Read PowerPoint Presentation text version

FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME

ISLAMIC TREASURY OPERATIONS

Table of Contents

CONTENTS

1. Overview 2. Objectives of Treasury 3. Development of Malaysia Financial Markets 4. Islamic Money Market 5. Islamic Financial Instruments 6. Islamic Derivatives Instruments 7. Islamic Foreign Currency 8. FOREX Trading 9. FOREX Transactions in Islamic Banking Operations

1

Overview

Overview

· Islamic Treasury involves activities that are carried out in ways that do not conflict with the conscience of Muslims and the religion of Islam. · It represents an assertion on religious law that prohibits the following transactions: · Usury (riba) · Gambling (maisir) · Ambiguity (gharar)

2

Objectives of Treasury

Objectives of Treasury

· Ensure liquidity is available to meet all current and future obligations, · Maximize return on investment portfolio managed, · Ensure bank is funded in the most appropriate and cost efficient manner, · Identify and mitigate financial risk that could erode bank's financial standing.

Objectives of Treasury - Sources & Uses of Funds

· Primarily responsible to manage a pool of bank's excess fund. This fund comprises of: · Customers Deposits (CD), · Inter-bank Deposits (ID), · Shareholders Fund (SHF) and any other sources approved by the bank . . . · after being utilized on statutory requirements, financing and investment.

Objectives of Treasury - Sources & Uses of Funds

SOURCES

Customer Deposits

Retail Markets Current Account Saving Account Investment Account - General Special Negotiable Islamic Debt Certificate Money Markets Mudharabah Inter-bank Deposit Shareholders Funds Paid up capital Share Premium Share Reserves Retail Markets

USES

Statutory Reserve Liquidity Requirement Financing Trade Finance Investment in quoted/ unquoted share Pool of Fund Managed by Treasury Investment in Bank Investment in Subsidiary Investment in quoted/ unquoted share Investment /Financing Liquidity Requirement Statutory Reserves Investment in Islamic Financial Instruments

Specific Investment Account

3

Development of Malaysian Financial Markets

Development of Islamic Financial Market

Characteristics : Global market Needs: 1. International acceptance 2. Liquidity 3. Hedging Tools Focus Product : Bank - Clients Bank ­ Bank Bank ­ Govt Example of Product: Soveriegn Sukuk, Securitisation of financial assets, Islamic Derivatives

Characteristics : Small Niche Needs: 1. Alternative to conventional bond Products 2. Primary market Focus Product : Bank ­ Clients

Characteristics : Broader Market Needs: 1. Variable needs of Client 2. Inter-bank instruments 3. Secondary market Focus Product : Bank - Clients Bank - Bank Example of Product : Zero Coupon Islamic Bond, BBA fixed rate, Istisna' bond, Murabahah CP

Example of Product : GIC-Qardul Hassan, Accepted Bills-I, BBA & Musharakah IPDS.

Development of Islamic Financial Market

Early Stage (1983-1992) Small Niche

After 11 years (1992-2000) Broader Market

After 18 years (2000 and beyond) Global Market

Development of Islamic Financial Market

Early Stage (1983-1992) Small niche

· Malaysian Government issuance of GIC · Bank Islam issued Accepted Bills - Islamic · Shell Malaysia issued BBA Fixed rate bond · Sarawak Shell issued Musharakah bond · Primary markets only

Development of Islamic Financial Market

After 11 years (1992-2000) Broader Markets · Islamic Money Market in Malaysia · Petronas issued Zero Coupon bond · Cagamas issued Sanadat Mudharabah bond · KLIA issued 2.2 billion BBA Fixed Rate bond · Moccis issued Murabahah Islamic Commercial Paper · Khazanah issued Benchmark bond · Evolution of Secondary market

