The Islamic Foreign Exchange Forward (IFX Forward) standard product templates were published on 6th June 2016 and this is the third hedging product standard under the TMA. The objective of IFX Forward is to minimize currency rate volatility and fluctuation especially under present global economic uncertainties.
Two versions of the IFX standard confirmations have been published based on the following structures:
i. Single Binding Wa’ad Structure where only one party is the buyer who grants the Wa’ad in favor of the other party.
ii. Two Unilateral and Independent 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 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.
Key Features
1. IFX Forward templates: Are designed to be used for bilateral deliverable FX forward transactions subject to a TMA entered into between the parties.
Use of Wa’ad leading to a Transaction for the exchange of currencies.
In the Single Binding Wa’ad Structure: only one party is the buyer who grants the Wa’ad in favour of the other party.
No Murabahah is required or needed in this transaction.
2. Single Binding Wa’ad structure IFX: only the buyer grants a Wa’ad in favour of the seller party at the outset of a trade, The Buyer’s Wa’ad will be exercised by the Seller on a given exercise date through an exercise notice together with an offer.
3. Definitions: New terminology has been introduced to make the document more accessible to those parties who may not have a detailed knowledge of the terminology used in the hedging market, as well as those which are specific to the Wa’ad structure of the IFX product. (both version)
4. Footnote guidance: Extensive footnotes are included throughout the IFX templates to provide guidance to the parties (in particular in respect of the some important Shari’ah considerations) but these do not form part of the terms of the contract between the parties. (Both Ver)
5. Gharar: To provide certainty of subject matter the parties should agree and describe in detail the relevant Sale Transaction contemplated in each DFT Terms confirmation to an IFX trade at the outset of that IFX trade (i.e. by filling in the missing information – in particular the First Currency Amount, the Second Currency Amount and, for Two Wa’ad Structures, the Spot Rate and the Forward Rate – in the form of undertaking(s) of the template DFT Terms confirmation as part of the DFT Terms Agreement) and, prior to entry into a Sale Transaction, the Offer and Acceptance. (both Ver)
6. Other annexed pro-forma documents: A form of Exercise Notice is included in the IFX templates. The form of Exercise Notice is intended to be extracted, completed and used by the Exercising Party (the Seller) when it wishes to exercise the Undertaking Party’s (the Buyer’s) Wa’ad on an Exercise Date. This form is not to be completed upon entry into the DFT Terms Agreement at the outset of an IFX trade. (both Ver)
Objective
To minimize currency rate volatility and fluctuation especially under present global economic uncertainties.
Year of publication 2016 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: In the Single Wa’ad Structure IFX, only the buyer grants a Wa’ad in favour of the seller at the outset of a trade. The Buyer’s Wa’ad will be exercisable and exercised by the Seller on a given exercise date through the Seller delivering to the Buyer an exercise notice together with an offer. Following the Buyer’s acceptance of such offer, the parties will enter into a Sale Transaction under which the Buyer will transfer a second currency amount in the second currency in exchange for transfer of a first currency amount in the first currency by the Seller.
