Legal and Regulatory Framework of Islamic Capital Market

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    Legal and Regulatory

    Framework of Islamic Capital

    Market

    Prepared for : Ustazah Norizan

    Prepared by :

    Nur Aisyah binti Amir Salleh

    Farazilamasni binti Muslimin

    Siti Masura binti Puasah

    Mohd Hanif

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    Development of Islamic Capital Market

    Sukuk Structure

    Local and International Regulatory Authorities of Islamic Capital

    Market

    Securities Commission MalaysiaBursa Malaysia

    Bank Negara Malaysia

    LOFSA

    IFSB

    IFSA

    Capital Market and Services Act 2007

    Table of Content

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    Guidelines

    Equity Capital Market and Instrument

    Guideline on Islamic Fund Manager

    Guidelines on Unit Trust Fund

    Guidelines for Islamic Real Estate Investment Trust

    Guidelines n Structured Products

    Debt Capital Market and Instruments

    Guidelines on Islamic Securities

    Guidelines on Asset Backed Securities

    Guidelines on Minimum Content of Trust Deed

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    Introduction

    Capital market is the place where long-term financial instruments with maturityexceeding one year are issued and traded.

    The goalis to channel savings into long term productive investments.

    Participant in this market consists ofgovernmentandprivate sectors.

    The financial instruments in the capital market may be categorized into:

    Equity instruments are in the form of share certificates, either common stock or

    preferred stock.

    Debt instruments are made up of bonds which may be classed into common bonds and

    convertible bonds.

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    Development of Islamic Capital Market

    MALAYSIAN ISLAMIC

    FINANCIAL SYSTEM

    Source: Asst. Prof. Dr. Rusni Hassan 5

    Islamic Capital

    Market

    Islamic

    BankingTakaful

    Retail

    Deposit &

    Investment

    Equity

    MarketBond MarketBank Negara

    IBA 1983 Islamic Bank

    BAFIA SPTF

    SPTF guidelines 1993

    etc

    Securities CommissionSecurities Commission Act 1993

    Capital Market and Services Act 2007

    Companies Act1965

    Guidelines for IS 2004

    etc

    Bank NegaraTakaful Act 1984

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    Islamic Capital Market (ICM) Is a market transactions are carried out in ways that do not against with the shariah

    compliance.

    Since almost a decade ago when the first Islamic private debt securities (IPDS)was

    issued, the ICM has developed and produced a wide range of equity products, debt

    securities and managed funds.

    There can be doubt that the government is intent on shaping Malaysia into a leading

    international Islamic capital market centre.

    IPDS continued to be a favorite instrument among corporate bodies for long-term

    financing.

    Malaysia Rating Corp Berhad says that 77% of the total issues rated in 2002 (going byvalue) were Islamic papers.

    Most of the IPDS approved by the Securities Commission (SC) to date were

    structured based on the principles of BaiBithaman Ajil (BBA) and Murabahah.

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    The SC had, in July 2002, informed relevant industry bodies and associations on the

    importance of recognizing the SAC as the only body that can make pronouncements to the

    public on any Shariahmatters in relation to the capital market. This was done to ensure

    harmonization and standardization of Shariah rulings and to avoid possible divergence ofShariahinterpretations among Shariahscholars in the country.

    The in-house Shariah advisers or committees of the members of industry bodies or

    associations should provide advice and guidance on internal process only and should not make

    pronouncements to the public.

    The Shariah Advisory Council (SAC) was established in May 1996 to advise the

    Commission on Shariah matters pertaining to the ICM. Members of the SAC are qualified

    individuals who can present Shariah opinions and have vast experience in the application

    of Shariah, particularly in the areas of Islamic economics and finance.

    Today, various capital market products are available for Muslims who only seek to invest and

    transact in the ICM. Such products include the SC list of Shariah-compliant securities, Sukuk,

    Islamic unit trusts, Shariah indices, warrants (TSR), call warrants and crude palm oil futures

    contract.

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    Where ICM in Malaysia today? Islamic capital market is a trillion ringgit industry in Malaysia. Having grown at an average

    rate of 13.6% per annum over the ten-year period between 2000 and 2010, the size of

    MalaysiasIslamic capital market, or ICM, stood at RM1.05 trillion as at the end of 2010,

    compared to just RM294 billion as at end-2000.

    During this period, the market capitalization of Shariah-compliant companies and the

    value of sukuk outstanding in Malaysia increased at average rates of 11.5% and 22.2%

    per annum respectively. A similar trend was also observed at the global level, with Islamic

    finance as a whole registering an average growth rate of almost 15% per annum.

    Malaysias ICM is projected to increase to RM2.9 trillion in 2020. In comparison, the

    whole capital market is projected to more than double from RM2.0 trillion in 2010 to RM4.5

    trillion by 2020.

    The Sukuk market has continued to expand impressively in 2011. The total value of Sukuk

    issued globally from January to August amounted to USD55 billion, representing a 105%increase over the corresponding period in 2010. Malaysia remains at the forefront of the Sukuk

    market, accounting for 67% or USD37 billion of the total Sukuk issued. Malaysia is also the

    domicile for 60% of the USD165 billion total Sukuk outstanding globally as at August 2011.

    Malaysia continues to enjoy a leadership role as an international centre for Islamic capital

    market activities. Malaysia has successfully developed various capabilities and capacities invirtually all segments and aspects of the Islamic capital market.

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    Fundamental ofSukuk

    Is the plural of Sakkwhich literally meaning as a certificate.

    Medieval Timesthe word chequeor checkderived from sak

    Technically, it refers to securities, notes, papers or certificates, with features of liquidity andtradability.

    Islamic Financial Services Board (IFSB-2) defines:

    Certificates that represent the holders proportionate ownership in an undivided partof the underlying asset, where the holder assumes all rights and obligations to such asset.

    The Accounting and Auditing Organisation for Islamic Finance Institutions (AAOIFI)Shariahstandard 17 (Investment Sukuk) definition:

    Certificates of equal value put to use as common shares and rights in tangible assets,usufructs and services; or equity in a project or investment activity.

    Guidelines on Sukuk in SC (Chapter 2) define;

    Certificatesof equal value which evidence undivided ownership or investment in theassets using Shariah principles and concepts endorsed by the SAC, but shall not includeany agreement for a financing/investment where the financier/investor andcustomer/investee are signatories to the agreement and where the financing/investmentof money is in the ordinary course of business of the financier/investor, and anypromissory note issued under the terms of such an agreement.

