gif Investment
A Breakthrough in Islamic Finance – Tahawwut
Author: Andre Jackson
The launch of the Tahawwut (Hedging) Master Agreement (TMA) earlier in March 2010 by the Bahrain-based International Islamic Financial Market (IIFM) in cooperation with the International Swaps and Derivatives As- sociation, Inc. (ISDA) gives the global Islamic financial industry the ability to trade Shariah-compliant hedg- ing transactions such as profit-rate and currency swaps, which are estimated to represent most of today’s Islamic hedging transactions.
While Ijlal Ahmed Alvi, the CEO of IIFM, hails the TMA as “a breakthrough in Islamic fi- nance and risk management, and marks the introduction of the first globally standard- ized documentation for privately nego- tiated Islamic hedging products,” it may be wise to remember that it re- mains a financial industry frame- work document that may be used on a voluntary adoption basis, as almost all standards issued by various relevant internation- al bodies such as IIFM, AAOIFI (Accounting and Auditing Or- ganization for Islamic Financial Institutions) and the IFSB (Is- lamic Financial Services Board) in the Islamic finance space.
As such, it is premature to sug- gest that the Tahawwut Master Agreement “is applicable across all jurisdictions where Islamic finance is practiced” because it would be subject to the vagaries of the legal and political governance process in various jurisdiction. Voluntary adoption of standards in the finan- cial sector by Muslims countries is very underdeveloped and very often national practice takes precedence over the less well-established international organiza- tions especially in the nascent Islamic fi- nance space. In addition, in markets such as Malaysia, they have developed local Shariah-compliant hedging techniques including profit-rate and currency swaps quite some time ago.
As such, as Dean Naumowicz of the London-based international law firm Nor- ton Rose points out, “parties wishing to transact under the (Tahawwut) Master Agreement will still be required to develop confirmations to document transactions. In addition, where parties intend to enter into designated future transactions, documents (each a DFT Terms Agreement) will need to be developed in order to bind the parties to enter into, and to give a value to, designated future transactions.”
64 GlobalIslamic Finance June 2010
Agreement, each party issues an undertak- ing to enter into a contract in the future for the sale of assets following the designation of an early termination date. The party to whom the relevant index amount is due may exercise the wad (promise) given in its favour and sell pre-agreed as- sets in exchange for the cost price of such assets and the relevant index amount. If, in breach of the wad it has issued, a party fails to purchase the assets under a Musawama, liquidated damages are determined and payable. The Tahawwut Master Agreement is also similar in some respects to the 2002 or 1992 ISDA Master
Agreement, a conventional hedg- ing framework agreement govern- ing the contractual relationship be-
tween the parties, with transactions documented by way of confirmations. But while ISDA represents participants in
There are also a number of similarities between the Ta- hawwut Master Agreement
and the 2002 and 1992 ISDA Master
Agreements. In fact, some of the provi- sions in the original Tahawwut Master Agreement had to be amended to bring them more in line with the 2002 and 1992 ISDA Master Agreements
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Under Shariah principles, the Tahawwut or hedge must be strictly linked to underlying transactions and cannot be a transaction that has the sole purpose of making mon- ey from money. From a Shariah structure point of view, in entering into the Tahawwut
the privately negotiated global derivatives industry, with members including most of the world’s major institutions that deal in privately negotiated derivatives, as well as many corporates, governmental entities and other end-users that rely on over- the-counter derivatives to manage effi- ciently the financial market risks inherent in their core economic activities, IIFM is an organization steeped in the politics of Islamic finance, especially between Bah- rain and Malaysia, arguably the two most developed Islamic finance markets in the world.
After two false starts in which the very ethos of the organization was confused and questioned, IIFM under the steward- ship of Alvi, reinvented itself emerging with a primary focus on the standardiza-
tion of Islamic products, documentation and related processes, and better resourced than previously.
The lack of hedging products for managing risks has put many investors and institutions involved in Islamic finance at a dis
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