The International Islamic Financial Market (IIFM) and ISDA have launched the ISDA/IIFM Tahawwut (Hedging) Master Agreement, marking the introduction of the first globally standardised documentation for privately negotiated Islamic hedging products. The Agreement is the first financial industry framework document that is applicable across all jurisdictions where Islamic finance is practiced.

IIFM and ISDA jointly developed the Tahawwut documentation under the guidance and approval of the IIFM Shari'ah Advisory Panel for this project and in consultation with market participants. The published document consists of the Tahawwut Master Agreement and an Explanatory Memorandum, both of which are part of the official Shari'ah Pronouncement.

"Given the growing nature of the Islamic finance industry, the institutions operating on Shariah principles can no longer afford to leave their positions un-hedged," comments Khalid Hamad, chairman of IIFM and executive director of banking supervision at Central Bank of Bahrain. "Hence, some key hedging products are now becoming common across jurisdictions to mitigate risk. The ISDA/IIFM Tahawwut Master Agreement gives the industry access to a truly global framework document, which is neutral in terms of treatment to both the transacting parties and at the same time strictly conforms to Shariah principles. IIFM is honoured to have achieved this milestone in collaboration with ISDA and I am confident that such joint efforts will continue in the future."

"Demand for customised, privately negotiated hedging tools that conform to the principles of Islamic finance has increased in momentum," adds Eraj Shirvani, chairman of ISDA and md, head of fixed income for the EMEA region, Credit Suisse. "The Tahawwut Master Agreement provides the critical framework for the growth and evolution of Shariah-compliant hedging instruments."

The ISDA/IIFM Tahawwut Master Agreement provides the structure under which institutions can transact Islamic hedging transactions, such as profit-rate and currency swaps, which are estimated to represent most of today's Islamic hedging transactions. It is designed to be used between two principal counterparties as a master agreement.

Parties understand that no interest shall be payable or receivable and no settlement based on valuation or without tangible assets is allowed. Moreover, the counterparties to the Tahawwut Master Agreement make representations as to the fact that they enter into Shariah-compliant transactions only.

It is a completely new framework document, though the structure of the document is similar to the conventional ISDA Master Agreement. However, the key mechanisms and provisioning such as early termination events, closeout and netting are developed based on the Islamic Shariah principles.

"Standardisation is a key element in the progress of Islamic finance, though it is not a simple process as evident from the efforts put in to the development of this master agreement," continues Ijlal Ahmed Alvi, IIFM ceo. "A record number of drafts - 24 drafts - were developed during the industry consultation and Shariah guidance process before ultimately reaching the final version, which is comprehensive as well as practical in terms of usage with no compromise to Shariah principles. It was indeed a pleasure to work with such an experienced and dedicated execution team and the efforts were supplemented by exemplary understanding and cooperation shown by ISDA, our joint partner. We express our heartfelt thanks to the Central Bank of Bahrain for their continuous support and to all who were involved in completing this important project. "

"IIFM has taken a lead in preparing Shariah-compliant Master Agreements for specific areas of Islamic finance, which a number of financial institutions globally have recognised and adopted in order to avoid misunderstanding, uncertainty and confusion; and also to seek clarity and sound business activities. The adoption of these Master Agreements will pave the way not only for Shariah compliance, but also product innovation," says Ahmad Rufai, IIFM Shariah head.

He adds: "The IIFM Shari'ah Advisory Panel have considered the Tahawwut Master Agreement to be a necessary step forward for promoting global standardisation for Islamic financial product standards, because the absence of a global Shariah-compliant standardised agreement may lead to negative effect in the industry. On this occasion, the IIFM Shari'ah Department would like to thank the IIFM Shari'ah Advisory Panel for their indispensable and greatly appreciated support. We don't know where the TMA development would be without their invaluable help and patience in reviewing many of the drafts. Maybe it would not have seen the light."

In addition to developing documentation for Islamic transactions, ISDA in coordination with IIFM is in contact with various regulators in a number of Islamic jurisdictions, such as the Gulf Cooperation Council (GCC) region (namely UAE, Bahrain and Qatar, plus Pakistan) to improve the local legal framework for hedging products and close-out netting provisioning.