Brief on IIFM Standards

IIFM Standards 8 and 9

ISDA/IIFM Wiqayah Min Taqallub As’aar Assarf (Islamic Foreign Exchange Forward)

The IFX Forward standard product templates were published on 6th June 2016 and this is the third hedging product template under the TMA. The objective of IFX Forward is to minimize exposure of Islamic financial institutions to currency rate which is volatile and fluctuating.

Two versions of the IFX standard confirmations have been published as follows:

Single Wa’ad Structure - where only one party is the buyer who grants the Wa’ad in favor of the other party.
Two Wa’ad Structure - where each of the parties grants a unilateral Wa’ad in favor of the other party, and a party’s right to exercise the other party’s Wa’ad is subject to an exercise condition being satisfied on the exercise date. Each Wa’ad carries different trigger condition and therefore do not constitute a contract.

The availability of both versions of the IFX standard confirmations is in response to Shari’ah preferences by some market participants for each party’s Wa’ad to be separately documented, as well as a reflection of the existing use of single Wa’ad structures by other market participants.

IIFM Standard 7:

ISDA/IIFM Islamic Cross Currency Swap (Himaayah Min Taqallub As‘aar Assarf) Standard Product Template  

The ICRCS standard template was published on 26th November 2015 as the second hedging product template under the TMA. With ICRCS the Islamic financial institutions can manage risk in transactions exposed to fluctuations in currencies and rate-of-return mismatches.

The ICRCS standard template also includes a product description for guidance purposes.

IIFM Standard 6:

IIFM Master Collateralized Murabahah Agreement

The MCMA was published on 16th November 2014 and it provides a mechanism for access to liquidity on a collateralized basis (based on the Shariah principle of Ar’rahn) utilizing Sukuk and other Islamic securities portfolio as collateral. It is an important new tool for Islamic financial institutions as they seek to address the increased global regulatory focus on liquidity and collateral.

Collateralized transactions based on Murabahah provide a level playing field to Islamic financial institutions by giving them option to tap funds from central banks in case of liquidity short-fall. 

The MCMA is accompanied by an operational guidance memorandum which covers the operational procedures which may be implemented by potential users of the MCMA.

IIFM Standard 5:

IIFM Inter-Bank Unrestricted Master Investment Wakalah Agreement

Published on 3rd June 2013, the inter-bank UMWA has being specifically designed to provide alternate liquidity management product to the Islamic finance industry in order to reduce over reliance on commodity Murabahah based transactions.

The important features of this standard documentation is Wakil’s discretion to invest the funds, use of general treasury pool (segregated and un-segregated asset pool), anticipated profit, early termination, replacement of asset, on-balance sheet accounting assessment etc.,

The Unrestricted Wakalah standard includes a detailed operational guidance memorandum on the mechanics of this agreement as well as how it should be applied by the transacting parties. In addition, the operational guidance memo also provides valuable recommendations to be taken into the consideration at the time of entering into unrestricted Wakalah investment transactions.

IIFM Standard 4 and IIFM Standard 3:

ISDA/IIFM Islamic Profit Rate Swap (Mubadalatul Arbaah) Standard Product Templates

In March 2012, in its efforts to accelerate the use of TMA, IIFM and ISDA jointly published the first hedging product template. The IPRS provides the industry access to robust and well developed product documentation under the TMA. It provides protection to Islamic financial institutions balance-sheet from wide swings in fixed and floating profit rates as well as enabling them to manage their cash-flow risk for various Islamic capital market instruments such as Sukuk.

Two sets of IPRS templates (four standard schedules in total) have been published, as follows:

  • One set of IPRS templates that are Wa’ad based and involve a Two Sales structure
  • Another set of IPRS template that are Wa’ad based and involve a Single Sale structure

The IPRS standard templates also include a product description for guidance purposes.

IIFM Standard 2:

ISDA/IIFM Tahawwut (Hedging) Master Agreement

In March 2010, the Tahawwut Master Agreement (TMA) was jointly published by IIFM and ISDA and marked the introduction of the first globally standardized documentation for OTC Islamic hedging products. TMA is a framework document that provides a globally standardized early termination and close-out mechanism and other legal and Shariah provisions for privately negotiated and widely accepted Islamic hedging products. The master agreement is designed to facilitate the risk management function of Islamic financial institutions including providing a legal framework. Under the TMA, Islamic hedging products can be transacted.

In order to provide clarity and transparency the TMA also includes an Explanatory Memorandum.

IIFM Standard 1:

IIFM Master Agreements for Treasury Placement

This was the first ever global standard documentation published in Islamic finance for liquidity management purpose. The Master Agreements for Treasury Placement (MATP) comprises of standalone Master Murabahah Agreement and a Master Agency Agreement. The standard documentation involves Commodity Murabahah based on two structures namely: (i) Commodity Murabahah under Agency Agreement, and (ii) Commodity Murabahah based Principle to Principle.

The Agreement was published in 2008 and based on IIFM recent survey MATP is widely used in Islamic inter-bank market particularly involving cross border trades.