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1. Product Description
The DFT Terms confirmation relates to a Mubadalatul Arbaah (MA) (Profit Rate Swap)
whereby each party grants a Wa'ad (undertaking) to the other party to purchase, if the
specified condition set out in the DFT Terms confirmation is satisfied, Shari'ah compliant
assets from such other party on one or more specified future dates on the basis of Murabaha
transactions to be entered into on each exercise of the Wa'ad (undertaking) by such other
party, and where the purchase price payable is to be determined by reference to the cost price
of the assets plus a profit amount. The DFT Terms confirmation contains the Wa'ad
(undertaking) given by one party. Under a related DFT Terms confirmation, the other party
grants or will grant a Wa'ad (undertaking) in respect of such Mubadalatul Arbaah (MA) (Profit
Rate Swap).
Each party will represent that, if Shariah compliance is relevant for its purpose, then it has
satisfied itself as to the Shariah compliance of the Transactions and DFT Terms Agreements
entered into by it under the ISDA/IIFM Tahawwut Master Agreement.
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4. Product Purpose
Profit rate swap (PRS) mechanism assist in the cash flow management of
mismatches in the fixed versus floating profit rates risks, thus enhancing the risk
mitigation of the Islamic financial institutions.
Illustration 1
PRS Two Sales Structure
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Trade Date is the date on which the parties enter into a DFT Terms Agreement
Effective Date is the date on which the DFT Terms Agreement becomes "live", i.e. the first day of
the period of the hedging protection and the first day of the first Calculation Period in respect of
that DFT Terms Agreement
The Effective Date may be the same date as the Trade Date or it may be later than the Trade Date
Why do we need both a Trade Date and an Effective Date?
Because, whilst the parties may enter into a DFT Terms Agreement on a given day, that
agreement may be subject to the satisfaction of conditions precedent by a certain later date
in order that the agreement can become effective; and/or
Because the parties may wish to have the "start date" of the DFT Terms Agreement coincide
with the period for which hedging is required. Therefore, the Effective Date may fall on a later
date than the Trade Date
In our example, the Trade Date is 25 January 2012 this is the date when the parties enter into
their DFT Terms Agreements. However, Party A requires the hedging to run from 1 February 2012
(the Effective Date) as that is the day it will issue the Sukuk in respect of which it is looking for
hedging protection. Also conditions precedent must be fulfilled before 1 February 2012 (the
Effective Date) in order for the DFT Terms Agreements to become effective
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Party B
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This diagram illustrates an example of entry into Murabaha Sale at the start of each Calculation Period:
Trade Date:
entry into
DFT Terms
Agreement
Effective Date:
DFT Terms
Agreement
becomes "live"
End of First
Calculation Period
End of Second
Calculation Period
End of Third
Calculation Period
Payment Date:
payment of Cost +
Profit by Buyer
Payment Date:
payment of Cost +
Profit by Buyer
Payment Date:
payment of Cost +
Profit by Buyer
February
March
April
Start of First
Calculation Period
Start of Second
Calculation Period
Start of Third
Calculation Period
Exercise Date
Exercise Date
Exercise Date
Entry into
Murabaha Sale
Entry into
Murabaha Sale
Entry into
Murabaha Sale
Purchase Date:
Delivery of Assets
by Seller
Purchase Date:
Delivery of Assets
by Seller
Purchase Date:
Delivery of Assets
by Seller
Time
Start of Fourth
Calculation Period
Conditions
precedent satisfied
10
This diagram illustrates an example of entry into Murabaha Sale at the end of each Calculation Period:
Trade Date:
entry into
DFT Terms
Agreement
Effective Date:
DFT Terms
Agreement
becomes "live"
February
Start of First
Calculation Period
End of First
Calculation Period
End of Second
Calculation Period
End of Third
Calculation Period
Exercise Date
Exercise Date
Exercise Date
Purchase Date:
Delivery of Assets
by Seller
Purchase Date:
Delivery of Assets
by Seller
Purchase Date:
Delivery of Assets
by Seller
Payment Date:
payment of Cost +
Profit by Buyer
Payment Date:
payment of Cost +
Profit by Buyer
Payment Date:
payment of Cost +
Profit by Buyer
April
March
Start of Second
Calculation Period
Start of Third
Calculation Period
Time
Start of Fourth
Calculation Period
Conditions
precedent satisfied
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Tahawwut Master
Agreement
(Master Terms)
Schedule
Exercise Notice
Exercise Notice
Murabaha Sale
Murabaha Sale
12
In the Two Sales Structure, each party may exercise the wa'ad
granted to it by the Undertaking Party on an Exercise Date
On any Exercise Date, both wa'ads may be exercised in respect of
the PRS
The wa'ad contained in the DFT Terms Agreement for the fixed rate
leg is exercisable and the waad contained in the DFT Terms
Agreement for the floating rate leg is also exercisable
If a wa'ad is exercised, the Undertaking Party must buy Assets from
the Exercising Party and execute a Murabaha Sale Confirmation
evidencing the Murabaha Sale between the parties: there are two
Murabaha Sales in respect of each Exercise Date in respect of a
PRS with a Two Sales Structure
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Party B
FPR Assets (Copper) sold by Party B
If Party A exercises Party Bs FLPR waad, the cash and asset flows will be as follows:
FLPR Assets (Zinc) sold by Party A
Party A
Party B
Payment (Cost plus Profit (i.e. FLPR Amount))
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Under FPR leg, Party B (Exercising Party) may exercise Party As (Undertaking Partys) waad in respect of the first Calculation Period
Therefore, Profit is AED16,438.36 in respect of the FPR leg for that Calculation Period
*
This formula is set out in the DFT Terms Agreement for the FPR leg and we are using the figures set out in the table above (with LIBOR at 1%).