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    Sukuk InMalaysia The issuance of Sukuk is regulated by the Securities Commission Malaysia, through the framework

    provided under the Guidelines on Sukuk.

    The structure of sukuk must be confirmed and approved by a Shariah Adviser who is appointed by theissuer. A Shariah Adviser can be an independent Shariah Adviser approved by the SC or a Shariah

    Committee attached to a financial institution that operates Islamic banking activities approved by BankNegara Malaysia.

    Malaysia pioneered the development of the global sukuk market with the launch of the first sovereign five-year global sukuk worth US$600 million in 2002. Since then our sukuk market has experiencedunprecedented growth with Malaysia firmly established as one of the largest issuers of sukuk over the years.

    As of the year 2007 - Malaysia is the largest sukuk market in the world with achieving 68.9% or USD62billion of the global outstanding sukuk.

    Malaysian corporation issued the largest sukuk offering in the worldamounting to USD4.7 billion

    Presently, The Deputy Prime Minister Tan Sri Muhyiddin Yassin in 10 thKuala Lumpur Islamic FinanceForum 2013said that Malaysia had grown its sukuk from US$1.5bil (RM4.8bil) of the global outstandingamount in 2001 to over US$148bil (RM473.7bil) in June 2013. It is accounted for 60.4% of the outstandingglobal sukuk.

    Despite the volatility in global bond markets and concerns over monetary policy in the United States, theglobal sukuk market had shown resilience in the first half of this year with US$61.2bil (RM194.7bil)worth of sukuk papers domiciled in more than 20 countries.

    Malaysia has grown its sukuk rapidly and is now leading in global sukuk. Sukuk market had become a majorcontributing factor in the internationalization of Islamic finance.

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    Sukuk Structures

    Sukuk

    Based

    on

    Sharia

    h

    Contracts Sales-Based

    Lease Based

    Agency Based

    Partnership

    Murabahah (Mark-Up Sale)

    Istisna (Manufacturing Sale)

    Salam (Forward Sale)

    Ijarah Muntahiah Bit Tamleek (Lease Ended With

    Transfer of Ownersip)

    Ijarah Mawsufah fi Dhimmah (Forward

    Lease)

    Wakalah lil Istihtmar (Agency for

    Investment)

    Mudharabah

    Musharakah

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    Sukuk IjarahMalaysia Global Sukuk Incorporated

    Federal Land

    Commissioner

    SPV (Malaysia

    Global SukukInc.)

    Sukuk Ijarah

    Owners

    9. Payment of rental and at maturity pay

    cash for sukuk redemption

    2. SPV enters into a Master Ijarah Agreement

    with GOM (lease of land parcels)

    7. At maturity, SPV sells the land to GOM at anagreed price.

    1. Sells beneficial interest in land parcels to SPV

    for USD600 million (transfer of beneficial title)4. Payment of proceeds from

    sale of Sukuk

    5. Proceeds

    Government of Malaysia

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    Sukuk IjarahShariah Requirements

    The rental payments maybe structured such that it comprises of (i) profits on the

    rental and (ii) redemption amount on the principal.

    Sukuk Ijarah does not represent debts; but undivided proportionate ownership of the

    leased asset (participatory certificates).

    Because the Sukuk Ijarah are not debts nor monetary, the issue of sale of monetary-

    debts with a discount do not arise. Hence Sukuk Ijarah maybe traded in the

    secondary market freely.

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    Sukuk IstisnaStructured to finance projects which will be completed in the future e.g. power plant, highways etc.

    Under parallelIstisna,the Issuer, being awarded the project by awarding party, will enter into Istisna 1 with theInvestors i.e. Investors to deliver the completed project to the Issuer and the Issuer is supposed to pay the Istisna

    Price + Profit Margin to the Issuer, to be paid deferred at an agreed maturity date.

    The Issuer, being indebted to the Investors, will issue Sukuk Istisnato the Investors.

    The Issuer will create an SPV for project management purposes.

    The Investor will then enter into Istisna 2 with SPV where the payment of the purchase price (equivalent to

    construction cost) is paid by Investor based on the contractually agreed terms e.g. progressive payment, one lump

    sum etc.

    ISSUER

    SPV

    INVESTOR

    Istisna 1 (Construction Cost + Profit Margin)

    Issue Sukuk Istisna

    Creates Special Purpose Vehicle

    (SPV)

    Istisna 2 (Construction

    Cost)

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    Sukuk al-Istisna structure

    SPVContractor/builder End buyer

    Sukuk holders(investors)

    2. Sukuk proceeds are used to pay the contractor/

    builder to build and deliver the future project

    1. SPV issues Sukuk to investors

    and receive proceeds

    3. Title to assets is

    transferred to the

    SPV

    4. Property/project is leased or sold

    to the end buyer.

    5. The returns are distributed among the

    Sukuk holders

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    Sukuk Murabahah (Tawarruq) StructureTawarruq (Monetisation) is applied by Cagamas (Malaysias national mortgage corporation) to purchase

    receivables from Islamic assets (house financings, hire purchase and leasing) of financial institutions.-

    INVESTOR

    Commodity

    Broker A

    Commodity

    Broker B

    Trustee

    1. Cagamas, as Agent (Wakil) of Investors

    purchase commodity on spot basis (Purchase

    Price)

    2. Issue Sukuk to Investors to evidence ownership of

    commodity

    5. Trustee (on behalf of Investors) sell

    the commodity to Cagamas (Deferred

    Sale Price = P+P) on deferred basis

    6. Cagamas sells commodity to Broker B

    on spot basis (P)

    7. Selling Priceused to fund Cagamas

    Islamic operations

    3. Proceeds

    9. At maturity,

    Cagamas pay

    principal to

    redeem

    8. Periodic

    Profit

    Payment

    4.

    Purchase

    Price

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    Sukukal-Musharaka structure

    SPV

    Musharakah

    Originator/

    Corporate

    1.Physical

    asset

    contribution

    2a. Sukukproceeds

    4..Periodic profits

    +incentive fees

    3. Periodic profits 2b. Sukuk

    proceeds

    5. Issues sukuk musyarakah + Periodic distribution of profit

    Investors

    6. Musharaka Arrangement- Undertaking to

    buy Musharaka shares of the SPV on a

    periodic basis

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    Corporate and the SPV enter into Musyarakah arrangement for fixed period and agreed profit

    sharing ratio and the appointment of the corporate as an agent to develop the land.

