year ended 31 december 2014 - morgan stanley · mssa has developed an icaap policy to measure,...

Morgan Stanley Saudi Arabia

Pillar III Disclosures Year ended 31 December 2014

February 2015 This report contains 23 pages

Pillar III Disclosures V.1

Pillar III Disclosures V.1.docx - 26 February 2015

Morgan Stanley Saudi Arabia Pillar III Disclosures

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Contents

1 Scope of Application 1 1.1 Scope 1

1.2 Group Structure 1

2 Capital Structure 3 2.1 Tier 1 and Tier 2 Capital 3

3 Capital Adequacy 5 3.1 Strategy and Approach for ICAAP 5

3.2 Capital Requirements and Capital Adequacy Ratio 6

4 Risk Management 7 4.1 Risk Management Objectives 7

4.2 Risk Management framework 7

5 Credit risk 8 5.1 Credit Risk Disclosures 8

6 Market risk 14 6.1 Capital Requirements 15

7 Operational risk 16 7.1 Risk mitigation and control 17

7.2 Capital Requirements 17

8 Liquidity risk 18

8.1 Funding and liquidity risk strategy 18

8.2 Stress testing 19

8.3 Contingency funding plan 19

A Appendix 21 A.1 Capital Requirements 21



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Glossary

BCP Business Continuity Plan BIA Basic Indicator Approach CAR Capital Adequacy Ratio CEO Chief Executive officer CMA Capital Market Authority CR Capital Requirement CRM Credit Risk Mitigation DRP Disaster Recovery Plan FX Foreign Exchange GCC Gulf Cooperation Council GRM Group Risk Management ICAAP Internal Capital Adequacy Assessment Process IT Information Technology KSA Kingdom of Saudi Arabia LRM Liquidity Risk Management MSSA Morgan Stanley Saudi Arabia NOP Net Open Position OR Operational Risk OTC Over The Counter PR Prudential Rules RAG Red Amber Green RWA Risk Weighted Assets S&P Standard & Poor's SA Standard Approach SAR Saudi Arabian Riyal US United States Of America USD Us Dollar



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1 Scope of Application

1.1 Scope Morgan Stanley Saudi Arabia (hereinafter referred to as “MSSA” or “the Company”) is a closed joint stock company registered with the Capital Market Authority (CMA) under license number 7044-37 dated 2 Jumada Al-Thani 1428 H (corresponding to June 17, 2007). MSSA is operating in the Kingdom of Saudi Arabia (KSA) under commercial registration No 1010224144 dated 18 Ramadan 1427H (corresponding to 10 October 2006).

MSSA operates subject to the minimum capital requirements as set out in the CMA’s Prudential Rules (PRs). These include the following framework consistent with the Basel Capital Accord. • Pillar I – Minimum capital requirements: defines rules for the calculation of credit, market and operational risk; • Pillar II – The Internal Capital Adequacy Assessment Process (“ICAAP”) requires firms to self-assess the level of capital that adequately

supports all relevant current and future risks in their business; and • Pillar III – Market discipline: requires expanded disclosures to allow investors and other market participants to understand capital

adequacy, particular risk exposures and risk management processes of individual firms.

The Pillar III Disclosure Report (hereinafter referred to as “Pillar III Disclosure”) is prepared and issued in accordance with the Article 68 of the PRs. The Pillar III Disclosure explains the basis on which the Company complies with the capital requirements and information pertaining to the management of its risks. It has been prepared in accordance with the “Suggested Format for Pillar III Disclosure” published on 15 December 2014, which sets the minimum requirements for the annual market disclosure of information as referred to by the Article 68 of the PRs.

1.2 Group Structure MSSA was established in 2007 with the acquisition by Morgan Stanley of a majority interest in the Capital Group. MSSA does not have any subsidiaries for the purpose of consolidation as part of the financial group.

The objectives of MSSA are to act as both principal and agent and to provide underwriting, management, custodial, and advisory services relating to financial securities.

