BACKGROUND AND LEGAL FOUNDATION
Context and Objective
The Netting Regulation was introduced under Article 214 of the Saudi Bankruptcy Law (2018), empowering SAMA to designatecertain financial contracts as exempt from bankruptcy limitations such as stays on set-off or collateral enforcement. This legal certainty is crucial for mitigating systemic risk, enhancing creditor confidence, and facilitating seamless risk management in the event of counterparty default or insolvency.
What It Covers
Close-out Netting Agreements- Enables the termination and valuation of contracts and consolidation of obligations into a single net balance, immediately payable upon default.
Financial collateral arrangements- Legal frameworks for securing exposures via title transfer or security interest, enforceable even after bankruptcy proceedings commence.
Qualified Financial Contracts- Includes interest rate and currency swaps, credit derivatives, repos, securities lending, Shari’ah-compliant contracts such as murabaha and wa’ad, and others listed in Annex (1) ofthe Regulation.
Scope of Application
The Close-out Netting and Related Financial Collateral Arrangements Regulation, issued by SAMA, applies to:
- Any Netting Agreement or Financial Collateral Arrangement related to a QFC,
- Involving at least one financial institution supervised by SAMA,
- Including multibranch arrangements, thereby covering obligations incurred by foreign financial institutions operating through branches in Saudi Arabia.
This ensures that protections under the regulation apply even when:
- Transactions are cross-border in nature,
- The foreign counterparty’s branch in Saudi Arabia becomes subject to bankruptcy or insolvency
This broad applicability brings Saudi Arabia in line with international standards and establishes a level playing field for both local andinternational participants operating within its financial system.
IMPLICATIONS OF NETTING REGULATIONS
CCR
Context under Basel III (SA-CCR): The Standardized Approach for Counterparty Credit Risk (SA-CCR) allows banks to calculate exposure on net basis subject to legally enforceable netting/ISDA agreements.
CVA
Context under Basel III – KSA Region: Most banks in KSA have adopted the Basic Approach (BA-CVA) for CVA risk. CVA captures the loss in MTM from counterparty credit deterioration before default. Enforceable netting reduces expected exposures and thus CVA risk.
NSFR
Currently, payables and receivables on account of derivative transactions are reported under NSFR on gross basis under available stable funding (ASF) and required stable funding (RSF) respectively.
Leverage Ratio
The Basel III Leverage Ratio is a non-risk-based measure to restrict the build-up of leverage in the banking sector. It is defined as the ratio ofTier 1 capital to total exposure (which includes on-balance sheet exposures, derivative exposures, securities financing transaction exposures, and off-balance sheet items).
Strategic Outlook and Market Impact
The Close-out Netting Regulation is more than a legal milestone—it is a foundational step in the evolution of Saudi Arabia’s capital markets. Its broader impact includes:
- Alignment in the Regulatory Reporting, financial reporting and the way settlement happen with the counterparties on a net basis.
- Netting allows banks to engage more competitively in cross-border derivative transactions, particularly with global banks. This results in better pricing / valuation while entering in the contract.
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ACTIONABLE FOR BANKS IMPLEMENTING SAMA’S NETTING REGULATION
While the genesis of the regulations is clear and has been in contention since long, along with the implications. However, implementation ofthese would require efforts in multiple directions as listed below:
Agreement Review and Compliance: While ISDA agreements would typically be in place with the counterparties engaging in derivative transactions, it’s imperative to undertake legal vetting to ensure that these agreements cover netting language and enforceability clauses. Additionally, ISDA agreements might undergo a change to incorporate the enforceability clauses for bankruptcy scenarios in line with ISDA standards.
Rapid Diagnostic of the CCR computation, NSFR and Leverage Ratio: These regulations will directly impact CCR, NSFR and the Leverage Ratio. Therefore, banks need to assess the current state vs the requirements stipulated in the nettingregulation, in terms of – data model enhancement, methodology change, and system level changes. Banks should also undertake an impact assessment of implementation of netting regulations on capital, liquidity, and leverage to evaluate how the potential benefits translate into bottom line improvements and more effective operations.
Technology and Process Upgrades: Implement netting-specific modules in trading platforms to calculate single net sums post- default automatically. Enhance reporting platforms (OFSAA, SAS, or othercapital engines) by addressing required data model enhancements and methodology adjustments.