Development of Islamic Financial Market

After 18 years (2000 and beyond) Global Markets · Guthrie issued USD150 milion Sukuk Al Ijarah · Malaysian Govt issued USD500 million Sukuk · Issuance of IPDS by Supranational Institutions · Bank Islam introduced FX Forward & Swap · Introduction of Commodity Murabahah Products · Standard Chartered introduced Islamic Profit Rate Swap, Cross Currency Swap & Forward Global Recognition of Islamic Financial Instruments

4

Islamic Money Market

Islamic Money Market

· Introduced by BNM in January 3, 1994 · Defined as:

· · · · Activities guided by Syariah principle Wholesale transactions Liquid and low risk instruments Less than 1 year

· Market players are Islamic banks and commercial and investment banks with Islamic window. · The activities include:

· Inter-bank Mudharabah · BNM Wadiah Tender · Trading of Islamic Financial Instrument

Islamic Money Market · Inter-bank Mudharabah (IBM)

· A system where a Islamic bank obtains investment from another Islamic bank on the basis of Mudharabah to source, invest and square their short term fund. · Mudharabah is a joint venture between two parties i.e one party with fund and the other party who is the entrepreneur. · Both parties will then negotiate and agree on the amount, tenor of investment and profit sharing ratio. Any loss must be borne by the investor. · IBM is an alternative to the conventional money market, the activities are based on profit sharing principle; as opposed to interest on borrowing / lending activities in the conventional money market.

Islamic Money Market

· The period of investment ranges from over night to 12 months. · The minimum amount of investment is RM50,000.00 · The rate of return shall be based on the gross profit before distribution for investment of 1 year of the receiving bank. · The profit of IBM is calculated based on the following formula : Profit = prt(k) 36500

where : p = Principal investment r = Gross Profit Rate of the Receiving FI t = Number of Day Invested k = Profit Sharing Ratio of the Investing FI

Islamic Money Market

Example : IRHB invest RM1,000,000 with BIMB for 30 days. Profit sharing ratio is negotiated at 75:25. Based on the prevailing gross profit rate during transaction i.e. 5.5%,. IRHB is expected to receive net profit of 4.125%. Upon maturity of the investment, BIMB' s effective gross profit rate has increases to 6%. Therefore, profit payable to provider of fund = 1,000,000 x 6% x 30 x 0.75 365 = 3,698.63 i.e. a return of 4.5% p.a

Islamic Money Market · BNM Wadiah Placement

· BNM accept placement of fund from the money market under the concept of Wadiah. · Under Wadiah contract, BNM undertake to safeguard the fund placed with them and will refund the same amount on maturity date. · Islamic banks will place excess fund with BNM for safe keeping. · The period of placement range for overnight only. · Profit (if any) is paid based on discretion of BNM.

Islamic Money Market · BNM Wadiah Tender

· Similar approach with Wadiah placement. · The information of tender is being disseminated early morning of the Wadiah issuance through FAST. · The period of placement ranges from 1 week to 3 months. · The amount tendered will be prorated with issuance size and successful tender is based on their bid size. · Profit (if any) is paid based on discretion of BNM.

Islamic Money Market · Trading of Islamic Financial Instruments

· IMM creates a secondary market where participants trade all the available Islamic financial instruments. · The market allows: · Easy access to Islamic Instruments · Provide liquidity in the market for the financial instruments · Trading and Arbitraging · between instruments with same tenor · between tenor of the same class of instruments · Each instrument is different from one another in terms of risk profile, yield, tenor, marketability and liquidity.

Islamic Money Market

Risk Spectrum

Increased risk and volatility

Corporate Papers (riskier, more volatile high return)

Financial Institutions (less risky, less volatile, reasonable return

Sovereign Papers (risk free, less volatile low return)

Reduced yield on investment

Islamic Money Market Calculation of Effective Yield/Yield to Maturity are as follows:

EY/YTM = (SP-PP) x 36500 t X PP

Where

SP = Selling Price /Maturity Price PP = Purchase Price/Principal Price t = Number of days held

5

Islamic Financial Instruments

Islamic Financial Instruments Bank Negara Monetary Notes - i (BNMN-i)

BNMN-i is a liquidity management tool issued by BNM to manage liquidity in the Islamic Money Market. BNMN-i was introduced by BNM on December 8, 2006 to replace Bank Negara Monetary Notes. Issued under the Islamic principle of Bai al Enah, the transaction involved a for forward sale (principal plus profit) of assets owned by BNM and the corresponding spot purchase (immediate delivery) of the said assets. Minimum standard amount is RM5 million.

