IIFM and ISDA publish Islamic Foreign Exchange Forward Standards

Manama, Bahrain, June 6, 2016 – The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association, Inc. (ISDA) today published two new standards for Islamic forward foreign exchange products for use in Islamic hedging transactions.

The ISDA/IIFM Wiqayah Min Taqallub As'aar Assarf (Islamic Foreign Exchange Forward) is part of an ongoing initiative by the two associations to provide the Islamic finance industry with documentation and product standards to mitigate risk arising from currency and rate-of-return mismatches.

The ISDA/IIFM Islamic Foreign Exchange Forward (IFX Forward) is intended to help minimize the exposure of Islamic financial institutions to foreign exchange volatility. The standards can be used to mitigate currency risk associated with capital markets instruments, as well as trade finance and corporate banking activities.   

The IFX Forward falls under the ISDA/IIFM Tahawwut (Hedging) Master Agreement, a framework document that contains general terms and conditions, and early termination and close-out netting provisions between transacting parties.

“In recent years, Islamic finance has increased its presence in a number of new jurisdictions and territories, which has resulted into pressing demands for Shari’ah compliant hedging products to reduce currency risk for foreign and local investors. IIFM has been playing a leading role in the Islamic hedging segment and has produced a number of required documentation and product standards for Islamic risk mitigation purposes. I am confident that the IFX Forward standards will benefit all stakeholders of the industry,” said Khalid Hamad, Chairman of IIFM.

“The IFX Forward is the latest in a series of initiatives aimed at standardizing the Islamic hedging market. Use of Islamic tools continues to grow, and it’s important that market participants have the standards and products available to manage their risk. We look forward to continuing our collaboration with IIFM to further develop the tools for this important market,” said Scott O’Malia, ISDA’s Chief Executive.

“The Islamic banking industry has long been desirous of an industry standard which does not require the usage of the balance sheet for both counterparties in Foreign Exchange Forward hedging transactions. These Standards using the Wa’ad structure will overcome this constraint and lead the way to handling other off-balance sheet hedging structures. We hope these standards will position IIFM ahead of the curve and give it prominence and credibility it deserves,” said Naveed Khan, Vice Chairman of IIFM.

“One of the unique aspects of the IFX Forward standards is the use of two independent unilateral Wa’ad (promise) which provides credit risk security to both the transacting parties. This was previously not achieved in the market and IIFM/ISDA efforts have resulted in an innovative risk mitigation product in line with the strict Shari’ah compliance enforced by the IIFM Shari’ah Board.  A confirmation template based on Single Wa’ad has also been standardized to assist the users who require this structure,” said Ijlal Alvi, Chief Executive of IIFM.

Ijlal Alvi added, “This new landmark and significant standardization achievement could not have been possible without the indispensable and greatly appreciated support of the honorable Scholars on the IIFM Shari’ah Board, the IIFM Board of Directors and the IIFM member institutions.”

IIFM and ISDA acknowledge the support of Islamic Development Bank (IDB) for providing financial assistance in the development of these IFX standards.

Two versions of the IFX standard confirmations have been published as follows:

Single Wa’ad Structure - where only one party is the buyer who grants the Wa’ad in favor of the other party.

Two Wa’ad Structure - where each of the parties 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.

The ISDA/IIFM Wiqayah Min Taqallub As'aar Assarf (Islamic Foreign Exchange Forward) standards are available on IIFM’s website and on ISDA’s website.