Introduction
The Saudi Central Bank (SAMA) has issued a new regulation titled "Close-out Netting and Related Financial Collateral Regulation" (the "Netting Regulation") The Netting Regulation, effective from the 17th of February 2025, establishes a comprehensive framework for the enforceability of Netting Agreements and related Financial Collateral Arrangements, particularly in the context of bankruptcy proceedings. SAMA has issued the Netting Regulation pursuant to Article 214 of the Bankruptcy Law determining the contracts and transactions that are exempted from the provisions, of the Bankruptcy Law especially the restrictions on set-off.
Scope of Application
The Netting Regulation applies to Netting Agreements and related Financial Collateral Arrangements connected with one or more Qualified Financial Contracts. These contracts must involve at least one party under SAMA's supervision.
Key Definitions
The Netting Regulation defines some key terms including
- Netting: Broadly includes – of any present or future payment or delivery obligations or entitlements or determination of close out value and the net amount under or in connection with one or more Qualified Financial Contracts.
- Netting Agreement: Broadly, this is an agreement that provides for the netting of payment or delivery obligations arising from one or more Qualified Financial Contracts.
- Collateral Arrangements: Collateral arrangements including, over cash, securities, commodities, letters of credit or other movable security created under the Movable Assets Security Law.
- Qualified Financial Contract (QFC): This definition includes a wide range of financial agreements such as a broad range of derivatives contracts, securities and commodities contracts (including repo and lending contracts), Shari'ah compliant contracts which is economically similar to these contracts and any agreement, contract or transaction designated as a QFC by SAMA under the Netting Regulation, as detailed in Annex (1) of the Netting Regulation.
- Multi-Branch Netting: Multi-branch netting is covered where one party is not based in KSA and has entered into a QFC through its branch or agency in KSA.
Objectives of the Regulation
The primary objective is to ensure the enforceability of Netting Agreements and related Financial Collateral Arrangements both outside and within bankruptcy proceedings.
Key Provisions
The Netting Regulations provide for:
Enforceability Provisions
- Qualified Financial Contracts: QFCs are enforceable and valid according to their terms, regardless of any changes in circumstances post-agreement. Specifically, Netting Agreements incorporated in the QFCs are valid even once procedures under the Bankruptcy Law (eg protective settlement, restructuring, liquidation) have commenced.
- Financial Collateral Arrangements: Where collateral arrangements are put in place to secure the obligations of under a QFC, such arrangements including security over cash, securities, or other movables are enforceable even upon the commencement of procedures under the Bankruptcy Law.
- Multibranch Netting Agreements: These agreements are enforceable against a Bankrupt Local Branch, with specific limitations on the liabilities and rights of both the Non-Bankrupt Party and the Foreign Multibranch Party.
General Provisions
- Enforceability Against Bankrupt Parties: Netting Agreements are enforceable against bankrupt parties and their guarantors or collateral providers, without being stayed or limited by bankruptcy proceedings.
- Systemically Important Financial Institutions: However, this will not affect SAMA and CMA's authority under the Law of Systemically Important Financial Institutions, to stay the right to terminate, liquidate, or accelerate any present or future payment or delivery obligations in connection with Qualified Finance Contracts to which the Netting Agreement applies.
- Limitation on Payment Obligations: After the initiation of bankruptcy proceedings, the obligation is to pay a net amount as determined by the Netting Agreement.
- Protection Against Bankruptcy Laws: The regulation ensures that the provisions of a Netting Agreement are not affected by bankruptcy laws that limit set-off or netting rights.
Conclusion
The new regulation by SAMA provides a robust legal framework for the enforceability of Netting Agreements and Financial Collateral Arrangements, offering greater certainty and protection for parties involved in Qualified Financial Contracts. Entities under SAMA's supervision should review their existing agreements and ensure compliance with the new regulation to benefit from its provisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
