its AML/CFT regime, including by establishing its financial intelligence unit and issuing guidance to reporting entities. However, the FATF has determined that strategic AML/CFT deficiencies remain. Uganda should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (3) ensuring effective record-keeping requirements; (4) establishing a fully operational and effectively functioning financial intelligence unit; (5) ensuring adequate suspicious transaction reporting requirements; (6) ensuring an adequate and effective AML/CFT supervisory and oversight programme for all financial sectors; and (7) ensuring that appropriate laws and procedures are in place with regard to international co-operation for the financial intelligence unit and supervisory authorities. The FATF encourages Uganda to address its remaining AML/CFT deficiencies and continue the process of implementing its action plan.
Yemen
Since February 2010, when Yemen made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies, Yemen has made progress to improve its AML/CFT regime. In June 2014, the FATF determined that Yemen had substantially addressed its action plan at a technical level, including by adequately criminalising money laundering and terrorist financing; establishing procedures to identify and freeze terrorist assets; improving its customer due diligence and suspicious transaction reporting requirements; issuing guidance; developing the monitoring and supervisory capacity of the financial sector supervisory authorities and the financial intelligence unit (FIU); and establishing a fully operational and effectively functioning FIU. While the FATF determined that Yemen has completed its action plan agreed upon with the FATF, due to the security situation, the FATF has been unable to conduct an on-site visit to assess whether the process of implementing the required reforms and actions is underway. The FATF will continue to monitor the situation.
Zimbabwe
Since June 2011, when Zimbabwe made a high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies, Zimbabwe has made significant progress to improve its AML/CFT regime. Zimbabwe has substantially addressed its action plan at a technical level, including by: adequately criminalising money laundering and terrorist financing; establishing adequate procedures to identify and freeze terrorist assets; establishing a financial intelligence unit; ensuring financial institutions are aware of and comply with their obligations to file suspicious transaction reports in relation to ML and FT; and ratifying the Terrorist Financing Convention. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Jurisdictions no longer subject to the FATF's on-going Global AML/CFT Compliance Process Argentina The FATF welcomes Argentina's significant progress in improving its AML/CFT regime and notes that Argentina has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in June 2011. Argentina is therefore no longer subject to the FATF's monitoring process under its on-going global AML/CFT compliance process. Argentina will work with the FATF and GAFISUD as it continues to address the full range of AML/CFT issues Identified in its mutual evaluation report. Cuba The FATF welcomes Cuba's significant progress in improving its AML/CFT regime and notes that Cuba has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in February 2013. Cuba is therefore no longer subject to the FATF's monitoring process under its on-going global AML/CFT compliance process. Cuba will work with GAFISUD to further strengthen its AML/CFT regime. Ethiopia The FATF welcomes Ethiopia's significant progress in improving its AML/CFT regime and notes that Ethiopia has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in June 2010. Ethiopia is therefore no longer subject to the FATF's monitoring process under its on-going global AML/CFT compliance process. Ethiopia will work with ESAAMLG to further strengthen its AML/CFT regime. Tajikistan The FATF welcomes Tajikistan's significant progress in improving its AML/CFT regime and notes that Tajikistan has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in June 2011. Tajikistan is therefore no longer subject to the FATF's monitoring process under its on-going global AML/CFT compliance process. Tajikistan will work with EAG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report. Turkey The FATF welcomes Turkey's significant progress in improving its AML/CFT regime and notes that Turkey has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified In February 2010. Turkey is therefore no longer subject to the FATF's monitoring process under its on-going global AML/CFT compliance process. Turkey will work with the FATF as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report. Document type News Related documents FATF Public Statement – 24 October 2014
Outcomes from the October 2014 Plenary meeting
High-risk and non-
cooperative Jurisdictions
- October 2014
Public Statement
Iran
Democratic Peoples’s
Republic of Korea (DPRK)Algeria
Ecuador
Indonesia
Myanmar
> full statement
Improving Global AML/CFT Compliance: on-going process Afghanistan
Albania
Angola
Cambodia
Guyana
Iraq
Kuwait
Lao PDR
Namibia
Nicaragua
Pakistan
Panama
Papua New Guinea
Sudan
Syria
Uganda
Yemen
Zimbabwe
Jurisdictions no longer subject to monitoring
Argentina
Cuba
Ethiopia
Tajikistan
Turkey
> full statement
More information
About the International Co-operation Review Group (ICRG)
FATF Public statement 22 February 2013
This section is currently available only in Arabic, please click here to read the Arabic version.FATF Statement issued on 16-2-2012 at the General Meeting at Paris
FATF Public Statement - 16 February 2012
Paris, 16 February 2012 - The Financial Action Task Force (FATF) Is the global standard setting body for anti-money laundering and combating the financing of terrorism (AML/CFT) . In order to protect the international financial system from money laundering and financing of terrorism (ML/FT) risks and to encourage greater compliance with the AML/CFT standards, the FATF identified jurisdictions that have strategic deficiencies and works with them to address those deficiencies that pose a risk to the international financial system.
Jurisdictions subject to a FATF call on its members and other jurisdictions to apply counter-measures to protect the International financial system from the on-going and substantial money laundering and terrorist financing (ML/TF) risks emanating from the jurisdictions*. Iran
Democratic People's Republic of Korea (DPRK)
Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies**. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction, as described below. Cuba**
Bolivia
Ethiopia
Ghana
Indonesia
Kenya
Myanmar
Nigeria
Pakistan
São Tomé and Príncipe
Sri Lanka
Syria
Tanzania
Thailand
Turkey
*The FATF has previously issued Public Statements calling for counter-measures on Iran and DPRK. Those Statements are updated below.
**Cuba has not engaged with the FATF in the process.
While the FATF published the revised FATF Recommendations: ‘International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation "on 16 February 2012, the FATF has reviewed the identified jurisdictions based on the FATF 40+9 Recommendations of 2003. Therefore, references to specific Recommendations or Special Recommendations (e.g. R.1", SR.II", etc.) in this document refer to the FATF 40+9 Recommendations of 2003. Iran
The FATF remains particularly and exceptionally concerned about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the International financial system, despite Iran’s previous engagement with the FATF.
The FATF reaffirms its call on members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with Iran, including Iranian companies and financial institutions. In addition to enhanced scrutiny, the FATF reaffirms its 25 February 2009 call on Its members and urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from Iran. FATF continues to urge jurisdictions to protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices and to take into account ML/FT risks when considering requests by Iranian financial institutions to open branches and subsidiaries in their jurisdiction. Due to the continuing terrorist financing threat emanating from Iran, jurisdictions should consider the steps already taken and possible additional safeguards or strengthen existing ones.
The FATF urges Iran to immediately and meaningfully address its AML/CFT deficiencies, in particular by criminalising terrorist financing and effectively implementing suspicious transaction reporting (STR) requirements. If Iran fails to take concrete steps to improve its CFT regime, the FATF will consider calling on its members and urging all jurisdictions to strengthen counter-measures In June 2012.
Democratic People’s Republic of Korea (DPRK)
The FATF remains concerned by the DPRK’s failure to address the significant deficiencies in Its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threat this poses to the integrity of the international financial system. The FATF urges the DPRK to Immediately and meaningfully address its AML/CFT deficiencies.
The FATF reaffirms its 25 February 2011 call on its members and urges all jurisdictions to advise their financial Institutions to give special attention to business relationships and transactions with the DPRK, including DPRK companies and financial institutions. In addition to enhanced scrutiny, the FATF further calls on its members and urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from the DPRK. Jurisdictions should also protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices and take into account ML/FT risks when considering requests by DPRK financial institutions to open branches and subsidiaries in their jurisdiction.
The FATF acknowledges the latest outreach from DPRK to FATF and remains prepared to engage directly in assisting the DPRK to address its AML/CFT deficiencies.
Cuba
Cuba has not committed to the AML/CFT international standards, nor has it constructively directly engaged with the FATF. At the same time, Cuba attended a GAFISUD plenary as a guest and prepared an Informal document on its AML/CFT regime. The FATF has identified Cuba as having strategic AML/CFT deficiencies that pose a risk to the international financial system. The FATF urges Cuba to develop an
AML/CFT regime in line with international standards, and encourages Cuba to establish a constructive and direct dialogue with the FATF and is ready to work with the Cuban authorities to this end.
Bolivia
Bolivia has taken steps towards improving its AML/CFT regime, Including enacting CFT legislation and regulations. Despite Bolivia's high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies, Bolivia has not made sufficient progress In Implementing its action plan, and certain strategic AML/CFT deficiencies remain. Bolivia should work on addressing these deficiencies, including by: (1) ensuring adequate criminalisation of money laundering (Recommendation 1); (2) adequately criminalising terrorist financing (Special Recommendation II); (3) establishing and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III); and (4) establishing a fully operational and effective Financial Intelligence Unit (Recommendation 26). The FATF encourages Bolivia to address Its remaining deficiencies and continue the process of implementing Its action plan.
Ethiopia
Despite Ethiopia's high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies, Ethiopia has not made sufficient progress in implementing Its action plan, and certain strategic AML/CFT deficiencies remain. Ethiopia should work on addressing these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing an adequate legal framework and procedures to identify and freeze terrorist assets (Special Recommendation III); (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); and (4) implementing effective, proportionate and dissuasive sanctions In order to deal with natural or legal persons that do not comply with the national AML/CFT requirements (Recommendation 17). The FATF encourages Ethiopia to address its remaining deficiencies and continue the process of implementing its action plan.
Ghana
Ghana has taken steps towards improving its AML/CFT regime, including by ratifying the UN Convention on Transnational Organised Crime and issuing CDD guidelines. Despite Ghana's high-level political commitment to work with the FATF and GIABA to address its strategic AML/CFT deficiencies, Ghana has not made sufficient progress in Implementing its action plan, and certain strategic AML/CFT deficiencies remain. Ghana should work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate measures for the confiscation of funds related to money laundering (Recommendation 3); (3) establishing a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); and (4) establishing and Implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III). The FATF encourages Ghana to address Its remaining deficiencies and continue the process of Implementing its action plan.
Indonesia
Indonesia has taken significant steps towards improving its AML/CFT regime, including by enacting AML legislation in 2010 and developing draft comprehensive CFT legislation. Despite Indonesia's high- level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Indonesia has not made sufficient progress in Implementing its action plan, and certain strategic AML/CFT deficiencies remain. Indonesia should work on Implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); and (3) amending and implementing laws or other instruments to fully implement the 1999 International Convention for the Suppression of Financing of Terrorism (Special Recommendation I). The FATF encourages Indonesia to address its remaining deficiencies and continue the process of implementing Its action plan.
Kenya
Despite Kenya’s high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies, Kenya has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Kenya should work on addressing these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (3) establishing and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III); and (4) implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements (Recommendation 17). The FATF welcomes the adoption of the ESAAMLG mutual evaluation report and will work with Kenya In light of the further deficiencies identified in the report. The FATF encourages Kenya to address its remaining deficiencies and continue the process of implementing Its action plan, including by implementing the AML legislation and setting up its FIU.
Myanmar
Despite Myanmar's high-level political commitment to work with the FATF and APG to address Its strategic AML/CFT deficiencies, Myanmar has not made sufficient progress in Implementing its action plan, and certain strategic AML/CFT deficiencies remain. Myanmar should work on addressing these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) further strengthening the extradition framework in relation to terrorist financing (Recommendation 35 and Special Recommendation I); (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (5) enhancing financial transparency (Recommendation 4); and (6) strengthening customer due diligence measures (Recommendation 5). The FATF encourages Myanmar to address its remaining deficiencies and continue the process of implementing its action plan.
Nigeria
Nigeria has taken steps towards improving its AML/CFT regime, including by enacting AML/CFT legislation and commencing supervision across all sectors. However, despite Nigeria’s high-level political commitment to work with the FATF add GIABA to address its strategic AML/CFT deficiencies, further engagement with Nigeria is needed to clarify whether these deficiencies have been addressed, including: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); and (2) implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III). The FATF encourages Nigeria to address its remaining deficiencies and continue the process of Implementing its action plan.
Pakistan
Pakistan has taken significant steps towards Improving Its AML/CFT regime, including by enhancing the capacity of its FIU, approving an AML/CFT strategy, and by ensuring training is provided to relevant stakeholders. Despite Pakistan's high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Pakistan has not made sufficient progress in implementing Its action plan, and certain AML/CFT deficiencies remain. Specifically, Pakistan needs to enact legislation to ensure that it meets the FATF standards regarding the terrorist financing offence (SR II) and the ability to identify, freeze, and confiscate terrorist assets (Special Recommendation III). The FATF encourages Pakistan to address the remaining deficiencies and continue to implement Its action plan, including by demonstrating effective regulation of money service providers and Implementing effective controls for cross-border cash transactions (Special Recommendation VI and Special Recommendation IX).
São Tomé and Príncipe
Despite São Tomé and Príncipe's high-level political commitment to work with the FATF and GIABA to address Its strategic AML/CFT deficiencies, São Tomé and Príncipe has not made sufficient progress in implementing Its action plan, and certain strategic deficiencies remain. São Tomé and Príncipe should work on addressing these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (3) ensuring that financial Institutions and DNFBPs are subject to adequate AML/CFT regulation and supervision (Recommendations 23, 24 and 29); and (4) implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements (Recommendation 17). The FATF encourages Sao Tomé and Principe to address Its remaining deficiencies and continue the process of implementing its action plan.
Sri Lanka
Despite Sri Lanka’s high-level political commitment to work with the FATF and APG to address Its strategic AML/CFT deficiencies, Sri Lanka has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Sri Lanka should work on addressing these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); and (2) establishing and implementing adequate procedures to Identify and freeze terrorist assets
(Special Recommendation III), The FATF encourages Sri Lanka to address its remaining deficiencies and continue the process of Implementing Its action plan, including by continuing to work on its AML/CFT legislation.
Syria
Syria has taken significant steps towards Improving its AML/CFT regime, including by improving the legal arrangements for freezing terrorist assets. However, despite Syria's high-level political commitment to work with the FATF and MENAFATF, further engagement with Syria is needed to clarify whether the remaining deficiencies have been addressed, including by: (1) implementing adequate procedures for Identifying and freezing terrorist assets (Special Recommendation III); (2) ensuring that financial Institutions are aware of and comply with their obligations to file suspicious transaction reports in relation to ML and FT (Recommendation 13 and Special Recommendation IV); and (3) ensuring that appropriate laws and procedures are in place to provide mutual legal assistance (Recommendations 36-38, Special Recommendation V). The FATF encourages Syria to demonstrate that its remaining deficiencies have been addressed to enable the FATF to properly evaluate Syria's progress.
Tanzania
Tanzania has taken steps towards Improving its AML/CFT regime, including by the passage of amendments to the Anti-Money Laundering and Proceeds of Crime Act and the AML law for Zanzibar. However, despite Tanzania’s high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies, Tanzania has not made sufficient progress in Implementing Its action plan, and certain strategic AML/CFT deficiencies remain. Tanzania should work on Implementing its action plan to address these deficiencies, including by: (1) determining whether money laundering is adequately criminalised (Recommendation 1); (2) adequately criminalising terrorist financing (Special Recommendation II); (3) establishing and implementing adequate procedures to Identify and freeze terrorist assets as well as Implementing the UNSCRs 1267 and 1373 through law, regulations or other enforceable means (Special Recommendation III); (4) establishing effective CDD measures (Recommendation 5); (5) establishing adequate record-keeping requirements (Recommendation 10); (6) establishing a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); and (7) designating competent authorities to ensure compliance with AML/CFT requirements (Recommendation 23). The FATF encourages Tanzania to address its remaining deficiencies and continue the process of Implementing its action plan.
Thailand
Despite Thailand's high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Thailand has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain, although Thailand has faced external difficulties from 2009 to 2011 which significantly impacted the legislative process for the necessary laws and regulations. Thailand has taken steps towards improving its AML/CFT regime, including by substantially completing an AML/CFT risk assessment for its financial sector. Thailand should work on implementing Its action plan to address the remaining deficiencies, Including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) establishing and implementing adequate procedures to Identify and freeze terrorist assets (Special Recommendation III); and (3) further strengthening AML/CFT supervision (Recommendation 23). The FATF encourages Thailand to address Its remaining deficiencies and continue the process of implementing Its action plan.
Turkey
Turkey has taken steps towards improving its AML/CFT regime, including by submitting CFT legislation to Parliament. Despite Turkey's high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies, Turkey has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Turkey should work on addressing these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); and (2) implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III). The FATF encourages Turkey to address its remaining deficiencies and continue the process of implementing Its action plan.
FATF Statement from the Meeting in Paris dated 19-10-2012
FATF Public Statement -19 October 2012
Paris, 19 October 2012 - The Financial Action Task Force (FATF) is the global standard setting body for anti-money laundering and combating the financing of terrorism (AML/CFT). In order to protect the international financial system from money laundering and financing of terrorism (ML/FT) risks and to encourage greater compliance with the AML/CFT standards, the FATF identified jurisdictions that have strategic deficiencies and works with them to address those deficiencies that pose a risk to the international financial system.
Jurisdictions subject to a FATF call on Its members and other jurisdictions to apply counter-measures to protect the International financial system from the on-going and substantial money laundering and terrorist financing (ML/TF) risks emanating from the jurisdictions. ✓ Iran
✓ Democratic People's Republic of Korea (DPRK)
Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress In addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction, as described below. Bolivia
Cuba
Ecuador
Ethiopia
Indonesia ✓
Kenya
Myanmar
Nigeria
Pakistan ✓
São Tomé and Príncipe
Sri Lanka
Syria ✓
Tanzania
Thailand .
Turkey* ✓
Vietnam
Yemen ✓
See the below text on Turkey
Iran
The FATF remains particularly and exceptionally concerned about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system, despite Iran’s previous engagement with the FATF and recent submission of information.
The FATF reaffirms its call on members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with Iran, including Iranian companies and financial institutions. In addition to enhanced scrutiny, the FATF reaffirms its 25 February 2009 call on its
members and urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from Iran. FATF continues to urge jurisdictions to protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices and to take into account ML/FT risks when considering requests by Iranian financial Institutions to open branches and subsidiaries in their jurisdiction. Due to the continuing terrorist financing threat emanating from ten, jurisdictions should consider the steps already taken and possible additional safeguards or strengthen existing ones.
The FATF urges Iran to immediately and meaningfully address its AML/CFT deficiencies, In particular by criminalising terrorist financing and effectively implementing suspicious transaction reporting (STR) requirements. If Iran falls to take concrete steps to continue to Improve its CFT regime, the FATF will consider calling on its members and urging all jurisdictions to strengthen counter-measures in February 2013.
Democratic People's Republic of Korea (DPRK)
The FATF remains concerned by the DPRK's failure to address the significant deficiencies In its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and the serious threat this poses to the integrity of the International financial system. The FATF urges the DPRK to immediately and meaningfully address its AML/CFT deficiencies.
The FATF reaffirms its 25 February 2011 call on its members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with the DPRK, including DPRK companies and financial institutions. In addition to enhanced scrutiny, the FATF further calls on its members and urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from the DPRK. Jurisdictions should also protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices, and take into account ML/FT risks when considering requests by DPRK financial institutions to open branches and subsidiaries in their jurisdiction.
The FATF remains prepared to engage directly in assisting the DPRK to address its AML/CFT deficiencies.
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Bolivia
Bolivia has taken steps towards Improving its AML/CFT regime, including by enacting new legislation to substantially address the deficiencies in the criminalisation of money laundering and terrorist financing and working towards strengthening the capacity and autonomy of the FIL). However, despite Bolivia's high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies, Bolivia has not made sufficient progress in implementing its action plan within the established timelines. Bolivia should continue to work on addressing the remaining Issue of enhancing the legal framework for identifying and freezing terrorist assets. The FATF encourages Bolivia to address its remaining deficiency and continue the process of implementing its action plan.
Cuba
In June 2011, the FATF identified Cuba as having strategic AML/CFT deficiencies and it had not engaged with the FATF. Since then, Cuba has significantly enhanced its engagement and co-operation with the FATF and made a request to join GAFISUD. However, the FATF urges Cuba to continue its engagement with the FATF and to work with the FATF to develop and agree on an action plan in order to address its AML/CFT deficiencies.
Ecuador
Ecuador has taken steps towards improving its AML/CFT regime, including by tabling CFT legislation in Parliament, Despite Ecuador’s high-level political commitment work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies, Ecuador has not made sufficient progress in Implementing Its action plan within the established timelines, and certain strategic deficiencies remain. Ecuador should continue to work with the FATF and GAFISUD on implementing its action plan to address these deficiencies, including by: (1 ) ensuring adequate criminalisation of terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) implementing adequate procedures for the confiscation of funds related to money laundering; and (4) continue to enhance co-ordination of financial sector supervision. The FATF encourages Ecuador to address Its remaining deficiencies, including by enacting CFT legislation, and continue the process of implementing its action plan.
