ISDA/IIFM Islamic Cross-Currency Swap (ICRCS)

Key Features

1. Templates are a pair of Wa’ad-based documents involving a “two sales” structure, whereby each party can exercise the other party’s Wa’ad on a payment date, generally leading to sales and purchases of assets across both Wa’ads on a given payment date.
First Leg (Party A as Buyer)
Second Leg (Party B as Buyer).

2. Two legs of an ICRCS: The ICRCS templates comprise two DFT Terms confirmations, one relating to Party A’s payment (and asset purchase) leg of an ICRCS; the other relating to Party B’s payment (and asset purchase) leg of an ICRCS

3. Use of Wa’ad leading to Murabaha Sale: The ICRCS templates use a Wa’ad (or undertaking) structure.

4. Two Sales Structure: Two Murabahah Sales will be entered into between the parties; one in relation to Party A’s payment leg and one in relation to Party B’s payment leg. Accordingly, there will be two asset flows and two cash-flows between the parties in relation to each Calculation Period.

5. Profit Types for Murabaha Sales: Templates allow the parties to make an initial exchange of a fixed amount of one currency against a fixed amount of the second currency at the start of an ICRCS. With a further final exchange of a fixed amount of that currency against a fixed amount of the second currency at a later date (such as upon maturity or an early termination date).

6. Related confirmations/legs: For the purposes of linking the two payments which are made in the currency swap, the DFT Terms confirmation for one leg of a ICRCS should identify the DFT Terms confirmation for the other leg as being related to it, as a “Related DFT Terms confirmation”.

Objective

To enables Islamic financial institutions and other market participants to manage risk in transactions exposed to fluctuations in currencies and rate-of-return mismatches.

Year of Publication 2015 Under TMA

Use: Reasonably used in Islamic inter-bank market as per the IIFM recent survey, as well as the gathered information during personal meetings by the IIFM secretariat with banks and financial institutions globally.

Further features & clarification: The DFT Islamic cross-currency swap (“ICRCS”) implemented through arrangements whereby each party simultaneously grants to the other party a Wa‘ad (undertaking) to purchase Shari ‘ah compliant assets from such other party on one or more specified future dates on the basis of Murabahah transactions to be entered into on each exercise of the Wa‘ad by such other party and where the purchase price payable in respect of such Murabahah transaction is to be determined on the basis of the cost price of the purchased Shari ‘ah compliant assets plus a profit amount, with the purchase price payable by one party being denominated in one of the two currencies the subject of such Islamic cross-currency swap and the purchase price payable by the other party being denominated in the other of the two currencies the subject of such Islamic cross-currency swap. This DFT Terms confirmation contains a Wa‘ad granted by Party A to Party B. Under a Related DFT Terms Agreement, Party B grants a Wa‘ad to Party A. This DFT Terms Agreement and the Related DFT Terms Agreement together form an Islamic Cross Currency Swap. A Murabahah Sale entered into between the parties constitutes a Transaction under the TMA. The mechanics of the Murabahah Sale are set out in Paragraph 11 of each template DFT Terms confirmation, with Annex 2 providing an agreed form of Murabahah Asset Sale Confirmation to evidence and contain the operative provisions of the Murabahah Sale.