    Any losses will be apportioned based on the capital contributed. The corporate undertakes to

    buy Musyarakah sahers of the SPV on a periodic basis.

    1. CorporateAs a (Musharik A) contribute land or other physical assets to the Musyarakah

    2. SPV (Musharik B)Contribute cash, i.e the issues proceeds received from the investor to the

    Musyarakah

    3. The corporate as an agent of the Musyarakah to develop the land with the cash injected into

    the Musyarakah and sell/lease the developed assets on behalf of the Musharik B.

    4. In return, the agent (corporate) will get a fixed agency fee plus a variable incentive fee

    payable.

    5. The profits are distributed to the sukuk holder.

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    Through this amendments, the SC will act as the sole regulatory authority both inrespect of the issuance of securities as well as in respect of the registration of prospectus.

    In considering proposals by public companies to undertake an issue of debt securities

    whether convertible into shares or not:

    The company is in need of funds for the expansion of business activities, includingexpansion by way of acquisition, thereby improving its productive capacity and enhancing

    its profitability

    The company is in need of funds for the diversification of business to achieve synergies

    The company is in need of funds to refinance its existing borrowings, thus reducing its

    interest cost and thereby improving its profitability.

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    (d) by way of issue of securities, effect

    (i) a compromise or arrangement whether or not for the purposes of or in connection witha scheme, compromise or arrangement for the amalgamation of any two or more

    corporations or for reconstruction of any corporation;

    (ii) an employee share or employee share option scheme;

    (iii) an acquisition of securities or assets;

    (e) apply for the listing of a corporation, or for the quotation of securities, on a stock

    market of a stock exchange;

    (f) distribute the assets of a public company to its members other than distribution in cash or

    distribution of assets to

    members of the public company on its winding up; or

    (g) acquire or dispose assets (whether or not by way of issue of securities) which results in a

    significant change in the business direction or policy of a listed public company.

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    Under section 32(2) of the Act, a person who propose to do any of the following

    proposals would have to submit to the SC for approval as provided under section 32(3)

    and (4) of the Act respectively:

    (a)make available, offer for subscription or purchase, or issue an invitation to subscribe for

    or purchase securities in Malaysia;

    (b) make available, offer for subscription or purchase, or issue an invitation to subscribe foror purchase, outside Malaysia, securities of a public company, or to list such securities on

    a securities exchange outside Malaysia;

    (c) make a bonus issue of securities of a public company other than by way of the

    capitalization of inappropriate profits;

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    Under section 2 of the Act securitieshas been defined as ;

    (a) debentures, stocks or bonds issued or proposed to be issued by any government;

    (b) shares in or debentures of, a body corporate or an unincorporated body; or

    (c) unit trusts or prescribed investments, and includes any right, option or interest in respect thereof

    Also, under the same section of Act ;

    debentureincludes debenture stock, bonds, notes and any other evidence of indebtedness of a corporation

    for borrowed moneys, whether or not constituting a charge on the assets of the corporation, but shall not

    be construed as applying to any of the following:

    (a) any instrument acknowledging or creating indebtedness for, or for money borrowed to defray the

    consideration payable under, a contract for sale or supply of goods, property or services or any contract of

    hire in the ordinary course of business;

    (b) a cheque, bankersdraft or any other bill of exchange or a letter of credit;

    (c) a banknote, an insurance policy or a guarantee;

    (d) a statement, passbook or other document showing anybalance in a current, deposit or savings account;

    (e) any agreement for a loan where the lender and borrower are signatories to the agreement and where the

    lending of money is in the ordinary course of business of the lender, and any promissory note issued underthe terms of such an agreement; or

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    All proposals submit to the SC for its consideration, including the issuance of IPDS,

    shall conform to the following:

    - The application must be a public company.

    - Listed company which submit a proposals the SC for its consideration must do so

    through a merchant bank.

    - Unlisted companies, with the exception of those making an application for floatation

    on the stock exchange, may do so either through a merchant bank or an approved

    firm of public accountants. An application for such waiver should be made prior to

    submission of a proposals, and a waiver may be granted in appropriate cases.

    All application for proposals requiring the approval of the SC (Includingapplications for waiver) should be submitted in three copies and addressed to the

    Chairman of the SC

    The application letter submitted by the principal adviser must be signed by at least 2

    authorized signatories.

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    Any person who is aggrieved by the decision of the SC may, within 30 days after the

    aggrieved person is notified of such decision, make an application for a review of

    the decision to the SC whose decision shall be final. An application for a revision

    the terms and conditions of an approval given by SC is not subjected to any time

    limit. The principle adopted by the SC on such application are as follows:

    - Such application should be supported by evidence of genuine new grounds of

    development beyond the control of the relevant parties.

    - Such application which do not comply with above may be considered by the SC at

    its discretion based on exceptional reasons.

    Any proposals that has been rejected by the SC may be re-submitted but only after alapse of at least 1 year from the date the application for the proposal or a review of

    decision, as the case may be, is rejected.

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    Bursa Malaysia

    Is an approved exchange holding company under section 15 of the Capital Marketsand Services Act 2007 regarding the Powerof Minister to approve an exchangeholding company

    A public company limited by shares under Companies Act 1965.

    Operates a fully integrated exchange, offering equities, derivatives, offshore, bondsas well as Islamic products and provide a diverse range of investment choicesglobally.

    The securities of Bursa Malaysia listed company which is Shariah CompliantSecuritiesclassified as shariah permissible for investment, based on the companys

    compliance with shariah principle in terms of its primary business and investmentactivities.

    It was introduces in June 1997 by the Shariah Advisory Council (SAC) of the SC.

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    Bursa Malaysia Secur itiesRegulates and operates the securities trading activities

    in Malaysia.

    Companies from any economic are listed either on the Main Market for large cap

    established companies, or the ACE Market for emerging companies of all sizes. The

    exchange adopts the FTSE Bursa Malaysia KLCI values as its main index.

    Bursa Malaysia Derivatives is a subsidiary of Bursa Malaysia Berhad which

    provides, operates and maintains a future and options market.

