Bahrain EDB hosts IIFM Consultation on Islamic Credit Support Arrangement

Manama, 20th October 2015:  The Bahrain Economic Development Board (EDB) hosted a Market Consultative Meeting on Islamic Credit Support Arrangement in association with the International Islamic Financial Markets (IIFM) and its Islamic hedging joint-partner International Swaps & Derivatives Association (ISDA) in the Kingdom of Bahrain.

Credit Support Arrangement (CSA) is one of the key documentations for risk management where counter-parties transactional risk is managed through collateral and margin maintenance mechanism. The Islamic CSA will be developed under the already published ISDA/IIFM Tahawwut Master Agreement for Islamic hedging transactions. There is a growing requirement from regulators for Islamic CSA in the GCC, Europe, Far East, North America & other regions. As the Islamic finance industry grows in scale, investors are increasingly taking larger positions, creating a requirement for mechanisms to manage that risk.

In accordance with the IIFM standard agreements development process, participants of consultative meeting  included Shari’ah scholars, regulators, banks, law firms, ISDA representatives and other market practitioners to provide guidance on technical, Shari’ah and legal issues to be tackled in the development of a standard Islamic CSA.

The main focus of the meeting was on the impact of new regulations from the Basel committee and other regulators on certain transactions’ clearing requirements and in case of un-cleared transactions, the requirement of additional collateral and margin maintenance. The participants discussed how, given the global expansion of Islamic banking, certain Islamic transactions may be impacted if proper arrangements and master agreements are not put in place.

The participants also explored various Shari’ah compliant alternatives which may be used to develop Islamic Credit Support Arrangement under the ISDA/IIFM Tahawwut Master Agreement, and how the arrangement needs to be efficient to cater for international law requirements of insolvency and close-out netting. The meeting has provided direction to IIFM to work on the development of Islamic CSA.  

Mr. Khalid Al Rumaihi, Chief Executive of the Bahrain EDB, commented:

“We are delighted to be playing a role in such a high profile consultative meeting. IIFM plays a vital role in the development of the industry not just here in Bahrain, but around the world and we firmly believe that what is good for the international Islamic finance industry is good for Bahrain.

“As the Islamic finance industry around the world continues to expand, it needs to evolve if it is to thrive in the future.  Enabling institutions to manage risk effectively is important in developing and growing the sector – and doing so in a way that does not compromise the stability of the financial sector.”

Mr. Ijlal Ahmed Alvi, Chief Executive of the IIFM said, “The expansion of Islamic finance industry across the globe has not only resulted in development of new segments such as risk mitigation or Islamic hedging ‘Tahawwut’ but has also resulted into new regulatory requirements such as Basel III and other regulators’ requirements of taking credit support/collateral including margin maintenance which is essential for certain transactions for all banks including Islamic financial institutions. The consultation on Islamic CSA and its subsequent standard development jointly by IIFM and ISDA will lead to another landmark achievement in creating a robust Islamic finance industry from the perspective of Shari’ah harmonization, market practices as well as creation of legal certainty i.e. law reforms”.

“IIFM is grateful to EDB for its support and thankful to all the attendees including Shari’ah scholars, regulators, banks, law firms, ISDA and other market practitioners from GCC, Europe, Far East, North America and other jurisdictions for their active participation in this initiative”, said Mr. Alvi.