7.3 Offering of Financial Derivatives Products
Effective from Nov 01 2023 - Oct 31 2023
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| Banks must ensure the following are satisfied before submitting a non-objection application to SAMA: | |
| 7.3.1 | Banks seeking to introduce new financial derivatives products for their customers are required to develop and implement internal customer suitability procedures ensuring that these products are only sold to suitable customers. |
| 7.3.2 | Customer suitability procedures must be designed to seek sufficient knowledge about the customer to establish that the customer has a practical understanding of the features of the product and the risks to be assumed. |
| 7.3.3 | For complex financial derivatives such as structured products, the complexity of the payoff structure can make it difficult for customers to accurately assess the value and risk of the structured product. Banks must clearly demonstrate to the customer the potential profit and loss scenarios for the structured products over the time horizon. |
| 7.3.4 | Banks must ensure that customers are fully aware of risks involved in complex products such as financial derivatives and structured products, the product must meet the customer’s business or investment objectives and risk appetite, the customer have prior investment experience and fully understood and sign-off the terms of contract accordingly. |
| 7.3.5 | Banks must not recommend a financial derivative product to a customer unless it is reasonably satisfied that the product is suitable for that particular customer and the nature of the customer’s business. Such a decision must be made based on information sought and obtained from the customer. |
| 7.3.6 | Banks seeking to introduce new financial derivative products must demonstrate that the proposed financial derivative instrument has a bona fide economic purpose and does not merely provide means of financial speculation, leverage, or regulatory arbitrage. To meet this test, a bank would have to identify the intended customers for the proposed new financial derivative products and describe (with sufficient specificity) potential uses. |
| 7.3.7 | Banks intending to introduce a new financial derivatives products must demonstrate that it has the internal organizational and operational capacity to monitor and manage potential risks of the proposed new products pose to a bank’s own financial health, as well as to the financial well-being of the customers and overall market stability. |
| 7.3.8 | Banks must demonstrate that effective control, monitoring & reporting systems, and procedures are in place to ensure on-going operational compliance with a bank’s, the customer’s and the counterparty’s risk appetite. A bank must also have a strong governance process around the valuation of financial derivatives, which includes robust control processes and documented procedures. |
| 7.3.9 | Banks intending to introduce a new financial derivatives products will have to demonstrate that the proposed products do not pose potentially unacceptable systemic risk. It is the responsibility of the bank to ensure that suitability of customers for the new financial derivatives product are assessed not only based on a bank’s exposure to an individual customer but also based on the industry’s exposure to the customer. A bank would therefore need to obtain full disclosure from the customers about their financial derivative exposures with other banks and non-banking entities prior to selling new financial derivative products. |
| 7.3.10 | Banks must ensure that the new financial derivative such as, structured products that seeks to market is not likely to have a negative impact on broader socio-economic policy goals of the country, for example an impact on SAIBOR or SAR. |
| 7.3.11 | Financial derivatives involving SAR against a foreign currency are subject to the requirements of a separate SAMA circular that banks must comply with. |
| 7.3.12 | Banks are required to ensure new financial derivative products comply with SAMA Rules on Trade Repository Reporting & Risk Mitigation Requirements for Over-the-Counter ("OTC") Derivatives Contracts issued by SAMA (issued in 2019) and any subsequent updates. |