    Its star product, the crude palm oil futures (FCPO) contract has been the global

    benchmark for the pricing of palm oil and palm oil based product.

    Bursa Malaysia is the first exchange to establish Bur sa Suq Al-sil a,the first end to

    end shariahcompliant commodities trading platform.

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    Market & Trading Participants

    Market participants

    Stock broking Companies currently, 35 stock broking companies which 14 arecategorized as Investment Banks. Offer services in dealing of securities listed on

    Bursa Malaysia Securities.

    Trading participants

    Is a company which owns at least one Preference Share of Bursa Malaysia

    Derivatives to conduct business as a future broker licensed by the Securities

    Commission under the Capital Market & Services Act 2007 and carries on trading in

    Contracts traded on the Bursa Malaysia Derivatives

    o I nvestor protection BM maintains 3 compensation funds, (Compensation fund of

    Bursa Malaysia Securities, Fidelity Fund of Bursa Malaysia Derivatives andCompensation Fund of Bursa Malaysia Depository.

    o Risk management through the supervision of the Risk management Committee

    (RMC), aimed at managing and controlling risks appropriately for the Group.

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    BANK NEGARA MALAYSIA

    Established on 26 January 1959 under the Central Bank of Malaysia Act 1958 (Revised

    2009). The new CBA Act 2009, known as Act 701 was gazetted on 3rd 0f September

    2009.

    Section 3(1) states the notwithstanding the repeal of the Central Bank of Malaysia Act

    1958 by section 99, the body corporate established under the repealed Act under the

    name Bank Negara Malaysia or in English Central Bank of Malaysia shall continueto be existence under and subject to the provisions of this Act.

    The Act incorporates an explicit mandate, provides comprehensive provisions for

    heightened surveillance, pre- emptive actions and expanded resolution powers to

    facilitate the swift and orderly resolution of a financial crisis

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    The bank also take appropriate intervention to avert risk that stem from

    unregulated entities.

    Anything that related with Islamic finance is discussed thorough in part V11

    of the Act.

    Section 5(1)

    laid down the principle objects of the Bank shall be to promotemonetary stability and financial stability conducive to the sustainable

    growth of the Malaysian economy

    Section 5(2)

    function of the Bank

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    Function of the Bank Negara Malaysia 5(2)

    To formulate and conduct monetary policy in Malaysia Issue currency in Malaysia

    To regulate and supervise financial institutions which are subject to the laws

    enforced by the bank

    To provide oversight over money and foreign exchange markets

    To exercise oversight over payments system

    To promote a sound, progressive and inclusive financial system To hold and manage the foreign reserves of Malaysia

    To promote an exchange rate regime consistent with the fundamentals of the

    economy

    To act as financial adviser, banker and financial agent of the government.

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    Is known as one stop agency established in 1996 and located in Labuan

    Function :

    Focus on business development and promotion

    Process application and supervise offshore activities;

    Develop national objectives, policies and set priorities; Administer and enforce legislation; and

    Incorporate/register offshore companies.

    Section 3 writes :

    The authority and its objective of its formation established as a corporate body bythe name of Labuan Offshore Financial Services Authority with perpetual

    succession and a common seal, which may sue and be sued in its name .

    Labuan Offshore Financial Services Authority (LOFSA)

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    Purpose of this Act

    May enter into contracts and may acquire , purchase , take, hold and enjoy

    movable and immovable property of every description and may convey, assign,surrender, yield up, charge, mortgage, demise, reassign, transfer or otherwise

    dispose of, or deal with, any movable or immovable property or any interest

    there in vested in the authority upon such terms as it deems fit.

    Section3(2)

    Spells out the objective of authority are:

    a) To promote and develop Labuan as a centre for offshore financial services

    b) To develop national objectives, policies and priorities for the orderly

    development and administration of offshore financial services in Labuan and to

    make recommendations to the Minister in respect thereof .

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    Section 5 state about the Membership of the Authority shall consist of the following

    members who shall be appointed by the minister:

    a) Chairman

    b) Director General

    c) Not less than three and not more than seven other persons, two of whom shall be

    form the public sector

    d) The members appointed under paragraph (1)(c) shall be from amongst personswho possess relevant experience in financial, commercial or legal matters.

    e) The Director General shall be the chief executive officer of the Authority and

    shall be entrusted with the day to day administration of the Authority.

    f) In the event of the Director General being absent or unable to act due to illness

    or any other cause, the chairman shall appoint any member of the authority to

    carry out the functions of the Director General

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    Laws enacted for LOFSA:

    OBA (offshore Banking Act 1990)

    An Act to provide for the licensing and regulation of persons

    carrying on offshore banking business and offshore financial businessand for matters incidental thereto or connected therewith.

    OIA ( Offshore Insurance Act 1990 )

    An Act to provide new laws for the licensing and regulation of

    persons carrying on offshore insurance business and offshore

    insurance-related activities and to provide for matters incidentalthereto or connected therewith.

    LOSIA

    An Act provide for the regulation of securities in Labuan , the

    establishment of an exchange and for other matters related thereto

    Labuan Offshore Financial services Authority Act 1996

    An Act to establish the Labuan Offshore Financial Services

    Authority and to provide for its functions and powers, and for

    matters connected therewith.

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    Labuan Offshore Business Activity Tax Act 1990

    An Act to provide for the imposition, assessment and collection of

    tax on offshore business activity carried on by an offshore companyin or from Labuan and for matters connected therewith.

    For formation of Labuan Companies in Labuan IBFC:

    Offshore Companies Act 1990 (OCA)

    An Act provide for the incorporation, registration, administration, of OffshoreCompanies and for matters connected therewith

    Labuan Offshore Limited Partnership Act 1997(LOLPA)

    An Act to provide new laws for the establishment, regulation and

    dissolution of offshore limited partnerships and for matters connected

    therewith or incidental thereto.

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    Labuan Offshore Trust Act 1996

    An Act to provide for the creation and recognition of offshoretrusts; and for matters connected therewith or incidental thereto.

    Labuan Trust Companies Act 1990

    An Act to provide for the registration of offshore companies as trust companies in

    Labuan, for the prescription of their powers and duties and for matters connected

    therewith or incidental thereto.

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    Islamic Financial SERVICES Board (IFSB)

    Based in Kuala Lumpur, was officially launched on 3rdNov 2002 and

    started operation on 10thMarch 2003.