FLPR leg
Under the FLPR leg, Party A (Exercising Party) may exercise Party Bs (Undertaking Partys) waad in respect of the first Calculation
Period
Therefore, Profit is AED 12,328.77 in respect of the FLPR leg for the first Calculation Period
**
This formula is set out in the DFT Terms Agreement for the FLPR leg and we are using the figures set out in the table above (with LIBOR at 1%).
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Exercise of the waad under each of FPR leg leads to Party A and Party B entering into a
Murabaha Sale, i.e. Party B sells Assets (copper) to Party A at a purchase price consisting of
Cost Price + Profit
Delivery: Party B (the Seller) delivers the Assets to Party A on the Purchase Date
Assets in respect of the FPR are Copper (see table above)
Purchase Dates are agreed between Party A and Party B on the Trade Date, and are to be
specified in the DFT Terms confirmation
In our example, Purchase Date falls at the start of the each Calculation Period (see Timeline
Example in slide 6 above)
Payment: Party A (the Buyer) pays the deferred purchase price of Cost + Profit on the Payment
Date
Payment Dates are agreed between Party A and Party B on the Trade Date, and are to be
specified in the DFT Terms confirmation
In our example, Payment Date falls at the end of the each Calculation Period (see Timeline
Example in slide 6 above)
Timeline Examples in slides 6 and 7 above illustrate how the Trade Date, Effective Date,
Purchase Dates and Payment Dates work in respect of the Calculation Periods for a PRS
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Exercise of the waad under each of FLPR leg leads to Party B and Party A entering into a
Murabaha Sale, i.e. Party A sells Assets (zinc) to Party B at a purchase price consisting of Cost
Price + Profit.
Delivery: Party A (the Seller) delivers the Assets to Party B on the Purchase Date
Assets in respect of the FLPR are Zinc (see table above)
Purchase Dates are agreed between Party B and Party A on the Trade Date, and are to be
specified in the DFT Terms confirmation
In our example, the Purchase Date falls at the start of the each Calculation Period (see
Timeline Example in slide 6 above)
Payment: Party B (the Buyer) pays the deferred purchase price of Cost + Profit on the Payment
Date
Payment Dates are agreed between Party B and Party A on the Trade Date, and are to be
specified in the DFT Terms confirmation
In our example, Payment Date falls at the end of the each Calculation Period (see Timeline
Example in slide 6 above)
Timeline Examples in slides 6 and 7 above illustrate how the Trade Date, Effective Date,
Purchase Dates and Payment Dates work in respect of the Calculation Periods for a PRS
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Illustration 2
PRS Single Sale Structure
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Trade Date is the date on which the parties enter into a DFT Terms Agreement
Effective Date is the date on which the DFT Terms Agreement becomes "live", i.e. the first day of
the period of the hedging protection and the first day of the first Calculation Period in respect of
that DFT Terms Agreement
The Effective Date may be the same date as the Trade Date or it may be later than the Trade Date
Why do we need both a Trade Date and an Effective Date?
