By Simon Miller
The International Swaps and Derivatives Association (Isda) has launched a standard for Islamic derivatives.
In co-operation with the International Islamic Financial Market (IIFM), Isda has developed the Isda/IIFM Mubadalatul Arbaah (Profit Rate Swap) product standard.
The standard follows on two years after the Tahawwut Master Agreement - a template for the management of cash flow, allowed for the hedging of risk for various Islamic capital market instruments such as the Shari’ah compliant Sukuk bonds.
Although Islamic financial institutions have largely shown resiliance in the current finanical environment there were fears that due to the inter-linkages with the global finance system, the balance sheets were exposed to fluctuation in foreign currency rates and also cash flow mismatches due to fixed and floating reference rates.
The Mubadalatul Arbaah (MA) allows 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 coordination with the external legal counsel Clifford Chance LLP 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 Tahawwut Master 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, CEO of IIFM.