Guidelines on the Regulatory Treatment of Banks’ Exposures to Central Counterparties

# مُؤسسة النقد العربي السعودي
Saudi Arabian Monetary Authority

## تعليمات المعالجة التنظيمية لتعرضات البنوك لمراكز مقاصة الأوراق المالية
Guidelines on the Regulatory Treatment of Banks’ Exposures to Central Counterparties

January 2020

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## المحتويات
| Contents | الصفحة | المحتويات |
| :--- | :--- | :--- |
| Introduction | 3 | المقدمة |
| General terms | 4 | مصطلحات عامة |
| Scope | 6 | النطاق |
| SAMA Requirements for Banks Who Wish to Apply for Clearing Memberships | 6 | متطلبات المؤسسة للبنوك التي ترغب في التقدم للحصول على عضوية المقاصة |
| Regulatory Treatment of a Bank’s and its clients’ Exposures to CCPs: | 7 | المعالجة التنظيمية لتعرض البنك أو عملائه لمراكز مقاصة الأوراق المالية: |
| - Capital Requirements | 7 | - متطلبات رأس المال |
| - Large Exposures | 8 | - التعرضات الكبيرة |
| - Leverage Ratio | 9 | - نسبة الرافعة المالية |
| - Basel Reporting | 9 | - تقارير بازل |
| - ICAAP and ILAAP | 10 | - عمليات التقييم الداخلية لكفاية رأس المال وكفاية السيولة |
| Additional Requirements | 10 | متطلبات إضافية |

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## 1. المقدمة
### Regulatory Treatment of Banks’ Exposures to CCPs

- Central Counterparties (CCPs) have become increasingly critical components of the financial system in recent years, due in part to the introduction of mandatory clearing for standardised OTC derivatives in some jurisdictions. Consistent with the key responsibility of guaranteeing the fulfilment of transactions to their clearing participants, CCPs play an important role in mitigating contagion risk in the event of a participant default. A CCP’s ability to effectively manage a default is essential to its resilience and can help reduce systemic risk.

- SAMA via these guidelines, is emphasizing on the treatment of banks’ trade exposures to a CCP under capital, large exposures, leverage ratio rules along with Pillar 2 framework.

- Banks should note that the foreign regulators would do an assessment to include Saudi CCPs in the list of their Qualifying Counterparties (QCCPs), in terms of exposures of banks under their jurisdictions to this entity.

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## 2. مصطلحات عامة
### General terms

- **Central Counterparty (CCP):**  
  (As defined in the BCBS guidelines on Capital Requirements for Banks Exposures to Central Counterparties and as published via SAMA circular No. 371000101116 dated 15/09/1437 AH)  
  A clearinghouse that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the future performance of open contracts. A CCP becomes counterparty to trades with market participants through novation, an open offer system, or another legally binding arrangement.

- **Qualifying Central Counterparty (QCCP):**  
  (As defined in the BCBS guidelines on Capital Requirements for Banks Exposures to Central Counterparties and as published via SAMA circular no. 371000101116 dated 15/09/1437 AH)  
  An entity that is licensed to operate as a CCP (including a license granted by way of confirming an exemption), and is permitted by the appropriate regulator/overseer (CMA) to operate as such with respect to the products offered. This is subject to the provision that the CCP is based and prudentially supervised in a jurisdiction where the relevant regulator/overseer has established. (Saudi Arabia) and publicly indicated that it applies to the CCP on an ongoing basis, domestic rules and regulations that are consistent with the CPMI-IOSCO Principles for Financial Market Infrastructures.

- **Direct Clearing Member:**  
  (As defined in Securities Central Counterparties Regulations Issued by the Board of the Capital Market Authority Pursuant to its Resolution No. 3-127-2019 Dated 21/03/1441AH)  
  A Clearing Member who is authorised to clear Securities which it has traded in its capacity as a member of an Exchange, including Securities it has traded on its own account or on behalf of its Client(s). A Direct Clearing Member shall not be permitted to clear for Exchange members with no clearing memberships.

- **General Clearing Member:**  
  (As defined in Securities Central Counterparties Regulations Issued by the Board of the Capital Market Authority Pursuant to its Resolution No. 3-127-2019 Dated 21/03/1441AH)  
  A Clearing Member who is authorised to clear Securities on behalf of its Client(s), including Exchange members that with no clearing memberships. A General Clearing Member, to the extent that it is a member of an Exchange, shall be permitted to clear Securities which it has traded in its capacity as a member of an Exchange, including Securities it has traded on its own account or on behalf of its Client(s).

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## 3. النطاق
### Scope

These requirements are applicable to all banks (domestic and foreign) licensed under the Banking Control Law (Royal Decree No. M/5 dated 22/2/1386 H) that wish to become members of a CCP and have exposures to the CCP.

