Finalized Guidance Document Concerning the Implementation of Basel III

Treatment of Highly Leveraged Counterparties (HLC) The following summary is appropriate. • Applicable to IMM and non IMM banks (IRB Approach) • New rule stipulates that PD for a highly leveraged counterparty (hedge funds) should be based on a period of stressed volatilities • While, the definition of highly-leveraged counterparties is aimed at hedge funds or any other equivalently highly-leveraged counterparties that are financial entities, SAMA will in due course provide a clear definition of HLC's for IRB purposes. 112. The Committee believes it is appropriate to add a qualitative requirement indicating that the PD estimates for highly leveraged counterparties should reflect the performance of their assets based on a stressed period and, thus, is introducing a new paragraph after 415 of the framework to read as follows: 415(i). PD estimates for borrowers that are highly leveraged or for borrowers whose assets are predominantly traded assets must reflect the performance of the underlying assets based on periods of stressed volatilities.