Rules on Liquidity Risk Management

Definitions The following terms and phrases, where used in these Rules, should have the corresponding meanings unless the context requires otherwise: SAMA: The Saudi Central Bank Rules: Rules Governing Liquidity Risk Management Liquidity: The capacity of a company to generate sufficient cash or its equivalent in a timely manner, without incurring unacceptable losses to meet its commitments as they fall due and to fund new business opportunities. Liquidity risk: The risk that a company will not be able to meet efficiently both expected and unexpected current and future cash flow and collateral needs without affecting either daily operations or the financial condition of the company due to insufficient liquid assets, an inability to liquidate assets, or to obtain adequate funding. Liquidity risk comprises both funding liquidity risk and market liquidity risk. a. Funding liquidity risk is the risk that the finance company will not be able to meet efficiently both expected and unexpected current and future cash flow. b. Market liquidity risk is the risk that a company cannot easily offset or eliminate a position without significantly affecting the market price because of inadequate market depth or market disruption. Liquidity Risk Tolerance: The maximum level of risk that a finance company is willing to accept, keeping in view not only normal times but also possible stress situations Net cash outflows: The cumulative expected cash outflows minus cumulative expected cash inflows arising in the time period under consideration. High Quality Liquid Assets (HQLA): Assets that can be easily and immediately converted into cash at little or no loss of value. The liquidity of an asset depends on the underlying stress scenario, the volume to be monetized and the timeframe considered. Unencumbered Assets: Assets not pledged either explicitly or implicitly in any way to secure, collateralize or credit enhance any transaction and are not held as a hedge for any other exposure. Contractual Maturity Mismatch: The gap between the contractual inflows and outflows of liquidity for defined time bands. These maturity gaps indicate how much liquidity a company would potentially need to raise in each of these time bands if all flows occurred at the earliest possible date. Stress Test: The assessment of the vulnerability of a company to internal and external shocks. Typically, it applies 'what if' scenarios and attempts to estimate the expected losses from shocks including capturing the impact of large, but plausible events. Stress testing methods include scenario tests based on historical events and information on hypothetical but plausible future events. Stress tests also include sensitivity analysis. Contingency Funding Plan (CFP): A contingency funding plan (CFP) addresses a company's strategy for handling liquidity crises. It describes procedures for managing and making up cash flow shortfalls in stress situations. 2. Liquidity Risk Governance The Board of Directors is ultimately responsible for the liquidity risk assumed by the finance company and should ensure that the company has the necessary liquidity risk management framework and is capable of dealing with normal and stressed scenarios. The strategy and significant policies related to the management of liquidity risk should be approved by the Board of Directors. The Board is responsible for: a. Establishing liquidity risk tolerance, which should define the level of liquidity risk that the company is willing to assume in line with its business strategy; b. Instituting an appropriate organization structure with clearly defined roles and responsibilities for management of liquidity risk exposure. c. Reviewing and approving the liquidity risk strategy and liquidity risk management policies including contingency funding plan and liquidity stress testing framework at least on an annual basis; d. Continuously monitoring the company's performance and overall liquidity risk profile through reviewing v