IIFM launches profit rate swap standard
Bahrain, March 27, 2012
The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association, (Isda) have announced the launch of a profit rate swap product standard to be used for Islamic hedging purposes.
The IIFM is the global Islamic financial market’s organization focused on the Islamic Capital & Money Market (ICMM) segment of the Islamic Financial Services Industry (IFSI).
Isda/IIFM Mubadalatul Arbaah (MA) standard follows on from the “Isda/IIFM Tahawwut (Hedging) master agreement” and provides the industry with a framework for Islamic risk mitigation.
The launch of the MA as the template for Shari’ah-compliant risk management was officially announced at a press conference hosted by Central Bank of Bahrain 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,' said Khalid Hamad, the chairman of IIFM and executive director of Banking Supervision at CBB.
However, due to the inter-linkages with the global financial system, the balance sheet of IFIs are exposed to fluctuation in foreign currency rates and also cash flow mismatches due to fixed and floating reference rates, Hamad noted.
IIFM, he said, recognizes the importance of this critical segment at an early stage and undertook the challenge of developing global Islamic hedging standards in collaboration with Isda.
'I am confident that such joint efforts will continue in the future for the benefit of the industry,' he added.
Isda CEO Robert G. Pickel said the association was pleased to continue its partnership with the IIFM as part of its own on-going efforts and commitment to building safe and efficient OTC hedging markets, across both global and Islamic financial markets.
“The agreement was a major milestone in the development of risk management in Islamic finance and the development of the ISDA/IIFM confirmation templates for Islamic Profit Rate Swaps is a natural step in the evolution and development of the market,” he noted.
The MA agreement is a mechanism structured to allow bilateral exchange of profit streams from fixed rate to floating rate or vice versa.
The documentation provides product schedules based on two separate structures for transacting MA to mitigate cash flow risk.
The MA standard documentation has been developed under the guidance and approval of the IIFM shari’ah advisory panel, in co-ordination with the external legal counsel Clifford Chance as well as market participants globally.
“The MA standard has given to the industry access to a robust and well developed product documentation under the agreement to manage 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 hedging will also increase,” said Ijlal A Alvi, IIFM chief executive officer.
Dr Ahmad Rufai, IIFM Shari'ah head said, “IIFM has taken a lead in preparing Islamic Financial Product and Documentation Standards for specific areas of the industry to provide best practices and clarity for sound business activities.”-TradeArabia News Service