Sensitization and Training Sessions: Considering its wide impact across functions – Treasury, Risk, Finance and IT, engage with the senior management for sensitization along with training sessions for the personnel involved in these processes.
IMPLEMENTATION CONSIDERATIONS AND CHALLENGES
While the Close-out Netting Regulation issued by SAMA provides legal and regulatory clarity, its effective implementation entailssubstantial transformation across legal, operational, and systemic dimensions. Below is a comprehensive analysis of the challenges and practical considerations for market participants.
Legal and Structural Considerations
01. Shari’ah Compliance Challenges: Applying close-out netting to Islamic finance instruments such as Murabaha, Wa’ad, and Ijara remains novel. Harmonization between Shari’ah principles and commercial enforceability is essential, particularly for default scenarios.
02. ISDA Agreement and Legal vetting:
Capital recognition for netting under SA-CCR is subject to enforceable bilateral netting agreements/ISDA. In line with SAMA’s Basel III Credit Risk guidelines and BCBS standards- The agreement must establish a single legal obligation across all included transactions (Cross- Product Netting).
Enforceability must be confirmed in all relevant jurisdictions where the bank has transactions, including:
- The counterparty’s home
- The jurisdiction governing the
- The jurisdiction where the transactions are
To support this, banks must obtain reasoned and jurisdiction-specific legal opinions including enforceability clauses:
- Conclude, with a high degree of certainty, that netting is enforceable in the event of default, bankruptcy, or liquidation.
- Are recognized as authoritative by the local legal
- Explicitly address the enforceability of each master agreement and the validity of the entire netting arrangement.
Data and Systems Readiness Challenges
- Netting Set and Legal Mapping: Banks must ensure availability of structured data on netting agreements, jurisdiction- specific terms, and counterparty documentation. Unique Netting IDs must be linked across front-office, risk, and reporting
- System Enhancements: Treasury, CCR, and regulatory systems need updates to reflect netting enforceability and real-time exposure aggregation.
- Data Integrity Risks: Incomplete or mismatched data across systems can result in non-recognition of netting, leading to higher capital requirements.
Market Transition and Confidence Building
Absence of Market Opinions
- ISDA netting opinions for Saudi Arabia are not yet publicly This hinders – capital release, interbank pricing confidence.
THE WAY FORWARD
We have seen the impact of these regulations, the actions banks need to take, and the associated challenges (data fields, legacy processes, unique customer identification, sourcing of netting IDs, and process overhauls).
We envisage the implementation approach unfolding across three dynamic phases — starting with a Rapid Diagnostic in Phase 1, transitioning into Enhance & Build in Phase 2, and culminating in Phase 3 with Knowledge Transfer & Documentation.
Assessment
Undertake an independent review of the bank’s current state around CCR/CVA, NSFR and Leverage Ratio against the requirements of netting regulations.
This involves thorough assessment of the bank’s systems, processes, and compliance status regarding SAMA’s netting regulations. This includes evaluating data fields, legacy processes, customer identification systems, netting ID management, and the need for process overhauls.
Enhance and Build
- Data Field Standardization: Identify required data fields for netting exposure across counterparty with same products, cross products, currency and tenors, and modernize these data fields by developing robust data model
- Unique customer identification: This is crucial to the overall implementation and hence implement robust customer identification frameworks to ensure accurate mapping of counterparties across transactions
- Overhaul legacy processes: Upgrade or integrate legacy systems to support automated netting calculations and enforceability tracking.
- Process redesign and Automation: Streamline data sourcing, workflow automation, and develop the whole logic to implement regulatory requirements to compute the exposure on a net basis which will flow for CCR, NSFR and Leverage Ratio computation.
- Integration with overall risk management framework: Design the comprehensive framework covering limit management, collateral management along with implementation of stress scenarios to assess impact during counterparty defaults.
Optimize and Knowledge Transfer
To optimize the whole process and assess the real impact, it’s imperative to deploy change management program covering essential changes in processes and systems.
Additionally, conduct sensitization session and training sessions to reinforce the importance of these regulations and impact on bottom line.
These three phased structured approaches, ensures that banks address technical, operational, legal, and strategic challenges while maximizing the benefits of SAMA’s new regulations and positioning themselves ahead of the curve.