Ethiopia
Ethiopia has taken steps towards improving its AML/CFT regime, including by building up Its Financial Intelligence Unit. However, despite Ethiopia's high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies, Ethiopia has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Ethiopia should continue to work on Implementing its action plan to address these deficiencies, Including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing an adequate legal framework and procedures to identify and freeze terrorist assets; (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit; and (4) Implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements. The FATF encourages Ethiopia to address its remaining deficiencies and continue the process of implementing its action plan.
Indonesia
Indonesia has taken steps towards improving its AML/CFT regime. However, despite Indonesia's high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Indonesia has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain, Indonesia should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; and (3) amending and implementing laws or other instruments to fully implement the Terrorist Financing Convention. The FATF encourages Indonesia to address its remaining deficiencies, particularly by passing adequate CFT legislation, and continue the process of implementing its action plan.
Kenya
Kenya has taken significant steps towards improving its AML/CFT regime, including the enactment of the Prevention of Terrorism Act and the Capital Market (Amendment) Bill and the passage by Parliament of the Proceeds of Crime and Anti-Money Laundering (Amendment) Act and the Finance Bill. The FATF has not yet assessed these laws due to their very recent nature, and therefore the FATF could not determine the extent to which they address any of the following issues: (1) adequately criminalising money laundering and terrorist financing; (2) ensuring a fully operational and effectively functioning Financial Intelligence Unit; (3) establishing and implementing an adequate legal framework for the confiscation of funds related to money laundering, and the identification and freezing of terrorist assets; (4) implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements; (5) implementing an adequate and effective AML/CFT supervisory programme for all financial sectors; (6) enhancing financial transparency; (7) further improving and broadening customer due diligence measures; and (8) establishing adequate record-keeping requirements. Despite Kenya's high-level political commitment to work with (he FATF and ESAAMLG to address its strategic AML/CFT deficiencies, Kenya has not made sufficient progress in implementing its action plan within the agreed timelines, and certain strategic AML/CFT deficiencies may remain. The FATF encourages Kenya to address its remaining deficiencies and continue the process of implementing its action plan.
Myànmar
Myanmar has taken steps towards improving its AML/CFT regime, including by removing its reservations to the extradition articles of the Vienna Convention, the Palermo Convention and the Terrorist Financing Convention, However, despite Myanmar's high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Myanmar has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Myanmar should work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) further strengthening the extradition framework in relation to terrorist financing; (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit; (5) enhancing financial transparency; and (6) strengthening customer due diligence measures. The FATF encourages Myanmar to address the remaining deficiencies and continue the process of implementing its action plan.
Nigeria
Nigeria has taken steps towards Improving its AML/CFT regime, including by the adoption by Parliament of both the Money Laundering (Prohibition) Amendment Bill and the Terrorism (Prevention) Amendment Bill. The FATF has not yet assessed these laws due to their very recent nature, and therefore the FATF could not determine the extent to which they address Nigeria’s two remaining issues regarding criminalisation of money laundering and terrorist financing. The FATF encourages Nigeria to address its remaining deficiencies and continue the process of implementing its action plan.
Pakistan
Pakistan has taken significant steps towards improving its AML/CFT regime, Including introducing CFT amendments into Parliament. However, despite Pakistan's high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Pakistan has not yet made sufficient progress in fully implementing its action plan, and certain key CFT deficiencies remain. Specifically, Pakistan needs to enact legislation to ensure that it meets the FATF standards regarding the terrorist financing offence and the ability to identify, freeze, and confiscate terrorist assets. The FATF encourages Pakistan to address the remaining deficiencies and continue the process of implementing its action plan.
São Tomé and Príncipe
Despite São Tomé and Príncipe's high-level political commitment to work with the FATF and GIABA to address its strategic AML/CFT deficiencies, São Tomé and Príncipe has not made sufficient progress In implementing its action plan, and certain strategic deficiencies remain. São Tomé and Príncipe should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing a fully operational and effectively functioning Financial Intelligence Unit; (3)ensuring that financial institutions and DNFBPs are subject to adequate AML/CFT regulation and supervision; and (4) implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements. The FATF encourages São Tomé and Príncipe to address its remaining deficiencies and continue the process of implementing its action plan.
Sri Lanka
Sri Lanka has taken significant steps towards improving its AML/CFT regime. However, despite Sri Lanka's high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Sri Lanka has not made sufficient progress in implementing Its action plan. Sri Lanka should continue to work on addressing the remaining issue regarding adequate criminalisation of terrorist financing. The FATF encourages Sri Lanka to address this deficiency and continue the process of implementing its action plan.
Syria
Previously, Syria had taken significant steps towards improving its AML/CFT regime. However, despite Syria's high-level political commitment to work with the FATF and MENAFATF to address Its strategic AML/CFT deficiencies, Syria has not made sufficient progress in implementing Its action plan, and certain strategic AML/CFT deficiencies remain. Syria should continue to work on implementing its action plan to address these deficiencies, including by: (1) providing sufficient legal basis for implementing the obligations under UNSCR 1373 and implementing adequate procedures for identifying and freezing terrorist assets; and (2) ensuring that appropriate laws and procedures are in place to provide mutual legal assistance. The FATF encourages Syria to demonstrate that its remaining deficiencies have been addressed to enable the FATF to properly evaluate Syria's progress.
Tanzania
Tanzania has taken steps towards improving its AML/CFT regime, including enactment of amendments to the Anti-Money Laundering Act and the Prevention of Terrorism Act as well as the issuance of implementing regulations which expand on requirements related to customer due diligence and recordkeeping and provide for an operational independent national Financial Intelligence Unit. However, despite Tanzania's high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies, Tanzania has not made sufficient progress in implementing Its action plan within the agreed timelines, and certain strategic AML/CFT deficiencies remain. Tanzania should continue to work on implementing its action plan to address these deficiencies, including by: (1) clarifying the remaining issues regarding the predicate offences for money laundering and criminalisation of terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets as well as implementing the UNSCRs 1267 and 1373 through law, regulations or other enforceable means. The FATF encourages Tanzania to address its remaining deficiencies, including ratifying the Terrorist Financing Convention, and continue the process of implementing its action plan.
Thailand
Thailand has taken steps towards improving its AML/CFT regime, including by issuing customer due diligence regulations. However, despite Thailand's high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Thailand has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain, although Thailand has faced external difficulties from 2009 to 2011 which significantly impacted the legislative process for the necessary laws and regulations. Thailand should continue to work on implementing its action plan to address the remaining deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing adequate procedures to Identify and freeze terrorist assets; and (3) further strengthening AML/CFT supervision. The FATF encourages Thailand to address its remaining deficiencies and continue the process of implementing its action plan, specifically enacting its draft CFT legislation.
Turkey*
Despite Turkey's high-level political commitment to work with the FATF to address its strategic CFT deficiencies, Turkey has not made sufficient progress in implementing its action plan, and certain strategic CFT deficiencies remain. Turkey should work on addressing these deficiencies, including by: (1) adequately criminalising terrorist financing; and (2) implementing an adequate legal framework for identifying and freezing terrorist assets. Given Turkey's continued lack of progress in these two areas, as a counter-measure, the FATF has decided to suspend Turkey’s membership on 22 February 2013 unless the following conditions are met before that date: (1) Turkey adopts legislation to adequately remedy deficiencies in its terrorist financing offence; and (2) Turkey establishes an adequate legal framework for identifying and freezing terrorist assets consistent with the FATF Recommendations. FATF calls upon countries to take additional steps as necessary proportionate to the risks arising from the deficiencies associated with Turkey.
Viètnam
Vietnam has taken steps towards improving its AML/CFT regime. However, despite Vietnam’s high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Vietnam has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Vietnam should continue to work with the FATF and APG on implementing its action plan to address these deficiencies, including by: (1) address the remaining Issues regarding adequate criminalisation of terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) making legal persons subject to criminal liability in line with FATF Standards or demonstrating that there is a constitutional prohibition that prevents this; (4) improving the overall supervisory framework); (5) improving and broadening customer due diligence measures and reporting requirements; and (6) strengthening international co-operation. The FATF encourages Vietnam to address its remaining deficiencies and continue the process of implementing its action plan.
Yemen
Despite Yemen's high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies, Yemen has not made sufficient progress in implementing its action plan and certain strategic AML/CFT deficiencies remain. Yemen should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalizing money laundering and terrorist financing; (2) establishing and Implementing adequate procedures to identify and freeze terrorist assets; (3) developing the monitoring and supervisory capacity of the financial sector supervisory authorities and the Financial Intelligence Unit (FIU) to ensure compliance by financial institutions with their suspicious transaction reporting obligations, especially in relation to the financing of terrorism; and (4) ensuring a fully operational and effectively functioning FIU. The FATF encourages Yemen to address its remaining deficiencies and continue the process of implementing its action plan.
Ghana
Pursuant to Ghana's progress in largely addressing its action plan agreed upon with the FATF, Ghana is now identified in the FATF’s separate but related public document, "Improving Global AML/CFT Compliance: On-going Process."
Improving Global AML/CFT Compliance: on-going process -19 October 2012
Paris, 19 October 2012 - As part of its on-going review of compliance with the AML/CFT standards, the FATF has to date identified the following jurisdictions which have strategic AML/CFT deficiencies for which they have developed an action plan with the FATF. While the situations differ among each jurisdiction, each jurisdiction has provided a written high-level political commitment to address the identified deficiencies. The FATF welcomes these commitments.
A large number of jurisdictions have not yet been reviewed by the FATF. The FATF continues to identify additional jurisdictions, on an on-going basis, that pose a risk to the international financial system.
The FATF and the FATF-style regional bodies (FSRBs) will continue to work with the jurisdictions noted below and to report on the progress made in addressing the identified deficiencies. The FATF calls on these jurisdictions to complete the implementation of action plans expeditiously and within the proposed timeframes. The FATF will closely monitor the implementation of these action plans and encourages its members to consider the information presented below.
Afghanistan
Cambodia
Philippines
Albania
Ghana
Sudan
Algeria
Kuwait
Tajikistan
Angola
Kyrgyzstan
Venezuela
Antigua and Barbuda
Mongolia
Argentina
Morocco
Bangladesh
Namibia
Nicaragua
Brunel Darussalam
Nepal
Zimbabwe
Trinidad and Tobago
Afghanistan
In June 2012, Afghanistan made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since then, Afghanistan has taken steps towards improving its AML/CFT regime, including by establishing high level AML/CFT coordination mechanisms. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Afghanistan should continue to work on implementing Its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (3) implementing an adequate AML/CFT supervisory and oversight programme for all financial sectors; (4) establishing and implementing adequate procedures for the confiscation of assets related to money laundering; (5) establishing a fully operational and effectively functioning Financial Intelligence Unit; and (6) establishing and implementing effective controls for cross-border cash transactions. The FATF encourages Afghanistan to address its remaining deficiencies and continue the process of implementing its action plan.
Albania
In June 2012, Albania made a high-level political commitment to work with the FATF and MONEYVAL to address its strategic AML/CFT deficiencies. Since then, Albania has taken steps towards improving Its AML/CFT regime, including by enacting legislation to implement adequate customer due diligence provisions. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Albania should continue to work on implementing its action plan to address these deficiencies, including by; (1) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; and (2) enhancing the framework for international co-operation related to terrorist financing, The FATF encourages Albania to address its remaining deficiencies and continue the process of implementing its action plan.
Algeria
In October 2011, Algeria made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since then, Algeria has taken steps towards improving its AML/CFT regime, including expanding the financial entities subject to reporting requirements, providing for the legal autonomy of the Financial Intelligence Unit and expanding its powers to request information and share information with other competent authorities. However, the FATF has concerns that strategic AML/CFT deficiencies remain and, therefore, further engagement with Algeria is needed to clarify whether these deficiencies have been addressed. Algeria should continue to work on implementing its action plan, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (3) improving and broadening customer due diligence measures; and (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit. The FATF encourages Algeria to address its deficiencies and continue the process of implementing its action plan.
Angola
In June 2010, Angola made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. Since June 2012, Angola has taken steps towards Improving its AML/CFT regime. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Angola should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) ensuring a fully operational and effectively functioning Financial Intelligence Unit; and (3) establishing and implementing an adequate legal framework to identify and freeze terrorist assets without delay. The FATF encourages Angola to address its remaining deficiencies and continue the process of implementing its action plan.
Antigua and Barbuda
In February 2010, Antigua and Barbuda made a high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies. Since June 2012, Antigua and Barbuda has taken steps towards improving its AML/CFT regime, including by enacting amendments to its Banking Act. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Antigua and Barbuda should continue to work on implementing its action plan to address these deficiencies, including by continuing to Improve the overall supervisory framework. The FATF encourages Antigua and Barbuda to address its remaining deficiencies and continue the process of implementing its action plan.
Argentina
In June 2011, Argentina made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. Since June 2012, Argentina has taken substantial steps towards improving its AML/CFT regime, including by applying in practice Presidential Decree 918/2012 to freeze terrorist-related assets.
However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Argentina should continue to work on implementing Its action plan to address these deficiencies, including by: (1) addressing the remaining deficiencies with regard to the criminalisation of money laundering, confiscation of funds related to money laundering, and freezing terrorist-related assets; (2) continuing to enhance financial transparency; (3) addressing the remaining issues for the Financial Intelligence Unit and suspicious transaction reporting requirements; (4) further enhancing the AML/CFT supervisory programme for all financial sectors; (5) further improving and broadening customer due diligence measures; and (6) enhancing the appropriate channels for international co-operation and ensuring effective implementation. The FATF encourages Argentina to address its remaining deficiencies and continue the process of implementing its action plan.
Bangladesh
In October 2010, Bangladesh made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since June 2012, Bangladesh has taken steps towards improving its AML/CFT regime. However, the FATF has determined that certain strategic AML/CFT deficiencies remain, Bangladesh should continue to work on implementing its action plan to address these deficiencies, including by; (1) adequately criminalising terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit; (4) improving international co-operation; and (5) issuing guidance to capital markets Intermediaries to ensure their AML/CFT obligations are complied with. The FATF encourages Bangladesh to address its remaining deficiencies and continue the process of implementing its action plan.
Brunei Darussalam
In June 2011, Brunei Darussalam made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Since June 2012, Brunei Darussalam has taken steps towards improving its AML/CFT regime, including by enacting appropriate mutual legal assistance legislation. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Brunei Darussalam should continue to work on implementing its action plan to address these deficiencies, including by: (1) establishing and implementing adequate procedures to identify and freeze terrorist assets; and (2) ensuring a fully operational and effectively functioning Financial Intelligence Unit. The FATF encourages Brunei Darussalam to address its remaining deficiencies and continue the process of implementing its action plan.
Cambodia
In June 2011, Cambodia made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. The FATF has determined that certain strategic AML/CFT deficiencies remain. Cambodia should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) establishing and implementing adequate procedures for the confiscation of funds related to money laundering; (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit; and (5) establishing and implementing effective controls for cross-border cash transactions. The FATF encourages Cambodia to address its remaining deficiencies and continue the process of implementing its action plan.
Ghana
Pursuant to Ghana's progress in largely addressing its action plan agreed upon with the FATF, Ghana has been removed from the FATF's Public Statement and identified in this document. Since October 2010 when Ghana made a high-level political commitment to work with the FATF and GIABA to address its strategic AML/CFT deficiencies, Ghana has taken important steps towards improving its AML/CFT regime, including by enacting legislation to criminalize money laundering, establishing and implementing adequate measures for the confiscation of funds related to money laundering, improving customer due diligence measures and enhancing the effectiveness of the Financial Intelligence Unit. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Kuwait
In June 2012, Kuwait made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Kuwait should continue to work on implementing its action plan to address these deficiencies, including by. (1) adequately criminalising terrorist financing; (2) implementing the Terrorist Financing Convention; (3) establishing and implementing adequate procedures to identify and freeze terrorist assets; (4) ensuring that appropriate laws and procedures are in place to provide mutual legal assistance; (5) establishing effective customer due diligence measures; (6) ensuring a fully operational and effectively functioning Financial Intelligence Unit (FIU), In particular addressing the operational autonomy of the FIU; and (7) ensuring that financial institutions are aware of and comply with their obligations to file suspicious transaction reports in relation to money laundering and terrorist financing. The FATF encourages Kuwait to address its remaining deficiencies and continue the process of implementing its action plan.
Kyrgyzstan
In October 2011, Kyrgyzstan made a high-level political commitment to work with the FATF and EAG to address its strategic AML/CFT deficiencies. Since June 2012, Kyrgyzstan has taken steps towards improving its AML/CFT regime, including by enacting AML amendments. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Kyrgyzstan should continue to work on implementing Its action plan to address these deficiencies, including by; (1) addressing the remaining issue regarding criminalisation of money laundering; (2) adequately criminalising terrorist financing; (2) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets; (3) addressing remaining issues regarding the implementation of adequate measures for the confiscation of funds related to money laundering; (4) establishing effective customer due diligence measures for all financial institutions; and (5) implementing an adequate and effective AML/CFT supervisory programme for all financial sectors. The FATF encourages Kyrgyzstan to address its deficiencies and continue the process of implementing its action plan, in particular swiftly enacting adequate CFT amendments,
Mongolia
In June 2011, Mongolia made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since June 2012, Mongolia has taken steps towards improving its AML/CFT regime, including by establishing a dedicated AML unit within its police department. However, the FATF has determined that strategic AML/CFT deficiencies remain. Mongolia should continue to work on implementing Its action plan to address these deficiencies, including by; (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) establishing adequate procedures for the confiscation of funds related to money laundering; (4) establishing suspicious transaction reporting requirements; and (5) demonstrating effective regulation of money service providers, The FATF encourages Mongolia to address its remaining deficiencies and continue the process of implementing its action plan.
Morocco
In February 2010, Morocco made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since then, Morocco has demonstrated progress in improving its AML/CFT regime, including by adopting amendments to extend the scope of the money laundering and terrorist financing offences, to broaden customer due diligence requirements and taking steps to operationalise the Financial Intelligence Unit. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Morocco should continue to work on implementing Its action plan to address these deficiencies, including by enacting legislation to adequately criminalize terrorist financing.
Namibia
In June 2011,'Namibia made a high-level political commitment to work with the FATF and ESAAMLG to address Its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Namibia should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) implementing an adequate AML/CFT supervisory programme with sufficient powers; (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit (FIU), in particular addressing the operational autonomy of the FIU; and (5) implementing effective, proportionate and dissuasive sanctions in order to deal with non-compliance with the national AML/CFT requirements. The FATF encourages Namibia to address its remaining deficiencies and continue the process of implementing its action plan.
Nepal
In February 2010, Nepal made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since June 2012, Nepal has taken steps to improve Its AML/CFT system, Including by ensuring that information held by the FIU is securely protected. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Nepal should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) implementing adequate procedures for the confiscation of funds related to money laundering; (4) enacting and implementing appropriate mutual legal assistance legislation; (5) ensuring a fully operational and effectively functioning Financial Intelligence Unit; and (6) establishing adequate suspicious transaction reporting obligations for ML and FT. The FATF encourages Nepal to address its remaining deficiencies and continue the process of implementing its action plan.
Philippines
In October 2010, the Philippines made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since June 2012, the Philippines has taken steps to improve its AML/CFT system, including by issuing the implementing rules and regulations for the recently enacted CFT law. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. The Philippines should continue to work on implementing its action plan to address these deficiencies, including by: (1) taking additional measures to
adequately criminalise money laundering; and (2) extending coverage of reporting entities to Include designated non-financial businesses and professions. The FATF encourages the Philippines to address Its remaining deficiencies and continue the process of Implementing its action plan. In particular, the FATF strongly encourages the Philippines to enact the pending legislative amendment on AML.
Sudan
In February 2010, Sudan made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Sudan should continue to work on implementing its action plan to address these deficiencies, including by: (1) implementing adequate procedures for identifying and freezing terrorist assets; (2) ensuring a fully operational and effectively functioning Financial Intelligence Unit; and (3) ensuring an effective supervisory programme for AML/CFT compliance. The FATF encourages Sudan to address its remaining deficiencies and continue the process of implementing its action plan.
Tajikistan
In June 2011, Tajikistan made a high-level political commitment to work with the FATF and EAG to address its strategic AML/CFT deficiencies. Since June 2012, Tajikistan has taken steps towards improving its AML/CFT regime. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Tajikistan should continue to work on Implementing its action plan to address these deficiencies, including by: (1) addressing remaining issues regarding criminalisation of money laundering and terrorist financing; (2) establishing and implementing adequate procedures for the confiscation of funds related to money laundering and identifying and freezing terrorist assets; (3) addressing the remaining Issues relating to the Financial Intelligence Unit and improving suspicious transaction reporting requirements; and (4) improving and broadening customer due diligence measures. The FATF encourages Tajikistan to address its remaining deficiencies and continue the process of implementing its action plan.
