The Tahawwut Master Agreement (TMA) was published in association with ISDA in March 2010 and marked the introduction of the first globally standardized documentation for OTC Islamic hedging products.
The TMA is a framework document that provides wider Shari’ah acceptability as well as innovation such as index based close-out mechanism, unilateral Wa’ad concept and other legal and Shari’ah provisions for privately negotiated and widely accepted Islamic hedging products. TMA s designed to provide a legal framework and to facilitate the risk management function of Islamic financial institutions and other financial institutions active in Islamic finance as well as corporate entities. Under the TMA, Islamic hedging products can be transacted.
In order to provide clarity and transparency the TMA also includes an Explanatory Memorandum.
The TMA has become the master agreement of choice and its use is increasing after publication of ISDA/IIFM standard product templates on Islamic Profit Rate Swap, Islamic Cross Currency Swap and Islamic Foreign Exchange Froward. Presently, the TMA has been implemented in Bahrain and Saudi Arabian markets due to regulatory support and institutions preference due to strong and well established documentation architecture.
Key Features
1. First ever globally standardized documentation for OTC Islamic hedging products.
2. Framework agreement: TMA is a master framework agreement that contains the general terms and conditions agreed between the parties and under which parties may enter into “Transactions” and/or “DFT Terms Agreements” relating to “Designated Future transactions”.
It is designed for use with Shari ’ah-compliant genuine hedging transactions that use Murabahah contracts based on Wa ‘ad or only single & two unilateral wa’ad .
Each time that a transaction is entered into, the terms of the TMA do not need to be re-negotiated and apply automatically.
3. Distinction: TMA draws a distinction between “Transactions” that have been entered into between the parties and “Designated Future transactions” that will or may be entered into between the parties in the future.
This is an important distinction which is key to the different close-out mechanisms which apply to these two types of arrangement.
TMA arrangements will be either: (a) Actual transactions (e.g. a Murabahah transaction through Confirmation), or (b) Undertakings (Wa ‘ad) or agreements to enter into a transaction in the future through DFT Terms confirmation (i.e. Designated Future transaction).
4. TMA contemplates two distinct sets of Wa’ad or undertaking.
One will be the Wa’ad to enter into Designated Future transactions.
The other is the Wa’ad to enter into a Musawamah upon the occurrence or effective designation of an Early Termination.
Objective
Designed to facilitate the risk management function of Islamic financial institutions including providing a legal framework
Year of publication 2010
Use: Widely 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: Musawamah concept is introduced as a last resort upon the occurrence or effective designation of an Early Termination event as a result of breach of the terms of the TMA. This Early Termination clause is the one through which net risk management is effected. It allows all Transactions and DFT Terms Agreements to be terminated. Broadly speaking, the Transactions (which are the concluded transactions) under which no deliveries remain to be made will be replaced by the obligation to pay an Early Termination Amount (See Sections 6(c)(ii) and 6(e)). In relation to the DFT Terms Agreements and Transactions under which deliveries remain to be made, the Relevant Index will be calculated and the wa’ad to enter into a musawama transaction will provide the mechanism for a net amount in respect of those DFT Terms Agreements and those Non-Fully Delivered Terminated Transactions to be paid (See Section 6(f)(v)). The intention is that where a payment is to be made by one party in respect of the concluded transactions and a payment is to be made by the other party in respect of the musawama entered into, those payments should be capable of being set off.
