Islamic Derivatives and Structured Finance

TRW’s Leadership in Islamic Derivatives and Structured Finance

TRW has established itself as a global leader in Islamic derivatives and structured finance, pioneering groundbreaking Shari’a-compliant financial products and offering expert guidance to governments, financial institutions, and corporate clients worldwide. Combining cutting-edge innovation with strict adherence to Shari’a principles, TRW ensures the seamless integration of traditional Islamic financial concepts with modern derivative and structured finance mechanisms.

Islamic Derivatives: The Foundation of TRW’s Expertise

Innovative Structuring of Shari’a-Compliant Derivatives

Islamic derivatives are designed to replicate the risk management capabilities of conventional derivatives while strictly adhering to Islamic financial principles. TRW employs traditional Islamic contracts such as murabaha (cost-plus financing), wa’ad (unilateral promise), salam (advance payment contracts), and arbun (earnest money contracts) to create solutions that achieve the desired economic outcomes without engaging in prohibited activities like speculation (gharar) or interest (riba).

Key Features:

• Profit Rate Swaps: Utilizing structures such as murabaha and wa’ad, these swaps replicate fixed-for-floating interest rate exchanges in a Shari’a-compliant manner.
• Currency Swaps: Tailored cross-currency swap structures adhere to Islamic rules by using wa’ad and murabaha mechanisms to facilitate currency risk management.
• Islamic Total Return Swaps: Offering exposure to underlying assets like sukuk, these structures use wa’ad agreements to align with Islamic principles while mimicking the economic benefits of conventional total return swaps.

Process and Methodology in Islamic Derivatives

1. Structuring Shari’a-Compliant Transactions

1. Assessment of Client Needs:

• Analyze the risk management requirements, including profit rate exposure, currency fluctuations, or portfolio hedging.
• Identify the Shari’a-compliant methods best suited for achieving the client’s objectives.

1. Development of Transaction Framework:

• Engage Shari’a scholars to ensure compliance with Islamic jurisprudence.
• Draft detailed frameworks integrating wa’ad (unilateral promises) or murabaha contracts to underpin the derivative structure.

1. Drafting and Approval:

• Utilize globally recognized documentation standards, including the ISDA-IIFM Ta’hawwut Master Agreement (TMA), which provides a standardized framework for Islamic hedging products.
• Secure Shari’a board approval for all transaction terms and documentation.

1. Execution and Monitoring:

• Execute transactions with full transparency and ongoing compliance oversight.
• Provide periodic reports to stakeholders to ensure continued adherence to Shari’a principles.

2. Pioneering Structured Products

Structured products in Islamic finance offer innovative investment opportunities while adhering to Shari’a guidelines. TRW merges Islamic finance principles with derivative-based capital market instruments to create unique financial solutions.

Examples:

• Shari’a-Compliant Certificates: These certificates mirror derivative payoffs by linking returns to an underlying stock, index, or security.
• Custom Hedging Instruments: Instruments like Islamic EquityBuilder Certificates™ allow Islamic investors to gain exposure to equity markets in compliance with Shari’a rules.

Development Process:

1. Conceptualization: Collaborate with clients to define the desired economic outcomes and identify suitable underlying assets.
2. Design and Approval: Employ contracts like arbun and salam to create structured solutions that offer Shari’a-compliant payoffs.
3. Execution: Issue structured certificates and ensure compliance with market regulations and Shari’a standards.

Notable Achievements and Transactions

Groundbreaking Transactions in Islamic Derivatives

• JPMorgan Total Return Swap: TRW advised JPMorgan on a Shari’a-compliant total return swap backed by sukuk. The transaction incorporated profit rate swap and credit default swap features, using a combination of wa’ad and murabaha contracts.
• Axis FX and Profit Rate Swap: TRW structured Asia’s largest Shari’a-compliant swap, combining foreign exchange and profit rate management to address complex financial risks.

Innovative Structured Products

• Islamic EquityBuilder Certificates™: TRW advised Deutsche Bank on creating certificates allowing Islamic investors to benefit from Shari’a-compliant equity exposure, with returns linked to underlying stocks or indices.
• HSBC and Morgan Stanley Certificates: Assisted in developing Shari’a-compliant certificates offering returns tied to the performance of financial indices or securities.

The ISDA-IIFM Ta’hawwut Master Agreement (TMA)

TRW played a pivotal role as lead counsel in drafting the ISDA-IIFM Ta’hawwut Master Agreement, a global standard for Islamic hedging products. This framework addresses:

• Profit Rate Swaps: Establishing templates for swaps that align with Shari’a principles.
• Cross-Currency Swaps: Drafting confirmation templates to enable Shari’a-compliant currency risk management.
• Treasury Placement Agreements: Developing robust agreements for managing Islamic treasury operations.

Benefits of TRW’s Islamic Derivative Solutions

1. Risk Management:

• Provide tools for managing profit rate and currency risks without violating Shari’a principles.

1. Market Access:

• Facilitate Shari’a-compliant access to equity, sukuk, and foreign exchange markets.

1. Transparency and Compliance:

• Ensure full compliance with Islamic jurisprudence through collaboration with Shari’a scholars.

1. Global Expertise:

• Leverage TRW’s international network and expertise to deliver seamless, cross-border solutions.

TRW’s expertise in Islamic derivatives and structured finance underscores its commitment to innovation, compliance, and client-centric solutions. From pioneering Shari’a-compliant risk management products to crafting bespoke structured instruments, TRW has set benchmarks in the global Islamic finance landscape. With a proven track record and a deep understanding of both financial and Shari’a principles, TRW remains the trusted partner for clients seeking to navigate the complexities of Islamic derivatives and structured finance.