Foreign banks branches who are clearing members of the CCP will be deemed to be engaged in Critical Economic Functions and as such will be considered Systemically Important under the Foreign Bank Branch regulations issued by SAMA via circular No.4922/67 dated 25/01/1441AH.

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## 4. متطلبات المؤسسة للبنوك التي ترغب في التقدم للحصول على عضوية المقاصة
### SAMA Requirements for Banks Who Wish to Apply for Clearing Membership

Banks who wish to engage in CCP activities and apply for a General Clearing Membership, to clear activities on behalf of their customers, must obtain a Non-Objection from SAMA.

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## 5. المعالجة التنظيمية لتعرض البنك أو عملائه لمراكز مقاصة الأوراق المالية
### Regulatory Treatment of a Bank’s and its clients’ Exposures to CCPs

#### - Capital Requirements:
##### Firstly, Qualifying CCP (QCCP):

- Where a bank acts as a clearing member of a CCP for its own purposes, a risk weight of 2% must be applied to the bank’s trade exposure to the CCP in respect of derivatives transactions.

- Where the bank, as a clearing member, offers clearing services to clients, the 2% risk weight also applies to the clearing member’s trade exposure to the CCP that arises when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults.

- Where a client is not protected from losses in the case that the clearing member and another client of the clearing member jointly default or become jointly insolvent but all other conditions relating to offsetting and default (as stated in circular no. 371000101116 dated 15/09/1437AH) are met, a risk weight of 4% will apply to the client’s exposure to the clearing member, or to the higher-level client, respectively.

- The banks’ contribution to the CCP’s default fund will be risk weighted according to the methods explained in Basel rules (SAMA circular no. 371000101116 dated 15/09/1437AH).

##### Secondly, Non-Qualifying CCP:

- Banks must apply the standardized approach for credit risk, according to the category of the counterparty, to their trade exposure to a non-QCCP.

- For a default fund, a risk weight of 1250% will be applied. For the purposes of this paragraph, the default fund contributions of such banks will include both the funded and the unfunded contributions which are liable to be paid should the CCP so require.

#### - Large Exposures:

- Banks exposures to CCPs are subject to the regulatory requirements as defined in SAMA Large Exposures Rules (circular no.1651/67 dated 09/01/1441AH).

- Banks’ exposures to QCCPs related to clearing activities are exempted from the large exposures framework. However, these exposures are subject to the regulatory reporting requirements as defined in the rules mentioned above.

- In the case of non-QCCPs, banks must measure their exposures as a sum of both the clearing exposures and other exposures as described in rules mentioned above, and must meet the general large exposure limit of 25% of the eligible capital base.

#### - Leverage Ratio:

Where a bank acting as clearing member offers clearing services to clients, the clearing member’s derivative trade exposures to the CCP that arise when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults must be captured by applying the same treatment that applies to any other type of derivative transaction. Therefore, this will be included in the exposure measure in the leverage ratio calculation. (For further guidance, refer to SAMA circular No. 351000133367 dated 29/10/1435AH and circular No. 351000155075 dated 28/12/1435AH).

#### - Basel Reporting:

Banks must use SAMA Q17 – Template to report their risks and exposures to the CCP in the following cells:

| Sheet | Cell | Description |
| :--- | :--- | :--- |
| Q17.2 | $BS27 | Exposure amount for contributions to the default fund of a Domestic CCP |
| Q17.2 | $BS28 | Domestic QCCP |
| Q17.2 | $BS29 | Foreign QCCP |
| Q17.2 | $BS68 | Risk Relating to CCP |
| Q17.4 | $AS12 | Of which: Centrally cleared through a Domestic QCCP |
| Q17.4 | $AS13 | Of which: Centrally cleared through a Foreign QCCP |
| Q17.4 | $AS16 | 2% |
| Q17.4 | $AS17 | 4% |
| Q17.5 | $AS26 | Centrally cleared through a Domestic QCCP |
| Q17.5 | $AS27 | Centrally cleared through a Foreign QCCP |
| Q17.5.3 | $AS26 | Centrally cleared through a Domestic QCCP |
| Q17.5.3 | $AS27 | Centrally cleared through a Foreign QCCP |
| Q17.9 | $CS127 | Risk Relating to CCP |

#### - ICAAP and ILAAP:

Banks must capture any risks arising from their CCP activities in the ICAAP and ILAAP documents in line with SAMA ICAAP and ILAAP rules issued via circulars No. 58514.BCS.27835 dated 15/11/2011 and 381000120488, dated 03/12/1438AH. Special attention should be paid in terms of concentration risks if any, arising from a CCP.

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## 6. متطلبات إضافية
### Additional Requirements

Banks are required to report “reportable transactions” cleared through the CCP to the SAMA authorised Trade Repository Operator (as defined and stated in SAMA circular No. 16278/67 dated 13/03/1441AH).

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**Version Number:** 1.0  
**Issue Date:** January 2020  
**Page Number:** 10 of 10