Minimum Capital Requirements for Credit Risk

For an instrument subject to a determined cash flow schedule, effective maturity M is defined as follows, where CF t denotes the cash flows (principal, interest payments and fees) contractually payable by the borrower in period t: 12.48 If a bank is not in a position to calculate the effective maturity of the contracted payments as noted above, it is allowed to use a more conservative measure of M such as that it equals the maximum remaining time (in years) that the borrower is permitted to take to fully discharge its contractual obligation (principal, interest, and fees) under the terms of loan agreement. Normally, this will correspond to the nominal maturity of the instrument. 12.49 For derivatives subject to a master netting agreement, the effective maturity is defined as the weighted average maturity of the transactions within the netting agreement. Further, the notional amount of each transaction should be used for weighting the maturity. 12.50 For revolving exposures, effective maturity must be determined using the maximum contractual termination date of the facility. Banks must not use the repayment date of the current drawing. 12.51 The one-year floor, set out in paragraph 12.46 above, does not apply to certain short- term exposures, comprising fully or nearly-fully collateralized 59 capital market- driven transactions (i.e. OTC derivatives transactions and margin lending) and repo- style transactions (i.e. repos/reverse repos and securities lending/borrowing) with an original maturity of less than one year, where the documentation contains daily re-margining clauses. For all eligible transactions the documentation must require daily revaluation, and must include provisions that must allow for the prompt liquidation or setoff of the collateral in the event of default or failure to re-margin. The maturity of such transactions must be calculated as the greater of one-day, and the effective maturity (M, consistent with the definition above), except for transactions subject to a master netting agreement, where the floor is determined by the minimum holding period for the transaction type, as required by paragraph 12.54. 12.52 The one-year floor, set out in paragraph 12.46 above, also does not apply to the following exposures: (1) Short-term self-liquidating trade transactions. Import and export letters of credit and similar transactions should be accounted for at their actual remaining maturity. (2) Issued as well as confirmed letters of credit that are short term (i.e. have a maturity below one year) and self-liquidating. 12.53 In addition to the transactions considered in paragraph 12.51 above, other short term exposures with an original maturity of less than one year that are not part of a bank’s ongoing financing of an obligor may be eligible for exemption from the one-year floor. After a careful review of the particular circumstances, SAMA will define the types of short-term exposures that might be considered eligible for this treatment. The results of these reviews might, for example, include transactions such as: (1) Some capital market-driven transactions and repo-style transactions that might not fall within the scope of paragraph 12.51. (2) Some trade finance transactions that are not exempted by paragraph 12.52. (3) Some exposures arising from settling securities purchases and sales. This could also include overdrafts arising from failed securities settlements provided that such overdrafts do not continue more than a short, fixed number of business days. (4) Some exposures arising from cash settlements by wire transfer, including overdrafts arising from failed transfers provided that such overdrafts do not continue more than a short, fixed number of business days. (5) Some exposures to banks arising from foreign exchange settlements. (6) Some short-term loans and deposits.