1.3. Definitions

No: 1651/67

Date(g): 8/9/2019 | Date(h): 9/1/1441

Status: In-Force

Effective from Oct 01 2019 - Sep 30 2019
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The following terms and phrases, where used in these Rules, shall have the corresponding meanings, unless the context requires otherwise:
i.	SAMA: the Saudi Central Bank*.
ii.	Rules: Large Exposure (LEX) Rules for Banks.
iii.	Subsidiary: include a subsidiary where a bank owns more than 50% of its shareholding.
iv.	Exposure: include both on and off-balance sheet exposures included in either the banking or trading books, and instruments with counterparty credit risk under the Basel risk-based capital framework. Banking and trading books have the same meaning as under the Basel risk-based capital framework.
v.	Large Exposure: if the sum of all exposures values of a bank to a single counterparty or to a Group of Connected Counterparties is equal to or above 10% of the bank's eligible capital base. The exposures values have to be measured and eligible capital base calculated as per requirements set out under these Rules.
vi.	Eligible Capital Base: is the effective amount of Tier 1 capital fulfilling the criteria defined in the Basel III framework.
vii.	Control Relationship: control relationship will be deemed to exist automatically if one entity owns more than 50% of the voting rights of another entity. In addition, banks must assess connectedness between counterparties based on control, using the following criteria:
	a.	Voting agreements (e.g. control of a majority of voting rights pursuant to an agreement with other shareholders);
	b.	Significant influence on the appointment or dismissal of an entity’s administrative, management or governing body, such as the right to appoint or remove a majority of members in those bodies, or a majority of members have been appointed solely as a result of the exercise of an individual entity's voting rights;
	c.	Significant influence on senior management, e.g. an entity has the power, pursuant to a contract or otherwise, to exercise a controlling influence over the management or policies of another entity (e.g. through consent rights over key decisions);
		Banks are also expected to refer to criteria specified in appropriate internationally recognized accounting standards (The International Financial Reporting Standards - IFRS are applied to all banks in KSA) for further qualitatively based guidance when determining control.
	Where control has been established based on any of these criteria, a bank may still demonstrate to SAMA in exceptional cases, e.g. due to the existence of corporate governance safeguards, that such control does not necessarily result in the entities concerned constituting a group of connected counterparties.
viii.	Economic Interdependence: In establishing connectedness based on economic interdependence, banks must consider, at a minimum, the following qualitative criteria:
	a.	Where 50% or more of one counterparty's gross receipts or gross expenditures (on an annual basis) is derived from transactions with the other counterparty (eg the owner of a residential/commercial property and the tenant who pays a significant part of the rent);
	b.	Where one counterparty has fully or partly guaranteed the exposure of the other counterparty, or is liable by other means, and the exposure is so significant that the guarantor is likely to default if a claim occurs;
	c.	Where a significant part of one counterparty's production/output is sold to another counterparty, which cannot easily be replaced by other customers;
	d.	When the expected source of funds to repay each loan of both counterparties is the same and neither counterparty has another independent source of income from which the loan may be serviced and fully repaid.¹
	e.	Where it is likely that the financial problems of one counterparty would cause difficulties for the other counterparties in terms of full and timely repayment of liabilities;
	f.	Where the insolvency or default of one counterparty is likely to be associated with the insolvency or default of the other(s);
	g.	When two or more counterparties rely on the same source for the majority of their funding and, in the event of the common provider's default, an alternate provider cannot be found. In this case, the funding problems of one counterparty are likely to spread to another due to a one-way or two-way dependence on the same main funding source.
	Where a bank can demonstrate to SAMA that a counterparty who is economically closely related to another counterparty may overcome financial difficulties or even the second counterparty's default by finding alternative business partners or funding sources within an appropriate time period, the bank is not required to combine these counterparties to form a group of connected counterparties despite meeting some of the above criteria.
	There are cases where a thorough investigation of economic interdependencies will not be proportionate to the size of the exposures. Therefore, banks are expected to identify possible connected counterparties on the basis of economic interdependence in all cases where the sum of all exposures (including guarantors) to one individual counterparty or a group of connected counterparties exceeds 5% of the eligible capital base.
ix.	Group of Connected Counterparties:
	In some cases, a bank may have exposures to a group of counterparties with specific relationships or dependencies such that, where one of the counterparties were to fail, all of the counterparties would very' likely fail. A group of this sort, referred to in these rules as a group of connected counterparties, must be treated as a single counterparty. In this case, the sum of the bank's exposures to all the individual entities included within a group of connected counterparties is subject to the large exposure limit and to the regulatory reporting requirements.²
	Two or more natural or legal persons shall be deemed a group of connected counterparties if at least one of the following criteria is satisfied:
	a.	The existence of a control relationship; or
	b.	The existence of Economic interdependence.
	c.	Other connections or relationships which, according to a bank’s assessment, identify the counterparties as constituting a single risk.
	The bank shall assess the relationship amongst counterparties with reference to (a),(b) and (c) above in order to properly assess the existence and the extent of a group of connected counterparties.
	Where control has been established based on any of these criteria, a bank may still demonstrate to SAMA in exceptional cases, e.g. due to the existence of specific circumstances and corporate governance safeguards, that such control does not necessarily result in the entities concerned constituting a group of connected counterparties.
x.	Entities Connected with Saudi Government: means public sector entities treated as sovereigns under the Basel risk-based capital framework including Sovereign Wealth Funds (SWFs). However, any commercial undertakings majority owned by Saudi Government will be treated as normal commercial entities and therefore be subject to the exposure limits under these Rules.
xi.	Commercial Undertakings Majority Owned by Saudi Government: commercial entities in which the Saudi Government or Entities Connected with Saudi Government owns (directly or indirectly ) 50% or more of shareholdings.

¹ As amended by BCBS via its FAQ issued on September 29, 2016
² See section '7. Regulatory Reporting' of this circular

* The Saudi Arabian Monetary Agency was replaced By the name of Saudi Central Bank accordance with The Saudi Central Bank Law No. (M/36), dated 11/04/1442H, corresponding in 26/11/2020AD.

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