Draft Regulatory Framework for Close-Out Netting for Capital Market Institutions

The objective of this Regulation is to regulate Netting Agreements and related Financial Collateral Arrangements in connection with one or more Qualified Financial Contracts that falls under the Authority's supervision, and entered into with at least one Party being a Capital Market Institution, and to ensure their enforceability in accordance with their terms both outside the scope of Bankruptcy Proceedings and following the commencement of any such proceedings, in accordance to the powers of the Authority under the Capital Market Law and the Bankruptcy Law, including the provisions of Article Two Hundred Fourteen of the Bankruptcy Law and Article Seventy-Nine of its implementing regulation.

1. ​Any reference to the “Law" in this Regulation shall mean the Capital Market Law issued by Royal Decree No. (M/30) dated 2/6/1424H.
   
2.  Without prejudice to Paragraph (c) of this Article, expressions and terms in this Regulation have the meaning which they bear in the Law and the Glossary of Defined Terms Used in the Regulations and Rules of the Capital Market Authority, unless the contrary intention appears.
3. For the purpose of this Regulation, the following expressions and terms shall have the meaning they bear as follows unless the contrary intention appears:

1. The termination, liquidation or acceleration of any present or future payment or delivery obligations or entitlements under or in connection with one or more Qualified Financial Contracts to which a Netting Agreement applies.
2. The calculation or estimation of a close-out value, market value, liquidation value or replacement value in respect of each obligation or entitlement or group of obligations or entitlements terminated, liquidated or accelerated under paragraph (1) of this definition.
3. The conversion of any values calculated or estimated under paragraph (2) of this definition into a single currency.
4. The determination of the net balance of the values calculated under paragraph (2) of this definition, as converted under paragraph (3) of this definition, by the operation of netting or set-off, giving rise to the obligation of one Party to pay an amount equal to the net balance to the other Party.

1. Any agreement between two Parties that provides for netting of the amounts due under two or more Netting Agreements.
2. Any Financial Collateral Arrangement related to or forming part of one or more of the foregoing agreements.

1. Protective settlement.
2. Financial restructuring.
3. Liquidation.
4. Small debtors' protective settlement.
5. Small debtors' financial restructuring.
6. Small debtors' liquidation.
7. Administrative liquidation.

1. a pledge or any other form of security interest in Collateral, whether possessory or non-possessory.
2. a Title Transfer Collateral Arrangement.
3. any guarantee, letter of credit or reimbursement obligation by or to a party to one or more Qualified Financial Contracts, in respect of those Qualified Financial Contracts; or a Netting Agreement.

A Qualified Financial Contract shall be enforceable and valid in accordance with its terms against any of the Parties thereto and the enforceability and validity of a Qualified Financial Contract shall not be affected by any subsequent change to any of the circumstances in which the Qualified Financial Contract was concluded.

​The provisions of a Netting Agreement will be enforceable in accordance with their terms, including against a Bankrupt Party, and, where applicable, against a guarantor or other natural or corporate person providing Collateral or security for any obligation of a Bankrupt Party, and may not be stayed, avoided or otherwise limited due to the following:

​The Bankruptcy Trustee or the Bankruptcy Commission are not entitled to nullify, suspend or refrain from executing any of the obligations or transactions stipulated in this Article on the ground that they constitute preference of an outstanding debt or related to a fraudulent transaction in respect of a Non-Bankrupt Party, unless there is a clear and sufficient evidence that the Bankrupt Party conducted any of these obligations or transactions with actual intent to hinder, delay, or defraud any entity to which the Bankrupt Party was indebted or became indebted, on or after the date such transaction was made, or such obligation was incurred, and such obligations and operations are as follows:

1. transfer, substitution or exchange of Cash, Collateral or any other interests from the Bankrupt Party to the Non-Bankrupt Party under or in connection with a Netting Agreement; or
2. any payment or delivery obligation incurred by the Bankrupt Party and owing to the Non-Bankrupt Party under or in connection with a Netting Agreement.​

​No stay, injunction, avoidance, moratorium, or similar proceeding or order, whether issued or granted by a court, competent authority, Bankruptcy Trustee or the Bankruptcy Commission pursuant to the Bankruptcy Law, shall limit or delay the application of otherwise enforceable Netting Agreements in accordance with Articles (4), (5) and (6) of this Regulation.

​Unless otherwise agreed by the Parties, the realization, appropriation or liquidation of Collateral under a Financial Collateral Arrangement shall take effect or occur without any requirement that prior notice shall be given to, or consent be received from, any Party, natural or corporate person or entity, provided that this paragraph is without prejudice to the provision of any applicable Laws in the Kingdom related to the realization, appropriation or liquidation of Collateral to be conducted in a commercially reasonable manner.

