Islamic Securities Selling and Buying - Negotiated Transaction (“ISSBNT”) Model is a Shariah compliant alternative to the conventional Securities Borrowing and Lending - Negotiated Transaction (“SBLNT”) Model.

The ISSBNT Model is structured based on two outright bai` (sale) transactions that includes the feature of wa`dan (two unilateral promises/undertakings), khiyar al-shart (conditional option) and the provision of collateral as security for the indebtedness. The details of these features are explained in Item 2 below.

The SAC of the SC resolved on 26 February 2015 that the ISSBNT Model is permissible (Ref: Resolutions of the Shariah Advisory Council of the Securities Commission Malaysia 31 December 2018, page 39, which is downloadable at https://www.sc.com.my/api/documentms/download.ashx?id=5f0c31dc-daa9-43c1-80ac-e7ecf70c8e44.

The key criteria of the ISSBNT model are reflected in item 2.1 to 2.11 below. These criteria must be present before a transaction can be considered an ISSBNT.

Each transfer of securities from a principal contracting party to another principal contracting party is supported by a contract of sale (bai`). The ISSBNT model proposes the following two (2) outright sale transactions:

1. Leg 1 – Approved Supplier sells securities to the Approved User at an agreed sale price (Sale Price for Leg 1) on a deferred payment basis; and
2. Leg 2– Approved User sells similar or equivalent securities to the Approved Supplier at an agreed sale price (Exercise Price for Leg 2) on a cash payment basis via setting-off the Sale Price for Leg 2 against the Sale Price for Leg 1.

The principal contracting parties of the ISSBNT must execute the wa’dan (two unilateral promises or undertakings), i.e. Wa’d 1 and Wa’d 2, to reflect the commitment of the principal contracting parties to perform certain obligations such as selling or delivery of securities, buying or acceptance of securities and releasing the pledged collateral upon the settlement of the contract.

Wa’d 1 is the unilateral promise/ undertaking issued by the Approved Supplier to buy or to accept if the Approved User sells or delivers or upon occurrence of the agreed upon trigger events.

Wa’d 2 is the unilateral promise/ undertaking issued by the Approved User to:

1. execute Leg 2 upon recall by the Approved Supplier or upon the occurrence of the agreed upon trigger events; and
2. adjust the value of pledged collateral in accordance to the market price of the securities on a marked to market basis.

The principle of khiyar al-shart, which is a conditional option to cancel a previous agreed sale within a specific number of days. is applied in the ISSBNT model where the Approved User may be granted a grace period to rescind the Leg 1 sale and return the purchased securities to the Approved Supplier without any cost to be incurred between the Approved Supplier and Approved User. For the avoidance of doubt, provided that the Approved User is the owner and in possession of the purchased securities, it reserves the right to exercise the option (khiyar) based on mutually agreed terms and conditions. The Approved User may lose the right should there be any impediments that would prevent the Approved User from returning the securities to the Approved Supplier such as the disposal by the Approved User of the purchased securities.

In ISSBNT, the securities sold via Leg 1 and Leg 2 are considered as different assets of sale. The set of securities transacted under Leg 1 might have been sold by Approved User of which the Approved Supplier will get upon execution of Leg 2 later, a different set of similar/ equivalent securities.

Leg 2 should take place when the Approved Supplier exercises his option to purchase equivalent securities as that in Leg 1 in accordance with the Wa’d given by the Approved User to the Approved Supplier or upon the triggering of certain events which the parties have agreed upon as circumstances when the Leg 2 transaction is to be executed, e.g. the announcement of a corporate action involving the securities in question. This corporate action could include rights issues, bonus issues or mergers and acquisitions.

The parties could, in lieu of executing Leg 2 also agree to vary the number of ISSBNT Eligible Securities but this would usually be confined to situations of corporate actions such as bonus issues and subdivision of shares.

The parties may also agree upfront that the ISSBNT may be extinguished without the execution of Leg 2 in certain circumstances as follow:

1. Where any of the events of default under the agreement between the ISSBNT Participants setting out the terms and conditions of the transaction are triggered; and
2. Where Leg 2 cannot be performed as a result of an event beyond the control of the ISSBNT Participant, and this would include the situation where the ISSBNT Securities cease to become Shariah compliant.

