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2020-10-22

Frequent Inquiries for a Range of Issues Related to Moving to a New Index

The Saudi Central Bank clarifies capital and counterparty credit risk treatments for financial institutions transitioning from LIBOR to a new index, confirming that contract amendments do not reset capital instrument status or extend the risk margin period beyond one year. The directive aligns domestic regulatory applications with Basel III standards and the Basel Committee’s June 2020 guidance, ensuring uninterrupted eligibility for transitional instruments. Institutions are directed to consult the Bank for International Settlements’ official FAQs for comprehensive implementation details.

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Saudi Central Bank

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In the name of Allah, the Most Gracious, the Most Merciful

Saudi Central Bank Headquarters

Banking Policy Department

Ref. No.: 42013868 Date: 1442/03/05 Attachments: None

Circular

To: Respected Banks/Financial Institutions, Peace be upon you, and the mercy of Allah and His blessings.

Subject: Frequent Inquiries for a Range of Issues Related to Moving to a New Index.

With reference to the Bank's Circular No. 341000015689 dated 1434/02/06 AH, which conveys the Bank's instructions regarding capital reforms in accordance with Basel III standards, and Circular No. 371000101120 dated 1437/09/15 AH, which conveys the unified methodology for counterparty credit risk.

With reference to the international decision to cease using the current index (LIBOR) by the end of 2021 and replace it with a new index, and the frequent inquiries and answers issued by the Basel Committee on Banking Supervision regarding it dated June 5, 2020. And in light of the ongoing work concerning the transition to a new index in the Kingdom.

The Bank confirms the following regarding the application of the capital definition in accordance with Basel III standards, and counterparty credit risk as stated in the aforementioned circulars, taking into account the transition to a new index:

  1. Capital Definition: Capital instruments will not be treated as new instruments when amendments are made to their contracts for the purpose of transitioning to a new index, and such amendments will not affect the assessment of the minimum maturity date, call date, and eligibility of Basel III transitional instruments.
  2. Counterparty Credit Risk: Extension of the risk margin period due to the lack of liquidity in collateral and financial derivatives (OTC derivatives) resulting from the transition to a new index will not be permitted, and shall apply for only one year from the date of discontinuation of the old index.

Banks/Financial Institutions may also view the complete frequent inquiries and their answers (FAQs) via the official website of the Bank for International Settlements (https://www.bis.org/bcbs/publ/d503.pdf).

Yours sincerely,

Fahd bin Ibrahim Al-Shathri Deputy Governor for Supervision

Distribution Scope:

  • Local banks and financial institutions operating in the Kingdom.
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