With the current geopolitical conflict and restrictions taking place across key trade routes, remaining resilient requires an understanding of how to effectively manage credit risk. S&P Global warns of “severe and disruptive credit scenarios” if businesses fail to take adequate measures to hedge against risk exposure. 

This article delves into managing credit risk when dealing with counterparties in the Gulf by providing an overview of netting regulations in KSA, UAE and Qatar and how these regimes could save a company from losing cashflow to the current events. 

Close-Out Netting

Close-out netting is a contractual mechanism in which the default of a party entitles the other non-defaulting party to request termination of all outstanding transactions which are then aggregated into a single net payment. Typically, parties seeking to mitigate credit risk through netting agree to a valuation methodology that is set out in a master agreement (e.g. ISDA master agreement) which will determine the means through which the net payment is calculated.

KSA

In the Kingdom, the Close-out Netting and Related Collateral Arrangements Regulation has been issued by each of the Capital Market Authority (CMA) and the Saudi Central Bank (SAMA) (referred to collectively as the KSA Netting Regulations). While initially introduced by SAMA in February 2025, the CMA has followed with a standalone regulation in July 2025 creating a unified statutory framework that is identical in substance.   

The promulgation of the KSA Netting Regulations and the issuance of a legal opinion by ISDA endorsing the enforceability of netting under these regulations gives parties sufficient comfort that existing netting arrangements with counterparties in the Kingdom will be enforceable and will not be ensnared by clawback rules or other draconian measures imposed by KSA bankruptcy law. However, international counterparties that have already entered into binding netting arrangements with KSA counterparties have to bear a few caveats in mind. 

First, the scope of the KSA Netting Regulations is limited to counterparties that are either regulated by the CMA or SAMA. This means that the universe of protected parties is restricted to heavily regulated industries such as banks, asset managers, brokers, payment firms and pharmaceutical companies. Practically speaking, parties whose trading track record in the Kingdom comprises of retail, construction, logistics or hospitality lose the protections afforded by the KSA Netting Regulations even if they have already entered into binding netting arrangements and would have to resort to traditional bankruptcy proceedings under KSA law.

Second, even if the KSA counterparty is regulated by the CMA or SAMA, a qualified financial contract must exist. The scope of qualified financial contracts is expansive in coverage and includes various types of derivative transactions and interest rate swaps. This breadth protects global counterparties dealing with CMA/SAMA regulated institutions but comes at the expense of those dealing with non-CMA/non-SAMA counterparties. This means that a party could enter into a hedging arrangement on the same terms with multiple KSA counterparties, but only be able to enforce the terms entered into with a CMA/SAMA counterparty.

The treatment of collateral under KSA Netting Regulations adds another layer of complexity. While the KSA Netting Regulations explicitly protect the enforceability of collateral arrangements entered into in connection with qualified financial contracts, they do not override the separate requirements under KSA law for perfecting security interests. Institutions dealing with KSA counterparties should not assume their collateral is safe merely by virtue of the KSA Netting Regulations as unperfected security is unrecognised in the Kingdom and will therefore fall within the purview of bankruptcy law.

Finally, parties should be cognisant of the fact that provisions governing netting are also subject to general principles of KSA contract law. Put simply, if a netting contract is challenged under KSA law, it will be interpreted according to contract law principles applied across the Kingdom which include good faith and reasonableness. 

With this in mind and notwithstanding the above points, there are two considerations for global counterparties to consider in times of distress with dealing with CMA/SAMA counterparties. Firstly, parties should ensure netting arrangements are fully compliant with KSA contract law by factoring in principles of good faith, reasonableness and public policy that govern how courts across the Kingdom interpret and enforce agreements. Secondly, parties should ensure any underlying collateral is perfected in order to be recognised under KSA law and be fully enforceable under the KSA Netting Regulations.

UAE

The UAE presents a more fragmented albeit distinctive framework when it comes to close-out netting.  

On the federal level, the UAE has issued Federal Decree Law No. 31 of 2024 Regarding Netting (UAE Netting Law) which repeals the previous netting law of 2018. Key changes introduced by the UAE Netting Law include the legal recognition and enforceability of financial contracts and the ability to implement close-out netting following insolvency of a UAE counterparty. 

The UAE Netting Law provides statutory protection for close-out netting arrangements and recognises 26 categories of agreements as qualified financial contracts providing expansive coverage. Unlike the KSA Netting Regulations, UAE Netting Law does not require the UAE counterparty to be a regulated entity allowing for a much broader range of parties to avail of the statutory protections afforded by UAE Netting Law. The UAE also recognises multi-branch netting agreements in line with the 2018 ISDA Model Netting Act.

For institutions dealing with entities based in the Dubai International Financial Centre (DIFC) or the Abu Dhabi Global Market (ADGM), both free zones have their own dedicated netting regulations substantially based on the ISDA Model Netting Act, creating a familiar legal environment for international finance and risk mitigation. Institutions dealing with counterparties in either free zone are afforded with protections that are equally rigorous.

Market participants based in the UAE will face the difficulty of navigating between co-existing regimes in the event that neither counterparty is registered exclusively in mainland UAE or in the DIFC/ADGM. Here, questions may arise as to which law governs the netting determination, which court has jurisdiction to resolve disputes, and how insolvency proceedings will interact. The prudent approach requires market participants to stipulate both governing law and jurisdiction in the master netting agreement while treating collateral in a manner consistent with the specific framework chosen by the counterparties.

Qatar

When moving to Qatar, the picture becomes murkier for market participants dealing with Qatari counterparties as unlike the UAE and KSA, the country lacks a dedicated onshore statutory framework for close-out netting arrangements. This does not automatically nullify netting arrangements entered into with Qatari counterparties, however it renders the enforceability of any existing arrangements to general principles of contract law and the specific terms of the agreement. 

Here, the usual features present in an insolvency regime, namely automatic stay, clawback rules and the trustee’s power to challenge pre-bankruptcy transactions remain fully applicable with a high likelihood of disrupting and overriding the enforceability of a legally binding master agreement between two parties. Additionally, when it comes to entering into derivatives or securities lending transactions with a Qatari bank, the counterparty will find that Qatari banks assign a higher charge to that exposure than would be the case for an equivalent KSA or UAE counterparty. The absence of a netting law makes financial transactions more expensive for counterparties due to capital charge requirements.

However, if a party’s ISDA agreement is governed by English law under the jurisdiction of the Qatar Financial Centre free zone (QFC), the party is arguably in a much safer position. The QFC has adopted its own netting regulations as of 2017 and recognises the enforceability of netting arrangements. The QFC similarly provides an expansive list of qualified financial instruments covering a broad range of modern financial transactions and Sharia compliant structures. Title transfer collateral arrangements are also protected by the QFC, eliminating the risk of recharacterisation. 

The fragmented regulation in Qatar currently affords the strongest protection to institutions dealing with QFC registered entities as there is no certainty that netting arrangements entered into with entities registered in mainland Qatar will be equally enforced under Qatari law in mainland courts.