MSSA’s ultimate parent and controlling entity is Morgan Stanley, a Delaware corporation, which, together with its consolidated subsidiaries, form the Morgan Stanley Group (“Morgan Stanley Group”). Morgan Stanley is a “Financial Holding Company” as defined by the Bank



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Holding Company Act of 1956, as amended, and is subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

The information disclosed in this document is not indicative of the Morgan Stanley Group as a whole. Investors, stakeholders, creditors or other users seeking information on capital adequacy, risk exposure and risk management policies of the Morgan Stanley Group should refer to the latest Morgan Stanley Group Pillar 3 disclosure at http://www.morganstanley.com/about/ir/regulated_information.html.



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2 Capital Structure MSSA has a basic capital structure consisting of:

Capital Items Details

Share capital The share capital of MSSA, amounting to SAR 65,000,000, is divided into 6,500,000 shares of SAR 10 each

Retained Earnings This represents the accumulated undistributed profits that are available for future dividend distributions as recommended by the Board and approved by the Audit Committee or to be eventually capitalized.

Statutory Reserves In accordance with MSSA’s Article of Association and the Regulation for Companies in the Kingdom of Saudi Arabia, the Company must have 10% of its net income after Zakat and income tax each year in Statutory reserve. This reserve is not subject to dividend distribution.

The capital of MSSA is composed of only Tier 1 Capital as mentioned in the below section.

2.1 Tier 1 and Tier 2 Capital The components of Tier 1 and Tier 2 capital for MSSA as of 31 December 2014 are as follows:

Capital Base Amount in SAR ’000

Tier 1 Capital

Paid-up capital 65,000

Audited retained earnings 60,819

Share premium -

Reserves (other than revaluation reserves) 32,500

Tier-1 capital contribution -

Deductions from Tier 1 capital -

Total Tier 1 Capital 158,319

Tier 2 Capital



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Capital Base Amount in SAR ’000

Subordinated loans -

Cumulative preference shares -

Revaluation reserves -

Other deductions from Tier 2 (-) -

Deduction to meet Tier 2 capital limit (-) -

Total Tier 2 Capital -

Total Capital Base 158,319

The Company does not have Tier 2 capital as at 31 December 2014 in its capital structure. The total capital base of the Company net of deductions as at 31 December 2014 is SAR 158,318,597.



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3 Capital Adequacy MSSA is adequately capitalized with respect to the minimum capital requirement of the Prudential Rules of the CMA i.e. the requirements for the minimum level of capital are fulfilled and MSSA management ensures that adequate capital is retained at all times to support the risks the Company undertakes in the course of its business and its expansion plans. Capital Adequacy indicates the ability of MSSA to ensure efficient utilization of capital in relation to its business requirements, growth and risk profile while meeting shareholder returns and expectations.

The Company recognizes that earnings are the first line of defense against losses arising from business risks. However, since capital is vital to ensure continued solvency, the Company’s objective is to maintain sufficient capital such that there is a buffer above regulatory capital adequacy requirement, in order to meet risks arising from fluctuations in asset values, business cycles, expansion and future requirements. The Company’s Internal Capital Adequacy Assessment Process (“ICAAP”) identifies risks that are material to its business and the capital that is required to be set aside for such risks. Since its incorporation, MSSA’s capital has increased over years by the retention of its dividends. MSSA plan to continue increasing its risk appetite by retaining profits in line with the business plans.

The Company seeks to achieve the following goals by implementing an effective capital management framework:

• Maintain sufficient capital to support overall business strategy; • Integrate capital allocation decisions with the strategic and financial planning process; • Enhance Board and senior management’s ability to understand how much capital flexibility exists to support the overall business

strategy; • Enhance the Company’s understanding on capital requirements under different economic and stress scenarios; • Build and support linkage between risks and capital and tie performance to both of them; and • Meet the regulatory capital adequacy ratios and have a prudent buffer.

