7.2 Derivative Exposures

Since written credit derivatives are included in the Leverage ratio exposure measure at their effective notional amounts, and are also subject to amounts for PFE, the Leverage ratio exposure measure for written credit derivatives may be overstated. Banks may therefore choose to exclude from the netting set for the PFE calculation the portion of a written credit derivative which is not offset according to paragraph 7.2.9 and 7.2.10 15 and for which the effective notional amount is included in the Leverage ratio exposure measure. 4 Paragraph 14 in SAMA Margin Requirements for Non-centrally Cleared Derivatives circular No42008998 dated 18/02/1442H 5 QCCP is defined in the Minimum Capital Requirement for Counterparty Credit Risk and Credit Valuation Adjustment issued by SAMA under paragraph 3 “Definitions” . 6 For the purposes of this paragraph, the term “MNA” includes any netting agreement that provides legally enforceable rights of offset (taking into account the fact that, for netting agreements employed by CCPs, no standardization has currently emerged that would be comparable with respect to over-the counter netting agreements for bilateral trading) and Master MNA may be deemed to be a single MNA. 7 The terms “clearing member”, “trade exposure”, “central counterparty” and “qualifying central counterparty” are defined in the Minimum Capital Requirement for Counterparty Credit Risk and Credit Valuation Adjustment issued by SAMA under paragraph 3 “Definitions” . In addition, for the purposes of this paragraph, the term “trade exposures“ includes initial margin irrespective of whether or not it is posted in a manner that makes it remote from the insolvency of the CCP. 8 A multi-level client structure is one in which banks can centrally clear as indirect clients; that is, when clearing services are provided to the bank by an institution which is not a direct clearing member, but is itself a client of a CM or another clearing client. The term “higher-level client” refers to the institution that provides clearing services. 9 upon the insolvency of the clearing member, there is no legal impediment (other than the need to obtain a court order to which the client is entitled) to the transfer of the collateral belonging to clients of a defaulting clearing member to the QCCP, to one of more other surviving clearing members or to the client or the client’s nominee. 10 If there is a clear precedent for transactions being ported at a QCCP and industry intent for this practice to continue, then these factors must be considered when assessing if trades are highly likely to be ported. The fact that QCCP documentation does not prohibit client trades from being ported is not sufficient to say they are highly likely to be ported. 11 The term “lower level client” refers to the institution that clears through that client. 12 For example, if a written credit derivative had a positive fair value of 20 on one date and has a negative fair value of 10 on a subsequent reporting date, the effective notional amount of the credit derivative may be reduced by 10. The effective notional amount cannot be reduced by 30. However, if on the subsequent reporting date the credit derivative has a positive fair value of five, the effective notional amount cannot be reduced at all. 13 This treatment is consistent with the rationale that the effective notional amounts included in the exposure measure may be capped at the level of the maximum potential loss, which means that the maximum potential loss at the reporting date is the notional amount of the credit derivative minus any negative fair value that has already reduced Tier 1 capital. 14 In other words, offsetting may only be recognized when the pool of reference entities and the level of subordination in both transactions are identical. 15 the removal of a PFE add-on associated with a written credit derivative from the leverage ratio exposure measure refers only to the offset by credit protection purchased through a credit derivative according to paragraph 7.2.9 and 7.2.10 and not to the reduction of the effective notional amount as a result of the negative change in fair value that has reduced Tier 1 capital.