    An international organizational that issues guiding principle and standardswithin the banking, insurance and capital market sector in order to promote

    stability in the Islamic financial services industry.

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    GOAL

    To promote the awareness of issues that could that have

    an impact on the Islamic financial services industry. It

    issues shariah compliant standard, hold conference and

    seminars and provides guidance and supervision, among

    other initiatives.

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    Full membership is available to the supervisory authority responsible for

    the supervision of the banking industry, securities and/or insurance/

    Takful industries of each sovereign country that recognises Islamic financial

    services, whether by legislation or regulation or by established practice, and

    international inter-governmental organisations that have an explicit mandatefor promoting Islamic finance.

    Associate membershipis available to any central bank, monetary authority

    or financial supervisory or regulatory organisation or international

    organisation involved in setting or promoting standards for the stability and

    soundness of international and national monetary and financial systems

    which does not qualify or does not seek to become IFSB Full member.

    Observer membershipwill be available to any:

    i) national, regional or international professional or industry association;

    ii) institution that offers Islamic financial services; oriii) firm or organisation that provides professional services, including

    accounting, legal, rating, research or training services to any aforementioned

    institutions in (a) and (b)

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    Islamic Financial Services Act 2013

    - IFSA section 152-157 (p87-91)

    - S152 Power of Bank to specify standard or issue codes

    - S153 prohibited conduct in Islamic money market and Islamic foreign exchange

    market

    - S154 Arrangement with relevant supervisory authority

    - S155 Submission of document or information to Bank

    - S156 Submission of statistical information

    - S157 Secrecy requirement under sections 155 and 156 not to apply

    - Definition Islamic Securities - IFSA page 20

    - S2 : Securities which are in accordance with Shariah.

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    The Capital Markets and Services Act 2007 (CMSA) repeals the Securities

    Industry Act 1983 (SIA) and the Futures Industry Act 1993 (FIA). The CMSA

    which takes effect on 28 September 2007 introduces a single licensing regime

    for capital market intermediaries. Under this new regime, a capital market

    intermediary will only need one licence to carry on the business in any one ormore regulated activities. This will mean less cost and paperwork for capital

    market intermediaries who carry on more than one regulated

    -The CMSA is supported by the Capital Market and Services Regulations 2007,

    the Licensing Handbook and the Guidelines on Regulation of Market.

    Capital Markets and Services Act

    2007

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    A key CMSA measure benefiting capital market intermediaries is the introduction

    of the single licensing regime. Under this measure, intermediaries hold a Capital

    Markets and Services Licence as opposed to multiple separate licences, which

    effectively reduces administrative and compliance costs, and ultimately saves

    time. The Licensing Handbook explains the implementation of the single

    licensing regime.

    This handbook sets out

    (a) the single licensing regime under the CMSA;

    (b) the criteria to be met for applying and varying a licence;

    (c) the application procedures; and

    (d) ongoing obligations imposed on licensed persons, including conditions and

    restrictions attached to a licence

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    This handbook will replace the following guidelines:

    (a) Guidelines for Dealers and Dealer's Representatives Under the SIA;

    (b) Guidelines for Fund Managers and Fund Manager's Representatives Under the SIA;(c) Guidelines for Investment Advisers and Investment Representatives Under the SIA;

    (d) Guidelines for Futures Brokers and Futures Broker's Representatives Under the FIA;

    (e) Guidelines for Futures Fund Managers and Futures Fund Manager's Representatives

    Under the FIA;

    (f) Guidelines for Futures Trading Advisers and Futures Trading Adviser's Representatives

    Under the FIA;(g) Guidelines for Submission Through the Electronic Licensing Application System; and

    (h) Guidelines on Permitted Activities for Stockbroking Companies.

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    The CMSA provides for two types of licences:

    Capital Markets Services Licence (CMSL) which entitles an institution to carry

    on the business in any one or more regulated activities; and

    Capital Markets Services Representative's Licence (CMSRL) which entitles an

    individual to carry on any one or more regulated activities on behalf of his

    principal.

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    CMSA PART IIICAPITAL MARKETS SERVICES

    Division 1Licensing and regulation

    58. Requirement for Capital Markets Services Licence

    59. Requirement for Capital Markets Services Representatives Licence

    60. Application for grant of licence

    61. Grant of licence

    62. Power of Commission to impose conditions or restrictions on licences63. Fees

    64. Grounds for refusal for the grant of Capital Markets Services Licence

    65. Grounds for refusal for the grant of Capital Markets Services

    Representatives Licence

    66. Power of Commission to enquire into transactions in respect

    of securities and derivatives

    67. Minimum financialrequirements

    68. [Deleted]

    69. Variation or transfer of licence

    70. [Deleted]

    71. False statements in relation to application for grant or variation of licence

    72. Revocation and suspension of licence

    73. Effect of revocation, suspension or cessation of licence, etc.

    74.Notificationof disqualifying event

    75. Appointment, election and nomination of directors and chief executive

    of licensed person, etc.

    76. Registered persons76A. Registration of persons providing capital market services

    77. Register of licence holders

    78.Notificationof change of particulars

    79. Publication of names and addresses

    80. Appeals

    81. Surrender of licence

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    1. The CMSA enhanced the SCs powers to take civil and administrative actions, and

    allowed it to recover three times the amount of losses through civil action for the

    wider range of market misconduct, including market manipulation

    2. The new Act also provides greater protection to investors by requiring applicationmonies of sophisticated investors to be held on trust in fund-raising exercises,

    enhancing the standards of trustees for debenture holders, and extending investor

    protection provisions to clients of financial institutions.

    3. The CMSA increases the efficiency of the fund-raising process where its approval on

    corporate proposal such as share splits or share consolidation, and entitlement in

    respect of warrants, option or right will longer be required

    4. Islamic banks which carry out the whole range of capital market activities for syariah-

    based product and services are automatically granted the registeredpersonstatus.

    5. Introduced the capital Markets and Services Regulation 2007 and Guidelines on

    Regulation of Markets to ensure a smooth transition to the new regulatory framework.

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    GUIDELINES

    Guidelines on Islamic Fund Management

    This guideline is issued by the Securities Commission (SC) under section 377 of theCapital Markets and Services Act 2007 (CMSA).

    Islamic fund manager should state that the Islamic fund management aims to achieve itscommercial objectives following Shariah principles.

