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 two Wa’ad Structure IFX, two unilateral and independent Wa’ads will be granted in respect of each IFX trade.
No Murabahah is required or needed in this transaction.
2. Two Wa’ad structure IFX: Each party grants a Wa’ad in favour of the other party at the outset of a trade whereby, the exercise of a party’s Wa’ad on a given exercise date is conditional upon the satisfaction of the exercise condition.
Only one Wa’ad will be exercisable on an exercise date and there will only be one Sale of currency Transaction under each pair of Wa’ads.
3. The exercise condition: Party A’s Wa’ad: Spot Rate is less than or equal to the Forward Rate. Party B’s Wa’ad: Forward Rate is greater than the Spot Rate.
Exercise Condition is always different across both Wa’ads in a Two Wa’ad Structure IFX trade.
4. Spot rate determination: Is determined by the Calculation Agent who will usually be one of either Party A or Party B.
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.
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: Upon satisfaction of the Exercise Condition in a party’s Wa’ad, that the Buyer’s Wa’ad will be exercisable and exercised by the Seller on a given exercise date by 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 to the Seller in exchange for the transfer of a first currency amount in the first currency by the Seller. Forms of the offer and acceptance are set out in Annex 4 of the two Wa’ad Structure IFX terms and conditions.
Related confirmations: Two Wa’ad Structure The DFT Terms confirmation for one Wa’ad of an IFX trade under the Two Wa’ad Structure should identify the DFT Terms confirmation for the other leg as being related to it, as a “Related Party [A]/[B] Undertaking.
