IIFM and ISDA publish Islamic Credit Support Deed for Variation Margin

Manama, Bahrain, 30th March 2017 – The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association, Inc. (ISDA) today published a new credit support deed for Islamic hedging transactions in response to global margin requirements for non-cleared trades.

The ISDA/IIFM Wathiqah Hamish al Rahn al Naqdi (Credit Support Deed for Cash Collateral (VM)) governs the exchange of collateral for hedging transactions under the ISDA/IIFM Tahawwut (Hedging) Master Agreement and follows the rollout of variation margin requirements for non-cleared transactions in multiple jurisdictions from March 1, 2017. The regulatory push for initial and variation margin exchange is part of a Group of 20 commitment to make global financial markets safer and more resilient.

The new credit support deed is the latest initiative by the two associations to provide the Islamic finance industry with documentation and product standards to manage and mitigate the risk arising from currency and rate-of-return mismatches. Islamic hedging transactions are widely used to help manage the exposure of Islamic financial institutions and mitigate risks associated with capital market instruments, trade finance and corporate banking activities.

“Use of Islamic finance is extending to new jurisdictions and territories, and this has led to a pressing demand for Shari’ah compliant hedging products, as well as collateral documentation in order to manage credit risk. Recent regulatory requirements for the exchange of variation margin on non-cleared derivatives transactions has created an urgent need for the Islamic finance industry to develop standard credit support documentation. The ISDA/IIFM Credit Support Deed for Cash Collateral (VM) will undoubtedly benefit all stakeholders of the industry, and the efforts of IIFM and ISDA are commendable achievements,” said Khalid Hamad, Chairman of IIFM. 

“Regulators across the globe are implementing margin requirements for non-cleared trades, which will require in-scope market participants to either set up or amend credit support documentation. The ISDA/IIFM Credit Support Deed for Cash Collateral (VM) responds to this development, and will further support the development of the Islamic hedging market,” said Scott O’Malia, ISDA’s Chief Executive.

“The new collateral requirements are part of a worldwide regulatory response to the global financial crisis, and will have an impact on certain Islamic finance transactions. IIFM and ISDA have developed this standard credit support deed in response to this regulatory requirement, with the active involvement of their member institutions, regulators, legal firms and other industry stakeholders, in coordination with external legal counsel Clifford Chance,” said Ijlal Ahmed Alvi, Chief Executive of IIFM.

Alvi added: “This achievement would 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, IIFM member institutions and market participants.”

IIFM and ISDA acknowledge the support of The Waqf Fund (Bahrain) for providing financial assistance in the development of this important legal document.

IIFM and ISDA will continue to assess the industry’s requirements for new products and documentation standards, including the possible publication of credit support documentation for other types of collateral, such as Sukuk.