3.1 Strategy and Approach for ICAAP MSSA has developed an ICAAP Policy to measure, monitor and report all material risks and adopt an efficient capital planning process to ensure sufficient capital is available to meet usual business activities as well as any unforeseen contingencies. Whilst the Company is exploring opportunities in expansion, the Company will continue to hold capital to cover those risks specified by CMA (under Pillar I) and hold additional capital to cover other risks (Pillar II), supporting its business activities while ensuring a comfortable buffer is held for capital requirement. The Company is sufficiently capitalized over the capital planning horizon and can support the planned growth and expansion of the business.



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MSSA has established a monitoring and reporting system that allows the senior management and the Board to:

• evaluate the level and trend of material risks and their effect on capital levels; • evaluate the sensitivity and reasonableness of key assumptions used in the Company’s business projections; • determine that the Company holds sufficient capital against the various risks and is in compliance with established capital adequacy

goals; and • assess its future capital requirements based on the Company reported risk profile and make necessary adjustments to the Company’s

strategic plan accordingly.

The Company’s capital management is aimed at maintaining an optimum level of capital, enabling it to pursue strategies that build long-term shareholder value, whilst always meeting both minimum regulatory capital requirements and internal capital requirements.

3.2 Capital Requirements and Capital Adequacy Ratio The capital requirements for credit risk, market risks, operational risks, foreign exchange risks and commodity risk in accordance with the Prudential Rules is provided in the table below: (Please see Appendix A.1 for details)

Exposure Class Capital Requirement

SAR ‘000

Total Credit Risk Exposure 11,996

Total Market Risk Exposure 290

Total Operational Risk Exposure 11,969

Minimum Capital Requirements 24,256

Surplus/(Deficit) in capital 134,063

Total Capital ratio (time) 6.53



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4 Risk Management

4.1 Risk Management Objectives MSSA assumes a variety of risks in undertaking its business activities. The risk management objective for each area of risk is to adopt the best practices available and to adhere to CMA requirements i.e. to identify, capture, monitor and manage different dimensions of risk with the aim of protecting asset values and income streams. MSSA is able to maximize returns intended to optimize the Company’s shareholder return, while maintaining its risk exposure within defined parameters.

4.2 Risk Management framework

4.2.1 Structure and Organization

The Company’s senior management is responsible for understanding the nature and level of risk being taken by the Company and how this risk relates to adequate capital levels. Senior management (CEO, Board and Group Risk Management team) are responsible for formulating the Company’s risk appetite and strategy and for approving the limit structure for different types of risks faced by the Company. The Board of Directors of the Company has overall responsibility for establishing the risk culture and ensuring that an effective risk management framework is in place. The Internal Audit function provides independent assurance that all types of risk are being measured and managed in accordance with the policies and guidelines set by the Board of Directors.

4.2.2 Risk Management Strategy

The Company’s risk strategy, backed by appropriate limit structures, is expressed through Group Risk Management policies. These policies, adopted by MSSA, provide an enterprise-wide integrated risk management framework in the Company. The risk policies identify risk objectives, policies, strategies and risk governance both at the Board and the management level. Where the Group Risk Management policies contradicts any of the local laws and regulations, the local regulations supersedes the internal group policy requirements.

The Company is in the process of enhancing its capabilities in risk measurement. The risk monitoring and reporting framework is also formalized to provide timely and periodic updates to the senior management on the risk exposures of the Company for any required actions. Based on the risk appetite of the Company, the Company has put in place various risk limits. These limits have been approved by the Board of Directors. Any limit breaches are reported by the Risk Management department to the Board of Directors. The limits are reviewed and revised, if necessary, at least annually.



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5 Credit risk Credit risk is defined as one of the principal Pillar I risks that the Company faces. Credit risk is the risk of loss arising out of failure of counterparties to meet their financial or contractual obligations when due. MSSA’s credit exposures can be categorized as:

• Risk against placement with the banks; • Risk against corporate receivables; and • Risk against accrued income

Currently, MSSA uses the Standardized Approach prescribed under the Pillar I requirements of the PRs to calculate regulatory capital for the credit risk faced by it.

