Bank Negara issues Policy Document on Islamic Collateralised Funding

01 August 2024

1.   Introduction

1. set out the scope of an SBBA transaction and a CCM transaction that can be conducted by a banking institution participating in the IIMM; 


2. set out regulatory requirements and BNM’s expectations in relation to an SBBA transaction or a CCM transaction entered into by a banking institution; 


3. promote sound risk management practices by a banking institution for the conduct of an SBBA transaction or a CCM transaction; and 


4. ensure compliance by a banking institution with Shariah principles when it enters into an SBBA transaction or a CCM transaction.

2.  Applicability

1. an SBBA transaction or a reverse SBBA transaction, where all requirements in the Policy Document that are applicable to an SBBA transaction shall equally apply to a reverse SBBA transaction; or 


2. a CCM transaction or a reverse CCM transaction, where all requirements in the Policy Document that are applicable to a CCM transaction shall equally apply to a reverse CCM transaction, 

3.  Key Definitions For the purposes of the policy document:
 
“banking institution” means:   

1. a licensed Islamic bank, including a licensed international Islamic bank as defined under section 2(1) of the Islamic Financial Services Act 2013 (“IFSA”); 


2. a licensed bank or licensed investment bank as defined under section 2(1) of the Financial Services Act 2013 (“FSA”) which is approved by BNM under section 15(1)(a) of the FSA to carry on Islamic banking business; and 


3. a prescribed institution as defined in section 3(1) of the Development Financial Institutions Act 2002 (“DFIA”) which is approved by BNM under section 33B(1) of the DFIA to carry on Islamic financial business. 

“collateralised commodity murabahah” or “CCM” means an arrangement where a CCM pledgor buys commodity from a CCM pledgee based on the Shariah principle of murabahah with deferred payment term, and the CCM pledgor pledges CCM securities as collateral for deferred payment obligation under the murabahah contract;
 
 “CCM pledgee” means a party that sells commodity to a CCM pledgor through a murabahah contract and is provided with CCM securities as collateral for deferred payment obligation under the murabahah contract;
 
“CCM pledgor” means a party that buys commodity from a CCM pledgee through a murabahah contract and provides CCM securities as collateral based on Shariah principle of rahn for deferred payment obligation under the murabahah contract;
 
“CCM securities” means Shariah-compliant securities pledged by a CCM pledgor with a CCM pledgee as collateral for deferred payment obligation under the murabahah contract;
 
“original price” means the amount paid by an SBBA buyer to an SBBA seller as consideration for the purchase of SBBA securities under an SBBA transaction;
 
“non-resident” refers to:

1. a non-resident as defined in section 213(1) of the FSA or 224(1) of the IFSA; or  


2. a person declared as a non-resident under section 214(6)(a) of the FSA or 225(6)(a) of the IFSA;  

“original price” refers to the amount paid by an SBBA buyer to an SBBA seller as consideration for the purchase of SBBA securities under an SBBA transaction:

“principal” means a party to an SBBA transaction or a CCM transaction who acts on its own behalf or who authorises an agent to act on its behalf; “profit rate” means:

1. in the context of an SBBA, an amount to be added to the original price in order to arrive at the sale price for which an SBBA buyer will sell back an SBBA Securities or its equivalent to an SBBA seller;  


2. in the context of a CCM, an amount to be added to the cost price at which a CCM pledgee sources a commodity from the market to arrive at the sale price at which the CCM pledgee sells the commodity to a CCM pledgor,  

expressed as a percentage per annum;
 
“RENTAS” means the Real-time Electronic Transfer of Funds and Securities System, which is a multi-currency real time gross settlement system for inter-bank funds transfer, a securities settlement system and a scripless securities depository for all unlisted debt instruments;
 
“RENTAS securities” means securities deposited under RENTAS;
 
“resident” refers to:

1. a resident as defined in section 213(1) of the FSA or 224(1) of the IFSA; or


2. a person declared as a resident under section 214(6)(a) of the FSA or 225(6)(a) of the IFSA;  

