The Basel III framework on Counterparty Credit Risk includes a comprehensive, non-modelled approach for measuring counterparty credit risk arising from derivative contracts, Securities Financing transaction (SFT) and cash transactions in securities, foreign exchange and commodities. With the continued growth of the derivative market and banks’ increasing use of financial instruments and structured products for yield enhancement and/or risk management purposes, it is essential for them to have the necessary systems and expertise for managing any CCR associated with those activities.

This Framework covers both Counterparty Default Risk as well as the Credit Valuation Adjustment (CVA) to calculate the risk of losses arising from the changes in the value of the CVA in response to the changes in the counterparty credit spreads and market risk factors that drive prices of derivative transactions and SFTs. Banks that are below the CVA materiality threshold may opt not to calculate its CVA capital requirements. A bank must regularly review and update its materiality assessment to reflect any significant changes in materiality.

This framework is issued by SAMA in exercise of the authority vested in SAMA under the Central Bank Law issued via Royal Decree No. M/36 dated 11/04/1442H, and the Banking Control Law issued 01/01/1386H.

This Framework supersedes any conflicting requirements in previous circulars in this regard (GDBC-371000101120, GDBC-410382700000, and GDBC-361000021954).