On February 17, 2023, the Saudi Central Bank implemented the Close-out Netting Regulation, which affirms the enforceability of netting agreements in financial transactions. The regulation aims to mitigate credit risk and enhance financial stability, encouraging more confident cross-border transactions. Associations are expected to release supportive legal opinions to facilitate broader trading activities, aligning with Saudi Arabia’s Vision 2030 objectives.
On February 19, 2023, a significant joint conference took place in Riyadh, Saudi Arabia, featuring collaborations among industry associations ISDA, ISLA, and ICMA. These organizations encompass entities involved in transactions such as derivatives, securities lending, and repurchase transactions. However, it was the recent introduction of the Close-out Netting and Related Financial Collateral Regulation by the Saudi Central Bank (SAMA) on February 17 that captured the attention of attendees. This regulation took effect immediately, establishing the enforceability of netting agreements within transactions involving SAMA-supervised entities, particularly amid counterparty defaults.
The primary aim of the newly-regulated framework is to ensure that the contractual elements of netting agreements remain enforceable during bankruptcy proceedings or in the event of parties failing to honor their obligations. By mitigating credit risk exposure and bolstering financial stability, this regulation enhances the security of cross-border transactions in Saudi Arabia. Financial institutions can now conduct transactions with increased assurance, knowing their netting provisions will remain valid even if a default occurs.
To further support the enforceability of close-out netting provisions, the respective associations plan to release annual legal opinions affirming the applicability of these provisions on an international level. These opinions are vital as they assist firms in managing credit risk and may reduce their regulatory capital requirements. This publication will empower financial institutions to broaden their engagement in these transactions, signifying a progressive stride in realizing Saudi Arabia’s Vision 2030 as a pivotal global investment hub.
The introduction of the Close-out Netting Regulation by SAMA marks a critical advancement in Saudi Arabia’s financial landscape, enhancing the enforceability of netting agreements and reducing credit risk. The collaboration among major industry associations reflects a collective effort to support this initiative. With the forthcoming publication of supportive legal opinions, financial institutions are poised to engage in increased trading activities, further solidifying the Kingdom’s ambitions as a global investment powerhouse under Vision 2030.
Original Source: natlawreview.com