Venezuela
In October 2010, Venezuela made a high-level political commitment to work with the FATF and CFATF to address Its strategic AML/CFT deficiencies. Since then, Venezuela has taken steps towards improving its AML/CFT regime, including by enacting AML/CFT legislation that criminalises terrorist financing and establishes suspicious transaction reporting (STR) obligations for money laundering and financing of terrorism, and issuing new resolutions aimed at establishing and implementing adequate procedures to identify and freeze terrorist assets. The FATF will conduct an on-site visit to confirm that the process of Implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Trinidad and Tobago
The FATF welcomes Trinidad and Tobago's significant progress in improving its AML/CFT regime and notes that Trinidad and Tobago has established the legal and regulatory framework to meet its commitments in its Action Plan regarding the strategic deficiencies that the FATF had identified in February 2010. Trinidad and Tobago is therefore no longer subject to FATF's monitoring process under its ongoing global AML/CFT compliance process. Trinidad and Tobago will work with CFATF as it continues to address the full range of AML/CFT issues identified In its Mutual Evaluation Report, particularly implementation of the new legislative and regulatory reform in order to more effectively combat illicit finance in Trinidad and Tobago.
Jurisdictions not making sufficient progress
The FATF is not yet satisfied that the following jurisdictions have made sufficient progress on their action plan agreed upon with the FATF. The most significant action plan items and/or the majority of the action plan items have not been addressed. If these jurisdictions do not take sufficient action to implement significant components of their action plan by February 2013, then the FATF will identify these jurisdictions as being out of compliance with their agreed action plans and will take the additional step of calling upon its members to consider the risks arising from the deficiencies associated with the jurisdiction.
Nicaragua
Despite Nicaragua's high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Nicaragua has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Nicaragua should work with the FATF and CFATF on implementing its action plan to address these deficiencies, including by: (1) establishing effective customer due diligence measures and record-keeping requirements, in particular entities not currently regulated by the supervisory authority; (2) establishing adequate suspicious transaction reporting obligations for ML and FT; (3) implementing an adequate AML/CFT supervisory programme for all financial sectors; (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit; and (5) establishing adequate procedures for identifying and freezing terrorist assets. The FATF encourages Nicaragua to address its remaining deficiencies and continue the process of implementing its action plan.
Zimbabwe
Despite Zimbabwe's high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Zimbabwe has made sufficient progress In implementing Its action plan, and certain strategic AML/CFT deficiencies remain. Zimbabwe should work with the FATF and ESAAMLG on implementing its action plan to address these deficiencies, including by; (1) adequately criminalising money laundering and terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit; (4) ensuring that financial institutions are aware of and comply with their obligations to file suspicious transaction reports in relation to money laundering and the financing of terrorism; (5) enacting and implementing appropriate mutual legal assistance legislation; and (6) ratifying the Terrorist Financing Convention. The FATF encourages Zimbabwe to address its remaining deficiencies and continue the process of implementing its action plan.
FATF Statement from the 22nd Meeting in Paris dated 22-2-2011
Outcomes of the FATF Plenary meeting, Paris, 23-25 February 2011
Under the Mexican Presidency, the FATF Plenary met in Paris on 23-25 February 2011 and has taken important new steps to protect the international financial system from abuse by:
- Producing two public documents as part of its ongoing work to identify jurisdictions that may pose a risk to the international financial system.
- FATF public statement
- Improving global AML/CFT compliance: on-going process
- Adopting the mutual evaluation reports of France and the Netherlands
- Publishing the Follow-Up Report to the mutual evaluation report of Singapore.
- Issuing a statement on the progress made by Argentina in addressing deficiencies identified in their mutual evaluation of October 2010.
- Agreeing to hold the Annual meeting of experts on typologies, organised jointly with the APG in Busan, Korea at the end of November 2011.
The FATF President also chaired a separate meeting with anti-corruption and anti-money laundering experts on the use of AML/CFT measures in the fight against corruption.
- Mutual Evaluation of France
The FATF has completed and adopted the third mutual evaluation of the AML/CFT system in France. France has over the past several years continually strengthened, refined and expanded its system. France’s overall degree of compliance with the FATF 40+9 Recommendations is very high, particularly in the financial sector and in the legal area. France should now focus its efforts on certain non-financial professions that still have to improve their level of compliance with the standards. Taking into account the high quality and overall effectiveness of the French system, France will henceforth report back to the FATF on a biennial basis on the further evolution of its AML/CFT system which now ranks as one of the most robust in the FATF.
- Mutual Evaluation of France
Mutual Evaluation of the Netherlands
The FATF has completed and adopted the third mutual evaluation of the AML/CFT system in the Netherlands. The AML/CFT system of the Netherlands is largely in line with the FATF requirements but some shortcomings in the legal framework and the implementation of already existing measures need to be addressed. The Netherlands will report back to the FATF as part of the regular follow-up process.
- Mutual Evaluation of the Netherlands
Follow-Up Report Singapore
The FATF has approved and published the Follow-Up Report of Singapore. Singapore has now taken action to address sufficiently the issue of criminalisation of money laundering and has therefore been taken off the regular follow-up process at this meeting. Singapore has also made progress in strengthening other aspects of their system. Henceforth, Singapore will report back to the Plenary on further developments in its AML/CFT system on a biennial basis.
- Follow-up report to the Mutual Evaluation of Singapore
Statement on the progress made by Argentina
The FATF heard Argentina’s report on progress made since the adoption of the FATF’s mutual evaluation of Argentina in October 2010. The FATF noted the high- level commitment expressed by the Minister of Justice at the Plenary and the preliminary action plan presented by Argentina. The FATF maintains its serious concern regarding the large number of significant AML/CFT deficiencies that remain and expects Argentina to make substantial progress in addressing these deficiencies by June 2011, in particular progress in the criminalisation of money laundering and terrorist financing. The FATF will work closely with Argentina throughout this process and will consider next steps in the context of the enhanced follow-up process for members insufficiently in compliance with FATF Recommendations.
Expert meeting on Corruption
Anti-corruption and anti-money laundering experts and policy makers from national governments, and international and regional bodies met on 27 February to gather information on how AML/CFT measures usefully contribute to the fight against corruption and to enhance engagement. Click here to see the President's Summary of this meeting.
Luis Urrutia Corral President FATF 28 February 2011 Improving Global AML/CFT Compliance: update on-going process
Paris 25 February 2011 - As part of its ongoing review of compliance with the AML/CFT standards, the FATF has to date identified the following jurisdictions which have strategic AML/CFT deficiencies for which they have developed an action plan with the FATF. While the situations differ among each jurisdiction, each jurisdiction has provided a written high-level political commitment to address the identified deficiencies. The FATF welcomes these commitments.
A large number of jurisdictions have not yet been reviewed by the FATF. The FATF continues to identify additional jurisdictions, on an ongoing basis, that pose a risk in the international financial system. The FATF has additionally begun initial reviews of a number of other jurisdictions as part of this process and will present its findings later this year.
The FATF and the FSRBs will continue to work with the jurisdictions noted below and to report on the progress made in addressing the identified deficiencies. The FATF calls on these jurisdictions to complete the implementation of action plans expeditiously and within the proposed timeframes. The FATF will closely monitor the implementation of these action plans and encourages its members to consider the information presented below.
Antigua and Barbuda
In February 2010, Antigua and Barbuda made a high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Antigua and Barbuda should continue to work on implementing its action plan to address these deficiencies, including by: (1) implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III); and (2) continuing to improve the overall supervisory framework (Recommendation 23). The FATF encourages Antigua and Barbuda to address its remaining deficiencies and continue the process of implementing its action plan.
Bangladesh
In October 2010, Bangladesh made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since October, Bangladesh has taken steps towards improving its AML/CFT regime, including by amending the Extradition Act to include ML/FT offences. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Bangladesh should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) implementing adequate procedures for the confiscation of funds related to money laundering (Recommendation 3); (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (5) improving suspicious transaction reporting requirements (Recommendation 13 and Special Recommendation IV); and (6) improving international cooperation (Recommendations 36 and 39 and Special Recommendation V). The FATF encourages Bangladesh to address its remaining deficiencies and continue the process of implementing its action plan.
Ecuador
In June 2010, Ecuador made a high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies. Since October, Ecuador has taken steps towards improving its AML/CFT regime, including by enacting AML and CFT amendments. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Ecuador should continue to work on implementing its action plan to address these deficiencies, including by: (1) ensuring adequate criminalisation of terrorist financing (Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) implementing adequate procedures for the confiscation of funds related to money laundering (Recommendation 3); and (4) reinforcing and improving coordination of financial sector supervision (Recommendation 23). The FATF encourages Ecuador to address its remaining deficiencies and continue the process of implementing its action plan.
Ghana
In October 2010, Ghana made a high-level political commitment to work with the FATF and GIABA to address its strategic AML/CFT deficiencies. However, the FATF has determined that strategic AML/CFT deficiencies remain. Ghana should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate measures for the confiscation of funds related to money laundering (Recommendation 3); (3) establishing effective CDD measures (Recommendation 5); (4) establishing a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); and (5) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III). The FATF encourages Ghana to address its remaining deficiencies and continue the process of implementing its action plan.
Greece
In February 2010, Greece made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. Since that time, Greece has demonstrated progress in improving its AML/CFT regime, including by adopting legislation that aims to address issues relating to criminalisation of terrorist financing, freezing of terrorist assets under UNSCR 1373, and the independence and operation of the FIU. The FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Honduras
In October 2010, Honduras made a high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies. Since October, Honduras has taken steps towards improving its AML/CFT regime, including by enacting legislation that criminalises terrorist financing. However, the FATF has determined that strategic AML/CFT deficiencies remain. Honduras should continue to work on implementing its action plan to address these deficiencies, including by: (1) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (2) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); and (3) improving and broadening CDD measures (Recommendation 5). The FATF encourages Honduras to address its remaining deficiencies and continue the process of implementing its action plan.
Indonesia
In February 2010, Indonesia made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Indonesia should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); and (3) amending and implementing laws or other instruments to fully implementing the 1999 International Convention for the Suppression of Financing of Terrorism (Special Recommendation I). The FATF encourages Indonesia to address its remaining deficiencies and continue the process of implementing its action plan.
Morocco
In February 2010, Morocco made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since that time, Morocco has demonstrated progress in improving its AML/CFT regime, including by adopting amendments to extend the scope of the money laundering and terrorist financing offences; to broaden customer due diligence requirements and taking steps to operationalise the FIU. Once the FATF assesses this recent legislation and ensures that these measures address the identified deficiencies, it will organise an onsite visit to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF.
Pakistan
In June 2010, Pakistan made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since October, Pakistan has taken steps towards improving its AML/CFT regime, including by issuing STR guidance to its financial institutions. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Pakistan should continue to work on implementing its action plan to address these deficiencies, including by (1) demonstrating adequate criminalisation of money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) demonstrating adequate procedures to identify, freeze and confiscate terrorist assets (Special Recommendation III); (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (4) demonstrating effective regulation of money service providers, including an appropriate sanctions regime, and increasing the range of ML/FT preventive measures for these services (Special Recommendation VI); and (5) improving and implementing effective controls for cross-border cash transactions (Special Recommendation IX). The FATF encourages Pakistan to address its remaining deficiencies and continue the process of implementing its action plan.
Paraguay
In February 2010, Paraguay made a high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies. Since October, Paraguay has taken steps towards improving its AML/CFT regime, including issuing regulations prohibiting anonymous accounts. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Paraguay should continue to work on implementing its action plan to address these deficiencies, including by: (1) establishing and implementing adequate procedures to identify, freeze and confiscate terrorist assets (Special Recommendation III); and (2) effectively implementing controls for cross-border cash transactions (Special Recommendation IX). The FATF encourages Paraguay to address its remaining deficiencies and continue the process of implementing its action plan.
Philippines
In October 2010, the Philippines made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since October, the Philippines has taken steps towards improving its AML/CFT regime, including by issuing new AML regulations. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. The Philippines should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) implementing adequate procedures to identify and freeze terrorist assets and confiscate funds related to money laundering (Special Recommendation III and Recommendation 3); (3) enhancing financial transparency (Recommendation 4); (4) ensuring capacity and financial resources for competent authorities (Recommendation 30); and (5) establishing effective CDD measures (Recommendation 5). The FATF encourages the Philippines to address its remaining deficiencies and continue the process of implementing its action plan.
São Tomé and Príncipe
In October 2010, São Tomé and Príncipe made a high-level political commitment to work with the FATF and GIABA to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Sao Tome and Principe should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (3) ensuring that financial institutions and DNFBPs are subject to adequate AML/CFT regulation and supervision, and that a competent authority or competent authorities have been designated to ensure compliance with AML/CFT requirements (Recommendations 23, 24 and 29); (4) implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements (Recommendation 17); and (5) taking the necessary action to gain membership of GIABA. The FATF encourages Sao Tome and Principe to address its remaining deficiencies and continue the process of implementing its action plan.
Sudan
In February 2010, Sudan made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since October, Sudan has taken steps towards improving its AML/CFT regime, including by issuing FIU regulations and circulars to financial institutions. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Sudan should continue to work on implementing its action plan to address these deficiencies, including by: (1) implementing adequate procedures for identifying and freezing terrorist assets (Special Recommendation III); (2) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (3) ensuring financial institutions are aware of and comply with their obligations to file suspicious transaction reports in relation to ML and FT (Recommendation 13 and Special Recommendation IV); and (4) implementing a supervisory programme for the regulators to ensure compliance with the provisions of the new law and regulations (Recommendation 23). The FATF encourages Sudan to address its remaining deficiencies and continue the process of implementing its action plan.
Tanzania
In October 2010, Tanzania made a high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Tanzania should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets as well as implementing the UNSCR 1267 and 1373 through law, regulations or other enforceable means (Special Recommendation III); (3) establishing effective CDD measures (Recommendation 5); (4) establishing adequate record-keeping requirements (Recommendation 10); (5) establishing a fully operational and effectively functioning national Financial Intelligence Unit (Recommendation 26); and (6) designating competent authorities to ensure compliance with AML/CFT requirements (Recommendation 23). The FATF encourages Tanzania to address its remaining deficiencies and continue the process of implementing its action plan.
Thailand
In February 2010, Thailand made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since October, Thailand has taken steps towards improving its AML/CFT regime, including by approving a national AML/CFT strategy. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Thailand should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); and (3) further strengthening AML/CFT supervision (Recommendation 23). The FATF encourages Thailand to address its remaining deficiencies and continue the process of implementing its action plan.
Turkmenistan
In June 2010, Turkmenistan made a high-level political commitment to work with the FATF and EAG to address its strategic AML/CFT deficiencies. Since October, Turkmenistan has taken steps towards improving its AML/CFT regime, including by undergoing an on-site for its mutual evaluation. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Turkmenistan should continue to work on implementing its action plan to address these deficiencies, including by: (1) addressing the remaining issues with the criminalisation of money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) implementing adequate procedures to identify and freeze terrorist assets without delay (Special Recommendation III); (3) ensuring a fully operational and effectively functioning FIU (Recommendation 26); (4) developing collaboration between the FIU and domestic counterparts, including supervisory authorities; and (5) strengthening international cooperation. The FATF encourages Turkmenistan to address its remaining deficiencies and continue the process of implementing its action plan.
Ukraine
In February 2010, Ukraine made a high-level political commitment to work with the FATF and MONEYVAL to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Ukraine should continue to work on implementing its action plan to address these deficiencies, including by: (1) addressing a few remaining issues regarding criminalisation of money laundering (Recommendation 1); and (2) improving and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III). The FATF encourages Ukraine to address its remaining deficiencies and continue the process of implementing its action plan.
Venezuela
In October 2010, Venezuela made a high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies. Since October, Venezuela has taken steps towards improving its AML/CFT regime, including by issuing regulations for the securities sector. However, the FATF has determined that certain strategic deficiencies remain. Venezuela should continue to work with the FATF and CFATF on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendations I and III); (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (4) implementing adequate CDD guidelines for all sectors (Recommendation 5); and (5) establishing adequate STR reporting obligations for ML and FT (Recommendation 13 and Special Recommendation IV). The FATF encourages Venezuela to address its remaining deficiencies and continue the process of implementing its action plan.
Vietnam
In October 2010, Vietnam made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Vietnam should continue to work with the FATF and APG on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) improving the overall supervisory framework (Recommendation 23); (4) improving and broadening customer due diligence measures and reporting requirements (Recommendation 5, 13, and Special Recommendation IV); and (5) strengthening international cooperation (Recommendations 36, 40). The FATF encourages Vietnam to address its remaining deficiencies and continue the process of implementing its action plan.
Yemen
In February 2010, Yemen made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since October, Yemen has taken steps towards improving its AML/CFT regime, including by issuing executive regulations for its AML/CFT law, including on customer due diligence and suspicious transaction reporting. However, the FATF has determined that certain strategic deficiencies remain. Yemen should continue to work on implementing its action plan to address these deficiencies, including by: (1) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (2) issuing substantive guidance/instructions to reporting institutions with respect to their ML/FT obligations (Recommendation 25); (3) developing the monitoring and supervisory capacity of the financial sector supervisory authorities and the FIU, to ensure compliance by financial institutions with their STR obligations, especially in relation to FT (Recommendation 23); and (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26). The FATF encourages Yemen to address its remaining deficiencies and continue the process of implementing its action plan.
Jurisdictions not making sufficient progress
The FATF is not yet satisfied that the following jurisdictions have made sufficient progress on their action plan agreed upon with the FATF. The most significant action plan items and/or the majority of their action plan items have not been addressed. If these jurisdictions do not take sufficient action to implement significant components of their action plan by June 2011, then the FATF will identify these jurisdictions as being out of compliance with their agreed action plans and will take the additional step of calling upon its members to consider the risks arising from the deficiencies associated with the jurisdiction.
Angola Despite Angola’s high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Angola has made sufficient progress in implementing its action plan, and certain strategic deficiencies remain. Angola should work on addressing these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); and (3) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets (Special Recommendation III). The FATF encourages Angola to address its remaining deficiencies and continue the process of implementing its action plan. Bolivia Despite Bolivia’s high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Bolivia has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Bolivia should work on addressing these deficiencies including by: (1) ensuring adequate criminalisation of money laundering (Recommendation 1); (2) adequately criminalising terrorist financing (Special Recommendation II); (3) establishing and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III); and (4) establishing a fully operational and effective Financial Intelligence Unit (Recommendation 26). The FATF encourages Bolivia to address its remaining deficiencies and continue the process of implementing its action plan. Ethiopia Despite Ethiopia’s high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Ethiopia has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Ethiopia should work on addressing these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing an adequate legal framework and procedures to identify and freeze terrorist assets (Special Recommendation III); (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (4) raising awareness of AML/CFT issues within the law enforcement community (Recommendation 27); and (5) implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements (Recommendation 17). The FATF encourages Ethiopia to address its remaining deficiencies and continue the process of implementing its action plan. Kenya Despite Kenya’s high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Kenya has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Kenya should work on addressing these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (3) establishing and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III); (4) raising awareness of AML/CFT issues within the law enforcement community (Recommendation 27); and (5) implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements (Recommendation 17).
The FATF encourages Kenya to address its remaining deficiencies and continue the process of implementing its action plan.
