Appendix VII

No: 1651/67

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

Effective from Oct 01 2019 - Sep 30 2019
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Calculation of exposure value for trading book positions¹⁴

A bank must add any exposures to a single counterparty arising in the trading book to any other exposures to that counterparty that lie in the banking book to calculate its total exposure to that counterparty.

Scope of large exposure limits in the trading book:

The exposures considered in this section correspond to concentration risk associated with the default of a single counterparty for exposures included in the trading book (See note below). Therefore, positions in financial instruments such as bonds and equities must be constrained by the large exposure limit, but concentrations in a particular commodity or currency need not be.

Note (SAMA recognizes that the risk from large exposures to single counterparties or groups of connected counterparties is not the only type of concentration risk that could undermine a bank's resilience. Other types include both sectoral and geographical concentrations of asset exposures; reliance on concentrated funding sources; and also a significant net short position in securities, because the bank may incur severe losses if the price of these securities increases. SAMA has decided to focus this framework on losses incurred due to default of a single counterparty or a group of connected counterparties and not to take into account any other type of concentration risk.)

Calculation of exposure value for trading book positions:

The exposure value of straight debt instruments and equities must be defined as the accounting value of the exposure (i.e. the market value of the respective instruments).

Instruments such as swaps, futures, forwards and credit derivatives must be converted into positions following the risk-based capital requirements/ See paragraph 718 (x - xii), Page 89, Basel II.5 SAMA's Guidance Document Concerning Implementation, 2012). These instruments are decomposed into their individual legs. Only transaction legs representing exposures in the scope of the large exposures framework need be considered (see note below)

Note: A future on stock X, for example, is decomposed into a long position in stock X and a short position in a risk-free interest rate exposure in the respective funding currency, or a typical interest rate swap is represented by a long position in a fixed and a short position in a floating interest rate exposure or vice versa.

In the case of credit derivatives that represent sold protection, the exposure to the referenced name must be the amount due in the case that the respective referenced name triggers the instrument, minus the absolute value of the credit protection, (see note below) For credit-linked notes, the protection seller needs to consider positions both in the bond of the note issuer and in the underlying referenced by the note. For positions hedged by credit derivatives, refer to “Offsetting long and short positions in the trading book" section below (paragraphs 3 to 6).

Note: In the case that the market value of the credit derivative is positive from the perspective of the protection seller, such a positive market value would also have to be added to the exposure of the protection seller to the protection buyer (counterparty credit risk; refer to "Banking book and trading book OTC derivatives section in Appendix VI above). Such a situation could typically occur if the present value of already agreed but not yet paid periodic premiums exceeds the absolute market value of the credit protection.

The measures of exposure values of options under this framework differ from the exposure value used for risk-based capital requirements. The exposure value must be based on the change(s) in option prices that would result from a default of the respective underlying instrument. The exposure value for a simple long call option would therefore be its market value and for a short put option would be equal to the strike price of the option minus its market value. In the case of short call or long put options, a default of the underlying would lead to a profit (i.e. a negative exposure) instead of a loss, resulting in an exposure of the option's market value in the former case and equal the strike price of the option minus its market value in the latter case. The resulting positions will in all cases be aggregated with those from other exposures. After aggregation, negative net exposures must be set to zero.

Exposure values of banks' investments in transactions (i.e index positions, securitizations, hedge funds or investment funds) must be calculated applying the same rules as for similar instruments in the banking book (refer to Appendix X). Hence, the amount invested in a particular structure may be assigned to the structure itself, defined as a distinct counterparty, to the counterparties corresponding to the underlying assets, or to the unknown client, following the rules described in Appendix X paragraphs 1 to 5).

Offsetting long and short positions in the trading book

Offsetting between long and short positions in the same issue:
Banks may offset long and short positions in the same issue (two issues are defined as the same if the issuer, coupon, currency and maturity are identical). Consequently, banks may consider a net position in a specific issue for the purpose of calculating a bank's exposure to a particular counterparty.
Offsetting between long and short positions in different issues:
Positions in different issues from the same counterparty may be offset only when the short position is junior to the long position, or if the positions are of the same seniority.
Similarly, for positions hedged by credit derivatives, the hedge may be recognised provided the underlying of the hedge and the position hedged fulfil the provision mentioned in the pervious paragraph (the short position is junior or of equivalent security to the long position).
In order to determine the relative seniority of positions, securities may be allocated into broad buckets of degrees of seniority (for example. “Equity”, “Subordinated Debt" and “Senior Debt”).
For those banks that find it excessively burdensome to allocate securities to different buckets based on relative seniority, they may recognise no offsetting of long and short positions in different issues relating to the same counterparty in calculating exposures.
In addition, in the case of positions hedged by credit derivatives, any reduction in exposure to the original counterparty will correspond to a new exposure to the credit protection provider, following the principles underlying the substitution approach stated in section 5.4 “Recognition of exposures to CRM providers”, except in the case described in the next paragraph.
When the credit protection takes the form of a CDS and either the CDS provider or the referenced entity is not a financial entity, the amount to be assigned to the credit protection provider is not the amount by which the exposure to the original counterparty is reduced but, instead, the counterparty credit risk exposure value calculated according to the SA-CCR. (See SAMA Circular No 351000095021, 21 May 2014, Basel Committee on Banking Supervision Document of March 2014 regarding the Standardized Approach for Measuring Counterparty Credit Risk Exposures) For the purposes of this paragraph, financial entities comprise:
	■	regulated financial institutions, defined as a parent and its subsidiaries where any substantial legal entity in the consolidated group is supervised by a regulator that imposes prudential requirements consistent with international norms. These include, but are not limited to, prudentially regulated insurance companies, broker/dealers, banks, thrifts and futures commission merchants; and
	■	unregulated financial institutions, defined as legal entities whose main business includes: the management of financial assets, lending, factoring, leasing, provision of credit enhancements, securitisation, investments, financial custody, central counterparty services, proprietary trading and other financial services activities identified by supervisors
Offsetting short positions in the trading book against long positions in the banking book:
Netting across the banking and trading books is not permitted.
Net short positions after offsetting:
When the result of the offsetting is a net short position with a single counterparty, this net exposure need not be considered as an exposure for large exposure purposes (refer to “Scope of large exposure limits in the trading book" section in this Appendix).

¹⁴ Paragraphs 44-59 of BCBS "Supervisory framework for measuring and controlling large exposures" April 2014