The International Swaps and Derivatives Association (ISDA) and the International Islamic Financial Market (IIFM) today signed a Memorandum of Understanding as a basis for developing a master agreement for documenting privately negotiated Shari’ah compliant derivatives transactions.
ISDA and IIFM aim for the agreement to be accepted by Shari’ah advisors and to become a standard document used for Shari’ah compliant privately negotiated derivatives in Gulf Cooperative Council member states and beyond. As part of this understanding, ISDA and IIFM have formed a joint working group open to members of both organizations, which will meet every four to six weeks. IIFM’s Shari’ah Supervisory Committee will be charged with evaluating the Shari’ah compliance of the master agreement.
Unlike their conventional counterparts, Islamic financial institutions (IFIs) have at their disposal a limited range of ‘allowed’ investment instruments, particularly hedging instruments, a key use of derivatives. This constraint has hindered the development of an efficient and active Islamic financial market. The limited risk management options available to IFIs makes them less competitive and, most importantly, affects their profitability.
“The potential market for Shari’ah compliant derivatives is a new and exciting area for ISDA and its membership,” said Robert Pickel, Chief Executive Officer and Executive Director of ISDA. “We look forward to addressing the unique set of challenges and opportunities in documenting these transactions and are delighted to be working closely with IIFM to this end.”
“The development of a Shari’ah compliant contract for derivatives will revolutionize the global Islamic financial market,” said Mr. Ijlal Alvi, Chief Executive Officer of IIFM. “The use of well structured risk management derivatives products will open up a whole new horizon of investment opportunities to IFIs, enabling them to manage their risk in a more efficient and effective manner. It will also take the Islamic financial market to a higher level of sophistication.”
IIFM intends to seek endorsement from regulatory authorities of different financial jurisdictions, particularly those from which IFIs operate.
“This is a significant undertaking,” said Mr. Pickel. “IIFM’s unparalleled expertise in the region will be vital to attaining recognition and acceptance of the new document.”
“IIFM’s host regulator, the Bahrain Monetary Agency (BMA), has been extremely encouraging of our efforts in this regard and we are confident of BMA’s support as we advance our work in the area of standardization for the global Islamic financial services industry,” said Mr. Alvi. “IIFM is delighted to have the opportunity of working with ISDA as the leading standard-setter in the area of financial derivatives.
The agreement to be developed by the two associations will be subject to copyright of ISDA and IIFM.
About ISDA
ISDA, which represents participants in the privately negotiated derivatives industry, is the largest global financial trade association, by number of member firms. ISDA was chartered in 1985, and today has over 725 member institutions from 50 countries on six continents. These members include most of the world's major institutions that deal in privately negotiated derivatives, as well as many of the businesses, governmental entities and other end users that rely on over-the-counter derivatives to manage efficiently the financial market risks inherent in their core economic activities. Information about ISDA and its activities is available on the Association's website: www.isda.org
About IIFM
IIFM is an international non-profit infrastructure institution, headquartered in the Kingdom of Bahrain and founded with the collective efforts of the central banks and monetary agencies of Bahrain, Brunei, Indonesia, Malaysia, Sudan and Islamic Development Bank based in Saudi Arabia. IIFM’s task lies in the development of the global primary Islamic capital and short term financial market and, subsequently, creation of a secondary market for Islamic financial instruments. IIFM is also focused on the advancement and standardization of Islamic financial instrument structures and contracts, infrastructure and product development, issuance of guidelines and enhancing co-operative framework among Islamic financial institutions. For more information about the IIFM, please visit the IIFM website at www.iifm.net
® ISDA is a registered trademark of the International Swaps & Derivatives Association, Inc.