Islamic Financial Instruments

· Bank Negara Monetary Notes-i (BNMN-i) · The issuance of BNMN-i is on tender basis to principal bidder with information of the issuance being published through FAST a few days before the issue date. · The bidding proceed is based on the following formula :

Proceed = Face Value of Tender x 1 ­ ((r x t)/36500) where r = discounting rate t = tenor of issue

· The successful bidder is the market participant who tendered for the highest price for the asset offered by BNM. · Debt created from the Bai al Enah contract is traded in the secondary market under Bai Al Dayn concept.

Islamic Financial Instruments Issuance process of BNMN-i

BNM

4. Through the sale and purchase transaction, a debt has been created. This debt is securitized through the issuance of BNNN 1. Identify Assets 3. BNM buy back the certificate of BNM assets at par value (100.00) to be paid on the maturity date 5. BNM to allot BNMN-i to successful banks via Rentas

BNMN-i

Certificate of BNM Assets

2. Sell assets on a tender basis at a discount from par value

Principal Dealers

Islamic Financial Instruments Bank Negara Malaysia Sukuk Ijarah (BNMSI)

BNMSI is another short term money market instrument issued by BNM under the Islamic principle of Ijarah. Under Ijarah contract, BNM undertake to sell an asset to an SPV who will issue BNMSI to finance the purchase price. SPV will lease back the asset to BNM with agreed rental which will be further paid to BNMSI holders. On the expiry of lease, BNM will purchase back the asset from SPV and the sukuk will be redeemed. Tenor of BNMSI ranges from 1 year to 3 years with quarterly rental payment. The tender is based on the rental rate and the successful bidder is the one who tendered for the lowest rental rate for the BNMSI.

Islamic Financial Instruments Issuance process of BNMSI

1. SPV purchase asset from BNM 2. SPV to issue BNMSI to finance the purchase asset

Sukuk Holder

6. SPV shall make periodic distribution of rental proceeds. On expiry of lease, BNM shall purchase the asset back and sukuk will be redeemed. 4. SPV shall lease the asset back to BNM

Original Issuer BNM

SPV (Lessor)

3. SPV shall use the proceed to pay BNM for the purchase of Ijarah asset from BNM 5. BNM shall pay periodic rental to SPV

BNM (Lessee)

Islamic Financial Instruments

Malaysia Islamic Treasury Bills (MITB)

MITB is a short term money market instrument issued by the Government under the Islamic principle of Bai al Enah. Under Bai al Enah contract, the Government will undertake to sell identified asset to successful FI's on cash basis at a discount and subsequently buy back the same asset at par on deferred payment. MITB's tenor, issuance process and trading in the secondary market is similar to BNMN-i.

Islamic Financial Instruments Issuance process of MITB

Government of Malaysia MITB

4. Through the sale and purchase transaction, a debt has been created. This debt is securitized through the issuance of MITB 3. GOM buy back the certificate of GOM assets at par value (100.00) to be paid on the maturity date 5. GOM thru BNM to allot MITB to successful banks via Rentas

1. Identify Assets

Certificate of GOM Assets

2. Sell assets on a tender basis at a discount from par value

Principal Dealers

Islamic Financial Instruments

Government Investment Issues (GII)

Issued by law under the Government Investment Act 1982 (amended 1990) Investment in GII constitutes an investment to the government based on the principle of Bai Al Inah. Under Bai al Enah contract, the Government undertake to sell identified asset to successful FI's on cash basis and subsequently buy back the same asset plus profit on deferred payment.