5.1 Credit Risk Disclosures

5.1.1 Past due claims

At MSSA, all invoices are due when issued. Due to the nature of MSSA business and long term nature of projects, payment due dates vary for different projects. However, as a policy, MSSA considers the following for provisioning:

• Invoices issued against fee and commission, outstanding for more than 180 days are fully provided for. A provision may be created before 180 days where the Business Units identify issues around collectability at an earlier stage.

• Provision against receivables arising from expenses incurred on projects which are reimbursable by the Client are assessed on two fronts; the status of the project and the ageing of the expenses in those categories. To aid this process, the status of projects are divided into the “Active” and “Inactive” phases to reflect MSSA ability to recover expenses on the projects and the level of focus and attention that needs to be applied. From prior experience, the ability to recover expenses from projects in the “Active” phase tends to be much more effective than those in the “Inactive” phase and accordingly a provision of 100% is set up against balances over 360 days.

5.1.2 Impaired assets

An annual assessment is made to determine whether there is objective evidence that a specific financial asset or a group of financial assets may be impaired. If such evidence exists, any impairment loss is recognized in the statement of income. Impairment is determined as the difference between cost and the present value of future cash flows discounted at the current market rate of return for similar financial assets.



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5.1.3 Total Gross Credit Risk Exposure

Total gross credit risk exposures broken down by major types of credit exposure are provided in the table below:

Risk Weights

Exposures after Netting and Credit Risk Mitigation

Gov

ernm

ents

an

d ce

ntra

l ba

nks

Adm

inis

trat

ive

bodi

es a

nd

NP

O

Aut

horis

ed

pers

ons

and

bank

s

Mar

gin

Fin

anci

ng

Cor

pora

tes

Ret

ail

Pas

t due

ite

ms

Inve

stm

ents

Sec

uriti

satio

n

Oth

er a

sset

s

Off-

bala

nce

shee

t co

mm

itmen

ts

Tot

al

Exp

osur

e af

ter

netti

ng

and

CR

M

Tot

al R

WA

SAR ‘000

0% - - - - - - - - - 15 - 15 0

20% - - 156,524 - - - - - - - - 156,524 31,305

50% - - - - - - - - - - - - -

100% - - - - - - - - - - - - -

150% - - - - - - - - - - - - -

200% - - - - - - - - - - - - -

300% - - - - - - - - - 13,181 - 13,181 39,542

400% - - - - - - - - - - - - -

500% - - - - - - - - - - - - -

714%* - - - - 1,508 - - - - 571 - 2,079 14,840

Average Risk Weight - - 156,524 - 1,508 - - - - 13,767 - 171,799 85,687

Deduction from Capital Base

- - 4,383 - 1,508

- - - - 6,107 - - 11,996

*include prohibited exposure



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5.1.4 Geographic Distribution of Credit Risk

The Company operates solely in KSA and does not have any investment portfolio outside KSA. There are, however, some receivables relating to fees from the Morgan Stanley parent entity. The credit risk exposure comprises mainly of intercompany receivables, placements with local banks and account receivables from corporates. The table below provides break-up of credit exposure in geographic areas:

Credit Risk Exposure Geographic area

Portfolio Saudi Arabia United States Total Amount

SAR ’000

Cash and Company balances 15 - 15

Deposits – Local Banks 152,068 - 152,068

Receivables from Authorized Persons and Banks - 4,456 4,456

Receivables from Corporates 1,508 - 1,508

Prepaid expenses and accrued income 3,939 - 3,939

Other assets 571 - 571

Total 158,101 4,456 162,556

5.1.5 Residual Contractual Maturity Breakdown

Less than 12 months More than 12 months Total 2014 SAR’000

Cash & Cash Equivalent 152,083 - 152,083 Accounts Receivable 1,508 - 1,508 Due from related party 4,456 - 4,456 Accrued Revenue 2,209 - 2,209 Prepayments and Other assets 2,301 - 2,301 Total Assets 162,556 - 162,556 Accrued Expenses and other liabilities 8,378 - 8,378