In the event the Shariah status of the securities turns to be Shariah non-compliant, subject to the agreement between the Participants, the following options are available;

Scenario 1
If the status of the ISSBNT Eligible Securities changes to Shariah non-compliant after the said securities are fully sold to a third party prior to execution of Leg 2, Approved User may wish to opt for the following remedies;

1. Cash settlement via Commodity Murabahah transaction; or
2. Replacement with other Shariah compliant securities.

Scenario 2
If the status of the ISSBNT Eligible Securities changes to Shariah non-compliant after the Approved User has not sold or sold a portion of the said securities to a third party, Approved User may wish to opt for the following remedies;

1. the remaining units in its possession can be sold to Approved Supplier under Leg 2; and the difference can be arranged via the following options;
2. Cash settlement via Commodity Murabahah transaction; or
3. Replacement with other Shariah compliant securities.

The cash settlement via Commodity Murabahah exercise is meant to settle the Sale Price of Leg 1 transaction which was deferred as well as preservation of investment value to Approved Supplier due to inability of Approved User to perform Leg 2. Therefore, the settlement process is to ensure neither Approved Supplier nor Approved User will be adversely affected by the non-event of Leg 2.

The settlement which takes into account the movement of market price of the securities (Δ MP), total fee (MI) and total dividend (D) needs to be undertaken. As there is no exchange of securities, it would be appropriate for Approved Supplier and Approved User to undertake a Commodity Murabahah transaction to reflect the above cash settlement. The settlement via Commodity Murabahah has no direct relationship with Leg 1 because it is a separate transaction of selling and buying a commodity at an agreed price. There will be no securities involved in this transaction.

Samples of calculation and mechanism of the settlement are provided in Appendix 1;

• Sample Calculation Scenario 1
• Sample Calculation Scenario 2
• Sample Calculation Scenario 3
• Sample Calculation Scenario 4

Based on the guide provided by the SAC of the SC in the List of Shariah Compliant Securities (Ref: https://www.sc.com.my/), holding of Shariah non compliant securities should observe the followings;

Timing for the disposal of Shariah non-compliant securities.

As a guide to investors, the SAC would like to advise investors on the timing for the disposal of securities which have been classified as Shariah non-compliant.

1. “Shariah-compliant securities” which are subsequently re-classified as “Shariah non-compliant”. These refer to securities which were earlier classified as Shariahcompliant but due to certain factors such as changes in the companies’ business operations and financial positions, are subsequently reclassified as Shariah non-compliant. In this regard, if on the date this updated list takes effect (24 November 2017), the respective market price of Shariah non-compliant securities exceeds or is equal to the investment cost, investors who hold such securities must dispose them off. Any dividends received up to the date of the announcement and capital gains arising from the disposal of Shariah non-compliant securities on the date of the announcement can be kept by the investors. However, any dividends received and excess capital gain from the disposal of Shariah non-compliant securities after the date of the announcement should be channeled to baitulmal and/or charitable bodies. On the other hand, investors are allowed to hold their investment in the Shariah non-compliant securities if the market price of the said securities is below the investment cost. It is also permissible for the investors to keep the dividends received during the holding period until such time when the total amount of dividends received and the market value of the Shariah non-compliant securities held equal the investment cost. At this stage, they are advised to dispose of their holding. In addition, during the holding period, investors are allowed to subscribe to:
1. any issue of new securities by a company whose Shariah non compliant securities are held by the investors, for example rights issues, bonus issues, special issues and warrants (excluding securities whose nature is Shariah non-compliant e.g. loan stocks); and
2. Shariah-compliant securities of other companies offered by the company whose Shariah non-compliant securities are held by the investors, on condition that they expedite the disposal of the Shariah non-compliant securities.


2. Shariah non-compliant securities
   
   The SAC advises investors who invest based on Shariah principles to dispose of any Shariah non-compliant securities which they presently hold, within a month of knowing the status of the securities. Any gain made in the form of capital gain or dividend received before or after the disposal of the securities has to be channeled to baitulmal and/or charitable bodies. The investor has a right to retain only the investment cost.

Note: Investment cost may include brokerage cost or other related transaction cost.