Myanmar Despite Myanmar’s high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Myanmar has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Myanmar should work on addressing these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) strengthening the extradition framework in relation to terrorist financing (Recommendation 35 and Special Recommendation I); (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (5) enhancing financial transparency (Recommendation 4); and (6) strengthening customer due diligence measures (Recommendations 5). The FATF encourages Myanmar to address its remaining deficiencies and continue the process of implementing its action plan. Nepal Despite Nepal’s high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Nepal has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Nepal should work on addressing these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) implementing adequate procedures for the confiscation of funds related to money laundering (Recommendation 3); and (4) enacting and implementing appropriate mutual legal assistance legislation (Recommendation 36). The FATF encourages Nepal to address its remaining deficiencies and continue the process of implementing its action plan. Nigeria Despite Nigeria’s high-level political commitment to work with the FATF and GIABA to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Nigeria has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. It is important to note that Nigeria passed AML and CFT legislation that the FATF has not yet examined due to the very recent nature of this action. The FATF will assess this legislation and, in any case, Nigeria should work on addressing its deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) ensuring that relevant laws or regulations address deficiencies in customer due diligence requirements and that they apply to all financial institutions (Recommendation 5); and (4) demonstrating that AML/CFT supervision is undertaken effectively across the financial sector (Recommendation 23). The FATF encourages Nigeria to address its remaining deficiencies and continue the process of implementing its action plan. Sri Lanka Despite Sri Lanka’s high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Sri Lanka has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Sri Lanka should work on addressing these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); and (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III). The FATF encourages Sri Lanka to address its remaining deficiencies and continue the process of implementing its action plan. Syria Despite Syria’s high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Syria has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. It is important to note that Syria issued an AML/CFT Decree that the FATF has not yet assessed due to the very recent nature of this action. The FATF will assess this decree and, in any case, Syria should continue to work on addressing its deficiencies, including by: (1) adopting adequate measures to implement and enforce the 1999 International Convention for the Suppression of Financing of Terrorism (Special Recommendation I); (2) ensuring adequate criminalisation of terrorist financing (Special Recommendation II); (3) implementing adequate procedures for identifying and freezing terrorist assets (Special Recommendation III); (4) ensuring financial institutions are aware of and comply with their obligations to file suspicious transaction reports in relation to ML and FT (Recommendation 13 and Special Recommendation IV); and (5) adopting appropriate laws and procedures to provide mutual legal assistance (Recommendations 36-38, Special Recommendation V). The FATF encourages Syria to address its remaining deficiencies and continue the process of implementing its action plan. Trinidad and Tobago Despite Trinidad and Tobago’s high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Trinidad and Tobago has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. It is important to note that Trinidad and Tobago enacted CFT Regulations and FIU Regulations that the FATF has not yet examined due to the very recent nature of this action. The FATF will assess these regulations and, in any case, Trinidad and Tobago should continue to work on addressing its deficiencies, including by: (1) implementing adequate procedures to identify and freeze terrorist assets without delay (Special Recommendation III); (2) implementing adequate procedures for the confiscation of funds related to money laundering (Recommendation 3); and (3) establishing a fully operational and effectively functioning FIU, including supervisory powers (Recommendation 26). The FATF encourages Trinidad and Tobago to address its remaining deficiencies and continue the process of implementing its action plan. Turkey Despite Turkey’s high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies, the FATF is not yet satisfied that Turkey has made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Turkey should work on addressing these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); and (2) implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III). The FATF encourages Turkey to address its remaining deficiencies and continue the process of implementing its action plan. - Producing two public documents as part of its ongoing work to identify jurisdictions that may pose a risk to the international financial system.
FATF Statement from the 28th Meeting in Paris Dated 22-10-2010
FATF Public Statement
Paris, 22 October 2010 - The Financial Action Task Force (FATF) is the global standard setting body for anti-money laundering and combating the financing of terrorism (AML/CFT). In order to protect the international financial system from ML/FT risks and to encourage greater compliance with the AML/CFT standards, the FATF identified jurisdictions that have strategic deficiencies and, along with the FATF-style regional bodies (FSRBs), works with them to address those deficiencies that pose a risk to the international financial system. The FATF and the relevant FSRBs will continue to work with the jurisdictions below and report on their progress in addressing the identified deficiencies.
1. Jurisdictions subject to a FATF call on its members and other jurisdictions to apply counter-measures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/TF) risks emanating from the jurisdiction *: Iran 2. Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of October 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with the jurisdiction, as described below. Democratic People's Republic of Korea (DPRK) * The FATF has previously issued public statements calling for counter-measures on Iran. Those statements are updated below.
Jurisdictions subject to a FATF call on its members and other jurisdictions to apply counter-measures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/TF) risks emanating from the jurisdiction:
Iran
The FATF welcomes the recent steps that Iran has taken to engage with the FATF, but remains concerned by Iran's failure to meaningfully address the ongoing and substantial deficiencies in its anti-money laundering and combating the financing of terrorism (AML/CFT) regime The FATF remains particularly concerned about Iran's failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system. The FATF urges Iran to immediately and meaningfully address its AML/CFT deficiencies, in particular by criminalising terrorist financing and effectively implementing suspicious transaction reporting (STR) requirements
The FATF reaffirms its call on members and urges all jurisdictions to advise their financial institutions to give special attention to business relationships and transactions with Iran, including Iranian companies and financial institutions. In addition to enhanced scrutiny, the FATF reaffirms its 25 February 2009 call on its members and urges all jurisdictions to apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) risks emanating from Iran. FATF continues to urge jurisdictions to protect against correspondent relationships being used to bypass or evade counter-measures and risk mitigation practices, and to take into account ML/FT risks when considering requests by Iranian financial institutions to open branches and subsidiaries in their jurisdiction. If Iran fails to take concrete steps to improve its AML/CFT regime, the FATF will consider calling on its members and urging all jurisdictions to strengthen counter-measures in February 2011.
- Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of October 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with the jurisdiction, as described below.
Democratic People's Republic of Korea (DPRK)
The Democratic People's Republic of Korea (DPRK) has not committed to the AML/CFT international standards, nor has it responded to the FATF's numerous requests for engagement on these issues. DPRK's lack of a comprehensive AML/CFT regime poses a risk to the international financial system. DPRK should work with the FATF to develop a viable AML/CFT regime in line with international standards.
Improving Global AML/CFT Compliance: update on-going process
Paris 22 October 2010 - As part of its ongoing review of compliance with the AML/CFT standards, the FATF has to date identified the following jurisdictions which have strategic AML/CFT deficiencies for which they have developed an action plan with the FATF While the situations differ among each jurisdiction, each jurisdiction has provided a written high-level political commitment to address the identified deficiencies. FATF welcomes these commitments.
A large number of jurisdictions have not yet been reviewed by the FATF. The FATF continues to identify additional jurisdictions, on an ongoing basis, that pose a risk in the international financial system. The new jurisdictions identified in this document are: Bangladesh Ghana, Honduras, Philippines, Tanzania, Venezuela, and Vietnam. The FATF has additionally begun initial reviews of a number of other jurisdictions as part of this process and will present its findings next year.
The FATF and the FSRBs will continue to work with the jurisdictions noted below and to report on the progress made in addressing the identified deficiencies. The FATF calls on these jurisdictions to complete the implementation of action plans expeditiously and within the proposed timeframes. The FATF will closely monitor the implementation of these action plans and encourages its members to consider the information presented below.
Angola
In June 2010, Angola made a high-level political commitment to Work With the FATF to address its strategic AML/CFT deficiencies. Since June, Angola has taken steps towards improving its AML/CFT regime, including by enacting an AML/CFT law and ratifying the UN Convention on Transnational Organised Crime. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Angola will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (3) establishing and implementing an adequate legal framework for identifying, tracing and freezing terrorist assets (Special Recommendation III); and (4) ratifying the UN Convention for the Suppression of the Financing of Terrorism. The FATF encourages Angola to address its remaining deficiencies and continue the process of implementing its action plan.
Antigua and Barbuda
In February 2010, Antigua and Barbuda made a high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies. Since June, Antigua and Barbuda has taken steps towards improving its AML/CFT regime, including by passing the Cooperative Societies Bill framework. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Antigua and Barbuda should continue to work on implementing its action plan to address these deficiencies, including by: (1) implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III); (2) continuing to improve the overall supervisory framework (Recommendation 23); and (3) enhancing financial transparency (Recommendation 4). The FATF encourages Antigua and Barbuda to address its remaining deficiencies and continue the process of implementing its action plan.
Bangladesh
In October 2010, Bangladesh made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Bangladesh has taken steps towards improving its AML/CFT regime. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Bangladesh will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) implementing adequate procedures for the confiscation of funds related to money laundering (Recommendation 3); (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (5) improving suspicious transaction reporting requirements (Recommendation 13 and Special Recommendation IV); and (6) improving international cooperation (Recommendations 36 and 39 and Special Recommendation V). The FATF encourages Bangladesh to address its remaining deficiencies and continue the process of implementing its action plan.
Bolivia
In February 2010, Bolivia made a high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic deficiencies remain. Bolivia should continue to work on implementing its action plan to address these deficiencies, including by: (1) ensuring adequate criminalisation of money laundering g (Recommendation 1); (2) adequately criminalizing terrorist financing (Special Recommendation II); (3) establishing and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III); and (4) establishing a fully operational and effective Financial Intelligence Unit (Recommendation 26). The FATF encourages Bolivia to address its remaining deficiencies and continue the process of implementing its action plan.
Ecuador
In June 2010, Ecuador made a high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies. Since June, Ecuador has taken steps towards improving its AML/CFT regime, including by tabling a revised AML/CFT law. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Ecuador will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) implementing adequate procedures for the confiscation of funds related to money laundering (Recommendation 3); and (4) reinforcing and improving coordination of financial sector supervision (Recommendation 23). The FATF encourages Ecuador to address its remaining deficiencies and continue the process of implementing its action plan.
Ethiopia
In June 2010, Ethiopia made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Ethiopia will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing an adequate legal framework and procedures to identify and freeze terrorist assets (Special Recommendation III); (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (4) raising awareness of AML/CFT issues within the law enforcement community (Recommendation 27); and (5) implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements (Recommendation 17). The FATF encourages Ethiopia to address its remaining deficiencies and continue the process of implementing its action plan.
Ghana
In October 2010, Ghana made a high-level political commitment to work with the FATF and GIABA to address its strategic AML/CFT deficiencies. Ghana has taken steps towards improving its AML/CFT regime. However, the FATF has determined that strategic AML/CFT deficiencies remain. Ghana will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate measures for the confiscation of funds related to money laundering (Recommendation 3); (3) establishing effective CDD measures (Recommendation 5); (4) establishing a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); and (5) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III). The FATF encourages Ghana to address its remaining deficiencies and continue the process of implementing its action plan.
Greece
In February 2010, Greece made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. Since June, Greece has taken steps towards improving its AML/CFT regime, including by taking measures to enhance the effectiveness of the FIU and adopting legislation to adequately criminalise terrorist financing. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Greece should continue to work on implementing its action plan to address these deficiencies, including by: (1) improving exisiting mechanisms and procedures for freezing terrorist assets under UNSCR 1373 (Special Recommendation III); and (2) further enhancing the effectiveness of the FIU (Recommendation 26). The FATF encourages Greece to address its remaining deficiencies and continue the process of implementing its action plan.
Honduras
In October 2010, Honduras made a high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies. Honduras has taken steps towards improving its AML/CFT regime. However, the FATF has determined that strategic AML/CFT deficiencies remain. Honduras will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); and (4) improving and broadening CDD measures (Recommendation 5). The FATF encourages Honduras to address its remaining deficiencies and continue the process of implementing its action plan.
Indonesia
In February 2010, Indonesia made a high-level political commitment to work with the FATF and the APG to address its strategic AML/CFT deficiencies. Since June, Indonesia has taken steps towards improving its AML/CFT regime, including by approving a new AML law on October 2010. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Indonesia should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) ensuring effective criminalisation of money laundering (Recommendation 1); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); and (3) amending and implementing laws or other instruments to fully implementing the 1999 International Convention for the Suppression of Financing of Terrorism (Special Recommendation I). The FATF encourages Indonesia to address its remaining deficiencies and continue the process of implementing its action plan.
Kenya
In February 2010, Kenya made a high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Kenya should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (3) establishing and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III); (4) raising awareness of AML/CFT issues within the law enforcement community (Recommendation 27); and (5) implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements (Recommendation 17). The FATF encourages Kenya to address its remaining deficiencies and continue the process of implementing its action plan.
Morocco
In February 2010, Morocco made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since June, Morocco has taken steps towards improving its AML/CFT regime, including by taking initial steps to make the FIU more operational. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Morocco should continue to work on implementing its action plan to address these deficiencies, including by: (1) amending the penal code to extend the scope of the ML and FT offences (Recommendation 1 and Special Recommendation II); (2) amending relevant laws or regulations to address deficiencies in customer due diligence requirements (Recommendation 5); and (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26). The FATF encourages Morocco to address its remaining deficiencies and continue the process of implementing its action plan
Myanmar
In February 2010, Myanmar made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Myanmar should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) strengthening the extradition framework in relation to terrorist financing (Recommendation 35 and Special Recommendation I); (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (5) enhancing financial transparency (Recommendation 4); and (6) strengthening customer due diligence measures (Recommendations 5). The FATF encourages Myanmar to address its remaining deficiencies and continue the process of implementing its action plan.
Nepal
In February 2010, Nepal made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since June, Nepal has taken steps towards improving its AML/CFT regime, including by tabling draft amendments on money laundering and terrorist financing. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Nepal should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) implementing adequate procedures for the confiscation of funds related to money laundering (Recommendation 3); and (4) enacting and implementing appropriate mutual legal assistance legislation (Recommendation 36). The FATF encourages Nepal to address its remaining deficiencies and continue the process of implementing its action plan.
Nigeria
In February 2010, Nigeria made a high-level political commitment to work with the FATF and GIABA to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Nigeria should continue to work on implementing its action plan to address these deficiencies, including by- (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) ensuring that relevant laws or regulations address deficiencies in customer due diligence requirements and that they apply to all financial institutions (recommendation 5); and (4) demonstrating that AML/CFT supervision is undertaken effectively across the financial sector (Recommendation 23). The FATF encourages Nigeria to address its remaining deficiencies and continue the process of implementing its action plan.
Pakistan
In June 2010, Pakistan made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. Since June, Pakistan has taken steps towards improving its AML/CFT regime, including by broadening the scope of ML predicate offences. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Pakistan will work on implementing its action plan to address these deficiencies, including by (1) demonstrating adequate criminalisation of money laundering and terrorist financing (Recommendation 1 and Special Recommendation II)- (2) demonstrating adequate procedures to identify freeze and confiscate terrorist assets (Special Recommendation III), (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (4) demonstrating effective regulation of money service providers, including an appropriate sanctions regime, and increasing the range of ML/FT preventive measures for these services (Special Recommendation vi), and (5) improving and implementing effective controls for cross-border cash transactions (Special Recommendation IX). The FATF encourages Pakistan to address its remaining deficiencies and continue the process of implementing its action plan.
Paraguay
In February 2010, Paraguay made a high-level political commitment to work with the FATF and GAFISUD to address its strategic AML/CFT deficiencies. Since June, Paraguay has taken steps towards improving its AML/CFT regime, including by establishing some fundamental CDD measures. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Paraguay should continue to work on implementing its action plan to address these deficiencies, including by: (1) establishing and implementing adequate procedures to identify, freeze and confiscate terrorist assets (Special Recommendation III); (2) improving financial transparency (Recommendation 4); (3) improving and broadening customer due diligence measures (Recommendation 5); and (4) implementing effective controls for cross-border cash transactions (Special Recommendation IX). The FATF encourages Paraguay to address its remaining deficiencies and continue the process of implementing its action plan.
Philippines
In October 2010, the Philippines made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. The Philippines has taken steps towards improving its AML/CFT regime. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. The Philippines will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) implementing adequate procedures to identify and freeze terrorist assets and confiscate funds related to money laundering (Special Recommendation III and Recommendation 3); (3) enhancing financial transparency (Recommendation 4); (4) ensuring capacity and financial resources for competent authorities (Recommendation 30); and (5) establishing effective CDD measures (Recommendation 5). The FATF encourages the Philippines to address its remaining deficiencies and continue the process of implementing its action plan.
São Tomé and Príncipe
In October 2010, São Tomé and Príncipe made a high- level political commitment to work with the FATF and GIABA to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Sao Tome and Principe will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (3) ensuring that financial institutions and DNFBPs are subject to adequate AML/CFT regulation and supervision, and that competent authority or authorities have been designated to ensure compliance with AML/CFT requirements (Recommendations 23, 24 and 29); (4) implementing effective, proportionate and dissuasive sanctions in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements (Recommendation 17); and (5) taking the necessary action to gain membership of GIABA. The FATF encourages Sao Tome and Principe to address its remaining deficiencies and continue the process of implementing its action plan.
Sri Lanka
In February 2010, Sri Lanka made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Sri Lanka should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); and (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III). The FATF encourages Sri Lanka to address its remaining deficiencies and continue the process of implementing its action plan.
Sudan
In February 2010, Sudan made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. Since June, Sudan has taken steps towards improving its AML/CFT regime, including by conducting outreach to financial institutions on AML/CFT obligations and taking initial steps to operationalise the FIU. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Sudan should continue to work on implementing its action plan to address these deficiencies, including by: (1) implementing adequate procedures for identifying and freezing terrorist assets (Special Recommendation III); (2) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (3) ensuring financial institutions are aware of and comply with their obligations to file suspicious transaction reports in relation to ML and FT (Recommendation 13 and Special Recommendation IV); and (4) implementing a supervisory programme for the regulators to ensure compliance with the provisions of the new law and regulations (Recommendation 23). The FATF encourages Sudan to address its remaining deficiencies and continue the process of implementing its action plan.
Syria
In February 2010, Syria made a high-level political commitment to work with the FATF and MENAFATF to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Syria should continue to work on implementing its action plan to address these deficiencies, including by: (1) adopting adequate measures to implement and enforce the 1999 International Convention for the Suppression of Financing of Terrorism (Special Recommendation I); (2) adequately criminalising terrorist financing (Special Recommendation II); (3) implementing adequate procedures for identifying and freezing terrorist assets (Special Recommendation III); (4) ensuring financial institutions are aware of and comply with their obligations to file suspicious transaction reports in relation to ML and FT (Recommendation 13 and Special Recommendation IV) and (5) adopting appropriate laws and procedures to provide mutual legal assistance (Recommendations 36-38, Special Recommendation V). The FATF encourages Syria to address its remaining deficiencies and continue the process of implementing its action plan.
Tanzania
In October 2010, Tanzania made a high-level political commitment to work with the FATF and ESAAMLG to address its strategic AML/CFT deficiencies. Tanzania has taken steps towards improving its AML/CFT regime. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Tanzania will work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets as well as implementing the UNSCR 1267 and 1373 through law, regulations or other enforceable means (Special Recommendation III); (3) establishing effective CDD measures (Recommendation 5); (4) establishing adequate record-keeping requirements (Recommendation 10); (5) establishing a fully operational and effectively functioning national Financial Intelligence Unit (Recommendation 26); and (6) designating competent authorities to ensure compliance with AML/CFT requirements (Recommendation 23). The FATF encourages Tanzania to address its remaining deficiencies and continue the process of implementing its action plan.
Thailand
In February 2010, Thailand made a high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Thailand should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); and (3) further strengthening AML/CFT supervision (Recommendation 23). The FATF encourages Thailand to address its remaining deficiencies and continue the process of implementing its action plan.
Trinidad and Tobago
In February 2010, Trinidad and Tobago made a high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Trinidad and Tobago should continue to work on implementing its action plan to address these deficiencies, including by: (1) implementing adequate procedures to identify and freeze terrorist assets without delay (Special Recommendation III); (2) implementing adequate procedures for the confiscation of funds related to money laundering (Recommendation 3); and (3) establishing a fully operational and effectively functioning FIU, including supervisory powers (Recommendation 26). The FATF encourages Trinidad and Tobago to address its remaining deficiencies and continue the process of implementing its action plan.
Turkey
In February 2010, Turkey made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. Since June, Turkey has taken steps towards improving its AML/CFT regime, including by working on draft CFT legislation. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Turkey should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); and (2) implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III). The FATF encourages Turkey to address its remaining deficiencies and continue the process of implementing its action plan.
Turkmenistan
In June 2010, Turkmenistan made a high-level political commitment to work with the FATF and EAG to address its strategic AML/CFT deficiencies. Since June, Turkmenistan has taken steps towards improving its AML/CFT regime, including by holding training workshops to build the capacity of its FIU. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Turkmenistan will work on implementing its action plan to address these deficiencies, including by: (1) addressing the remaining issues with the criminalisation of money laundering and terrorist financing (Recommendation 1 and Special Recommendation II), (2) implementing adequate procedures to identify and freeze terrorist assets without delay (Special Recommendation III); (3) ensuring a fully operational and effectively functioning FIU (Recommendation 26), (4) developing collaboration between the FIU and domestic counterparts, including supervisory authorities, and (5) strengthening international cooperation. The FATF encourages Turkmenistan to address its remaining deficiencies and continue the process of implementing its action plan.
Ukraine
In February 2010, Ukraine made a high-level political commitment to work with the FATF and MONEYVAL to address its strategic AML/CFT deficiencies. Since June, Ukraine has taken steps towards improving its AML/CFT regime, including by bringing a new AML/CFT law into force. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Ukraine should continue to work on implementing its action plan to address these deficiencies, including by: (1) addressing remaining issues regarding criminalisation of money laundering (Recommendation 1); and (2) improving and implementing an adequate legal framework for identifying and freezing terrorist assets (Special Recommendation III). The FATF encourages Ukraine to address its remaining deficiencies and continue the process of implementing its action plan.