“reverse CCM” means an arrangement where a CCM pledgee sells commodity to a CCM pledgor based on Shariah principle of murabahah with deferred payment term, and the CCM pledgee is provided with CCM securities as collateral based on the Shariah principle of rahn for deferred payment obligation under the murabahah contract;
 
“reverse SBBA” means an arrangement comprising separate transactions in the following sequence:

1. an outright purchase of SBBA securities by an SBBA buyer from an SBBA seller based on the Shariah principle of bay’ at an original price;  


2. a promise, which may be in any of the following forms:  

• a unilateral promise (wa’d) by the SBBA buyer to sell the same or equivalent SBBA securities to the SBBA seller on a future date at a sale price;
• a unilateral promise (wa’d) by the SBBA seller to buy back the same or equivalent SBBA securities from the SBBA buyer on a future date at a sale price; or
• a bilateral promise (muwa’dah) by the SBBA seller to buy back and by the SBBA buyer to sell the same or equivalent SBBA securities on a future date at a sale price; and  

3. an outright sale of the same or equivalent SBBA securities by the SBBA buyer to the SBBA seller based on the Shariah principle of bay’;  

“SBBA buyer” means the party who purchases SBBA securities and promises/commits to sell back the same or equivalent SBBA securities on a certain date in the future at the original price plus the profit rate;
 
“SBBA securities” means underlying Shariah-compliant securities in an SBBA transaction;
 
“SBBA seller” means the party who sells SBBA securities for cash consideration and promises/ commits to buy back the same or equivalent SBBA securities on a certain date in the future at the original price plus the profit rate;
 
“sell and buy back” or “SBBA” means an arrangement comprising separate transactions in the following sequence:

1. an outright sale of SBBA securities by an SBBA seller to an SBBA buyer based on the Shariah principle of bay’ at an original price;  


2. a promise, which may be in any of the following forms:  

• a unilateral promise (wa’d) by the SBBA seller to buy back the same or equivalent SBBA securities from the SBBA buyer on a future date at a sale price;
• a unilateral promise (wa’d) by the SBBA buyer to sell the same or equivalent SBBA securities to the SBBA seller on a future date at a sale price; or
• a bilateral promise (muwa’adah) by the SBBA buyer to sell and by the SBBA seller to buy back the same or equivalent SBBA securities on a future date at a sale price; and  

3. an outright purchase of the same or equivalent SBBA securities by the SBBA seller from the SBBA buyer based on the Shariah principle of bay’; and  

"Shariah-compliant securities” means securities issued in accordance with Shariah. 4.  General Requirements The general requirements include the following:

1. The conduct of an SBBA transaction or a CCM transaction must be in line with the principle of professionalism and integrity, as outlined under the Principles for a Fair and Effective Financial Market for the Malaysian Financial Market issued by BNM.  


2. A banking institution must not enter into an SBBA transaction or a CCM transaction which limits the availability of SBBA securities or CCM securities with intention of creating a false or misrepresented market in SBBA, CCM, SBBA securities or CCM securities.  


3. For SBBA, a banking institution is to ensure the legal ownership of the SBBA securities sold under an SBBA or reverse SBBA is transferred to the purchaser of the SBBA securities.  


4. For CCM, the CCM securities pledged by a CCM pledgor under a CCM transaction may be transferred to the CCM pledgee⁴.  
5. The maximum tenure of an SBBA transaction or a CCM transaction must not exceed five years.  


6. The standard lot for an interbank SBBA transaction or a CCM transaction involving ringgit is RM10 million, whereas an SBBA transaction or a CCM transaction involving foreign currency may be based on the standard lot or minimum market lots practised in the relevant markets of such foreign currency. A banking institution that wishes to transact an SBBA transaction or a CCM transaction for an amount which is different from the standard lot or minimum market lots may specify the amount when requesting for, or providing, quotes.  


