MCMA Enhancing Liquidity Management

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Silvia King
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1 IIFM Seminar on Islamic Financial Markets Monday, 1 st December 2014, Manama Ismail Dadabhoy Advisor - IIFM MCMA Enhancing Liquidity Management Murabahah transaction with the benefit of : 1 1

2 Purpose of Collateralisation A Tool that Flows Liquidity Into the Cash & Sukuk Market 2 Collateralisation How does it Work? 2

Murabahah Collateralised by Sukuk Murabahah Cash Rich Party Sukuk Requires Liquidity 4 Collateralization Overall Transaction Flow Bi- Lateral Transaction Single or Pool of Sukuk From Party A - Party

spot deliver & spot payment and raises Cash for its funding needs Acting as Principal PARTY A -requires Funding - Party A NOW acting as Principal Purchases the same commodity from Party B for Spot

3 Murabahah Collateralised by Sukuk Murabahah Cash Rich Party Sukuk Requires Liquidity 4 Collateralization Overall Transaction Flow Bi- Lateral Transaction Single or Pool of Sukuk From Party A - Party A delivers acceptable pool of Sukuk having market value in excess of the Deferred Cash as collateral Collateral Party B Provides Funding 4 Commodity Buyer 4- Party A sells commodity to the market for spot deliver & spot payment and raises Cash for its funding needs Acting as Principal PARTY A -requires Funding - Party A NOW acting as Principal Purchases the same commodity from Party B for Spot Deliver But with deferred Payment Acting as Agent 2 1- Party B appoints Party A as Agent to purchase Commodity and transfers Cash to Party A s account to purchase the commodity Commodity Seller 2- Party A buys commodity for Spot Payment and Spot Deliver from the market as Agent for Party B 1 5

IIFM Master Collateralized Murabahah Agreement (MCMA) & Guidance Notes Discussing few points IIFM Standard MCM Agreement Objective of the MCM Agreement Entering into Murabahah Transactions Margin

allows a Buyer an opportunity to raise liquidity by creating security of Shari ah compliant assets Schedule set out in the MCMA enables individual Murabahah transaction to be entered between the

4 IIFM Master Collateralized Murabahah Agreement (MCMA) & Guidance Notes Discussing few points IIFM Standard MCM Agreement Objective of the MCM Agreement Entering into Murabahah Transactions Margin Maintenance Collateral Substitution Master agreement or framework agreement which sets out the terms upon which the parties can subsequently enter into Collateralised Murabahah Transaction that allows a Buyer an opportunity to raise liquidity by creating security of Shari ah compliant assets Schedule set out in the MCMA enables individual Murabahah transaction to be entered between the Buyer and Seller from time to time and initial Collateral is delivered to the Seller through the grant of security Margin Maintenance mechanism is outlined whereby the initial collateral is mark to market to maintain an agreed level of exposure. Any Shortfall or excess can be returned subject to an agreed threshold value Posted Collateral are pledged in a segregated and identifiable account. However, the initial as well as subsequent collateral can be called backed and replaced with any security acceptable to the Seller Shari ah Approval The IIFM MCMA is approved by well respected Scholars represented on IIFM Shari ah Advisory Board 7 4

5 IIFM MCM Agreement Operational Guidance Notes Is it permissible to use Bonds as Collateral Can the Seller make use the Posted Collateral What happens to the Profit received from Pledged Sukuk Does the MCMA allow FI to do two way financing Governing Law MCMA is a Shari ah Complaint Liquidity Management Agreement and envisaged to use SUKUK or other Shari ah compliant securities as collateral. Bonds and Non Shari ah compliant securities are impermissible The collateral are delivered to the seller by granting of security of the assets and they are to be held in a segregated account. The Seller cannot make use of the Posted Collateral. The Collateral may be disposed off in an event of default The Pledge Sukuk does not involve transfer of ownership. Any profits received in the segregated or identifiable account is for the benefit of the Collateral provider and needs to be returned to him The MCMA is intended to be applied between parties in capacities in which they entered into on execution of the agreement. Separate MCMA has to be executed to allow parties roles to be Reversed Governing Law is at the option of the Parties. The MCMA has been based on the assumption that the governing law will be English Law. Each Party represents that it has satisfied itself as to Shari ah compliance of Collateralised Murabahah Transaction entered under MCMA 8 Collateralized Product Benefits Alternative to Clean Lending Credit Risk Management Liquidity Management Central Bank Market Intervention Development for Sukuk Collateralized financing offers a structure that requires some extra operational task but does provide credit enhancement as well as providing an effective liquidity management tool that makes best use of available Shari ah compliant securities As long as the collateral is marked to market, Counterparty exposure is reduced to the margin threshold, rather than a full clean exposure. It can allow for positive capital treatment. Having the comfort of collateral allows the institutions to finance for a longer duration and or larger quantum as the credit risk is reduced. CB can include Islamic Banks as part of its market liquidity actions. Add or Remove Cash from the system. Also, Islamic Financial Institutions can use this liquidity instrument to raise funds from the CB Allowing Financial institutions to maintain less cash and allocate more in income generating Sukuk. Giving rise to greater take up of Sukuk by Islamic investors 9 5

Unrestricted Wakalah Agreement Roles of Each Party The First Party, Islamic Financial Institution (IFI) providing the Cash for investment is the MUWAKKIL and the second party IFI who will invest the

6 Unrestricted Wakalah Agreement Roles of Each Party The First Party, Islamic Financial Institution (IFI) providing the Cash for investment is the MUWAKKIL and the second party IFI who will invest the funds on behalf of the First party is the Wakil Investment Asset Pool Wakil Fee Investment Performance Risk Event of Default by the Wakil The Asset Pool could be either comingled with the Wakil s general Pool or a specific segregated pool of Assets as agreed Wakil acting as an Asset Manager will receive an agreed fee for its services. In addition if the Wakil performs better than the indicated profit rate then he is entitled to retain the excess as incentive as communicated at inception of the arrangement Any Loss from the investment is to be borne by the Muwakkil, The Liability of the Wakil is limited to misconduct, negligence, misrepresentation or breach of the Agreement The Muwakkil will rank pari pasu with all other unsecured creditors 10 Unrestricted Wakalah Agreement Operational Guidance Can Conventional Financial Institution use this IIFM Wakalah Agreement Yes, Provided it follows the following The funds are invested in Shari ah compliant products / transaction and documented in the Wakalah Offering The Financial Institution must have a Shari ah Board / governing body to ensure investments are deployed according to Shari ah Understanding the Investment Pool Comingled or general Treasury Pool Segregated Asset Pool 11

7 Operational Guidance Memorandum Anticipated Profit Rate Understanding Anticipated Profit Rate Actual Profit Rate Actual Profit Rate different from the Anticipated Profit Rate? What are the consequences? Early Termination? What if the Actual Profit is in excess of the Anticipated Profit Rate? 12 Accounting Assessment ON IIFM Interbank Unrestricted Master Investment Wakalah Agreement 1 7

8 Thank you Do Not Forget To Download The IIFM Agreements

Use of Sukuk/Islamic Securities as Collateral

Use of Sukuk/Islamic Securities as Collateral 11 th Meeting of the Organisation of Islamic Cooperation (OIC) Member Staters Stock Exchanges Forum Tuesday, 31 st October 2017, Le Meridien Etiler Hotel,