The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) have joined hands to launch the ISDA/IIFM Tahawwut (Hedging) Master Agreement.

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 agreement is the first financial industry framework document that is applicable across all jurisdictions where Islamic finance is practiced, said a IIFM statement.

The Tahawwut Master Agreement was officially announced at a launch event in Bahrain hosted by IIFM and ISDA under the patronage of Rasheed Mohammed Al Maraj, Governor, Central Bank of Bahrain.

IIFM and ISDA jointly developed the Tahawwut documentation under the guidance and approval of the IIFM Shari’ah advisory panel for this project and in consultation with market participants.

The published document consists of the Tahawwut Master Agreement and an Explanatory Memorandum, both of which are part of the official Shari’ah Pronouncement, said a top official.

“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 CBB.

“Hence, some key hedging products are now becoming common across jurisdictions to mitigate risk. The 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," he explained.

"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," he added.

Eraj Shirvani, chairman of ISDA and managing director, head of Fixed Income for the EMEA Region, Credit Suisse, said the demand for customized, privately negotiated hedging tools that conform to the principles of Islamic finance has increased in momentum.

“The Tahawwut Master Agreement provides the critical framework for the growth and evolution of Shari’ah-compliant hedging instruments,” he added.

The ISDA/IIFM Tahawwut 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 pay¬able 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 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.

“Standardization is a key element in the progress of Islamic finance though it is not a simple process as evident from the efforts put in to the development of this master agreement,” said Ijlal Ahmed Alvi, chief executive officer of IIFM.

"A record number of drafts - 24 drafts – were developed during the industry consultation and Shari’ah guidance process before ultimately reaching the final version, which is comprehensive as well as practical in terms of usage with no compromise to Shari’ah principles," he added.

“ISDA is pleased to have partnered with the IIFM as part of its own on-going efforts to promote prudent risk management and to support the efficient development of privately negotiated hedging products,” said Robert Pickel, executive vice chairman, ISDA.

"The Tahawwut Master Agreement represents a major milestone in the development of risk management in Islamic finance,” he added.

Dr Ahmad Rufai, IIFM Shari'ah head said the IIFM had taken a lead in preparing Shari'ah complaint Master Agreements for specific areas of Islamic finance, which a number of financial institutions globally have recognized and adopted in order to avoid misunderstanding, uncertainty, and confusion; and also to seek clarity and sound business activities.

"The adoption of these agreements will pave the way not only for Shari'ah compliance but also product innovation," he added.-TradeArabia News Service