By Richard Barley
LONDON (Reuters) - A framework document for Islamic derivatives that could spur growth in the fledgling instruments may be ready by the middle of this year, an official from the International Islamic Financial Market (IIFM) said on Tuesday.
IIFM, a body that aims to develop Islamic financial markets, and the International Swaps and Derivatives Association (ISDA) are working on the document, which will set out best practice for certain common events under derivatives contracts that will have to comply with Islamic principles.
"We are seeing light at the end of the tunnel," said Iljal Alvi, chief executive officer of IIFM, at the Reuters Islamic Banking and Finance Summit in London.
A consultation document may be released to the industry in March and the framework document may be ready in the second quarter, Alvi said.
"It will not be product specific," he said. "It will be the foundation."
The document will set out common clauses that cover many different types of derivatives, for instance the early termination of contracts.
As well as boosting standardization -- a key factor in the growth of markets such as the conventional credit derivatives market -- this should lead to simpler documentation.
"It will have a lot of common clauses ... instead of a murabaha agreement of 20 pages, we can reduce it to six or seven pages," Alvi said.
Afaq Khan, head of Islamic banking at Standard Chartered (STAN.L: Quote, Profile, Research, Stock Buzz), earlier told the Summit there was huge potential for growth in Islamic derivatives, with Islamic institutions at a potential disadvantage to their conventional peers without them.
However, one challenge the industry faces is in avoiding the speculation that is common in conventional derivatives markets, with Islamic derivatives intended to be used solely for hedging purposes.
"We are looking purely from the risk management point of view," Alvi said.
(Editing by David Holmes)
© Thomson Reuters 2009. All rights reserved.
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