Dubai Financial Market issues draft rules on sharia-compliant hedging

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 customised 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.