Venezuela
In October 2010, Venezuela made a high-level political commitment to work with the FATF and CFATF to address its strategic AML/CFT deficiencies. Venezuela has taken steps towards improving its AML/CFT regime. However, the FATF has determined that certain strategic deficiencies remain. Venezuela will work with the FATF and CFATF on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing (Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26); (4) implementing adequate CDD guidelines for all sectors (Recommendation 5); and (5) establishing adequate STR reporting obligations for ML and TF (Recommendation 13 and Special Recommendation IV). The FATF encourages Venezuela to address its remaining deficiencies and continue the process of implementing its action plan.
Vietnam
In October 2010, Vietnam made a high-level political commitment to work with the FATF to address its strategic AML/CFT deficiencies. Vietnam has taken steps towards improving its AML/CFT regime. However, the FATF has determined that certain strategic AML/CFT deficiencies remain. Vietnam will work with the FATF and the APG on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising money laundering and terrorist financing (Recommendation 1 and Special Recommendation II); (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) improving the overall supervisory framework (Recommendation 23); (4) improving and broadening customer due diligence measures and reporting requirements (Recommendation 5, 13, and Special Recommendation IV); and (5) strengthening international cooperation (Recommendations 36, 40). The FATF encourages Vietnam to address its remaining deficiencies and continue the process of implementing its action plan.
Yemen
In February 2010, Yemen made a high-level political commitment to work with the FATF and MENFATF to address its strategic AML/CFT deficiencies. However, the FATF has determined that certain strategic deficiencies remain. Yemen should continue to work on implementing its action plan to address these deficiencies, including by: (1) issue regulations to implement AML law; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets (Special Recommendation III); (3) issuing substantive guidance/instructions to reporting institutions with respect to their ML/FT obligations (Recommendation 25); (4) developing the monitoring and supervisory capacity of the financial sector supervisory authorities and the FIU, to ensure compliance by financial institutions with their STR obligations, especially in relation to FT (Recommendation 23); and (5) ensuring a fully operational and effectively functioning Financial Intelligence Unit (Recommendation 26). The FATF encourages Yemen to address its remaining deficiencies and continue the process of implementing its action plan.
In February 2010, the FATF identified the following jurisdictions as having strategic AML/CFT deficiencies. Since then, they have substantially addressed the strategic deficiencies identified in their action plans and will be removed from this FATF monitoring process. The jurisdictions will continue to work with their respective FSRBs to improve their AML/CFT regimes.
Qatar
The FATF welcomes Qatar's significant progress in improving its AML/CFT regime and notes that Qatar has met its commitments in its Action Plan regarding the strategic AML/CFT deficiencies that the FATF had identified in February 2010. Qatar is therefore no longer subject to FATF's monitoring process under its ongoing global AML/CFT compliance process. Qatar will work with MENAFATF as it continues to address the full range of AML/CFT issues identified in its Mutual Evaluation Report, in particular compliance with Special Recommendation III (adequate procedures to identify and freeze terrorist assets).
Azerbaijan
The FATF welcomes Azerbaijan's significant progress in improving its AML/CFT regime and notes that Azerbaijan has met its commitments in its Action Plan regarding the strategic AML/CFT deficiencies that the FATF had identified in February 2010. Azerbaijan is therefore no longer subject to FATF's monitoring process under its ongoing global AML/CFT compliance process. Azerbaijan will work with MONEYVAL as it continues to address the full range of AML/CFT issues identified in its Mutual Evaluation Report, particularly compliance with SRIII (adequate procedures to identify and freeze terrorist assets).
Statement from Financial Action Task Force (FATF) on 18-2-2010 from Joint Assembly Meeting in Abu-Dhabi
This section is currently available only in Arabic, please click here to read the Arabic version.Due Diligence and Transparency Regarding Cover Payment Messages Related to Cross-Border Wire Transfers
The Basel Committee on Banking Supervision has issued the attached paper in May 2009 entitled: "Due Diligence and Transparency Regarding Cover Payment Messages Related to Cross-Border Wire Transfers". This guidance aims to enhance transparency in cross-border payment messages. The paper also addresses issues including information to be included on payment messages, various mechanisms that must be used to ensure that complete and accurate information has been included in messages and the different roles of parties involved in these mechanisms.
The proposal also takes into consideration Financial Action Task Force (FATF) Recommendation Ⅶ on wire transfers, and the SWIFT Community Technical solution which is planned for implementation in November 2009.
It is very important for the Banks to review and implement the systems and procedures in response to the proposals in Section Ⅱ "The Roles of Banks Processing Cross-Border Wire Transfers".
SAMA requires banks to examine their current practices in light of these new guidelines and ensure that they are in line with those described in this paper. Any major differences or deviations from these recommendations should be reported to SAMA by 15 October 2009. Also, in evaluating banks' practices in future, SAMA supervisors will take into account these guidelines.
Governmental Agencies
Completion of Joint Signatures Required for Withdrawals from Government Accounts
Referring to the letter of His Excellency the Minister of Finance No. 8906 dated 3/9/1440 H, referring to the Royal Order No. 47723 dated 24/8/1440 H, stating that government entities that have bank accounts must adhere to joint signatures when withdrawing from them, in accordance with the powers determined by the relevant regulations.
SAMA emphasizes to all banks operating in the Kingdom that they should not accept withdrawals from government bank accounts except with joint signature from the authorized individuals, in implementation of the aforementioned Royal Order.
The Obligation to Obtain SAMA No Objection Before Providing Governmental and Non Governmental Entities with Information and Supervisory and Statistical Data
In reference to the periodic supervisory statements provided to SAMA by finance companies, which play a crucial role in SAMA's supervisory and regulatory functions to enhance the stability and financial soundness of the finance sector and improve the quality of financial services and products. SAMA is also keen on improving the accuracy of reports and statistical publications by implementing the best measures to verify the accuracy of this data and promoting transparency through its publication across available media.
Therefore, SAMA emphasizes that finance companies must obtain SAMA's no objection before providing governmental and non-governmental entities with supervisory data that is submitted to SAMA periodically, as well as unpublished statistical data.
Instructions on Providing Government and Non-Government Entities with Documents, Information and Data of Customer Bank Accounts
No: 391000079052 Date(g): 29/3/2018 | Date(h): 12/7/1439 Status: In-Force Translated Document
Given that banking confidentiality is a fundamental principle in banking operations worldwide, and due to its importance as a cornerstone of the banking sector's reputation and the enhancement of trust among its clients, the regulations in the Kingdom have accorded it the utmost importance. Referring to SAMA’s Circular No. (371000018717) dated 14/2/1437H, which emphasizes the instructions on banking information confidentiality and the prohibition of disclosing customer data without obtaining SAMA's non-objection, and with the aim of clarifying the procedures and mechanisms that banks, financial institutions, and licensed exchange operators in the Kingdom should follow concerning repeated requests and inquiries in this regard.
You will find the instructions governing the cases in which banks, and licensed money changers are prohibited from directly disclosing customer data and information to entities without obtaining SAMA's non-objection, as well as the cases in which direct disclosure to entities is allowed without referring to SAMA or obtaining prior non-objection.
For your information, and to inform all relevant departments and branches to act accordingly.
First: Cases in which Banks, and Licensed Money Changers are Prohibited from Directly Disclosing to Government and Non-Government Entities
Several regulations and guidelines have authorized certain entities to request information, documents, or disclosure of customer banking relationships and accounts. However, they require that such requests be submitted through SAMA. These are as follows:
1- Criminal Cases: Article (58) of the Implementing Regulations of the Law of Criminal Procedure issued by Minister Council Decision No. (142) dated 21/3/1436 H specifies the competent authority for requesting such information. It states: "Seizure of funds and bank balances and inquiries thereon during the investigation stage shall be pursuant to a request submitted to the Saudi Central Bank by the head of the Bureau branch in the province or by an authority having the power to submit such request.
2- Civil Cases: The specialized judicial authorities are responsible, based on the Enforcement Law issued by Royal Decree No. (M/53) dated 13/8/1433H and its Implementing Regulations, and the Law of Civil Procedures issued by Royal Decree No. (M/1) dated 22/1/1435H. These laws grant judicial authorities various powers in this regard through a request directed to SAMA.
This has been previously confirmed by the written telegram circular issued by His Royal Highness the Minister of Interior, No. (89853) dated 30/6/1436H, which emphasizes that requests for information, documents, disclosure of banking relationships and accounts, or their seizure must be made through SAMA upon request from the Public Prosecution in criminal cases or from judicial authorities in civil cases.
3- Powers granted to certain other government entities under their regulations: Some other public entities' regulations include exceptional powers to request specific information about certain bank customers and licensed Money Changers in the Kingdom who are relevant to their activities. Requests for such information must follow the same procedures as those for criminal and civil cases, meaning they should be made through SAMA and with its approval based on objective criteria (facts and circumstances) provided.
Therefore, banks, and licensed Money Changers in the Kingdom, when receiving a direct request from government or non-government entities related to the above-mentioned cases, must respond in writing by declining to fulfill the request. The response should reference the number and date of SAMA's instructions and clarify that such requests should be made through SAMA, either upon request from the Public Prosecution in criminal cases or from the competent judicial authorities in civil cases. For requests from authorized government entities, they should be submitted directly to SAMA (attached is Guideline Template for Responding to entities).
Second: Specific Cases and Entities for which Banks, and Licensed Money Changers are Allowed to Directly Disclose Information, Data, Documents, or Banking Relationships and Accounts without Needing to Obtain a Non-objection Letter from SAMA
Notwithstanding what is mentioned in clause (First) above, and in accordance with the special instructions issued by SAMA to banks, and licensed money changers, and based on the contractual relationships between entities, banks, money changers and their clients, the following cases are exceptions where information, documents, data, and banking relationships and accounts may be disclosed directly without needing SAMA's non-objection. These cases are exhaustive and include:
1. Requests received directly from the General Directorate of Financial Intelligence at the Presidency of State Security, based on the provisions of the Anti-Money Laundering Law or the Law on Combatting the Financing of Terrorism, for providing information, data, and documents related to a suspicious transaction report previously sent by the bank, or licensed money changer. The requested data, information, and documents should be limited to what is specified in the report.
2. Requests received directly from judicial authorities regarding lawsuits in which the bank, or licensed money changer is a party (plaintiff or defendant). The information or documents provided to the judicial authorities should be limited to what is necessary for the case and should not extend to disclosing data or information about other clients (parties) who are not involved in the lawsuit.
3. Requests received directly from government and non-government entities regarding information, documents, and data related to their own accounts and transactions with the bank, or licensed money changer. The request must be signed by the authorized individuals managing the entity's accounts or by the highest responsible official in the entity, in accordance with the contractual relationship provisions.
4. Requests received directly from the Public Prosecution and security agencies and their branches for providing video recordings from ATMs located outside branch locations, outside the main office, or regional offices, or from their external facades (for transactions that have not exceeded twelve months from the date of execution).
5. Requests received directly from the Public Prosecution and security agencies and their branches for providing video recordings from cameras located on the external facades of branch locations, the main office, and regional offices, which capture only the exterior surroundings of the building, for transactions that have not exceeded twelve months from the date of execution.
Third: Compliance with the Provisions of These Instructions and Not Exceeding Them
- Banks, and licensed money changers must designate a department at their head office to handle the requests mentioned above. They must also have internal audit prepare an annual report detailing the number and types of cases and entities dealt with in accordance with these instructions.
- SAMA emphasizes that the disclosure or misuse of customer information—beyond the mechanisms and procedures outlined in these instructions—is considered a criminal act under the Banking Control Law and is subject to legal penalties. Banks, and money changers must continuously ensure that their staff is aware of this and monitor compliance with these instructions.
Guideline Template for Appropriate Responses to the Cases in Item First
Subject: Request for Banking Information
Dear/Respected Sir/Madam,
The name of the entity to which the response is directed: ____________________Peace be upon you and the mercy of Allah and His blessings,
Subject: Request for Banking Information.
We refer to your letter No. ..................... dated ..................... (regarding the request for (information/documents ..................... as requested) concernin/.................., ID Number (.....................).
We would like to inform you that the instructions communicated by the Central Bank under Circular No. (.....................) dated ....................... stipulate that Article (58) of The Implementing Regulations of the Law of Criminal Procedure states that "Seizure of funds and bank balances and inquiries thereon during the investigation stage shall be pursuant to a request submitted to the Saudi Central Bank by the head of the Bureau branch in the province or by an authority having the power to submit such request." Additionally, the provisions of the Enforcement Law and its Implementing Regulations, as well as The Law of Civil Procedure, grant judicial authorities the power to request disclosure of banking relationships and information concerning bank clients and their seizure through the Saudi Central Bank. Furthermore, the telegram from His Royal Highness the Minister of Interior, No. 89853 dated 30/6/1436H, confirmed that requests for information, documents, disclosure of banking relationships and accounts, or their seizure must be made through SAMA upon request from the Public Prosecution in criminal cases or from judicial authorities in civil cases. Requests from other government entities authorized under their regulations for information not related to criminal or civil cases must be made directly from the entity itself to the Central Bank, provided that the request is relevant to the entity's activities and based on objective and substantiated facts and circumstances.
Therefore, we kindly request your attention to the fact that providing the requested (information/documents) will be in accordance with the aforementioned instructions.
Please accept my sincere regards
Signature………………………..
Providing SAMA Quarterly Reports on Government Accounts
SAMA received the Ministry of Finance's letter No. 3720 dated 08/05/1435 H, regarding the request to provide the Ministry with data at quarterly intervals with government account information (only), including accounts opened for special purposes or that originate from donations or grants, such as parallel education accounts in universities and the like.
We hope to provide SAMA on a quarterly basis, starting from the end of the first quarter of the fiscal year 2014, with information on government accounts according to the form attached to you, provided that it is unified in a period not exceeding one month from the end of each quarter. To obtain an electronic copy of the form, you can contact SAMA.
Accepting the Names and Signatures of Authorized Persons to Directly Manage Government Bank Accounts
This section is currently available only in Arabic, please click here to read the Arabic version.Providing Facilities for Some Government Entities, With Amounts Surpassing Their Payment Orders Which are Drawn from the Ministry of Finance
This section is currently available only in Arabic, please click here to read the Arabic version.Government Accounts Opened in Local Banks
This section is currently available only in Arabic, please click here to read the Arabic version.The Agreements Made Between Banks and Government Entities
According to a letter we received from HE the Minister of Finance & National Economy No. 12/7363, dated 10-7-1418 H, some government agencies are terminating agreements concluded with banks specified by SAMA and, instead, concluding agreements with other banks regarding salary payments to their employees without recourse to Minister of Finance and National Economy.
Pursuant to the Ministry of Finance & National Economy circular No. 12/1936 dated 16-6-1405 H, a copy of which was communicated to you, re the implementation rules for payment of civil servants through checks drawn on operating Saudi banks, article (2) thereof stated that the bank in which a current A/c is opened for salary payment has to be specified by SAMA at the request of the relevant government agency.
Hence, we wish to stress on all your employees in charge not to accept any offer, conclude any agreement with any government agency or open any A/c without a prior approval by SAMA after consultation with the Ministry of Finance & National Economy to understand the reasons and justifications for this.
Please do the necessary and acknowledge receipt.
The Revised Edition of the Permanent Instruction Manual for the Uniforms and Equipment of Security Personnel in Government Entities and Private Institutions
SAMA has received the letter of HRH the Minister of Interior No. 5/535/4 dated 15-5-1416H, attached thereto an amended copy of the instruction booklet regarding clothing and equipping of the security employees of government agencies and departments.
We attach herewith ( ) copies of the booklet which will go into effect within one year from the date of HRH circular.
Please be informed and notify all your branches accordingly.
Violations Limited to Governmental Entities and Banks
SAMA received a letter from His Excellency the Minister of Finance and National Economy No. 6881/12 dated 12/10/1415H, referring to the Royal Directive No. 1501/3 dated 4/2/1412H, which was based on a letter from His Excellency the Minister of State and Chairman of the Oversight and Investigation Commission No. 13/Kh dated 14/1/1412H. The letter indicated that the commission conducted inspections of several government departments using checks to disburse employee salaries through commercial banks and their branches. These inspections resulted in several observations that the Royal Directive ordered to be studied by specialists in the relevant ministries.
The committee formed for this purpose concluded in its final report, which was submitted regarding these observations, that the violations identified are confined between the government entity and the client bank. Accordingly, His Excellency the Minister of Finance and National Economy, in his aforementioned letter, requested that the following be communicated to banks:
- Cashiers and disbursement officers in government departments have been depositing public funds into their personal accounts in commercial banks. Client banks must not accept deposits of any checks related to public funds into personal accounts.
- Some departments have been using salary current accounts for other purposes. Commercial banks must not accept any deposits into these accounts that are unrelated to salaries.
- Some government entities have opened current accounts in commercial banks without consulting the Ministry of Finance and National Economy and SAMA, as required by current regulations. Commercial banks must not open any accounts for government entities without authorization from SAMA.
- Some government entities have issued salary checks with a single signature or based on stamps instead of handwritten signatures. Commercial banks must not accept any check that carries only a stamp or a single signature.
- Certain government entities have been printing salary checks on their own, in violation of instructions requiring such entities to obtain checkbooks in the necessary quantity from the bank, based on an official letter issued by the authorized person. Client banks must not accept any check not issued directly by the bank itself.
We request strict adherence to the above guidelines, avoiding any violations, and that all branches be informed to comply accordingly.
Instructions About the Opening by Some Government Agencies of Accounts with Local Banks
Re letter of HE the Minister of Finance & National Economy No. 19/21, dated 1/2/1411 H, regarding instructions about the opening by some government agencies of accounts with local banks for various purposes, such as the various disbursement committees, subsidies, lending and operating funds, revenues and the like, which were approved by Ministerial decision No. 19/208, dated 1/2/1411 H, and included the following instructions:
- The government agency must submit an account opening application to the Minister of Finance and National Economy (Directorate General of Accounts). After studying the application, the Ministry shall notify SAMA of opening the account with one of the local banks. The government agency will then provide the bank with the names and signature samples of the authorized signatories.
- The name of the beneficiary shall be in the payment order pertaining to deposit in this account (To the order of A/c No…..).
- The A/c at the bank shall be in the name of the government department or authority and not in the name of a physical person. The purpose must be specified for identification from other accounts.
- Check books shall be requested by an official letter signed by those authorized to withdraw.
- The authorization of deposit and withdrawal must be issued by the officer in charge. Authorized signatories cannot delegate their power to others unless they are so authorized by the officer in charge.
- Withdrawal from the A/c shall be by checks signed jointly by the authorized signatories.
The following banking rules regarding checks must be observed.
(a) The name of the beneficiary must be identical to his name in his identity card. (b) Check must be presented for cashing within 6 months (c) The amount must be identical in letters and figures. (d) Erasing, scratching or using chemical material on the check is not allowed. (e) If the check is amended, the amended part shall be removed and the correct replacement must be signed by the authorized signatories.
All Government Agencies and Domestic Coordinating with the Concerned Department in Um Al-Qura Calendar
SAMA has received the letter of HE the Minister of Finance and National Economy No. 844/404 dated 26-2-1404 H. referring to Royal Order No. 1546 dated 24-2-1404 H, which instructed all government agencies and domestic establishments which were issuing calendars at the start of each year to stop doing so starting next Hejira year without coordinating with the concerned department in Um Al-Qura so that their calendars will be consistent with the official calendar.
Please comply with this Royal Order and acknowledge receipt.
Use Arabic in Correspondence with Government Authorities
Reference our circular No. BC/200 dated 5-4-1398 H, referring to the Council of Ministers Decision No. 266 dated 21-2-1398 H, which instructed all foreign companies and institutions, and their branches and offices, working in the Kingdom to use Arabic in their correspondence with Government authorities.
SAMA has received the circular of HE the Minister of Finance and National Economy No. 3282/400 dated 28-6-1400 H, referring to the Order of HRH the Vice President of the Council of Ministers No. 3/H/15351 dated 20-6-1400 H whereby HRH noted that foreign languages are still used in drafting contracts and their attachments and in correspondence between government agencies, institutions and State-owned companies and foreign companies and establishments, despite the two decisions taken by the Council of Ministers instructing foreign companies and establishments, and their branches operating in the Kingdom, to use the Arabic language.
SAMA calls on you to use Arabic in correspondence with government authorities and to instruct your branches in the Kingdom to act accordingly.
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”
No: 42076931 Date(g): 13/6/2021 | Date(h): 4/11/1442 Translated Document
Referring to the role of SAMA in supervising and regulating financial institutions under its oversight, based on the powers granted to it by the Banking Control Law issued by Royal Decree No. (M/5) dated 22/02/1386H, and the Rules for Bank Accounts communicated in Circular No. 65681/67 dated 01/11/1440H, and SAMA's initiative to facilitate the processing of requests from the Ministry of Finance related to (opening, activating, closing, modifying the name of) accounts for government entities at commercial banks operating in the Kingdom in a technical manner to enhance the quality of related procedures, speed up their execution, and ease access to the data associated with these requests through the electronic portal "Hisab."