    The Shariah principles applicable for an Islamic fund management business are:1. Wakalah2. Ujrah

    3. Jialah

    4. Wadiah yad amanah

    5. Wadiah yad dhamanah

    6. Mudharabah

    7. Musyarakah

    8. Murabahah

    9. Istisna

    10. Hibah

    11. Hiwalah

    12. Hak Tamalluk

    13. Tawarruq

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    An Islamic Fund Manager must appoint either:

    (a) An individual or a corporation as an independent Shariahadviser, approved and registered by the SC, and meets the

    following criteria:

    i. The person is not an undischarged bankruptii. The person has not been convicted for any offence arising from a

    criminal proceeding

    iii. The person is of good repute and character

    iv. The person possesses the necessary qualifications and expertise,

    particularly in fiqh muamalat and Islamic jurisprudence, and hasexperience and/or exposure in Islamic finance; or

    (b) An Islamic bank or a licensed institution approved by Bank

    Negara Malaysia to carry on Islamic banking business

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    An Islamic Fund Manager must appoint either:

    (a) An individual or a corporation as an independent Shariah adviser,

    approved and registered by the SC, and meets the following criteria:

    i. The person is not an undischarged bankrupt

    ii. The person has not been convicted for any offence arising from a criminal

    proceedingiii. The person is of good repute and character

    iv. The person possesses the necessary qualifications and expertise,

    particularly in fiqh muamalat and Islamic jurisprudence, and has

    experience and/or exposure in Islamic finance; or

    (b) An Islamic bank or a licensed institution approved by Bank Negara

    Malaysia to carry on Islamic banking business

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    An Islamic Fund Manager must appoint either:

    (a) An individual or a corporation as an independent Shariah adviser,approved and registered by the SC, and meets the following criteria:

    i. The person is not an undischarged bankrupt

    ii. The person has not been convicted for any offence arising from a criminal

    proceeding

    iii. The person is of good repute and character

    iv. The person possesses the necessary qualifications and expertise,

    particularly in fiqh muamalat and Islamic jurisprudence, and has

    experience and/or exposure in Islamic finance; or

    (b) An Islamic bank or a licensed institution approved by Bank Negara

    Malaysia to carry on Islamic banking business

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    The roles of a Shariah adviser include the following:

    a) To advice on all aspects of Islamic fund management business in accordancewith Shariah principles

    b) To provide Shariah expertise and guidance on all matters, particularly in

    documentation, structuring and investment instruments, and ensure compliance

    with relevant SC regulations and/or standards, including resolutions issued by

    the SAC

    c) To review reports of compliance officers of the Islamic fund manager or anyinvestment activities are Shariah compliant; and

    d) To provide a written opinion and/or periodic report to confirm and certify

    whether the Islamic fund management business has been managed and/or

    administered in accordance with Shariah principles

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    An Islamic fund manager must ensure that its investment activities are limited to Shariah-compliant

    investments.

    For investment in listed securities on Bursa Malaysia, an Islamic fund manager should invest only in

    securities listed on the SACslist of Shariah-compliant securities.

    For investment in unlisted securities, an Islamic fund manager is encouraged to follow the SACs

    methodology in determining the Shariah status of listed securities.

    For investment in securities traded on a recognised stock exchange, an Islamic fund manager should only

    invest in securities endorsed by the Shariah adviser of the recognised stock exchange or by aninternational Shariah standard setting body.

    An Islamic fund manager must should ensure that its clients monies and properties are properly

    safeguarded under the securities law in accordance to Shariah requirements.

    An Islamic fund manager is encouraged to maintain all accounts with Islamic financial institutions, but it

    is allowed to maintain the accounts in other financial institutions provided they are maintained in

    accordance with Shariah principles.

    To manage risk, an Islamic fund manager is permitted to undertake appropriate risk management

    techniques and tools in compliance with Shariah principles.

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    Guidelines on Unit Trust Funds

    As prescribed under sections 288(2) and 289(1) of the CMSA, only a management

    company approved by the SC can act as a management company to a fund.

    A management company is a company that:

    (a) establishes a fund

    (b) issues, offers for subscription, makes an invitation to subscribe for or

    purchase units of the fund(c) operates and administers the fund

    A management company must:

    (a) be an entity incorporated in Malaysia

    (b) have a minimum of 30% Bumiputera equity

    (c) not have more than 49% foreign equity

    (d) have a minimum shareholdersfunds of RM10 million at all times

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    As prescribed under sections 288(1)(a) and 289(1) of the CMSA, a trustee must be appointed for a fund

    and the appointment must be approved by the SC.

    A trustee must:(a) be a trust company registered under the Trust Companies Act 1949 or incorporated pursuant to

    the Public Trust Corporation Act 1995

    (b) be registered with the SC

    (c) have a minimum issued and paid-up capital of not less than RM500,000

    A trustee should:(a) act honestly and in accordance with the deed and prospectus, these guidelines, trust laws and

    securities laws

    (b) exercise the degree of care and diligence that a reasonable person would exercise in the

    position of a trustee

    (c) act in the best interests of unit holders and, if there is a conflict between unit holdersinterests

    and its own interests, give priority to unit holdersinterests(d) not improperly make use of information acquired through being the trustee to:

    (i) gain an advantage for itself or other person; or

    (ii) cause detriment to unit holders in the fund

    (e) comply with any other duty, not inconsistent with the CMSA and these guidelines, that is

    conferred on the trustee by the deed

    A management company or trustee should ensure that:

    (a) adequate procedures are in place to monitor the conduct of its delegate or service provider and

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    (a) adequate procedures are in place to monitor the conduct of its delegate or service provider and

    to ensure that the function delegated or outsourced is performed in a proper and efficient

    manner

    (b) there are controls in place to ensure compliance with the deed, prospectus, these guidelines

    and securities laws

    A management company or trustee should also ensure that its delegate or service provider is suitable to

    undertake the particular functions, including that it:

    (a) is duly licensed or authorised by the relevant authority (where applicable)

    (b) has adequate financial resources

    (c) has an adequate track record in the performance of the functions

    (d) has adequate and appropriate human resources, systems, procedures and processes to carry out

    the function (including on compliance with applicable requirements and policies and

    procedures on internal controls)

    The service agreement between the management company or trustee and its delegate or service provider

    should, among others, contain clear provisions on:

    (a) the services to be provided

    (b) the fees, remuneration and other charges of the delegate

    (c) any restriction or prohibition regarding the performance of the function to be delegated

    (d) reporting requirements, including the line of reporting between the delegate and the

    management company or trustee, and means of evaluating the performance of the delegate

    (Amended on 18February 2009)

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    Guidelines for Islamic Real Estate Investment Trust Syariah-compliant assessments must be carried out by the appointed Syariah committee/Syariah

    adviser to assess any property to be acquired by an Islamic REIT.

