This document proposes a collateralized financing solution using a tri-party agent to provide liquidity management. The solution involves two parties (Party A and Party B) initiating a collateralized transaction through a tri-party agent. Party A provides a pool of eligible sukuk as collateral to Party B in exchange for funds. The tri-party agent monitors the transaction, maintains collateral levels, and returns the sukuk to Party A upon repayment of funds to Party B at maturity. The tri-party structure aims to provide an alternative compliant liquidity tool for Islamic banks through automated collateral allocation and margin maintenance over the life of the financing transaction.

1. Repo Alternative
Collateralized
Collateralized
Financing Solution
Ismail Dadabhoy
Oman May 2102

2. Generic
Conventional Repo
C ti lR
TRI
PARTY
BUY
CLASSIC SELL

3. Repo Pumps Liquidity
Into the Market
I t th M k t
Great Tool for Cash
Management
Frees up Blank Credit lines
with relationship Banks
with relationship Banks
Develops Liquidity in the
Develops Liquidity in the
Fixed Income Market leading
to tighter Bid offer Spread

4. Value Proposition‐
Value Proposition
Proposition‐ Conventional
Leveraging Portfolio for
Yield Enhancement
Yield Enhancement
Carry Trade
Revenue Generation
Increased take up in the Primary
market
Greater Liquidity in the secondary
market
Hedging & Financing of Derivatives

5. Islamic Solution
Islamic Solution
• Financing Transaction with the benefit of Collateral

6. Collateralized Product Benefits
 Alternative to Clean Lending: Collateralized financing offers a structure that
requires some extra operational task but does provide credit enhancement as
well as providing an effective liquidity management tool for use with the
Collateral Management Agent.
C ll l
 Credit Risk Management: as long as the collateralization, is followed,
Cou e pa y e posu e s educed o e a g
Counterparty exposure is reduced to the margin threshold plus Sukuk
es o d p us Su u
execution risk, rather than a full clean exposure. It can allow for positive
capital treatment.
IFSB to provide guidance and standard
 Liquidity Management: Having the comfort of collateral allows the institutions
to finance for a longer duration and or larger quantum as the credit risk is
reduced.
 Multi Currency Capabilities – Allows financial institution under Repo document
to support multicurrency activities that are netted to a pre agreed base
currency for easy monitoring of overall exposures and margin calls.
 Development for Sukuk: Allowing Financial institutions to maintain less cash
and allocate more in income generating Sukuk. Giving rise to greater take up
of Sukuk by Islamic investors

7. Collateralization Overall Transaction Flow
5‐ Party A delivers acceptable pool of
Sukuk having market value in excess of the
S k kh i k l i f h
Single Deferred Cash as collateral 5
or Collateral
Pool of Sukuk
6 – Party A transfers the
y 6 Party B
y
From Party A
From Party A Deferred payment at maturity Provides
5 and receives its Sukuk back Funding
1
PARTY A 7
Requires Funding
1‐ Party B appoints Party A
1 P t B i t P t A
as Agent to purchase Commodity
Acting as Acting and transfers Cash to Agent to
as Agent 2
forward the funds for the purchase
Principal
of the commodity
3
4 3‐ Party A NOW
Commodity acting as Principal Commodity
Buyer Purchases the same
Seller
commodity from
y
4‐ Party A sells commodity to Party B for Spot
the market for spot deliver & spot Deliver But with
2‐ Party A buys commodity for
payment and raises Cash for its deferred Payment Spot Payment and Spot Deliver from
funding needs the market as Agent for Party B

8. Types of Collateral
Types of Collateral
International Sukuk
International Sukuk
Equity Linked Sukuk ‐‐ Convertible / Exchangeable
Domestic Sukuk
Sharia Compliant Structured Notes
Sharia Compliant Commodities
Sharia Compliant Funds
Sharia Compliant Equities
Sharia Compliant Equities

