Close-out netting allows counterparties in a qualified financial contract to offset their obligations if one party defaults, leaving only a single net payment due. Thus, reducing systemic risk and ensures the orderly settlement of contracts. Additionally, its enforceability determines whether international investors can manage their exposures efficiently.

The CMA regulation that was published establishes a legal recognition of netting and related Financial collateral arrangements where one party is a capital market institution. It also aims to enhance the stability of the financial system and protect investors by ensuring the enforceability of a qualified financial contracts thereby safeguarding the rights of all parties involved.

Mr. Raed Alhumaid, CMA Deputy for Market Institutions, said that the development reflects Saudi Arabia's ongoing effort to strengthen the foundations of its financial system. He added, "We welcome ISDA's legal opinions that recognize the enforceability of close-out netting in the Kingdom of Saudi Arabia, following the issuance of our (Close-out Netting and Related Collateral Arrangements Regulation) this year."

For international institutions, the recognition of enforceable netting in Saudi Arabia reduces counterparty uncertainty and supports broader participation in the local derivatives markets, creating the legal foundation necessary for market depth and liquidity growth.

It is worth noting that Saudi Arabia's derivatives market was launched in 2020 with the MT30 Index Futures, followed by single stock futures (SSF) in 2022 and single stock options (SSO) in 2023. These instruments expanded investors' ability to hedge and manage risk. The enforceable netting framework strengthens this market by ensuring greater legal certainty in derivatives transactions and supporting its continued growth and stability.

The CMA noted in its press release that the regulation includes a set of provisions governing close-out netting and associated collateral arrangements, defines its scope of application and the entities subject to it, and defines qualified financial contracts and transactions that would be exempt from the provisions of the Bankruptcy Law. This step is expected to contribute to enhancing the stability and sustainability of the Kingdom's financial sector and the overall capital market framework.