IIBR: The Trilogy in De-Linking from Conventional Finance RUSHDI SIDDIQUI GLOBAL HEAD ISLAMIC FINANCE & OIC COUNTRIES October 2, 2012
Market Efficiency & Economic Information
• Market Efficiency & Market Information are inextricably related
• Examples: price dispersion in China after availability of telephones; car prices on internet
• Efficient markets –financial markets especially- dependent on availability of reliable, consistent, verifiable, information about current and expected future ‘states of the world’
• ‘Public Good’ aspect of information
Source: Hawkahma
Market Efficiency & Economic Information
• Better Information Better Resource Allocation & Efficiency
• Disclosure of financial information directs capital to its most productive uses
• Transparency: flow of timely & reliable economic, social, political information about policies and outcomes
• Transparency: Access, Relevance, Quality & reliability
Source: Hawkahma
Financial Market Indicators
• Asset Prices & their indicies are forward looking, discount expected future actions, policies and events
• Tend to be leading indicators of economic activity
• More volatile than real economic indicators
Source: Hawkahma
Growth of Islamic Finance Stages (Abilities)
Viability
Credibility
Durability
Sustainability
Scalability
40 Years $1T $214B Sukuk $100+B iLoans $37-52B iFunds G20 over OIC Presence
Crisis (l &ll) GFH/TID Sukuk Default NPL/Provisioning UK Sov Sukuk?
Windows/Subs Acct/Law Non-OIC IF Hubs
Alternative Catch up to Halal? Faith & Finance Merger
A.I.R. Abilities?
IIBR?
Decoupling Why Important? Authenticity
• Decoupling or Delinking – Conventional finance
– Law of Necessity
– Indigenous development
• Dow Jones Islamic Market Index (1999)
• DJ-CitiGroup Sukuk index (2006)
• DJ Islamic Sustainability Index (2006)
• SAMI Halal Food Index (2011)
• Islamic Interbank Benchmark Rate (IIBR 2011)
DE-COUPLING FROM LIBOR
BHIBOR
KIBOR
USD LIBOR
Daily USD LIBOR QSAIBOR1Y=, QBHIBOR1Y=, QAEIBOR1Y=, QUSDLIBOR1Y=, QKIBOR1Y=
Price
0.86
0.88
0.9
0.92
0.94
0.96
0.98
1
1.02
1.04
Price
0.8
1
1.2
1.4
1.6
1.8
2
2.2
2.4
2.6
2.8
J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A 2009 2010 2011 2012
AEIBOR
SAIBOR
7
De-linking begins Oman Crude v Brent/US Crude
• The DME is pushing the Oman contract as a benchmark for markets east of Egypt's Suez canal, arguing that much of the world's crude comes from the region and should be priced in the Middle East. Its target is for the Oman contract to eventually challenge established global benchmarks, Brent <LCOc1> and U.S. crude futures <CLc1>.
• "We strongly believe the Omani crude contract is an outstanding proxy for the Middle Eastern crude. It make lot of sense. It has good correlations," Gary Morsches, managing director, energy for CME Group said in a conference call to reporters.
IIBR v LIBOR • Is IIBR a proxy for ME cost of
Islamic funds?
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Islamic Interbank Benchmark Rate What’s the difference?
• IIBR measures expected profit while conventional benchmarks measures interest rates
• The IIBR question for contributors explicitly refers to the cost of raising Shariah compliant funding
• The IIBR contributors benchmark based on return generated by Islamic assets, hence a reference to an Islamic asset risk profile
• Although invariably some connection/correlation to global markets, the IIBR is linked to the economies of the Islamic world and not to the events and risks of Europe and the US
A WORLD FIRST
A PARADIGM
SHIFT
FROM THE MARKET
FOR THE MARKET
INVOLVES THE LARGEST ISLAMIC
BANKS
Participating Institutions
Pulse of the Islamic Capital Markets
• Interbank profit rate fixing by 16 contributor banks
• Calculated and distributed by Thomson Reuters
• Governed by the Islamic Benchmark Committee
• Certified by the Shariah committee comprised of AAOIFI scholars
• Calculated daily Sunday-Thursday
What Why
• Certainty, Reliability & Transparency
• To Agree settlement and marked-to-market procedures
• Increase trade through transparent and trusted pricing
• De-link from conventional benchmarks
• Establish local currency benchmarks
• Be rate linked to Islamic bank’s real financing and investment activities
The profit rate that an individual Contributor Panel bank would perceive to be reasonable for Shariah compliant funding were it to do so by asking for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 am Makkah local time (GMT + 3).