Islamic Financial Instruments

Government Investment Issues (GII)

Tenor ranges from 3 years to 10 years. Issuance of GII is on tender basis to principal bidder with information of the issuance being published through FAST a few days before the issue date. Tendering procedure for GII is similar to instruments issued by Government or BNM. Pricing of GII in the secondary market is based on the normal bond market pricing convention.

Islamic Financial Instruments Issuance process of GII

Government of Malaysia GII

4. Through the sale and purchase transaction, a debt has been created. This debt is securitized through the issuance of GII 3. GOM buy back the certificate of GOM assets (principal plus profit) to be paid on the maturity date 5. GOM thru BNM to allot MITB to successful banks via Rentas

1. Identify Assets

Certificate of GOM Assets

2. Sell assets on a tender basis either on discount or par value

Principal Dealers

Islamic Financial Instruments · Accepted Bills ­ Islamic (AB-i)

· AB-i is a bill of exchange which is either: · drawn by the Bank and accepted by the importer/purchaser ­ underlying syariah concept is Murabahah · drawn by the exporter/seller and accepted by the Bank ­ underlying syariah concept is Dayn · The bill constitutes a debt owed to the Bank, thus eligible for trading in the secondary market. · The underlying Shariah transaction for trading in the secondary market is known as Bai Al-Dayn (debt trading) · The rate of discounting of AB-i shall reflect the current market standing

Islamic Financial Instruments

· Accepted Bill - Islamic (AB-i) · Calculation of proceeds of AB-i is derived at as follows:

Proceed

=

FV

(

1-

rxt 365

)

Where

FV = Face Value r t = Discounting rate (in %) = Number of remaining days to maturity

Islamic Financial Instruments

· Islamic Commercial Papers

· ICP are debts issued by corporation to fund their capital requirement on short term, roll over basis. · It is issued under the concept of Murabahah. · Prior to issuance of ICP the rated by rating agency. · Corporation must obtain approval from Securities Commission (SC) · Types of ICP:

· Murabahah Notes Issuance Facility (MUNIF) · Islamic Revolving Underwritten Facility (IRUF) · Guaranteed Revolving MUNIF (GRUNIF)

Islamic Financial Instruments Issuance process of ICP

Corporation

4. Through the sale and purchase transaction, a debt has been created. This debt is securitized through the issuance of ICP 1. Identify Assets 3. Corporation buy the assets (principal plus profit) to be paid on the maturity date 5. Lead arranger to allot ICP to successful banks

ICP

Assets

2. Sell assets on a tender basis either on discount or at par value

Tender Panel Members

Islamic Financial Instruments

· Islamic Commercial Papers

· Calculation of proceeds of Islamic Commercial Papers is derived at as follows:

Proceed

=

FV

(

1-

rxt 365

)

Where

FV = Face Value r t = Discounting rate (in %) = Number of remaining days to maturity

Islamic Financial Instruments

· Negotiable Islamic Debt Certificate (NIDC) · NIDC is the Shariah-compliant alternative to the Negotiable Instrument of Deposit (NID) currently offered by the conventional banks. · The underlying Shariah transaction for the creation of NIDC is Bai Bithaman Ajil ­ BBA (Deferred payment sale). · NIDC is issued to the customer as an evidence of the Bank's debt to the customer. · The debt is tradable in the secondary market under the concept of Bai Al-Dayn. · NIDC certificate is a security items that must be kept by the customer's authorized custodian which is usually the issuing bank.