Similar to SBLNT, the title of the securities transfers to the Approved User. The economic rights over the securities still reside with the beneficial owner by virtue of the ISSBNT Agreement.

The execution of Leg 2 in an ISSBNT must not be on the same day with the execution of Leg 1. The time gap is required under ISSBNT to eliminate bai’ al-‘inah (a sale with an immediate re-purchase).

Sale values for both Leg 1 and Leg 2 should typically take into consideration the market price of the securities at the contracted date, fees, and dividend payout, as demonstrated by the following formula:

1. Leg 1: Selling Price = MPt x Q
   Where,
   MPt : Market Price of the shares at Leg 1 contracted date
   Q : Quantity of the shares


2. Leg 2: Exercise Price = (MPt x Q) – MI – D
   Where,
   MI : Monthly Instalment (reflects the “lending fee” in conventional SBL)
   D : Dividend

Unless the parties agree otherwise, the indebtedness arising from Leg 1 is to be secured against acceptable collateral as set out below. The significance of the pledged collateral is to ensure the payment of the Leg 1 transaction by the Approved User to the Approved Supplier through the set-off settlement mechanism.

1. Cash or cash equivalent instruments;
2. Shariah compliant securities;
3. Sukuk (Malaysia);
4. Sukuk (Foreign);
5. Sovereign bonds (Foreign) – in the event of non-availability of (i) – (iv).

Examples of cash equivalent instruments: Fixed Deposit, Bank Draft etc.

The imposition of compensation charges at actual loss based on the principle of ta’widh (compensation) on the defaulting party is permissible. The calculation of the actual loss is to be determined by the contracting party.

Defaulting party means any participant who does not honour its obligation(s) towards its counterparty as agreed upon.

The imposition should be applicable in the event of insufficient collateral value to cover indebtedness and any other actual losses incurred by Approved Supplier (e.g. actual losses due to change of market price of the securities).

The onus to ensure Shariah compliance of the ISSBNT lies with the ISSBNT Participants.

ISSBNT is architectured based on the established framework of the Securities Borrowing and Lending Negotiated Transaction (SBLNT) model. The key differences between SBLNT and ISSBNT are as follows:

Execution of Leg 2 would take place upon occurrence of a triggering event as agreed between the contracting parties and set out in the Wa’d 1 and Wa’d 2 of ISSBNT. Depending on mutual agreement between an Approved Supplier and Approved User, the circumstances/ events that would trigger the Wa’d 1 to be exercised by Approved User are amongst others;

1. Whenever the Approved User does not want to hold the ISSBNT Securities, i.e. to make full settlement of the Sale Price and to redeem the collateral.
2. Whenever there is any activity related to corporate action of the affected Public Listed Company (“PLC”), e.g. delisting, merger, etc.

Depending on mutual agreement between Approved Supplier and Approved User, the circumstances/ events that would trigger Wa’d 2 to be exercised by Approved Supplier are amongst others;

1. Whenever the Approved Supplier needs to recall the sold securities for the purpose of exercising its voting rights.
2. Whenever the Approved Supplier wants to completely dispose of its holding of the securities to the market (not through ISSBNT).
3. Whenever the total payment of monthly installment (“MI”) and dividend (“D”) exceeds 90% of the value of the Sale Price of Leg 1.
4. Whenever there is any issuance of ‘bonus issue’ or ‘right issue’ by the respective PLC(s) on the assumption that the Approved Supplier would want to participate in such corporate exercises.

The list of ISSBNT Eligible Securities is made available on the website of Bursa Malaysia. The list is updated twice a year in accordance to the List of Shariah compliant Securities published by the SAC of the SC.

The Participating Organisation and the Custodial Client shall execute a written agreement to allow the utilisation of the Custodial Securities for ISSBNT which shall address Shariah compliant issues and stipulates the Custodial Client’s consent to allow PO to utilise the ISSBNT Eligible Securities in its custody.

It is not possible for the Approved Supplier to sell the securities to a third party since the securities are considered transferred to and owned by the Approved User as a result of the execution of Leg 1. If the Approved Supplier intends to sell the securities to a third party, the Approved Supplier would need to have recalled the securities first from the Approved User before selling the securities to a third party.