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Less than 12 months More than 12 months Total 2014 SAR’000

Zakat & Income Tax 1,208 - 1,208 End of service Indemnities - 3,894 3,894 Total Liabilities 9,585 3,894 13,479 Net 152,970 (3,894) 149,076

5.1.6 Amount of impaired exposures

MSSA does not hold any proprietary investments and the impaired exposure relates to receivables in lieu of expenses incurred on projects which are reimbursable by clients. The impaired exposure at MSSA amounts to SAR 605,116 as at 31 December 2014. The amount is fully provided for and the allowance for doubtful receivables in MSSA books as at 31 December 2014 amounts to SAR 605,116.

The charge for specific provisions during the year 2014 amounts to SAR 565,177. Below table provide details of movement in allowance for doubtful receivables for the year ended 31 December 2014.

Movement in the allowance for doubtful receivables account Amount SAR’000 Allowance - Beginning of the year 2014 (178) Written off during the year 138 Charge for the year (565) Allowance – At the end of Year 2014 (605)

5.1.7 Credit Risk Protection

Exposure amounts before and after credit risk protection associated with each credit quality step in regards to non-trading activities, as well as the exposure amounts that are deducted from capital are detailed in tables 5.1.7.2 and 5.1.7.3 below:

5.1.7.1 Long term Ratings of counterparties

MSSA does not hold any long term on or off balance sheet exposures.



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5.1.7.2 Short term Ratings of counterparties

Exposure Class

Short term Ratings of counterparties Credit quality step 1 2 3 4 Unrated

S & P A-1+, A-1 A-2 A-3 Below A-3 Unrated

Fitch F1+, F1 F2 F3 Below F3 Unrated

Moody’s P-1 P-2 P-3 Not Prime Unrated

Capital Intelligence A1 A2 A3 Below A3 Unrated

On and Off-balance-sheet Exposures

Governments and Central Banks

Authorised Persons and Banks 152,068* 4,456**

Corporates 1,508

Retail

Investments

Securitisation

Margin Financing

Other Assets

Total 152,068 4,456 1,508

* Deposit with local Saudi Bank ** Intercompany receivables (from Morgan Stanley International) - A-2 rating assigned by S&P.



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5.1.7.3 Credit Risk Mitigation Exposure

MSSA credit exposure mainly comprises of intercompany receivables, placements with banks and receivables in lieu of fee & commission and reimbursement of project expenses. None of the exposure is covered by collateral as detailed in table below:

Exposure Class Exposures before CRM

Exposures covered by Guarantees/

Credit derivatives

Exposures covered by Financial Collateral

Exposures covered by

Netting Agreement

Exposures covered by

other eligible collaterals

Exposures after CRM

Credit Risk

On-balance Sheet Exposures

Governments and Central Banks Authorised Persons and Banks 156,524 156,524

Corporates 1,508 1,508

Retail

Investments

Securitisation

Margin Financing Other Assets 13,767 13,767 Total On-Balance sheet Exposures 171,799 171,799

Off-balance Sheet Exposures

OTC/Credit Derivatives Exposure in the form of repurchase agreements Exposure in the form of securities lending

Exposure in the form of commitments *Other Off-Balance sheet Exposures

Total Off-Balance sheet Exposures - - Total On and Off-Balance sheet Exposures

171,799

171,799



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6 Market risk Market risk is the potential of losses in earnings or an adverse change in the value of MSSA’s assets and liabilities in response to changes in their respective market prices.

For the Company, market risk may arise from movements in interest rates, foreign exchange markets or equity markets. A single transaction or financial product may be subject to any number of these risks.

Interest Rate Risk is the sensitivity of financial products to changes in the interest rates. Interest rate risk arises from holding assets and liabilities - actual or notional - with different maturity dates or re-pricing dates, creating exposure to changes in the level of profit rates. Currently MSSA does not hold any proprietary investments.