    In general, an Islamic REIT is a collective investment scheme in real estate, in which the tenant(s)operates permissible activities according to the Syariah.

    However, in the event that the tenant(s) is found to operate non-permissible activities, the fundmanager for the Islamic REIT must perform additional compliance activities.

    The fund manager must obtain the rental from each non-permissible activity operating at the

    property to be acquired.

    Rental from each non-permissible activity must be added to obtain the total rental from non-permissible activities.

    The list of non-permissible activities, as decided by the Syariah Advisory Council (SAC) of theSecurities Commission are:

    1. Financial services based on riba (interest)2. Gambling (gaming)

    3. Manufacture or sale of non-halal products or related products

    4. Conventional insurance

    5. Entertainment activities that are non-permissible according to the Syariah

    6. Manufacture or sale of tobacco-based products or related products

    7. Stockbroking or share trading in Syariah non-compliant securities

    8. Hotels and resorts

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    Subsequently, the total rental from non-permissible activities will be compared to the total turnoverof the Islamic REIT (latest financial year) to obtain the percentage of rental from non-permissibleactivities.

    The percentage amount will be referred to the 20% benchmark as determined by the SAC for the

    criteria on rental from non-permissible activities.

    In the event that the percentage exceeds the benchmark, the Syariah committee/Syariah adviser shalladvise the Islamic REIT fund manager not to invest in the said real estate.

    However, an Islamic REIT is not permitted to own real estate, for example, a building, even if thepercentage of rental from that building to the total turnover of the Islamic REIT is still below thebenchmark (20%).

    The Syariah committee/Syariah adviser must advise the Islamic REIT fund manager not to accept anew tenant(s) whose activities are fully non-permissible.

    Calculation of the rental of non-permissible activities from a tenant(s) operating mixed activities can

    be based on the ratio of area occupied for non-permissible activities to the total area occupied.

    The percentage will be used as the basis for determining the ratio of rental of non-permissibleactivities to rental paid by the tenant(s)

    For activities that do not involve the usage of space, such as service-based activities, the calculationmethod will based on ijtihad of the Syariah committee/Syariah adviser of the Islamic REIT.

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    An Islamic REIT must ensure that all forms of investment, deposit and financing instruments

    comply with the Syariah principles.

    An Islamic REIT must use the Takaful schemes to ensure its real estate.

    If the Takaful schemes are unable to provide the insurance coverage, then the Islamic REIT is

    permitted to use the conventional insurance schemes.

    An Islamic REIT is permitted to participate in forward sales or purchases of currency, and is

    encouraged to deal with Islamic financial institutions.

    If the Islamic REIT deals with Islamic financial institutions, then it will be bound by the

    concept of wad(only one party is obligated to fulfil his promise/responsibilty).

    The party that is bound is the party that initiates the promise.

    However, if the Islamic REIT deals with conventional financial institutions, it is permitted to

    participate in the conventional forward sales or purchases of currency.

    G id li St t d P d t

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    Guidelines on Structured Products

    These Guidelines stipulate the criteria which must be met with regard to any issue, offeror invitation of over-the-counter structured products which comes under the ambit of theSecurities Commission Act 1993.

    For any Islamic structured products which comes within the ambit of these Guidelines,the issuer must appoint an independent Syariah adviser approved by the SC.

    In addition, any Syariah principle and concept adopted must be based on such principlesand concepts as approved by the SCs Syariah Advisory Council and in the event of

    doubt, clarification should be sought from the SC.

    The following non-transferable structured products where at least on counterparty is alicensed institution as defined under the Banking and Financial Institutions Act 1989(BAFIA) or the Islamic Banking Act 1983 (IBA), or a licensed dealer under the SecuritiesIndustry Act 1983 (SIA) with a universal broker status, will not require the prior approvalof the SC under these Guidelines:

    1. Bond options

    2. Credit default swaps

    3. Credit options

    4. Total return swaps

    5. Equity swaps/options

    I ddi i f bl d d i h b h i

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    In addition, non-tranferable structured product transactions where both counterparties are

    licensed institutions as defined under BAFIA, licensed institutions as defined under IBA or

    licensed dealers under the SIA with a universal broker status would not require the prior

    approval of the SC.

    The following categories of persons are deemed as eligible issuers:

    a) A licensed commercial bank or a Special Purpose Vehicle (SPV), on whose behalf a

    performance guarantee has been issued by a licensed commercial bank

    b) A licensed merchant bank or an SPV, on whose behalf a performance guarantee hasbeen issued by a licensed merchant bank

    c) A licensed Islamic bank or an SPV, on whose behalf a performance guarantee has been

    issued by a licensed Islamic bank

    d) A licensed dealer with a universal broker status or an SPV, on whose behalf a

    performance guarantee has been issued by a licensed dealer with a universal brokerstatus

    Eligible investors shall be those set out under Schedule 2 and Schedule 3 of the SCA, while

    the issuer and its adviser, if applicable, must ensure that the investors to whom structured

    products are issued or offered are persons falling under Schedule 2 and 3 of the SCA.

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    The following are key measures that the issuer and its adviser, if applicable, are expected to

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    The following are key measures that the issuer and its adviser, if applicable, are expected to

    observe to ensure adequate investor protection with regard to any issue, offer or invitation of

    structured products:

    a) KNOW YOUR CLIENT: To ensure that structured products are suitable for clients, theissuer and its adviser, if applicable, should take all reasonable steps beforehand to

    establish the clients financial position, investment experience and investment

    objectives

    b) DUTY OF CARE: When issuing structured products to clients, the issuer and its

    adviser, if applicable, should ensure that clients are informed of and fully understand

    the financial risks and potential losses that may arise from investing in structured

    products

    c) PROVIDE RISK DISCLOSURE STATEMENT: The issuer and its adviser, if

    applicable, should provide clients with pertinent information regarding structuredproducts

    d) DECLARATION BY ISSUERS/ADVISERS AND CONFIRMATION BY CLIENT:

    The issuer and its adviser, if applicable, should ensure that a risk disclosure statement

    has been provided to the client and that the client has been invited to read the risk

    disclosure statement, ask questions and take independent advice if the client so wishes

    G id li I l i S i i

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    Guidelines on Islamic Securities All necessary approvals from other regulatory bodies would have to be obtained prior to the

    submission of any written declarations and information to the SC.