Islamic Financial Instruments

Formula to calculate price of NIDC, with maturity less than 1 year:

RV Price = 1+

(

TxY 36500

)

[Price are rounded up to 4 nearest decimal point]

Where

RV = Redemption value per RM100 nominal value T Y = No. of days from settlement date to maturity date = Yield / Profit rate

Islamic Financial Instruments

Formula to calculate price of NIDC, with maturity exceeding 1 year:

Price

RV =

(

1+

Yld m

)

n-1+DSC/DCC

Where

RV = Redemption value per RM100 nominal value Yld = Yield in % p.a. DSC = No. of days from settlement date next quasi coupon date (as if the instrument pay semi annual profit) DCC = No. of days in quasi coupon period n= m= No. of remaining quasi coupon profit period No. of dividend payment per year

Islamic Financial Instruments · Commodity Murabahah Program (CMP)

· CMP is a universally accepted trade transaction structured as a money market instruments under the contract of Murabahah. · The trade involve a spot purchase of Syariah approved commodities for immediate delivery and a forward sale on deferred payment term. · There are three types of CMP:

· Commodity Murabahah Deposit · Commodity Murabahah Investment · BNM Commodity Murabahah Tender

· Profit on CMP is calculated based on the simple interest formula i.e. Principal x Rate x Tenor

Islamic Financial Instruments

Commodity Murabahah Deposit

Counter Party

2

1

BIMB, Acting as Agent

Commodity

Deferred $

C/party appoints BIMB as its agent to buy commodity from London Metal Exchange (LME). BIMB buys the commodity by cash via Trader 1.

$

Commodity

BIMB, as Principal

Commodity

C/party then sells the commodity to BIMB via deferred payment. The Sale Price represents the return from deposit for BIMB.

Trader 1

$

Trader 2

3 BIMB sells the commodity at LME via Trader 2 for cash.

Islamic Financial Instruments

Commodity Murabahah Investment

BIMB

Deferred

BIMB then sells the commodity to C/party. Sale Price represents BIMB's expected return from investment and will be paid by C/party via deferred payment.

1

$

Commodity

$

Commodity

2

BIMB buys a Commodity at LME by cash via Trader 1

Trader 1

Counter Party BIMB as Agent

C/party then appoints BIMB as agent to sell the Commodity at LME by cash via Trader 2. The cash belongs to C/party, representing investment proceeds.

$

Commodity

3

Trader 2

Islamic Financial Instruments

Cagamas Islamic Bond (CIB)

CIB are bonds issued by Cagamas Berhad under the Islamic principle to raise funds for their operations. Cagamas business includes purchase of Islamic mortgage, hire purchase and other asset classes from financial institutions Bond issuance range between 1 to 7 years with profit payable semi annual basis From purchases of asset with recourse, Cagamas has expanded it business to include outright purchases of financial assets There are 3 types of Cagamas Islamic Bond: 1. Sanadat Murabahah Cagamas 2. Cagamas Bai Bithaman Ajil Islamic Securities (BAIS) 3. Cagamas Islamic Residential Mortgage Backed Securities

Islamic Financial Instruments

Overview of Cagamas Structure

Customers Principal Dealers/ Investors

5 Issue CIB 6 Receive cash 9 Pay coupon

2 Pay monthly instalment

1 Grant Islamic financing

8 Remit Cagamas instalment

4 Receive cash

Approved Sellers

3 Sell Islamic debts 7 Appoint Approved Sellers as servicer

Cagamas

Pre-sale During sale Post-sale

Islamic Financial Instruments

1. Cagamas Mudharabah Bond (CMB)

Based on the concept of Al Mudharabah CMB allows the bondholders and Cagamas to share profit generated from the issuer operation in purchasing financial assets from Islamic financial institutions. Both parties agree to share the profit derived from the venture based on an agreed profit sharing ratio. The bondholder will bear any loss of diminution in the principal amount of the bond

Islamic Financial Instruments 2. Cagamas Bai Bithaman Ajil Islamic Securities (BAIS)

Introduced to replace SMC with its first issuance in August 2004. Issued based on the principle of Bai al Inah. Under Bai al Enah contract, Cagamas undertake to sell identified asset to successful investors on cash basis and subsequently buy back the same asset at par on deferred payment basis. The profit rate is fixed and paid twice a year. Calculation of proceed is similar with coupon bearing bonds calculation.