Foreign Exchange Risk is the sensitivity of financial products to changes in spot foreign exchange rates. The value of the Company’s portfolio which has products based in a number of currencies may be exposed to these risks when converted back to the portfolio’s base currency. Currency or foreign exchange risk arises from an open position, either long or short, in a foreign currency, creating exposure to a change in the relevant exchange rate. This may arise from a holding of assets in one currency funded by liabilities in another currency, or from a spot or forward foreign exchange trade, currency swap, currency future or currency option which is not matched with an offsetting contract.

Equity Risk is the sensitivity of financial products to the changes in equity prices. Equity risk arises from holding open positions, either long or short, in equities or equity based instruments, thereby creating exposure to a change in the market price of the equity or equity instrument. This exposure may arise from holding actual equities, from an equity derivative, or from an index arbitrage. In addition to Company performance expectations, equity prices are also susceptible to general economic data and sector performance expectations.

Currently, MSSA does not hold any equity positions in the trading book. MSSA’s market risk exposure is restricted to its foreign exchange exposures. MSSA manages currency risk based on the Net Open Position (NOP) of currencies. As MSSA has limited exposure outside the GCC currencies which are already pegged with the US Dollar, volatility levels are not significant.

The Company uses a combination of limits to control its market risk exposures. Regional Finance supports the measurement of market risk on a periodic basis and monitors the market risk limits, generating an alert whenever a limit is breached.



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6.1 Capital Requirements

6.1.1 Trading Book Business

MSSA does not have any exposure against its trading book business and accordingly no capital requirement has been calculated.

6.1.2 Business Activities

Risk Exposure Capital Requirements SAR ‘000

FX 14,504 290 Commodity - -



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7 Operational risk Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition excludes reputational and strategic risk.

When calculating its internal capital requirement for operational risk, MSSA uses the maximum of the capital requirement calculated under the Basic Indicator Approach (BIA) and that under the Expenditure Based Approach (EBA). The Company has established guidelines which have been classified into major factors that give rise to operational risk, including people risk, process risk, system risk and external events, and manages them accordingly.

People risk: The Company assesses the current and future human resource needs of the Company, which will be implemented through Board approved policies and procedures for staff hiring, termination and resignation. The Company has established a code of conduct, which are to be read and signed by all employees and strict measures shall be taken in case of non-compliance. Process risk: Each business unit/support function ensures the adequacy of its internal controls against each activity, in co-ordination with the Internal Audit, and reports any issues to Finance for further analysis and evaluation. The Company reviews the internal control policies and procedures periodically and updates changes while considering internal and external conditions. System risk: The Company’s strategic plan caters to current and future IT needs, in line with business objectives. Senior management reviews the strategic plan catering to IT needs periodically and makes amendments where required, while considering environmental changes, internal resources and future dependency on IT. All new systems are approved by authorized personnel, after going through an evaluation process (i.e., suitability, feasibility and acceptability of the new system). Only approved vendors are used for any procurement. External events: The Company has established an appropriate Business Continuity and Disaster Recovery Plan to effectively manage emergency situations and utilize its resources effectively, directing them where they are needed most. As part of these plans, the Company has policies in place for the insurance of valuable and vital assets and the application of these policies is the responsibility of the Corporate Service Department of MSSA.

Senior management oversight is one of the key requirements to demonstrate commitment to risk management by the Company. In order to support adequate management oversight, regular, objective and independent reporting on the status of operational risks has been made mandatory. Formal reporting done to keep the senior management apprised of the state of risks within the Company.



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7.1 Risk mitigation and control The business units/support functions, in consultation with the Finance and Group Risk Management, determines all material operational risks and decide whether to use appropriate procedures to control and/or mitigate the risks, or accept the risks. Control processes and procedures for each business/support function are augmented by the line heads and operational risk coordinators where control measures are amended for identified risks. Finance and Group Risk management facilitate the business/support functions in the monitoring and reporting of operational incidents and losses.

7.2 Capital Requirements The Company based its internal capital requirement for operational risk on the expenditure approach for operational risk as it provides a higher capital requirement than that under the BIA.

