Oct 11 Dubai Financial Market (DFM), the
Gulf's only listed stock exchange, has published draft rules
covering sharia-compliant hedging, part of broader efforts to
develop Islamic business in the emirate.
The rules aim to expand guidance on transactions that
currently lack standardisation, and would be the third set of
rules from the DFM specific to Islamic finance after ones
covering equities and Islamic bonds.
A standard on Islamic hedging could provide greater clarity
between counterparties as the industry makes a gradual shift
from customized solutions towards volume transactions which can
be cost- and time-effective.
The rules set parameters for valid sharia-compliant hedging
tools with an emphasis on their underlying contracts and expands
on the rationale behind them, said Hussein Hamed Hassan,
chairman of the DFM's Fatwa and Sharia Supervisory Board.
"Perhaps the most significant achievement of this unique
standard is clarifying the rampant misunderstanding about the
ability of Islamic banks and financial institutions to exercise
hedging," he said.
The document defines possible substitutes for conventional
derivatives-based hedging, including hedging tools for currency
exchanges, liquidity management and protecting against
fluctuations in index-based returns.
Islamic finance follows religious principles that ban the
charging of interest and shun ambiguity in contracts, provisions
which effectively preclude use of traditional derivatives such
as options and swaps.
There are several hedging tools used in Islamic finance but
these cannot be used for outright speculation, while certain
types cannot be traded and have to be fully settled upon
maturity or cancellation.
The DFM said a public consultation period for the draft
rules will close on Nov. 10.
(Reporting by Bernardo Vizcaino; Editing by Richard Borsuk)