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Approval to Adopt an Internal Models Method to Estimate EAD
No: 44047144
Date(g): 27/12/2022 | Date(h): 4/6/1444
Status: In-Force
Effective from Jan 01 2023 - Dec 31 2022 To view other versions open the versions tab on the right
7.1.
A bank that wishes to adopt an internal models method to measure exposure or exposure at default (EAD) for regulatory capital purposes must seek SAMA approval. The internal models method is available both for banks that adopt the internal ratings-based approach to credit risk and for banks for which the standardized approach to credit risk applies to all of their credit risk exposures. The bank must meet all of the requirements given in 7.6 to 7.60 and must apply the method to all of its exposures that are subject to counterparty credit risk, except for long settlement transactions.
7.2.
A bank may also choose to adopt an internal models method to measure counterparty credit risk (CCR) for regulatory capital purposes for its exposures or EAD to only over-the-counter (OTC) derivatives, to only securities financing transactions (SFTs), or to both, subject to the appropriate recognition of netting specified in 7.61 to 7.71. The bank must apply the method to all relevant exposures within that category, except for those that are immaterial in size and risk. During the initial implementation of the internal models method, a bank may use the Standardized Approach for counterparty credit risk for a portion of its business. The bank must submit a plan to SAMA to bring all material exposures for that category of transactions under the internal models method.
7.3.
For all OTC derivative transactions and for all long settlement transactions for which a bank has not received approval from SAMA to use the internal models method, the bank must use the standardized approach to counterparty credit risk (SA-CCR, in Chapter 6 of this framework).
7.4.
Exposures or EAD arising from long settlement transactions can be determined using either of the methods identified in this framework regardless of the methods chosen for treating OTC derivatives and SFTs. In computing capital requirements for long settlement transactions banks that hold permission to use the internal ratings-based approach may opt to apply the risk weights under this Framework’s standardized approach for credit risk on a permanent basis and irrespective to the materiality of such positions.
7.5.
After adoption of the internal models method, the bank must comply with the above requirements on a permanent basis. Only under exceptional circumstances or for immaterial exposures can a bank revert to the standardized approach for counterparty credit risk for all or part of its exposure. The bank must demonstrate that reversion to a less sophisticated method does not lead to an arbitrage of the regulatory capital rules.