Based on the previous arrangements that the Bank's commissioners have been informed of and provided with the data regarding the use of the electronic portal, we inform you that requests from the Ministry of Finance related to accounts for government entities at all commercial banks under the supervision of SAMA will be processed through the electronic portal "Hisab" according to the attached guide and the powers granted to your designated representatives to handle these requests, starting from Tuesday, 15/06/2021G.
SAMA also emphasizes the importance of directing your specialists to activate their accounts and ensure that all related procedures are completed promptly. They should adhere to and comply with the instructions governing the electronic portal "Hisab" and make the necessary effort and care to process all requests received through the program immediately and as required. It is noted that the responsibility for monitoring the processing of these requests rests with the bank. If there are any inquiries in this regard, please contact via email (GovAccountsInBanks@SAMA.GOV.SA).
Real Estate Development
Continues of Monthly Deduction for Real Estate Fund
Further to SAMA Circular No. 19404/BCS/377 dated 07/05/1428 H supplementary to Circular No. 19838/BCS/250 dated 10/09/1424 H regarding the desire to overcome all obstacles facing the Real Estate Development Fund in collecting its dues from borrowers in order to achieve the Fund's development goals and to continue serving the community through the following:
- Accept the deduction forms issued by the Fund, emphasizing the need for the borrower to sign the bank's forms for debiting from his account.
- Confirmation to stop deducting any commissions for the transfer process from clients' accounts to the Fund's account.
Whereas, SAMA received the letter of His Excellency the Minister of Housing and Chairman of the Board of Directors of the Real Estate Development Fund No. 8657/35701 dated 08/03/1435 H, which includes His Excellency's statement that some banks have suspended the monthly deduction from the borrower's account in favor of the Fund at the request of the borrower without referring to the Fund.
Accordingly, SAMA stresses the need to adhere to the mandatory monthly deduction from the borrowers' accounts in favor of the Fund until the end of the debt or receiving a letter from the Fund approving the suspension of the deduction. And abide by the contents of SAMA Circular No. 351000019897 dated 14/02/1435 H in terms of emphasizing the processing of monthly installments due from borrowers of the real estate development fund in accordance with the Fund's letters received by the Bank in this regard.
For your information and briefing within ten days from its date.
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 according to the Responsible Lending Principles for Individual Customers
Based on the powers vested to SAMA pursuant to The Saudi Central Bank Law issued by Royal Decree No. (M/36) dated 11/04/1442 H , according to the relevant regulations, and to Responsible Lending Principles for Individual Customers, issued pursuant to Circular No. (46538/99) dated 02/09/1439 H, and amended by Circular No. (1/40694) dated 09/09/1439 H.
SAMA wishes to emphasize adherence to the provisions of the principles, including the following:
First: Emphasis on compliance with Article (14/c) of the principles, where Government subsidies, such as those provided through the Citizen Account Program, should not be counted as part of the total monthly income of the consumer, except for government subsidies that are documented and provided by the Ministry of Municipal and Rural Affairs and Housing or the Real Estate Development Fund, which are provided as periodic amounts. Non-financial support or amounts that are not disbursed periodically should not be included in the total monthly income of the consumer.
Second: Emphasizing that the deductible ratio mentioned in Article (15/C) for consumer benefiting from the Ministry of Municipal and Rural Affairs and Housing or the Real Estate Development Fund should be calculated from the total monthly income of the consumer if there are subsidy amounts disbursed to the consumer on a monthly basis.
For your information and action accordingly.
Monthly Installments Due from Borrowers of the Real Estate Development Fund
Referring to the letter of His Excellency the Minister of Housing, Chairman of the Board of Directors of the Real Estate Development Fund No. 3415/3570 dated 25/01/1435 H, which includes a reference to the Fund deducting the installments due from retired or non-employee borrowers from their bank accounts after the borrower signs a form stating his approval of the deduction, and then the borrower reviews the bank to approve the deduction according to the specified date for the start of the deduction, but they often receive complaints from some borrowers stating that the bank has not deducted them at all or that the deduction is made before the specified date, which leads to a defect in collecting the installments due from the Fund’s borrowers and increases the burden of review on borrowers between the Fund and the banks
With reference to paragraph (3/15) of the banking consumer protection principles, we hope to take this into account and fully adhere to the deduction of installments (whether installments of Real Estate Development Fund loans or others) on the agreed date without submitting or delaying the deduction process, and to ensure that the installments of the Fund's borrowers are processed in accordance with the Fund's letters in this regard, with a report of implementation within a week from its date.
Resumption of Monthly Deductions from the Bank Accounts of Real Estate Development Fund Borrowers for Residential Purposes, Starting from the Salary of Jumada I for the Year 1434H
Referring to SAMA Circulars No. 18589/MAT/7431 dated 11/04/1432H and No. 44698/MAT/20914 dated 06/09/1432 H referring to the Royal Decree No. A/18 dated 20/03/1432 H exempting all borrowers from the Real Estate Development Fund for Private Residential Purposes from two installments for a period of two years, and SAMA directing banks to stop the monthly deduction from their customers' accounts in favor of the Real Estate Development Fund, starting from the salary of the month of Jumada Al-Awwal for the year 1432 H for a period of 24 months, so that the deduction resumes starting from the salary of Jumada I for the year 1434 H. Whereas, SAMA received the letter of His Excellency the General Director of the Real Estate Development Fund No. 5296/34701 dated 20/02/1434 H containing a request to resume the monthly discount on borrowers from the Real Estate Development Fund for private residential purposes, starting from the salary of the month of Jumada Al-Awwal for the year 1434 H.
Therefore, we hope to resume the monthly discount on borrowers from the Real Estate Development Fund for private residential purposes, starting from the salary of the month of Jumada Al-Awwal for the year 1434 H.
Real Estate Development Fund Loan Installments
SAMA received the letter of His Excellency the Minister of Housing No. 7917/33701 dated 9/3/1433 H, which includes that the Real Estate Development Fund requests to repay the loan in monthly installments, and due to the difference in the value of the loan from one borrower to another and therefore the amount of the installment deducted on the borrower, it may result in differences in the amount of the monthly installment and the amount of the installment is not equal in all the monthly installments paid during the three hundred installments, and in most cases it is necessary to settle the differences in one of the paid monthly installments. The Ministry of Housing wishes to inform banks that the amount of the last monthly installment is different from the rest of the installments.
Therefore, we inform you that SAMA has no objection to the deduction of the last installment of the Real Estate Development Fund loan being different from the previous monthly installments, in order to settle the differences arising from the loan in an easy way for borrowers.
Supporting the Real Estate Development Fund to Achieve its Development Goals
This section is currently available only in Arabic, please click here to read the Arabic version.Authorizing the General Manager of the Real Estate Development Fund to Open Bank Accounts
This section is currently available only in Arabic, please click here to read the Arabic version.Supporting the Real Estate Development Fund to Achieve its Development Goals
This section is currently available only in Arabic, please click here to read the Arabic version.Points of Sale
GCC POS Pricing Policy
We would like to inform you that the GCC countries have decided to apply a service fee for Point-of-Sale (POS) operations among GCC countries at a rate of 1% of the transaction value, with a maximum cap of (SAR 37.5) per transaction, to be paid by the host network to the issuing network. No costs from this service fee should be passed on to the customer.
As the POS service between the Kingdom of Saudi Arabia and the Kingdom of Bahrain will soon be operational, SAMA emphasizes compliance with the following:
» When using MADA bank cards at merchant terminals in Bahrain (MADA as an issuer):
- Local issuing banks will receive 0.9% of the transaction value for each purchase transaction conducted in GCC countries and routed through the GCC network, with MADA system fees at 0.1%, capped at (SAR 2).
»When using MADA POS terminals to process transactions with cards issued by banks in Bahrain (MADA as an acquirer):
- Merchants will be charged 1.5% of the transaction value, capped at (SAR 80), which includes Acquiring bank fees (0.4%), MADA system fees (0.1%, capped at SAR 2), and GCC network fees (1%, capped at SAR 37.5).
Accordingly, SAMA emphasizes the implementation of the above service fee policy upon the launch and operation of the service.
- Local issuing banks will receive 0.9% of the transaction value for each purchase transaction conducted in GCC countries and routed through the GCC network, with MADA system fees at 0.1%, capped at (SAR 2).
POS Pricing for Gas Stations
Further to SAMA Circular No. 351000152594 dated 25/12/1435H regarding the SPAN Pricing Policy, and as part of SAMA's efforts to support and promote the use of electronic channels in the financial market for various commercial activities, as well as the studies and discussions conducted with banks and financial institutions operating in the Kingdom to provide Point of Sale (POS) services at fuel stations to facilitate the payment process during refueling,
We inform you that a commercial pricing model has been developed for the POS service in the fuel station sector (fuel refueling service only) for transactions conducted using Saudi Network cards (Debit Cards) and Prepaid Cards. The commercial model has been implemented on the Saudi Payments Network system since the beginning of April of the current year, and it can be summarized as follows:
Subject
Tariff
1
Reciprocal charges (Interchange) Zero (no fee) 2
Saudi Payments Network fees Zero (no fee) 3
Store Fees (Merchant Service Charge) Limit the maximum fee, if any, to (0.07) (seven halala) regardless of the value of the fuel SAMA emphasizes the importance of banks adhering to the following instructions:
Banks must comply with the designated MCC codes (5541 and 5542) used to identify and classify POS terminals for the fuel station sector. These codes must be exclusively applied to such terminals and not to other devices.
Banks must ensure the accuracy and validity of terminal data in the Terminal Management System (TMS).
Banks are required to clearly explain the terms of the mentioned service through the Merchant Service Agreement (MSA) and ensure that the other party (the merchant) accepts them before signing the agreement.
The bank providing the service will face all legal actions and financial and administrative penalties for each terminal if it fails to comply with the exclusive use of the codes mentioned in paragraph (1) of this circular. This applies to POS terminals installed and operated at fuel stations (fuel refueling service only).
Furthermore, SAMA reiterates the importance of adhering to the pricing policy for the Saudi Payments Network system and not imposing any additional fees (such as installation fees, monthly fees, maintenance fees, communication fees, or others) on all POS terminals across various commercial activities. It should be noted that this pricing policy applies exclusively to Saudi Payments Network cards, while other network cards are subject to specific agreements with the bank.
NFC Contactless
Referring to SAMA Circular No. 341000076614 dated 20/6/1434H regarding Saudi Payments Network (Mada) operating rules and regulations.
Attached is the document of technical and operational rules and procedures for the Atheer service (Near Field Communication Technology version 8.1 NFC Contactless) for banks that wish to apply and activate it for their beneficiary customers. The provisions therein must be adhered to, and customers are educated about this service, how to use it and its requirements.
For more information and coordination regarding this service, you can contact the Mada team on the website(mada.com.sa).
Suspending Mobile Point-of-Sale Service for Collecting Donations for Charitable Organizations
Due to the availability of information indicating the use of mobile POS devices to collect donations in markets, squares and mosques in the names of charitable organizations outside their headquarters and geographical scope through kiosks and mobile offices.
The Central Bank of Egypt (CBE) stresses that local banks should not grant charitable organizations and institutions mobile point of sale (GPRS) devices that allow their users to move around with them, and to cancel the services of all existing mobile devices and replace them with POS devices connected to the fixed (landline) phone of the facility within its headquarters only.
Apply PIN Request for All Credit Cards Used at Points of Sale
In reference to the current work program between SAMA and banks, which aims to apply authentication on credit cards using special PIN request when executing transactions at points of sale, and in order to increase the security and safety of electronic financial transactions, all banks issuing credit cards are obliged to apply the authentication feature on all credit cards using the feature of requesting the password (Chip-and-pin) for all transactions conducted at point of sale outlets and converting all credit cards from (Chip-and-signature) to cards supporting the (Chip-and-pin) feature.
We also emphasize taking the necessary measures to ensure gradual implementation without affecting the level of service provided to customers and that the implementation is completed according to the program prepared in cooperation with the relevant banking committees by the end of 2015.
To adopt and act accordingly.
Guidelines for Receipt Printed From POS Machines
Out of SAMA's keenness on the interest of bank customers and the protection of their personal information and in line with the internationally applicable security policies and standards, which work to preserve banking information to reduce fraud and reduce potential risks, and as you know, the current receipts for POS operations show all the card number used, whether on debit or credit card receipts, as SAMA believes that this is a leak of customer card information, which may be misused in fraudulent operations.
Therefore, it was decided that the Bank will coordinate with POS suppliers to amend the POS operations receipts printing form so that it shows the last four digits as follows:
<nnnn************>
Therefore, the bank must take this procedure to modify all current devices before the beginning of Ramadan 1429 H and inform SAMA of what the bank will take in this regard within two weeks from its date, taking into account the evaluation of the current service and solving all obstacles that may face users of POS machines.
Automatic Transfer Service at Point-of-Sale Devices through the Saudi Payments Network
We refer to the meeting held at SAMA on Sunday 12 Shaaban, 1414(23 January 1994), attended by local bank representatives, regarding the automatic transfer service at POS through SPAN and the final preparation for the promotion campaign for this service which is financed by the banks.
The following major points were addressed at the meeting:
I.
The level of service rendered to the commercial firms, whether already connected or will be connected in the future, including the delivery, installation and use of the machines, adequate training of operators and periodic calls on commercial firms to make sure the operators are familiar with the system and service controls.
II.
Starting 21 Shaaban, 1414 (1st February, 1994) the maximum purchase amount via POS shall be SR twenty thousand (20,000/00) per day subject to review in the future.
III.
There is more need now to offer extensive assistance to card holders by explaining to them the features of the services by bank branches, being ready to answer any inquiries raised by the promotion campaign and reminding the clients that they have to sign their cards and replace the ones that do not meet the specifications.
Claims by Bank Clients Arising from ATM and POS Operations
Saudi Central bank has noticed that some banks are delaying the presentation of the ATM Balancing Sheet at the weekly meeting. This is hurting the bank clients by delaying the crediting of their accounts with the banks. Saudi Central Bank, therefore, calls on you to pay this surplus in accordance with the procedures adopted at the weekly meeting without waiting for a request from the client. In the event a bank rejects a claim by a client of another bank, the former bank must submit a copy of the machine tape, plus a copy of the approved daily inventory minutes in order to convince the client of the validity of the operation.
Please be informed and act accordingly.
Deactivation of Point-of-Sale Terminals Tied to Frozen Bank Accounts of Juristic Persons
Based on the powers vested to SAMA under the relevant regulations and instructions, and based on its supervisory and regulatory role over the financial institutions under its supervision.
I would like to inform you that banks operating in the Kingdom must disable point-of-sale devices for the frozen bank accounts of Juristic Persons, while ensuring that all accounts and transactions of Juristic Persons are frozen upon the expiration of the necessary documentation to conduct business.
For your information and action accordingly as of its date.
POS Payment Service of GCC Net
Further to SAMA's instructions issued by Circular No. 7039/41 dated 20/10/1439 H, and Circular No. 371000100598 dated 14/9/1437 H regarding GCC POS Pricing Policy and its associated fees, and in continuation of ongoing work between monetary institutions and central banks in the Gulf Cooperation Council (GCC) countries aimed at integrating payment systems among the GCC states, and referring to what was agreed upon in the periodic meetings of the governors of monetary institutions and central banks in the council to link the POS networks of the GCC countries with the Gulf Payments Network, as this is a vital aspect of integrating payment systems among GCC countries, enhancing and supporting cooperation among the GCC countries.
I would like to inform you that it has been decided to activate the Point of Sale (POS) service for the Gulf Payments Network in the State of Kuwait to accept POS transactions starting from 01/01/2020, and accordingly banks are required to adhere to the following:
First: Take the necessary technical and operational measures to accept and process transactions on their systems and on their point-of-sale (POS) devices to complete purchase transactions via POS between the Kingdom and the State of Kuwait.
Second: Take the necessary commercial measures with their customers holding Gulf Network cards and merchants accepting Gulf Network cards to ensure that transactions are processed in accordance with the approved pricing.
Third: Notify and educate customers holding Gulf Network cards that purchase transactions in the State of Kuwait will be processed through the payment network of (K-Net), which is connected to the Gulf Network.
Fourth: Process and accept all Gulf network transactions using cards bearing the Gulf Network logo, and also accept Gulf network cards on their point-of-sale devices.
For your information, and action accordingly from the activation date mentioned above.
Banks are Prepared to Receive Requests from Car Workshop Owners and Related Services for Point-of-Sale Services Through the National Payment System (Mada)
Referring to the strategic directions of the Financial Sector Development Program in reducing cash transactions and enhancing electronic payments in order to reach a cashless society, and to complement the efforts of SAMA in support of activating the use of electronic channels through the implementation of the Integrated Digital Payments Strategy Program to improve the level of electronic services provided, and to enhance the efforts of the National Program to Combat Commercial Concealment by gradually obliging the retail sector to provide an electronic payment method.
I inform you that in cooperation with the Ministries of Municipal and Rural Affairs and Commerce and Investment, car workshops and related services have been obligated to provide the "Mada Point of Sale" service starting from 18/3/1441 H corresponding to 15/11/2019 G, and in order to succeed in the special efforts to activate this decision, and to ensure the readiness of the banking sector to keep pace with the expected volume of demands, banks must verify the following:
First: Readiness to receive requests to open bank accounts for owners of car workshops and related services, and quick response to them. Second: Readiness to receive and respond to requests for the provision of POS devices through the bank's various channels such as branches, internet banking, and phone banking to facilitate this requirement for owners of car workshops and related services, and to adhere to the specified times for maintenance as stipulated in the Mada standards document and service level agreements. Third: Commitment to use Merchant Category Codes for POS devices designated for this sector, which are as follows: "7531", "7534", "7535", "7538", "5533", "5532". Fourth: Circular internally to the bank's employees of this decision to ensure that they understand it adequately when receiving requests and inquiries in this regard. For your information ana action accordingly, and communicate it to all concerned departments and branches.
Preparedness of Banks to Receive Requests from Gas Station Operators and Service Centers to Provide POS Terminals Connected via the National Payment System (Mada)
Referring to the strategic directions of the Financial Sector Development Program in reducing cash transactions and enhancing electronic payments in order to reach a cashless society. I inform you of SAMA's cooperation with the Ministry of Commerce and Investment and the Ministry of Municipal and Rural Affairs, leading to a decision to oblige all gas stations in the Kingdom and their affiliated service centers to provide point-of-sale services through the national payment system (Mada), starting from Sunday, 11/11/1440 H.
I would like to emphasize the importance of this decision and its alignment with the general strategies of institutions aimed at enhancing the principle of financial inclusion and reducing the percentage of cash transactions in order to achieve the goals of Saudi Vision 2030.
To ensure the success of efforts to activate this decision and to guarantee the banking sector's readiness to meet the expeted volume of demands, it is necessary for banks to verify the following:
First: Readiness to receive applications for opening bank accounts for gas station owners and their affiliated service centers, and to respond quickly to these requests.
Second: Readiness to receive requests for providing point-of-sale devices and responding through various bank channels, such as branches, online banking, and phone banking, to facilitate this requirement for gas station operators and their affiliated service centers, and to adhere to the specified maintenance times as stipulated in the Mada standards document and service level agreements.
Third: Limiting the use of the reduced pricing model for gas stations mentioned in SAMA's instructions issued under Circular No. 361000111820 dated 18/8/1436 H should be limited to fuel sales services only, and should not be used for any other services related to gas stations.
Fourth: Internally circulate this decision to bank employees to ensure they have a sufficient understanding when receiving requests and inquiries in this regard.
For your information, please act accordingly and inform all relevant departments and branches.
Point of Sale Payment Services for the Gulf Payment Network
In reference to the agreements made during the meetings of the governors of the central banks of the Gulf Cooperation Council (GCC) countries regarding linking point-of-sale operations between the member states through the coordination of their payment systems, and further to SAMA's circular No. 371000100598 dated 14/09/1437H regarding the pricing policy for point-of-sale payments for the Gulf Payment Network.
We would like to inform you that the Saudi Payment Network (MADA) has completed the system readiness in preparation for the launch of the point-of-sale service for the Gulf Payment Network with the Kingdom of Bahrain on 22/07/2018G.
Therefore, SAMA emphasizes that all banks should communicate and coordinate with the MADA team regarding the technical and operational aspects and conduct the necessary tests to enable the acceptance and processing of transactions on their systems and on their point-of-sale devices, as follows:
- Enabling its devices in stores to accept purchase transactions executed with cards issued by Bahraini banks, regardless of the international payment systems accepted by these devices, while considering any commercial agreements signed with the stores, such as merchant service agreements and specific pricing for the service.
