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. —Agencies