7.2.1 Basic Indicator Approach

Operational Risk Gross Operating Income Average Gross

Operating Income Risk Capital

Charge Capital

Requirement 2012 2013 2014 SAR’000 % SAR’000

Basic Indicator Approach 49,112 63,365 74,338 62,272 15.0 9,341

7.2.2 Expenditure Based Approach

Operational Risk Overhead Expenses (Year-1)

Average Gross Operating Income

Risk Capital Charge

Capital Requirement

SAR’000 % SAR’000

Expenditure Based Approach 47,877 N/A 25.0 11,969



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8 Liquidity risk The liquidity risk is defined as “the risk that the Company will be unable to meet its obligations as they come due because of an inability to obtain adequate funding or to liquidate assets”.

MSSA pursues a policy of maintaining a high level of liquidity through active and prudent management of assets and liabilities. MSSA has limited or insignificant liabilities and the majority of assets are placed with a local Financial Institution.

MSSA monitors the liquidity risk through a liquidity and funding risk management policy framework that:

• Ensures that the liquidity profile of MSSA is managed and maintained in a manner that is commensurate with the MSSA’s asset risk profile and risk tolerances.

• Formalizes the governance structure for liquidity risk oversight by specifying the roles of the MSSA’s Board of Directors, MSSA Management Team, and Treasury in the liquidity risk management process.

8.1 Funding and liquidity risk strategy The primary goal of MSSA liquidity and funding activities is to ensure adequate liquidity over a wide range of potential stress scenarios and market environments. To ensure that MSSA is able to withstand liquidity stress, continue to fund its ongoing business, and meet its financial obligations without issuing unsecured debt, MSSA has established a robust Liquidity Risk Management Framework (LRM Framework).

MSSA’s LRM is based on the following key elements that are undertaken to ensure that financings are executed in a manner that reduces the risk of disruption to MSSA business operations that would result from an interruption in the availability of MSSA’s funding sources.

Liquidity Risk Assessment: The overall liquidity risk assessment includes 2 sections: early indicators, and liquidity stress testing result. A liquidity risk assessment dashboard (Dashboard) is developed to monitor and assess overall liquidity risk of MSSA. Red, Amber, and Green (RAG) will be assigned to each category, and overall RAG status will be assigned by Treasury.

Risk Measurement and Modeling in Stress Testing: MSSA has a defined set of scenarios and assumptions used to measure liquidity risk over short and long-term time horizon.

Tolerance: MSSA has set and maintained low liquidity risk tolerance to ensure that the MSSA has sufficient liquidity to cover contractual obligations and contingencies in a liquidity stress event over one-year horizon.

Liquidity Reserve: MSSA maintains a liquidity reserve comprising of cash, cash equivalents and highly liquid unencumbered securities accessible to MSSA and readily convertible to cash



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Liquidity Risk Reporting : Responsibility of managing MSSA’s liquidity risk and funding lies with local finance in coordination with Treasury. Finance consolidates the Dashboard and reports to CEO and the Board on a periodic basis.

8.2 Stress testing MSSA has a defined set of scenarios and assumptions used to measure liquidity risk over short and long-term time horizon. Stress testing is an evolutional process that is constantly reviewed and refined through time to capture the experiences of volatile markets

The Saudi finance team updates the stress testing assumptions on a semiannual basis. It is reviewed by Treasury and the CEO and approved by the MSSA Board.

Analytical processes exist to evaluate and report periodically the liquidity risk exposures of MSSA. MSSA performs stress testing that models stressed market environment scenarios over an eighteen months horizon on a semiannual basis. Shocks can result from market-driven financial distress and/or a Bank credit event. The liquidity stress testing models incorporate a wide range of potential cash outflows.

MSSA models following distinct types of contingencies, as detailed below:

• Contractual: fulfilling requests based on contractual obligations; and • Discretionary: MSSA reserves a buffer to preserve the franchise to honor client requests where no contractual obligation exists.