Islamic Financial Instruments 3. Cagamas Islamic Residential Mortgage Backed Securities (RMBS-i)

First issued on August 8, 2005. Issued based on the principle of Musyarakah, Cagamas and bondholders enter into a joint venture to fund the issuer operation in purchasing financial assets from Islamic financial institutions. Profit is shared by both Cagamas and bondholders based on an agreed profit sharing ratio. Both Cagamas and bondholder will bear any loss arising from the bond issuance according to the ratio agreed by both parties.

Islamic Financial Instruments ·

·. · ·

Islamic Bond (IB)/ Islamic Debt Securities (IDS)

IB's are debts issued by the multinational or big corporation to raise funds for their operations. Typically issued for long term capital expenditure requirements and project financing for concessionaires, infrastructures and utilities. The tenor of issuance of IB's ranges between minimum period of 3 years and maximum of 20 years. SC approval is required prior to any bond issuance and must be rated (except for quasi government issuance) . There are two types of IB:

1.Zero Coupon Islamic Bond 2.Fixed Rate Islamic Bond

· · ·

Islamic Financial Instruments 1. Zero Coupon Islamic Bond

· Issued at a discount from the face value. · This bond does not have any inward cash flow in term of profit payable every semi annual and bond holder only received the face value upon maturity of the bond. · The few Syariah contracts used as underlying transaction include:

a. Murabahah - Khazanah Bond b. Bai Bithaman Ajil ­ SILK & Encorp b. Qardh Al Hassan - Petronas Dagangan & Petronas Gas

Islamic Financial Instruments

Price of Bond is calculated based on the following formula:

P

=

FV 1+i

mn-1+D/E

m

Proceed =

P FV i m n D E NV = Price of Bond

NV x PB

100

= Face value per RM100 nominal value = Yield to maturity = Number of coupon payment per year = Number of years to maturity = Number of days from value date to next coupon date (as if the bond pays semi annual coupon) = Number of day in coupon period = Nominal Value of bond

Islamic Financial Instruments 2. Coupon Islamic Bond

· Issued at nominal value which is equivalent to the face value (amount payable upon maturity). · A series of coupon (annual or semi annual ) is paid based on fix agreed rate. · The underlying Syariah concept is Bai Bithaman Ajil Ijarah, Mudharabah and Musyarakah. · The few Syariah contracts used as underlying transaction for Coupon Islamic Bond include :

a. Bai Bithaman Ajil ­ KLIA Bond, SAJ, TNB b. Ijarah - Segari Energy Venture. Silterra, KL Kepong c. Mudharabah ­ PG Municipal Council, Mukah Power, OCBC Sub Debt b. Musyarakah ­ KL Sentral, PLUS, Rantau Abang

Islamic Financial Instruments

P = mn t=1 c/m x 100 (1 + i/m) 100 x +

t-1+D/E

FV (1 + i/m )

mn-1+D/E

c x m

A E + NV c 2 x A E

Proceed = NV x PB 100

Where P FV I m n c A D E NV = = = = = = = = = =

Price of Bond per RM100 nominal value Face Value per RM100 nominal value Yield to maturity Number of coupon payment per year Number of years to maturity Coupon rate per annum Number of days from last coupon payment to value date Number of days from value date to next coupon date Number of days in current dividend period Nominal value of bond transacted

6

Islamic Derivatives Instruments

Islamic Derivatives Instruments

· Starting from middle of 2005, the Islamic financial market has started to explore application of derivatives in Islamic finance. · Basic building blocks of derivatives: · Swap · Forward · Options · Futures · National Syariah Council has approved FX Forward/Swap and Islamic Profit Rate Swap and with more research undertaken by the market there will be more derivatives instruments endorsed by the council thus opening up the development of Islamic structured products in the near future.

