During 2022, the International Islamic Financial Market (IIFM) focused on carrying out extensive industry consultations to assess and plan out its standardization initiatives in line with industry developments and requirements in a robust manner with strict adherence to Shariah rules and principles.
The following is a brief overview of IIFM activities during 2022.
Risk-free rates (RFRs) implementation solutions for Islamic hedging segment
The year 2021 closed with the publication of the ‘ISDA–IIFM Inter-Bank Offered Rates (IBORs) Fallback Definitions Booklet for Islamic Hedging Transactions’, to enable financial institutions to transact under relevant alternative benchmark rates to be used as fallbacks for certain key IBORs.
The fallback provisions contained in the IBORs Fallback Definitions lay out the process through which a replacement RFR can be determined if a benchmark (eg US dollar LIBOR [London Inter-Bank Offered Rate]) ceases to be available or becomes non-representative.
As well as being necessary to comply with regulatory requirements, these fallbacks are required in order to enable a smooth transition to a new RFR. It should be noted that the fallbacks only apply to the benchmark rate to be used and do not otherwise amend the terms of any transaction or the overall structure.
Review of Islamic hedging segment documentation and guidelines
In order to assess the impact of certain global regulatory developments on the Islamic hedging segment and to assess the requirement for any additional risk mitigation-related documentation or confirmation standards as well as to obtain feedback on existing Islamic hedging standards which were published several years ago, IIFM organized a virtual meeting of its working group in October 2022.
The meeting focused on information-gathering on experiences with the use of the Tahawwut Master Agreement (TMA) and possible inclusion of certain clauses as well as aligning the Islamic Profit Rate Swap and the Islamic Cross Currency Swap documentation architecture with the Islamic Foreign Exchange Forward standard confirmations.
New TMA legal opinion for Malaysia
The new ‘Malaysian Law Memorandum on Enforceability of Close-Out Netting of the 2010 ISDA/IIFM Tahawwut Master Agreement’ was published in November 2022 to ensure the enforceability of the TMA under Malaysian law in case of an early termination event such as default by the counterparty.
Islamic syndication documentation standardization
In early 2022, IIFM reconvened its Syndication Core Working Group (CWG) after an interruption due to the COVID-19 pandemic and held its first virtual meeting in March. A steering committee consisting of key members of the CWG was formed to support IIFM in the finalization of a consultation paper identifying key issues to be tackled as well as prioritizing the areas for standardization.
The consultation paper will be the basis of deliberations to take place at the industry-wide virtual consultation meeting to be held during the first quarter of 2023 to form a consensus in the approach and consequently commence the actual development phase of the Islamic Syndication Documentation standards.
Shariah compliant alternative liquidity management product and related master agreement
The development of a standardized Master Agreement based on a Shariah compliant sell–buy product structure is one of the long-standing requirements of the industry.
Although the IIFM Master Collateralized Murabahah Agreement published a few years back is widely used in the market, however, market participants continue to explore additional Shariah compliant liquidity management tools which could be economically better with enhanced capital preservation features to assist the Islamic financial market’s development and progression.
Based on recommendations from member institutions, IIFM has been exploring the standardization of a Shariah compliant Waad-based repo product structure which is now being used by institutions in the GCC as well as the development of a Master Agreement.
IIFM has formed a working group consisting of leading institutions to carry out further assessment and its first virtual meeting will take place in November to deliberate on the product structure and related Master Agreement requirements.
Training on IIFM standards
After the successful launch of virtual training workshops on IIFM standards in 2021, IIFM and Dar Al Sharia held two in-person workshops in 2022 in Dubai covering IIFM Hedging and Liquidity Management Standards. The participants included representatives from international and Islamic banks, regulatory bodies and multilateral development institutions.
The practical and application-oriented workshops equip finance professionals with the knowledge of underlying Shariah structures, core documentation and execution process for transactions relating to IIFM standards and also share practical experience in negotiation and adoption of IIFM standards in banking operations.
IIFM and the Participation Banks Association of Turkiye signed an MoU to collaborate on areas of common interests for the development of the participation banking sector in Turkiye and globally. The joint initiatives under the MoU will further promote the use of IIFM standards as well as facilitate translation of IIFM standard agreements into the Turkish language. The two bodies will work together in increasing awareness by way of joint events, workshops and other capacity-building initiatives.
Annual Sukuk Report
The Annual IIFM Sukuk Report has been published for over a decade and the 11th edition of the report was launched in September 2022 via a special webinar where leading international speakers discussed the findings of the report and the latest Sukuk market trends. More than 350 market participants representing around 175 institutions based in over 35 countries registered to attend the report launch webinar. Over 2,000 digital copies of the report have so far been downloaded from the IIFM website while the number of downloads by readers exceeds 5,000 copies yearly.
The flagship report is one of the main sources of reference on the Sukuk market and provides a detailed analysis of the international and domestic Sukuk issuances, Sukuk structure developments and types of Sukuk issuers. The report also contains country-focused reports as well as case studies on landmark Sukuk issuances and articles on Sukuk market developments.
Industry consultation and awareness events
In early 2022, IIFM organized a virtual industry awareness seminar in collaboration with the Oman Banks Association titled ‘Latest Global Developments Impacting Islamic Finance’, covering pressing topics such as the impact of ‘global climate change-related initiatives’ and ‘global benchmark rate reforms’ on Islamic finance.
IIFM also jointly with AAOIFI and the IFSB organized a virtual roundtable titled ‘Issues and challenges for Islamic finance in adopting alternative benchmark rates and finding an Islamic benchmark rate’.
In addition to virtual awareness seminars, the Sukuk Report launch webinar and in-person training workshops; IIFM also held virtual meetings of its hedging working group, liquidity management working group and syndication working group.
As part of its mandate to standardize financial documentation to support the development of the Islamic finance industry, IIFM in consultation with its members and the market continues to explore new segments of the industry where its standards will add value and benefit all stakeholders, particularly financial institutions.
IIFM is also evaluating the impact of ESG-related global initiatives as well as digitization and fintech-related smart contract requirements.