The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) has launched the ISDA/IIFM Tahawwut (Hedging) Master Agreement.
The agreement marks the introduction of the first globally standardized documentation for privately negotiated Islamic hedging products, and 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 todays Islamic hedging transactions.
According to International Financial Services London, Shariah-compliant assets has increased 35% to $951 billion between 2007 and 2008, a time where most financial sector revenues were heading south.
Given the growing nature of the Islamic finance industry, the institutions operating on Shariah 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 Shariah principles.
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 Shariah-compliant hedging instruments.
According to a joint statement from ISDA and IIFA, the agreement “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 Tahawwut Master Agreement make representations as to the fact that they enter into Shariah-compliant transactions only.”
ISDA and IIFM is also in contact with various regulators in a number of Islamic jurisdictions, such as the Gulf Cooperation Council region, namely UAE, Bahrain and Qatar, plus Pakistan to improve the local legal framework for hedging products and close-out netting provisioning.