Islamic Derivatives Instruments 1. Islamic Profit Rate Swaps (IPRS)

3 IPRS

Main objective of IPRS is to assist banks and corporate in the management of profit rate risk. An agreement to exchange a series of profit/return/ coupon rates between two counterparties (normally consist of a Fixed Rate Party and a Floating Rate Party); Implementation is by the execution of a series of underlying Murabahah contracts on commodities.

Islamic Derivatives Instruments

IPRS (cont'd)

Financial Asset

Receives Fixed Returns

I P R S

Pays Fixed Rate

BIMB

Receives Floating Rate Pays Floating Obligations

IPRS Counterparty

Financial Liability

Islamic Derivatives Instruments

· IPRS Stage 1: Fixed Profit Rate Leg

IPRS (cont'd)

Broker

3

Broker

1

Bank Islam as Agent

IPRS Counterparty

2

CParty sells commodity to Bank Islam at FIXED price (costPlus - Deferred)

Bank Islam

1

CParty buys commodity from broker through Bank Islam as Agent

2

3

Bank Islam sells commodity to broker

Commodity Flow Funds Flow

Islamic Derivatives Instruments

IPRS Stage 2: Floating Profit Rate Leg

broker

IPRS (cont'd)

1 3

Bank Islam as Agent IPRS Counterparty

broker

2 2

BIMB

3

CParty sells commodity to broker through Bank Islam as Agent

Commodity Flow Funds Flow

1

BIMB buys commodity from broker

BIMB sells commodity to CParty at FLOATING price (costPlus - Deferred)

Islamic Derivatives Instruments 2. Islamic Forward Rate Agreement (IFRA)

Main objective of IFRA is to assist banks and corporate in the management of profit rate risk. An agreement to exchange profit/return/ coupon rates between two counterparties at a single specified period Implementation is by the execution of a single Murabahah contracts on commodities. IFRA can also be structured to hedge a series of amortized cashflow.

Islamic Derivatives Instruments 3. Islamic Cross Currency Swaps (ICCS)

ICCS enables counter-party to switch their asset or liability from one currency to another to :

Hedge currency risk Profit rate risk

The agreement to exchange currency between two counterparties can be between fixed profit rate to fixed profit rate, fixed to floating or floating to floating. Implementation is by the execution of a series of underlying Murabahah contracts on commodities.

Islamic Derivatives Instruments

Initial Exchange of Principal and Periodic Profit Payment

US Subsidiary

1. USD Principal 2.USD Profit Payment 2.USD Profit Payment

I C C S

Malaysian Corporate

1. MYR Principal

2.MYR Profit Payment 1. MYR Principal 1.USD Principal

BIMB

2.MYR Profit Payment

MYR Financing

Islamic Derivatives Instruments

Exchange of Principal on Maturity Date

US Subsidiary

3. USD Principal

I C C S

Malaysian Corporate

3. MYR Principal

3.USD Principal

BIMB

3. MYR Principal

MYR Financing

7

Islamic Foreign Currency

Islamic Foreign Currency

· Treasury operation also involves activities related to foreign exchange which conform to Syariah. The activities include :

· Commercial transactions · Inter-bank trading (Proprietary Trading)

· Forms of foreign exchange transactions include spot, swap and forward. · Exchange of one currency against another is permissible in Islam under the concept of Al Sarf. However such transaction must be under the following conditions

· involving two different currencies · delivery of currencies must be done concurrently

Islamic Foreign Currency

·

Inter-bank trading which account to more than 90% of the total foreign exchange volume worldwide can be classified as follows:

i. ii. iii. Investment - Fundamental / Long term in nature Speculation - Technical / Short term in nature Gambling - No basis / information

· ·

Transaction acceptable is for investment and speculation. Trading is subject to the net open position permissible by BNM and internal approved daylight and overnight exposure of the respective financial institution.

