ISDA and IIFM launch Islamic hedging master agreement

The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association, (ISDA) launched the ISDA/IIFM Tahawwut (Hedging) Master Agreement on March 1th, 2010. The development is a breakthrough in Islamic finance and risk management, and marks the introduction of the first globally standardized documentation for privately negotiated Islamic hedging products. The Master Agreement is the first financial industry framework document that is applicable across all jurisdictions where Islamic finance is practiced.  

The Master Agreement provides the structure under which institutions can transact Islamic hedging transactions such as profit-rate and currency swaps, which are estimated to represent most of today’s Islamic hedging transactions. It is designed to be used between two principal counterparties as a master agreement. Parties understand that no interest shall be pay­able or receivable and no settlement based on valuation or without tangible assets is allowed. Moreover, the counterparties to the Master Agreement make representations as to the fact that they enter into Shari’ah-compliant transactions only. It is a completely new framework document though the structure of the document is similar to the conventional ISDA Master Agreement. However, the key mechanisms and provisioning such as early termination events, closeout and netting are developed based on the Islamic Shari’ah principles.

“Given the growing nature of the Islamic finance industry, the institutions operating on Shari’ah principles can no longer afford to leave their positions un-hedged”, said Khalid Hamad, Chairman of IIFM and Executive Director of Banking Supervision at Central Bank of Bahrain. “Hence, some key hedging products are now becoming common across jurisdictions to mitigate risk. The ISDA/IIFM Tahawwut Master Agreement gives the industry access to a truly global framework document which is neutral in terms of treatment to both the transacting parties and at the same time strictly conforms to Shari’ah principles. IIFM is honored to have achieved this milestone in collaboration with ISDA and I am confident that such joint efforts will continue in the future.”

 “Demand for customized, privately negotiated hedging tools that conform to the principles of Islamic finance has increased in momentum”. said Eraj Shirvani, Chairman of ISDA and Managing Director, Head of Fixed Income for the EMEA Region, Credit Suisse. “The Tahawwut Master Agreement provides the critical framework for the growth and evolution of Shari’ah-compliant hedging instruments.” 

BAHRAIN, March 1, 2010 

WWW.TREASURYANDFINANCE.INFO

Source: International Swaps and Derivatives Association (ISDA), www.isda.org


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