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In its efforts to accelerate the use of TMA, in March 2012, IIFM and ISDA published the Islamic Profit Rate Swap (IPRS) as the first standard Islamic 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 schedules in total) have been published based on the following structures:
i. One set of IPRS templates involving Two Sales Wa’ad Structure where each party 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 a different trigger condition and therefore does not constitute a contract.
ii. Another set of IPRS templates that involve Single Sale Wa’ad Structure where only one party who is the buyer grants the Wa’ad in favor of the other party.
The availability of both versions of the IPRS standards 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 use of single Wa’ad structure by some market participants.
The IPRS standard templates also include a product description for guidance purposes.
1. First Standard Islamic Hedging Product Template:
It is first standard Islamic hedging product template that provides the industry access to robust and well developed product documentation under the TMA.
Two Sets of Template Documents:
It consists of two sets of template documents and two different structures (four schedules in total) for the:
Fixed Profit Rate leg and Floating Profit Rate leg.
2. PRS two structures as follows:
(a) Two Sales Wa’ad Structure: Where each party grants a unilateral Wa’ad in favour 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 a different trigger condition and therefore does not constitute a contract. There will be two asset flows and two cash-flows between the parties in relation to each Calculation Period for the PRS.
(b) Single Sale Wa’ad Structure: Where only one party who is the buyer grants the Wa’ad in favour of the other party.
Each party’s Wa’ad is documented separately.
3. Use of Wa’ad leading to Murabahah Sale to generate the cash-flow.
The mechanics of the Murabahah Sale are set out in Paragraph 11 of each template DFT Terms confirmation.
To 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.
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: Two Sales Structure PRS: With a Two Sales Structure PRS, for each Calculation Period in relation to the PRS, the two Wa’ads set out in the DFT Terms confirmations for the Fixed Profit Rate leg and for the Floating Profit Rate leg, respectively, will be exercisable and exercised against the undertaking party (i.e. the Buyer) by the exercising party (the Seller). Therefore, two Murabahah Sales will be entered into between the parties; one in relation to the Fixed Profit Rate leg and one in relation to the Floating Profit Rate leg. Accordingly, there will be two asset flows and two cash-flows between the parties in relation to each Calculation Period for the PRS. While two-way cash-flows which are matured payment obligations becoming due on the same day, in the same currency and between the same parties may be set-off against each other, the asset flows may not. Purchased assets should always be delivered.
Single Sale Structure PRS: With a Single Sale Structure PRS, for each Calculation Period in relation to the PRS, only one of the two Wa’ads set out in the DFT Terms confirmations for the Fixed Profit Rate leg and for the Floating Profit Rate leg, respectively, will be exercisable against the undertaking party (i.e. the Buyer) by the exercising party (the Seller), depending on whether or not a specified condition to exercise (the Exercise Condition) is met in relation to a Calculation Period. The Exercise Condition is that the Profit in relation to a Calculation Period is greater than zero. The Profit is calculated by a Calculation Agent by reference to a calculation formula. Ordinarily with a fixed/floating PRS, if the Profit under one leg is positive (i.e. greater than zero) the Profit under the other leg will be negative, so leaving only one Wa’ad (the one with the positive Profit) to be exercised. In respect of each Calculation Period, the Exercise Condition will be met in relation to only one leg of the PRS. Therefore, only one of the two Wa’ads will be exercisable, and one Murabaha Sale will be entered into between the parties, either in relation to the Fixed Profit Rate leg or in relation to the Floating Profit Rate leg. Accordingly, there will be only one asset-flow and one cash-flow between the parties in relation to each Calculation Period for the PRS.
Note: The website is being updated, please contact us on info@iifm.net for document access.