· Prices of the underlying concept for FX Forward and Swap is Waad Mulzim (Unilateral Promise) · This is to facilitate settlement process and satisfy market convention for a forward contract where the delivery of the exchange is done at a specified future date. · In other word, Wa'ad is made on the transaction date and the Sarf akad is perform on settlement date.

8

FOREX Trading

FOREX TRADING

· Front Line Operations · Back Office Operations

FOREX TRADING

Front Line Operations: · Corporate Forex · Proprietary Trading · Funding

FOREX TRADING

Corporate Forex: · Provides quotations to corporate customers · Provides advisory services to corporate customers · Daily branch FX counter rates · Marketing

FOREX TRADING

Proprietary Trading: · Trading on the inter-bank market · Taking position for the bank · Guided by limits imposed by bank · `Squaring off' corporate positions

FOREX TRADING

Funding: Placing of excess foreign currency funds (borrowing of shortage currency funds) in deposits/trading of excess funds

FOREX TRADING

Back Office Operations: · Settlement of transactions · Confirmation of transactions · Limit monitoring

9

FOREX Transactions in Islamic Banking Operations

OVERVIEW

· A marketplace where one currency (e.g. MYR) is exchanged with another currency (e.g. USD) at a price determined by market forces · Operates in Over The Counter (OTC) market · Global foreign exchange (FX) market is the biggest market in the world · Average global daily turnover in foreign exchange transactions is more than USD1.5 trillion. · Operates in a 24 hour market.

OVERVIEW

Corporations: ·Trade ·Investment

Individuals: ·Investments ·Personal use

Commercial Banks: ·Provide services to corporations and individuals ·Trading for own accounts Central Bank: ·Managing reserves/intervention ·Provide direction to other participants

Brokers: Middlemen

OVERVIEW Factors Affecting FX Rates: · Economic Factors: Gross Domestic Product (GDP), Consumer Price Index (CPI), Money Supply, Balance of Payment (BOP), Capital Flows · Government and Central Bank Policies Fiscal/monetary policies External debt, budget deficits/surpluses Current account deficits/surpluses

OVERVIEW Factors Affecting FX Rates: Central Bank's action and policies Speculative position Political Technical Seasonal demand, year-end factors Market information and rumours

Foreign Exchange Trading Policies

· Bank Negara Malaysia's Exchange Control Notices · Exchange Control Act 1953 · Rules on Ringgit Operations Monitoring System (RIMS)

Foreign Exchange Trading Policies

Bank Negara Malaysia's Exchange Control Notices

· · · · · · ·

ECM 2: Dealings in Gold & Foreign Currency ECM 3: External Accounts ECM 4: General Payments ECM 5 : Export of Goods ECM 6: Credit Facilities to Non-Residents ECM 7: Foreign Currency Accounts ECM 8: Domestic Credit Facilities to Non-Resident Controlled Companies · ECM 9: Investment Abroad · ECM 10: Foreign Currency Credit Facilities & Ringgit

Foreign Exchange Trading Policies

Bank Negara Malaysia's Exchange Control Notices

· ECM 12: Securities · ECM 13: Import & Export of Currency Notes, Bills of Exchange, Assurance Policies, etc. · ECM 14: Dealings with Specified Persons and In Restricted Currencies · ECM 15: Labuan International Offshore Financial Centre · ECM 16: Approved Operational Headquarters

Types of FX Instruments:

·Spot ·Forward ·Swap ·Futures ·Non-Deliverable Forward (NDF) ·Options ·Structured Products/Derivatives

OVERVIEW Various Types of FX Transactions and Value Dates Immediate Contracts FX Contracts Forward Contracts

OVERVIEW Various Types of FX Transactions and Value Dates Immediate Contracts

Value Today (TOD)

Value Tomorrow (TOM) Value Spot

FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME

Thank you

Information

PowerPoint Presentation

89 pages

Find more like this

Report File (DMCA)

Our content is added by our users. We aim to remove reported files within 1 working day. Please use this link to notify us:

Report this file as copyright or inappropriate

68055