New Banking Products and Services Regulation

Banks seeking to introduce new financial derivative products must demonstrate that the proposed financial derivative instrument has a bona fide economic purpose and does not merely provide means of financial speculation, leverage, or regulatory arbitrage. To meet this test, a bank would have to identify the intended customers for the proposed new financial derivative products and describe (with sufficient specificity) potential uses. 7.3.7 Banks intending to introduce a new financial derivatives products must demonstrate that it has the internal organizational and operational capacity to monitor and manage potential risks of the proposed new products pose to a bank’s own financial health, as well as to the financial well-being of the customers and overall market stability. 7.3.8 Banks must demonstrate that effective control, monitoring & reporting systems, and procedures are in place to ensure on-going operational compliance with a bank’s, the customer’s and the counterparty’s risk appetite. A bank must also have a strong governance process around the valuation of financial derivatives, which includes robust control processes and documented procedures. 7.3.9 Banks intending to introduce a new financial derivatives products will have to demonstrate that the proposed products do not pose potentially unacceptable systemic risk. It is the responsibility of the bank to ensure that suitability of customers for the new financial derivatives product are assessed not only based on a bank’s exposure to an individual customer but also based on the industry’s exposure to the customer. A bank would therefore need to obtain full disclosure from the customers about their financial derivative exposures with other banks and non-banking entities prior to selling new financial derivative products. 7.3.10 Banks must ensure that the new financial derivative such as, structured products that seeks to market is not likely to have a negative impact on broader socio-economic policy goals of the country, for example an impact on SAIBOR or SAR. 7.3.11 Financial derivatives involving SAR against a foreign currency are subject to the requirements of a separate SAMA circular that banks must comply with. 7.3.12 Banks are required to ensure new financial derivative products comply with SAMA Rules on Trade Repository Reporting & Risk Mitigation Requirements for Over-the-Counter ("OTC") Derivatives Contracts issued by SAMA (issued in 2019) and any subsequent updates. 7.4 Documentation Requirements 7.4.1 A bank notifying or seeking a non-objection from SAMA for the introduction of a new product or service must fully complete the checklist and provide the supporting documents as stated in ( Annexure 1 ).