- Enabling its customers to complete purchase transactions in the Kingdom of Bahrain through direct integration with the Bahrain payment system operated by (Benifit), without the need to use international systems, and educating its customers about the benefits of this service while updating customer agreements accordingly.
We would like to emphasize the importance of incorporating this into the agreements and guidelines for providing the service to merchants and customers, educating them on how to benefit from this service. Furthermore, customers should be notified of the transactions conducted via SMS messages, in accordance with the requirements outlined in SAMA's letter No. 381000060893 dated 07/06/1438H regarding the transaction type "Payment via Point of Sale," including the host country.
The Finance of MSMEs Based on Cash Flows Through MADA POS Terminals
In line with the Kingdom’s Vision 2030 to support small and medium enterprises as a vital sector contributing to the prosperity of the Kingdom's economy, and with SAMA's commitment to support banking initiatives related to this important sector.
We inform you that SAMA has recently activated certain technical settings on its Central Management System (Terminal Management System – TMS) to support small, medium, and micro enterprises by enabling banks operating in the Kingdom to finance these enterprises based on the volume/value of cash flows executed through point-of-sale devices (Mada) only during the period specified in the contract. SAMA has introduced a new feature that allows all banks to check the status of the enterprise (store) regarding any financing obligations linked to cash flows executed through point-of-sale systems with another bank before contracting to provide it with the point-of-sale service (Mada).
Therefore, we hope TO adhere to the following:
- Utilize the feature applied to the TMS for financing contracts for small, medium, and micro enterprises that rely only on cash flows through point-of-sale systems (Mada).
- Banks must not use this feature for other financial obligations that require multiple guarantees, even if such service is mentioned in the contract and obliges the enterprise (merchant) to benefit from it.
- When granting the aforementioned financing, it should be considered whether there are existing financings based on the cash flows of the enterprise.
Raise the Purchase Limit for MADA Bank Cards on Point-of-Sale Devices
In reference to the strategy of SAMA, which primarily aims to reduce cash transaction volumes and support the spread of electronic payment adoption through bank cards, especially via point-of-sale devices in stores, and the role of SAMA in monitoring and encouraging all stakeholders to strive toward achieving the main objectives of this strategy, with the aim of fulfilling the aspirations of the Kingdom under Vision 2030 regarding initiatives to develop the financial sector, and to meet the requirements of the local market, particularly for commercial sectors with high-ticket purchases, and further to SAMA’s circular No. 351000073726 dated 08/06/1435H concerning increasing the daily limit for purchase transactions through point-of-sale devices.
We would like to inform you that SAMA has decided to allow banks to raise the maximum payment limit via point-of-sale devices to 200,000 SAR based on customer requests and the bank's assessment, provided that the following is taken into consideration:
- 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 based on their risk assessment, and they must notify SAMA regarding the approved purchase limits for each category of their customers accordingly.
For your information and to act accordingly, please inform all relevant departments and branches, and share the plan of action with SAMA to meet the requirement of raising the limit at the following email address: (bd.btd@sama.gov.sa).
Pricing Policy for POS at Remittance Centers
Further to SAMA's Circular No. 351000152594 dated 25/12/1435H regarding the tariff for the Saudi Payments Network (Mada) services, and as part of SAMA's efforts to support and promote the use of electronic channels in the local market for various commercial activities,
we would like to inform you that a commercial model (Pricing Model) has been developed for the Point of Sale (POS) service in the remittance centers sector for transactions conducted using Mada cards. The implementation of the pricing model for the remittance centers sector has been decided as follows:
Phase One – For a duration of two months (starting from 27/10/1437H, corresponding to 01/08/2016G):
Subject
Tariff
1
Merchant fees (Merchant Service charge) The maximum fee, if any, is limited to one riyal, regardless of the value of the transfer. 2
Reciprocal charges (Interchange) Zero (no fee) 3
Mada Payments fees Zero (no fee) 2. The second phase (starting from 30/12/1437 H corresponding to 1/10/2016 G):
Subject
Tariff
1
Merchant fees (Merchant Service charge) The maximum fee, if any, is limited to one riyal, regardless of the value of the transfer. 2
Reciprocal charges (Interchange) (50) fifty halala regardless of the value of the remittance 3
Mada Payments fees No charge (free of charge) SAMA also emphasizes the need for banks to adhere to the following instructions:
Adhere to the definition of the Merchant Category Code (MCC) assigned to identify and classify the POS devices used for the financial transfer centers sector, which is the code (4829), and limit their use to these devices.
Ensure the correctness and accuracy of the device data available in the Terminal Management System (TMS).
The bank shall clarify the terms of the mentioned service through the Merchant Service Agreement (MSA) and ensure that the other party (merchant) accepts it before signing the agreement.
All legal procedures and financial and administrative penalties will be taken against the service provider bank for each device in case of non-compliance with the restriction of using the codes mentioned in paragraph (1) of this circular for POS devices that are installed and operated in financial transfer centers.
SAMA also emphasizes the need to adhere to the Mada tariff policy and not to impose any additional fees (such as installation fees, monthly fees, maintenance fees, communication fees or others) on all POS devices in various commercial activities. Note that this pricing applies exclusively to Saudi Network 'Mada' cards. The bank may use it as a reference if it wishes to apply it to other cards
Mada Operating Rules Mada Operating Standards & Procedures Update on Refunds
No: 371000120070 Date(g): 22/8/2016 | Date(h): 20/11/1437 Referring to SAMA Circular No. 341000076614 dated 20/6/1434 H regarding the Saudi Payments Network Operating Rules and Regulations (Mada), which include the Refund service on POS terminals.
Attached is the updated document detailing the technical and operational rules and procedures for the Refund service for banks wishing to implement it and sign the agreement to activate the service for their merchant customers. Compliance with the outlined provisions is mandatory, and no fees should be imposed on the customer, merchant, or bank for this service.
For more information and coordination regarding this service, please contact the Mada team via their official website (mada.com.sa).
A. Introduction
1. This update is a part thereof and should be read in conjunction with the SPAN Operating Rules, V. 6.1.1 and SPAN Operating Standards and Procedures, V. 6.1. 2. As per section 15.5 in the SPAN Operating Rules, V. 6.1.1 the update is a minor change. 3. Any change as a result of this update takes effect from this document's official publication date. 4. Rules on Refunds apply to domestic debit Transaction only.
B. Update on Refunds
1. Refund: A Transaction that is initiated by a Merchant to return funds to a Cardholder in respect of a prior Purchase of goods, services or price adjustment. A return of residual value of funds in stored value payment instruments other than Cards does not qualify as a Refund as defined in the SPAN Operating Rules and SPAN Operating Standards and Procedures.
SAMA does not permit the use of a Reversal function for an authorized Purchase Transaction if it was followed by a subsequent Purchase Transaction with a new sequence number or is no longer in the POS terminal (Flushed from SAF or Reconciled). In this instance, a Refund must be used to credit the Cardholder's account.
2. If the 'Refund' function is offered or enabled for a Merchant by the Acquirer (bank), the terms and conditions relating to such Refunds must be clearly stated in the Standard Merchant Services Agreement (MSA). If the 'Refund' function is offered or enabled after the original MSA has been signed, the Acquirer may add an addendum to the existing valid agreement to cover the additional Refunds function.
3. A Refund Transaction is considered as new Transaction, and is subject to the SPAN Operating Rules, Standards, Procedures, and SPAN the Pricing Policy in that regard is No interchange, authorization, settlement or MSC fees are levied on a Refund Transaction.
4. The cardholder must receive the paid amount without any deduction (i.e. if the cardholder paid SAR500 for goods and requested refund; the cardholder should receive the full SAR500.
5. Issuers must provide Refund capability to Cardholders by default subject to the issuer's internal risk policies and procedures.
6. The issuer must decline the authorization of a Refund transaction request if no PIN verification is indicated in the authorization request message.
7. The Merchant must ensure that the Transaction amount of the Refund does not exceed the amount of the original Purchase and in all cases, a refund transaction must not exceed the daily purchase limit of PoS
8. A Refund Transaction may be processed Offline when Card and Terminal are enabled for Offline Authorization, subject to eligibility and Offline value limits.
9. The Refund amount must be in the same currency as the original Purchase amount.
10. Following the completion of a Refund Transaction, The Merchant must provide the Cardholder with a (Refund) Transaction receipt.
11. The refund capability should be disabled on all PoS terminals by default. The function should not be activated until:
a) the Acquirer has offered and the Merchant accepts inclusion of the function on their PoS service b) the Acquirer ensures that the Merchant fully understands the duties, responsibilities, related risk, fraud liability, and operating procedures relating to the Refund of transactions c) the Merchant has signed the Refund Agreement part of the MSA.
In exceptional circumstances, the Acquirer may elect to decline merchant request to activate the service based on the Acquirer's internal risk policies and procedures, subject to appeal by the Merchant to SAMA. The Acquirer may also disable the Refund function if the Merchant so requests.
12. Acquirers must ensure that their Merchants disclose their policies on returns and Refunds in a clear and visible format near the location of the POS Terminal, including clear references to documents required as proof of the original Purchase Transaction.
13. Following the clearing and settlement of the Transaction, the issuer will credit the Cardholder with the amount of the Refund as per the SPAN Operating Standards and Procedures. The issuer must ensure that the Refund amount is posted without delay to the Cardholder's account.
14. The timeframe for a Refund, being the period between the transaction date and the Refund date, is determined by the Merchant according to its internal policies and procedures (and may be subject to commercial (licensing) laws and regulations.
15. When a Refund is provided, the Merchant must credit the same Card account used to make the original POS Purchase. ?
16. Merchants that provide full or partial Refunds for SPAN Transactions must not do so through cash, check or voucher.
17. To authenticate the 'Original Transaction' the Merchant must ask the Cardholder for a Transaction receipt or similar documentation as proof of the original purchase transaction; if the original receipt is not available, the Merchant may fall back to its internal policies and procedures in deciding whether to proceed or not.
18. Merchants that provide full or partial Refunds must do so only for the purpose of crediting a Cardholder account for returned merchandise, cancelled services, or a price adjustment related to a previous POS Purchase.
19. In the event of overcharging a POS sale, Merchants must not use the Reversal function but use a Refund Transaction to return the difference to the Cardholder.
20. A Merchant that offers Cashback as part of an 'Original Purchase' transaction must not Refund the Cashback portion of the original Transaction.
21. The Acquirer must monitor Refund Transactions and report to SAMA if a Merchant exhibits repetitive, unusual or excessive Card Refunds. SAMA may initiate an investigation at its own discretion, subject to the SPAN Rules, Standards and Procedures.
22. Issuer Banks must ensure that the terms and conditions in the account opening and/or Card application documents state that, in the event of a Cardholder exercising their entitlement to a Refund, the Cardholder agrees to accept credits to his associated Card Account for such Refunds and agrees to the Refund policy of that merchant.
23. In the event where an attempted Refund Transaction is not completed (no advice is received by the issuer to enable a credit to the Cardholder's account), the issuer, on behalf of the Cardholder, may raise a claim through CPS if the issuer is satisfied with the authenticity of the concerned Transaction and supporting documents.
24. Merchants must Refund the (relevant proportion of the) purchase amount through one single refund transaction, not through multiple transactions.
25. Refund Transactions (and any associated fees) will be reported by SAMA in the normal SPAN activity and fee reports.
26. Refunds to Cardholders can only be performed at Merchants with valid agreements with Acquiring Banks and a POS Terminal compliant with the SPAN Operating Rules, Standards and Procedures and ‘mada’ POS Standards.
27. A merchant may choose to reimburse a SPAN Cardholder outside the SPAN network (i.e. a refund in cash or in kind). In such instances, the merchant accepts full responsibility for the Transaction and none of the SPAN stakeholders will have any liability for the Transaction. The Merchant may not fall back to the SPAN network for any dispute arising out of such a Refund.
28. The Standard POS Merchant Service Agreement must reference these Rules(?).
29. Merchants may cancel (void) a transaction provided it did not exceed the time allowed to effect a Reversal as per SPAN Operating Standards and Procedures1.
Beyond this time limit, the Merchant must use the Refund function described here.
30. The issuer Bank must notify the Cardholder via the Short Message Service (SMS) of the relevant details of any Refund Transactions in line with SAMA instructions.
31. The issuer must ensure that all Refund Transactions are shown on the Cardholder's account statement with adequate details that allow the Cardholder recourse if required.
1 SPAN Operating Standards and Procedures, Sections 5.3.2,5.4 and 5.4.2
Offline Authorization Operating Rules, Standards, and Procedures
No: 371000117542 Date(g): 14/8/2016 | Date(h): 12/11/1437 In reference to the Direct Authorization Service on Point of Sale Devices “POS Offline Authorization” using Saudi Payment Network (Mada) cards.
Attached is the updated version of the technical and operational procedures document for banks wishing to implement this service and offer it to their customers. Emphasis is placed on the importance of adhering to the content of the document. For more information and coordination regarding this service, please contact the Mada team via the website (mada.com.sa).
A. Update to SPAN Operating Rules
Rule 1. Transactions will be processed online at PCS Terminals if the transaction value exceeds the floor limit set by SAMA for POS purchase transaction. 2. Banks that are members of SPAN are required to support Offline authorization for the following transactions :
Terminal Type Process Type Transaction Type Issuer (Mandatory/optional) Acquirer(Mandatory/optional) POS Offline Purchase M M 3. Offline Authorization at POS is permitted if the authorization request for a purchase transactions with a value below the Terminal Floor Limit specified by SAMA was initiated by a chip Card at a POS terminal following successful Terminal and Card Offline Authorization processing. 4. The Terminal Floor Limit mandated by SAMA at this time for POS Offline authorization is SAR 75. 5. In determining whether to perform a Transaction online or Offline, whether the Chip Card's maximum Transaction amount differs from the Terminal Floor Limit, the lower amount prevails. 6. An issuer of a Card containing a payment application must enable Offline Authorization by setting offline parameter values that do not exceed those prescribed by SAMA. 7. The issuer may opt to set one or more values to zero (0) as per its internal. Policies. All valid mada Cards are eligible and support for Offline limits. 8. An issuer of a Card enabled for Offline Authorization will support the following Transaction types only:
a) Purchase Transaction.
9. An issuer is liable for the parameter values and processing options contained in the payment application as defined by SAMA in the Technical Books. 10. An issuer is liable for Offline Transactions initiated by a Card if these were authorized following the successful completion of Terminal and Card offline Authorization processes as required by SAMA. 11. The issuer is responsible for the settlement of Transactions generated from an Issuer's compliant chip Card, irrespective of the status of the Cardholder's account at the time of the Transaction that is authorized Offline. 12. For an Offline Transaction, a valid Transaction Certificate (TC) is proof to the Issuer that the Card was present and that data covered by the TC is valid and has not been altered. This protects the Issuer against liability from a Cardholder's claim of denial of the Transaction. 13. Issuers will ensure that Cardholders are not party to a decision on offline limits as the Card authorizes the Transactions when eligible on behalf of the Issuer. 14.
In the unlikely event of an unarranged overdraft in the Cardholder's account as a result of a delayed financial advice or insufficient balance, the Issuer will not levy any fees and interest rate on the affected amount or the event itself. Also, the issuer must not insert the cardholder name in SIMAH, the Saudi Credit Bureau, as a result of any debt or overdraft that may result from such an event.
Generally, such overdraft positions are not permitted on cardholders' account(s) as a result of an offline transaction. The Issuer must take reasonable and appropriate actions to avoid such occurrences.
In all cases, the Issuer is liable and responsible for any (unauthorized) overdraft position that may accrue on a cardholders account, pursuant to the terms defined at Clause 10 and 11 above.
15. Issuers that provide Offline limits for their Cards shall ensure that Cardholders are aware of the offline feature and the potential of delayed SMS messages generated for offline purchase Transactions. Issuers may wish to include text in the account opening form and/or debit Card collateral indicating that some Transactions may be authorized offline. 16. It is recommended that Issuers that provide Offline Limits for their Cards support Script Management as per SAMA technical requirements. 17. Issuers may amend risk management values on the card using dynamic risk management scripting based on their internal policies provided velocity checks and parameters do not exceed values mandated by SAMA. 18. An Issuer of SPAN Cards must support Offline Counters and Offline Limits included in the Card personalization process as defined by SAMA. 19. An Issuer is responsible for deciding the personalization parameter values for Offline authorization, if lower than offline parameter values specified by SAMA, at its discretion. 20. If online authorization initiated by a POS Terminal cannot be completed for technical reasons Transactions may be authorized offline by the card at the Issuers discretion if these satisfy the offline Authorization processes of the card and Terminal. 21. Issuers must not block funds from cardholder accounts as a risk mitigation measure in offline authorization. 22. Issuers may choose between one of the following recommended offline risk mitigation process:
a. Ring fencing an account with a shadow account earmarked for offline authorization provided the cardholder has full access, through the SPAN card, to the total balance in both accounts
b. Deferring a debit entry resulting from an offline authorization until such time as there are sufficient funds in an account to clear the accrued amount.
23. Issuers may ensure that funds accrued from domestic offline debit transactions are debited from the cardholder’s. designed account before international offline debit transactions 24.
An Acquirer must ensure that the POS Terminal Floor limit for POS Terminals provided to its Merchants its equal to or below the Floor Limit mandated by SAMA Acquirers will use the relevant application administered by SAMA to amend the floor limit for one or more merchants on a temporary or permanent basis, if terminal management system-TMS has the capability to support that. 25. An Acquirer must ensure that its Merchants reconcile the POS Terminals daily. The
Acquirer must advise its merchants of the procedure to be followed in the event that a Terminal is unable to communicate with the SPAN switch for this purpose.
26. An Acquirer is liable for an authorized Offline Transaction at its POS Terminal which is over the SAMA mandated Floor Limit and/or no TC is generated. 27. An Acquirer that offers offline processing for purchase Transactions must ensure that
POS Terminals provided to its merchants perform Terminal Risk Management for Cards regardless of the parameters on the Card.
28. An Acquirer must ensure that its Merchants obtain online authorization for Transaction amounts above the Terminal Floor Limit mandated by SAMA. 29. An Acquirer must ensure that its Merchants are aware that some purchase Transactions may be authorized Offline. The Acquirer must notify its Merchants of the Offline feature and the need for daily Reconciliation and retention of the merchant copy of the receipt for such Transactions as per SPAN operating Rules, Standards and procedures. 30 An Acquirer must ensure that its POS Terminals' Terminal Risk Management processes and parameters remain in compliance with SAMA technical requirements. 31. SPAN Scheme Processing Fees
In its capacity as operator and Settlement agent on behalf of Members, SAMA may levy processing fees on SPAN issuing and SPAN acquiring banks for POS Transactions authorized Offline as indicated in Table (7)
Table 7 Terminal Transaction Fee Paid by paid To
Interchange Acquirer Issuer POS Purchase Settlement Issuer SPAN Acquirer SPAN B. Update to SPAN Operating Standards and Procedures
Update to SPAN Operating Standards and Procedures - Part IV - Acquirer
Rule 1. The Acquirer is obligated to provide the Transaction Certificate (TC) upon request in the processing of a retrieval request as per sections 2.11.6, 3.34.1 and 5.11 of the SPAN Operating Standards and Procedures. 2. The Acquirer must meet transaction approval requirements: Specifically, a TC must be generated when a Transaction initiated by a Card is approved off-line. All offline approved Transactions without a TC are at the Acquirer's risk. 3. Acquirers that support Offline authorization will ensure that POS Terminal Risk Management be comprised of the following functions:
a. Terminal Floor Limit Check
b. Velocity Check
c. Random Online Transaction Selection
4. An Acquirer that sets the POS Floor Limit at or below SAMA's defined limit must support terminal parameters that instruct the Terminal on the appropriate actions to take under various conditions during Offline Authorization. The possible actions are:
Approve Offline;
Go Online;
Decline Offline.
