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advantage. The global financial crisis has underscored the importance of sound risk management, primarily related to hedging transactions. Similarly, the lack of standard- ized documentation has often meant that transactions in the Islamic finance industry were faced with delays in their execution. The Tahawwut Master Agreement has other potentially wide-reaching implications. Ac- cording to Azizan Abdul Rahman, director general, Labuan Financial Services Authority (Labuan FSA), the Malaysian offshore regu- lator, the Tahawwut Master Agreement pro- vides the needed consistency and predicta- bility to ensure deep and liquid international Islamic financial markets and is a testament to the greater convergence in Shariah inter- pretations in the global industry.
Similarly, industry players such as Afaq Khan, CEO, Standard Char- tered Saadiq, stress that the TMA will allow Islamic banks to offer end- to-end solutions to their customers and will allow better treasury risk management tools for Islamic fi- nancial institutions to competitively manage market risks.According to Norton Rose, the Tahawwut Master Agreement permits “parties to enter into transactions which may be doc- umented immediately (each a trans- action) as well as transactions due to occur in the future (designated future transactions). Using transac- tions and designated future trans- actions, parties are able to create cash flows similar to the cash flows created in conventional derivatives products.”
Master Agreement, but have been extended to apply to designated future transactions. IIFM stresses that though the structure of the Tahawwut Master Agreement document is similar to the conventional ISDA Master Agreements, the key mechanisms and pro- visioning such as early termination events, closeout and netting are developed based on Shariah principles. It is designed to be used between two principal counterparties as a master agreement. Parties understand that no interest shall be payable or receiva- ble and no settlement based on valuation or without tangible assets is allowed. Moreover, the counterparties to the Tahawwut Master Agreement make representations as to the fact that they enter into Shariah-compliant transactions only.
Volun- tary adop- tion of standards in the financial sec-
of the agreement, especially in the case of a non-Muslim party in a transaction which may wish to exclude the representation that a party is only obliged to confirm that the transaction is Shariah-compliant as far as it wishes or is required to do so. There are also disclaimers throughout the Tahawwut Mas- ter Agreement that there is no guarantee of Shariah compliance for any amendments or additions to the agreement or related underlying transaction documents. Another area for potential concern is the election of New York law or English law as the governing secular law for the Tahawwut Master Agree- ment. Under English law, as several of the cases involving Islamic financial institutions and their clients have shown, it is for each party to satisfy themselves that the substan- tive terms of the underlying contract comply with Shariah principles. This Eng- lish court approach prevents par- ties introducing Shariah principles to avoid the contract they observe.
tor by Muslim countries is very un- derdeveloped 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
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There are also a number of similari- ties between the Tahawwut Master Agreement and the 2002 and 1992 ISDA Master Agreements. In fact, some of the provisions in the original Tahawwut Master Agreement had to be amended to bring them more in line with the 2002 and 1992 ISDA Master Agreements. According to Norton Rose, these include: i) condition precedent -- where the Tahawwut Master Agreement retains the right of a party to withhold payments and deliveries if an event of default or a potential event of default has occurred with respect to the other party; ii) payments in the same currency, due on the same date in respect of the same transac- tion will automatically be netted with the ability to opt for multiple transaction pay- ment netting; iii) The scope of the set-off provisions in the Tahawwut Master Agree- ment were amended to allow such amounts to be capable of being set off in a similar way as under the 2002 or 1992 ISDA Mas- ter Agreement; iv) the events set out in the Tahawwut Master Agreement are very simi- lar to those contained in the ISDA 2002
66 GlobalIslamic Finance June 2010
Indeed, according to Alvi, “a record 24 drafts were developed during the industry consul- tation and Shariah guidance process before ultimately reaching the final version, which is comprehensive as well as practical in terms of usage with no compromise to Sha- riah principles.” However, another London- based international law firm, K & L Gates, while stressing the Tahawwut Master Agree- ment as “a step forward in demystifying the Islamic finance and investment market by using an accepted market document as the basis for a new standard,” agrees that the agreement’s use will need to be monitored on an ongoing basis, and predicts that is- sues will arise in its application which will need to be carefully considered. Indeed, Jonathan Lawrence and his colleagues Stephen H. Moller and Anthony R.G. Nolan at K & L Gates stress that a number of clarifi- cations are needed regarding the Tahawwut Master Agreement especially with reference to the caveats as to the Shariah compliance
The Tahawwut Master Agreement also rigorously eliminates provi- sions for payment of interest. How- ever, according to K & L Gates, it is not clear how the time value of money is addressed in situations contemplated by the agreement where amounts may be deferred. These issues related to the removal of interest will need further ex- amination by parties and in-house counsel to determine whether the economics of a transaction will be distorted on early termination or otherwise. They also raise points of ambiguity including relating to net- ting of transactions and Relevant Index Amounts under DFT, since the netting of future transactions is not covered (except in a footnote
that contemplates that parties may provide for similar netting in those agreements); the replacement of “transfer” with “re-designa- tion” in the Tahawwut Master Agreement may create ambiguity as to whether “re-des- ignation of rights and obligations” implies the ability of the affected party to change substantive rights in connection with chang- ing the obligor office; the replacement of the definition of close out amount that ap- pears in the 2002 Master Agreement with a very brief definition; the removal of credit- worthiness in determining quotations, which could distort the economics of a transaction on early termination or otherwise; the lack of Shariah board approval for transactions; and basis risk concerns, because it may re- main to be seen how the Tahawwut Master Agreement will coexist with other forms to the extent that counterparties may hedge exposure there under by entering into mas- ter agreements with differing terms.
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