1. A Netting Agreement shall be deemed to be a netting agreement notwithstanding the fact that such Netting Agreement may contain provisions relating to agreements, contracts or transactions that are not considered Qualified Financial Contracts according to Annex (1) of this Regulation. Provided that, for the purposes of this Chapter, such Netting Agreement shall be deemed to be a Netting Agreement only with respect to those agreements, contracts or transactions that fall within the definition of "Qualified Financial Contract" in terms of Article Two and Annex (1) of this Regulation.
2. A Financial Collateral Arrangement shall be deemed to be a Financial Collateral Arrangement notwithstanding the fact that such Financial Collateral Arrangement may contain provisions relating to agreements, contracts or transactions that are not a Netting Agreement or Qualified Financial Contract to which a Netting Agreement applies in terms of Article Two of this Regulation, provided that, for the purposes of this Chapter, such Financial Collateral Arrangement shall be deemed to be a Financial Collateral Arrangement only with respect to those agreements, contracts or transactions that fall within the definition of "Netting Agreement" or "Qualified Financial Contract" in terms of Article Two of this Regulation.
3. For the purposes of this Chapter, a Netting Agreement and all Qualified Financial Contracts to which a Netting Agreement applies shall constitute a single agreement.
4. For the purposes of this Chapter, the term "Netting Agreement" shall include the term "Multibranch Netting Agreement" (as defined in Article Two of this Regulation), provided, however, that in a separate bankruptcy of a branch or agency of a foreign party (as defined in Article Two of this Regulation) in the Kingdom, the enforceability of the provisions of the Multibranch Netting Agreement shall be determined in accordance with Article thirteen of this Regulation.
   

 a)      The liability of a Bankrupt Local Branch to a Non-Bankrupt Party under a Multibranch Netting Agreement shall be calculated as of the date of the termination of the Qualified Financial Contracts to which the Multibranch Netting Agreement applies in accordance with its terms and shall be limited to the lesser of:
the Global Net Payment Obligation; and
the Local Net Payment Obligation.
b)      The liability of the Bankrupt Local Branch under paragraph ‎(a) shall be reduced but not below zero by:

1. any amount otherwise paid to or received by the Non-Bankrupt Party in respect of the Global Net Payment Obligation pursuant to such Multibranch Netting Agreement which if added to the liability of the Bankrupt Local Branch under paragraph ‎(a) would exceed the Global Net Payment Obligation.
2. ​​the fair market value of, or the amount of any proceeds of, Collateral that secures or supports the obligations of the Foreign Multibranch Party under the Multibranch Netting Agreement and has been applied by the Non-Bankrupt Party to satisfy the obligations of the Foreign Multibranch party pursuant to the Multibranch Netting Agreement.

1. the Global Net Payment Entitlement; and
2. the Local Net Payment Entitlement.

1. the Local Bankruptcy Trustee on behalf of the Bankrupt Local Branch; and
2. any Foreign Bankruptcy Trustee on behalf of the Foreign Multibranch Party.

If the Non-Bankrupt Party to a Multibranch Netting Agreement has taken Collateral under a Financial Collateral Arrangement that secures or supports the obligations of the Foreign Multibranch Party under the Multibranch Netting Agreement, the Non-Bankrupt Party may retain such Collateral and apply it in satisfaction of the obligation of the Foreign Multibranch Party in respect of the Global Net Payment Obligation. The Non-Bankrupt Party must return any excess Collateral to the Foreign Multibranch Party.

1. a currency, cross-currency or interest rate swap or profit rate swap.
2. a basis swap.
3. a spot, future, forward or other foreign exchange transaction.
4. a cap, collar or floor transaction.
5. a commodity swap.
6. a forward rate agreement.
7. a currency or interest rate future.
8. a currency or interest rate option.
9. an equity derivative, such as an equity or equity index swap, equity forward, equity option or equity index option.
10. a derivative relating to bonds or other debt securities or to a bond or debt security index, such as a total return swap, index swap, forward, option or index option.
11. a credit derivative, such as a credit default swap, credit default basket swap, total return swap or credit default option.
12. an energy derivative, such as an electricity derivative, oil derivative, coal derivative or gas derivative, including a derivative on physical transmission rights, financial transmission rights or transmission capacity.
13. a weather derivative, such as a weather swap or weather option.
14. a bandwidth derivative.
15. a freight derivative.
16. an emissions derivative, such as an emissions allowance or emissions reduction transaction.
17. an economic statistics derivative such as an inflation derivative.
18. a property index derivative.
19. a spot, future, forward or other securities or commodities transaction.
20. a securities contract, including a margin loan and an agreement to buy, sell, borrow or lend securities, such as a securities repurchase or reverse repurchase agreement, a securities lending agreement or a repurchase based on sale/ purchase of securities or a securities buy/sell-back agreement.
21. an agreement to clear or settle securities transactions or to act as a depository for securities.
22. a commodities contract, including an agreement to buy, sell, borrow or lend commodities, such as commodities repurchase or reverse repurchase agreement, a commodities lending agreement or a commodities buy/sell-back agreement.
23. contracts and transactions of certificates of deposit.
24. preferred stocks contracts and transactions.
25. any other agreement, contract or transaction similar to any agreement, contract or transaction referred to in paragraphs (1) to (24) of this Annex with respect to one or more reference items or indices relating to, without limitation, interest rates, currencies, commodities, energy products, electricity, equities, fund interest, weather, bonds and other debt instruments, sukuk, precious metals, quantitative measures associated with an occurrence, extent of an occurrence, or contingency associated with a financial, commercial or economic consequence, or economic or financial indices or measures of economic or financial risk or value.
26. any swap, forward, option, contract for differences or other derivative in respect of, or combination of, one or more agreements or contracts referred to in paragraphs (1) to (25) of this Annex.
27. any contract or transaction (including a murabaha, musawama or wa'ad) which individually or together with any other such contract or transaction has been or is entered into with a view to having an economic effect similar to any instrument, contract or transaction referred to in paragraphs (1) to (26) of this Annex in a manner intended to take account of Shari'a compliance requirements.
28. any agreement, contract or transaction designated as such by the Authority under this Regulation.