Capital Market Authority Issues Close-out Netting Regulation

Capital Market Authority Issues Close-out Netting Regulation

Key Takeaways for Financial Market Participants

On July 2, 2025, the Saudi Capital Market Authority (“CMA”) issued the Close-out Netting and Related Collateral Arrangements Regulation (“Regulation”), establishing a comprehensive legal framework for the enforceability of netting agreements and related collateral arrangements involving qualified financial contracts. The Regulation aims to provide legal certainty for financial market participants, particularly in the context of bankruptcy proceedings.

Scope of Application

The Regulation applies to netting agreements and financial collateral arrangements connected to one or more qualified financial contracts under the CMA’s supervision, where at least one party is a capital market institution. The framework is designed to ensure that such agreements are enforceable according to their terms, both outside and during bankruptcy proceedings, subject to the powers of the CMA and relevant Saudi laws.

Key Definitions

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.

Qualified Financial Contract: This includes a wide range of financial agreements such as derivatives contracts, securities and commodities contracts, Shari’ah compliant contracts which are economically similar, including those listed under Annex (1) of the Regulation.

Financial Collateral Arrangement: Any arrangement for providing collateral or other credit support related to a Netting Agreement or Qualified Financial Contract.

Enforceability of Netting and Collateral Arrangements

The Regulation confirms that Netting Agreements and related collateral arrangements are enforceable in accordance with their terms, even in the event of a party’s bankruptcy.  Key provisions include:

Protection from Bankruptcy Proceedings: The enforceability of netting agreements is not affected by the initiation of bankruptcy proceedings or actions by bankruptcy trustees or commissions, except as provided under the Law of Systemically Important Financial Institutions.

Single Net Obligation: Upon bankruptcy, the only obligation or right of either party is to pay or receive a single net amount, as determined by the Netting Agreement.

Limitation on Trustee Powers: Bankruptcy trustees cannot prevent the termination, liquidation, or acceleration of obligations under Qualified Financial Contracts subject to a Netting Agreement. Their powers are limited to the remaining net amount after such actions.

Protection Against Bankruptcy Laws: Provisions in Saudi bankruptcy law that might otherwise limit set-off or netting rights do not affect the enforceability of netting agreements as defined in the Regulation.

Multibranch Netting: Special provisions address multibranch netting agreements involving foreign institutions with branches in Saudi Arabia. The Regulation clarifies how liabilities are calculated in the event of a local branch’s bankruptcy.

Fraudulent Transactions and Preferences: The Regulation restricts the ability of bankruptcy trustees to challenge or unwind transactions under Netting Agreements on grounds of preference or fraud, unless there is clear evidence of intent to hinder, delay, or defraud creditors.

Implications for Market Participants

The new Regulation provides significant legal certainty for financial institutions, investors, and counterparties engaging in derivatives and other qualified financial contracts in Saudi Arabia. By ensuring the enforceability of netting and collateral arrangements, even in insolvency scenarios, the Regulation reduces credit risk and aligns the Saudi market with global best practices.

Conclusion

The new Regulation contributes to strengthening the stability and sustainability of the financial sector in Saudi Arabia, enhancing the overall capital market framework. The CMA also seeks, through approved regulation, to keep pace with international developments in accordance with the best global practices and confirms the enforceability of Qualified Financial Contracts not to be affected by any subsequent change in the status in which they were concluded, which may include the initiation of any bankruptcy procedures.

How can we help?

If you have any questions or require further information on the new law or its implications for your business, please get in touch.