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Wednesday, 3 March 2010

ISDA, IIFM Set Global Islamic Derivatives Standards

March 1 (Bloomberg) -- Global standards for Islamic derivatives published today will help Shariah-compliant borrowers and investors manage risk more effectively, according to the industry bodies that spent four years preparing them.

The ‘Hedging Master Agreement’ provides a structure under which institutions can trade derivatives such as profit-rate and currency swaps, the Bahrain-based International Islamic Financial Market and New York-based International Swaps and Derivatives Association said in a joint statement.

“Given the growing nature of the Islamic finance industry, institutions operating on Shariah principles can no longer afford to leave their positions unhedged,” IIFM Chairman Khalid Hamad said in the statement. The master agreement “gives the industry access to a truly global framework” that is approved by recognized scholars of Islamic law.

Islamic finance is the fastest-growing segment of the global financial system and sales of Islamic bonds may rise by 24 percent to $25 billion this year, CIMB Group Holdings Bhd., the top underwriter last year, said on Feb. 3. Demand for financial products that comply with Shariah is rising as the wealth of the world’s 1.6 billion Muslims increases, spurred by Gulf Arab oil earnings and export-led Asian economic growth.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Because Shariah prohibits payment or receipt of interest, speculation and uncertainty, many Islamic investors avoid the contracts.

Compliance Vetting

To ensure compliance with Shariah, new Islamic financial products must be vetted and approved by recognized scholars who are versed in its principles. The IIFM is advised by a panel that includes Sheikh Nizam Yaquby and Mohammed Daud Bakar, its Web site shows.

While the structure of the master agreement is “similar” to the ISDA’s rules for conventional derivatives transactions, counterparties using the new standards will “understand that no interest shall be payable or receivable and no settlement based on valuation or without tangible assets is allowed,” according to today’s statement.

The ISDA, which represents more than 810 organizations active in the derivatives market, is also working with the IIFM and countries including Pakistan, the United Arab Emirates, Indonesia and Malaysia to improve legal frameworks for close-out netting provisioning, Executive Vice Chairman Robert Pickel said in a telephone interview.

“It’s to provide certainty that if you’re doing a transaction with a counterparty in, say, the U.A.E. or another country in the region, and that counterparty goes bankrupt, you’d be able to close out your position under the contract and then go to a bankruptcy court in U.A.E. to have your claim enforced,” he said.

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