3
The myriad uses of the Islamic Benchmark
• Pricing of common overnight to short term investment and financing instruments such as Murabaha, Wakala and Mudaraba
• Pricing of longer term investment and financing of yielding assets (Ijarah assets)
• Pricing of sukuk and other Shariah compliant fixed income instruments
• Official incorporation possible for pricing onto confirmations/annexes related to the IIFM-ISDA Tahawwut Master Agreement (TMA).
Indigenous pricing is eventually achieved as Islamic banks increase
•Interbank transaction
•Benchmark securities issuances to the Islamic rate
eventually less reliant on the conventional banking system and its pricing
Banks provide estimate
contributions
Rates incorporated in TR Dealing TR Dealing
captures dealt rates
EVOLUTIONARY OBJECTIVE – INDIGENOUS ISLAMIC PRICING
4
Overall Structure and Governance
Audit Committee
Thomson Reuters
Terminals
Rates Data
By 10.45am Makkah time
Islamic Benchmark Committee Panel Association (Thomson Reuters, Islamic Development Bank, AAOIFI,AIBIM, SESRIC,
Hawkamah Institute for Corporate Governance, Bahrain Association of Banks, and representatives of Contributing Banks)
Fixing
Top & Bottom Quartile Excluded
Arithmetic Mean (Average) Taken
IIBR
By 11.00 am Makkah time
Shariah Committee Sh Taqi Usmani (Chairman), Sh. Yusuf Talal Delorenzo; Dr. Abdulrahim Sultan Al Olama; Dr. Mohammad Daud Bakar; Muddassir Siddiqui, Prof Abbas Mirakhor, Sh Akram Laldin
Selected Contributing
Banks
6
TENORS: ON, 1 W, 1 M, 2M, 3M, 6M, 9M, 1Y
PUBLICATION FREQUENCY Every business day (Sun – Thurs) except
•New Year’s Day
•Eid Al Adha (1st Shawwal)*
•Eid Al Fitr (10th Dhul Hijjah)* *As determined by the authorities in Saudi Arabia
Timing of Fix publication
Rates are contributed based
on a pre-set question asked to contributor banks
Rates are snapped by Thomson
Reuters
9.00 AM – 10.44 AM 10.45 AM 10.45-10.59 AM 11.00 AM
OFFICIAL REFERENCE TIME: MAKKAH (GMT +3)
Automated and Manual Audit and
Review Procedures (Errors / Tolerance /
Std. Dev / Call)
Publication on Thomson Reuters
Terminals
7
Calculation Process
2nd Step Ordering of Rates
1st Step Collation of Rates
3rd Step Discard Top/ Bottom Quartiles
4th Step Calculate Moving Average
16 C
ontr
ibut
or B
anks
5th Step Publish IIBR
8
Error Checking
• Central Fixing Support @ Exeter, UK notified of all types of errors per bank contribution
Tolerance
• Difference between the rate and the corresponding moving average within acceptable confidence levels
Standard Deviation
• Anything above the upper and lower limit based on a pre-defined confidence levels will be flagged
Outlier Verification
• Call up contributor and verify the rate. If not available, discretion on Thomson Reuters to accept or reject the rate based on a number of factors
Quality Review and Audit procedures
Tenor Max
Spread ON 0.05 SW 0.05 1M 0.10 2M 0.10 3M 0.10 6M 0.15 9M 0.15 1Y 0.15
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Governance Framework and Roles
Islamic Interbank
Benchmark Rate
Contributor Panel
Shariah Committee
Fixings Infrastructure
Provider
Islamic Benchmark Committee
Islamic Benchmark Committee •Self governing body that determines selection, admission and exclusion of contributors •Oversees rules, process and procedures for fixing •Review of discrepancies in rate contributions/ periodic review of contributor rate quality •Establishes disciplinary sub-committee when necessary
Contributor Panel • Contributors as chosen by the Islamic
