gif Market Review
ISLAMIC BENCHMARK STANDARD SET FOR HEDGING
Source:
GlobalIslamicFinanceMagazine.com
The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) have launched the ISDA/IIFM Mubadalatul Arbaah (Profit Rate Swap) prod- uct standard to be used for Islamic hedging pur- poses.
The Mubadalatul Arbaah (MA) standard follows on from the ISDA/IIFM Ta- hawwut (Hedging) Master Agreement and provides the industry with a frame- work for Islamic risk miti- gation.
The launch of the Tahaw- wut Master Agreement as the template for Shariah- compliant risk manage- ment was officially an- nounced by Central Bank of Bahrain (CBB) in March 2010. “Islamic Financial Institutions (IFIs) have largely shown resilience in the current difficult financial environment and some are even going through an expansion phase,” IIFM chairman and CBB executive director of banking supervision Khalid Ha- mad said.
“However, due to the inter-linkages with the global financial system, the balance sheet of IFIs are exposed to fluctuation in foreign cur- rency rates and also cash flow mismatches due to fixed and floating reference rates. “IIFM recognises the importance of this critical segment at an early stage and un- dertook the challenge of developing global
54 Global Islamic Finance May 2012
The MA Agreement is a mechanism structured to allow bilateral exchange of profit streams from fixed rate to floating rate or vice-versa. The docu- mentation provides prod- uct schedules based on two separate structures for transacting MA to miti- gate cash flow risk.
The MA standard docu- mentation has been de- veloped under the guid- ance and approval of the IIFM Sharia Advisory Pan- el, in co-ordination with the external legal counsel Clifford Chance as well as market participants glo- bally.
Islamic hedging standards in collaboration with ISDA. “I am confident that such joint ef- forts will continue in the future for the ben- efit of the industry,” he said.“ISDA is pleased to continue its partnership with the IIFM as part of its own on-going efforts and commit- ment to building safe and efficient OTC hedg- ing markets, across both global and Islamic financial markets” said ISDA chief executive Robert G Pickel.
“The ISDA/IIFM Tahawwut Master Agree- ment was a major milestone in the develop- ment of risk management in Islamic finance and the development of the ISDA/IIFM con- firmation templates for Islamic Profit Rate Swaps is a natural step in the evolution and development of the market,” he said.
“The MA Standard has given to the industry ac- cess to a robust and well
developed product documentation under the Tahawwut Master Agreement to man- age cash flow risk for various Islamic Capital Market instruments such as sukuk which has seen increasing number of fixed profit rate issuances in the last few years and as the sukuk market grows, the need for hedg- ing will also increase,” said IIFM chief execu- tive Ijlal A Alvi.
“IIFM has taken a lead in preparing Islamic financial product and documentation stand- ards for specific areas of the industry to provide best practices and clarity for sound business activities,” said IIFM Sharia head Dr Ahmad Rufai.
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