Finalized Guidance Document Concerning the Implementation of Basel III

Central Counterparties to be Implemented The following represents a summary of the additional capital requirements to central counterparties. • International regulators intention to move to CCPs to clear OTC trades • No local CCP’s is in KSA- banks will be at disadvantage For further clarifications also refer to SAMA Circular # BCS 25092 dated 21/11/1433 (Hijri) entitled "BCBS Finalized Document Entitled "Capital Requirements for Bank Exposures to Central Counterparties" . Definition of CCP ‘’is a clearing house that interposes itself between counterparties to contracts traded on or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the future performance of open contracts’’ • In 2009, the G20’s ambition of moving standardized over-the-counter (OTC) derivatives from a bilaterally cleared to a centrally cleared model by the end of 2012 reducing systemic risks in global banking • Capitalizing exposures to CCPs builds on the new CPSS-IOSCO Principles for Financial Market Infrastructures (PFMIs) Key features of Interim rules published by BCBS July, 2012 As part of the reform process BCBS released interim rules for the risk weighting of exposures to CCP’s ( Document entitled: Capital requirements for bank exposures to central counterparties July, 2012 ) The decision to publish the rules on an interim basis suggests that Basel Committee will monitor and make further changes if necessary Exposures to Qualifying CCPs Trade exposures: Where a bank acts as a clearing member of a CCP, a risk weight of 2% must be applied to the bank’s trade exposure to the CCP in respect of OTC derivatives, exchange-traded derivative transactions and SFT’s. Where a clearing member offers clearing services to clients 2% risk weight also applies when the clearing member is obligated to reimburse the clients for any losses suffered due to changes in the value of transactions in the event CCP defaults. (‘’A qualifying CCP is a CCP that meets the new ‘’ Principles for Financial Market Infrastructures ’’ published by Payment and Settlement Systems and International Organization of Securities Commission’’) Clearing member exposures to clients ‘’A clearing member is a member of or a direct participant in a CCP that is entitled to enter into transactions with the CCP’’ • Clearing member will always calculate its exposure (including potential CVA risk exposure) to clients as bilateral trades • To recognize shorter close-out period for cleared transactions clearing members can capitalize the exposure to their clients applying a margin of period of risk of at least 5 days in case if they adopt the IMM or multiply the EAD by a scalar of no less than 0.71 if they adopt either the CEM or the Standardized Method Client exposure ‘’A client is a party to a transaction with a CCP through either a clearing member acting as a financial intermediary or a clearing member guaranteeing the performance of the client to the CCP’’ • Where a bank is a client of a clearing member and enters into a transaction with the clearing member acting as financial intermediary the client’s exposures to the clearing member may receive the same treatment as defined for clearing member exposures to CCPs subject to meeting two conditions as defined in Para 114 (a) and (b) of Basel Document for central counterparties Basel III imposed a capital charge on a bank’s exposures to a CCPs default funds ‘’CCP default funds consist of contributions made by clearing members which are designed to protect the relevant CCP from losses caused by the default of a clearing member’’ • Whenever a bank is required to capitalize for exposures arising from default fund contributions to a ‘’Qualifying CCP’’ • Clearing member banks may apply one of the following approaches: Method 1: Risk sensitive approach Risk sensitive formula considers size and quality of a qualifying CCP’s financial resources Method 2: Simplified method Clearing member banks: Default fund exp