Leverage Ratio Framework

Calculation of Derivatives (i) Banks must calculate their exposures associated with all derivative transactions, including where a bank sells protection using a credit derivative as per subparagraph (iv) below (ii) If the derivative exposure covered by an eligible bilateral netting contract as specified in subparagraphs (v) and (vi) below, a specific treatment may be applied. (iii) Written credit derivatives are subject to an additional treatment, as set out in paragraphs 7.2.8 to 7.2.15 below. (iv) Derivative transactions not covered by an eligible bilateral netting contract as specified in subparagraphs (v) and (vi) below, the amount included in the Leverage ratio exposure measure will be determined for each transaction separately, as follows: Exposure measure = Alpha * (RC + PFE) Where: a. Alpha = 1.4; b. RC = the replacement cost measured as follows: Where: ■ V is the market value of the individual derivative transaction or of the derivative transactions in a netting set; ■ CVM r is the cash variation margin received that meets the conditions set out in paragraph 7.2.4 and for which the amount has not already reduced the market value of the derivative transaction V under the bank’s operative accounting standard; and ■ CVM p is the cash variation margin provided by the bank and that meets the same conditions. ■ If there is no accounting measure of exposure for certain derivative instruments because they are held (completely) off balance sheet, the bank must use the sum of positive fair values of these derivatives as the replacement cost. c. PFE = The potential future exposure (PFE) for derivative exposures must be calculated in accordance with the Minimum Capital Requirement for Counterparty Credit Risk and Credit Valuation Adjustment paragraph 6.22 to 6.79 . Mathematically: Where: ■ Multiplier fixed at one. ■ When calculating the aggregate Add-on component, for all margined transactions the maturity factor set out in the Minimum Capital Requirement for Counterparty Credit Risk and Credit Valuation Adjustment issued by SAMA paragraph 6.51 to 6.56 may be used. Further, as written options create an exposure to the underlying, they must be included in the Leverage ratio exposure measure by applying the required treatment, even if certain written options are permitted the zero exposure at default (EAD) treatment allowed in the risk-based framework. (v) Bilateral netting: when an eligible bilateral netting contract is in place the following will apply: a. Banks may net transactions subject to novation under which any obligation between a bank and its counterparty to deliver a given currency on a given value date is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations. b. Banks may also net transactions subject to any legally valid form of bilateral netting not covered in point (a) above, including other forms of novation. c. In both cases (a) and (b) above, a bank will need to prove that it has: ■ A netting contract or agreement with the counterparty that creates a single legal obligation, covering al included transactions, such that the bank would have either a claim to receive or obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions in the event that a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstances; ■ Written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and authorities would find the bank's exposure to be such a net amount under: - The law of the jurisdiction in which the counterparty is chartered and, if the foreign branch of a counterparty is involved, then also under the law of jurisdiction in which the branch is located; - The law that governs the individual transactions; and - The law that governs any contract or agreement necessary to effect the netting. ■ Procedures in place to ensure that the legal characteristics of netting arrangements are kept under review in the light of possible changes in relevant law. ■ Netting agreements are not allowed in Saudi Arabia however, if netting is enforceable in any jurisdiction, positive and negative mark to market exposures in that jurisdiction will be allowed to net; 4 (vi) Contracts containing walkaway clauses will not be eligible for netting for the purpose of calculating the Leverage ratio exposure measure pursuant to this framework. A walkaway clause is a provision that permits a non-defaulting counterparty to make only limited payments or no payment at all, to the estate of a defaulter, even if the defaulter is a net creditor.