7. Prior to undertaking an SBBA transaction or a CCM transaction, a banking institution shall ensure that:  

• only dealers duly authorised by the banking institution can undertake an SBBA transaction or a CCM transaction;
• a list of authorised dealers is maintained and updated from time to time;
• policies, procedures and internal controls are established to ensure that any SBBA transaction or CCM transaction including the selection of underlying SBBA securities or CCM securities have been properly authorised; and
• infrastructures, including systems for securities valuation and management, credit control, risk management and record keeping, are in place to support the SBBA transaction or CCM transaction.  

5.  Legal documentation Every SBBA transaction or CCM transaction must be governed by a written agreement that specifies all the terms and conditions of the SBBA transaction or CCM transaction and the duties and obligations between the parties.
 
At minimum, the agreement shall provide for:

1. in the case of an SBBA transaction, the absolute transfer of the legal title of the SBBA securities from the seller to the buyer, including any security transferred through substitution or mark-to-market adjustment;  


2. marking-to-market of transactions;  


3. use of risk management tools including haircut and margin maintenance, where relevant;  


4. events of default and the consequential rights and obligations of the parties, including provision on close-out netting;  


5. full set off of claims between the parties to the transaction in the event of default;  


6. the rights of the parties regarding substitution of SBBA securities and CCM securities and the treatment of coupon, profit, income or rental rate payments in respect of the SBBA securities and CCM securities subject to it; and  


7. the agreed governing law of the agreement.

6.  Collateral A banking institution must set up a custodian arrangement for SBBA securities and CCM securities held in their custody on behalf of their counterparty arising from any SBBA transaction or CCM transaction. Procedures and systems to segregate and monitor the SBBA securities and CCM securities held in custody, which are subject to independent risk assessment, must be established to avoid the risk of duplicative use of the SBBA securities and CCM securities.
 
Terms and conditions of the custody arrangements must be made clear by the banking institution to their counterparty prior to entering any SBBA transaction or CCM transaction under such custodian arrangements.
 
SBBA securities and CCM securities held in custody must not be rehypothecated by an SBBA seller and a CCM pledgor during the tenure of the SBBA transaction or CCM transaction. SBBA securities and CCM securities held in custody may be substituted with equivalent securities mutually agreed between both parties provided that the Agreement contains the terms and conditions for the substitution. 7.  Risk management A banking institution is required to:

1. establish a risk management framework which enables identification, measurement and continuous monitoring of all relevant and material risks arising from all SBBA transactions or CCM transactions; and  


2. formulate and implement risk management measures to address risks arising out of an SBBA transaction or a CCM transaction, including counterparty credit assessment, net counterparty exposure limits and risk mitigation techniques involving the use of prudent haircuts, margin maintenance and timely margin call to maintain effective control of risk exposure.

8.  Foreign exchange policy An SBBA transaction or a CCM transaction carried out by a banking institution must be in compliance with the prevailing foreign exchange policy on borrowing and lending by resident and non-resident.
 
Hedging by a banking institution of Ringgit-denominated SBBA securities or CCM securities arising from an SBBA transaction or a CCM transaction must comply with the prevailing foreign exchange policy on buying and selling of foreign currency against the ringgit. 9.  Reporting and settlement requirements An SBBA transaction or a CCM transaction involving RENTAS securities shall be reported by a banking institution to Bursa Malaysia Electronic Trading Platform.
 
An SBBA transaction or a CCM transaction involving RENTAS securities as collateral, collateral for substitution or margin transfer shall be settled through RENTAS.
 
A banking institution shall disclose the details of the SBBA transaction or CCM transaction for both RENTAS and non-RENTAS securities in BNM’s Statistical Mart for Analysis and Reporting (STATsmart).

10.   Frequently Asked Questions
 
To clarify some of the requirements in the Policy Document, BNM issued a set of Frequently Asked Questions on the same day that the Policy Document was issued.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.