Benchmark Committee • Regulated by the Standard Fixings
Agreement between Thomson Reuters and Contributor
Fixings Infrastructure Provider • Provides the necessary infrastructure in
order to absorb, calculate and distribute the rates contributed by the Contributor Panel
• Reports on the quality of contributions to the Islamic benchmark committee
Shariah Committee • Self governing body that determines
the Shariah compliance of the fixing definition, question, process and procedures
• Voluntary attendance of Islamic Benchmark Committee meetings
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Governance Committees
*as at 22nd November 2011
Islamic Benchmark Committee
INDEPENDENT MEMBERS*
• AAOIFI (Secretariat) • Association of Islamic
Banking Institutions Malaysia (AIBIM)
• Bahrain Association of Banks
• Hawkamah Institute for Corporate Governance
• Islamic Development Bank • Statistical, Economic and
Social Research Center for Islamic Countries (SESRIC)
• Thomson Reuters
Islamic Benchmark Committee
REPRESENTATIVE BANK MEMBERS*
• Abu Dhabi Islamic Bank • Ahli United Bank • Al Baraka Bank • Al Hilal Bank • Alinma Bank • Al Salam Bank • Bahrain Islamic Bank • Barwa Bank • Dubai Islamic Bank • Ithmaar Bank • Kuwait Finance House • Masraf Al Rayan • Noor Islamic Bank • National Commercial Bank • Qatar Islamic Bank • Sharjah Islamic Bank
Shariah Committee
• Sh Taqi Usmani (Chairman)
• Yusuf Talal DeLorenzo • Mohammed Daud Bakar • Mohammad Abdul Rahim
Al Olama • Muddassir Siddiqui • Prof Abbas Mirakhor • Akram Lalidin
Note: The Shariah Committee works independently from the Islamic Benchmark Committee
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Selection of Contributor Banks
SELECTING AND ADMITTING
Selection Criteria
1.Primary Preference: Highly Rated Islamic Banks / Windows
2.Secondary Preference: Include active Islamic Banks as nominated / approved by quorum
Admitting
Each bank must sign the Standard Fixings Agreement and acknowledge
•Fixing calculation method and timing of fix •Their responsibility to contribute on every business day
EXCLUDING Thomson Reuters’ Discretion •To protect the quality and integrity of the IIBR, which is of paramount importance
Quality of Contributions •Rate investigation based on outlier status •Certain explanations valid •Inform the Islamic Benchmark Committee and recommend exclusion
•Where objections received or recommended by at least 4 members, form Disciplinary Sub Committee
Delay in Contribution or Missing Contributions
•Banks that are consistently missing contributions may be removed in consultation with the Islamic benchmark committee.
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0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
IIBR ON
IIBR 1M
IIBR 3M
IIBR 6M
IIBR 1Y
LIBOR ON
LIBOR 1M
LIBOR 3M
LIBOR 6M
LIBOR 1Y
LIBOR v IIBR
Conclusion
• Decoupling (authentic v cosmetic)
• IIBR published before LIBOR Implications?
• Traction – Legal documents
– Wider use
– Consumer reference
• Looking Ahead – More banks, but limitations- geographic representation
– Local currency
– Wakala
– Dealt rates
Conclusion ll
• Market information, efficiency & good governance are inextricably linked
• Islamic Finance needs a central body to compile and disseminate data & statistics
• Standardisation of securities and instruments is essential for building markets and efficiency
• IIBR is important IF market building block
Source: Hawkamah