Minimum Capital Requirements for Market Risk

Banks are allowed to deviate from the presumptive list specified in [5.9] according to the process set out below 7 . (1) If a bank believes that it needs to deviate from the presumptive list established in [5.9] for an instrument, it must submit a request to SAMA and receive Written approval. In its request, the bank must provide evidence that the instrument is not held for any of the purposes in [5.5]. (2) In cases where this approval is not given by SAMA, the instrument must be designated as a trading book instrument. Banks must document any deviations from the presumptive list in detail on an on-going basis. 2 A bank will have a net short risk position for equity risk or credit risk in the banking book if the present value of the banking book increases when an equity price decreases or when a credit spread on an issuer or group of issuers of debt increases. 3 Under IFRS (IAS 39) and US GAAP, these instruments would be designated as held for trading. Under IFRS 9, these instruments would be held within a trading business model. These instruments would be fair valued through the P&L account. 4 Subject to SAMA review, certain listed equities may be excluded from the market risk framework. Examples of equities that may be excluded include, but are not limited to, equity positions arising from deferred compensation plans, convertible debt securities, loan products with interest paid in the form of “equity kickers”, equities taken as a debt previously contracted, bank- owned life insurance products, and legislated programmes. The set of listed equities that the bank wishes to exclude from the market risk framework should be made available to, and discussed with, SAMA and should be managed by a desk that is separate from desks for proprietary or short-term buy/sell instruments. 5 Repo-style transactions that are (i) entered for liquidity management and (ii) valued at accrual for accounting purposes are not part of the presumptive list of [5.9]. 6 An embedded derivative is a component of a hybrid contract that includes a non- derivative host such as liabilities issued out of the bank’s own banking book that contain embedded derivatives. The embedded derivative associated with the issued instrument (ie host) should be bifurcated and separately recognised on the bank’s balance sheet for accounting purposes. 7 The presumptions for the designation of an instrument to the trading book or banking book set out in this text will be used where a designation of an instrument to the trading book or banking book is not otherwise specified in this text. SAMA Supervisory Expectation 5.11 Notwithstanding the process established in [5.10] for instruments on the presumptive list, SAMA may require the bank to provide evidence that an instrument in the trading book is held for at least one of the purposes of [5.5] . If SAMA is of the view that a bank has not provided enough evidence or if SAMA believes the instrument customarily would belong in the banking book, SAMA may require the bank to assign the instrument to the banking book, except if it is an instrument listed under [5.6] . 5.12 SAMA may require the bank to provide evidence that an instrument in the banking book is not held for any of the purposes of [5.5] . If SAMA is of the view that a bank has not provided enough evidence, or if SAMA believes such instruments would customarily belong in the trading book, SAMA may require the bank to assign the instrument to the trading book, except if it is an instrument listed under [5.8] . Documentation of Instrument Designation