The International Swaps and Derivatives Association is writing to capital markets regulators in the Middle East to see whether its derivatives documentation can be used in Islamic jurisdictions.
Isda is drafting a letter that it hopes to send to financial regulators in Bahrain, Kuwait, Qatar, Saudi Arabia, and the UAE this month.
The letter will ask them to help solve problems that Isda members have encountered when using the Isda Master Agreement on deals subject to Shariah law.
?Firstly, we aim to find out if the regulators can accept the single-agreement approach,? says Isda policy director Peter Werner. ?It might not be a problem, but it is the fundamental characteristic of our documentation, and the regulators need to be comfortable with it.?
The single agreement concept means that the Isda Master Agreement and all confirmations under it form a single agreement between the parties.
?This is critical in a close-out situation to permit the values of all transactions to be calculated and netted off against each other and produce a single amount payable by one party,? says Werner.
The other big question in the Middle East is whether Isda?s close-out netting procedure is enforceable under local insolvency laws and Shariah law. ?If close-out netting is not enforceable, the Master Agreement isn?t useable,? says Werner. ?Close-out netting reduces credit risk by letting parties net their exposure under different OTC derivatives transactions against one another. If close-out netting is uncertain, they must calculate their credit exposure on a gross basis.?
Isda members have also raised more specific points, such as whether certain commodity derivatives are tradable under Shariah law.
Isda hopes to get responses from the regulators by the autumn. It has also been talking to the International Islamic Financial Market (IIFM). Set up two years ago to structure Shariah-compliant products and try to coordinate Shariah boards, IIFM includes central bank and government representatives from Sudan and Malaysia, and the Islamic Development Bank.
Isda?s Middle Eastern working group, chaired by Douglas Bongartz-Renaud, head of structured risk, financial market derivatives at ABN Amro, is overseeing the initiative.