Non-Linear Multi-leg Forward Structured Transactions
| No: 391000058636 | Date(g): 6/2/2018 | Date(h): 21/5/1439 |
This circular is aimed at all Banks undertaking Non-Linear Multi-Leg Forward Structured OTC Derivatives transactions with their customers in the Kingdom of Saudi Arabia, whether their operations are located in Saudi Arabia or elsewhere.
This circular replaces our Circular #371000088317 dated 09/08/1437H (16 May 2016G) on the subject of “Multi-Leg USD/SAR forward structured product”. Following a request from some banks seeking clarification on the above Circular, SAMA is now providing the following guidance:
| (1) | USD/SAR Non-Linear Multi-leg Forward Structured Transactions: SAMA’s policy continues to prohibit all Banks from undertaking such transactions, which involve any optionality in USD/SAR FX products with their customers in the KSA. | |
| (2) | USD/Other Foreign Currency Non-Linear Multi-leg Forward Structured Transactions: For Non-Linear forward structured transactions involving USD and other currencies, Banks are required to ensure that no leverage¹ is created. | |
| (3) | Hedging/Speculation: All non-leveraged transactions under (2) above involving non-SAR currency pairs should not exceed the underlying commercial needs² of the customers. Banks are required to fully document the purpose of each transaction. Banks are further required to obtain customers’ written confirmation that they are not undertaking similar transactions with other banks so that the maximum aggregate exposure remains within their commercial needs. Transactions by any local or foreign banks engaging with local clients that create leverage¹ or are for speculative purposes will risk considerable regulatory financial penalties. | |
| (4) | Product Class: These rules apply to FX products, and to interest rate products that are designed to achieve the same or similar end-result as using an FX product. |
Banks should continue to comply with the requirements of Circular #391000006163 dated 18/01/1439H (8 October 2017G) on new products.
¹ “Leverage” means a transaction that at any point of time may lead the client to transact more than the underlying commercial needs”.
² “Commercial needs” are defined as clients’ needs on an ongoing business based upon its history or pattern of similar transactions.