The Monetary and Banking Research Institute of the Central Bank published a policy report examining the formation of a market for currency derivative under Sharia in the country's financial system.
According to the Public Relations of the Monetary and Banking Research Institute, the management summary of this report, which was compiled by Dr. Hossein Meysamy and Fereshteh Mollakarimi and supervised by Dr. Sajjad Ebrahimi, states:
The currency derivative market is one of the missing financial institutions in the country's financial system, the absence of which has created various costs at the macro level for foreign exchange policymaking of the Central Bank and the micro-level for producers, traders, foreign investors, and the general public. In the absence of this market, the risk coverage of exchange rate fluctuations is challenged, and it will not be possible for economic stakeholders to predict the future course of the exchange rate (even in the short term). This study tries to discuss the idea of forming a currency derivative market in the country's financial system and the role of this market in creating currency stability and explain its necessity, dimensions, and some details. The research findings show that it is possible to launch a currency derivative market by considering economic concerns and Sharia rules. In practice, the currency derivative market can be formed in three stages: foreign exchange wholesale cash market (organized foreign exchange market), foreign exchange derivatives wholesale market, and foreign exchange derivatives retail market. The most critical purpose of forming a foreign exchange wholesale cash market is to extract the cash rate in major transactions that can be used as a basis for derivative transactions. After this stage, wholesale foreign exchange derivatives transactions can be established and supervised by the Central Bank and the main market stakeholders such as banks, exchange offices, importers, exporters, producers, etc. Finally, the formation of a "foreign exchange derivatives retail" market on the commodity exchange can be put on the agenda so that speculative foreign exchange transactions can also be directed from the informal market to a structured, regular and supervised framework. It is also possible to buy and sell risk between risk-taking and risk-averse people at the micro-level. Based on the research findings, the following points can also be emphasized:
1. In the currency derivative market, various types of derivative contracts are traded on a specific underlying asset (foreign currency). Stakeholders enter the market with different goals and motivations and try to achieve their goals in the best way by adopting the right buying and selling strategies. While central banks enter the market to stabilize currency at the macro level and policymaking, speculators and investors enter the market to make a profit from their forecasts (in the short and medium term) and traders producers with the aim of hedging risk.
2. Due to the currency derivative market's important functions in areas such as attracting foreign investment, major developed countries and many developing countries have taken action to establish currency derivative markets. For example, Argentina, Brazil, Turkey, the UAE, South Korea, India, and China have launched currency derivative markets.
3. If the currency derivative market wants to be launched, besides the issue of economic functions, the dimensions of compliance with its Sharia law need to be considered. In general, the most important principles that need to be considered in designing the currency derivative market in the Islamic context are: acceptance of the general nature of the derivatives market within the framework of Sharia, acceptance of speculative transactions within a regulated framework, the necessity of possibility of delivery of basic assets, incorrect design of derivative contracts on indices and necessity of observing general rules of contracts.
4. In addition to paying attention to the general principles of Sharia, it is necessary that the legal nature of the instruments used in the currency derivative market under Sharia (including futures, options, and clearing) to be compatible with the rules of Islamic jurisprudence.
5. Legally, a foreign exchange futures contract can be designed in the legal form of a "future sales commitment" or a "contract of compromise." In the first form, the futures trader, under the contract, undertakes to sell a certain amount of a foreign currency at a specified price at the present time at a specified maturity. In return, the currency's prospective buyer undertakes to purchase the said currency with the specified specifications. In the second legal form (contract of compromise), the futures seller of the currency, according to the contract, gives a certain amount of a foreign currency to the currency's prospective buyer for a certain price.
6. The option contract can also be designed in the form of an obligation. It means that the seller of the option undertakes to sell a certain amount of currency at a certain price at the customer's request, and in return for this obligation, he receives a sum from the customer, which is called the option price.
7. In the conventional currency swap, the interest element is remarkably present, and this interest is not due to the real economy's activities. However, because under Islamic jurisprudence law, the opportunity cost of money is not accepted without connection to the economy's real sector. Therefore, the exchange of interest is faced with the challenge of loan usury and cannot be justified in the Islamic context. This argument is valid in cases where the principal of currencies is exchanged in addition to interest and where only interest rates are intertwined. The solution that can be suggested to solve this problem is to eliminate interest rates during the contract period. A legally binding foreign exchange swap can be considered a new legal contract under Article 10 of the Civil Code, which includes the sale of cash at present and the obligation to sell cash in reverse in the future. At time zero, the parties sell their currency to each other and commit to a reverse transaction at maturity.
8. Although Sharia-compliant foreign exchange swap contracts based on the proposed legal framework (as opposed to foreign exchange futures and Sharia-compliant option transactions) cannot meet all the economic functions of conventional foreign exchange swaps, they do meet at least some of the needs of Islamic derivatives market stakeholders.
9. To implement the proposed stage model for the formation of the currency derivative market in the country, it is necessary to pay attention to some general considerations, some of the most important of which are: extensive impact of the exchange rate on the country's economy and its difference from other basic assets, the priority of macro-level goals (currency stability) over micro-level (risk coverage), a monetary position as a supplier and policymaker, the existence of a multi-exchange rate system in the country and the Informal currency derivative market (tomorrow's deals).10. The proposed model for forming a currency derivative market in the country's financial system will face some challenges and obstacles for implementation that need to be addressed to eliminate them. Some of the most important challenges mentioned are: development of speculative activities in the economy and the issue of justice, multi-rate exchange rate, negative experience in launching coin futures market, currency derivative market impact on the cash market, rising exchange rate and lack of supplier and finally unfavorable macroeconomic conditions (including International sanctions, high inflation, budget deficit and restrictions on international payment and receipt processes).