Because, whilst the parties may enter into a DFT Terms Agreement on a given day, that
agreement may be subject to the satisfaction of conditions precedent by a certain later date
in order that the agreement can become effective; and/or
Because the parties may wish to have the "start date" of the DFT Terms Agreement coincide
with the period for which hedging is required. Therefore, the Effective Date may fall on a later
date than the Trade Date
In our example, the Trade Date is 25 January 2012 this is the date when the parties enter into
their DFT Terms Agreements. However, Party A requires the hedging to run from 1 February 2012
(the Effective Date) as that is the day it will issue the Sukuk in respect of which it is looking for
hedging protection. Also conditions precedent must be fulfilled before 1 February 2012 (the
Effective Date) in order for the DFT Terms Agreements to become effective
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Party B
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This diagram illustrates an example of entry into Murabaha Sale at the start of each Calculation Period:
Trade Date:
entry into
DFT Terms
Agreement
Effective Date:
DFT Terms
Agreement
becomes "live"
End of First
Calculation Period
End of Second
Calculation Period
End of Third
Calculation Period
Payment Date:
payment of Cost +
Profit by Buyer
Payment Date:
payment of Cost +
Profit by Buyer
Payment Date:
payment of Cost +
Profit by Buyer
February
March
April
Start of First
Calculation Period
Start of Second
Calculation Period
Start of Third
Calculation Period
Exercise Date
Exercise Date
Exercise Date
Entry into
Murabaha Sale
Entry into
Murabaha Sale
Entry into
Murabaha Sale
Purchase Date:
Delivery of Assets
by Seller
Purchase Date:
Delivery of Assets
by Seller
Purchase Date:
Delivery of Assets
by Seller
Time
Start of Fourth
Calculation Period
Conditions
precedent satisfied
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This diagram illustrates an example of entry into Murabaha Sale at the end of each Calculation Period:
Trade Date:
entry into
DFT Terms
Agreement
Effective Date:
DFT Terms
Agreement
becomes "live"
End of First
Calculation Period
End of Second
Calculation Period
End of Third
Calculation Period
Exercise Date
Exercise Date
Exercise Date
Purchase Date:
Delivery of Assets
by Seller
Purchase Date:
Delivery of Assets
by Seller
Purchase Date:
Delivery of Assets
by Seller
Payment Date:
payment of Cost +
Profit by Buyer
Payment Date:
payment of Cost +
Profit by Buyer
Payment Date:
payment of Cost +
Profit by Buyer
Start of First
Calculation Period
April
March
February
Start of Second
Calculation Period
Start of Third
Calculation Period
Time
Start of Fourth
Calculation Period
Conditions
precedent satisfied
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Tahawwut Master
Agreement
(including Schedule)
(Master Terms)
Exercise Notice
in relation to undertaking where Exercise Condition is met
Murabaha Sale
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In the Single Sale Structure, a party may only exercise the wa'ad
granted to it by the Undertaking Party on an Exercise Date if the
Exercise Condition has been met
It is possible for the Exercise Condition to be met only in relation to
one of the two wa'ads on any Exercise Date: only one wa'ad may be
exercised in respect of the PRS
If the Exercise Condition is met in the fixed rate leg of the PRS
(which means that it will not be met in the floating rate leg), the
wa'ad contained in the DFT Terms Agreement for the fixed rate leg is
exercisable (and the waad contained in the floating rate leg will not
be exercisable)
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If the Exercise Condition is met in the floating rate leg of the PRS
(which means that it will not be met in the fixed rate leg), the wa'ad
contained in the DFT Terms Agreement for the floating rate leg is
exercisable (and the waad contained in the fixed rate leg will not be
exercisable).
If a wa'ad is exercised, the Undertaking Party must buy Assets from
the Exercising Party and execute a Murabaha Sale Confirmation
evidencing the Murabaha Sale between the parties: there is only
one Murabaha Sale in respect of each Exercise Date in respect of a
PRS with a Single Sale Structure.
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Party B
FPR Assets (Copper) sold by Party B
If FLPR (floating rate) amount exceeds FPR (fixed rate) amount, Party A can exercise Party Bs
waad :
FLPR Assets (Zinc) sold by Party A
Party A
Party B
Payment (Cost plus FLPR amount less FPR amount)
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FLPR leg
Under the FLPR leg, Party A (Exercising Party) may exercise Party Bs (Undertaking Partys) waad in respect of
the first Calculation Period if the Profit in respect of the first Calculation Period is greater than zero
The Calculation Agent determines Profit as follows**:
**
Therefore, Profit is negative (AED -4,109.59) in respect of the FLPR leg for the first Calculation Period. (The Profit
element can only be positive in relation to one leg of the PRS)
As Profit is less than zero, Exercise Condition is NOT met in relation to the FLPR leg for the first Calculation
Period
Party B may NOT exercise Party As waad on the Exercise Date
This formula is set out in the DFT Terms Agreement for the FLPR leg and we are using the figures set out in the table above (with LIBOR
at 1%)
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Under FPR leg, Party B (Exercising Party) may exercise Party As (Undertaking Partys) waad in respect of the
first Calculation Period if the Profit in respect of the first Calculation Period is greater than zero
Therefore, Profit is AED4,109.59 in respect of the FPR leg for that Calculation Period
As Profit is greater than zero, Exercise Condition is met in relation to the FPR leg for that Calculation Period
Party B may exercise Party As waad on the Exercise Date
**
This formula is set out in the DFT Terms Agreement for the FPR leg and we are using the figures set out in the table above (with LIBOR
at 1%).
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Exercise of the waad under FPR leg leads to Party A and Party B entering into a Murabaha Sale,
i.e. Party B sells Assets to Party A at a purchase price consisting of Cost Price + Profit.
Delivery: Party B (the Seller) delivers the Assets to Party A on the Purchase Date
Assets in respect of the FPR are Copper (see table above)
Purchase Dates are agreed between Party A and Party B on the Trade Date, and are to be
specified in the DFT Terms confirmation
In our example, Purchase Date falls at the start of the each Calculation Period (see Timeline
Example in slide 6 above)
Payment: Party A (the Buyer) pays the deferred purchase price of Cost + Profit on the Payment
Date
Payment Dates are agreed between Party A and Party B on the Trade Date, and are to be
specified in the DFT Terms confirmation
In our example, Payment Date falls at the end of the each Calculation Period (see Timeline
Example in slide 6 above)
Timeline Examples in slides 6 and 7 above illustrate how the Trade Date, Effective Date,
Purchase Dates and Payment Dates work in respect of the Calculation Periods for a PRS
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