9. Margin & Credit Control
g
Risk Mitigation via Documentation
Mark to market of collateral  margin maintenance
Netting of Credit Exposure  greater volume
g p g
Default  Counterparty credit risk managed via haircuts
and the daily margin process
 Haircuts are imposed in line with agreement by the two parties– these
represent a discount on the amount of cash funding provided or taken
 Daily margin process operated by Operations or Collateral Management dept
Looks at an individual client’s portfolio and aggregates mark‐to‐market of
each trade to an overall portfolio threshold
The ability to price securities financed is vital for the risk management
process to succeed and therefore, Banks will only take Collateral that it
feels comfortable in being able to price

10. Collateral Sharia Requirement
q
Shariah requires that any form
of collateral taken should be
kept in a segregated client
kept in a segregated client
account and not comingled with
the bank’s own inventories.
Important to stress that any income received from the underlying product
Important to stress that any income received from the underlying product
held in a segregated accounts belongs to the Collateral giver.
The Bank receiving or being credited income in its custody account has to
pass the fund to original owner
pass the fund to original owner

11. Regulatory & Legal Challenges
 In case of conventional market repo documentation
the collateral is effected through netting i.e. the ability
to close out and set-off in an insolvency where the
value of the collateral securities can be determined
and applied in set off against the repurchase price.
However, the legal framework in most of the OIC
countries does not recognize this technique
technique.
 The Islamic Industry need to assess and tackle this
requirement or find a workable solution
 IIFM and ISDA are working towards obtaining opinion in
the UK, Singapore, & Malaysia as a starter

12. Looking Forward
L ki F d
TRI – PARTY
I A Y
BUY – SELL
Structure
St t

13. Operational Solution for Collateral Management
• A frequently used product in U.S. domestic and
international bond repo markets to invest or raise funds
• Uses third party to Monitor Collateral Threshold and
request to move cash and allocate securities
• Benefits:
 Auto allocation of bonds within pre-agreed
criteria/schedules
 Mark-to-market pricing and margin maintenance
p g g
 Reduced operational burden
 Optimisation of collateral
 Minimal infrastructure

14. Funds & Collateral (Sukuk) Flow – Tri Party
Funds & Collateral (Sukuk) Flow Tri Party
(Against Payment) Islamic
Sukuk Bank A
Tri Party
Agent
g Funds
Sukuk
Islamic
Bank B
Bank B
Funds
Islamic Islamic
Bank A Bank B
(as principal) (as principal)

15. Initiation of Collateralized Transaction –
Initiation of Collateralized Transaction –
Tri Party
Upon receipt of Funds
Party B undertakes
Transaction
For & with
Tri Party Party A
Agent
Bank A and Bank B informs the Tri-party Agent on trade of
Collateralized Transaction (could be Murabaha or other
arrangement)
Financing Amount + Currency
Profit Rate/Amount
Party
Party
Start Date & End Date B
A
Collateral Parameters
Margin Maintenance Threshold Amount
Base Currency for Portfolio Valuation and Margining

16. Initiation of Collateralized Transaction –
Initiation of Collateralized Transaction –
Tri Party
Tri Party
i a y
Agent
Start – Value Date
Party
Party
A
B

17. Monitoring of Collateralized Transaction –
Monitoring of Collateralized Transaction –
Tri Party
Tri Party
i a y
Agent
Party
Party Period of monitoring from Start A
B Date to Termination Date

18. Termination of Collateralized Transaction –
Termination of Collateralized Transaction –
Tri Party
Tri Party Agent Transfers
Tri Party Agent Transfers
Sukuk back to Party A
upon receipt of Funds
Tri Party
TiP t
Agent
Termination –
Deferred Value Date
D f dV l D t
Party
Party A
B
g
Agent to receive a fee
for its services

19. Collateralized Financing
Collateralized Financing
Solution
Principal & Tri Party
P i i al & T i Pa ty
• THANK YOU
Ismail .E.Dadabhoy
y