5. Acquirers will support Issuer scripts sent to Cards through online response messages. 6. Acquirers must ensure that an advice message is sent to the Issuer in the event that a script is not successfully transferred between the terminal and Card. 7. Acquirers must retain the TC and related data elements with each transaction record for the period specified by SAMA in Part II, Section 2.6.2 of the SPAN Operating Standards and Procedures. 8. An Acquirer must ensure that it is able to provide the required TC data elements when an Issuer re-submits a claim requesting Transaction data as part of the claim processing procedure for Transactions authorized Offline. 9. A SPAN Acquirer or its appointed agent(s) will not change the following POS terminal parameter values required for random selection as pre-determined by SAMA.
a) Target Percentage: 15
b) Maximum Target Percentage: 15
c) Threshold Value: SAR 40
11. An Acquirer must ensure that receipts (paper or electronic receipts) from offline Transactions are retained by Merchants for a period of at least six (6) months from the date of the transaction. This must be rejected in the Merchant Services Agreement-MSA. 12. In the unlikely event where a Transaction approved Offline is not sent with a SAF flush or a reconciliation advice or through an unrecoverable technical fault, the receipt will be used as documentary support for a CPS claim raised by the Acquirer on behalf of the Merchant. If a receipt is not submitted, Issuers may settle the Transactions on best effort basis. 13. If the Merchant Is unable to reconcile one or more terminals due to technical reasons, the merchant must contact the Acquirer or its appointed agent(s) helpdesk to report the incident. The Merchant must request a reference (ticket- opened) number and maintain this reference as proof of reporting the incident. 14. An Acquirer must ensure that all POS devices with Floor Limits above zero (0) are reconciled daily. 15. A POS Terminal can be removed and/or replaced only after it has been reconciled (and all SAF entries flushed) as per SPAN operating Rules, Standards and Procedures and section (13) of these procedures. 16. Acquirers will use the 1220 authorization advice generated from an offline transaction to post the required entries to merchant accounts and for SPAN settlement. Acquirers are expected to respond with a 1230 message. 17. Acquirers will be capable of identifying an offline transaction through data element
39 (Code 087,089, 190) present in the 1220 financial authorization advice.
18. With the exception of mitigating circumstances proven beyond its control, the Acquirer should ensure that the time between the Transaction date and the reconciled / cleared date for a Transaction authorized offline, does not exceed five (5) business days. Update to SPAN Operating Standards and Procedures – Part IV- Issuer
Rule 19. A Mada Card issuer must support Card parameters that instruct the Terminal on the appropriate actions to take under various conditions during Offline Authorization.
The possible actions are:
Approve Offline;
Go Online;
Decline Offline.
20. Mada Issuers should be capable of processing script messages to change Card parameters dynamically, and delivered in a response to online authorization requests. 21.
Issuers must have an effective method to confirm and record which scripts have been successfully received by the Mada Card 22. It is recommended that Issuers support the following scripts for domestic Offline transactions over a contact interface:
a) Amend LCOTA ( value should be equal or lower than the SAMA mandated value)
b) Amend UCOTA (value should be equal or lower than the SAMA mandated value)
Issuers may support the above updates over a Contactless interface.
23. In Offline Authorization the Transaction Certificate (TC) represents an Issuer approval. If the TC highlights that Terminal Risk Management functions were not executed correctly, the Issuer has the right to submit (or re-submit a claim). 24. Issuers will advise cardholders through normal communication channels (including the account opening form) of the possibility of an SMS message delay for a POS purchase generated from the actual transaction date as a result of an offline authorization. The SMS message will mention offline and transaction date. 25. Issuers will use the 1220 authorization advice generated from an offline transaction to post the required entries to cardholder accounts and for settlement. Issuers are expected to respond with a 1230 message. 26.
Issuers will be capable of identifying an offline Transaction through data element 39 (Code 087,089, 190) present in the 1220 financial authorization advice. Update to SPAN Operating Standards and Procedures-Part V - POS
Rule 1. All POS Terminals must support Terminal actions in offline authorization specified by
SAMA.
2. All POS Terminals must support Terminal Risk Management in offline Authorization as specified by SAMA. 3. Issuers must retain the TC and related data elements with each transaction record for the period specified by SAMA in Part II, Section 2.6.2 of the Operating Standards and Procedures. 4. An Issuer must ensure that it is able to provide the required TC data elements when an Acquirer re-submits a claim requesting Transaction data as part of the claim processing procedure for Transactions authorized Offline. 5. The Issuer must set the parameter values for domestic offline transactions during and post-issuance at or lower than the following Offline Authorization limit values mandated by SAMA for the combined SPAN/IBCS application:
a) CTTAL/LCOTA: SAR 150
b) CTTAUL/UCOTA: SAR 225
Above limits mean: A single Transaction up to SAR 75, cumulative total under normal conditions of SAR 150, and a cumulative total under exceptional conditions (loss of connectivity) of SAR 225.
6. Based on the duration between the Transaction date and the Reconciliation date as evident in the relevant Transaction log File report, the issuer may accept a Purchase Transaction authorized offline and reconciled /cleared over a period exceeding five (5) business days. C. Definitions
'Domestic' A Transaction authorized Offline with a SPAN card through the
Saudi Payment Network within Saudi Arabia
'Offline Authorization' Authorizing or declining a payment transaction through card-to- terminal communication, using issuer-defined risk parameters that are set in the card to determine whether the transaction can be authorized without going online to the issuer host system. "CTTAL" Cumulative Total Transaction Amount Limit "CTTAUL* Cumulative Total Transaction Amount Upper Limit "LCOTA" Lower Consecutive Offline Transaction Amount "Offline" In the context of this document, an Offline Authorization occurs when a POS Transaction is authorized Offline by the SPAN chip Card without sending a request to the SPAN Issuer. "Offline PIN" A process where the PIN is verified Offline at the SPAN POS
Terminal.
"TC" Transaction Certificate "Transaction Certificate" A unique cryptogram generated by the Card proving that the card was present at the time of a Transaction approved Offline on behalf of the Issuer. "UCOTA" Upper Consecutive Offline Transaction Amount Issuance of a Point-of-Sale Service Level Agreement
Based on 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 22/2/1386H, and based on Cabinet Resolution No. 59 dated 28/3/1420 H which empowered SAMA to grant licenses for issuing All Electronic Bank Cards in addition to SAMA Circular No. (341000076614) dated 20/6/1434 H issuing the SPAN Operating Rules and Regulations, and the subsequent workshops with banks to discuss the draft POS Service Level Agreement.
Please find attached the Point of Sale Service Level Agreement (POS-SLA) aimed at improving the service provided, which is one of the main electronic channels to reduce cash handling in the retail sector, and SAMA hopes that banks will do the following:
Apply the accompanying agreement to the POS service as of 1/3/2015 G, and adhere to it and any updates from time to time.
Print and sign two (2) Arabic copies by the bank's CEO or his representative and return them to SAMA within a period not exceeding two weeks from the date of this report. (Attachments - Arabic and English version of the POS Service Level Agreement on a CD).Circular's scope of application
12 banks - Al Rajhi Bank.
- National Commercial Bank.
- Riyad Bank.
- Alinma Bank.
- Al-Bilad Bank.
- Arab National Bank.
- Bank Al Jazira.
- Samba Financial Group.
- Saudi British Bank - SABB.
- Saudi Holland Bank.
- Saudi Investment Bank.
- Banque Saudi Fransi.
MADA's Standards for Point of Sale Services
In reference to the five-year strategy for the Saudi Payment Network System (SPAN2016) and its initiatives aimed at enhancing the efficiency and quality of point-of-sale (POS) service in the local market to increase electronic payments, one of which includes developing specific service standards to improve the user experience for cardholders and merchants, particularly with the launch of the new identity of the Saudi Payments Network, "MADA".
We inform you of the development of the Mada Service Standards Document for Point of Sale (POS) (attached: a copy of the document on CD), after sharing it with local banks during the development stages. This document includes the following:
A. Market Segmentation Into six segments of commercial sectors that share the specific requirements for the Point of Sale (POS) service, with the specifications of appropriate devices for each segment determined based on the field studies conducted in this regard. B. Standards for Point-of-Sale Service (PoS Standard) Aligned with global best practices for point-of-sale services, covering several relevant aspects such as: - Defining the transaction completion speed for various technologies. - Enhancing the confidentiality and privacy of the cardholder during the purchasing process. - Defining the locations for installing Point of Sale (POS) devices at merchant outlets. - Emphasizing security standards for payment cards, referred to as (Payment Card Industry - PCI). - Increasing the efficiency of merchant services, particularly in the area of technical support. The implementation of these standards will contribute to enhancing the service level and increasing its adoption by bank cardholders and merchants. This is considered one of the key pillars of the Saudi Payments Network strategy, which supports the expansion and use of Point of Sale (POS) systems as an alternative electronic channel to cash. Therefore, SAMA requests directing the bank's specialists to adhere to the following:
- Begin implementing the accompanying POS Service Standards Document.
- Provide SAMA with the bank's timeline for full compliance with these standards using the template available in the document (outlined in Appendix I). The timeline must be submitted within two weeks from this date.
- Submit monthly reports to SAMA – within the first five working days of each calendar month starting from November 2014 – detailing the bank's performance using the template available in the document (Appendix I).
- Send the bank's timeline and all monthly reports to SAMA via email address at: bd.btd@sama.gov.sa. with the subject line formatted as: Bank Name: MADA PoS Standard – Progress Update.
For inquiries, you can contact SAMA.
Mada "Naqd" Service (Purchase with Cash-back) Business Rules
No: 371000016319 Date(g): 21/11/2015 | Date(h): 10/2/1437 Document References
Name Version SPAN Purchase with Cashback - Requirements Specification V1.1 SPAN Pricing - Business Requirement MoSCoW Template.doc V 0.03 SPAN Business Strategy V1.4 SPAN Daily/Monthly Reconciliation Reports - Revised June 2013 1. Introduction
The Saudi Arabian Payments Network (SPAN) supports all card payments within the Kingdom and is a key component in the Saudi Arabian National Payments Strategy delivered through the IPSS. The SPAN Business Strategy (SPAN 2016 - Driving Change) is designed to position SPAN as the 'First Payment choice in the Kingdom of Saudi Arabia'. Driven by the IPSS objective of reducing the volume and velocity of cash in the kingdom, the SPAN scheme will target the reduction of cash in the kingdom from over 94% of retail payment transaction volume, to less than 70% by 2020.
The SPAN Business Strategy defines the development and change program Into four key dimensions:
a. Quality initiatives, designed to improve the overall service level and performance of the scheme b. Growth Initiatives, designed to extend the reach of cashless retail payment services within the kingdom and to stimulate increased usage of card payment services among existing SPAN cardholders c. Governance of the SPAN Scheme and development programme, to ensure appropriate development and management of stakeholder interests d. Communications Initiatives, to ensure a consistent level of stakeholder education and understanding of the SPAN vision, mission and deliverables, optimization of the scheme promotional and marketing initiatives and a clear understanding of the operational and regulatory obligations of scheme participants.
Figure 1: 'SPAN 2016 - Driving Change' program outline
Central to the development of the SPAN service is the ongoing development of new business services which:
1. Support the strategic direction of the IPSS and the SPAN Business Strategy - 2016 2. Offer added value to the key stakeholders (Merchant, Card Issuer and Card Acquirer) 3. Offers value to the Card holder
Naqd Service (Cash-back with Purchase) at Point of Sale generates the following opportunities:
○ Encourages cardholders to use PoS functionality as a source of multiple Card based services ○ Migrates some traffic away from (an already busy) ATM network ○ Provides an opportunity for Merchants to offload (expensive) cash ○ Allows Card Acquirers sell the benefits of PoS, by including Cash-back as an additional service suite to the Merchant
Naqd Service at PoS Is a common feature in retail (card) payment markets In Europe, Asia, US and Australia, and is acknowledged as a material feature of progressive card-based retail payments systems.
International analysis suggests that Cash-back with purchase at point of sale can be a feature of (typically) 5% to 8% of card point-of-sale transactions.
2. Naqd Service Business Rules
2.1 Service Availability
1. The 'Naqd Service' will be offered as a SPAN/mada Scheme service
2. The service will be (technically) available on all SPAN/mada branded cards
3. Naqd will be available at all SPAN/mada Merchant terminals.
a. The Acquirer will have the capacity to disable the Naqd facility at any of their Merchants by assigning the Merchant to the appropriate 'TMS Group', which excludes the Naqd feature
4. Naqd will only be available to cardholders if conducted as part of a SPAN/mada purchase transaction
a. The Total Value of the transaction will be identified in field DE04 b. The Naqd (Cash-back) element of the transaction will be Identified in field DE54 c. A Naqd (Cash-back) only transaction will be Identifiable and declined by the Issuer (i.e. DE04 = DE54 > 0) d. The processing code, field DE03 carries the processing code 090000
2.2 Transaction Limits
5. There will be no maximum number of transactions per day on which Naqd could be requested or authorised (subject to available funds)
6. The scheme will operate to a parameterised minimum and maximum value for cash-back.
a. Minimum Value - SAR 1 b. Maximum Value - SAR 400 per day c. Cash-back values will be calculated and permitted to two places of decimals
The maximum value will be calculated and applied daily, subject to available funds and will be managed by the Card Issuer
7. When a Naqd transaction is requested, the request will be evaluated at three levels:
a. The Acquirer (Terminal) will check to confirm that the individual transaction(s) for Purchase and for Naqd don't exceed SAR 60,000 and SAR 400 respectively b. The SPAN Switch will check to ensure the total value of the transaction does not exceed the PoS limit (DE04 <= SAR 60,400) c. The Issuer will check to ensure the cumulative Purchase value and/or the Cash-back value doesn't exceed the daily limit(s)
8. Daily limits will be defined on the calendar day, typically, but not mandated, from 00:00:00 to 23:59:59
9. Transactions containing values that cause either the cumulative daily PoS Purchase limit of up to SAR 60,000 or the cumulative daily Naqd limit of SAR 400 to be exceeded, will be declined in total
10. Naqd 'Cash-back' values will form part of the revised cumulative total PoS value limit of SAR 60,400 per day*
2.3 Naqd Transaction Authorization
11. A Naqd 'Cash-back' element will only be permitted on a transaction that has received (online) positive authorization from the Issuer
12. Where 'off-line transaction functionality' Is available, Naqd will not be permitted.
2.4 Commercial Model
13. Naqd will operate as a 'fee-free' transaction to the Card Issuer, Transaction Acquirer, Merchant and Cardholder. No unique SPAN switch fees will be applied by the scheme to the Naqd 'Cash-back' element of the Point of Sale (PoS) transaction.
a. The Issuer and Acquirer fees applied at the SPAN switch will reflect the standard rate for the card (i.e. one Authorization Fee and a split Settlement Fee for the overall Purchase & Naqd 'Cash-back' transaction) b. Interchange Fees will apply for the Purchase element only (i.e. the value of field DE04-DE54), based on Table 1 below: (See SPAN/mada Charging Policy for details)
Table 1: SPAN PoS Interchange Fees (Acquirer pays Issuer)
Interchange Value Band From To SPAN Interchange Band 1 SAR 0.00 SAR 1,000 0.4% (40bp) Band 2 SAR 1.000.01 SAR 60,000.00 SAR 4.00 c. MSC charged by the SPAN Acquirer to the Merchant on the total transaction will be subject to the normal SPAN Maximum, based on the Purchase element only (i.e. the value of field DE04-DE54.
Table 2: SPAN PoS MSC Maximum Fees (Subject to bi-lateral negotiation between Acquirer & Merchant)
Merchant Services Commission (MSC) Value Bands From To SPAN MSC Band 1 SAR 0.00 SAR 5,000.00 (approx.) 0.8% (80bp) max Band 2 SAR 5,000.01 (approx.) SAR 60,000.00 SAR 40.00 max The SAR5,000 reference Is Indicative, since MSC rate Is negotiable between Acquirer and Merchant, but still subject to SAR 40 max
2.5 PoS Terminal Output
14. SPAN PoS Terminal will be configured to generate a counterfoil/transaction confirmation which includes:
a. Purchase Value (DE04 - DE54) b. Naqd (Cash-back) value (DE54) c. Total transaction value (DE04)
15. The Naqd 'Cash-back' element on the 'receipt' will be situated close to a cardholder signature panel where the cardholder will be asked to sign to confirm receipt of the cash as this will help in the event of a dispute
Promotional material should encourage the Merchant to confirm the Naqd element on the merchant receipt copy, which should then be signed by the cardholder, as this will help in the event of a dispute.
2.6 Bank to Customer Reporting
16. Transaction Reporting on Statements:
a. The cardholder statement will post a single transaction for the full value of the Purchase and Naqd (Cash-back) value (i.e. field DE04). b. The Transaction narrative on the statement will detail the value of the Cash-back element, (DE54) and the value of the Purchase element (DE04 - DE54) c. SMS messages to the cardholder after execution of a transaction shall adopt a standard message, which will be Issued In both Arabic and English.
17. The SMS (transaction confirmation) narrative will read:
Your account XXXX has been debited for SAR NNN.NN(DE04) Including purchase value SAR XXX.XX (DE04-DE54) and Naqd value YYY. YY (DE54) at <Merchant Name> on dd.mm.yyyy at hh:mm
2.7 Naqd (Cash-back with Purchase) - Transaction Declines and Reason Codes
18. Decline reason codes will be issued from the acquirer to the merchant (via SPAN) where a requested transaction has been denied by the issuer. Where relevant, a transaction will be declined In whole (i.e. both the Purchase and the Cash-back element will be declined).
19. The standard reasons codes apply, as defined in the Decline reason codes will be as follows:
a. DE 39 (SPAN Technical Books, Part 4, MBI p 106)
i. Reason Code 110 - Invalid Amount (where the cumulative purchase amount exceeds the dally limit) ii. Reason Code 121 - Exceeds Withdrawal Amount (where the cumulative Naqd cash-back amount exceeds the daily limit) iii. No additional / new decline codes are added or changed and all other decline codes remain applicable where appropriate and are unchanged
2.8 Naqd (Cash-back with Purchase) - Transaction Reversals
20. A PoS transaction reversal will be effected when:
a. The Merchant cancels the transaction within 60 seconds of approval or b. The SPAN switch determines that the transaction is incomplete (timed out)
The SPAN Operating Standards and Procedures V 6.0 section 5.4 (page 106) outlines the relevant procedures and processes.
21. A Purchase with Cash-back transaction will also be reversed in these conditions. In such cases, the full amount of the transaction will be reversed (DE04) prior to the Merchant completing the transaction or issuing the cash. No further action is required.
2.9 Naqd (Cash-back with Purchase) - Transaction Refunds
22. Transaction refunds will be managed as normal through the Complaints Processing System (CPS - see CPS Claims Officer Rulebook).
Where appropriate for refund and following CPS due process, only the Purchase Amount of the transaction (DE04 - DE54) will be subject to refund. The Naqd Cash-back element will not be subject to refund.
2.10 Bank to Merchant Reporting
23. The Merchant Bank and the Merchant will receive information relating to the 'total value of Cash-back processed per terminal'.
This value will be carried in field DE124.7 and will support Merchant and Terminal reconciliation. (See SPAN Technical Books v 5.4: Part 4: MBI p163)
2.11 Bank Reporting
24. SAMA / SPAN Reporting schedules will uniquely identify transactions which included cash- back.
25. The 'Interchange Fee' report for each bank will show the number of 'Purchase with Cash- back' transactions effected by the issuer, falling into each of the Interchange bands. Transactions will be allocated to an interchange band based on the value of the purchase component only (DE04-DE54)
2.12 (Internal) SAMA Reporting
26. No additional changes to the current SAMA internal reporting suite, which carries a 'whole count' reference field for Naqd (Purchase with Cash-back) transactions, is required.
Emphasize of the Mandatory Verification of the Customer and the Effectiveness of the Procedures Followed to Adhere with the "Know Your Customer (KYC)" Principle Before Initiating the Sale or Purchase of Point-of-Sale Devices
Based on the Banking Control Law issued by Royal Decree No. M/5 dated 22/02/1386 H, and with reference to the powers vested to SAMA under the Minister Council Decision No. (226) dated 2/5/1440 H, confirming that it is the competent authority to operate, monitor and supervise payment and financial settlement systems and services in the Kingdom, and may issue rules, instructions and licenses according to the standards it applies in this regard, and based on Article III of the Payment Services Providers Regulations , which stipulates that "invites or induces a person located in the Kingdom to enter into, or offer to enter into, an agreement in relation to a Payment Service, or markets or otherwise promotes any Payment Service is considered a practice of payment services in the Kingdom and requires obtaining a license from SAMA; and according to what is stipulated in Article Eight of the regulations, regarding the obligation to put in place policies and procedures for detecting fraud cases and handling them, in addition to informing the relevant authorities in the State and notifying SAMA in according to the format specified by it.
SAMA would like to emphasize the importance of verifying the effectiveness of the procedures in place to comply with the 'Know Your Customer' (KYC) principle before initiating the sale or operation of point-of-sale (POS) devices. The entity entrusted with the marketing and the devices must be licensed by SAMA. Additionally, it is important to verify the comprehensiveness and appropriateness of the internal policies and procedures set by the company for all categories of customers benefiting from these services. These policies should include the identification of potential risks and the mechanisms for monitoring, managing, and reporting them. Furthermore, we emphasize the importance of ensuring that the POS terminal is only linked to the customer’s bank account and that transfers to another person’s account are not accepted.