    An indicative rating must have been obtained by the issuer at the time of submission of thedeclarations and information to the SC.

    However, a rating is not required if the Islamic securities are non-transferable and non-tradable andwhose investors do not require a rating.

    As for underwriting, it shall be decided by the issuer and its principal adviser.

    In the event that no underwriting or only partial underwriting is required, the alternative is for theissuer to state the minimum level of subscription necessary to achieve the funding objectives of theissue.

    This is vital because unless otherwise allowed in writing by the SC, any issue, offer or invitationwhich is under subscribed and is unable to meet the level of subscription must be aborted.

    Subsequently, any consideration received for the purposes of subscription must be immediatelyreturned to all subscribers.

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    All issues of Islamic securities must be reported and/or tendered on the Fully Automate

    System for Issuing/Tendering (FAST) unless a listing is sought to any Malaysian stoc

    exchange.

    It is the obligation of the issuers and advisers to ensure that such issues must comply with al

    rules and requirements of FAST.

    In addition to FAST, Islamic securities must be made under the Real Time Electronic Transfeof Funds and Securities (RENTAS) System unless a listing is sought to any Malaysian stoc

    exchange.

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    Guidelines on Asset Backed Securities

    Asset Backed Securities (ABS) means private debt securities that are issuedpursuant to a securitization transaction.

    Such private debt securities shall exclude all debt securities that are capable of beingconverted into equity whatsoever and whether redeemable or otherwise.

    Hence, the securitization transaction as defined would mean arrangement whichinvolves the transfer of assets or risks to a third party where such transfer is funded

    by the issuance of debt securities to investors.

    Assets that are eligible to be securitized must generate cash flow and be transferred ata fair value.

    Originators must have a valid and enforceable interest in the assets and in the cashflow prior to the securitization transaction.

    There should not be any trust or thirdpartysinterest which exist in competition withthe originatorsinterest over the assets.

    The originators must be incorporated in Malaysia.

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    The originators must be incorporated in Malaysia.

    It has to be a going concern at the point of transfer of assets to the Special Purpose Vehicles (SPV).

    The transfer of assets from the originator to the SPV must comply with the truesalecriteria.

    This means that the assets that are transferred to the SPV from the originator must be put beyond the reach

    of the originator and its creditors even in receivership or bankruptcy to the extent possible.

    The originator must effectively transfer all right and obligations in the assets to the SPV and must not

    retain any residual beneficial interest in these assets.

    The risk that a transfer of assets by an originator to an SPV might be re-characterised as a financing

    transaction rather than a sale of assets should be minimized as far as possible.

    Conversely, the SPV must have no recourse to the originator for losses arising from those assets.

    However, in the event of a breach by the originator of any condition, representation or warranty in respect

    of the securitization transaction, the originator may repurchase the assets from SPV where the originator

    is under an obligation to do so under the securitization transaction.

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    Additionally, where such assets have decline to a level that renders the asset

    securitization transaction uneconomical to carry on, an originator may retain a first

    right of refusal to repurchase assets from an SPV at a fair value.

    Transfer can also take the form of legal assignment or equitable assignment from the

    originator to the SPV.

    In undertaking the transfer, it must be ensured that the necessary regulatory or

    contractual consents have been obtained in order to effect the transfer of such assetsfrom an originator to the SPV, and that the originator has not done or omitted to do any

    act which enables a debtor of the originator to exercise the right of set-off in relation to

    such assets.

    The SPV itself must be bankruptcy remote in that it should not carry on any

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    The SPV itself must be bankruptcy remote , in that it should not carry on any

    other business activity other than in relation to the securitization transaction itself.

    To do so, the necessary factors are:

    a) An SPV cannot include, in its objectives, the power to enter into any other

    activities that are not incidental to its function as a special purpose vehicle

    in relation to the securitization transaction

    b) An SPV must subcontract to third parties all services that may be requiredby it in order to maintain the SPV and its assets

    c) An SPV is not permitted to have employees or incur any fiduciary

    responsibilities to third parties other than to parties involved in the

    securitization transactions

    d) All the liabilities, present or future of an SPV (including tax) must bequantifiable and capable of being met out of resources available to it

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    Guidelines on Minimum Content of Trust Deed

    Approvals and registration of trust deeds rest with the SC.

    No holder of a Capital Markets Services Licence shall carry on any regulated

    activity in respect of its licence without the written consent of the Commission if

    it does not meet the minimum financial requirements as may be specified by the

    Commission or as may be provided in the rules of a stock exchange or a

    derivatives exchange

    .

    Every person issuing offering for subscription or purchase or making an invitation to

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    Every person issuing, offering for subscription or purchase, or making an invitation to

    subscribe for or purchase, any debenture shall:

    (a) enter into a trust deed that meets these requirements:

    1. A trust deed shall contain such provisions, covenants, requirements,

    information and particulars as may be specified by the Commission

    2. A person issuing, offering for subscription or purchase, or making aninvitation to subscribe for or purchase, any debenture shall deliver a copy

    of the trust deed to the Commission together with such other particulars,

    information or documents as the Commission may specify

    (a) appoint a trustee who is a person eligible to be appointed or to act as trustee inaccordance with section 260

    (b) comply with the requirements and provisions of this Division

    Every person issuing offering for subscription or purchase or making an

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    Every person issuing, offering for subscription or purchase, or making aninvitation to subscribe for or purchase, any debenture shall:

    (a) enter into a trust deed that meets these requirements:

    1. A trust deed shall contain such provisions, covenants,requirements, information and particulars as may be specified bythe Commission

    2. A person issuing, offering for subscription or purchase, or makingan invitation to subscribe for or purchase, any debenture shalldeliver a copy of the trust deed to the Commission together withsuch other particulars, information or documents as theCommission may specify

    (a) appoint a trustee who is a person eligible to be appointed or to act astrustee in accordance with section 260

    (b) comply with the requirements and provisions of this Division