8.3 Contingency funding plan In the event of a liquidity stress, MSSA will utilize its Contingency Funding Plan, which describes the internal responsibilities, information flows, escalation procedures, and execution of potentials contingency actions.

In case of any cash flow forecast stress testing scenario is rated Amber or Red in the dashboard, local Finance will:

• Escalate to regional Finance team, Firm Management and Treasury; • Depending on the discussions, regional finance team and Treasury will determine if measures should be taken for injecting liquidity into

MSSA, the amount of funding needed and timelines for having this achieved; • Obtain external auditors/local tax consultants/Legal & Compliance advise for any local regulatory requirement; • Update MSSA Audit Committee with steps taken by management to address the funding need of MSSA; • Present MSSA Board with the case to fund liquidity into MSSA and the options available for the funding for their approval; • Obtain authorisation from MSSA General Assembly for the amount of funding before additional steps are implemented;



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After MSSA General Assembly approval, treasury, and regional finance team will discuss steps to have the required and approved funding to take place.

8.3.1 Liquidity Ratio

MSSA uses following liquidity risk assessment dashboard to assess its liquidity risk.

Liquidity Ratio* (times) Rating > or equal to 1.5 Green

> or equal to 1 but less than 1.5 Amber

< 1 Red *Liquidity Ratio: Current Assets / Current Liability

MSSA has demonstrated strong liquidity position during 2014. As at 31 December 2014 the liquidity ratio (Current Assets/ Current Liabilities) was 17 times, (SAR 162,555,615/ SAR 9,585,288).

8.3.2 Cash Position

The cash position during the last review is illustrated below. This is based on the stress scenarios performed over the 18 months period: Stress Scenario Cash Position* SAR’000 Rating

Loss of 25% revenue 143,340 Green

Loss of 50 % revenue 115,841 Green

Loss of 100% revenue 60,840 Green

*Cash position at the close of 18th month period

Criteria: • Green rating: Positive cash flow under any loss of revenue stress scenarios • Amber rating: Negative cash flow forecast under 100% loss of revenue • Red rating: Negative cash flow under a 50% or 25% loss of revenue.



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A Appendix

A.1 Capital Requirements

Exposure Class Exposures before CRM Net Exposures after CRM Risk Weighted Assets Capital Requirement

SAR ‘000

Credit Risk

On-balance Sheet Exposures - - - -

Governments and Central Banks - - - -

Authorised Persons and Banks 156,524 156,524 31,305 4,383

Corporates 1,508 1,508 10,764 1,508

Retail - - - -

Investments - - - -

Securitisation - - - -

Margin Financing - - - -

Other Assets 13,767 13,767 43,618 6,107

Total On-Balance sheet Exposures 171,799 171,799 85,687 11,996

Off-balance Sheet Exposures - - - -

OTC/Credit Derivatives - - - -

Repurchase agreements - - - -

Securities borrowing/lending - - - -

Commitments - - - -

Other off-balance sheet exposures - - - -

Total Off-Balance sheet Exposures - - - -

Total On and Off-Balance sheet Exposures 171,799 171,799 85,687 11,996



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Exposure Class Exposures before CRM Net Exposures after CRM Risk Weighted Assets Capital Requirement

Prohibited Exposure Risk Requirement - - - -

Total Credit Risk Exposures 171,799 171,799 85,687 11,996

Market Risk Long Position Short Position

Interest rate risks - - - - -

Equity price risks - - - - -

Risks related to investment funds - - - - -

Securitisation/resecuritisation positions - - - - -

Excess exposure risks - - - - -

Settlement risks and counterparty risks - - - - -

Foreign exchange rate risks 14,504 - - - 290

Commodities risks. - - - - -

Total Market Risk Exposures 14,504 - - - 290

Operational Risk - - - - 11,969

Minimum Capital Requirements - - - - 24,256

Surplus/(Deficit) in capital - - - - 134,063

Total Capital ratio (time) - - - - 6.53



February 2015

23

End of Document

year ended 31 december 2014 - morgan stanley · mssa has developed an icaap policy to measure,...

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